WeeklyWatch – Banks mull over forecasts for slower growth

23 September 2019

Stock Take

Fed’s first unscheduled intervention in money markets since crisis

“Whoever controls the volume of money in any country is absolute master of all industry and commerce.” Former US President James A Garfield might not have witnessed the creation of the modern Federal Reserve, but he was clearly in no doubt about the power it would come to possess. Last week, however, the world’s leading bank found itself caught in the middle between two big hitters on the market – on the one hand, trade disputes show signs of beginning to drag on US economic growth; on the other, the services sector is performing well, and consumer spending shows few signs of flagging.

Throughout the week, the Fed injected billions into the market to respond to a cash access problem for banks, in what was its first unscheduled intervention in money markets since the financial crisis. The move worried investors that companies and banks were short of cash and, while the Fed’s actions dealt with the immediate challenge, the demand for cash is widely expected to continue to rise, meaning the Fed might need to provide more support.

When it came to rates, the Fed cut another quarter point off the base rate, thereby taking it down to 1.75-2%. Forward guidance suggests no more cuts in 2019 or 2020, but the Federal Open Market Committee was divided; such divisions make it even harder than usual for onlookers to make any assumptions.

Jerome Powell commented after the meeting: “I think we’ll learn quite a lot in the next six weeks” – but if investors will have to bide their time on the rates front, he did at least make clear that short-term interventions will remain the go-to option in the coming months.

Other central banks show similar signs of dovishness

China was one of a number of major economies that saw its growth forecast downgraded by the OECD last week. The People’s Bank of China responded by pumping some $17 billion into the market and narrowly trimmed its one-year lending rate in an attempt to stimulate markets.

But while China’s rate was downgraded by 0.2%, the euro area’s was dropped by 0.4%. Moreover, while the headline Chinese growth rate slipped to 6.2% in the second quarter, three leading economists who advise the Chinese government said last week that a drop to 4 or 5% was manageable; arguing that the larger size of the Chinese economy means it can absorb any new labour supply with a smaller rate of growth.

The Bank of England, meanwhile, kept rates unchanged at 0.75%, but said that it expected rates to stay low for longer than previously anticipated. Although it forecast the UK would avoid a recession in 2019, it said that Brexit and global trade uncertainties were weighing on growth. The FTSE 100 ended the week roughly where it had started, and sterling had a relatively calm few days, given recent turmoil. The Bank of Japan said its inflation targeting is not working as well as hoped and hinted at taking further action in October.

Saudi Arabia aims to keep oil afloat

While central banks look to keep the money flowing, Saudi Arabia is seeking to do the same for oil – even going as far as importing oil to ensure it could continue to satisfy customers following the recent oilfield attacks.

Furthermore, reports last week claimed that the administration was leaning heavily on major Saudi families and businessmen to buy into the much-delayed initial public offering of Saudi Aramco, the state oil group that should be the largest listed company in the world; the Saudi administration is hoping the company will be valued at $2 trillion.

The price of oil has had a bumpy ride in 2019 and last week Brent Crude pushed back above $65 a barrel. Having spiked first thing last Monday morning, courtesy of the oilfields attack, the S&P 500 Energy index then slowly declined over the course of the week.

Cameron draws palace criticism

But the Crown Prince’s power is not absolute, as the Queen well knows. Last week it emerged that Elizabeth II is the only woman to have ever driven the King of Saudi Arabia (women are barred from driving in the kingdom). The report was far from the most surprising disclosure former PM David Cameron about his meetings with the monarch, resulting in criticism from the palace.

Meanwhile, the current Prime Minister’s woes continued, as the Supreme Court continued to deliberate on whether he had lied to the monarch over his reasons for requesting a prorogation of parliament. Indeed, any politician who messes with the monarchy has cause to fear the court of public opinion. Many pundits argue that the current constitutional crisis has begun to politicise the monarchy, especially now the executive is at odds with the legislature – and potentially the judiciary, too.

The biggest repatriation in peacetime

In final news, this morning saw the collapse of UK travel agent Thomas Cook, which has left 150,000 travellers stranded abroad. The UK’s Civil Aviation Authority (CAA) is coordinating the repatriation, the biggest in peacetime.

Wealth Check

Last week’s decision by the Bank of England to keep interest rates on hold at 0.75% was not a surprise, given the continuing Brexit uncertainty. The Bank expects the economy to expand by 0.2% in the third quarter of this year – while this is weaker than predicted growth, it means the UK is expected to avoid a recession.

Yet, it’s clear that banks and building societies are expecting the next move to be downwards. All average fixed rates on savings have fallen for the third consecutive month according to the latest figures from Moneyfacts. It’s a similar story for Cash ISAs – for the first time since November 2016, variable and fixed average rates have fallen simultaneously. The average Cash ISA notice rate is now 1.16%.

Inflation dropped to 1.7% last month, but the figures confirm savers’ ongoing struggle to maintain the spending power of their money. However, in the uncertain climate, it seems they are valuing accessibility over returns; £3.2 billion was deposited into easy access accounts in July – 38% higher than in June.1

1 Bank of England, Bankstats, August 2019

In the Picture

Food retail in the UK is a highly competitive industry, but Aldi are relishing the challenge. Despite hot competition and some mixed earnings, the chain recently announced that it would open a new store in the UK every week for the next two years. And, with over 75% of consumers shopping there (and fellow German global discount supermarket chain, Lidl), it’s clear to see why they are ripe for expansion:

The Last Word

“Now everybody can pretend they are a travel agent. They’ve got access to all the airline seats, hotel beds, car rentals in the world and they can put things together themselves.”

Simon Calder, travel journalist, delivers a postmortem for Thomas Cook following the airline’s collapse.

The information contained is correct as at the date of the article.

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