Federal Reserve leaves interest rates on hold, as global manufacturing picks up pace - as it happened

Graeme Wearden

from on 2017-02-01 21:07 (#2B1PE)

US central bank resists raising interest rates, despite strengthening US economy, on day of strong factory date from across the globe

9.06pm GMT

And finally, Wall Street has closed a little higher tonight.

Shares were helped by the Fed's upbeat view of the US economy, and its decision not to hike borrowing costs.

#Stocks cap the session little changed after #Fed keeps rates on hold, offers few clues for future rate increases. https://t.co/UWxtpLEYiz pic.twitter.com/NfhR8SlGdR

8.27pm GMT

There's not much market reaction to the Fed decision.

The Dow Jones industrial average has turned positive. up a modest 24 points at 19,888 points.

8.02pm GMT

The next US interest rate hike might not come until June, argues Lee Ferridge, head of multi-asset strategy for North America at State Street Global Markets.

The market is currently attaching around a 25 percent probability to a hike in March and that is unlikely to change substantially following the broadly neutral statement. Although recent Fed commenters have taken a more hawkish tone it seems that the uncertainty surrounding likely policy moves in the coming months means that the FOMC remains in wait and see mode. While a March move is still possible should headline inflation and inflation expectations rise materially in the coming weeks, it seems that the June meeting is now the most likely time for the next hike in the cycle.

7.48pm GMT

Paul Ashworth of Capital Economics agrees, saying the Fed is obviously in 'wait and see mode'.

At the conclusion of its two-day FOMC meeting, the Fed issued a near-identical statement to the one released in December, which strongly suggests it has no intention of raising interest rates again at the upcoming March meeting.

7.46pm GMT

We love a sporting metaphor in this blog, but Matt Weller, Senior Market Analyst at Faraday Research, may baffle UK readers with this quote....

Ahead of today's Federal Reserve meeting, some analysts were comparing the central banker confab to this weekend's NFL Pro Bowl, an event that even diehard football fans struggled to watch given the lack of effort by the so-called stars. As it turns out, watching a replay of the Pro Bowl (or even watching paint dry) may have been more exciting.

7.45pm GMT

The Fed will be reluctant to raise borrowing costs until it has a better idea of Donald Trump's policy plans, argues Tanweer Akram of Thrivent Financial, a financial services group.

Akram says:

Higher tariffs, restrictive immigration policies, and protectionism could have some harmful effects, though increased infrastructure spending and lower taxes could be beneficially. It remains to be seen what economic policies will enacted and how these will be implemented.

Tighter labor markets could lead to an increase in inflation, but so far inflationary pressures have been restrained. The Fed will resume tighten in the coming months if economic conditions continue to show signs of improvement and there is evidence of inflationary pressures mounting.

7.40pm GMT

Kully Samra, UK Managing Director of Charles Schwab, says the Fed was in no rush to hike borrowing costs today:

"This is only the first FOMC meeting of eight in 2017 so there are still plenty of opportunities for the Fed to raise interest rates throughout the year and it is likely that we will see a rate rise in March or June. In our view, two rate hikes this year would be sufficient to stave off inflation concerns and would not negatively impact economic growth.

"Inflation is picking up and the Fed is becoming more hawkish, but the conditions supporting those moves can also be seen as positive news for US stocks. We continue to see encouraging economic data and earnings reports which, combined with a healthy job market, wage growth and increased consumer confidence, is good news for US equities and the wider economy.

"We stand by our view that U.S. stocks will outperform developed international stocks in the coming months. Although rising inflation and investor nerves could lead to bouts of volatility and some pullbacks, the bull market shows little sign of slowing in the near future."

7.21pm GMT

No-one's surprised that the Federal Reserve's Open Market Committee left interest rates unchanged today -- it's only two months since their last hike, after all.

Here's some reaction:

No change in policy expected but the little change in economic assessment leaves us wanting given the rise of risks domestically/globally

The dollar has turned red on the day. Trump will like.

FOMZZZZZZ

7.07pm GMT

The US Federal Reserve has flagged up that the US economy is strengthening (but not enough to encourage it to raise borrowing costs today).

In a statement, it says:

Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace

Job gains remained solid and the unemployment rate stayed near its recent low. Household spending has continued to rise moderately while business fixed investment has remained soft.

The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will rise to 2 percent over the medium term.

Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Federal Reserve holds rates, as expected. Statement: https://t.co/7dB6WlwehI

7.01pm GMT

Newsflash: America's central bank has decided to leave interest rates unchanged, at their current level of 0.5%-0.75%.

6.17pm GMT

European stock markets closed higher tonight, helped by the news that factory output across the eurozone rose last month.

France's CAC gained 0.96%, while Germany's DAX ended 1.1% higher.

With some words of Brexit-related caution, the Bank of England (BoE) may surprise with a more hawkish tone at tomorrow's Inflation Report as it revises up its near-term growth forecast and highlights growing underlying inflationary risks. The shift could come either in the form of more hawkish forward guidance or some MPC members voting in favour of bringing an end to the planned corporate bond purchase program sooner than planned.

3.16pm GMT

I'll be back in a few hours to catch the US Federal Reserve interest rate decision (at 7pm GMT, or 2pm East Coast time). In the meantime, here's a brisk summary.

The world's factory sectors made a decent start to 2017, according to a flurry of manufacturing surveys from across the globe.

US manufacturing sector another one to start 2017 off with a bang. And guess what? There's some price pressures too. pic.twitter.com/4JPshbzkqi

Common themes from the various manufacturing PMIs - strong start to 2017 across the world, price pressures intensifying (UK in particular).

3.02pm GMT

ISM has just released its rival survey of US manufacturing -- and it also shows growth picking up last month.

*U.S. JANUARY ISM MANUFACTURING INDEX AT 56; EST. 55

2.55pm GMT

Just in: America's manufacturing sector has grown at the fastest pace in almost two years.

Despite exports being subdued by the strong dollar, order books are growing at the fastest pace for over two years on the back of improved domestic demand.

"With optimism about the year ahead at the highest since last March, the outlook has also brightened.

2.31pm GMT

European stock markets are continuing to rally today, as traders welcome this morning's strong factory data.

The Stoxx 600 index is up 1.3%, on track for its biggest one-day gain since 9th November (the date of the US election)

2.13pm GMT

Over in Greece....there's no sign of a breakthrough in the stalled review of the country's bailout.

"Europe will be undermining itself, undermining democracy, if it insists."

1.26pm GMT

Breaking! American companies created tens of thousands more jobs than expected last month.

The latest ADP survey of US company payrolls has absolutely smashed forecasts, showing an increase of 246,000 workers last month. Economists had expected an increase of 165,000.

ADP employment figures beat estimates by miles, +246k vs 165k expected

$ADP comes in well above expectations 246,000 giving a boost to $USD dollar basket.
5 min @IGcom chart pic.twitter.com/sWd8e7piJH

12.58pm GMT

Our Brussels bureau chief, Daniel Boffey, has a great story -- a leaked report has shown that the EU is worried that a poor Brexit deal could hurt the City of London, and rebound badly on Europe's economy.

He writes:

The European commission's Brexit negotiators must strike a "workable" deal with Theresa May's government to protect the City of London or the economies of the remaining member states will be damaged, a leaked EU report warns.

The document - which has been seen by the Guardian - describes it as critical for the economic health of the remaining member states that the current financial eco-system is not hit in the coming Brexit negotiations.

12.28pm GMT

Morrisons have issued a statement to the City, confirming that Sir Ken Morrison has died, and explaining his major contribution to the company over more than 50 years:

"I know that I speak for the whole company when I say how profoundly sad we were to hear of Sir Ken's death. He was an inspirational leader and the driving force behind Morrisons for over half a century. Although he retired several years ago, his legacy is evident every day and in every aspect of our business.

"Taking Morrisons from a small Bradford-based family business to a major UK grocery retailing chain is an outstanding achievement in the history of UK business. On a personal level, Ken was an enormous help to me as we made some significant changes to set the business on a new course; his knowledge of retail and his strategic insights have remained as relevant and intuitive as they were when he first built the business.

12.12pm GMT

Sir Ken Morrison, one of Britain's most successful businessmen, has died at the age of 85.

Sir Ken took over his father's egg-and-butter grocery business in Bradford in the 1950s, and grew the company into one of the UK's largest supermarket chains on the back of "no nonsense" low-price offerings.

Sir Ken is regarded as a grandee of the British grocery business. Even at 71, he still walks the shop floors and is regarded as a hard task master by his 43,000 employees. He is fiercely protective of the company's northern heritage and his forays south are few and far between. When he does venture to the capital he ensconces himself in the foyer of a hotel and grants audiences to those who wish to see him.

But former Asda chief executive Allan Leighton described him as "streets ahead of everybody in terms of retailing".

Related: Profile: Sir Ken Morrison

Sad news just breaking - one of Yorkshire's most treasured sons has passed away. Thoughts with the family of Sir Ken https://t.co/EfLDQk7Er4 pic.twitter.com/T4TTDzet0m

Gutted to hear Sir Ken Morrison - founder of supermarket chain Morrisons - has died. An absolute legend.

Sir Ken Morrison, who was instrumental in growing supermarket Morrisons into one of the UK's largest retailers, has died aged 85 #yplive

11.30am GMT

There are also signs today that the UK housing market is running out of steam, as economic uncertainty and rising inflation hit confidence.

Nationwide, the building society, reported earlier this morning that annual house price inflation slowed to 4.3% in January, from 4.5% in December.

"With inflation set to rise further in the months ahead as a result of the weaker pound, real wages are likely to come under further pressure. Employment growth is also likely to continue to moderate, should the economy slow as most forecasters expect."

11.14am GMT

Martin Beck, senior economic advisor to the EY ITEM Club, fears that this will be a tough year for UK manufacturers:, even though output was strong in January.

"The makers appear to have begun 2017 on a similarly strong note as they ended 2016. Granted, January's PMI dipped slightly to 55.9 from the 56.1 seen in the previous month. But this was well above both the average of 52.4 recorded in 2016 and even further above the survey's long-run norm of 51.5.

"Many of the details of January's survey were also reassuring. Output rose at the fastest rate since May 2014 and new orders and employment were also up. The domestic market accounted for the bulk of growth - while export orders continued to rise, the pace of expansion saw a noticeable slowdown.

10.29am GMT

Ms Lee Hopley, chief economist at EEF, the manufacturers' organisation, also believes consumers are going to be hit in the pocket by this jump in raw material costs.

With mounting evidence of pricing pressures across the industrial sector, the pass through to consumers is certainly on its way.

This does present some risks to the resilience of the UK market later this year, in addition to the risks from further sharp swings in exchange rates and a shift in gears in global growth."

10.28am GMT

How worried should consumers be about this record jump in factory input costs?

Capital Economics reckon that firms are managing to absorb some of the impact, rather than simply passing everything on through higher prices in the shops:

But output prices have risen by much less, suggesting firms are taking a hit to margins, which should limit impact on CPI inflation. (2/2) pic.twitter.com/RzWUdTFYxl

Input costs rose at their fastest rate in 25 years and higher commodity prices made an impact on margins along with the weaker pound. With these ongoing cost burdens, manufacturers were no longer able to absorb these costs themselves as output prices grew at one of the fastest rates since records began.

Consumers must soon be wondering whether these rising costs will impact on their daily life."

10.17am GMT

Mike Rigby, Head of Manufacturing at Barclays, is encouraged that UK factory growth hit a 32-month high last month, despite the pressure from surging raw materials costs.

"Today's figures provide further evidence that manufacturers were quickly off the blocks in 2017 with strong growth in output and order books looking healthy, driven largely by domestic demand.

Although the growing prospect of inflationary pressure looms large and the impact of Brexit continues to cause much uncertainty, it is encouraging to see that the manufacturing sector is just getting on with business as usual."

10.11am GMT

Dave Atkinson, head of manufacturing at Lloyds Bank Commercial Banking, fears that factories will face further cost inflation in the coming months.

There will be challenges ahead as import prices continue to rise, affecting bottom line profitability, while the impact of some companies' historical long-term currency hedging coming to an end may expose them to the devaluation of sterling that they have managed against to date.

10.02am GMT

Worryingly, the export boost enjoyed by UK factories after the pound tumbled appears to be fading.

Today's report from Markit says:

The domestic market was the prime source of new business wins in January.

There was also a modest increase in new export orders, although the pace of expansion was noticeably slower than during the prior survey month. Where an increase in new work from overseas was reported, this was linked to improving global market conditions and the weak sterling exchange rate.

UK factory costs ballooned at record pace last month, and weaker pound no longer boosting exports https://t.co/laF5vhHcNB via @ReutersUK

9.51am GMT

Oh. My. Goodness.

The costs paid by British factories for raw materials jumped at a record rate last month, as the weak pound bites.

"UK manufacturers have reported a bumper start to 2017, but are also seeing prices rise at an unprecedented rate. Factory output growth accelerated to a 32-month high in January, as solid domestic demand continued to drive production volumes higher. There were signs that the boost to export orders from the weak exchange rate was waning, as growth of new business from abroad slowed sharply.

"The big numbers coming out of the January survey were for the price measures. Input cost inflation spiked to the highest seen since data were first collected in 1992. Over 55% of companies link rising costs to the exchange rate. However, we're also seeing more companies reporting domestic supplier price hikes resulting from the rising cost of commodities such as fuel, oil, plastics and steel. With cost pressures increasingly feeding though to higher selling prices at factories, it looks inevitable that consumer price inflation will rise further in coming months.

9.26am GMT

Greek factories struggled in January due to particularly wintery weather, Markit reports:

Greek manufacturers felt the effects of unexpected heavy snowfall in the opening month of the new year, with the health of the sector deteriorating at the sharpest pace since September 2015.

The downturn was driven by marked declines in both output and new orders, subsequently leading firms to reduce their headcounts further. On the price front, input cost inflation accelerated to a 70-month high, however, firms lowered their selling prices.

9.07am GMT

Boom! Eurozone factories have posted their best month in almost six years, thanks to the strong growth in Austria, Germany and the Netherlands.

Markit's eurozone factory PMI, which tracks output and job creation across the sector, has risen to 55.2 in January, up from 54.9 in December.

"Eurozone manufacturing is off to a strong start to the year, enjoying the fastest rate of expansion for almost six years in January.

"Rates of growth of new orders, exports and employment have all hit multi-year highs, with the depreciation of the euro playing a key role in helping drive new sales in export markets.

8.58am GMT

Germany has also had a good month - with factory growth hitting the highest level in three years.

Germany Manufacturing PMI (Jan) comes in at 56.4 exp: 56.5

8.56am GMT

Zut alors! France's factory sector has posted its best month in almost six years.

The French manufacturing PMI jumped to 53.6 in January, the highest level in 68 months. Growth was driven by increases in output, new orders and employment, Markit says,

"Operating conditions in the French goods-producing sector continued to improve at the start of 2017. Underlying sector growth was the sharpest round of job creation in over five-and-a-half years, with firms buoyed by further marked expansions in both output and new orders. These are encouraging signs given the broad desire in France to reduce its level of unemployment.

However, uncertainty surrounding the political environment, including May's presidential elections, may serve to dampen demand in coming months and provide a headwind to the resurgent labour market."

8.49am GMT

Italy's factory sector has made a 'solid start' to 2017, says Markit.

Rates of growth in output and total new orders were slightly slower than in December, but the pace of job creation in the sector picked up to the highest for nine months.

*ITALY JAN. MANUFACTURING PMI FALLS TO 53; FORECAST 53.3

8.37am GMT

European stock markets are rallying in early trading, thanks to this flurry of good factory data from Europe and Asia.

In London, the FTSE 100 index has jumped by 51 points, to 0.75%, back to 7151.

Decent manufacturing figures from China and Japan lifted the European indices ahead of their own PMIs this Wednesday morning.

8.35am GMT

Poland's manufacturing PMI rose to a two-year high last month, up to 54.8 from 54.3.

Dutch factories also recorded robust growth, but at a slightly slower rate -- the Netherlands' PMI dipped to 56.5 from 57.3.

8.25am GMT

Now it's Spain's turn to report factory data....and it looks good, with business sentiment rising and firms hiring more staff.

The Spanish manufacturing sector started 2017 in a similar fashion to how it ended 2016, with sharp rises in output and new orders recorded. The key highlight from the latest survey was the sharpest rise in employment since July 1998, while business sentiment picked up.

*SPAIN JAN. MANUFACTURING PMI RISES TO 55.6; FORECAST 55

8.22am GMT

Ireland's factories have reported the fastest rise in manufacturing output for 18 months.

8.19am GMT

Russian factories have grown at their fastest pace in 70 months, says Markit, thanks to a boost in new orders.

"Russian manufacturers carried the momentum they built up during the closing stages of 2016 through to the new year, as firms recorded the sharpest improvement in operating conditions for nearly six years.

"The sector continues to go from strength to strength, supported by robust demand for goods from domestic clients.

8.09am GMT

Sweden's manufacturing sector had a stellar January - growing at the fastest pace in over six years.

$SEK: Sweden PMI manufacturing strongest since October 2010. Soft signs suggest rapid growth acceleration in H1, 2017 - to 3%-3.5%(!) pic.twitter.com/QKIaWNvOgd

8.09am GMT

Asian stock markets gained ground today, as traders digested the solid economic data from Japan and China.

Tokyo's Nikkei gained 0.5%, while Australia's S&P/ASX200 rose by 0.8%.

8.05am GMT

In another encouraging sign, Japan's factory sector is growing at its fastest pace in almost three years.

January data pointed to the sharpest increase in new work inflows since December 2015. Firms linked this to greater domestic and international demand as well as improved advertising.

Reports of an increase in foreign demand was also backed by the survey data, with new export orders rising at the quickest rate in one year. Resulting from improved manufacturing conditions, manufacturers continued to hire additional workers in January. In fact, the rate of job-creation was little- changed from December's 32-month high.

7.59am GMT

China got PMI Day off to a good start by reporting that factory growth was near a two-year high in January.

"The breakdown suggests that an acceleration in service sector activity offset a slowdown in the construction sector, which has been hit by the cooling property market and a reduction in fiscal support.

The upshot is that China's recent recovery appears to remain largely intact for now."

7.42am GMT

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

It's a new month, which means a flood of economic surveys showing how the world's factories performed in January.

In the euro area, the day's main release is Spanish and Italian manufacturing PMIs for January. Both strengthened in December to recent highs; an 11-month high for Spain and a six month high for Italy. The readings in both look set to hold broadly at those levels in the January survey and we see no change this month as the manufacturing sector continues to benefit from buoyant euro area exports growth.

Dollar steadies after worst January performance in 3 decades as Trump gvt channels Brian's mother & declares Germany "a very naughty boy" pic.twitter.com/0EnbrEMmN8

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