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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Federal Reserve calls coronavirus 'very serious issue' as it holds US interest rates - as it happened

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

After a small pause (the intrepid reporter had the microphone upside down, but we’ll preserve his blushes) we have the final question:

Q: Do you have sympathy with savers who have suffered from low interest rates?

Monetary policy is a “blunt but powerful tool”, Powell replies, and the Fed uses it to keep inflation low and employment high.

He points out that many, many people benefit from low interest rates -- and you won’t hear many people on low and moderate incomes pleading for higher rates. They want the economy to keep growing.

But ..... he “absolutely” sympathises with those who are reliant on savings for their income. But if you also own a home or equities (like many wealthier pensioners) you have benefited from higher asset prices.

And that’s the end of the press conference!

Here’s a clip of America’s top central banker talking about the coronavirus:

Q: US stock market levels are very high - are you concerned?

Jay Powell says the Fed looks at a range of financial conditions, including leverage in the financial and non-financial sectors, debt levels, and asset price levels.

We do see asset prices as “somewhat elevated” he says - but not at “extreme levels”.

But funding levels, another key issue, are very stable.

Q: How might the coronavirus outbreak affect China’s ability to deal with its bad debts?

Jay Powell says China had a significant problem with debts. It decided to tackle those high debt levels a few years ago - which was one of the causes of the global slowdown.

Powell agrees that the coronavirus will have “some effect on the Chinese economy” at least in the short term.

Updated

There may not be an immediate bounce from the US trade deal with Mexico and Canada, Powell cautions.

He sees a ‘wait and see’ attitude among American businesses, so there’s no “decisive” recovery in manufacturing.

Q: Does climate change pose a system-wide risk to financial stability?

It’s certainly possible over the long-term, Powell replies, but ultimately the issue must fall to elected officials.

But he agrees that the Fed must ensure the financial system is prepared to withstand climate change. So yes, it’s part of its role -- but the Fed can’t take on responsibility for the whole issue.

Q: So why haven’t you joined the Network for Greening the Financial System, with over 40 other central banks?

Powell says the Fed has attended meetings, and will probably join in the future.

Powell: coronavirus is very serious

Q: Various US companies are closing factories, bringing staff home or seeing supply chain disruption due to the coronavirus. So what impact could it have on US growth, and is it a significant risk to the global economy?

Federal Reserve chair Jerome Powell says the coronavirus is a very serious issue, which has already caused significant human suffering.

It is likely to cause some disruption to growth in China, and globally, he predicts.

But it is “very uncertain” how far it will spread within China and to its neighbours, and thus what the impact will be.

As such, Powell won’t speculate, but he does add:

Of course we are very carefully monitoring the situation.

He also suggests that the global economy appeared to be picking up, due to easing trade tensions, the lower risk of a no-deal Brexit, and signs of manufacturing bottoming out.

On the US economy, Powell says the labour market is still performing well.... and it’s a “bit surprising” that wages haven’t risen faster.

Hmmm....

Powell is giving (well, reading out) a long answer on the Fed’s repo operation (buying short-term treasury bills with new money).

He’s basically saying the Fed will keep running the programme until it has build up ‘ample reserves’ - of at least $1.5tn.

Q: But aren’t you worried that the markets think your repo operation is QE, and are trading accordingly?

Powell says the goal is simply to deliver effective monetary policy. It’s not the same as a broad asset-purchase programme (ie QE), and it’s hard to say what’s moving markets.

Onto questions, and Powell confirms that the Fed has tweaked its language on the inflation target.

It now states clearly that it wants to see inflation at 2%, not merely near it.

Jay Powell (who may have a touch of the sniffles) says US inflation should move closer to the 2% target in coming months.

We are determined to avoid inflation running persistently below 2%, he insists.

He then confirms that the Fed will keep running its repo operations until April, but will ‘slow’ these purchases over time.

Powell: coronavirus creates economic uncertainty

Federal Reserve chair Jerome Powell is giving a press conference now.

He confirms that the Fed has left interest rates on hold today, adding that monetary policy is well purposed to serve the US economy, create jobs and get inflation on target (it’s currently 1.5%, below the 2% target).

Powell blames sluggish growth abroad, and trade tensions, for weak business investment and manufacturing.

But uncertainties remain, he adds, and there are risks to the outlook -- including the coronavirus outbreak.

Updated

Another small change -- the Fed has decided to keep lubricating the plumbing of the US financial system for a few more months.

This repo scheme, in which the Fed buys hundreds of billions of dollars of short-term bonds, was meant to expire in January - but will now run until April.

The Fed insists it is simply providing liquidity, not stimulating the system.... but many investors have compared it to quantitative easing programmes launched after the crisis. And indeed, the scheme appears to have pumped up the stock markets (just like QE did).

The Fed has made a small technical tweak - raising the interest rate it pays banks on their excess reserves. That’s meant to keep interest rates within the Fed’a 1.5%-1.75% target.

There’s no mention of the coronavirus in the Fed statement.

That suggests the central bank isn’t too worrked about the epidemic, says Naeem Aslam, chief market analyst at Avatrade:

The FOMC decision failed to turbocharge market reaction and the fact the Fed didn’t mention anything Coronavirus made it clear for investors that the Fed isn’t worried.

Gold traders were hoping that perhaps the Fed will mention the economic impact of this virus but the absence of these comments kept bulls out of this trade.

Understandably, there’s not much market reaction to the Fed’s decision (which Bloomberg’s Mike McKee has astutely dubbed a ‘nothing-burger’).

The Dow Jones industrial average is up 166 points, or over 0.5%, at 28,889, having been 133 points higher just before the decision was announced.

Read the Fed's statement here

The Fed also sounds upbeat about the state of the US economy, saying:

Information received since the Federal Open Market Committee met in December indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low....

The statement, explaining why US interest rates remain on hold, is online here.

Today’s decision is unanimous -- every Federal reserve policymaker decided to do nothing this month.

And the FOMC’s accompanying statement looks nearly identical to December’s offering.

As before, it says US jobs gains are solid while inflation is below target.

One tweak -- the committee says household spending is rising at a ‘moderate rate’ (last month, it was ‘strong’). But it also reiterates that business fixed investment and exports remain weak.

Fed leaves rates on hold

NEWSFLASH: The Fed has left US interest rates unchanged, at 1.5%-1.75%.

Melissa Davies, Economist at Redburn, agrees that the Fed will be cautious today, partly due to the health crisis in China:

“Tonight’s FOMC meeting should not bring any headline changes to interest rates.

Indeed, with coronavirus having taken the wind out of the sails of hopes for a sustained bounce in global commercial activity in early 2020, and some particularly poor US manufacturing surveys of late, the FOMC has plenty of reason to strike a dovish tone.

Preamble: Fed rate decision coming up....

It’s nearly time for the first US interest rate decision of 2020 - but don’t expect many fireworks.

The Federal Reserve is widely expected to keep its benchmark Fed Funds rate unchanged, at 1.5% to 1.75%.

Following three cuts in the second half of 2019, the Fed is effectively on hold - waiting to see how the economic data plays out.

Although trade tensions have eased, the coronavirus crisis is a new threat to global growth - so central bankers will remain cautious.

Updated

Coronavirus worries have kept a lid on the London stock market today.

The FTSE 100 index has closed just 2 points higher at 7,483 - still 100 points down this week after Monday’s troubles.

Connor Campbell of SpreadEx blames the risk of a Chinese slowdown:

The market rebound petered out on Wednesday afternoon, investors struggling to justify the gains in the face of the latest coronavirus news.

Probably the most relevant headline came from Chinese government economist Zhang Ming, who warned that the country’s first quarter growth may fall under 5% as the virus spreads, with the forecast based on a mid-February peak for the outbreak. Given investors freaked out as China’s GDP dropped to 6.0%, a reading more than 1% under that is a potential nightmare.

Afternoon summary

Time for a quick recap, as investors await the Federal Reserve interest rate decision in four hours time.

Concerns over the coronavirus continue to weigh on market today. A top Chinese economists has warned that the outbreak could cause more economic damage than Sars in 2003.

Hong Kong’s stock market tumbled as it reopened after the Lunar New Year. The Hang Seng fell almost 3%, with property companies and gambling firms based in Macao leading the rout.

European markets, though, are calmer after two days of volatility.

A swathe of companies have been cutting their activity in China, with several airlines including British Airways freezing flights. Car firms, such as Toyota, are leaving factories suspended until mid-February.

Apple’s share price has hit a new alltime high, after beating Wall Street forecasts again. It’s now worth a sizzling $1.4tn, as much as every company on Germany’s DAX 30.

UK house pries have risen, as political uncertainty eases (somewhat).

Rail operator Northern has been nationalised, after the government lost patience with its shoddy service.

There are reports that American Airlines and Lufthansa are now cancelling their services to China, following British Airways’ lead this morning.

Apple’s stock surge means the company is worth over $1.4tn -- more than every company on Germany’s DAX index combined (as flagged earlier).

Amanda Lyons, investment manager, GAM, has delved into last night’s numbers -- and concluded that not everything is as rosy as you’d think.

She points out that strong iPhone sales drove the strong revenue growth -- probably existing iPhone users shifting to the new, more expensive, iPhone 11s.

With iPhone still accounting for over 60% of total revenue it shows how much the company still relies on this product for growth and that outperformance elsewhere is not enough to fuel future growth.

But service revenue growth missed expectations, at 17% per year.

Although Services revenue is impressive, it is intricately liked to Product sales. In the earnings release (and again on the call), Apple highlighted that the installed base has reached 1.5bn devices. It is hard to see that this segment can grow to become the driver of the company and overtake the iPhone.

And what about Apple’s TV?

“Almost no colour was given regarding the Apple TV+ launch; in its current form, it does not feel that TV+ will be the new Netflix. Its content offering is significantly lighter than competitors and is relying on gaining subscribers through the service being bundled for free for a year with the purchase of any Apple hardware. Without significant investments in content, it is hard to see many of those ‘free’ subscribers converting to paid subs at the end of the year.

Apple hits record high after strong results

Boom! Apple’s share price has hit a new record high, at the start of trading in New York.

Apple has gained more than 2% to above $326 per share, which means it has more than doubled in the last year.

The tech giant is cheering investors after reporting a 9% jump in revenues to $91.8bn last night, a record. This lifted net earnings to $22.2bn (also a record).

Apple’s share price
Apple’s share price over the last year Photograph: Bloomberg TV
Apple’s share price
Apple’s share price today Photograph: Bloomberg TV

Boeing has taken another big hit from the 737 Max crisis.

The US aircraft maker has doubled the likely cost of fixing the problem, to over $18bn, in its new financial results today. This has dragged Boeing into its first annual loss since 1997.

More here:

Oil has now unrallied -- as traders take claims of an attack on Saudi facilities in their stride.

Back in the markets, the oil price is rallying following reports of an attack on Saudi Arabia’s oil facilities.

Not much detail yet, but Brent crude rallied by over 1.2% to $60.25 per barrel.

Northern Rail nationalised

Back in the UK, another rail operator has been taken out of private hands into the tender care of the government.

Northern Rail, which operates services (badly) in the North of England will be nationalised on the first of March. The government has run out of patience over the litany of problems - from cancelled trains and carriage shortages to faulty ticket machines and a lack of drivers.

Passengers have also been unimpressed that it has still used the old Pacer trains -- constructed from busies in the 1980s, and due to be phased out years ago.

It should be a popular decision:

Here’s the story:

China economist: Coronavirus could cause more economic damage than SARS

A security officer directs a man past a thermal imaging camera at a subway station in Beijing today
A security officer directs a man past a thermal imaging camera at a subway station in Beijing today Photograph: Mark Schiefelbein/AP

Newsflash: A Chinese government economist has warned that the Wuhan coronavirus may cause more economic damage than the SARS epidemic.

Zhang Ming, an economist at the Chinese Academy of Social Sciences (part of Beijing’s State Council) predicted that China’s annual growth rate could drop below 5% in January-March quarter.

The official target is 6%; some economists have predicted that the economy could actually shrink during the quarter, as firms halt production and transport links are shuttered.

Writing in Caijing magazine, Zhang said the coronavirus’s economic impact could be “significantly bigger” than Sars, which slowed growth back in 2003. That is based on the forecast that the outbreak, which began in Wuhan’s meat market late last year, will peak in mid-February and end by April.

For comparison, Pantheon Economists estimates that SARS dragged China’s quarterly growth rate down to 1.8% in April-June 2003, from an average of 2.8%.

Zhang also predicted that Beijing could pull on the stimulus levers to prevent the economy weakening -- perhaps by cutting interest rates or encouraging banks to lend more money (by cutting the amount of capital they have to hold).

A McDonald’s restaurant in the Chinatown section of New York.
A McDonald’s restaurant in the Chinatown section of New York. Photograph: Mark Lennihan/AP

Just in: Fast food giant McDonalds has beaten Wall Street forecasts, achieving more than 100 billion dollars of annual sales for the first time.

The burgers, fries, salads and fizzy pop provider has posted a 5.9% jump in sales in the last quarter, better than expected and the strongest result since 2010.

For 2019 as a whole, systemwide sales increased 4% to $100.2 billion.

McDonald’s President and Chief Executive Officer Chris Kempczinski says:

“2019 marked a year of significant milestones for McDonald’s - including surpassing $100 billion in Systemwide sales and achieving our highest global comparable sales growth in over a decade.”

Updated

The long grind of job cuts at banking group Lloyds continues today.

Banking union Accord has announced that Lloyds is cutting almost 80 jobs, as part of a drive to close 56 branches this year.

It affects 31 Lloyds, 10 Halifax and 15 Bank of Scotland branded branches, the union said, with many staff being redeployed.

Ovo Energy, which recently joined the ranks of Britain’s biggest energy firms, has now also joined the ranks of firms fined by the regulator.

Ovo’s sin was to send inaccurate bills, or no statement at all, to over 500,000 customers over several years.

Readers with long memories may be surprised to hear that Greece can now borrow at an interest rate just below zero.

Yes, investors are prepared to pay Athens for the privilege of buying its debt -- at least the short-term bonds, repayable in six months.

Athens also saw solid demand for its first 15-year bond, which went on sale yesterday. Investors placed bids worth almost €19bn for the €2.5bn bond on offer, as Greece continues to slowly recover from its debt crisis.

Financial analysts have been hiking their price targets for Apple, after it beat expectations yesterday with its strong profit and revenue growth.

Fair enough. Except...shouldn’t Wall Street’s finest minds have expected such a good performance, given they’ve been watching Apple so closely?

Here’s a great chart showing how Apple’s share price has rocketed since Steve Jobs was lured back to run the company 23 years ago.

Jobs’ return in 1997 is one of the great ‘what ifs’ of business. Had he not returned to revive the company, on $1 per year, would we ever have had the iMacs, the iPod or the iPhone?

Would Apple have moved into media, with iTunes, or pioneered smartphones with the App Store?

Would Apple be worth more than $1 trillion today? Surely not. More likely it would have continued to slide into relative obscurity, losing money despite a loyal army of desktop fans devoted to its Mackintosh machines.

UK house prices are picking up

Back in the UK, house prices have risen as the market shakes off some of its recent lethargy.

Average house prices rose by 0.5% during January, Nationwide reports. This lifts the annual rate of housing inflation to 1.9%.

This might bolster the argument that the Conservative’s election win has lifted some economic uncertainty, ungumming the economy.

Lucy Pendleton, of estate agents James Pendleton, says:

“Sparks were flying after the election but this month the housing market has ignited, with the Boris Bounce providing the match.

“A year ago the annual growth rate was just 0.1%. This step change in house price growth is being driven by a resurgence of demand and, with it coming before we’ve even left the EU, is clearly significant.

Robert Gardner, Nationwide’s Chief Economist, sounds more cautious, saying:

“January saw a further modest pick-up in annual UK house price growth to 1.9%, from 1.4% in December. This follows twelve 12 successive months in which annual price growth had been below 1%.

“Indicators of UK economic activity were fairly volatile for much of 2019, but the underlying pace of growth slowed through the year as a result of weaker global growth and an intensification of Brexit uncertainty.

More here:

Over at the Hong Kong harbour, Bloomberg’s Alex Longley reports that things are unusually quiet - a bad sign for the economy as it tries to clamber out of recession.

More reaction to the slowdown in eurozone money supply:

Apple worth more than Germany's DAX stock index

Apple’s shares have jumped 2% in after-market trading, following its record-break profits and revenues last night.

That lifts its market capitalisation to over $1.4 trillion, tightening its place as the world’s most valuable tech company (only Saudi Aramco is worth more).

Astonishingly, this is more than Germany’s 30 largest listed companies who make up the DAX index. The DAX is worth a combined $1.36tn, including software giant SAP ($162bn), chemicals firm Linde ($111bn), engineering company Siemens ($108bn), and insurance group Allianz ($100bn).

Allianz’s chief economist, Katharina Utermöhl, says it’s a warning sign to Europe:

In a worrying sign, money supply growth in the eurozone has slowed.

The European Central Bank reports that growth in broad money slowed to 5% last month, from 5.6% in November.

Growth in the narrower M1 measure (how much currency is circulating) also slowed -- indicating a cooling of economic growth.

European markets calm after virus panic

European stock markets have just opened a little higher, as investors resist hitting the panic button (yet, anyway).

The Stoxx 600 index of Europe’s top companies has risen by 0.5%, with gains in Spain, Italy, France and Germany.

In London the FTSE 100 has risen by 6 points, or 0.1%.

Kit Juckes of French bank Societe Generale sums up the mood:

The virus outbreak marches on but markets are trying hard not to over-react. Treasury yields are back up a bit, most Asian equity indices are back up a bit, though the Hang Seng is playing catch-down as it re-opens.

Commodity prices are rising slightly today, as traders try to calculate the impact of the virus outbreak on the global economy.

Copper, nickel and zinc all rose, recovering some of their recent losses. Yesterday, a basket of metal prices hit its lowest level since early 2017:

The London Metal Exchange index of commodity prices
The London Metal Exchange index of commodity prices Photograph: Tradingeconomics.com

After a rough day, the Hang Seng index closed 2.8% lower. That’s a bad start to the new year, but frankly the rout could have been worse, given anxiety over the coronavirus.

Updated

Here’s a nice summary of the economic impact of the coronavirus, from the BBC’s Victoria Fritz:

Here’s our main liveblog on the coronavirus outbreak - which has now claimed at least 132 lives:

Japanese car maker Toyota has announced it will leave its Chinese factories closed until February 9th, extending the usual New Year shutdown.

Reuters has the details:

Toyota, which runs plants in regions such as the northern city of Tianjin and the southern province of Guangdong, said the closures after the Lunar New Year holidays were in line with transport lockdowns in some places, and as it assesses its parts supply situation.

That’s another sign of the economic damage that the virus outbreak is causing; several carmakers including Nissan, Honda and PSA Group are also withdrawing staff from China.

British Airways has just suspended all its flights to mainland China, underlining how the virus crisis will hit businesses around the globe.

It says:

“We apologise to customers for the inconvenience, but the safety of our customers and crew is always our priority.

Customers due to travel to or from China in the coming days can find more information on BA.com.”

While Hong Kong stocks slumped, other Asian markets had a better day.

Australia, South Korea and Japan all gained around 0.5%, as traders grasped onto hopes that the outbreak will be contained.

Shares in medical mask-makers continue to surge, as the public try to protect themselves from the Wuhan coronavirus.

Updated

The biggest fallers on the Hang Seng today were two Hong Kong real estate firms, Hang Lung Properties (-6.3%) and Country Garden Holdings (-5.7%).Demand for their properties will surely be knocked by the coronavirus outbreak.

They were followed by two Macao casino operators Sands China (-5.3%) and Galaxy Entertainment Group (-5.2%). Their betting operations will suffer from the clampdown on travel between the City and mainland China (Macau is an autonomous region, across the Pearl River Delta from Hong Kong).

Hong Kong stocks hit seven-week low

Passengers at the high speed train station in Hong Kong.
Passengers at the high speed train station in Hong Kong. Photograph: Achmad Ibrahim/AP

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

Returning to the office after a holiday is rarely fun. But Hong Kong investors have suffered a hefty dose of back-to-work blues today as trading resumed after the Lunar New Year break.

Stocks tumbled across the Hang Seng index, as traders responded to the coronavirus outbreak. Every stock lost ground in a wave of selling, driving the index down to a seven-week low.

Consumer goods companies, energy firms and financial stocks led the sell-off, on concerns that the virus crisis will hurt Hong Kong’s economy -- which is already in recession after months of pro-democracy protests.

In late trading, the Hang Seng is down 807 points, or 2.9%, at 27,141 -- wiping out all the gains posted since mid-December.

It’s the worst start to a New Year since 2016 (the Year of the Pig); Jeffrey Chan Lap-tak of Oriental Patron Financial Group explains why the Year of the Rat has begun badly:

“The Wuhan coronavirus has been spreading around the world. It will affect market sentiment in the near term, as the disease will hit the tourism and retail industries of Hong Kong,”

“These sectors have already been hit hard by the eight-month-long anti-government protests.”

But while Hong Kong played catch-up, other markets are looking a little calmer today amid hopes that the coronavirus outbreak could peak soon.

Traders are also encouraged by strong results from Apple after Wall Street closed last night. The tech giant posted record revenues and profits for the last quarter, justifying the doubling of its share price over the last year.

My colleague Julia Carrie Wong reports:

Sales of the iPhone 11 propelled Apple to all-time record revenues and profits for the final three months of 2019, a strong performance that comes amid concerns over the impact of the coronavirus on the Chinese economy.

Apple’s $91.8bn in quarterly revenue topped analyst expectations thanks to $56bn in iPhone sales. The strong performance marks a rebound for the company, which suffered a rare setback in holiday sales one year ago.

CEO Tim Cook reported strong demand for iPhones, and for the company’s newer wearable technology. He also said Apple was “closely following the development of the coronavirus”, amid worries that its supply chain could be disrupted.

Also coming up today

The US central bank meets to set interest rates today. The Fed probably won’t cut borrowing costs, despite ongoing pressure from Donald Trump, but it could pave the way to ease later this year.

Fed chair Jay Powell may also talk about the impact of the coronavirus on the global economy, which comes just as trade war tensions are easing.

It’s also a big day for US corporate news, with McDonalds, Boeing, Facebook, Microsoft and Tesla all reporting results.

The agenda

  • 1.30pm GMT: US trade balance for December
  • 7pm GMT: US Federal Reserve interest rate decision
  • 7.30pm GMT: Fed chair Jerome Powell holds press conference

Updated

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