Daily Economy Watch keeps an eye on events that affect your hard asset portfolio. View archives.
Services sector buoys economic outlook
-- The U.S. services sector expanded in April as new orders and employment accelerated, bolstering views that economic growth would rebound after almost stalling in the first quarter. The growth outlook was, however, dimmed by another report on Wednesday showing private employers hired the fewest number of workers in three years in April. Economists say strong services industry activity together with a rebound in automobile sales in April reported on Tuesday, underscore the economy's firm fundamentals that could keep the Federal Reserve on track to raise interest rates twice this year.
"The earliest indications point to a solid growth rebound of the U.S. economy in the second quarter. If Friday's payrolls report corroborates that trend, a June rate hike certainly remains an option," said Harm Bandholz, chief economist at UniCredit Research in New York. The Institute for Supply Management said its nonmanufacturing index rose 1.2 percentage points to a reading of 55.7 in April, with the majority of industries expressing optimism about the business climate and the economy. A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of the U.S. economy. Services industry activity was last month buoyed by a 3.2 percentage point surge in new orders. See full story.
China's manufacturing PMI slips again
-- A private gauge of nationwide factory activity in China fell to 49.4 in April from 49.7 in March, Caixin Media Co. and research firm Markit said Tuesday. The reading points to a continued deceleration in China's manufacturing activity and marks the 14th month in a row that the index has languished in contractionary territory. A reading below 50 indicates a contraction in manufacturing activity from the previous month, whereas a reading above that level indicates an expansion. China's official manufacturing PMI, a competing gauge, came in at 50.1 in April compared with 50.2 in March, according to data from the National Bureau of Statistics on Sunday.
"All of the index's categories indicated conditions worsened month-on-month, with output slipping back below the 50-point neutral level," said He Fan, chief economist at Caixin Insight Group. "The fluctuations indicate the economy lacks a solid foundation for recovery and is still in the process of bottoming out. The government needs to keep a close watch on the risk of a further economic downturn." Mr. He said. See full story.
U.S. manufacturing barely grows in April
-- U.S. manufacturers barely grew in April and there’s little sign of a broad pickup in business anytime soon, a survey of executives found. The Institute for Supply Management said its manufacturing index fell to 50.8% last month from 51.8% in March. Economists surveyed by MarketWatch had forecast the index to fall to 51.4%. Although readings over 50% indicate more companies are expanding instead of shrinking, manufacturers are clearly struggling to grow. The ISM index has hovered between 48% and 52% since last summer.
The sluggish ISM reading for April also suggests that scattered evidence recently of improvement among manufacturers is probably a mirage. Companies have been hurt by a strong dollar and weak global economy, reducing exports. And a slump in the U.S. energy sector because of cheap oil has forced oil and natural gas producers to slash equipment purchases from very high levels just a few years ago. See full story.
Tame U.S. inflation bolsters Fed caution
-- U.S. inflation barely rose in March as consumer spending remained tepid, making it less likely that the Federal Reserve will be able to follow through on its projected two interest rate hikes this year. The tame inflation backdrop was reinforced by another report on Friday showing labor costs increasing moderately in the first quarter. The Commerce Department said the personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, edged up 0.1 percent last month after an upwardly revised 0.2 percent increase in February. The so-called core PCE rose 1.6 percent in the 12 months through March, after advancing 1.7 percent in February. The core PCE is the U.S. central bank's preferred inflation measure and is running below its 2 percent target.
Following its latest policy meeting, the Fed said on Wednesday it was continuing to "closely" monitor inflation. It left its benchmark overnight interest rate unchanged and suggested it was in no hurry to tighten monetary policy further. It hiked rates in December for the first time in nearly a decade. Fed policymakers earlier this year forecast two more rate hikes for 2016. But market-based measures of Fed policy expectations are mostly leaning toward one increase this year. See full story.
U.S. economy stalls in first quarter
-- U.S. economic growth braked sharply in the first quarter to its slowest pace in two years as consumer spending softened and a strong dollar continued to undercut exports, but a pick-up in activity is anticipated given a buoyant labor market. Gross domestic product increased at a 0.5 percent annual rate, the weakest since the first quarter of 2014, the Labor Department said on Thursday in its advance estimate. Growth was also held back by businesses stepping up efforts to reduce unwanted merchandise clogging up warehouses.
Almost all sectors of the economy weakened in the first quarter, with housing the lone star. The dollar's rally is largely over, oil prices appear to be stabilizing and the bulk of the inventory liquidation is out of the way. In addition, the jobs market remains fairly robust. A separate report from the Labor Department showed first-time applications for unemployment benefits rose less than expected last week and the four-week average of initial claims fell to its lowest level since 1973. See full story.
Fed tones down concerns over global economy
-- The Federal Reserve voted Wednesday to leave interest rates unchanged and took a wait-and-see stance toward future interest rate hikes. For the third time since the start of the year, Chairwoman Janet Yellen and her colleagues voted to keep the federal funds rate in a range of 0.25-0.5%. In its carefully calibrated statement the Fed did not give any hints about a possible move in June. The tone was slightly more upbeat than the central bank’s last statement at the end of March.
The Fed moderated previous expression of concern about global financial and economic developments, saying only that it was monitoring them. In March, it expressed concern these were areas of risk. For instance, the new statement spotlighted continued improvement in the labor market and “solid” gains in household income.But the Fed also noted that consumer spending has moderated while business investment and net exports are soft. See full story.
Weak factory, consumer data cloud outlook
-- Orders for long-lasting U.S. manufactured goods rebounded far less than expected in March as demand for automobiles, computers and electrical goods slumped, suggesting the downturn in the factory sector was far from over. Tuesday's report from the Commerce Department also implied that business spending and economic growth were weak in the first quarter. Prospects for the second quarter darkened after another report showed an ebb in consumer confidence in April. The data came as Federal Reserve officials started a two-day policy meeting. The U.S. central bank is expected to leave its benchmark overnight interest rate unchanged on Wednesday. The Fed raised rates in December for the first time in nearly a decade.
"These disappointing reports will likely add to the caution at the Fed. Given the weak performance in these two key segments of the economy, we expect the rebound in growth momentum in the second quarter to be quite weak," said Millan Mulraine, deputy chief economist at TD Securities in New York. Manufacturing, which accounts for 12 percent of the U.S. economy, is struggling with the lingering effects of the dollar's past surge and sluggish overseas demand. The durable goods report added to recent reports on retail sales, trade and industrial production in suggesting economic growth slowed further in the first quarter. The economy grew at an anemic 1.4 percent annualized rate in the fourth quarter. See full story.
Stockes hurt by earings, oil
-- Wall Street was lower on Monday as a drop in oil prices, lackluster quarterly earnings and an impending Federal Reserve meeting weighed on investor sentiment. The central bank's policymakers are expected to hold interest rates steady when they meet on Tuesday and Wednesday, but may tweak their description of the economic outlook to reflect more benign conditions. Oil prices fell more than 1 percent after traders cited reports of a supply buildup, interrupting the stock market's long bull run. Still, the S&P 500 remained just 2.5 percent short of its record.
Equities have slowed down in the past sessions as investors look for fresh catalysts to propel the indexes beyond their record highs. Underwhelming earnings and the upcoming Fed meeting have put investors in a risk-off mode. "We have run into technical resistance now that we're near the record high," said Randy Frederick, managing director of trading and derivatives for Charles Schwab in Austin, Texas. "People are taking some profits and stocks are looking a little bit expensive at the moment, especially since there is no earnings growth." See full story.
Dollar rallies as BOJ expected to ease
-- The dollar broke above ¥111 for the first time in more than two weeks Friday on reports the Bank of Japan is weighing whether to offer negative interest rate loans to financial institutions that have been pressured by the central bank’s policies. Since the beginning of the year, the Japanese currency has risen nearly 8% against the greenback despite the Bank of Japan’s decision to apply negative interest rates on excess reserves parked at the central bank — a move that, in theory, should’ve helped the currency weaken. The currency’s strength has become a headache for Prime Minister Shinzo Abe because a weaker currency was seen as one of his administration’s biggest accomplishments.
Now, with the BOJ set to meet late next week, speculation is mounting about what, if anything, the BOJ might do to help the currency weaken. Giving negative interest rate loans to banks would essentially allow them to get paid for being debtors, Foley said. “The BOJ would literally be funding commercial banks to push money into the system,” Foley said. See full story.
Draghi defends ECB low-rate policy
-- The head of the ECB robustly defended its cheap money policy on Thursday against sharp criticism from Germany, as the country's leader entered a debate that has driven a wedge between the euro zone's central bank and its biggest economy. Mario Draghi said the ECB's policy of printing money and keeping borrowing costs at rock bottom was working, adding that interest rates would stay at current record lows for a long time. Emphasizing the bank's right to independence from political interference, Draghi also called on euro zone governments to help get the region's sluggish economy on a more solid footing through economic reforms.
Speaking to reporters after the bank's governing council held key rates, he said harsh criticism in Germany undermined the ECB and its attempts to buoy the economy, playing down complaints that low rates were squeezing savers. "We obey the law, not politicians," Draghi said, underscoring his commitment to the ECB's primary task of keeping inflation ticking steadily up. Criticism by politicians in Germany has escalated amid fears that the ECB could even start to hand out free or 'helicopter money' to citizens. See full story.
Oil bounces after stockpile data
-- Oil prices jumped on Wednesday as government data showed U.S. crude stocks rose slightly less than expected last week, while the U.S. dollar advanced against the euro ahead of Thursday's European Central Bank meeting. U.S. stocks climbed following gains in energy shares and some upbeat earnings reports. Speculation that major oil producers would meet in Russia in May for another attempt at curtailing output also boosted oil prices.
The U.S. dollar rose against the euro on fears that comments from the ECB on Thursday could hurt the euro zone common currency, while some riskier commodity currencies remained near multi-month highs on relief over China's economy. The ECB, though, is not expected to make any policy changes at its meeting on Thursday. It is expected to reiterate its plans to support the euro zone economy, according to analysts. See full story.
Housing adds to signs of weakness
-- U.S. housing starts fell more than expected in March and permits for future home construction hit a one-year low, suggesting some cooling in the housing market in line with signs of a sharp slowdown in economic growth in the first quarter. Tuesday's report from the Commerce Department continued the recent run of weak data that has cast a pall on the economy's prospects. Economists say the fragile economy, combined with tepid inflation vindicated the Federal Reserve's cautious approach to raising interest rates.
"It's not just American consumers stepping back a bit this year, homebuilders also lost steam," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. "This means the two key drivers of the expansion have lost their pep, which explains why the Fed will probably lift rates, at most, a couple of times in 2016." Last month's drop in starts pointed to a moderation in housing market activity and mirrors other reports on business spending, industrial production, trade, inventory investment and retail sales that have suggested economic growth stalled in the first quarter. See full story.
Oil falls on failed output freeze
-- Oil prices edged lower on Monday after producers failed to agree on a plan to curb global supply at a meeting in Qatar, while world stock markets rose and the Dow Jones industrial average closed above 18,000 for the first time since July. Shares of consumer companies including Hasbro and Walt Disney helped buoy U.S. stocks, while investors braced for a flurry of quarterly earnings reports through the week.
In Qatar, some 18 oil-exporting nations, including OPEC members, failed to agree to stabilize output at January levels until October 2016. A pact fell apart after Saudi Arabia demanded that Iran join in. Crude oil ended well off the day's lows, however, with a strike in Kuwait slashing the country's oil output by more than half. Brent crude LCOc1 settled down 19 cents, or 0.4 percent, at $42.91 a barrel, after falling $3 earlier in the session, while U.S. WTI crude CLc1 closed down 58 cents, or 1.4 percent, at $39.78 a barrel, after hitting $37.61 earlier. See full story.
Industrial output falls in March
-- Industrial production fell 0.6% in March, the sixth decline in the past seven months, according to data released by the Federal Reserve on Friday. Economists polled by MarketWatch had expected a 0.2% fall. Production in February was revised down to a 0.6% decline from the initial estimate of a 0.5% decline. Capacity utilization fell to 74.8% in March from a downwardly revised 75.3% in February. This was below expectations.
The decrease in output in March was led by a 2.9% decline in mining and a 1.2% drop in utilities. But manufacturing was also weak, falling 0.3% after a 0.1% decline in February. Output of motor vehicles and parts fell 1.6%. For the first quarter as a whole, industrial output fell at a 2.2% annual rate. Manufacturing was up a slim 0.6% over the same period. The manufacturing sector has been hammered since last summer by weak growth overseas, the strong dollar, and the collapse of oil prices. See full story.
Tame inflation supports Fed caution
-- U.S. consumer prices barely rose in March and underlying inflation slowed, suggesting little urgency for a cautious Federal Reserve to raise interest rates in the near term. The benign inflation backdrop is prevailing despite tightening labor market conditions, underscored by other data on Thursday showing the number of Americans filing for unemployment benefits back at a 42-1/2-year low last week. "A rate hike is unquestionably off the table for April, with a June rate increase increasingly unlikely barring a surge in domestic activity and perceived calm on the international front," said Lindsey Piegza, chief economist at Stifel Fixed Income in Chicago.
The Labor Department said its Consumer Price Index gained 0.1 percent last month as a rebound in gasoline prices was partially offset by a drop in the cost of food. Medical care and housing costs also retreated in March after strong increases in the prior two months. The so-called core CPI, which strips out food and energy costs, inched up 0.1 percent after two strong monthly readings. March's increase in the core CPI was the smallest since August and followed a 0.3 percent rise in February. See full story.
China trade data boosts dollar
-- The U.S. dollar rallied and major stock markets rose on Wednesday after JPMorgan's results beat lowered expectations and upbeat Chinese trade data offered hope Asia's biggest economy is finally stabilizing. The euro fell nearly 1 percent versus the greenback as stronger Chinese economic growth boosted recently batted-down expectations that the Federal Reserve could raise interest rates again in the not-too-distant future. China reported exports jumped 11.5 percent year on year in March, the first increase since June, well above market forecasts.
On Wall Street, stocks rallied after JPMorgan Chase's first quarter earnings fell nearly 7 percent but beat lowered expectations. The S&P 500 financial sector gained more than 2 percent. "It's a positive that (JPMorgan) earnings were well received," said Michael O'Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut. "It's just a quiet tape and there's not much going on, so it doesn't take much to create the move." See full story.
IMF cuts growth outlook again
-- The International Monetary Fund warned on Tuesday of the risk of political isolationism, notably Britain's possible exit from the European Union, and growing economic inequality as it cut its global growth forecast for the fourth time in a year. In the run-up to its spring meetings in Washington this week, the IMF said chronic weakness had left the global economy vulnerable to shocks such as sharp currency devaluations and worsening geopolitical conflicts. In its latest World Economic Outlook, the IMF forecast global growth of 3.2 percent this year, compared to a downwardly revised forecast of 3.4 percent in January. The growth estimate also was lowered in July and October of last year.
For 2017, the IMF said the global economy would grow 3.5 percent, down 0.1 percentage point from its January estimate. Its latest report cited a worsening spillover from China's economic slowdown as well as the impact of low oil prices on emerging markets such as Brazil. It also highlighted persistent economic weakness in Japan, Europe and the United States. The gloomier picture sets the stage for the IMF and the World Bank to call this week for more coordinated global action to support growth. See full story.
Dollar falls to nearly 8-month low
-- The dollar traded broadly lower on Monday as doubts about the pace of Federal Reserve interest-rate hikes weighed broadly on the dollar. Analysts said investors are looking for the next Federal Reserve interest rate hike to come after the central bank’s June meeting, which is simultaneously weighing on the dollar and driving U.S. stocks higher. A stronger dollar has often been cited as a headwind for the quarterly results of multinational companies. “The dollar’s looking very soft,” said Stephen Gallo, currency strategist at BMO Capital Markets. “Provided we don’t get any negative news that drives the yen higher, we’re on the cusp of the weaker dollar being synonymous with risk on.”
After rising off a nearly 18-month low against the yen in early trade, the dollar encountered renewed weakness on the expectation that the Fed would likely only raise interest rates one time in 2016, if that. In other currency trading, the euro and pound strengthened against the greenback, sending the ICE U.S. dollar index , a measure of the dollar’s aggregate strength against a basket of six rivals, down 0.4% to 93.7540, its lowest level since late August. See full story.
Inventories point to weaker growth
-- U.S. wholesale inventories fell at their fastest pace in nearly three years in February, pointing to a sharper slowdown in first-quarter economic growth than previously thought. Wholesale inventories dropped 0.5 percent in February, the Commerce Department said on Friday, the sharpest decline since May 2013. Analysts polled by Reuters expected a 0.1 percent decline. The government also revised its reading for January to show a 0.2 percent decline in inventories rather than a 0.2 percent rise.
Inventories are a key component of gross domestic product changes. The component of wholesale inventories that goes into the calculation of GDP - wholesale stocks excluding autos - dropped 0.4 percent in February. Weak economic growth in the first quarter of recent years has led many analysts to wonder if the government is having trouble making seasonal adjustments to its data. Weak inventories in the first three months of the year could lead to catch-up growth in the economy in the second quarter as companies restock their shelves. Economists generally expect the economy grew at less than a 1 percent annual rate in the first quarter, down from a 1.4 percent rate in the last three months of 2015. See full story.
S&P 500 erases 2016 gain
-- The S&P 500 retreated on Thursday to close in the negative territory for the year as investors shunned assets perceived as risky in favor of haven plays. The S&P 500 fell 1.2%, to close at 2,041.91 with all 10 sectors finishing lower. The large-cap index is now down 0.1% for the year. The Dow Jones dropped 1% to finish at 17,541.96. “The market appears to be pivoting on oil prices and a strengthening yen; both of which are consistent with global slowing,” said Jack Ablin, chief investment officer at BMO Private Bank.
A drop in oil prices after two days of gains dented the appetite for risk assets as investors weighed a fall in crude inventories against fading hopes that a meeting of oil producers will lead to a curb on output. Quincy Krosby, market strategist at Prudential Financial, said the market is also coming to terms with the realization that “central banks’ tools are losing their potency, and that is underpinning existing concerns over global growth.” See full story.
Oil surges on inventory drop
-- The U.S. oil benchmark scored its biggest one-day jump in three weeks Wednesday after weekly government data showed a large and unexpected fall in U.S. crude inventories and an increase in demand by refineries. On the New York Mercantile Exchange, light, sweet crude futures for delivery in May advanced $1.86, or 5.2%, to close at $37.75 a barrel. The jump was the biggest since March 16. June Brent crude on London’s ICE Futures exchange rose $1.97, or 5.2%, to finish at $39.84 a barrel.
The Energy Information Administration said oil inventories fell by 4.9 million barrels in the week ended April 1. Analysts surveyed by oil data firm Platts had forecast an inventory rise of 2.9 million barrels. Oil futures, however, had already found support after closely watched data from the American Petroleum Institute, an industry trade group, late Tuesday reportedly showed a 4.1 million barrel drop. The decline was the biggest for this week of the year since at least 1997, according to Bespoke Investment Group. In addition, the data showed U.S. refineries used over 16.4 million barrels a day on average, up 199,000 barrels from a week earlier. Refiners operated at 91.4% of operable capacity last week, the data showed. See full story.
U.S. trade data points to weak Q1 growth
-- The U.S. trade deficit widened more than expected in February as a rebound in exports was offset by an increase in imports, the latest indication that economic growth weakened further in the first quarter. But the growth picture should brighten in the months ahead, with other data on Tuesday showing that activity in the vast services sector picked up in March as new orders rose strongly, and sustained strength in the labor market. "There are some green shoots appearing this spring in the economic data which makes us more confident that 2016 is going to be a good year after a step-down in expectations and hopes at the start of the year," said Chris Rupkey, chief economist at MUFG Union Bank in New York.
The Commerce Department said the trade deficit increased 2.6 percent to $47.1 billion in February, worse than economists' forecasts for a reading of $46.2 billion. When adjusted for inflation, the shortfall rose to $63.3 billion, the largest since March last year, from $61.8 billion in January. That prompted economists to cut their first-quarter gross domestic product growth estimates by as much as half a percentage point to as low as a 0.4 percent annualized rate. See full story.