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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Fed chair Powell promises to protect US economy from trade war - as it happened

Federal Reserve Chair Jerome Powell.
Federal Reserve Chair Jerome Powell. Photograph: Susan Walsh/AP

Update: Wall Street is now hailing Powell’s pledge to take appropriate action to help the US economy ride the trade war rapids.

The Dow is now up 414 points at 25,235, a strong gain of 1.6%. Hopes of an imminent rate cut are building!

Finally, Britain’s FTSE 100 index has ended the day 29 points higher at 7,214. That’s a gain of 0.4%.

Jay Powell’s pledge to do what it takes to address the trade war helped shares to close a little higher.

Still, morale was also dampened by the steady drip of poor economic news (from weak construction activity in Britain to a downturn in South Africa).

Goodnight! GW

A deal to restructure Philip Green’s Arcadia group may be close.... the retailer is expected to announce he’ll provide more money to address the firm’s pension deficit. More here:

Updated

David Madden, analyst at CMC Markets, agrees that the luke-warm words from China helped markets recover today.

He writes:

The Chinese Ministry of Commerce said the trade spat with the US will need to be worked out with additional talks. In the era of heighted trade tensions, any language that isn’t hostile, and advocates further dialogue, is seen as a step forward. The situation is far from diffused, but the absence of aggression has promoted traders to snap up stocks. The FTSE 100 is lagging behind its Continental counterparts as big oil stocks are holding back the London index.

The Italian FTSEMIB is holding up well even though the coalition government in Rome is looking a little shaky. There has been chatter of a possible collapse in administration, but it was reported that the two coalition heads, Matteo Salvini, and Luigi Di Maio had a long and cordial telephone conversation, so that should take the heat off Italian government bonds in the near-term.

Fed chair Powell: We'll act to protect trade war damage

The Federal Reserve Board building on Constitution Avenue in Washington, U.S.
The Federal Reserve Board building on Constitution Avenue in Washington, U.S. Photograph: Leah Millis/Reuters

Newsflash: America’s top central banker has pledged to take “appropriate” measures to protect the US economy from the impact of trade wars.

It may be a hint that US Federal Reserve could cut interest rates soon, as a growing number of investors suspect.

Fed chair Jerome Powell is making the comments at a monetary policy conference in Chicago right now.

Powell has told attendees that the Fed is “closely monitoring the implications” the ongoing trade disputes, which helped to drive markets down last month.

He said:

“We don’t know how or when these issues will be resolved.

As always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2% objective.”

Powell hasn’t explicitly mentioned an interest rate cut, but these comments look like a central banker’s ‘eyebrow-waggle’ at the markets.

A few months ago, the Fed was expected to raise interest rates several times in 2019 and 2020 -- now, the markets are pricing in cuts to borrowing costs, to prevent the US sliding into recession.

Just in: American factory orders have fallen, in (yet another) sign that global manufacturing is weak.

Orders shrank by 0.8% in April, new official figures show. March’s data has been revised lower too, to a 1.3% increase (from 1.9% before).

Demand for durable goods, such as computers and electronics equipment, dropped.

Updated

Wall Street rallies

Ding Ding! The New York stock exchange has opened higher, following the turnaround in Europe today.

The Dow Jones industrial average has gained 263 points, or just over 1%, in early trading, as investors grip onto hopes of trade war progress with Beijing and/or Mexico City.

Just in: Donald Trump has warned Mexico that he will press on with tariffs on their goods.

He told a press conference in London that Mexico needed to do more to prevent migration to the US, saying he “I don’t want to hear that Mexico is run by the ... cartels and the coyotes.”

Investors are taking comfort from those mollifying comments from China (here) and Mexico (here).

European stock markets are all positive, shaking off their earlier losses, on hopes that the trade tensions will ease - before they cause even more damage to the global economy.

Refinitiv
Refinitiv Photograph: Refinitiv

The oil price is also clawing back some losses, having hit a three-month low this morning. Brent crude is now back around $61 per barrel, from $60.20 earlier.

Fiona Cincotta of City Index says the oil price is being moved by the latest trade war issues:

Against the background of uncertainty over US tariffs on China, Mexico and now possibly India, the market is waiting for new clues before making any decisive trade moves.

Mexico: Hopeful of trade breakthrough

Mexico’s Foreign Minister Marcelo Ebrard speaks during a news conference about the ongoing trade negotiations with the U.S., at the Mexican Embassy in Washington, U.S., June 4, 2019. REUTERS/Al Drago
Mexico’s Foreign Minister Marcelo Ebrard speaks during a news conference about the ongoing trade negotiations with the U.S at the Mexican Embassy in Washington today. Photograph: Alexander Drago/Reuters

Mexico’s foreign minister Marcelo Ebrard has also talked up the prospects of an agreement with the US.

Ebrard is in Washington on a diplomatic mission to prevent America hiking tariffs on Mexican imports, as threatened by Donald Trump late last week.

He’s told reporters that his officials will present a new proposal to control immigration from Mexico to the US tomorrow. It may help placate the White House, which wants the flow of migrants curbed.

Ebrard told a news conference that talks have already been productive, pledging:

“We’re going to find common ground, I think... We are ready.

China: US must abandon its 'wrong practices'

China’s latest statement on the trade war with America is a classic blend of carrot and stick.

On the one hand, the Ministry of Commerce insists that the trade war will only be resolved through fresh talks, saying:

“The Chinese side always believes that the differences and frictions between the two sides in the economic and trade field will ultimately need to be resolved through dialogue and consultation.”

But that conciliatory tone is immediately followed by a reminder that Beijing blames Washington for the recent deterioration in relations (which have seen China’s Huawei blacklisted from trading with US firms...)

“However, consultations are principled and need to be based on mutual respect, equality and mutual benefit...

It is hoped that the US will abandon its wrong practices and work in tandem with the Chinese side. In the spirit of mutual respect, equality and mutual benefit, we will control differences and strengthen cooperation to jointly safeguard the healthy and stable development of China-US economic and trade relations.”

Newsflash: China commerce ministry has called for “dialogue and negotiations” to resole the ongoing trade war with the US.

Details to follow...

Anxiety over global growth prospects, and fears that stock markets will fall, have pushed the gold price to a three-month high today.

Gold has gained 4%, or nearly $50 per ounce, this week to nearly $1,320/ounce - its highest level since the end of February.

South African slump shows global weakness

Electricity pylons in front of the cooling towers at the Lethabo thermal power station, a coal-burning Eskom power station near Sasolburg in the northern Free State province.
Electricity pylons in front of the cooling towers at the Lethabo thermal power station, a coal-burning Eskom power station near Sasolburg in the northern Free State province. Photograph: Siphiwe Sibeko/Reuters

South Africa’s central bank needs to follow Australia’s lead, and cut interest rates fast, argues Jameel Ahmad of curency trading firm FXTM.

He says South Africa’s economic contraction shows that the global economy is weakening, partly due to the ongoing global trade war.

Policymakers don’t have time to hang around, given the fears over the global economy, he writes:

Emerging markets are having to contend with a tornado of different external headwinds, and these including persistent trade tensions that are adding further downside anxieties to economies that are reliant on resilient global demand. South Africa is just one of the many nations that is heavily exposed to the fears of another world recession arising at the turn of the next decade.

The problem that is not helping South Africa, or other emerging markets across the world by any means is that the latest Manufacturing PMIs across the world are confirming further contractions. South Korea, Japan, Taiwan, Malaysia, Russia, Poland, Turkey, Italy, Germany and the United Kingdom have all seen Manufacturing PMIs contracting in recent weeks.

This is a reliable signal that a coordinated world slowdown is close to arriving, and the GDP reading out of South Africa has reinforced these expectations further.

South Africa’s currency, the rand, has fallen sharply since the weak GDP figures were released.

South Africa's economy contracts

More gloom! South Africa’s economy has suffered its worst quarter since the financial crisis.

South African GDP shrank at an annual rate of 3.2% in the first three months of 2019, new government data shows. That’s twice as bad as expected (it’s effectively a 0.8% contraction quarter-on-quarter).

South Africa’s manufacturing, mining and agricultural sectors all shrank, in a blow to newly re-elected president Cyril Ramaphosa. Agriculture industry contracted by 13%, mining fell 11%, while manufacturing decreased by 8.8% year-on-year.

The downturn was partly due to a series of national power cuts, as supplier Eskom Holdings struggled to keep the lights on. That badly hurt business and investor confidence.

It’s only six months since South Africa emerged from its last recession - now it risks falling into another one, unless growth picks up this quarter.

The latest eurozone inflation data is also flashing a warning light.

Consumer price inflation across the currency block fell to 1.2% per year in May, new ‘flash’ figures from Eurostat show. That’s down from 1.7% in April - so a very substantial decline.

Eurostat reports that energy prices rose by 3.8% year-on-year in May, down from 5.3% in April. Food, alcohol & tobacco inflation crept up to 1.6% from 1.5%, but services inflation slumped to 1.1%, from 1.9%.

Prices of non-energy industrial goods were only up 0.3%, from 0.2% a month ago.

Consumers will be pleased, but it will cause serious head-scratching at the European Central Bank. Despite its massive money-printing QE bond-buying programme, inflation is not back at its target of just below 2%.

So it’s hard to see how the ECB can raise interest rates anytime soon, as it had once hoped.

In better news, eurozone unemployment has dropped to 7.6%, the best since the financial crisis.

Today’s UK construction PMI report is surprisingly weak, says Max Jones, relationship director in Lloyds Bank Commercial Banking’s infrastructure and construction team.

“The drop can partly be attributed to a change in focus, with a lot of contractors now placing more emphasis on cashflow rather than revenues. However, many are also feeling the pinch on their working capital, as requirements to pay clients within 30 days become more stringent.

Cash will be king in the coming months, and those able to reduce debt while improving cashflow will be in a much stronger position when activity picks up again.

Jones adds that some “megaprojects” are running behind schedule (Crossrail, for example), which is causing anxiety among contractors.

It’s only Tuesday morning, and we’ve already had three piece of weak UK economic data, namely:

Tomorrow we discover how the UK service sector fared in May. Economists predict very modest growth (the Services PMI is expected to rise to 50.6, from 50.4 in April). Anything weaker would be another blow.

Tim Moore, associate director at IHS Markit, also blames the confusion over Britain’s departure from the EU for the construction slowdown.

“May data reveals another setback for the UK construction sector as output and new orders both declined to the greatest extent since the first quarter of 2018. Survey respondents attributed lower workloads to ongoing political and economic uncertainty, which has led to widespread delays with spending decisions and encouraged risk aversion among clients.

“Commercial building remained hardest-hit by Brexit uncertainty, with construction firms reporting the steepest fall in this category of activity since September 2017. Civil engineering work also dried up in May and a fourth consecutive monthly fall in activity marked the longest period of decline since the first half of 2013. Construction companies often commented that recent tender opportunities for civil engineering work had been insufficient to replace completed projects.

“House building was the only sub-category of construction output to buck the downward trend in May, but growth remained softer than on average in 2018.

This chart shows how Britain’s construction PMI (which measures activity across the sector) has weakened in recent months:

UK construction PMI
UK construction PMI Photograph: Markit

Brexit uncertainty is having a chilling effect on UK builders, says Duncan Brock, group director at the Chartered Institute of Procurement & Supply.

Here’s his explanation for why UK construction went into reverse last month:

“A fragile dreariness descended on the sector this month with lower workloads leading to the fastest decline in purchasing of construction materials since September 2017. With the continuing uncertainty around Brexit and instabilities in the UK economy, client indecision affected new orders which fell at their fastest since March 2018 and particularly affected commercial activity.

“The previously unshakeable housing sector barely kept its head above water, growing at its weakest level since February as residential building started to lose momentum. The biggest shock however, came in the form of job creation as hesitancy to hire resulted in the largest drop in employment for six and a half years.

Not much to be happy about it seems though an easing in some input costs for raw materials offered some relief while energy and fuel prices continued to rise.

“This is unlikely to be nearly enough to turn around the sector’s fortunes, as optimism about the strength of the sector’s future was the lowest since October 2018. Policymakers will need to pull a large rabbit out of

the hat, and fast, to improve these difficult conditions and prevent a further entrenchment of gloom and contraction this summer.”

UK construction sector shrinks as Brexit uncertainty bites

Newsflash: Britain’s construction sector has slumped back into a contraction.

Activity across UK building firms fell last month, driven by a sharp decline in commercial construction and civil engineering, according to data firm Markit.

Markit’s monthly survey of purchasing managers at construction firms also found that new orders fell last month.

Builders blamed “subdued domestic economic conditions”, which deterred hesitant clients from committing to new projects.

In another blow, business optimism across the sector fell to its weakest since October 2018. Many builders blamed concerns that domestic political and economic uncertainty would dampen business activity growth over the next 12 months.

This pulled the UK construction PMI down sharply to 48.6 in May, down from 50.5 in April. That’s below the 50-point level that shows whether activity rose or fell during the month.

It’s also the weakest reading since March 2018, when the Beast from the East froze construction output.

Markit also found that builders cut jobs at the fastest rate since November 2012.

UK construction PMI
UK construction PMI Photograph: Markit

Reaction to follow...

Updated

Ireland’s factory sector has weakened, mirroring the global slowdown in manufacturing.

Activity at Irish manufacturers grew at its slowest rate in nearly three years in May, new figures from data firm Markit shows.

Factory bosses reporting that new orders shrank, while the boost from pre-Brexit stockpiling has faded.

This pulled Markit’s Irish manufacturing PMI down to 50.4 in May, from 52.5 in April.

Here are the key points (more details here).

  • Output posts first fall since UK’s EU referendum
  • New business contracts at fastest pace in six years
  • Purchasing activity declines as firms reduce stockpiling
Irish manufacturing PMI

The Woodford debacle could cause significant damage to investor confidence. Will people be as willing to put their money into such funds, if they can suddenly be frozen without warning?

Shares in Hargreaves Lansdown, which provides easy access to retail funds (for a fee!), have slumped by 6% this morning - the biggest faller on the FTSE 100.

It has been forced to remove the now-frozen Woodford Equity Income from its Wealth 50 list of favourite funds (given recent losses, should it have ever been there?!).

Emma Wall, head of Investment Analysis at Hargreaves Lansdown, says another Woodford vehicle has also been kicked off the Wealth 50 list.

“The suspension follows a period of underperformance and outflows for the Woodford Equity Income Fund. We are advocates of long-term investing and think Woodford’s multi-decade track record remains compelling – but we don’t underestimate the disappointment investors must feel with Woodford’s recent performance.

“The suspension is understandably frustrating, but it’s important to remember that the value of your investment will be dependent on the share prices of the portfolio’s underlying holdings, which are not directly impacted by the suspension.

“Because the fund has been suspended we’ve removed it from our Wealth 50 list of favourite funds. We have also removed the Woodford Income Focus Fund, as we would prefer to see a resolution to the dealing suspension before we conduct a review.”

Woodford shares slump after redemptions freeze

It’s a grim morning for investors who backed one-time top stock picker Neil Woodford.

Yesterday, Woodford blocked investors from pulling cash from his flagship fund -- called ‘equity income’ -- after becoming overwhelmed by customer withdrawals following a series of bad market bets.

It’s a major, embarrassing blow to Woodford, once the darling of the City for his ability to invest money wisely.

He was forced to freeze equity income redemptions after a series of poor punts, often on medium-sized UK firms (the last straw may have been Kier Group, who issued a profits warning on Monday). Investors have been fleeing in recent weeks, forcing Woodford to take the draconian step of locking them in.

Another of his vehicles, Woodford Patient Capital Trust, is traded on the London stock market. Traders have been impatiently ditching the stock, sending its shares slumping by 13% to a record low.

Updated

Technology stocks are vulnerable to global slowdown worries, and the US-China trade war, so it’s notable how far they’ve fallen recently:

European stock markets have also fallen in early trading.

Technology stocks are the big fallers, following the FAANG losses on Wall Street overnight, followed by healthcare and consumer goods firms.

Britain’s FTSE 100 is down 0.3%, while France’s CAC has lost 0.7%. Only Italy is bucking the trend, up 0.25% after prime minister Giuseppe Conte warned his coalition partners to end their bickering.

European stock markets
European stock markets this morning Photograph: Refinitiv

Neil Wilson of Markets.com says the prospect of antitrust probes into Google, Facebook et al is worrying traders:

Markets remain on the hook to the trade war rumblings, but a new war has opened up that threatens equity investors – a war on tech. What the Fed threatens to give, the DoJ takes away.....

Political pressure is building – lawmakers sniff votes in tackling big tech. The shift really happened last year with Facebook’s scandals, which broken the illusion of Silicon Valley being in it for the little guy. They’re just big corporations out to make money like any other – the politicians can smell blood.

As I noted a year or two ago, I always thought Trump had the hallmarks of a Teddy Roosevelt trust-buster.

Anxiety over the economic outlook hit shares in Asia today.

China’s Shanghai Composite fell by almost 1%, while Hong Kong’s Hang Seng has lost 0.65% and India’s Sensex dipped by 0.5%.

Investors were particularly jittery after seeing shares in US technology giants slide last night, amid concerns of antitrust investigations into companies such as Alphabet.

Overnight, the US Congress announced a new bipartisan investigation into digital markets and the tech industry, looking into giants such as Facebook, Google and Amazon for “competition problems” and “anti-competitive conduct”.

Slowdown fears have forced Australia’s central bank to slash interest rates to a record low.

The Reserve Bank of Australia cut borrowing costs to just 1.25%, warning that household spending is suffering from low income growth and falling housing prices.

It’s the latest sign that the world’s central bankers are turning more dovish, and worried that the economic picture is weakening.

Here’s our liveblog on the RBA’s decision:

Introduction: Slowdown fears mount

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

How healthy is the world economy? Fears of a global slowdown are building, as America’s pugnacious trade policies threaten to derail the long, slow, recovery from the financial crisis.

We saw yesterday that factory output in the UK and eurozone is shrinking, while American factories are growing at their slowest pace in a decade. This is now fuelling calls for US central bankers to slash interest rates before the economy suffers a recession.

A chorus of Wall Street economists are now predicting a sharp slowdown in America, as the impact of Donald Trump’s tariffs on Chinese imports reverberates. Morgan Stanley fears the US could slump by early 2020 unless the trade war calms down.

Trump’s latest threat - to impose levies on Mexican imports - has intensified concerns. As JP Morgan analysts put it:

“The latest developments this week are likely to have lasting damaging effects on business confidence. Growth concerns are unlikely to dissipate over the near term, and could in fact build further.”

After a turbulent May, analysts fears that the stock markets could remain volatile - with the risk of chunky losses in the months ahead.

John Higgins of Capital Economics predicts that the US S&P500 could slide by another 17% by the end of the year - on top of the 7% decline in recent weeks.

He warned clients:

We remain of the view that the bond market is simply running ahead of the stock market. We think that the equities will “catch up” in due course.

Admittedly, we aren’t explicitly forecasting another recession, just a significant economic slowdown. But our end-2019 forecast of 2,300 for the S&P 500 would only leave it 22% or so below its recent peak. This would be a much smaller drop than the declines seen around the two recessions of the 2000s.

Coming up today

The latest eurozone inflation figures are out this morning, and likely to show that the cost of living slowed last month. Great news for consumers, but a blow to the European Central Bank’s plans - ahead of its monetary policy meeting on Thursday.

A new healthcheck on Britain’s builders is likely to show limited growth last month. The UK construction PMI is tipped to inch up to 50.6, from 50.5 in April, barely above stagnation.

Overnight, we’ve learned that UK consumer spending fell at the fastest rate in at least 25 years last month - a worrying sign for the economy.

Plus, it’s stock market reshuffle day in Britain. Budget airline Easyjet looks likely to be ejected from the FTSE 100 to make room for sports fashion chain JD Sports.

But Marks & Spencer, another laggard, might avoid being kicked out, if the powers at FTSE Russell decide to add its ongoing £600m cash call to its market capitalisation.

The agenda

  • 9.30am BST: UK construction PMI for May
  • 10am BST: Eurozone unemployment for April
  • 10am BST: Eurozone inflation for May
  • 2.55pm BST: US Federal Reserve chair Jerome Powell speaks in Chicago
  • 3pm BST: US factory orders

Updated

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