Fed's Mester says higher rates likely needed later this year

NEWARK, Del. (Reuters) – The U.S. Federal Reserve may need to raise interest rates in 2019 but it could still end its efforts to trim its massive bond portfolio before the end of the year, Cleveland Federal Reserve President Loretta Mester said on Tuesday.

Mester’s comments are an example of the complexity of the U.S. central bank’s efforts to establish new norms for setting monetary policy at a time when the economic outlook appears increasingly uncertain.

Mester, who has long supported higher interest rates, also backed the Fed’s decision last month to remove guidance in its policy statement on whether its next move was likely to be a raise or a cut in rates. On Tuesday, she said dropping the rate guidance from the policy statement was part of the Fed’s shift to what she called more “normal” policy.

At the same time, she still expects the economy to stay strong despite risks to growth like a global economic slowdown and ongoing trade negotiations between the United States and China.

“I would think that we probably have to raise interest rates a little bit later this year,” Mester told reporters in Newark, Delaware.

Mester said her view was that the Fed could also end its process of trimming its bond holdings by the end of this year.

The Fed’s balance sheet ballooned to over $4 trillion in the wake of the 2007-09 recession and policymakers began trimming bond holdings in the final months of 2017.

Some financial market analysts have said the reduction of the balance sheet has amounted to a tightening of monetary policy and Mester said the process has likely put upward pressure on longer-term interest rates.

But she does not expect ending the balance sheet reduction process will provide any economic boost.

“In general I don’t think the balance sheet would have a material impact on the economy,” she said.

Mester does not have a vote on the Fed’s policy-setting committee this year although she participates in the central bank’s deliberations.

Mester said she would prefer the Fed only hold Treasury securities, and would favor a portfolio weighted toward shorter-term maturities.

The Fed is reducing the balance sheet by not reinvesting all of the proceeds of its maturing securities. Earlier in the day, Mester’s comments on a panel at the University of Delaware suggested she supported a “slowing” of the balance sheet reduction process.

Speaking with reporters, Mester said she thought the Fed could end its efforts at balance sheet reduction in one step.

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Dollar slips on U.S.-China trade hopes, Swedish crown sags

NEW YORK (Reuters) – The dollar on Tuesday fell against a basket of other currencies as traders scaled back their safe-haven greenback holdings on optimism that a fresh round of talks between China and the United States would help resolve their trade conflict.

The dollar index hit a near two-month peak on Friday after last week’s set of negotiations in Beijing failed to result in a deal, although officials from both sides said the talks had produced progress on contentious issues.

“We are hoping to hear more positive news on trade,” said Dean Popplewell, chief currency strategist at Oanda in Toronto. “The dollar should come under pressure as it loses some safe-haven appeal.”

The ICE index, which tracks the dollar against six other major currencies, was down 0.25 percent at 96.657. On Friday, it hit 97.368, which was the highest since Dec. 17.

U.S. financial markets were closed on Monday for the Presidents Day holiday.

Among other major currencies, the Swedish crown tumbled after weak inflation data spurred sales of the currency and a paring of bets that interest rates would rise this year.

Last week, the crown rose after Sweden’s central bank broke with growing caution among major monetary-policy makers, saying it would stick to its plan to raise rates in the second half of 2019.

The currency plunged more than 1 percent to a two-year low against the dollar at 9.4180, after a report showed inflation slowed in January.

Against the euro, it was headed for its biggest daily decline in more than 15 months. It touched 10.621, its weakest since September.

The euro appreciated against the dollar on trade optimism. It reversed earlier losses after data showed Italian industrial orders dropped 5.3 percent in December from a year earlier.

Euro zone bond yields, notably those of German bunds, fell amid the cloudy European economic outlook, weighing on the euro. When European Central Bank policymakers meet on March 7, they are expected to lower growth and inflation projections.

The euro was up 0.2 percent at $1.13350 , holding above a three-month low of $1.1234 set last week.

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The single currency, however, fell against the British pound as data showed domestic workers’ salaries held at its fastest pace in a decade in late 2018.

The euro was 0.62 percent lower at 86.99 pence, while the pound was up 0.82 percent at $1.303.

The sterling’s gains were limited ahead of British Prime Minister’s Theresa May’s meeting with the EU to find a way to get their Brexit deal through the UK parliament.

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Gold hits 10-month peak on hopes for U.S.-China trade talks

NEW YORK (Reuters) – Gold prices surged to a 10-month high on Tuesday, as the U.S. dollar weakened, on optimism for a breakthrough in U.S.-China trade talks, with bullion also receiving support as a safe-haven asset due to concerns over global growth.

A gauge of global stock markets rose modestly, with an advance in Walmart helping to lift Wall Street equities, although gains were hemmed in by concerns in Europe a car tariff could hurt the region’s exports to the United States.

Worries over a possible global economic slowdown buoyed gold prices. The World Trade Organization warned of sluggish trade as a leading indicator of world merchandise trade hit its lowest reading in nine years.

A new round of talks between the United States and China to resolve an extended trade spat will take place in Washington on Tuesday, with follow-up sessions at a higher level later in the week, following a round of negotiations in Beijing last week.

The Dow Jones Industrial Average fell 27.17 points, or 0.1 percent, to 25,856.08, the S&P 500 lost 0.1 points, or 0.00 percent, to 2,775.5 and the Nasdaq Composite added 8.93 points, or 0.12 percent, to 7,481.34.

The pan-European STOXX 600 index lost 0.23 percent and MSCI’s gauge of stocks across the globe gained 0.05 percent.

Emerging market stocks rose 0.07 percent. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.03 percent higher, while Japan’s Nikkei rose 0.10 percent.

Gold prices surged to a near 10-month high, driven by concerns over slowing global growth. Adding to recent weak data from the United States, Japan and China, an ECB official signaled interest rates would remain at current levels until monetary policy goals are met.

Spot gold added 0.9 percent to $1,338.21 an ounce. U.S. gold futures gained 1.44 percent to $1,341.20 an ounce.

Bank of Japan Governor Haruhiko Kuroda said on Tuesday the central bank was ready to ramp up stimulus if the stronger yen derails the path toward its 2 percent inflation target.

The Japanese yen strengthened 0.03 percent versus the greenback at 110.61 per dollar, while Sterling was last trading at $1.3028, up 0.83 percent on the day.

The dollar index, tracking the U.S. unit against six major currencies, fell 0.27 percent, with the euro up 0.18 percent to $1.1328.

“We are hoping to hear more positive news on trade,” said Dean Popplewell, chief currency strategist at Oanda in Toronto. “The dollar should come under pressure as it loses some safe-haven appeal.”

The Swedish crown pared losses against the dollar after hitting a more than four-year low after inflation data came in decidedly weak just two months after a milestone rate hike.

The crown lost 0.74 percent versus the U.S. dollar at 9.32.

U.S. crude rose 0.07 percent to $55.63 per barrel and Brent was last at $65.92, down 0.87 percent.

Benchmark 10-year notes last rose 8/32 in price to yield 2.6375 percent, from 2.666 percent late on Friday.

The 30-year bond last rose 12/32 in price to yield 2.9786 percent, from 2.997 percent late on Friday.

Copper rose 0.77 percent to $6,323.50 a ton.

(Graphic: Global assets in 2019 – tmsnrt.rs/2jvdmXl)

(Graphic: Global currencies vs. dollar – tmsnrt.rs/2egbfVh)

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U.S. wants pledge for stable Chinese yuan as talks resume: report

WASHINGTON (Reuters) – The United States is seeking to secure a pledge from China it will not devalue its yuan as part of an agreement intended to end the countries’ trade war, Bloomberg reported on Monday.

Officials from the two countries, which resumed talks on Tuesday in Washington, are discussing how to address currency policy in a “Memorandum of Understanding” that would form the basis of a U.S.-China trade deal, the news agency reported, citing unnamed people involved in and briefed on the discussions.

U.S. Treasury Secretary Steven Mnuchin had told Reuters last October that currency issues must be part of U.S.-China trade negotiations and that Chinese officials told him that further depreciation of the yuan was not in their interests.

The Bloomberg report said the U.S. request for a pledge to keep the yuan’s value stable was aimed at neutralizing any effort by Beijing to devalue its currency to counter American tariffs.

Spokesmen for the U.S. Trade Representative’s office, which is leading the talks, and the U.S. Treasury, which leads currency policy, could not immediately be reached for comment.

Two days of negotiations between deputy-level officials began on Tuesday, led by Deputy U.S. Trade Representative Jeffrey Gerrish on the U.S. side. Higher-level talks involving Mnuchin and led by USTR Robert Lighthizer, are expected to begin on Thursday.

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The talks follow a round of negotiations that ended in Beijing last week without a deal but which officials said had generated progress on contentious issues between the world’s two largest economies.

The talks are aimed at “achieving needed structural changes in China that affect trade between the United States and China. The two sides will also discuss China’s pledge to purchase a substantial amount of goods and services from the United States,” the White House said in a statement issued late on Monday.

U.S. tariffs on $200 billion in imports from China are set to rise to 25 percent from 10 percent if no deal is reached by March 1.

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BlackRock, KKR plan $4 billion-$5 billion investment in ADNOC pipeline unit: FT

(Reuters) – U.S. investment firms BlackRock Inc and KKR & Co Inc are in advanced talks to take a $4 billion to $5 billion stake in Abu Dhabi National Oil Co’s (ADNOC) pipeline network, the Financial Times reported on Tuesday.

The deal could be signed as early as next week, the newspaper reported, citing people briefed on the matter.

State-owned ADNOC was looking to sell a stake in its multibillion-dollar pipeline infrastructure assets, Reuters had reported bit.ly/2GySytx in early October.

ADNOC has started a major transformation drive in the past two years to make it more competitive and commercially focused like other state-owned peers, selling and listing stakes in parts of its business.

BlackRock and KKR did not immediately respond to a Reuters request for comment, while ADNOC declined to comment.

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Oil slips from 2019 high as economy worries weigh

LONDON (Reuters) – Oil fell from its 2019 high of almost $67 a barrel on Tuesday as concerns about the progress of U.S.-China trade talks and slowing economic growth countered lower supplies.

Supply cuts led by the Organization of the Petroleum Exporting Countries have helped crude to rise more than 20 percent this year, although demand-side worries remain the main drag on the market.

Brent crude slipped 64 cents to $65.86 a barrel by 1435 GMT, having reached a 2019 high of $66.83 on Monday. U.S. crude was down 26 cents at $55.33.

“The market is slowly regaining its bullish footing, subject to the perception of economic risks tied to U.S.-China trade talks,” said Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas.

More talks between the United States and China to resolve their trade dispute will take place on Tuesday. Traders said they were cautious on taking large new positions before the outcome of the talks.

“If they falter, we run the risk of sell-offs like we had in December,” Tchilinguirian said.

In a further warning sign about the economic outlook, Europe’s biggest bank HSBC warned it may delay some investments this year as it missed 2018 profit forecasts due to slowing growth in China and Britain.

OPEC last week lowered its forecast for growth in world oil demand in 2019 to 1.24 million barrels per day and some analysts believe it could be weaker still.

“Given a continuously uncertain economic picture, our already relatively bearish outlook for 2019 of below 1 million bpd in global oil demand growth may be subject to further downwards revisions,” analysts at JBC Energy wrote.

To stop a build-up of inventories that could weigh on prices, the group of OPEC and non-OPEC producers known as OPEC+ began a new supply cut of 1.2 million bpd on Jan. 1.

Top crude exporter Saudi Arabia has sharply reduced production and exports to ensure that the deal gets off to a strong start.

In keeping with that aim, the kingdom plans to reduce light crude oil supplies to Asian customers for March, two sources with knowledge of the matter said on Tuesday.

U.S. sanctions against exporters Iran and Venezuela have provided additional support to the market.

Venezuela is a major crude supplier to U.S. refineries. Iran’s exports, while down steeply since the sanctions began in November, have risen in early 2019, according to tanker data and sources.

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Former Trump adviser Stone ordered to appear in court over Instagram posts

WASHINGTON (Reuters) – Roger Stone, a former political adviser to U.S. President Donald Trump, was ordered on Tuesday to appear in court this week over Instagram posts that chastised and appeared to threaten the judge presiding over his criminal trial.

U.S. District Judge Amy Berman Jackson said Stone would need to show cause at a hearing on Thursday as to why the posts did not violate a gag order in the case or the conditions of his release.

Stone, who is free on a $250,000 bond and is free to travel to certain U.S. cities without the court’s permission, has pleaded not guilty to charges of making false statements to Congress, obstruction and witness tampering as part of Special Counsel Robert Mueller’s investigation of Russian meddling in the 2016 election.

Stone’s attorneys filed a formal apology with the court on Monday, after he posted a photograph on Instagram of Jackson alongside what appeared to be the crosshairs of a gun.

He later deleted the image and reposted it without the crosshairs before removing it again, according to other media outlets.

Next to the close-up image of Jackson’s face, Stone said Jackson was an “Obama appointed Judge who dismissed the Benghazi charges” against Hillary Clinton. He also accused Mueller of being a “Deep State hitman.”

Stone later posted a statement on his account saying the photo was not intended to threaten the judge or disrespect the court.

His posts came just days after Jackson issued a partial media gag order on Stone and his lawyers.

Friday’s order prohibits them from speaking with the news media or making statements near the federal courthouse about the case, but it does not stop Stone from discussing the case when he is away from the courthouse.

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Huawei founder says will not share data with China: CBS News

WASHINGTON (Reuters) – Huawei Technologies Co Ltd’s founder and chief executive pledged not to share any customer information with the Chinese government and said the company had never done so, in an interview with CBS News that aired on Tuesday.

Asked if it had shared data with China’s government, Huawei’s Ren Zhengfei said in a translated interview with the television news outlet: “For the past 30 years, we have never done that. And (for) the next 30 years to come, we will never do that.”

Ren also said the company did not have a back door to share customer data with Beijing without his knowledge.

“It is not possible,” he told CBS, saying if there were such an opening the United States would have uncovered it already.

On Monday, Ren said in a separate interview with the BBC that the technology company would not undertake any spying activities and that it could shift its business investments to other countries amid an ongoing U.S. pressure campaign.

The United States is calling on its allies not to use technology from Huawei, the world’s biggest producer of telecommunication equipment, amid concerns over its relationship with the Chinese government and allegations it has enabled state espionage.

Huawei has repeatedly denied such claims.

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Activist Bramson's unlikely Barclays board seat bid sharpens scrutiny of bank

LONDON (Reuters) – Activist investor Edward Bramson’s bid to join the Barclays board is destined to fail, shareholders told Reuters, though he has sharpened scrutiny of its investment banking strategy that Bramson argues has depressed profitability.

When Barclays reports its 2018 results on Thursday, investors will examine whether the trading and advisory business that Bramson believes should be shrunk has improved its performance, and whether those gains are sustainable.

“The onus is now on the Barclays management team to convince the market that their plan is the best way forward,” one investor said. “This probably requires more disclosure on the varying returns within the corporate and investment bank.”

The high-profile dispute between Bramson and Barclays CEO Jes Staley over strategy has helped spark wider debate about the viability of European investment banks, which have in recent years increasingly lagged U.S. rivals.

Barclays rival HSBC on Tuesday for instance reported a slump in fourth-quarter trading revenue, joining other European lenders in seeing a sharp annual decline from stock trading while U.S. rivals prospered.

(Graphic: Investment banks hit by Q4 market rout – tmsnrt.rs/2TVGoOq)

Bramson’s Sherborne vehicle holds 5.5 percent of Barclays stock.

In a letter to his shareholders last December, he criticized the bank’s tactic of using considerable capital and resources to chase modest or volatile investment banking revenues by undercutting rivals, which might beef up market share temporarily but offer poor long-term returns.

Barclays declined to comment.

Barclays’ corporate and investment bank averaged an annual return on equity of 4 percent between 2015 and 2017, compared with 6 percent for Barclays UK and 23 percent for the Consumer, Cards and Payments business, a Reuters analysis showed.

Bramson also said “fortunately timed” tax income benefits and some 900 million pounds ($1.2 billion) worth of non-recurring items put a gloss on the bank’s recent earnings. The bank by contrast said the report showed its strategy working.

NOBLE EXIT

Investors said that while Bramson’s board seat bid is unlikely to succeed, it could offer him a “noble exit” from a campaign that threatens his track record in driving lucrative change at target firms.

“I think having been rebuffed by asking the board for a seat he was always likely to take it to shareholders, but that doesn’t mean that he isn’t playing a game,” one investor, who declined to be named, said. 

“I’ve always thought he wouldn’t get anywhere and will just have to hope that the business does actually perform better than he thinks it can, and he can exit at a higher share price having nobly failed but without losing investors’ money.”

Barclays shares have fallen 27 percent since Bramson’s stake became public in March last year, suggesting his investors are currently set to take a heavy loss.

Some of Barclays’ recent actions to shore up the investment bank have irked investors sharing Bramson’s perspective, notably the appointment of more than 80 managing directors late last year and the transfer of up to 47 billion pounds of capital to the investment bank, to the perceived detriment of the broader group.

But while some share Bramson’s worries over Barclays’ poor risk-return profile and sagging credit rating – of just one notch above “junk” by Moody’s – it may prove hard to dismantle the bank’s strategy, even if he does win a board seat.

“If he gets on the board then he will definitely add value, but will he be a lone voice and still be seen as an outsider even though he has been voted on?” asked another investor.

TRACK RECORD

Bramson, together with Stephen Welker, co-managing director of Sherborne, has pursued 10 activist campaigns since 2003, six of which saw principals of Sherborne join the target company’s board.

Four of the investments were liquidated without a turnaround effort, including holdings in Scapa Group, Cutera, 4imprint Group and 3i Group.

According to filings, average sterling-based returns on the six completed investments before fees or incentive allocations were more than 110 percent.

All investors contacted by Reuters said they were not surprised by Bramson’s board seat resolution, tabled on Feb. 5, but said his chances of winning a place were slim.

“I can’t see any good reason why we would support his resolution,” a third shareholder said.

“At the moment, we have very little detail on what his alternative plan might be, and some of his reported conclusions look flawed, not least his focus on returns in Markets, whereas actually it is the Corporate bank that really needs to improve its returns.”

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Walmart holiday quarter sales top estimates, shares jump

(Reuters) – Walmart Inc reported an estimate-beating jump in holiday quarter comparable sales on Tuesday as a strong economy boosted consumer spending and fueled more e-commerce purchases, sending shares of the world’s larger retailer up nearly 3 percent.

The performance offered a glimpse into the health of the U.S. consumer as spending was helped by a strong labor market and cheaper gasoline prices.

“We still feel pretty good about the consumer. We haven’t seen much of a change,” Walmart Chief Financial Officer Brett Biggs told Reuters. “The data we are seeing still looks pretty healthy. Gas prices are down year over year, which helps.”

U.S. retail sales recorded their biggest drop in more than nine years in December, the government reported last week, as receipts fell across the board, suggesting a sharp slowdown in economic activity at the end of 2018.

Overall sales for the 2018 U.S. holiday shopping season hit a six-year high as shoppers were encouraged by early discounts, according to a Mastercard report in late December.

Walmart sales at U.S. stores open at least a year rose 4.2 percent, excluding fuel, in the fourth quarter ended Jan. 31. The gain exceeded analysts’ expectations of 2.96 percent, according to IBES data from Refinitiv.

Sales were also boosted after federal officials distributed food stamp aid early due to the partial government shutdown, the company said.

Adjusted earnings per share increased to $1.41 per share, beating expectations of $1.33 per share, according to IBES data from Refinitiv.

Online sales jumped 43 percent during the quarter, in line with the previous quarter’s rise, helped by the expansion of Walmart’s online grocery pickup and delivery services and a broader assortment on its website.

The company has expanded a program that allows customers to order groceries online and pick them up at its U.S. stores. It said it will have the service at 3,100 stores by next January. At the end of the third quarter it was offered at 2,100 stores.

Walmart will add grocery deliveries to about 800 more stores by the end of the year, bringing the total to 1,600 stores during the same period.

Grocery sales currently make up 56 percent of total revenue. At its investor day last year, Walmart Chief Executive Officer Doug McMillon claimed that Walmart has an advantage in the food category by offering fresh food within 10 miles of 90 percent of the U.S. population.

Amazon.com Inc is trying to crack the food category, especially since it bought organic supermarket chain Whole Foods.

Walmart is partnering with third-party couriers and working with so-called gig, or freelance, drivers, who are cheaper than full-time employees, to drive down costs, Reuters recently reported.

Google-backed Deliv, a Walmart delivery partner in Miami and San Jose, ended its relationship with the retailer, Reuters reported last week.

The U.S. retailer, which overtook Apple Inc to become the third largest e-commerce retailer last year, is likely to capture a 4.6 percent share of the U.S. e-commerce market, behind eBay Inc and Amazon, according to research firm eMarketer.

Walmart repeated its forecast that fiscal year 2020 earnings per share would decline in the low single digits in percentage terms, compared with last year. Excluding the acquisition of Indian e-commerce firm Flipkart, it sees an increase in the low- to mid-single-digits.

Walmart expects fiscal year 2020 comparable sales growth of 2.5 percent to 3 percent, excluding fuel and online sales growth of 35 percent.

Total revenue increased 1.9 percent to $138.8 billion, beating analysts’ estimates of $138.65 billion.

Walmart has recorded 18 quarters, or over four straight years of U.S. comparable sales growth, unmatched by any other retailer.

The stock rose to $102.66, up 2.7 percent in premarket trading.

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