Daily Economy Watch keeps an eye on events that affect your hard asset portfolio. View archives.
U.S. deficit to dip in 2015 as era of dramatic declines ends
-- The U.S. budget deficit will decline slightly to $468 billion this fiscal year, the lowest level since President Barack Obama took office, congressional forecasters said on Monday in a report heralding the end of a brief period of dramatically shrinking red ink.
The deficit, down sharply from the $1 trillion-plus levels of Obama's first four years and a $483 billion gap in fiscal 2014, will stay largely flat in 2016 but then begin a steady march upward due to rising costs for servicing the national debt and caring for the fast-retiring Baby Boom generation.
See full story: http://www.reuters.com/article/2015/01/26/us-usa-budget-idUSKBN0KZ26X20150126
QE boosts Eurozone confidence
-- Euro-area manufacturing and services expanded at the fastest rate in five months at the beginning of 2015 amid increasing new orders and employment. A Purchasing Managers Index for manufacturing and services rose to 52.2 in January from 51.4 in December, London-based Markit Economics said on Friday. Economists in a Bloomberg News survey forecast an increase to 51.7. A reading above 50 indicates expansion.
Confidence in the euro area’s weak recovery has improved in recent months, and the European Central Bank took another step on Thursday in its fight to revive growth and inflation across the 19-nation region. Policy makers committed to monthly asset purchases of 60 billion euros ($68 billion) for a total of 1.1 trillion-euros. “There’s good reason to believe the rate of expansion will continue to improve in coming months,” said Chris Williamson, chief economist at Markit. “The additional stimulus in the form of full-scale quantitative easing by the ECB should help to underpin a further improvement in confidence among households and businesses.” See full story.
ECB launches 1 trillion euro rescue plan
-- The European Central Bank took the ultimate policy leap on Thursday, launching a government bond-buying program which will pump hundreds of billions in new money into a sagging euro zone economy. The ECB said it would purchase sovereign debt from this March until the end of September 2016, despite opposition from Germany's Bundesbank and concerns in Berlin that it could allow spendthrift countries to slacken economic reforms. Together with existing schemes to buy private debt and funnel hundreds of billions of euros in cheap loans to banks, the new quantitative easing program will release 60 billion euros ($68 billion) a month into the economy, ECB President Mario Draghi said.
By September next year, more than 1 trillion euros will have been created under quantitative easing, the ECB's last remaining major policy option for reviving economic growth and warding off deflation. The flood of money impressed markets: the euro fell more than two U.S. cents to $1.14108 on the announcement, and European shares hit seven-year highs. The prospect of dramatic ECB action had already prompted the Swiss central bank to abandon its cap on the franc against the euro. Denmark cut its main policy interest rate on Thursday for the second time this week after the ECB announcement, aiming to defend the Danish crown's peg to the euro. See full story.
ECB set to decide on money printing plan
-- The European Central Bank's Executive Board has proposed a program that would enable the ECB to buy 50 billion euros ($58 billion) in bonds per month starting in March, a euro zone source said on Wednesday. With the likely start date imminent and only one other opportunity at the beginning of March for governors to agree details, pressure will be high on them to finalize talks and announce the mechanics on Thursday. These details will describe how far the ECB goes in meeting demands from Germany's Bundesbank for the risk of the scheme to rest with national central banks in countries from Greece to Italy, rather than with the ECB. ECB President Mario Draghi will speak to the media at 1330 GMT on Thursday.
The duration of the program is highly significant but also contested because Germany is troubled by the concept of bond-buying, particularly any government bond purchases, and wants to limit its scale. A program starting in March and running for a year would amount to a total volume of some 600 billion euros, based on a purchase rate of 50 billion euros per month. If a similar plan ran until the end of 2016, it would surpass 1 trillion euros. See full story.
IMF cuts outlook, calls for more easing
-- The International Monetary Fund lowered its forecast for global economic growth in 2015, and called on Tuesday for governments and central banks to pursue accommodative monetary policies and structural reforms to support growth. Global growth is projected at 3.5 percent for 2015 and 3.7 percent for 2016, the IMF said in its latest World Economic Outlook report, lowering its forecast by 0.3 percentage points for both years. "New factors supporting growth, lower oil prices, but also depreciation of euro and yen, are more than offset by persistent negative forces, including the lingering legacies of the crisis and lower potential growth in many countries," Olivier Blanchard, the IMF's chief economist, said in a statement.
The IMF advised advanced economies to maintain accommodative monetary policies to avoid increasing real interest rates as cheaper oil heightens the risk of deflation. If policy rates could not be reduced further, the IMF recommended pursuing an accommodative policy "through other means". Projections for emerging economies were also broadly cut back, with the outlook for oil exporters Russia, Nigeria and Saudi Arabia worsening the most.See full story.
ECB may deliver $635 billion in QE
-- Mario Draghi is likely to announce a 550 billion-euro ($640 billion) bond-purchase program this week and won’t skimp too much on the details, economists say. The European Central Bank president will make his biggest push yet to steer the euro area away from deflation by announcing quantitative easing on Jan. 22, according to 93 percent of respondents in a Bloomberg News survey. The median estimate of the size of the package tops the 500 billion euros in models presented to officials this month.
Draghi’s goal at a press conference after the Governing Council gathers will be to convince investors he has a strategy big and bold enough to reinvigorate the moribund economy. Speculation over his plans has already sent the euro to an 11-year low, with the fund flows probably contributing to the Swiss National Bank’s shock decision to end a cap on the franc. “Market expectations now are stellar,” said Attilio Bertini, head of research at Credito Valtellinese SC in Sondrio, Italy. There must be “no disappointment” and “the ECB’s next move should be pervasive, risk-transferring and long-lasting,” he said. See full story.
CPI falls by most in six years
-- U.S. consumer prices recorded their biggest drop in six years in December and a gauge of underlying inflation was flat, which could make the Federal Reserve more cautious about raising interest rates. The Labor Department said its Consumer Price Index fell 0.4 percent last month, the largest decline since December 2008, after sliding 0.3 percent in November. In the 12 months through December, the CPI increased just 0.8 percent, the weakest reading since October 2009 and a sharp deceleration from November's 1.3 percent rise.
"The odds of a rate hike in June are fading fast," said Michelle Girard, chief economist at RBS in Stamford, Connecticut. "The recent data cannot leave the Fed feeling more confident that inflation will move higher." While Fed officials have viewed the energy-driven drop in inflation as transitory, a strong dollar is taming underlying price pressures, which could cause them some discomfort. The so-called core CPI, which strips out food and energy costs, was unchanged in December. It was only the second time since 2010 that it did not increase. See full story.
Swiss central bank stuns market
-- The Swiss National Bank shocked financial markets on Thursday by scrapping a three-year-old cap on the franc, sending the currency soaring against the euro and stocks plunging on fears for the export-reliant Swiss economy. Only days ago, SNB officials had described the 1.20 francs per euro cap, introduced in 2011 at the height of the euro zone crisis to fend off deflation and a recession, as a policy cornerstone. The U-turn sent the franc nearly 30 percent higher against the euro in chaotic early trading. Coming a week before the European Central Bank is expected to unveil a bond-buying program to counter deflationary pressures, it fed speculation that this quantitative easing (QE) scheme will be so big that the SNB would have struggled to defend the cap.
As it removed the upper limit on the currency, the SNB sought to discourage new flows into Swiss francs by pushing down its interest rate on some cash deposits held at the central bank by commercial banks and other financial institutions. After taking the rate into negative territory last month for the first time since the 1970s, it cut another 0.5 percentage points on Thursday to -0.75 percent. See full story.
Retail sales slump in December
-- Retail sales in the U.S. sank in December largely because consumers spent a lot less to fill up at the gas station, but most stores posted weak results during the busiest month of the shopping season, government data show. The surprisingly large decline in retail sales triggered a selloff in U.S. stocks, while foreign markets took a darker tone on fresh worries that lower oil prices aren’t helping the American economy as much as predicted.
Sales at retailers dropped a seasonally adjusted 0.9% last month to mark the biggest pullback in nearly a year, the Commerce Department said Wednesday. Economists polled by MarketWatch were expecting a smaller 0.2% decline. “The December retail sales report was extremely weak,” said Stephen Stanley, chief economist at Amherst Pierpont Securities. See full story.
Euro drops to 9-year low on QE, Greece
-- The euro fell to a nine-year low as officials fueled speculation that the European Central Bank will begin buying government bonds as early as next week to stave off deflation. A gauge of the dollar gained to almost the highest in a decade on bets the Federal Reserve will raise interest rates this year. Richard Clarida of Pacific Investment Management Co. said he sees the euro falling to parity. The shared currency slid after a Greek official said the nation may exit the currency union as the opposition party holds a slim lead heading into elections.
“The euro has been pressured by several factors, including prospects of central-bank policy action and concerns regarding political developments in Greece,” said Sireen Harajli, a Mizuho Bank Ltd. strategist in New York. “It seems that there is very little to support the single currency.” Greek Finance Minister Gikas Hardouvelis said the nation could exit the euro zone by accident if a new government led by Syriza fails to reach an agreement with international creditors soon after this month’s election. See full story.
Oil tumbles 5% on Goldman forecast
-- Oil prices slumped more than 5 percent on Monday after an influential Wall Street bank cut its forecasts and Gulf producers showed no sign of being willing to curb output. Brent LCOc1 was down $2.36 to $47.75 a barrel by 1:44 p.m. EST, after dropping to $47.16, its lowest since April 2009. U.S. crude CLc1 was down $2.07 at $46.30 after earlier hitting $45.90, also near a six-year low. Three days of relative price stability ended abruptly after Goldman Sachs slashed its outlook, saying oil could tumble to the low $40s.
"I figured we’d see $40 in the near term, but everything seems to be happening quicker than expected,” Tariq Zahir of Tyche Capital Advisors. Goldman said that despite declining investments in U.S. shale oil, production will take longer to fall. The bank cut its three-month forecasts for Brent to $42 a barrel from $80 and for the U.S. futures contract to $41 from $70. The unrelenting rout that has wiped nearly 60 percent off prices since June shows no sign of letting up, with many traders giving up attempts to predict a bottom even amid growing signs that U.S. shale drillers are hitting the brakes. See full story.
U.S. adds 252,000 jobs but wages fall
-- The U.S. added 252,000 new jobs in December to extend the strongest streak of hiring since the mid-1990s, but wages fell and more people dropped out of the labor force to slightly tarnish an otherwise excellent employment report. The nation’s unemployment rate also continued to tumble, falling to 5.6% from 5.8% and hitting the lowest level since June 2008, the Labor Department said Friday. The fall in the jobless rate stemmed partly from the increase in the number of people working, but more Americans also dropped out of the labor force. As a result, the percentage of working-age Americans 16 or older fell again to match a postrecession low of 62.7% — a level last seen in 1978.
What’s more, the surge in job creation and sinking unemployment still haven’t led to sustained increases in how much American workers get paid each hour, the key to putting the U.S. recovery on an ideal growth path. Wages in December fell 5 cents, or 0.2%, to $24.57 an hour. That’s the biggest percentage drop since at least 2006, when the government introduced a new index to measure overall U.S. wage growth. The gain in wages over the past 12 months, what’s worse, slowed to just 1.7% from 1.9%. That’s barely faster than the rate of inflation. See full story.
Euro falls to 9-year low
-- The euro fell to its lowest level against the dollar since 2005 on Thursday, extending more than a week of declines, after the European Union Commission’s report on eurozone economic sentiment showed no change from November’s tepid reading. The report, along with unexpectedly poor German manufacturing data, helped strengthen the European Central Bank’s case for launching more stimulus measures, which some analysts expect could happen as early as the central bank’s Jan. 22 meeting.
German manufacturing orders fell sharply in November. The weak reading comes a day after a Eurostat report showed that falling consumer prices sent the eurozone inflation into negative territory in December, fueling fears that the region could face a prolonged period of deflation. See full story.
Eurozone deflation risks mount
-- Deflation is stalking the euro area. As European Central Bank policy makers gather for their first meeting of 2015 today, the backdrop is a 0.2 percent annual drop in consumer prices, the first in more than five years. For President Mario Draghi, who wants to open the money tap, the data may push the central bank closer to the unprecedented step of buying government bonds to revive growth and inflation. ECB officials are working on a plan to purchase sovereign debt as they strive to prevent a deflationary spiral of falling prices and households postponing spending, a risk Draghi has said can’t be “entirely excluded.”
In addition to moribund growth, the region risks being further unsettled by elections in at least three countries this year and mounting concern about the future of the single currency. The last time the euro area’s inflation rate went negative in 2009, the economy was struggling to recover from the recession that followed the collapse of Lehman Brothers Holdings Inc. This time, the decline was partly driven by sluggish growth and a drop in crude oil prices of about 50 percent in the past year. See full story.
Services, factories signal slowdown
-- Growth in the U.S. services sector braked in December and new orders for manufactured goods fell for a fourth straight month in November, signs the economy lost some momentum in the fourth quarter. But with domestic demand picking up, against the backdrop of lower gasoline prices and firming wage growth, any slowdown in economic growth is likely to be temporary. "The economy hardly ended the year with a bang, but only because the recent pace was not sustainable. It is easing only modestly," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
The Institute for Supply Management said on Tuesday its services index fell to 56.2 last month, the lowest reading since June, from 59.3 in November, which had left it just shy of revisiting its post-recession highs. It was held back as growth across all categories moderated, with some respondents saying a labor dispute at the nation's West Coast ports was causing delays, which required the rerouting of goods to ports on the East Coast. The data helped to push U.S. stocks lower. Prices for U.S. government debt rose, while the dollar fell marginally against a basket of currencies. See full story.
Equities slump as oil hits 5-1/2-year lows
-- Equity markets worldwide tumbled on Monday, led by commodity-linked shares as oil prices fell to 5-1/2-year lows and investors fled to the safety of government bonds.Crude oil futures and U.S. crude prices dropped to their lowest levels since spring 2009, hit by a global supply glut and lackluster demand. Strength in the U.S. dollar, which touched a near nine-year high against the euro on the EBS platform, weighed on dollar-denominated commodities.
Data showed Russia's oil output hit a post-Soviet high last year, while Iraq's oil ministry said the country's oil exports in December were the highest since 1980, underscoring excess supply. The decline in U.S. stocks is "driven quite a bit by the slump in energy prices," said Rick Meckler, president of LibertyView Capital Management in Jersey City, New Jersey. Political uncertainty in Greece, which has renewed fears of a possible Greek exit from the euro zone, also rattled European stocks ahead of the country's elections later this month. See full story.
Factory sector suffers end-of-year chill
-- The U.S. factory sector grew at its slowest pace in six months in December, a sign that weakness in the global economy is weighing on the United States. The Institute for Supply Management (ISM) said its index of national factory activity fell to 55.5 last month from 58.7 in November. A reading above 50 indicates expansion in the manufacturing sector, and the reading remains well above its two-year average. That means the slowdown appears unlikely to derail a broader strengthening of the U.S. economy.
Prices for U.S. Treasuries rose and the U.S. dollar was up against a basket of currencies after the data. Still, the data suggests weakness abroad and a surge in the value of the dollar, which is near its strongest level since 2005, are inflicting pain on key parts of the U.S. economy. A gauge of factory exports fell to 52 in December from 55 in the previous month. See full story.
Stocks fall as Treasurys, gold rise
-- U.S. stocks fell from near records, with the Standard & Poor’s 500 Index paring a seventh straight December gain, while Treasuries rose and gold surged. European and emerging-market equities slipped with energy shares. The S&P 500 slid 0.5 percent to 2,080.35 by 4 p.m. in New York, after closing yesterday at a record for the 53rd time in 2014. Utilities sank the most since June last year. The Stoxx Europe 600 Index lost 0.9 percent to extend its December retreat. The MSCI Emerging Markets Index fell 0.4 percent to push its loss this year to almost 5 percent. Ten-year Treasury yields touched their lowest level in a week as gold futures jumped 1.6 percent. Russia’s ruble strengthened 4 percent versus the dollar, trimming its worst annual slump since 1998.
The S&P 500 has risen 0.6 percent in December, bolstered by the fastest growth for the American economy in more than a decade. A report today showed U.S. consumer confidence increased less than estimated this month, while crude oil traded near the lowest level since 2009 in New York and London amid speculation U.S. oil inventories will hold at the highest level for the time of year in at least 30 years. Greek Prime Minister Antonis Samaras will request elections for Jan. 25, with the anti-austerity party Syriza leading in opinion polls. Gold futures for February delivery climbed to $1,200.40 an ounce, after touching $1,210.90, the highest intraday price since Dec. 18. Futures are down 0.2 percent this year after sliding 1.1 percent yesterday as the strengthening dollar eroded the precious metal’s appeal as a store of value. See full story.
Greek vote puts ECB funds at risk
-- Greece’s descent into political crisis is threatening the country’s financial system. The European Central Bank, already battling the risk of euro-area deflation, may soon have to decide whether to withdraw much of its funding for Greek lenders. Special rules on Greek assets accepted as collateral will become invalid if snap elections prevent the country from agreeing to a replacement for its bailout program by the end of February.
The prospect of renewed Greek turmoil is reviving memories of the euro-area debt crisis, which started in the southern European nation in 2009 and spread until it threatened the survival of the single currency in 2012. The regional economy has struggled to recover since then, prompting the ECB to take unprecedented stimulus measures that may extend to quantitative easing as soon as next quarter. There is “a risk of around 30 percent that Greece may descend into a new deep crisis with potential euro exit beyond the inevitable bout of near-term uncertainty now,” said Holger Schmieding, chief economist at Berenberg Bank in London. “That is a significant risk.” See full story.