By Isabelle Lee
Good morning. Powell signals a delay to rate cuts. China tries to settle nerves about its new stock exchange rules. And the US considers more sanctions against Iran. Here’s what’s moving markets. — Isabelle Lee
Staying high
Federal Reserve Chair Jerome Powell said recent inflation data have indicated it will likely take longer for the central bank to attain the confidence needed to lower interest rates. Powell pointed to the lack of additional progress made on inflation after the rapid decline seen at the end of last year. If price pressures persist, he said the Fed can keep rates steady for “as long as needed.” Powell’s remarks represent a shift in his message after a third straight month in which a key measure of inflation exceeded analyst forecasts. Meanwhile, Bank of England Governor Andrew Bailey hinted the UK might be able to lower rates before the US since inflation dynamics in the two economies are diverging. Treasury yields climbed to fresh 2024 highs with the two-year yield briefly hitting 5%. The S&P 500 slid for a third straight day, while the US dollar extended its advance.
Soothing noises
China’s top securities regulator tried to allay concerns about new stock exchange rules following a rout in small-cap shares. Guo Ruiming, a China Securities Regulatory Commission director, said they don’t expect a surge in delistings as a result of the changes. The amended rules target so-called “zombie” companies or “bad actors” in the market, said Ruiming, not small caps. The CSI 2000 Index of small-cap companies fell 11% in two days on fears of delisting risks in light of the new regulatory framework. China’s State Council on Friday pledged to tighten stock listing criteria, crack down on illegal share sales and strengthen the supervision of dividend payouts. The measures came after a recovery in Chinese stocks stalled this month as investor focus returned to the uncertain economic outlook and earnings growth. Only about 30 companies may be delisted next year due to their financial metrics, according to CSRC calculations.
Beating estimates
In a rare sweep, fixed-income and equities traders at five of the largest US banks beat estimates for the first quarter. Altogether they posted nearly $2 billion more from trading than analysts expected, eking out a small gain from a year ago in defiance of an anticipated decline. “Interest in investing in equities has increased,” Jim DeMare, Bank of America’s head of global markets, said. Geopolitical tensions and economic uncertainty have “caused investors to rethink their strategy, which drives opportunity in the markets,” he said. The haul helped ease the blow from disappointing net interest income, driven lower by increased pressure to pay out more for deposits. Bank of America and Morgan Stanley rounded out earnings season for the country’s biggest lenders on Tuesday: shares in the former dived on the back of expenses and worse-than-anticipated bad loan charge-offs, while the latter got a bigger than expected revenue boost.
Iran in focus
Treasury Secretary Janet Yellen warned that the US will strengthen its sanctions on Iran after its attack on Israel. She also said that “all options” to disrupt Iran’s terrorist financing will be on the table, and that the US wouldn’t hesitate to work with allies to continue disrupting Iran’s “destabilizing activity.” Meanwhile, Israel has vowed to retaliate for the weekend’s drone and missile attack, but is yet to provide any details about how or when. Some of the potential options range from a strike at Iran’s nuclear facilities — one of the riskiest and most aggressive possibilities — through to cyberattacks on military infrastructure or actions against Iranian proxies.
Coming up…
Investors will be keeping a leery eye on the bevy of top global policy makers that has descended on the US for spring meetings of the International Monetary Fund and World Bank. The IMF on Tuesday inched up its expectations for global economic growth this year, citing strength in the US and some emerging markets, while warning the outlook remains cautious amid persistent inflation and geopolitical risks.
The US on Tuesday reiterated to China its concerns over what it sees as industrial overcapacity in the world’s second-largest economy, prompting Beijing officials to push back against that accusation. Looking ahead, Israel and Iran will be a key focus for a gathering of Group of Seven finance ministers on Wednesday, as will the ongoing war in eastern Europe and the question of delivering fresh aid to Ukraine.
What we’ve been reading
Here’s what caught our eye over the past 24 hours:
- Xi rebuffs Scholz pressure to rein in Chinese manufacturing
- Trump mastered the art of SPAC deal. Cashing out is harder
- Bid to bring private assets to masses fires up meme crowd
- Cathie Wood’s ARKK hits five-month low as Tesla fuels falters
- LVMH sales growth slowed as wealthy consumers reined in spending on pricey handbags and cognac.
And finally, here’s what Ed is interested in today
There are some contrarian investors who reckon that the Fed’s interest hikes have actually buoyed the economy rather than cooled it. (My colleague Ye Xie has a great article on it here.) It might be considered an almost heretical view, but it’s an idea that has some merit.
Think of higher interest rates as restrictive to the degree they slow borrowing and investment in a way that translates into lower output, less demand for goods and services and less hiring. When interest rates go up, for the money you owe, it’s almost as if someone was reaching into your pocket and taking some of your money. That means less money is left over to spend and invest. That is how it feels to be a borrower.
But if you’re a lender, higher rates are great. You’re the one getting a little bit more money for yourself. If you’re a saver, a bond investor or a bank lending money, the reality is that higher interest rates mean more income for you.
For higher rates to be restrictive for the economy as a whole, the retarding effect of rates on growth and the value of financial assets must outweigh the stimulus effects of higher interest income.
That may not be the case in today’s world. Right now, economic agents that spend and invest the most money day-in and day-out in the private sector are overwhelmingly insulated from higher rates because many of them locked in lower borrowing costs during the near zero policy era. At the same time, they’re benefiting from higher savings and lending rates.
Of course, small businesses and lower income households are suffering, just not enough to drag down the economy as a whole at the moment. At some point, though, the bite from higher rates has to overwhelm the salve of higher interest income. We’re not there yet. But that day will come and growth will slow.