Daily Economy Watch keeps an eye on events that affect your hard asset portfolio. View archives.
Consumer confidence hits 7-year high
-- Confidence among consumers soared in July to an almost seven-year high as increased employment opportunities led to brighter views of the U.S. economy. The Conference Board’s index advanced to 90.9, the highest since October 2007, from 86.4 in June, the New York-based private research group said today. The gauge exceeded the most optimistic projection in a Bloomberg survey of 75 economists. “Employment conditions improved, gas prices are lower, equity markets remain robust, and that’s pretty much it,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. “The fact that confidence is rising at a fairly steady rate implies that employment growth is going to continue at a fairly healthy rate.”
More Americans than at any time in the past six years viewed jobs as abundant and a greater share anticipated their incomes will increase, laying the groundwork for a pickup in consumer spending. Progress in the labor market and other data showing limited traction in the housing market probably explain why Federal Reserve policy makers are forecast to keep interest rates low well into 2013 even as they trim monetary stimulus. See full story.
Home sales unexpectedly decrease
-- Fewer Americans than forecast signed contracts to buy previously owned homes in June, a sign residential real estate is struggling to strengthen. The index of pending home sales declined 1.1 percent from the month before after rising 6 percent in May, figures from the National Association of Realtors showed today in Washington. The median forecast of 39 economists surveyed by Bloomberg projected sales would rise 0.5 percent.
Limited availability of credit and sluggish wage growth are making it harder for prospective buyers to take the plunge, threatening to throttle the pace of the housing recovery. Continued gains in employment and a bigger supply of available homes will be needed to help accelerate the industry’s progress, which Federal Reserve Chair Janet Yellen has said is lackluster. “Unfortunately, I don’t see much of an acceleration in housing demand going forward until we get a significant improvement in the labor market and the income part of it in particular,” said Yelena Shulyatyeva, a U.S. economist at BNP Paribas in New York, who forecast a 1 percent decrease in pending sales. “An uneven recovery in the housing market is really one of the biggest concerns of the Fed.” See full story.
Durable goods show subdued spending
-- Orders for U.S. business equipment rose in June after falling the prior month, forming an inconsistent pattern that indicates corporate investment lacks the momentum needed to propel economic growth to a higher level. Bookings for non-military capital goods excluding aircraft climbed 1.4 percent after a 1.2 percent decrease in May that was previously reported as a 0.7 percent gain, data from the Commerce Department showed today in Washington. Such demand, considered a proxy for future business spending, declined 0.9 percent over the past three months, dimming the third-quarter outlook. Orders for all durable goods climbed.
Companies are waiting to expand capacity until they believe sales increases will be sustained. An improving job market will probably prompt consumers to keep replacing older cars, appliances and computers, a sign manufacturers will remain busy and give growth a boost in the second half of the year. “We’re seeing a continuation of the pattern we’ve seen, which has been relatively subdued growth in capital goods and equipment spending,” said Ryan Wang, an economist at HSBC Securities USA Inc. Wang is the second-best forecaster for capital-goods orders over the past two years, according to data compiled by Bloomberg. See full story.
IMF warns of stagnation in rich nations
-- The International Monetary Fund on Thursday chopped its 2014 forecast for global economic growth to take into account weakness early in the year in the United States and China, the world's two biggest economies. The IMF warned that only some of the factors leading to the reduction were temporary, and richer nations in particular faced the risk of economic stagnation unless they took steps to foster sustainable growth. In an update to its World Economic Outlook report, the IMF said the global economy should expand 3.4 percent this year, 0.3 percentage points below what it predicted in April.
But the Fund said a robust global recovery from the deep financial troubles of 2007-09 was still not assured, and geopolitical risks from the crises in the Middle East and Ukraine could dent growth further. "Robust demand momentum has not yet emerged despite continued very low interest rates and easing of brakes to the recovery, including from fiscal consolidation or tight financial conditions," the IMF said, adding that all major advanced economies would do well to keep policy rates low for now. See full story.
IMF cuts U.S. growth forecast
-- The Federal Reserve may have scope to keep interest rates at zero for longer than investors anticipate as inflation stays muted and a 2014 slowdown prolongs the labor-market recovery, the International Monetary Fund said. The IMF cut its U.S. growth forecast for this year to 1.7 percent from 2 percent predicted in June, citing a first-quarter contraction, after a 1.9 percent advance last year. The fund left its 2015 forecast at 3 percent, the fastest expansion since 2005.
“Even with that relatively good growth outlook, we still see there’s a lot of slack in the economy,” Nigel Chalk, deputy director of the IMF’s western hemisphere department, said today on a conference call. The nation’s jobless rate fell to 6.1 percent in June, down from 6.6 percent in January, even as harsh winter weather contributed to a 2.9 percent contraction in gross domestic product from January through March. While the job market is weaker than the unemployment rate implies, there’s “meaningful rebound” under way, the staff report said. See full story.
Consumer prices rise in June
-- Consumer prices gained again in June but the rise was not as broad-based as in the prior month and was driven mainly by the rising cost for gasoline. The Labor Department said the consumer price index increased 0.3% in June after a 0.4% gain in May. The gasoline index rose 3.3% in June, and accounted for two-thirds of the increase in overall June prices, the department said.
Food prices rose 0.1% in June, the smallest monthly increase since January, after a steep 0.5% gain in May. Excluding volatile food and energy prices, core prices ticked up 0.1% after three straight gains of 0.2% or more. Economists surveyed by MarketWatch had expected a 0.3% gain in the overall CPI and a 0.2% rise in the core rate. U.S. stock futures added to gains after the CPI report was released. See full story.
Rising wage pressures point toward inflation
-- The share of U.S. companies raising wages more than doubled in the three months to July from a year ago, a survey showed on Monday, suggesting a faster pace of wage growth. The National Association for Business Economics' (NABE) latest business conditions survey found that 43 percent of the 79 economists who participated said their firms had increased wages. That compared to only 19 percent last year and marked an increase from 35 percent in the three months to April. "For the third survey in a row, an increasing share of panelists reported rising wage costs last quarter," said NABE President Jack Kleinhenz, who is also chief economist at the National Retail Federation.
It was the first time since October 2012 that no respondents reported declining wages at their firms. The economists represented a broad spectrum of businesses, including goods-producing, transportation, finance and services industries.While Federal Reserve Chair Janet Yellen maintains wage growth is still a long way from igniting inflation, the anecdotal evidence of faster wage growth has some economists worried the U.S. central bank could be slow to raise interest rates and end up with an inflation problem. See full story.
U.S. consumer sentiment dips
-- U.S. consumer sentiment dipped in early July while an index of consumer expectations weakened for a third straight month, a survey released on Friday showed. The Thomson Reuters/University of Michigan's preliminary July reading on the overall index on consumer sentiment came in at 81.3, below both the consensus analyst expectation of 83 and the final June read of 82.5. "The most remarkable aspect of recent trends in consumer confidence has been its resistance to change in either direction due to very negative GDP nor very positive employment gains," survey director Richard Curtin said in a statement.
"This stability will provide the necessary strength for consumer spending to continue to expand, but does not support an acceleration in spending above 2.5 percent." The survey's barometer of current economic conditions rose to 97.1 from 96.6, compared with a forecast of 97.0. The survey's gauge of consumer expectations slipped for a third straight month, to 71.1 from 73.5. The subindex was below an expected 74.0. The survey's one-year inflation expectation rose to 3.3 percent from 3.1 percent in June, while the survey's five-to-10-year inflation outlook fell to 2.6 percent from 2.9 percent. See full story.
U.S., EU escalate Russia sanctions
-- The U.S. and the European Union imposed the most aggressive sanctions to date on Russian business and said more may follow, acting after threats to squeeze the $2 trillion economy over the conflict in Ukraine. Russia’s ruble and bonds plunged and stocks fell to a more than six-week low after the Obama administration unveiled the plan and Ukraine said a fighter jet was shot down by the Russians yesterday. Targeted companies include OAO Rosneft (ROSN), Russia’s largest oil company, natural gas producer OAO Novatek (NVTK), OAO Gazprombank, the country’s third-largest lender, and eight defense firms. EU leaders agreed to blacklist companies and halt lending to public-sector projects in Russia.
“These sanctions are significant,” U.S. President Barack Obama said yesterday at the White House. “But they are also targeted, designed to have maximum impact on Russia while limiting any spillover effects on American companies or those who are allies.” Russian President Vladimir Putin denounced the action as a reflection of an “aggressive” U.S. foreign policy. At a news conference in Brazil yesterday, he warned they are liable to “boomerang” and hurt U.S. business interests. Russia won’t tolerate “blackmail” and reserves the right to respond, the Foreign Ministry said in a statement on its website today, adding it was disappointed the EU “gave in” to the pressure. See full story.
PPI rises more than expected
-- U.S. producer prices rose more than expected in June with gains across most categories, indicating some inflation at the factory gate. The Labor Department said on Wednesday its producer price index for final demand increased 0.4 percent, reversing May's 0.2 percent decline. Economists polled by Reuters had forecast prices received by the nation's farms, factories and refineries rising 0.2 percent.
The government revamped the PPI series at the start of the year to include services and construction. The new series was viewed as an alternative measure of economy-wide inflation. But big swings in prices received for trade services, a gauge of margins for retailers and wholesalers, have injected volatility into the series and made it difficult to get a clear read on producer inflation. Through the volatility, however, producer prices maintained a firmer bias. In the 12 months through June, producer prices increased 1.9 percent after rising 2.0 percent in May.See full story.
Yellen: Fed may move sooner
-- The Federal Reserve may have to raise interest rates sooner and higher than expected if the labor market keeps surprising the central bank, Chairwoman Janet Yellen said Tuesday. In testimony to the Senate Banking Committee, Yellen stressed, as she has since the spring, that “considerable uncertainty” surrounds the economic outlook and the Fed’s decisions about interest rates will depend on the data.
“If the labor market continues to improve more quickly than anticipated by the Federal Open Market Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned,” Yellen said in testimony accompanying the semi-annual monetary policy report. She quickly noted that the converse was also true. “If economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated,” she said. See full story.
IMF warns on Eurozone recovery
-- Any new shocks could halt the euro zone's economic recovery, spoil improving market sentiment and eventually tip the region into deflation, the International Monetary Fund warned on Monday. The euro zone economy has been growing for a year, but its expansion remains too weak to compensate for the preceding two years of recession across the 18 countries that share the euro. Nor can it yet make inroads into record-high unemployment. "With limited policy space in the near term, further negative shocks - either domestic or external - could sour financial market sentiment, halt the recovery, and push the economy into lower inflation and even deflation," the Fund wrote in a regular report.
News last week of irregularities at a web of family-held holding companies behind Portugal's largest listed bank, Banco Espirito Santo (BES.LS), pushed up borrowing costs for some euro zone countries and revived memories of the region's debt crisis. The IMF said the euro zone's recovery remained too weak after the efforts of member governments to reform, the European Central Bank's action to spur growth and a clean-up of the financial sector. See full story.
Budget gap shrinks to six-year low
-- The U.S. budget deficit so far this fiscal year was the smallest since 2008 as a stronger economy bolstered tax payments by consumers and businesses, a government report showed. The $365.9 billion shortfall from October through June compared with a $509.8 billion gap in the same period a year earlier, the Treasury Department said in a report today in Washington. Last month, the government posted a $70.5 billion surplus compared with a $116.5 billion excess a year earlier, the report also showed.
Rising employment and corporate profits will probably keep lifting tax receipts this year as the U.S. recovers from a first-quarter slump. That will help shrink this fiscal year’s deficit, which is projected to be the smallest as a share of the economy since 2007. “Deficits are rapidly declining,” Paul Edelstein, director of U.S. financial economics at IHS Global Insight Inc. in Lexington, Massachusetts, said before the report. “A lot of it is coming on the revenue side, mostly from taxes -- there were increases in payroll taxes last year, which are still being felt this year, corporate profits are up and they are paying more in taxes.” See full story.
Portugal revives banking fears
-- Just what Europe needed: another banking crisis. Thursday’s turmoil in Portuguese financial conglomerate Espirito Santo International has sent stock markets tumbling, driven bond yields skyward and re-awoken niggling fears about the robustness of Europe’s banking system. Sound familiar? Well, there are striking similarities to daily headlines from the crisis two years ago, when European Central Bank President Mario Draghi was forced to calm panicky bond markets with his famous “do whatever it takes” speech. And as Peter Garnry, head of equity strategy at Saxo Bank, put it in a note on Thursday: “The event has hit European financials like a torpedo and has revived investors’ darkest nightmares about Europe.”
If your definition of that nightmare is a selloff, his description is pretty much spot-on. Portuguese government bonds are tanking, sending the benchmark 10-year yield to levels not seen since before the June ECB meeting, when the central bank launched an aggressive package of liquidity measures. The 10-year borrowing costs for government paper were up 21 basis points on Thursday, to 3.97%, according to electronic trading platform Tradeweb. That’s on top of the 13 basis-point rise on Wednesday. See full story.
Fed plans to end bond purchases in October
-- Federal Reserve revealed in the minutes of its June meeting released Wednesday that it has decided to end its asset-purchase program in October if the economy stays on track. According to the new plan, the Fed will make a $15 billion final reduction at its October meeting, after trimming it by $10 billion at each meeting up to that point. Fed officials said that members of the public had asked them if the Fed would end the program in October or with a final $5 billion reduction in December. Most Fed officials said that the exact end of the tapering issue will have no bearing on the timing of the first rate hike.
The Fed has said that rates would remain near zero for a “considerable time” after the Fed halts its program of bond purchases. The central bankers generally agreed to keep reinvesting the proceeds of securities that mature on its balance sheet until after it had hiked interest rates. Fed officials “signal a good deal of comfort in managing policy with a high balance sheet,” said Eric Green, head of U.S. rates and economic research at TD Securities. There is “no appetite whatsoever to sell assets,” he noted. The Fed holds a record $4.38 trillion of securities. See full story.
Hedge funds boost gold wagers
-- Gold is precious again. After investors sent bullion tumbling in 2013 by the most in three decades and kept dumping the metal earlier this year, demand is now up and prices are defying bearish forecasts. Money managers increased net-long positions for a fourth straight week through July 1 and holdings in exchange-traded products are climbing at the fastest pace since 2012. “Gold’s performance has proven the bears wrong so far this year,” John Kinsey, who helps manage about C$1 billion ($935 million) at Caldwell Securities Ltd. in Toronto, said in a telephone interview yesterday. “We look for further strength through the balance of the year.”
While the latest government data point to an improved U.S. economy and Goldman Sachs Group Inc. and Societe Generale SA predict prices will retreat by year-end, inflation concerns and pockets of unrest are sending investors into gold as a haven. Prices extended gains after the Federal Reserve signaled earlier this month that it will keep interest rates near record lows and violence spread in Iraq and Ukraine. The bulls are being rewarded. The value of the gold funds rose by $4.6 billion this year as prices rallied 9.5 percent. The metal has rebounded from last year’s 28 percent plunge that was triggered by muted inflation and as investors shunned the metal in favor of equities. See full story.
China second-quarter GDP seen steady at 7.4%
-- China's economy probably steadied in the second quarter with annual growth holding firm at 7.4 percent, a Reuters poll showed, suggesting that a recovery is taking hold as a flurry of government stimulus measures kick in. All but three of the 21 analysts polled by Reuters predicted that growth either stabilised or edged up between April and June, reinforcing the view that authorities have successfully arrested a cooldown with a modest loosening in policies. Indeed, even though economists expect the headline growth rate to cling to an 18-month low of 7.4 percent, they also believe that China's export and manufacturing sectors likely enjoyed their best performances in several months in June.
"We expect China's upcoming June and second-quarter data to show an economy that is still recovering," UBS analysts said in a note to clients. "With more easing measures underway and an ongoing export recovery, sequential growth momentum should warm up further in the third quarter." China's economic growth quickened in the second quarter from the previous three months, but further modest government support measures will still be needed, Premier Li Keqiang said on Monday, without giving a GDP figure. See full story.
U.S. job growth surges in June
-- U.S. employment growth jumped in June and the jobless rate closed in on a six-year low, decisive evidence the economy was moving forward at a brisk clip after a surprisingly big slump at the start of the year. Nonfarm payrolls increased by 288,000 jobs last month and the unemployment rate fell to 6.1 percent, its lowest level since September 2008, the Labor Department said on Thursday. Data for April and May were revised to show a total of 29,000 more jobs created than previously reported. "It’s an extremely bullish report. It's a report that really checks off all the positive boxes. I don’t think you could have asked for a stronger read," said Jacob Oubina, senior U.S. economist at RBC Capital Markets in New York.
Employment has now grown above a 200,000-jobs pace for five straight months for the first time since the technology boom in the late 1990s. The economy has added an average of 231,000 jobs per month this year, the highest six-month average since 2006. The data gave a lift to U.S. stocks, with the Dow Jones industrial average crossing the 17,000 threshold for the first time. Prices for U.S. Treasuries fell, while the U.S. dollar gained against a number of major currencies, as traders bet on an earlier interest rate hike from the Federal Reserve. See full story.
ADP sees most jobs gained since 2012
-- U.S. private-sector hiring hit a 1-1/2-year high in June, reinforcing views that momentum was building to carry the economy through the rest of the year after a dismal start. Wednesday's report from payrolls processor ADP added to other bullish data ranging from manufacturing to auto sales that has suggested the economy has bounced back smartly after a first-quarter slump. "This is further proof that recent weaker growth numbers are not a true reflection of the U.S. economy," said Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh.
Private employers added 281,000 workers to payrolls last month, up from 179,000 in May, ADP said. June's increase, which topped economists' expectations for a gain of only 200,000 jobs, was the largest since November 2012. Coming a day before the government's comprehensive employment report for June, the ADP data increased the likelihood of another month of strong nonfarm payrolls growth, economists said. Most, however, maintained their forecasts for the government data, noting that the ADP report, which is jointly developed with Moody's Analytics, was not a reliable indicator of overall jobs growth. See full story.
Manufacturing stays strong in June
-- U.S. manufacturers remained on a second-quarter hot streak as new orders for cars, computers, chemicals and other products climbed to the highest of 2014, according to the a survey of industry executives. The Institute for Supply Management said its manufacturing index registered 55.3% in June, just a hair below May’s reading of 55.4%. Any number above 50% signals expansion. Read ISM report.
The resurgence among American manufacturers suggests the plunge in first-quarter U.S. growth was an aberration that’s quickly faded away. The 2.9% drop in gross domestic product was the biggest outside of a recession since 1947, but economists polled by MarketWatch predict growth will rebound to around 3% in the second quarter. Also, a global manufacturing survey rose to a four-month high and a similar index in the U.K. showed surprising strength in June. See full story.
Dollar set for quarterly losses
-- The dollar on Monday was on track to post second-quarter losses against nearly all major rivals, with the exception of the euro. The ICE dollar index, which pits the greenback against six other currencies, fell to 79.995 from 80.0410. For the quarter, the index is down 0.2%. The big question in the currencies market is when the Federal Reserve could begin to lift interest rates. The Fed has maintained an accommodative monetary policy in the form of low rates, which will remain relevant even after it ends its monthly purchases of bonds later this year. Higher interest rates would likely boost the U.S. dollar, as foreign investors flock to buy the U.S. currency in order to obtain higher-yielding dollar-denominated assets.
“The market appears to be torn between the surprisingly weak U.S. economic data in Q1 of this year and the seemingly stronger evidence of growth in the most recent economic reports,” said Boris Schlossberg, managing director of foreign-exchange strategy at BK Asset Management, in a note. On Monday, the Chicago purchasing managers index for June fell to 62.6 from 65.5 in May, below expectations for a reading of 64.3. Separately, a measure of pending-home sales rose 6.1% in May to an eight-month high. See full story.