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FILE PHOTO: Federal Reserve Board Chairman Jerome Powell speaks at his news conference after the two-day meeting of the Federal Open Market Committee (FOMC) on interest rate policy in Washington, U.S., June 13, 2018. REUTERS/Yuri Gripas

The Fed takes a hawkish tilt

Bloomberg
The Federal Reserve left rates unchanged but put a hike in September back in focus. Markets were mixed as prospects for strong economic growth were offset by rekindled trade-war concerns. Here are some of the things people in markets are talking about.

Fed Strikes Hawkish Tone

The Federal Reserve took a hawkish tilt Wednesday, leaving the benchmark interest rate unchanged but citing “strong” economic growth. The committee said it expects that “further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the committee’s symmetric 2 percent objective,” repeating language from its June statement. The comments put expectations for a September hike back in focus.

Markets Tempered

Asian stocks were set for small declines Thursday morning. U.S. stocks had a mixed session and Treasuries held on to losses Wednesday, after the Fed signaled its intention to raise rates amid a robust economy. The S&P 500 Index edged lower as investors weighed trade tensions between the world’s two largest economies with positive earnings for Apple Inc., which rose to a record. Industrial shares fell as a measure of manufacturing trailed estimates. The yield on 10-year Treasuries touched 3 percent for the first time since June. Emerging markets struggled to gain traction amid heightened trade-war rhetoric. The Turkish lira slumped to a record low on a reportthe U.S. is preparing a list of sanctions targets.

U.S. Considering Higher Tariffs

The Trump administration said it’s weighing whether to increase the proposed tariff on $200 billion of Chinese goods to 25 percent from 10 percent, stepping up pressure on Beijing to change its trade practices. President Donald Trump asked the U.S. Trade Representative’s office to seek public input on the proposed tariff increase, two senior administration officials said on a conference call with reporters Wednesday. The duties could be implemented as early as next month. The move to more than double the levy may inflame already heightened tensions between the two countries.

PBOC Attempts to Spur Lending

China’s central bank has started actively encouraging banks to extend more credit by taking a softer stance on loan quotas, people familiar said, as authorities ratchet up efforts to bolster a cooling economy. The PBOC has delivered the message via so-called window guidance, said the people. The central bank hasn’t provided specific targets, but it indicated a willingness to be more flexible on banks’ government-imposed lending caps, the people said. While China has taken several steps to free up credit in recent weeks, the central bank’s latest interactions with lenders suggest official efforts have intensified. One executive at a large state-owned bank said the firm exceeded its year-to-date lending quota, judging that the PBOC would be less strict in enforcing the cap. A smaller bank focused on small-business lending had its quota raised by more than 50 percent in August from the previous month, a person with knowledge of the matter said.

Tesla Weighs Chinese Funding

Tesla Inc., under fire from investors for burning through cash as it ramps up production, will look to China to at least partially fund the cost of building its first factory in the world’s fastest-growing auto market. The electric-car pioneer is considering raising some of the $5 billion it intends to invest in the plant near Shanghai from local partners, according to a person familiar with the plans. The company reported a wider-than-expected third-quarter loss, but forecast being profitable on a GAAP basis in both the third and fourth quarters. It’s aiming to produce 6,000 Model 3s a week by the end of August, with deliveries outpacing production this quarter. Have a look at Bloomberg’s Model 3 tracker for an estimate of weekly output.

What we’ve been reading

This is what caught our eye over the last 24 hours.

And finally, here’s what Adam’s interested in this morning

The investing legend that is Mark Mobius caught my attention this week when he said we have yet to reach the bottom in emerging-market assets. He went into more detail on Chinese equities, specifying three reasons why we’ve yet to see the lows for the world’s second-biggest stock market. Ballooning debt levels, a deepening trade war and the outsized influence of technology stocks all point to continued weakness, he says. You can watch his Bloomberg TV interview from earlier in the week.

But clearly the forward price-earnings discount now on offer for Chinese shares relative to the MSCI All-Country World Index is providing some comfort to longer-term buyers prepared to stomach the shorter-term volatility. At just below 11 times forecast profits, we are seeing signs of stabilization in the bear market as authorities ramp up stimulus efforts. The strength of that floor will now largely be influenced by policy makers’ signals on their next moves. If it’s viewed they might be postponing more trouble for the future, that might warrant an even higher multiple.

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