Daily Economy Watch keeps an eye on events that affect your hard asset portfolio. View archives.
CBO slashes growth forecast
-- The Congressional Budget Office on Wednesday raised its estimate of the federal government's budget deficit for the 2014 fiscal year by $14 billion to $506 billion. That would represent 2.9% of gross domestic product. The new estimate is largely a result of lower-than-expected revenues for the year.
In its updated 10-year budget and economic outlook, the nonpartisan agency also cut its estimate of gross domestic product growth for 2014 to 1.5% from 3.1%, "reflecting the surprising economic weakness in the first half of the year." The CBO last estimated the full-year deficit in April. The fiscal year runs from October through September. See full story.
Consumer confidence near seven-year high
-- U.S. consumer confidence rose in August to its highest level since October 2007 on improved feelings about the current state of the economy, according to a private sector report released on Tuesday. The Conference Board, an industry group, said its index of consumer attitudes rose to 92.4 from a downwardly revised 90.3 the month before. Economists had expected a reading of 89, according to a Reuters poll. July's reading was originally reported as 90.9.
"Consumer confidence increased for the fourth consecutive month as improving business conditions and robust job growth helped boost consumers' spirits," Lynn Franco, director of economic indicators at The Conference Board, said in a statement. The expectations index fell to 90.9 from a revised 91.9 figure, while the present situation index rose to 94.6, highest since February 2008, from 87.9. Consumers' labor market assessment improved. The "jobs hard to get" index fell to 30.6 percent from 30.9 percent the month before, while the "jobs plentiful" index rose to 18.2 percent from 15.6 percent. See full story.
Draghi pushes ECB closer to QE
Jackson Hole, WY
-- Mario Draghi just pushed the European Central Bank closer to quantitative easing. With euro-area data this week likely to show the weakest inflation since 2009, the ECB president used a high-powered central-banking conference in Jackson Hole, Wyoming, to warn that investor bets on prices have “exhibited significant declines.” Stocks rose, the euro fell and bond yields dropped to record lows today as the comments fanned speculation the ECB is finally heading for a form of monetary stimulus it has long avoided.
Draghi previously said that a worsening of the medium-term inflation outlook would provide a reason for broad-based asset purchases. The Aug. 22 speech “was a major event and marked a turning point in ECB rhetoric,” said Philippe Gudin, chief European economist at Barclays Plc in Paris. “We think the recent economic developments have increased the chance of outright QE as the next step.” Draghi’s fear is that if inflation expectations keep falling, they’ll affect actual inflation as investors, consumers and companies pull back spending in anticipation of even weaker prices. That could tip Europe into a deflationary spiral that would be hard to reverse. See full story.
Yellen says job market still in recovery
Jackson Hole, WY
-- Federal Reserve Chair Janet Yellen called for a "pragmatic" approach to U.S. monetary policy on Friday, amid calls by hawkish members of the central bank's policy committee for a quick rise in interest rates due to tightening labor markets and inflationary risks. In a speech at the Fed's annual central banking conference, Yellen laid out in detail why she feels the unemployment rate alone was inadequate to evaluate the strength of the jobs market and why the central bank needed to move cautiously on raising rates.
At the same time, she nodded to the concerns of some Fed officials who are growing uneasy with the sustained level of its monetary policy stimulus. "There is no simple recipe for appropriate policy," Yellen said, arguing for a "pragmatic" approach that gives officials room to evaluate data as it arrives without committing to a preset policy path. But, overall, it marked a defense of her basic premise that significant slack remained in the jobs market, even though she said the 2007-2009 financial crisis and recession damaged the economy and work force in ways that are not fully understood. See full story.
Housing, jobs data bolster outlook
-- U.S. home resales rose to a 10-month high in July and the number of Americans filing new claims for unemployment benefits fell last week, signaling strength in the economy early in the third quarter. The growth outlook was further buoyed by other reports on Thursday showing factory activity in the mid-Atlantic region hit its highest level since March 2011 in August while a gauge of future economic activity increased solidly last month. Home resales have now increased for four straight months after the housing market recovery stalled in the second half of 2013 following a run-up in mortgage rates.
"It goes some way in allaying fears about a relapse in the housing sector recovery, which until recently appears to have stagnated," said Millan Mulraine, deputy chief economist at TD Securities in New York. In a separate report, the Labor Department said initial claims for state unemployment benefits fell 14,000 to a seasonally adjusted 298,000 for the week ended Aug. 16. That pointed to a sustained improvement in labor market conditions. See full story.
Fed: job gains not yet enough
-- The Federal Reserve has been surprised by how quickly the U.S. labor market is healing but doesn't want to bring forward a planned rate hike until the recovery looks more convincing, according to minutes of its last policy meeting. Policymakers "generally agreed" improvements in the labor market over the last year had been "greater than expected," according to minutes of the central bank's July 29-30 meeting released on Wednesday. The Fed had said in its policy statement following the meeting that there was "significant" labor market slack, but the minutes showed many members of its policy-setting panel thought this characterization "might have to change before long."
"Labor market conditions had moved noticeably closer to those viewed as normal in the longer run," the minutes said. Still, most policymakers felt any change in their view on when to start raising rates "would depend on further information on the trajectories of economic activity, the labor market and inflation." The minutes also showed Fed officials had largely agreed on many elements of a framework for eventually raising rates from near zero, with almost all of them agreeing it would be appropriate to retain the overnight federal funds rate as their key target. See full story.
Consumer prices rise modestly
-- U.S. consumer prices barely rose in July as declining energy costs partially offset increases in food and rents, which could give the Federal Reserve ammunition to keep interest rates low for a while. The Labor Department said on Tuesday its Consumer Price Index edged up 0.1 percent last month after increasing 0.3 percent in June. In the 12 months through July, the CPI increased 2.0 percent after advancing 2.1 percent in June. Inflation pushed up a bit from March through June, but labor market slack, marked by tepid wage growth, is keeping a lid on price pressures. That could add to the view that the U.S. central bank will be in no hurry to raise its benchmark interest rate.
The Fed targets 2 percent inflation and it tracks an index that is running even lower than the CPI. The Fed last month said the risk of inflation running persistently below its target had diminished somewhat. It has kept its overnight lending rate near zero since December 2008 while nursing the economy back to health. Last month's gain in consumer prices was in line with economists' expectations. See full story.
Homebuilder confidence at seven-month high
-- Confidence among U.S. homebuilders rose in August to the highest level in seven months, showing the industry is making more headway after weakness earlier this year. The National Association of Home Builders/Wells Fargo sentiment measure climbed to 55 from 53 in July, the Washington-based group reported today. Readings above 50 mean more respondents said conditions were good. The median forecast in a Bloomberg survey of economists projected it would hold at 53.
Historically low mortgage rates and increased employment are bringing home purchases within reach of more Americans. Faster wage gains would help provide an additional push for the industry, which is struggling to lure first-time buyers beset by tougher credit conditions. “As the employment picture brightens, builders are seeing a noticeable increase in the number of serious buyers entering the market,” NAHB Chairman Kevin Kelly, a homebuilder from Wilmington, Delaware, said in a statement. “However, builders still face a number of challenges, including tight credit conditions for borrowers and shortages of finished lots and labor.” See full story.
Consumer sentiment falls to nine-month low
-- American consumer confidence unexpectedly declined in August to a nine-month low, repressed by gloomy wage perceptions. The Thomson Reuters/University of Michigan preliminary sentiment index dropped to 79.2, the lowest since November, from 81.8 in July, according to data issued today. It was lower than any economist surveyed by Bloomberg projected and represented the biggest negative surprise in a decade.
The retreat in confidence was paced by mounting concern about the economic outlook as households said earnings would probably not climb as fast as prices. That bolsters Federal Reserve Chair Janet Yellen’s argument that there remain pockets of labor-market weakness that require the central bank to maintain monetary stimulus into 2015. “The median household doesn’t think it will be able to beat inflation over the next year,” said Dana Saporta, director of U.S. economic research at Credit Suisse in New York, who projected sentiment would drop. “Chair Yellen specifically cited pessimism over household income as one of the headwinds that’s impacting the U.S. economy right now, and these figures would seem to underscore her point.” See full story.
Jobless claims rise to six-week high
-- Applications for unemployment benefits in the U.S. rose more than forecast last week, interrupting a steady decline to pre-recession lows. Jobless claims climbed by 21,000 to 311,000 in the period ended Aug. 9, the highest in six weeks, a Labor Department report showed today in Washington. The median forecast of 48 economists surveyed by Bloomberg called for 295,000. There was nothing unusual in the data and no states were estimated, a spokesman said as the figures were released. The jump represents a departure from a run of low readings that showed employers had been holding firm on staffing levels in order to keep up with demand.
Federal Reserve Chair Janet Yellen is among policy makers who remain concerned that pockets of slack in the job market, including stagnant wages and elevated numbers of long-term unemployed workers, continue to hold back the world’s largest economy. Two-thirds of labor market indicators that Yellen has said she monitors to judge the health of the labor market haven’t yet returned to pre-recession strength. A still-elevated level of underemployment, decades-low workforce participation and a still-low number of workers secure enough to quit their jobs are among the gauges that remain weaker than 2004-07 averages. See full story.
Weakest retail sales in six months
-- Sales at U.S. retailers in July had the weakest growth in six months, dragged down by auto dealers, in a disappointing start to the third quarter, according to government data released Wednesday. Overall retail sales were basically unchanged in July, ticking up only a tiny fraction from June, the U.S. Commerce Department reported. That result missed expectations from economists polled by MarketWatch, who had forecast retail-sales growth of 0.2% in July, matching June’s result. Excluding autos, retail sales rose 0.1% in July, also missing forecasts that called for growth to hold steady at 0.4%.
“On the whole, the tone of this report was disappointing as it points to a marked slowing in consumer spending activity at the start of [the third quarter],” Millan Mulraine, deputy head of U.S. research and strategy at TD Securities, wrote in a research note. Retail sales are a major chunk of consumer spending, which is the backbone of the U.S. economy. Recent retail-sales reports have been tepid, held back by weak wage growth and wary consumers. A string of weak retail-sales reports could depress wider economic growth, noted Jennifer Lee, senior economist at BMO Capital Markets, who had this to say about Wednesday’s retail data: “Boo.” See full story.
German investor morale plunges on Ukraine
-- German analyst and investor morale plunged in August to its lowest level in more than 1-1/2 years as the crisis in Ukraine took its toll, a survey showed, suggesting that Europe's largest economy is running out of steam. Mannheim-based think tank ZEW's monthly survey of economic sentiment, published on Tuesday, fell for an eighth consecutive month to 8.6 in August, from 27.1 in July. That was its lowest since December 2012, as tensions in Ukraine hit stock markets and robbed firms of the confidence to invest at a time when worries about German economic growth are gaining ground.
The reading, which was way off the consensus forecast in a Reuters poll for a reading of 18.2, sent the euro to a session low against the dollar and pushed Bund futures higher."German investor confidence plunged in August, as concerns over growth and the escalation of tensions in eastern Ukraine triggered a sharp correction in equity markets in the past two weeks," said Christian Schulz, senior economist at Berenberg Bank. "The drop in the ZEW index confirms the near-term downside risk for the German and euro zone economies emanating from the Ukraine crisis," he said. See full story.
Low wages undermine U.S. job growth
-- Jobs growth in the U.S. since the 2008 recession has been undermined by lower wages, with workers earning an average 23 percent less than earnings from jobs which were lost, a report by an organization representing U.S. cities said on Monday. The average annual salary in sectors where jobs were lost - particularly manufacturing and construction - during the 2008-9 financial crisis was $61,637, according to the report by the United States Conference of Mayors (USCM), which represents cities with populations of more than 30,000. Job gains through the second quarter of 2014 in comparative sectors showed average wages of $47,171, implying $93 billion in lower wage income, the report said.
The report also showed that the majority of metro areas - 73 percent - had households earning salaries of less than $35,000 a year. The latest monthly employment data from the Labor Department showed that more than 200,000 jobs were created for the sixth straight month in July, but that wages were about flat in the private sector. See full story.
Stocks rise as Ukraine tension eases
-- The Standard & Poor’s 500 Index rose, while Treasuries erased gains as speculation that Russia is de-escalating tension in Ukraine outweighed concern about crises in the Middle East. The S&P 500 added more than 1 percent, erasing its decline for the week. Futures contracts on the Euro Stoxx 50 rose 0.4 percent after the Stoxx Europe 600 Index capped its first back-to-back weekly losses since March. Ten-year Treasury yields were little changed after earlier sinking to the least in more than a year. The yen reversed gains against most of its major peers.
Russia’s Defense Ministry said warplanes had ended drills in the region near Ukraine. RIA Novosti earlier reported that Russia offered to mediate between the government in Ukraine and the separatists that it’s battling. President Barack Obama approved airstrikes in Iraq, and rocket attacks marked the end of a cease-fire between Israel and Hamas. Brent crude fell on speculation the airstrikes will stabilize supplies from OPEC’s second-largest producer. “For the most part the market has been pretty resilient over the last week or so,” Michael James, a Los Angeles-based managing director of equity trading at Wedbush Securities Inc., said in an interview. “It has been able to shrug off a lot of negatives and not go lower than it had.” See full story.
Stocks fall to Treasurys, gold
-- The U.S. stock market ended Thursday’s session with modest losses, as investors moved out of riskier assets and into gold and U.S. Treasurys. The drop in stocks, while relatively modest, was global, with Asian and European markets also losing ground. The S&P 500 fell 0.6%. The Dow Jones Industrial Average dropped 0.5%.
The S&P 500 is now down 4% from its peak, hit by fears that the stronger economy could push the Federal Reserve to raise interest rates sooner than expected as well as escalating tensions surrounding Ukraine. On Thursday, Russia banned food imports from the U.S., members of the European Union and other countries in retaliation over sanctions. See full story.
Italy slides back into recession
-- Italy slid into recession for the third time since 2008 in the second quarter, underlining the chronic weakness of the euro zone's No.3 economy and pressuring Prime Minister Matteo Renzi to complete promised reforms. Figures on Wednesday from statistics agency ISTAT showed gross domestic product unexpectedly declined by 0.2 percent in April-June from the previous three months. A Reuters poll of economists had forecast growth of 0.2 percent. The economy also shrank by 0.1 percent in January-March, meaning it has returned to recession, defined as two consecutive quarters of contraction.
Unions and opposition parties said the figures showed Renzi had failed to address the problems of the country, which the leftist SEL party said faced a "real economic disaster". However, Economy Minister Pier Carlo Padoan rejected suggestions that the government would have to pass an emergency budget to ensure Italy respected European Union deficit rules. Italy has posted only one quarter of growth since mid-2011, expanding 0.1 percent in late 2013. Adjusted for inflation, second quarter GDP was the lowest for 14 years, ISTAT said. See full story.
Stocks fall on Ukraine tensions
-- U.S. stocks fell, with the Standard & Poor’s 500 Index (SPX) sinking to the lowest since May, while Treasuries and gold erased declines as concern that tension in Ukraine would escalate fueled demand for haven assets. The Standard & Poor’s 500 Index slid 0.9 percent at 4 p.m. in New York. The rate on 10-year Treasury notes was little changed at 2.48 percent, erasing a five-basis-points gain sparked by rising U.S. services data that increased speculation officials may raise interest rates early next year. Gold reversed a loss to add 0.2 percent. Energy shares in the S&P 500 plunged as U.S. crude tumbled to a six-week low.
The S&P 500 extended losses and Treasuries reversed after Polish Foreign Minister Radoslaw Sikorski said Russia had restored its combat readiness on the Ukraine border. He did not give any indication that an incursion was imminent. Putin is showing no sign of backing down since the U.S. and the European Union tightened sanctions last week, with Russia massing forces on its neighbor’s border in the biggest military buildup since troops were withdrawn from the area in May. See full story.
U.S. stocks rise after bailout
-- U.S. stocks rose, after the biggest weekly loss in two years for the Standard & Poor’s 500 Index, as Portugal announced a bailout for Banco Espirito Santo SA and Berkshire Hathaway Inc. beat earnings estimates. Warren Buffett’s Berkshire Hathaway rose 3.1 percent as results improved at operating businesses including auto insurer Geico, railroad BNSF and the energy unit. The S&P 500 rose 0.7 percent.
“We’re seeing a reprieve of geopolitical concerns,” Chad Morganlander, a money manager at St. Louis-based Stifel, Nicolaus & Co., which oversees about $160 billion, said in a phone interview. “The economy overall is moving forward with better-than-expected earnings, and we see an upward bias continuing over the next couple of months.” The S&P 500 tumbled 2.7 percent last week, the most since June 2012, as companies around the globe including Exxon Mobil Corp. posted disappointing results, Argentina defaulted and Banco Espirito Santo was ordered to raise capital. See full story.
Jobs data bolsters Yellen's argument
-- The U.S. Federal Reserve has made a big bet that recovery of the labor market is a long way from creating a worrisome surge of inflation. A range of economic data on Friday suggested the Fed has been reading the odds well. While the Labor Department's monthly employment report showed more than 200,000 jobs created for the sixth straight month, wages were about flat in the private sector and there was little improvement in America's blight of long-term unemployment.
The report supported Fed Chair Janet Yellen's view that a sharp drop in the unemployment rate over the last year has masked substantial weakness in the labor market. That could give Yellen room to keep interest rates at rock-bottom levels well into next year - without inflation becoming a threat."We need more wage growth to see a pickup in inflation," said Ryan Sweet, an economist at Moody's Analytics in West Chester, Pennsylvania. See full story.
Wage growth up as labor market tightens
-- U.S. labor costs recorded their biggest gain in more than 5-1/2 years in the second quarter and a gauge of trends in the jobs market fell to an eight-year low last week, bolstering the economy's outlook. Though economists cautioned against reading too much into the rise in the employment cost index, they said a tightening jobs market suggested wage growth would soon accelerate significantly. "If the unemployment rate keeps declining, compensation pressures simply have to increase. Most members of the Federal Reserve appear to believe it will be a lot later and not very rapidly but I am not that sure," said Joel Naroff, chief economist at Naroff Economics Advisors in Holland, Pennsylvania.
The Employment Cost Index, the broadest measure of labor costs, rose 0.7 percent. That was the largest gain since the third quarter of 2008 and followed a 0.3 percent increase in the first quarter. It is one of Fed Chair Janet Yellen's favorite labor market gauges and is being closely watched for clues on the timing of the first interest rate increase from the U.S. central bank. Fed officials on Wednesday acknowledged the improvement in labor market conditions, but said "significant underutilization of labor resources" remained. See full story.
Economy grows 4% in spring
-- The U.S. economy sprang back to life in second quarter and expanded at the fastest pace since last fall, fueled by a upturn in consumer spending on big-ticket items such as cars and trucks as well as a sharp rebound in business investment. Gross domestic product — the value of all goods and services produced by the U.S. — grew at a 4% annual clip in the second quarter, the government said Wednesday. Newly revised figures also show the economy contracted by a somewhat smaller 2.1% in the first quarter instead of 2.9%.
The second-quarter rebound “provides evidence that the economy is healthy and will continue to grow at an above-average rate in the second half of this year and into 2015,” asserted Douglas Handler, chief U.S. economist at IHS Global Insight. Economists polled by MarketWatch predict the U.S. will expand by 3%-plus in the third and fourth quarters. They base their optimism on a surge in hiring that’s added 1.39 million new jobs in the first half of 2014, marking the best six-month stretch since the Great Recession ended in mid-2009. See full story.
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.