Daily Economy Watch keeps an eye on events that affect your hard asset portfolio. View archives.
U.S. services sector cools in April
-- U.S. services sector expansion eased slightly in April from a seven-month high in March on a dip in new business growth, but the pace of hiring in the sector accelerated to its highest since last June, an industry report showed on Monday. Financial firm Markit said its "flash," or preliminary, reading of its Purchasing Managers Index for the services sector slipped to 57.8 in April from a final reading of 59.2 in March, which had been the highest level since August. A reading over 50 signals expansion in economic activity.
Markit's April reading of employment at service companies, meanwhile, rose to a 10-month high of 55.4 from March's 54.0. The services index's new business component pulled back slightly from the month before, when it had notched its highest level since September. Markit's composite PMI, a weighted average of its manufacturing and services indexes, dropped to 57.4 from 59.2 last month. Last week, Markit in its flash reading of U.S. manufacturing activity said the goods-producing sector's growth fell in April by the most in six months, although it remained solidly in expansion territory. See full story.
Busniess spending hints at slower growth
-- U.S. business investment spending plans fell for a seventh straight month in March, weighed down by a strong dollar and lower energy prices, suggesting the economy was struggling to rebound from a recent soft patch. The report from the Commerce Department on Friday came on the heels of lukewarm data on retail sales, employment and housing starts that have hinted at insufficient growth momentum that could prompt the Federal Reserve to delay raising interest rates until later this year. "This is consistent with a sluggish rebound in growth. It's shedding more doubt on the Fed's willingness to raise rates mid-year," said Gennadiy Goldberg, an economist at TD Securities in New York.
Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, declined 0.5 percent last month after a revised 2.2 percent drop in February, which was the biggest decline since July 2013. The so-called core capital goods orders were previously reported to have declined 1.1 percent in February. Economists had forecast these orders gaining 0.3 percent last month. The weakness mirrors other manufacturing indicators such as industrial production and various regional factory surveys. See full story.
Global economy disappoints in April
-- Business activity weakened in China and Japan in April and growth slowed in Europe and the U.S., suggesting the global economy may be less robust than policymakers are predicting. In China, where the government has been engineering a rebalancing of its economy towards domestic spending and away from reliance on exports of manufactured goods, the preliminary purchasing managers' index (PMI) fell to a one-year low of 49.2 from 49.6, according to data from HSBC/Markit. The Markit/JMMA preliminary Japan PMI for April also slid, to 49.7 from 50.3, as new orders continued to shrink and manufacturing production fell for the first time since July 2014.
A sudden drop in the euro zone flash composite Markit Purchasing Managers' Index (PMI) was driven by sharply slower growth in manufacturing orders in Germany and France, suggesting recent optimism about the euro zone may be overdone. Factory order growth slowed particularly in France, but also in major exporter Germany, the euro zone's No. 1 economy, suggesting more subdued activity ahead. Growth in the U.S. manufacturing sector slowed more than expected in April, with factory activity expansion showing the slowest momentum since January, according to Markit. See full story.
Home sales hit 18-month high in March
-- Springing back from a tough winter and supported by the growing economy, sales of used homes in March reached the fastest pace in 18 months, according to data released Wednesday. If such strong results keep up, 2015 could be the best year for used-home sales in almost a decade, said Lawrence Yun, chief economist of the National Association of Realtors. “After a quiet start to the year, sales activity picked up greatly throughout the country,” he said. “The combination of low interest rates and the ongoing stability in the job market is improving buyer confidence and finally releasing some of the sizable pent-up demand that accumulated in recent years.”
Sales of existing homes rose 6.1% in March to a seasonally adjusted annual rate of 5.19 million, the fastest pace in 18 months, the National Association of Realtors reported Wednesday. Treasury yields shot higher after the housing data. But there are still reasons to be cautious about home sales. Prominent economists met at a forum Tuesday in Washington and warned that weak income growth and few first-time buyers have been holding back home sales. And here’s another worry: The government recently reported that monthly job gains hit the slowest pace in more than a year. See full story.
Greece’s woes spark flight to quality
-- Treasury yields declined Tuesday morning, as fears of a Greek default, along with mixed data on Germany’s investor sentiment, fueled a flight-to-safety in U.S. Treasurys. As Tuesday offered nothing in the way of economic data ahead of next week’s Federal Reserve meeting, the influence of external market — either overseas or domestic equities — was more pronounced. Meanwhile, the last Fed speaker comments before the blackout — no more comments are expected until after next week’s meeting — did not give the market a clear direction, as New York Fed President William Dudley expressed no urgency to raise interest rates.
This resulted in an overarching bullish theme in the market Tuesday, as “so much of the domestic data has disappointed, stocks are having a hard time, and Europe’s various woes and influences keep the 10-year benchmark Bunds to a miserly 7.4 basis points,” David Ader, head of government bond strategy at CRT Capital Group, said in a note. “Under such conditions, it’s hard to see Treasuries selling off much more significantly,” Ader added. The Greek debt roll-over is still the prime focus of the global markets at this point, Tom di Galoma, head of rates and credit trading at ED & F Man Capital Markets, said in a note. See full story.
Europe braces for messy Greek endgame
-- It’s still possible that Greece can remain in the eurozone — though that is no longer the base case for many policy makers. At the very least, most fear the situation is going to get much, worse before it gets any better. No one now expects a deal to unlock Greek bailout funding at this week’s meeting of eurozone finance ministers in Riga — originally set as the final deadline for a deal. The new final, final deadline is now said to be a summit on May 11.
But among European politicians and officials gathered in Washington DC last week for the International Monetary Fund’s Spring Meetings, there was little optimism that a deal will be agreed by then. The two sides are no closer to an agreement than when the Greek government took office almost three months ago. “Nothing, literally nothing has been achieved,” says an official. In fact, it is worse than that: so far, the bulk of Athens’s reform plans would actually cost money or reduce government revenues, according to eurozone officials. They say that when you add up all the government’s proposals, the budget surplus required under the current program turns into a 10-15% deficit while debt soars far above the 120% of GDP targeted for 2022. There is no way that the eurozone — let alone the IMF — could disburse funds on the basis of such fantastical numbers. See full story.
Wall Street tumbles on earnings, China
-- Wall Street tumbled on Friday, with the major indexes down one percent or more, on investor concerns over new regulations in China, Greece's debt negotiations and disappointing earnings reports from U.S. corporations. All ten major S&P 500 sectors lost ground"Today, it just seems the wall of worry is higher than it's been in a while because of Greece, oil, earnings and economic data from the past few days," said Jeffrey Carbone, senior partner, Cornerstone Financial Partners, in Cornelius, NC.
"Eventually, people have to say, 'OK, forget about the Fed and central bankers nonsense and focus on the fundamentals,' because if the large-caps are coming in with lower-than-expected earnings, then you know that other smaller companies will be in trouble," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. Chinese authorities lifted restrictions on short-selling while also warning against excessive borrowing on margin, two developments that could pressure that market. Market participants were also concerned Greece could leave the euro zone as it tries to reform its economy and deal with heavy debt. Greece dismissed reports it needed to tap remaining cash reserves to meet salary payments. Reuters
Jobless claims hit six-week high
-- The number of people who sought new U.S. unemployment benefits in the second week of April rose to the highest level in six weeks, government data showed Thursday. Initial jobless claims rose to 294,000 in the seven days ended April 11 from a revised 282,000 the prior week, the Labor Department said.
Economists polled by MarketWatch had expected claims for regular state unemployment-insurance benefits to remain steady at 281,000 in the most recent weekly data from the estimate initially reported in the prior week. The department said there were no special factors in the report. The Federal Reserve’s Beige Book on Wednesday reported a spate of layoffs in manufacturing and the oil sector due to the slump in energy prices. See full story.
U.S. industrial output weakens in March
-- Industrial output sputtered in March, leading to the first quarterly decline in production since the recession, data released by the Federal Reserve on Wednesday showed. Industrial production dropped 0.6%, larger than the 0.5% decline foreseen in a MarketWatch-compiled economic forecast. The decline means production slumped an annualized 1% in the first quarter, the first quarterly decrease since the second quarter of 2009.
Manufacturing is acting as a significant drag on the economy: The consensus is for first-quarter gross domestic product growth at just a 1.5% rate, compared with a 2.2% GDP expansion in the fourth quarter. Analysts expect some pickup in the second quarter, but the first reading of factories in one key region in April started on a soft note. The Empire State factory index, a measure of factory activity in the Fed’s New York district, slipped into negative territory in April, according to a report released earlier Wednesday. See full story.
Retail sales climb less than forecast
-- Sales at U.S. retailers rose less than forecast in March after being depressed by harsh winter weather, signaling consumers are intent on not overextending themselves. Purchases increased 0.9 percent, the first gain in four months, after a 0.5 percent drop in February, Commerce Department figures showed Tuesday in Washington. The median forecast of 87 economists surveyed by Bloomberg called for a 1.1 percent advance. The figures show Americans remain focused on using the savings at the gas pump to shore up finances even as employment and confidence firm and interest rates remain low. A boost in wage growth may be what’s needed to drive households to loosen their purse strings and sustain a pickup in growth after a first-quarter slowdown caused mainly by unusually harsh winter weather.
“The U.S. consumer is cautious and not ready to go on a shopping spree just because gas prices are lower,” said Thomas Costerg, an economist at Standard Chartered Bank in New York, who correctly projected the retail sales gain. “I would expect consumption to accelerate as we go through the year.” Estimates for retail sales in the Bloomberg survey ranged from advances of 0.2 percent to 1.7 percent. February’s reading was revised from an initially reported 0.6 percent decrease. See full story.
China exports fall by a shocking 15%
-- China's export sales contracted 15 percent in March, a shock outcome that deepens concern about sputtering Chinese economic growth. The tumble in exports - the worst in about a year - compared with expectations for a 12 percent rise and could heighten worries about how a rising yuan has hurt demand for Chinese goods and services abroad, analysts said. The yuan's strength was one factor in March's 19.1 percent on-year decline in exports to the European Union and 24.8 percent drop to Japan.
In a sign that domestic demand was also tepid, imports into the world's second-biggest economy shrank 12.7 percent last month from a year ago, the General Administration of Customs said on Monday. By volume, coal imports plunged more than 40 percent in January-March. The March fall in imports was in line with forecasts, unlike the one for exports. "It's a very bad number that was much worse than expectations," Louis Kuijs, an economist at RBS in Hong Kong, said about the export data. "It leads to warning flags both on global demand and China's competitiveness." See full story.
U.S. import prices fall in March
-- U.S. import prices fell in March as rising petroleum costs were offset by declining prices for other goods, a sign of muted inflation that supports the view the Federal Reserve will probably not raise interest rates in June. The Labor Department said on Friday import prices dropped 0.3 percent last month after a downwardly revised 0.2 percent gain in February. Economists polled by Reuters had forecast import prices slipping 0.3 percent after a previously reported 0.4 percent increase in February, when prices advanced after declining for seven straight months.
In the 12 months through March, prices plunged 10.5 percent, the largest drop since September 2009. But the combination of low inflation and weak economic growth in the first quarter has prompted many economists to push back their rate hike expectations to later in the year. And some economists believe monetary policy tightening will only begin in 2016. The Fed has kept its key short-term interest rate near zero since December 2008. See full story.
Dollar rises after strong jobless claims
-- The ICE U.S. Dollar Index DXY, a measure of the dollar’s strength against a basket of six currencies, rose 1% to 98.91 and the euro fell to its lowest level against the dollar in three weeks after a strong jobless-claims report. The Labor Department said that jobless claims climbed to a seasonally adjusted 281,000 last week, from a revised 267,000 the week before. The four-week average of jobless claims, meanwhile, dropped by 3,000 to 282,250, its lowest level since June 2000. While this morning’s data was strong, analysts said that the minutes from the March meeting of Federal Reserve policy makers represent the largest driver of the dollar’s rally.
The minutes, released Wednesday, showed that several policy makers had advocated raising the fed-funds rate at the central bank’s June meeting, causing traders to push the dollar higher on the expectation that a June rate hike was still on the table. “There’s a higher probability that they go earlier than what the market is pricing in,” said Aroop Chatterjee, a currency strategist at Barclays, referring to the timing of what would be the first increase in the Federal Reserve’s benchmark interest rate since 2006. Comments from New York Fed President William Dudley, made Wednesday, supported the notion that a June interest-rate increase remains a possibility. See full story.
Fed minutes suggest low bar for hike
-- The Federal Reserve is willing to make its first interest rate hike since the financial crisis in a matter of months, according to minutes from the March meeting released on Wednesday. “Several” Federal Reserve officials thought that the U.S. central bank would be able to raise interest rates in June, according to minutes from the March meeting released Wednesday. That’s a term suggestive of a solid core of Federal Open Market Committee members favoring action, though perhaps short of a majority. At the same time, others thought a rate hike would not be warranted until later in the year as low oil prices and the strong dollar would likely hold inflation down.
Stocks gave up gains and the dollar rose after the release of the minutes. Still, the hawkish tone at the meeting might not reflect the current thinking of U.S. central bank officials in light of the weak March job data released two weeks later. For instance, William Dudley, the influential president of the New York Fed, said earlier Wednesday a June rate hike remained a possibility but said the bar had been moved higher given that soft report along with others. See full story.
Kocherlakota: No rate hikes until late 2016
-- Minneapolis Fed President Narayana Kocherlakota on Tuesday laid out a case for waiting until the second half of 2016 to start raising interest rates, and to then raise them gradually to just 2 percent by the end of 2017. It was the first time the dovish policymaker detailed his preferred path for "late and slow" rate hikes. His remarks afterwards to reporters suggest he is increasingly worried that market expectations for nearer-term rate rises, fueled by comments from many of Kocherlakota's Fed colleagues, could knock the wind out of the economic recovery. "That conversation (about raising rates) in and of itself is a tightening of policy," Kocherlakota said. "I do worry about the ongoing conversation about tightening monetary policy being a drag on economic performance both in terms of growth and in terms of employment outcomes."
Some of the Fed's more hawkish policymakers have even pressed for a rate rise as early as June, warning that waiting too long could force the Fed to hike borrowing costs sharply to head off a potential surge in unwanted inflation. "I continue to believe that it would be a mistake to raise the target range for the fed funds rate in 2015," Kocherlakota told the Bismarck-Mandan Chamber of Commerce. Because of still-low employment and excessively low inflation, he said, the Fed should "start late and raise (rates) more slowly than we did in 2004 to 2006," the last time the Fed boosted rates. The Fed will eventually increase short-term borrowing costs to 3 percent or 3.25 percent, but not until at least 2018, he said. Most Fed officials see the rate near that level by the end of 2017. See full story.
Dollar extends losses after poor jobs report
-- The euro traded higher against the dollar Monday, extending gains scored Friday after a weaker-than-expected jobs report saw investors push back expectations for a rate hike by the Federal Reserve. The euro traded at $1.1030, just under its highest level in two weeks, compared with $1.0972 in North American trade late Friday. Traders pushed the euro higher after New York Federal Reserve President William Dudley said that the strong dollar has given a “significant shock” to the U.S. economy, and after the Institute for Supply Management’s non-manufacturing index showed slowing growth in the U.S. service sector.
Matt Weller, a senior technical analyst at Forex.com, said that the euro’s gains are a symptom of the market pricing in a lower probability that the Federal Reserve will raise interest rates in the third quarter for the first time in nearly a decade. Friday’s tumble in the dollar was the biggest fall in almost two weeks following U.S. labor data for March that showed nonfarm payrolls grew by 126,000, about half the increase forecast by economists in a Wall Street Journal survey.See full story.
Jobs growth slumps to 15-month low
-- The U.S. created the fewest new jobs in March in 15 months, a steep downshift in hiring that raises questions about whether the economy is suffering from a temporary malaise or if a broader slowdown in underway. The economy generated just 126,000 new jobs last month, breaking a streak of 12 straight 200,000-plus gains and marking the smallest increase since the end of 2013. The unemployment rate was unchanged at 5.5%, the Labor Department reported Friday. What’s more, employment gains for February and January were reduced by a combined 69,000, taking a bit of shine off the labor market’s performance in the first two months of the year.
The result: The increase in hiring in the first three months of 2015 has slowed dramatically to an average of 197,000. While the pace of hiring this year is still fairly decent, it doesn’t come close to matching average job gains of 289,000 in the fourth quarter. The disappointing report makes it more likely the Federal Reserve will to wait until the end of summer before raising a key interest rate for the first time since 2006. See full story.
Rising factory orders offer glimmer of hope
-- New orders for U.S. factory goods unexpectedly rose in February after six straight months of declines, offering a ray of hope for a sector that has been battered by a strong dollar and weaker global demand. The Commerce Department said on Thursday new orders for manufactured goods increased 0.2 percent, the largest gain since July, after a revised 0.7 percent drop in January. Orders excluding transportation rose 0.8 percent, the biggest rise in eight months. Shipments of factory goods rose 0.7 percent after four straight months of declines.
Economists polled by Reuters had expected factory orders to slip 0.5 percent in February after a previously reported 0.2 percent dip in January. Manufacturing has been hit by a strong dollar and lower crude oil prices, which are putting a squeeze on the profits of multinational corporations and oil firms. Softer growth in China and Europe has also weighed on factories, with a report on Wednesday showing manufacturing activity at a near two-year low in March. See full story.
Dollar down on disappointing data
-- The dollar fell on Wednesday at the start of the second quarter as disappointing data on U.S. manufacturing and jobs growth raised bets the Federal Reserve might refrain from raising interest rates until late 2015 at the earliest. The soft readings reinforced the notion that the recent surge in the greenback has hurt exporters and dragged on the economy, which would worry Fed policymakers. Payroll processor ADP said U.S. companies added 189,000 workers in March, the fewest in 14 months, while the Institute for Supply Management said its index on U.S. factory activity fell to a lower-than-expected 51.5 last month.
"There's more uncertainty about the timing and pace of policy normalization from the Fed," said Eric Viloria, currency strategist at Wells Fargo Securities in New York. "We saw a negative reaction (from the data) that contributed to the weakness in the dollar." Expectations the Fed was on track to end its near-zero rate policy later this year resulted in the dollar index .DXY posting a stellar first quarter, its strongest since the third quarter of 2008. As the new quarter kicks off, it was 0.3 percent lower at 98.085. See full story.
Consumer confidence, house prices rise
-- U.S. consumer confidence rebounded strongly in March amid optimism over the labor market while house prices increased in January, hopeful signs that a recent sharp slowdown in economic activity was probably a blip. The Conference Board said on Tuesday its index of consumer attitudes rose to 101.3 this month from 98.8 in February. That was well above economists' expectations for a reading of 96. While consumers were less optimistic about the short-term outlook, they had greater confidence in the labor market, with the share of those anticipating more jobs in the months ahead increasing significantly.
A second report showed single-family home prices rose in January from a year earlier, in part boosted by a shortage of properties on the market. The S&P/Case Shiller composite index of 20 metropolitan areas gained 4.6 percent in January on a year-over-year basis after rising 4.4 percent in December. Housing has been sluggish amid a dearth of properties, as insufficient equity keeps potential sellers from entering the market. The re-acceleration in home prices could see more houses put up for sale.See full story.
China annouces Silk Road initiative
-- Over the weekend, China unveiled details of its blueprint for a modern Silk Road to improve links from Asia to Europe and Africa, an ambitious initiative that could translate into a new wave of investment. Analysts say "Silk Road"-related investment, which this year alone could reach 300 billion to 400 billion yuan ($48-64 billion), would benefit a wide range of companies including port operators, train makers and steel producers. "The initiative is a boon to many of China's struggling industries," said Alex Kwok, Hong Kong-based strategist at China Investment Securities (HK).
Chinese stocks surged to seven-year highs on Monday, while the Hong Kong market posted its biggest daily gain in two months, as investors bet more infrastructure spending and policy stimulus would re-energise China's cooling economy. China's main indexes, the CSI300 and the Shanghai Composite Index, both jumped nearly 3 percent to the highest level since March 2008, while Hong Kong's benchmark Hang Seng index rose 1.5 percent, the biggest daily gain in two months. See full story.