Global markets hit as Trump unveils China tariffs; Bank leaves rates on hold - as it happened

Graeme Wearden (until 1.45pm) and Nick Fletcher

from Economics | The Guardian on 2018-03-22 17:53 (#3JTMG)

5.53pm GMT

European markets have closed sharply lower, although off their worst levels, as a combination of factors unnerved investors once more.

In an echo of the early February slump, share prices around the globe came under pressure.

5.49pm GMT

Here's more on the exemptions to the US steel and aluminium tariff move:

#Steel & Aluminum #tarriffs update. US Trade Rep Lighthizer confirms during Senate Finance Committee testimony that these countries will be exempt:
- Canada
- Mexico
- EU
- Brazil
- Australia
- Argentina
- South Korea

Impact of tariff now only 30% of original announcement! pic.twitter.com/a3UkTngO7A

5.44pm GMT

The US move to impose sanctions on China is a high risk strategy, says Mike Jakeman, global analyst at the Economist Intelligence Unit:

This has been clearly signposted by the Trump administration and is actually likely to prove broadly popular with US businesses and in Congress. The Democratic minority leader in the Senate, Chuck Schumer, welcomed it as a sign of the US standing up to China.

But there is a lot riding on China's response. The US is gambling that any response will be proportionate. China could hit the US hard in return, by making access to the local market harder for US farmers, for example. Were farmers faced with falling prices for the exports and higher prices at home because of the import tariffs, the popularity of the tariffs would diminish quickly.

5.23pm GMT

And here's Trump's signed tariff sanctions against China:

5.03pm GMT

US President Trump says that tariffs signed today will be the "first of many" - this is just the opening salvo in a global trade war.

4.58pm GMT

President Trump is signing the order to impose tariffs on China, which he says could be up to $60bn.

He says he has been talking to senior Chinese representatives and asked them to cut the deficit by $100bn immediately.

4.27pm GMT

The proposed tariffs on China are expected shortly. AP sums up the situation:

The Trump administration is readying restrictions on Chinese investment and tariffs on nearly $50 billion worth of Chinese imports to punish Beijing for stealing American technology and pressuring U.S. companies to hand it over.

China is already warning that it will take "all necessary measures" to defend itself, raising the prospect of a trade war between the world's two biggest economies.

4.10pm GMT

A number of countries look like they will be exempt from the proposed US tariffs on steel and aluminium, including the European Union, Mexico, Canada, Australia, Argentina, Brazil and South Korea. China of course is clearly in the frame.

Here is the European side, from Daniel Boffey in Brussels:

The EU believes it has won a temporary reprieve from president Donald Trump's tariffs on steel and aluminium after appealing to Washington to take a step back from a potential trade war.

Following intensive talks in the US, the EU's commissioner for trade, Cecilia Malmstrom, said she believed the omens were good, although she indicated concern that the situation could unravel.

3.59pm GMT

With markets tumbling it is no surprise the measure of volatility is on the way up again:

OUCH! Fear Index #VIX jumps above 20 again as sentiment in US stocks is confused following Fed meeting. Chaos in DC and Sell off in banks add to the confusion. pic.twitter.com/uEv5ySc3tB

3.32pm GMT

Back with the Bank of England, and is a May rate rise a done deal? Our economics editor Larry Elliott says it would be a suprise if there is no increase but the Bank has been careful to give itself some wriggle room:

A rate rise will depend on the economic data that is published over the next month and a half, but judging by the minutes of the MPC's March meeting that data would have to be quite poor for Threadneedle Street to sit tight.

3.26pm GMT

The weakness in the FTSE 100 could mean UK-listed companies being targets for potential predators, says Richard Hunter, head of markets at Interactive Investor,:

At current levels, the FTSE100 is just a few points from being down 10% in the year to date, knocking on the door of what is often described as correction territory.

UK equities on the whole have fallen out of favour with international investors with the spectre of Brexit looming, whilst the recent relative strength of sterling has meant additional pressure on the premier index, where the majority of earnings come from overseas. Meanwhile, the possibility of trade disputes particularly between China and the US is denting sentiment, and the move towards tighter monetary policy is another brick in the wall of worry which investors are currently climbing.

3.15pm GMT

Markets continue under pressure, ahead of the announcement by President Trump of trade tariffs.

Apart from fears of a trade war, investors are also concerned about the fallout from the current Facebook controversy, and the prospect of increased regulation for technology companies. Facebook itself has lost another 3% so far today.

2.11pm GMT

The pound's surge in the immediate wake of the Bank of England announcement has proved short lived, as investors decided that an interest rate rise in May had really already been priced into the market.

Sterling has slipped 0.02% to a1.1455 against the euro and is down 0.16% against the dollar at $1.4116. Ken Odeluga, market analyst at City Index, said:

Sterling traded against the dollar was able to spike to a fresh seven-week high though it soon settled around 100 pips lower. It remained elevated relative to earlier in the month. Against the euro the pound made a similarly short-lived move to the highest levels since January but then retreated by 60 pips. In short, a May rate rise remains all but certain, but the market had largely priced it before Thursday.

2.00pm GMT

More signs of a fairly robust US economy, with the latest snapshots of the manufacturing and service sectors.

The preliminary IHS Markit manufacturing PMI for March has come in at 55.7, up from 55.3 last month and the highest level since March 2015.

The flash PMI surveys indicate that the economy likely continued to expand at a robust pace in March, rounding off a solid opening quarter of the year. The surveys are running at a level consistent with annualised first quarter GDP growth approaching 2.5% (though we note that official GDP estimates may once again understate growth in the opening quarter of the year).

The survey's employment index is meanwhile at its highest for nearly three years and indicative of another strong payroll rise in the order of 240,000 in March.

The improved hiring trend reflects buoyant optimism regarding future growth. Companies' expectations for output in the year ahead remained elevated, dipping slightly in services but surging to a three-year high in manufacturing.

Inflationary pressures meanwhile remain a key theme of the surveys, especially in manufacturing, reflecting increased raw material prices, notably for metals. The survey found average prices charged for goods and services are rising at one of the strongest rates seen since 2014. Furthermore, with factory costs showing the largest jump for seven years amid growing shortages of key inputs, inflationary pressures appear to be on the rise.

US Markit PMI Data (Mar P):
- Manufacturing 55.7 versus 55.5 expected, previous 55.3 - Highest since March 2015
- Service 54.1 versus 55.8 expected, previous 55.9

Full Report: https://t.co/BbVo6HFZkb

1.46pm GMT

Back with UK interest rates, and there could be four over the next two years, reckons Kallum Pickering, senior UK economist at Berenberg:

The Bank of England seems to be re-opening the playbook it used ahead of the November 2017 rate hike. Step one, signal to markets that a hike could come soon. Step two, let a couple of known hawks dissent in a policy vote shortly thereafter. Step three, hike rates. After signalling at the February 2018 Inflation Report that a rate hike could come soon, the minutes of the March Monetary Policy Committee meeting published today showed two members of the nine member Monetary Policy Committee - Saunders and McCafferty, both known hawks - voted in favour of raising the Bank Rate by 25bp to 0.75%. These are the same members that dissented ahead of the November hike. The March minutes strengthen the bank's February guidance that a hike could come soon. The real question is, when will it happen?

...We expect the BoE to hike its Bank Rate by 25bp four times over the next two years, with two hikes in 2018 and two in 2019. This would take the Bank Rate to 1.5% by the end of 2019. We look for the next 25bp hike in May 2018.

1.41pm GMT

Ouch! Britain's FTSE 100 has fallen to a fresh 15-month low.

London's index of leading shares has lost 101 points, or nearly 1.5%, to 6937. That's its lowest point since December 2016.

1.26pm GMT

Peter Dixon, Economist at Commerzbank, thinks there are two good reasons for the Bank of England to raise interest rates away from their near-record lows.

1.06pm GMT

A rate rise would be good news for savers. And Craig Inches, head of rates & cash at Royal London Asset Management, suggests the Bank of England should have taken the plunge today.

He argues:

"Today's decision not to raise rates was a missed opportunity in our opinion. With real wage growth moving into positive territory for the first time in over two years, strong retail sales (despite the adverse weather conditions) and some welcome progress on the Brexit negotiations, the uncertainty that has concerned the Bank in recent months is beginning to be demystified.

"The markets were warned in February that rates would rise "faster and sooner", the question we'd ask is why the Bank thought it necessary to wait until May. The probability of a rate rise now stands at over 75% following the vote today, sterling has risen in recent weeks from 1.37 to 1.42 and gilt short gilt yields have risen to the highs of the year. Given these moves and in light of the recent slew of positive data, the economy is clearly ready for a rate hike in May, but it would have been just as ready today!

"In the meantime the Bank continues to buy gilts via the APF facility and is massively distorting the shape of the yield curve, which is detrimental for pension funds and an accident waiting to happen further down the line."

1.02pm GMT

Economist James Smith of Dutch bank ING says the Bank of England could potentially raise interest rates twice this year - perhaps once in May, and once in the autumn.

But that could be undone if Brexit negotiations hit problems, Smith adds:

By alluding to the need for "ongoing tightening", policymakers have kept the door open to a second rate hike later this year. We certainly wouldn't rule it out, and markets are increasingly coming around to this view - there's now not far off two hikes priced in for this year.

But if Brexit talks - which are due to be wrapped up in October to allow time for ratification - get particularly noisy, then this could get in the way of a second rate rise in the autumn.

We're not going to rule out a second rate hike in 2018 says ING's @smitheconomics and other key takeaways from the Bank of England meeting.https://t.co/rVwZOjSbMM

12.33pm GMT

The City was surprised that two MPC policymakers wanted to raise interest rates today, says Ben Brettell, senior economist at Hargreaves Lansdown.

He suspects that Brexit angst is helping to split the monetary policy committee:

Ian McCafferty and Michael Saunders are worried that inaction now will mean rates will need to rise faster and further in future. Sterling jumped on the news, hitting a seven-week high against the dollar.

The Bank faces a delicate balancing act. Inflation seems to be falling back towards the target of 2%, as the effect of the weaker pound starts to filter out of the calculation. But a pick-up in wage growth points to an erosion of slack in the labour market. This raises the prospect that a wage-price spiral could push inflation back up in future. Throw in a hefty dose of Brexit-related uncertainty and it's easy to see why the committee is divided at present.

12.28pm GMT

The Institute of Director's senior economist, Tej Parikh, reckons the Bank made the right decision this month.

"Business leaders will welcome the Bank of England's decision not to spring any surprises this month, but firms and households will be on tenterhooks for what comes in May.

"The Bank has been paving the way for a rate rise, but must tread lightly until there is richer evidence of growing inflationary pressures, to avoid unnecessarily placing a speed bump in the way of economic activity.

12.25pm GMT

UK savers and borrowers should prepare for interest rates to rise in May, warns Ed Monk, associate director for Personal Investing at Fidelity International:

Monk says the recent pick-up in UK wage growth (to 2.8%, if you include bonuses) means the Bank is worried that the economy could overheat.

"The message from the Bank of England to borrowers couldn't really be clearer: get ready for higher rates now. Two members voted for a rate rise this month and the Bank said nothing to dispel expectations that rates will rise in May.

"The rate rise made in November felt like a straightforward reversal of the emergency post-Brexit cut, but this now feels more like we're entering a genuine tightening phase at the Bank.

12.17pm GMT

The minutes of this week's meeting show that the Bank of England expects to raise interest rates over the coming months, having left them at 0.5% today.

It says:

Given the prospect of excess demand over the forecast period, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a more conventional horizon.

All members agreed that any future increases in Bank Rate were likely to be at a gradual pace and to a limited extent.

These members noted the widespread evidence that slack was largely used up and that pay growth was picking up, presenting upside risks to inflation in the medium term. A modest tightening of monetary policy at this meeting could mitigate the risks from a more sustained period of above-target inflation that might ultimately necessitate a more abrupt change in policy and hence a greater adjustment in growth and employment.

There had been few surprises in recent economic data and the February Inflation Report projections, conditioned on a gently rising path of Bank Rate, had appeared broadly on track. The May forecast round would enable the Committee to undertake a fuller assessment of the underlying momentum in the economy, the degree of slack remaining and the extent of domestic inflationary pressures.

12.08pm GMT

GBP Intraday (Following BOE Decision): 7-2 in favor of no change, 2 wanted a hike pic.twitter.com/nRcXgtNfI4

12.07pm GMT

The pound has jumped, following the news that two policymakers - Ian McCafferty and Michael Saunders - voted to raise UK interest rates today.

Sterling has hit a1.151 against the euro, the highest level since June 2017.

12.00pm GMT

NEWSFLASH: The Bank of England has left UK interest rates unchanged at 0.5%.

Two members of the MPC voted to hike rates, but were outvoted by the other seven policymakers.

11.55am GMT

Five minutes to go, until we learn whether the Bank of England has voted to leave rates on hold....

11.43am GMT

Britain's FTSE 100 shares index has fallen below the 7,000 point mark for the first time in 15 months.

Worries over trade wars, plus the strength of the pound, have combined to pull the index of blue-chip companies down to 6,983, a drop of 55 points.

11.36am GMT

The team at Deutsche Bank believe the Bank of England will raise rates in two months time...

Deutsche Bank 1/2: @bankofengland decision due out at 12pm GMT today. The consensus is for no change in policy while market pricing also assigns a low 16% probability of a hike. #forex #fx #BoE #forextrading #centralbanks

DB 2/2: bigger question is whether or not we see a more hawkish #BoE centre in light of yesterday's stronger than expected wages numbers. Indeed, pricing for a May hike is over 80% & our #UK economists yesterday changed their view to a rate hike (from a hold) for 2 months' time

11.31am GMT

Here's an explanation of how the Bank of England sets interest rates:

One of Gordon Brown's first moves as chancellor in 1997 was to hand control of interest rates to an independent Bank of England. Previously the cost of borrowing had been decided between the chancellor and the governor of the Bank.

11.12am GMT

The pound is pushing higher as traders get ready for the Bank of England decision, in under 50 minutes.

Sterling has risen to a1.1489 against the euro, its highest levels since January 25th.

Another sterling morning for the Pound, BoE likely to take GBP/EUR through a1.15 pic.twitter.com/CjyBFgO2eg

While a rate hike is not expected today, it is heavily priced in for May when the central bank will also release its inflation report containing new macro-economic projections.

The Monetary Policy Committee has become notably more hawkish recently and the reference to rate hikes needing to come "somewhat earlier and by a somewhat greater extent" than it expected in November, last month was a clear reference to an upcoming meeting. If the MPC is still planning to raise in May, I would expect another clear hint from the central bank today.

10.55am GMT

Over in the City, shares in printing group De La Rue have slumped by 5% after it missed out on the contract for Britain's new blue-coloured passport.

De La Rue is fuming over the snub, especially as the contract has been awarded to Gemalto, a Franco-Dutch security firm.

"come to my factory and explain my dedicated workforce why they think this is a sensible decision to offshore the manufacture of a British icon".

"Theresa May and Amber Rudd need to explain to De La Rue workers why 'taking back control' means their jobs could be put at risk while the production of Britain's new iconic passport is shipped overseas to France.

"It wouldn't happen in France because of national security and it shouldn't happen in the UK. De La Rue is the UK's leading security printer making bank notes as well as passports sustaining thousands of decent jobs in the UK.

#passport issue potentially very toxic for government. 1) there is comedy element of new blue passport being made overseas and 2) the danger voters think free trade promise of #Brexit = things they don't like.

10.26am GMT

Optimism is building that Europe could win an exemption from America's new US tariffs on steel and aluminium.

EU trade commissioner Cecilia Malmstrom has just held high-level talks with US officials, in an effort to prevent European metal-producers from being hit by Donald Trump's import duties, which kick in tomorrow.

"Cecilia Malmstrom had a good, very fruitful visit to Washington,.

We have good opportunities now to solve the issue and stabilize, or calm down, the problem."

Good meeting here in snowy Washington DC with Secretary of Commerce Wilbur Ross. We have agreed to launch immediately a process of discussion with President Trump and the Trump Administration on trade issues of common concern... 1/2

...including steel and aluminium, with a view to identifying mutually acceptable outcomes as rapidly as possible. I will also speak to @USTradeRep Lighthizer later today. Returning to Brussels this evening. https://t.co/xnKyJbp7Q0 2/2

9.51am GMT

Newsflash: UK retail sales rose last month, but the broader picture is still downbeat.

Retail sales volumes (the amount of stuff people bought) rose by 0.8% in February, compared to forecasts of just 0.4%.

"Retail sales did grow in February, with increases seen in food, non-store and fuel, but this followed two months of decline in these sectors.

"However, the underlying three-month picture is one of falling sales, mainly due to strong declines across all main sectors in December.

9.33am GMT

Just in: The eurozone's recent economic surge seems to be levelling off.

Data firm Markit has reported that growth across eurozone service sector firms and manufacturers has slowed to its slowest since January 2017.

The fact that export order book growth has more than halved since the end of last year suggests the stronger euro is taking an increasing toll on export performance. Survey responses also highlighted how political uncertainty also appears to have intensified, dampening demand.

The data therefore suggest that eurozone growth peaked around the turn of the year and the region is settling into a slower, but still robust pace of expansion.

9.05am GMT

European stock markets have dropped this morning, as investors fret about the risks of a trade war.

The FTSE 100 is down 13 points, or 0.2%, at 7021 after falling through 7,000 points at the start of trading. Germany's DAX has lost 0.4%.

The state of the Dow futures, alongside the re-emergence of trade war chatter ahead of Trump's China tariff announcement later this Thursday, left the European indices in a sorry state after the bell.

8.45am GMT

Alan Clarke of Scotia Bank is confident the Bank of England will leave rates on hold today:

MUFG: "Outside chance that the BoE could deliver a rate hike as soon as today" pic.twitter.com/3Nie292crV

8.21am GMT

The US dollar has fallen against other major currencies overnight, as traders digested Jerome Powell's debut press conference since becoming Fed chief.

I thought Powell handled the occasion pretty well (rattling through the questions within 45 minutes, not the full hour available). He was upbeat about the US economy, avoided any bear traps, and reassured listeners that the Fed would take the 'middle ground' as it seeks to normalise monetary policy without slowing growth.

8.11am GMT

China's central bank has responded to last night's move in US interest rates, by hiking its own borrowing costs.

The People's Bank of China increased the cost of short-term loans to commercial lenders, hours after the Fed announced it was tightening policy in America.

The People's Bank of China raised the interest rates it charges on 7-day reverse-repurchase agreements by five basis points, the central bank said in a statement. The move is "in line with market expectations and a normal reaction to the Fed's rate hike", the PBOC said in a statement on the website.

China's CB, PBoC raises borrowing costs after Fed hikes, (interest rates it charges on 7-day reserve repo by 5bp), chart @business https://t.co/tOJlglx4yn pic.twitter.com/kSus99plX4

#China's central bank conducts 10 billion yuan 7-day reverse-repo, with rate going up to 2.55%. It follows US Fed's move to raise rates. It comes only days after China's newly appointed PBOC governor Yi Gang said its rate hike decision will largely based on domestic situations. pic.twitter.com/KlG1iOiF3V

8.05am GMT

The Bank of England could send the pound shooting higher at lunchtime, if it hints at a rate hike in the next few months (or even raises rates today, of course).

Konstantinos Anthis, head of research at ADS Securities, explains:

The focus today will be on the Bank of England rate decision which will have a significant effect on the medium-term outlook of the British pound. The UK currency has seen good demand over the past few days being supported by expectations for a positive labour market report - which indeed printed in a bullish fashion yesterday - but also hopes for a hawkish tone from the BoE today. The key drivers for this upbeat bias? Inflation rebounded higher last month, we noted good wage growth in yesterday's employment report and there has even been progress in the Brexit negotiations.

All these factors paint a positive outlook for the pound and shape expectations for a bullish BoE message which will underpin investors' hopes for a rate hike soon. There's some speculation that the BoE might even go ahead and raise rates today but we believe that this is too optimistic - our base scenario suggests an interest rate increase in the summer, either in May or June. Today though a positive message and a consistent bullish bias from the British central bank will keep the pound in demand: we're looking to the pound/ dollar to extend gains towards 1.42 and euro/ pound to break below the 0.87 mark.

7.51am GMT

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

Thanks to the drop in headline inflation to 2.7% in February (3.0% in January), and the uptick in nominal weekly earnings to 2.8% in January (up from 1.9% in May 2017), the real wage squeeze is probably over.

Tight labour markets should push nominal wage growth higher over the medium term as inflation gradually trends towards a rate of about 2-2.5%. Real weekly earnings growth can rise towards 1.0% by the end of the 2018.

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