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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Stanley Fischer resigns from the Fed; Canada raises interest rates - as it happened

Federal Reserve Vice Chairman Stanley Fischer.
Federal Reserve Vice Chairman Stanley Fischer. Photograph: Susan Walsh/AP

Afternoon summary: Fischer, Canada, ECB pressure....

Time for a quick recap.

The future of the US Federal Reserve has been thrown into fresh uncertainty after vice chair Stanley Fischer suddenly resigned.

Fischer’s early departure may help Trump to reshape the Fed, and could be a sign that chair Janet Yellen won’t be reappointed next year.

Canada’s central bank has surprised the markets with its second interest rate rise in as many months. The BoC raised borrowing costs from 0.75% to 1%, citing the strengthening Canadian economy.

Nicholas Wall, portfolio manager at Old Mutual Global Investors, says the BoC is showing its confidence in the business cycle.

Canada has been experiencing a period of above-trend growth, underlined by 4.5% annualised GDP expansion in the second quarter, with more timely data suggesting that economic momentum remains strong. The BoC sees the composition of growth as broad-based and self-sustaining, despite some cooling in the housing market.

This backdrop appears to have strengthened the central bank’s view that the output gap has all but closed, meaning it was prepared to tighten policy despite core inflation running about 0.5% below its target.The move sent the Canadian dollar up by over 1.4% to a two-year high.

Pressure is mounting on the European Central Bank to cut its bond-buying stimulus programme, following hard-hitting comments from Germany today.

John Cryan, the head of Deutsche Bank, warned that ‘cheap money’ is fuelling financial bubbles, while finance minister Wolfgang Schauble said policy should be normalised as the European economy has recovered.

Something for the ECB to chew on tonight, ahead of tomorrow’s policy meeting....

In the UK, the chairman of Sports Direct has clung onto his job. Only 45% of shareholders opposed Keith Hellawell’s re-election, despite City concerns over the way the retailer operates.

The day began with a surprise fall in German factory orders. They fell by 0.3% in July, due to falling demand from domestic customers and other eurozone members.

It may be a sign that the German economy slowed over the summer.

European stock markets have ended the day in a mixed position; Britain’s FTSE 100 lost 18 points, or 0.25%, but there were gains in Germany, France and Italy.

European stock market closing prices
European stock market closing prices Photograph: Thomson Reuters

Chris Beauchamp of IG sums up the day:

It seems clear that risk appetite is struggling to gain a foothold as the market deals with hurricanes, North Korea, administrative struggles in Washington and the surprise resignation of the deputy Fed chair.

Flight to safety in government bonds has driven yields lower, and when combined with yesterday’s dovish comments from Fed policymaker Brainard, the result has been to put severe pressure on bank stocks.

A rate hike from the Bank of Canada has provided the ‘move of the day’ as the USDCAD exchange rates slumps to its lowest level in over two years.

Having been the poster-boy for tighter policy earlier in the year, the Fed is losing ground to others. This week’s ECB meeting will give us clues as to whether Draghi is about to burnish the ECB’s hawkish credentials.

And that’s all for today. Thanks for reading and commenting. GW

Intriguingly, Stanley Fischer’s resignation comes a few weeks after he criticised efforts to roll back financial regulations.

He told the FT that there are worrying signs of a return to the status quo that preceded the financial crisis of 2008.

Fischer said:

“It took almost 80 years after 1930 to have another financial crisis that could have been of that magnitude. And now after 10 years everybody wants to go back to a status quo before the great financial crisis. And I find that really, extremely dangerous and extremely short-sighted.

“One can understand the political dynamics of this thing, but one cannot understand why grown intelligent people reach the conclusion that [you should] get rid of all the things you have put in place in the last 10 years.”

The US dollar has hit an eight-day low following Fischer’s resignation, and the Canadian rate hike.

Carney toasts Fischer

Mark Carney, governor of the Bank of England, has paid Stanley Fischer a rather lovely tribute:

“It has been an extraordinary privilege – and exceptionally good fortune – for me to have worked closely with Stan Fischer. The combination of his encyclopaedic knowledge of economics, outstanding judgment, quiet leadership and his perennial good humour has helped policymakers around the world to navigate one of the most challenging periods in the global economy.

In the years ahead, students and practitioners of macroeconomic policy will continue to draw inspiration from Stan’s contributions at the Federal Reserve and the Bank of Israel, his earlier stellar career at the IMF and his many and varied academic contributions”.

Fischer quits: Instant reaction

Stanley Fischer’s resignation has sent a ripple of excitement through the financial markets.

Johan Javeus, chief strategist at SEB Group, says Fischer’s replacement will be significant for monetary policy:

Danske Bank points out that the vacancies are piling up at the Fed.....

This is from investor Axel Merk.

Mike Bird of the Wall Street Journal points out how influential Fischer has been during his long career:

Updated

Stanley Fischer quits the Fed

Newsflash! Stanley Fischer, the vice chair of America’s Federal Reserve central bank, has tendered his resignation.

In an unexpected move, Fischer will leave the Fed in mid-October. His term officially expired next June.

Fischer cites “personal reasons”, in a letter to president Donald Trump. He also says it has been a “great pleasure” to serve alongside chair Janet Yellen.

Stanley Fischer's letter to Donald Trump

Fischer’s decision means that he certainly won’t be succeeding Yellen when her term ends next year (not that this was very likely....).

It also gives Trump more control over the Fed, as a new vice chair must now be appointed.

Fischer is a highly respected economist and central banker. He’s previously served as chief economist of the World Bank, and governor of the Bank of Israel.

Updated

Here’s Dutch Bank ING’s snap take:

With back to back 25bp rate hikes, the Bank of Canada has fully reversed the 2015 policy easing that was spurred by the downturn in commodity prices.

How quickly times change. It was just three months ago the Bank’s officials were sounding relaxed about the monetary policy stance, suggesting that there was no hurry to raise rates.

But a swift change of tone was followed by a July rate hike and they have now decided to follow up with a further 25bp hike, taking the policy rate back to 1%.

ING expect the BoC will leave rates on hold until the end of the year, and raise them twice in 2018.

Updated

Here’s Bloomberg’s explanation of today’s Canadian rate hike:

The Bank of Canada is trying to strike a balance between bringing interest rates up to more normal levels amid the strongest growth spurt in more than a decade, and acknowledging the persistence of low inflation and subdued wage pressures.

It may also be attempting to restrain market expectations it will get too far ahead of the Federal Reserve.

Futures trading suggests investors were anticipating -- before Wednesday’s rate decision -- as many as three hikes from the Bank of Canada by the end of 2018, versus one more for the Federal Reserve.

Canadian dollar

The Canadian ‘loonie’ (so named for the bird that adorns the coin) surged by 1.5% against the US dollar after the rate hike was announced.

It hit a high of C$1.2134 against the US dollar, from C$1.241.

The Loonie
The Loonie vs the Greenback Photograph: FT

Updated

Why Canada raised interest rates, again

This is the second Canadian interest rate rate in under two months, and comes after Canada posted its strongest growth in 17 years.

In a statement, the Bank of Canada says:

“Recent economic data have been stronger than expected, supporting the bank’s view that growth in Canada is becoming more broadly based and self-sustaining.”

That growth is broad-based, the BoC adds.

It cites “robust” consumer spending, “solid” job and income growth, and “widespread strength” in exports.

But...it could send a shiver though the Canadian housing market. After a long boom, there are signs that the sector is now cooling. In Toronto, prices have fallen by a fifth since April, according to a new survey.

Canada raises interest rates

Boom! Canada’s central bank has voted to hike interest rates to 1%, from 0.75%.

It’s a surprise move, which has sent the ‘Loonie’, or Canadian dollar, soaring against the US.

The BoC says it is withdrawing some of its ‘considerable’ stimulus, due to Canada’s stronger than expected economic performance recently.

The US dollar vs the Canadian dollar
The US dollar vs the Canadian dollar Photograph: Bloomberg TV

Given Canada’s economy is growing strongly, and house prices have accelerated, there are decent arguments for an interest rate hike.

But still, this is a surprise to investors. It will also bring pain to borrowers.

In a statement, the BoC says it will pay close attention to the “sensitivity” of the economy to higher interest rates given “elevated” household indebtedness.

Updated

US trade deficit creeps up

Over in America, the trade gap has widened slightly, and the deficit with China has hit an 11-month high.

The Commerce Department has reported that the difference between US imports and exports rose by 0.3% in July to $43.7bn, from June’s $43.5bn.

That’s a smaller rise than expected, with exports dropping by 0.3% and imports by 0.2%.

The politically sensitive US-China trade deficit climbed by 3.0% to $33.6 billion in July, the highest level since August 2016.

That might normally attract fresh criticism from Donald Trump, but he may be too busy handling North Korea and a stream of hurricanes.....

Updated

Analyst: ECB should act now over stimulus

Despite this pressure from Germany, the European Central Bank will be reluctant to trim its bond purchase programme at tomorrow’s meeting.

But....waiting too long has its own dangers, and could allow the ‘bubbles’ which John Cryan warned about to get even larger.

Fawad Razaqzada, technical analyst at FOREX.com argues that the ECB should take a decision on QE this week, so the markets know what will happen beyond 2017.

He writes:

In July, the European Central Bank President Mario Draghi said that the Governing Council would discuss the future of its €60 billion monthly purchases programme in the autumn. Technically, autumn in the Northern Hemisphere will not start until Friday September 22, so there is a possibility that the topic of QE tapering may not be discussed at this week’s meeting.

However, many analysts reckon that an announcement would be made a bit early at this meeting because it coincides with the new ECB staff forecasts. There are a number of reasons why the ECB would want to reduce QE purchases, not least because of bond scarcity. But more importantly, the consequences of acting too late could be very damaging as inflation could spiral out of control.

Sky News’s Ian King has a good explanation of why the ECB is under fire from Germany’s finance minister, and one of its top bankers, today:

Pressure is building on the European Central Bank (ECB) to bring Quantitative Easing (QE) to an end - with one of the eurozone’s most prominent bankers today adding to the calls.

In an attempt to stimulate demand in the single currency area, the ECB began buying assets in March 2015 at the rate of €60bn per month, paying for it with newly-created electronic money.

It raised its purchases to €80bn per month in March last year before bringing the figure back down to €60bn in March this year.

At the time the ECB’s president, Mario Draghi, pledged to continue the programme until the end of 2017.

However, with the eurozone now enjoying solid growth in most countries and the ECB having bought more than €2tn worth of assets, there are growing calls for the programme to be wound up early on the grounds that the job has been done.

More here:

Sports Direct chairman re-elected despite protests

Newsflash: Sports Direct’s chairman has narrowly survived efforts to oust him at today’s AGM.

Around 53.2% of independent shareholders backed Keith Hellawell’s reappointment, with 46.7% opposing it.

That’s a narrow result, and even narrower if you note that some shareholders abstained.

Sports Direct AGM result

This vote doesn’t include Mike Ashley’s large stake in SPD (last year - Ashley used his vote to save Hellawell from a rebellion).

Presumably Hellawell (a former chief constable of West Yorkshire and government drugs tsar) will now carry on at Sports Direct, despite City concerns over its corporate governance.

Britain’s employers have been falling over each other to criticise the government’s leaked immigration plans.

The proposals, reported by the Guardian yesterday, would dramatically cut the number of low-skilled migrants after Brexit by only allowing them to stay for two years.

The Food and Drink industry has warned of a ‘catastrophe’, with firms unable to fill posts, while the CBI has called for an ‘open but managed’ migration system.

More here:

Over in parliament, Labour’s Jeremy Corbyn has asked prime minister Theresa May to condemn Sports Direct’s failure to end zero hours contracts.

She rather ducked the question, though, pointing out that the Conservatives have taken action against unfair use of zero hours contracts in the past.

More here:

Updated

Sports Direct’s AGM has wrapped up - now we wait for the results of the shareholder vote.

Crucially, chairman Keith Hellawell has promised to step down if a majority of investors don’t back him today.

Schäuble: ECB must normalise policy

Heads-up! Germany’s finance minister, Wolfgang Schäuble, has backed John Cryan’s call for an interest rate hike in the eurozone.

Speaking (via satellite) at the banking conference in Frankfurt, Schäuble took another swipe at the current ultra-loose monetary policy.

He urged the European Central Bank to “normalise” policy as soon as possible - ie, end its money-printing QE programme and raise borrowing costs.

Schäuble said:

Unusual monetary policy implies it is not usual or normal — we should get back to a normal monetary policy.

We have come back to a normal situation much quicker than people thought.

This isn’t the first time that Germany’s finance minister has fired a broadside at the ECB, and its president Mario Draghi. But it does put a little more pressure on the ECB’s governing council ahead of tomorrow’s meeting. Could it embolden hawkish members to push to tighten policy?

City economists are divided on whether the ECB will make a decision to curb its bond-buying programme this month, or delay until October. So it will certainly be an exciting meeting....

We have another no-show at the Sports Direct AGM -- senior independent director Simon Bentley.

So chairman Keith Hellawell has faced the music alone -- and rejected a call for an independent review of SPD’s work practices

John Cryan has also warned that many bank jobs will be lost as the industry embraces automation.

The FT’s Laura Noonan has the details:

Alas, Sports Direct founder and chief executive Mike Ashley isn’t gracing today’s AGM with his presence.

That’s not against the rules -- handling the shareholders is the responsibility of the chairman. SPD has blamed “conflicting demands” on Ashley’s time....

Deutsche Bank’s John Cryan also took a swipe at the ECB’s policy of charging negative interest rates on commercial bank deposits.

This policy was introduced in Jun 2014; Cryan argues that it’s gone on quite long enough, saying:

“It can’t be forever that deposit taking is a loss making… for banks.”

Over in Derbyshire, unions are protesting outside Sports Direct’s headquarters ahead of today’s shareholder AGM.

They’re pointing out that SPD hasn’t delivered on the promises made after its ‘Victorian’ working practices were revealed.

My colleague Sarah Butler is there, and tweeted these photos:

Updated

Deutsche Bank boss calls for end to cheap money

One of Europe’s top bankers has urged policymakers to end the era of ‘cheap money’ and start raising interest rates.

John Cryan, CEO of Deutsche Bank, warned that the European Central Bank is helping to fuel a dangerous bubble in the financial markets.

He wants the ECB to tighten policy now; it is currently pumping €60bn of new money into the economy each month, and hitting banks with negative interest rates to encourage them to offer credit.

Speaking to fellow bankers in Frankfurt this morning, Cryan declared:

“The era of cheap money in Europe should come to an end - despite the strong euro.”

This cheap money is driving asset prices to unsustainable levels, he added:

We are now seeing signs of bubbles in more and more parts of the capital market.

As this chart shows, the ECB’s balance sheet has swelled to record levels thanks to its bond-purchase programme. That QE programme has also driven bond prices to record highs.

The ECB's balance sheet

Cryan’s intervention comes a day before the EBC’s governing council sets monetary policy. Economists expect the ECB to hold off tightening policy until October.

He also argued that City banks who quit London because of Brexit should head to Germany, as:

“There is only one European city which can fulfil these requirements and that city is Frankfurt.”

City traders are “on edge” due to the North Korean crisis, says David Madden of CMC Markets.

Investors aren’t running scared, but they are a touch on the nervous side, and while the situation keeps rumbling on, dealers could be reluctant to start a fresh round of buying.

Russian president Valdimir Putin has now weighed in, saying fresh sanctions aren’t the answer and would only “push Pyongyang into a corner”.

Now this is more encouraging.

German shoppers boosted their spending in August, suggesting that consumer confidence is still robust.

The monthly Retail PMI, which tracks activity across the sector, jumped to 53.0 last month from 50.7 in July.

European stock markets are falling in early trading, as Germany’s weak factory orders and the North Korean crisis worry investors.

Britain’s FTSE 100 has lost 25 points, or 0.33%, with similar falls in France and Germany following the selloff in Asia.

European stock markets this morning
European stock markets this morning Photograph: Thomson Reuters

Fears that Pyongyang could be preparing another missile test are pushing shares down, and keeping gold near a one-year high.

North Korean ambassador Han Tae Song added to concerns yesterday, by warning that the US could receive “more gift packages”.

European bank shares are leading the selloff, reflecting caution ahead of tomorrow’s European Central Bank policy meeting.

The first Ryanair flight with passengers taxies past a Lufthansa plane as it arrives at Frankfurt Airport in Frankfurt .

Attention, travellers! Budget airline Ryanair has shaken up its luggage policy in a bid to deter customers from taking two bags onto their flight.

Angela Monaghan explains:

Ryanair customers will have to pay £5 for priority boarding from 1 November if they want to carry a wheelie bag on board, as the airline attempts to reduce boarding and flight delays caused by a shortage of overhead cabin space.

Priority boarders will still be able to carry on two bags, but all other passengers will only be allowed to take one smaller bag on board the aircraft.

A second, larger, wheelie bag will have to be placed in the hold free of charge at the boarding gate, to be collected at baggage reclaim on arrival...

Is it just an attempt to raise money? Apparently not - Ryanair say the policy will cost them £50m, but hopefully speed things up.

More here:

Updated

Sports Direct has reiterated its bold pledge to become the “Selfridges of Sport” retailing.

As it prepares for a potentially bruising AGM meeting today, SPD told the City that:

The Company is pleased to confirm ahead of today’s AGM that trading in our new generation flagship stores continues to exceed our expectations as Sports Direct moves towards the ‘Selfridges’ of sport.

I suspect that won’t stop some investors voting against chairman Keith Hellawell’s reappointment, though. Several influential shareholders, including Hermes and Fidelity, argue that fresh blood is needed at the top following recent revelations over the company’s working practices.

German consumer goods makers had the toughest July, suffering a 3% drop in new orders.

Capital goods (heavy duty machinery) dropped by 0.7%, while intermediate goods orders fell by 0.4%.

This is the first drop in German factory orders in three months, as this chart shows:

German factory orders fall unexpectedly

Just in: Germany’s factories suffered a surprise drop in new orders in July, suggesting Europe’s powerhouse economy could be running out of steam.

New government figures show that factory orders dropped by 0.7% during the month, missing City forecasts of a 0.3% rise.

German factory orders

Orders from other eurozone countries fell by 1% during the month. However, orders from other nations rose by 0.6% -- suggesting the recent strength of the euro isn’t hurting Germany.

But....domestic orders declined by 1.6% - perhaps a sign that German companies are taking a breather after a strong few months?

Germany factory orders can be volatile, but this isn’t exactly what chancellor Angela Merkel would hope to see ahead of this autumn’s election.

But the economics ministry insists that German manufacturing remains robust, saying:

Order activity remains on a very high level....

Updated

The agenda: Geopolitics worries weigh on markets

A currency trader walks by the screens showing the Korea Composite Stock Price Index (KOSPI) at the foreign exchange dealing room in Seoul, South Korea, today.
A currency trader walks by the screens showing the Korea Composite Stock Price Index (KOSPI) at the foreign exchange dealing room in Seoul, South Korea, today. Photograph: Lee Jin-man/AP

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Investors are jittery again this morning as the North Korea nuclear crisis weighs on the markets.

Asian stocks are dropping today, following a nervy session on Wall Street last night that saw the Dow Jones fall 1%.

The selloff comes as South Korea’s president, Moon Jae-in, warned that the crisis on the Korean peninsula risks becoming “uncontrollable”.

Speaking at a bilateral meeting with Russian president Vladimir Putin, Moon declared:

“The global political situation has become very serious due to North Korea’s repeated provocations.”

South Korean media are reporting that Moon asked Putin to help “tame” North Korea, following last Sunday’s nuclear test.

More details here:

On the economics front, we find out how whether America’s trade gap with the rest of the world widened or narrowed, and how its service sector performed in August.

We’ll also be watching two annual general meetings, with retailer Sports Direct and housebuilder Berkeley Group facing their shareholders.

Sports Direct’s chairman, Keith Hellawell, will face a rebellion from investors who believe he should resign.

And there’s a possibility that Canadian interest rates could rise today, as the Bank of Canada holds its latest monetary policy meeting.

Here’s the agenda:

  • 1.30pm: US trade balance for July
  • 3pm: Bank of Canada interest rate decision
  • 3pm: US service sector PMI for August

Updated

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