Daily Economy Watch keeps an eye on events that affect your hard asset portfolio. View archives.
Dollar at highest level since March
-- The dollar rose Friday against its major rivals, reaching its highest level since early March as weak data from Europe softened the pound and the euro. Investors also were shifting their focus to the Federal Reserve’s meeting on monetary policy, scheduled for next week. The ICE U.S. Dollar Index, measure of the buck’s strength against a basket of six rival currencies, rose 0.5% to 97.43, its highest level since early March, according to FactSet data. “We haven’t seen the dollar index this high since the market was projecting the Fed would hike rates,” said Jameel Ahmad, chief market analyst at FXTM.
Despite the dollar moves, Wall Street is currently pricing in a mere 2.4% probability that the U.S. central bank will raise interest rates at the conclusion of its policy meeting, according to the CME Group’s FedWatch Tool, which tracks Fed-funds futures prices. But the theme of monetary-policy divergence, which means that the Fed is on a monetary-tightening path while other central banks in Europe and Japan are implementing easing policies, continued to support the dollar, analysts said. An upbeat reading of U.S. manufacturing for July, which rose to its best level since October, helped to support the idea that a recent spate of better-than-expected reports may offer the Fed sufficient confidence sometime this year. See full story.
ECB keeps door open to easing
-- The European Central Bank kept interest rates unchanged on Thursday but left the door open to more policy stimulus, highlighting "great" uncertainty and abundant risks to the economic outlook. Signalling a readiness to act, ECB President Mario Draghi argued that Britain's decision to leave the European Union and weak emerging market growth both dampen the euro zone's own outlook, leaving the balance of risks tilted firmly to the downside and possibly requiring action.
But Draghi also noted that growth and inflation were both moving along the path projected in June so more evidence, including fresh staff projections in September, were needed before any decision. "If warranted to achieve its objective, the Governing Council will act by using all the instruments available within its mandate," Draghi said. "So I would stress readiness, willingness, ability to do so." The balanced comments give the ECB time until its September meeting to weigh the economic costs of Brexit without fuelling excessive market expectations, potentially leading to disappointment, even if it does decide to act. See full story.
Dollar hits 4-month high as peers dip
-- The dollar rose on Wednesday, hitting its highest level in four months against a basket of currencies, as expectations for central bank easing weighed on major global peers. The dollar has benefited in recent weeks from data showing strength in the U.S. labor market and inflation that has bolstered expectations the Federal Reserve may raise rates before the end of the year. "Really, you’re kind of seeing the tone in the rest of the dollar block and the majors be a little bit softer," said Mark McCormick, North American head of FX strategy at TD Securities in Toronto. "I think what you’re seeing is idiosyncratic risk in most G10 currencies."
Indications the Bank of Japan will pursue additional monetary easing, possibly in conjunction with the Japanese government, have weighed on the yen with a majority of economists polled by Reuters expecting further BOJ easing. The euro against the dollar as markets sold euros ahead of the European Central Bank policy meeting on Thursday. Policymakers are not expected to announce further easing but could signal a bias for monetary stimulus in the future, analysts said. "The ECB governing council is unlikely to say anything supportive of the currency at its Thursday meeting," said John Hardy, head of currency strategy at Saxo Bank. See full story.
IMF cuts growth view on Brexit
-- The International Monetary Fund (IMF) cut its global growth forecasts for the next two years on Tuesday, citing uncertainty over Britain's looming exit from the European Union. The move included a nearly full percentage-point reduction in the UK's 2017 growth forecast. Cutting its World Economic Outlook forecasts for the fifth time in 15 months, the IMF said that it now expects global GDP to grow at 3.1 percent in 2016 and at 3.4 percent in 2017 -- down 0.1 percentage point for each year from estimates issued in April.
The Fund said that despite recent improvements in Japan and Europe and a partial recovery in commodity prices, the UK's Brexit vote had created a "sizeable increase in uncertainty" that would take its toll on investment and market and consumer confidence. On the day before Britain's June 23 EU referendum, the IMF was "prepared to upgrade our 2016-17 global growth projections slightly," IMF chief economist Maury Obstfeld said in a statement. "But Brexit has thrown a spanner in the works." See full story.
After Brexit, Britons warm to gold
-- When Britain voted to leave the European Union, the thoughts of Yorkshire teacher Grace Hall immediately turned to her family's bottom line. Three days later, as UK stocks and sterling plummeted, she put those thoughts into action and deposited part of her life savings -- 25,000 pounds -- into gold. "My husband and I are both worried about bank failures and our cash getting swallowed up," she said. "I'm also worried about our kids' jobs and their future." Hall was not alone. Dealers are seeing an unprecedented amount of interest in gold, much of it from first-time buyers, to take advantage of its role as a safe haven in times of stress or unexpected "black swan" events like Brexit."The speed at which people are purchasing gold is unprecedented," said Joshua Saul, CEO of The Pure Gold Company, where Hall bought and keeps her Britannia coins.
"We are seeing people convert as much as 40 to 50 percent of their net worth into physical gold, (compared to) 5 to 10 percent in the past," he said. Government-owned bar and coin producer, the Royal Mint, saw a 7-fold increase in sales of 100-gram bars, around half the size of a credit card and costing around $4,400, in the two weeks following the June 23 vote. Around 4 million pounds ($5.5 million) of gold and silver were traded online on the platform of London-based Bullionvault.com on the June 25-26 weekend, seven times the average weekend of the previous 12 months. The number of first-time UK buyers on the site rose by around 170 percent in June and the first week of July, compared to the previous 12-month daily average, it said. See full story.
Industrial output jumps in June
-- Industrial production in June grew at the fastest monthly rate in eleven months, on the back of strong auto and utility output, but analysts said the sector was still likely to face headwinds in coming months. The Federal Reserve said Friday that industrial production grew 0.6% in June, topping the MarketWatch-compiled economist consensus for 0.5% growth. This is the fastest growth since last July. In addition, May’s decline was revised to a 0.3% fall from an initially reported 0.4% drop.
Despite the gains, the factory sector is still struggling. For the second quarter as a whole, industrial production fell at an annual rate of 1%, its third consecutive quarterly decline and the fifth out of the past six. Compared to a year ago, production was down 0.7%. Manufacturing has been hurt by the strong dollar, the drop in oil prices, and the sluggish global economy. See full story.
PPI rises by most in a year
-- U.S. producer prices jumped 0.5% in June — the biggest increase in more than a year — largely owing to higher oil prices and margins for financial services. Yet inflation overall remains muted, a government report shows. Economists surveyed by MarketWatch had predicted a 0.2% increase in the producer price index. Wholesale prices, though often quite volatile, have been rising in 2016 after declining for much of the prior two years. In the past 12 months, the producer price index has advanced 0.3%, the first year-over-year increase since the end of 2014, the Labor Department said.
A modest rebound in oil prices this year is largely responsible for nudging wholesale inflation higher. Prices have climbed after falling in early 2016 to the lowest level in years. Yet overall price pressures are still on the low side, especially if the volatile food, energy and trade margin categories are stripped out. So called-core prices rose a smaller 0.3% in June. What’s more, core prices have barely budged in 2016. They’ve risen 0.9% in the past 12 months, essentially unchanged since January. With the rise in oil prices at a halt, core inflation could move sideways for months. See full story.
BOE readies new blast of QE
-- Hailed by investors as a weapon to fight off recession but slammed by critics for fuelling inequality, quantitative easing looks set for a comeback in Britain as the Bank of England tries to shield the economy from the fallout of Brexit. The central bank is poised to cut interest rates as soon as Thursday and will probably follow up soon afterwards by reviving the massive bond-buying program that it credits with helping to shore up the economy after the global financial crisis.
Economists are now asking how the BoE might tailor QE to meet the problems Britain faces in the aftermath of last month's vote to leave the European Union - a result that threw the country into political chaos and has sparked fears of recession. Most economists polled by Reuters expect the BoE will cut rates to a new record low of 0.25 percent on Thursday, followed by an extension of the QE program which it adopted as the financial crisis raged in early 2009, probably in August. Following the lead of the central banks in Japan and the United States, the BoE created 375 billion pounds ($496 billion) between 2009 and 2012 to buy government bonds to get money flowing through the economy. See full story.
Dow, S&P 500 hit record highs
-- Major U.S. stock indexes set record intraday highs on Tuesday as optimism about the world economy and upbeat corporate results from Alcoa boosted risk appetite, while European shares rose for the fourth straight day. The benchmark S&P 500 hit 2,155.32, topping Monday's intraday record high by more than 12 points, while the Dow Jones industrial average rose to 18,363.72 to top its previous record intraday high touched in May 2015. The tech-heavy Nasdaq Composite also gained, wiping out its losses for the year.
Increasing prospects of global economic health boosted shares, while Alcoa (AA.N) reported a smaller-than-expected drop in quarterly profit, sending the aluminum producer's shares up more than 5 percent and helping boost optimism about the earnings season. Investors' appetite for equities has increased after robust economic data, including a stronger-than-expected U.S. jobs report for June last Friday, and low yields on government bonds. Easing political uncertainty in Britain and Japan have reduced some global uncertainties. See full story.
Economy posts largest job gains in eight months
-- U.S. job growth surged in June as manufacturers and other employers boosted hiring, confirming the economy has regained speed after a first-quarter lull, but tepid wages suggested the Federal Reserve will probably not raise interest rates soon. Nonfarm payrolls increased by 287,000 jobs last month, the largest gain since last October, the Labor Department said on Friday. May payrolls were revised sharply down to show them rising 11,000 rather than the previously reported 38,000. The sign of strength in the economy, however, precedes Britain's stunning vote last month to leave the European Union. The so-called Brexit referendum on June 23 roiled financial markets, raising fears that sustained volatility might hit companies' hiring and investment decisions.
"For the Fed, this report is likely to offer some encouragement on the underlying labor market backdrop, though it is unlikely to change the current 'wait and see' policy stance as they assess the fallout from the Brexit vote," said Millan Mulraine, deputy chief economist at TD Securities in New York. With the jobless rate rising, average hourly earnings increased only two cents or 0.1 percent in June, suggesting some slack still remains in the labor market. That took the year-on-year gain in earnings to 2.6 percent from 2.5 percent in May. "Wage growth remains subdued, which could reflect the fact that there is still slack in the labor market," said Michelle Meyer, a senior economist at Bank of America Merrill Lynch in New York. "Or perhaps it is a function of low inflation expectations and low productivity, which restricts the ability or desire of businesses to raise wages." See full story.
Silver could hit $25 by year end
-- Silver has outshined its sister metal since the U.K.’s decision to leave the European Union sparked turmoil in global equities markets, and the rally could lift the white metal to a three-year high. Gold and silver futures have reached their highest levels in about 2 years. On Wednesday, gold futures settled at $1,367.10 an ounce, marking their highest finish since March 2014, while silver futures hit a 23-month high of $20.203 an ounce. Silver prices are set to surpass some analysts’ $21 to $22 predictions from earlier this year and talk of $25, $27, and even $32 an ounce have emerged. Those levels would take prices to their highest since at least 2013.
Like gold, silver’s climb isn't just about Brexit, or the U.K.’s EU exit. Most analysts agree that the vote provided the spark for the precious-metal rally, but it isn’t the genuine impetus. Brexit is a “symptom” of the European Central Bank’s “failure to stimulate” the EU’s economy via money printing,” said Michael Armbruster, principal and co-founder at Altavest. The bull market in gold and silver is really “all about negative real interest rates, currency market volatility and failed central-bank policy world-wide.” See full story.
Minutes show more vocal doves at the Fed
-- Dovish Federal Reserve policymakers are growing more vocal, pushing a divided committee firmly on the side of taking no action, a close reading of the June meeting minutes released Wednesday reveal. When the central bank met in mid-June, an abysmal May jobs report had just startled markets, and the upcoming British referendum on European Union membership loomed large. But familiar refrains are sprinkled throughout the meeting minutes, signaling that the same old fears still linger for some members.
In a discussion about the May payroll report, for example, the minutes reveal that “many” members thought the report might be an aberration, and “some” thought other indicators showed a stronger labor market. “In contrast, some noted that the lower rate of payroll gains could instead be indicative of a broader slowdown in growth of economic activity that was also evidenced by other downbeat labor market indicators,” the minutes went on. The same participants saw economic bogeymen in almost every topic the committee discussed. Even though retail sales were strong in April and May, “a few participants expressed caution,” noting that if job gains slowed down and energy prices moved up, consumers might curtail spending. See full story.
Treasurys soar on "insatiable" demand for safety
-- Treasury prices soared Tuesday, pushing yields to record lows, amid a global flight to the perceived safety of government debt as fears over the U.K.’s vote to leave the European Union re-emerged. Investors continued to fret about the uncertainty surrounding so-called Brexit, ahead of a busy U.S. data calendar, with the U.S. official jobs report expected Friday. Meanwhile, factory orders in the U.S. fell in May after two straight gains, the government said Tuesday.
The global government-bond rally pushed several benchmark yields around the world to record lows—including some in negative territory. At the same time global equities and crude-oil futures plummeted as investors continued to sell assets perceived as risky. Demand for safe assets is “insatiable,” said Aaron Kohli, interest-rate strategist at BMO Capital Markets, pointing to widespread pessimism and uncertainty in global markets. “Investors are on the lookout for risk and problems,” Kohli said. see full story.
Treasury yields touch record lows
-- U.S. Treasury yields kicked off the second half of the year by slumping to record lows as investors bet that the U.K.’s vote to leave the European Union would prevent the Federal Reserve from raising interest rates this year. But yields quickly bounced off their lows after a report showed U.S. manufacturing activity in June improved to its strongest level in 15 months. “This post-Brexit world has a lot of volatility and unknowns that are going to remain with us for the summer,” said Marvin Loh, global markets strategist at BNY Mellon.
The International Monetary Fund has warned that negative repercussions from Brexit will spread beyond the U.K. and Europe. Fed officials haven’t said how the vote might influence the timing of the next rate increase. The decline in short-term yields was much smaller than the drop in longer-dated bonds, an environment known as a “bull flattener.” This type of trading activity typically means investors expect interest rates to rise at a slower pace, market strategists said. See full story.
IMF sees negative ‘repercussions’ from Brexit
-- The Brexit vote will have negative repercussions that will spread beyond the U.K. and Europe to the global economy, the International Monetary Fund said Thursday. The risks arise mainly from macroeconomic and financial market impact of a sizable increase in uncertainty, especially about the future relationship between the U.K. and EU “and we believe this is likely to dampen growth in the near term,” said IMF spokesman Gerry Rice at the regular press briefing. If the uncertainty lasts, it would mean even lower growth, Rice said.
Prior to the referendum, the international financial agency had added its voice to a chorus of warnings on the potential costs of a U.K. exit from the EU. The IMF doesn’t have any specific recommendation for U.K. and EU officials, but said they have a “key role to play” to make the transition predictable and smooth. This echoes earlier comments from IMF Managing Director Christine Lagarde. See full story.
Fed’s Powell sees further Brexit risks
-- Global weakness and financial market volatility posed dangers to the U.S. economy even before the Brexit vote last week and the results of the referendum have simply shifted these risks “even further” to the downside, said Fed Governor Jerome Powell on Tuesday. “The risks to the global outlook were somewhat elevated even prior to the referendum, and the vote has introduced new uncertainties,” Powell said in a speech followed by questions from the audience at the Chicago Council on Global Affairs. Powell’s remarks are the first from a Fed official in the wake of the decision last week by U.K. voters to leave the European Union.
The Fed governor said it was “far too early” to judge the effects of the Brexit vote on the U.S. economy, suggesting the U.S. central bank could hold interest rates steady for months. He said there has been a “modest” tightening in U.S. financial market conditions since the vote last week as the dollar has strengthened, equity prices have dropped and credit spreads have widened. Markets don’t expect any more rate hikes this year. See full story.
Currency market stabilizes after Brexit
-- After two days of wild swings, currency markets steadied Tuesday as the pound and a host of emerging-market currencies rebounded against the dollar. The U.K. currency gained 1.1% to $1.3378, rebounding after a wrenching few days of trading that saw a 12% plunge in the value of sterling. Standard & Poor’s and Fitch Ratings each cut their credit ratings for the U.K. on Monday. Despite the modest rally, the U.K. currency remains near 1985 lows. An influx of liquidity helped calm price movements as dealers who restricted trading after the results of Thursday’s vote showed a likely victory for the “leave” camp returned to the market, said Craig Wiffen, managing director of currency at Peregrine & Black.
But many expect the recovery to be short-lived as investors focus on political turmoil in the U.K. and meetings between the European Union member countries about how a U.K. exit should be handled. “It’s a small return to normality, even if it’s just for a day or two,” Wiffen said. Because of the Brexit vote, investors expect the Federal Reserve to wait until next year to raise interest rates. The Fed-funds futures market, a popular venue for betting on Fed rate-hike expectations, is pricing in a higher likelihood of a rate cut than a hike at the central bank’s next two meetings. See full story.
Sterling hits 31-year low on Brexit
-- The British pound fell to a 31-year low against the U.S. dollar on Monday on anxiety over the aftermath of Britain's decision to quit the European Union, while the euro also dipped. Sterling hit $1.3151, its lowest level since mid-1985 and marking an 11.5 percent fall from the currency's closing level on June 23, the day of the referendum. Analysts predicted more downside for sterling as traders monitored the fallout of the vote and how it would affect the European economy.
"By no means is the collapse of the cable over," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York, referring to the sterling/dollar exchange rate. "The trade in the pound continues to be on the downside until the market gets some sort of resolution." A likely fresh move for Scottish secession, and the response of the EU and its ability to contain calls by anti-EU parties across the continent, in part combined to make matters worse for sterling. See full story. Analysts said sterling had further room to fall since markets were reluctant to act in response to the referendum vote and were in a "wait and see" mode ahead of reactions from European policymakers.
Why gold may hit $1,500 by year’s end
-- Gold’s impressive rally Friday offered a taste of what may be in store for the precious metal, as some analysts say it’s just a matter of time before prices top $1,500 or even $1,900 an ounce. Futures prices for the metal soared by as much as $100 an ounce on an intraday basis Friday as the United Kingdom’s historic vote to leave the European Union sent investors scrambling for a safer place to park their money. But the decision, known as Brexit, has vast implications for global financial markets, economies and currencies as well as for monetary policies among the world’s major central banks. That means gold could soon have many more reasons to rally.
“The market’s fearful reaction has made Brexit the most stressful event investors have seen since the Lehman Brothers bankruptcy in September 2008,” said David Beahm, chief executive of Blanchard and Co. “This is a major negative for global markets, and gold is positioned for long-term price growth because of ... the Brexit vote and other negative global financial conditions.” While the outcome of the U.K.’s historical referendum roiled stock markets around the world and European stocks posted their worst daily drop in nearly eight years on Friday, gold benefited from its perceived safety in financial crises. “Brexit is a once-in-a-lifetime event,” said Ned Schmidt, editor of the Value View Gold Report. “All arguments against holding gold have now been crushed.” He expects gold to continue its climb, and head to $1,400 an ounce, with prices eventually topping $1,900 next year. See full story.
Stocks rise as Brexit seen unlikely
-- The three major U.S. stock indexes rose about 1 percent each to record their biggest percentage gains in a month as investors grew confident that Britain would choose to remain in the European Union in Thursday's referendum. Markets across the globe have been rattled over the past two weeks as investors speculated about the consequences of Britain's exit, including the unraveling of the bloc. The "Remain" camp has found 52 percent favor, according to an Ipsos MORI poll conducted on Tuesday and Wednesday. The final result of the referendum will be known on Friday.
U.S. markets also took solace in Fed Chair Janet Yellen's two-day testimony this week when she expressed optimism about the economy and downplayed the chances of a recession this year. "Regardless of the outcome in the UK, we will see a relief rally in the U.S. today and tomorrow," said Mohannad Aama, managing director, Beam Capital Management in New York. "I think we'll continue to go up tomorrow even if a "Leave" vote prevails because there's a lot of money in the sidelines ... and that will be routed to safer havens and that includes U.S. stocks." See full story.