Daily Economy Watch keeps an eye on events that affect your hard asset portfolio. View archives.
Euro sags to 11-1/2-year low
-- The euro fell to an 11-1/2-year low against the dollar on Thursday as U.S. and euro zone bond prices rose, after the European Central Bank spelled out its 1 trillion-euro stimulus plan that begins next Monday. European stock prices were supported by the ECB's latest effort to jump-start the struggling euro zone economy, while U.S. equities were little changed as investors awaited direction from the government's monthly labor report due out on Friday.
ECB President Mario Draghi outlined the central bank's quantitative easing program at a press conference following a scheduled policy meeting. He left the door open for more bond purchases beyond September 2016. "Mr. Draghi is showing that the ECB is determined to continue until it gets the results it needs. They are perfectly aware that they cannot afford to fail," said Mauro Vittorangeli, a senior fixed income portfolio manager with Allianz Global Investors in Paris. The ECB upgraded its growth outlook for the euro zone to 1.5 percent for 2015. That still trails a 2.8 percent pace seen for the United States. See full story.
U.S. service firms expand in February
-- Companies in the U.S. service sector such as insurers and real-estate firms grew at a slightly faster pace in February and beefed up employment, according to survey of senior executives. The Institute for Supply Management said its nonmanufacturing index edged up to 56.9% from 56.7% in January. Readings over 50% signal that more businesses are expanding instead of contracting.
The survey is compiled from a questionnaire of the executives who buy supplies for their companies and it tends to rise in fall in tandem with the broader economy. The new orders index fell 2.8 points to 56.7%, but the employment gauge climbed 4.8 points to 56.4%, a sign that more companies plan to hire. That's the highest rate since last July. See full story.
German data signal Eurozone rebound
-- The economic clouds over Europe may be starting to lift. While the sentiment on Europe has been overshadowed by the recent Greek debt debacle, the truth is the eurozone is doing much better fundamentally than it has been giving credit for. This was clearly evidenced on Tuesday, when German retail sales exceeded even the most optimistic estimates, indicating that consumers in the eurozone’s largest economy finally have started spending. Greg Fuzesi, European economist at J.P. Morgan, referred to the 2.9% surge in January retail sales month-on-month “legendary”, while Christian Schulz, senior economist, at Berenberg, noted that private consumption now looks set to be a major driver for German growth in 2015. Economists had expected a 0.4% rise in retail sales.
“Cheap oil, healthy income gains, low interest rates and fading risks combined for a very strong start to the year for German retailers,” Schulz said in a note. And this isn't only good news for the Germans, but also for the rest of the currency bloc, he explained. “Germany’s strength is very positive for the rest of the eurozone as well, as consumer demand will help exporters in the newly competitive peripheral countries, while the weaker euro helps them fend off none-euro competitors,” Schulz said. See full story.
Global stimulus swells as China eases
-- Global stimulus is swelling, with China cutting interest rates ahead of disappointing factory data and the European Central Bank set to start government bond purchases just as data hints the euro zone economy may be picking up. Central banks from Switzerland to Turkey, Canada and Singapore have already loosened monetary policy this year and chances are high the Reserve Bank of Australia will cut rates for a second time in as many months on Tuesday.
The People's Bank of China (PBOC) on Saturday cut its benchmark lending and deposit rates, pre-empting official data which showed a second consecutive month of shrinking manufacturing activity. The European Central Bank will meanwhile start its trillion-euro quantitative easing program this month. See full story.
Dudley, top economists urge later rate hike
-- Raising interest rates too late is safer than acting too early, an influential Federal Reserve official said on Friday, endorsing a high-profile research paper that argues that the U.S. economy, given time, can rebound to normal growth. The paper by four top U.S. economists, presented on Friday to a roomful of powerful central bankers in New York, argues the Fed would be wise to keep rates at rock bottom for longer than planned and then tighten monetary policy more aggressively. New York Fed President William Dudley, who offered a critique of the paper, cited currently low inflation and warned against being too anxious to tighten monetary policy.
The risks of hiking rates "a bit early are higher than the risks of lifting off a bit late," he told a forum hosted by the University of Chicago's Booth School of Business. "This argues for a more inertial approach to policy." The U.S. central bank is in the global spotlight as it weighs when to lift rates after more than six years near zero, and how quickly to tighten policy thereafter, given the economy appears to have finally recovered from recession. Given the uncertainty, "there may be benefits to waiting to raise the nominal rate until we actually see some evidence of labor market pressure and increases in inflation," wrote the economists, including Jan Hatzius of Goldman Sachs and Ethan Harris of Bank of America Merrill Lynch. See full story.
Inflation negative for first time since 2009
-- Consumer prices fell in January for the third straight month while inflation over the past 12 months turned negative for the first time since 2009, largely because of cheaper gasoline. Despite the low rate of inflation, the Federal Reserve is laying the groundwork for an increase in interest rates as early as June. The central bank views the steep drop in inflation as a temporary phenomenon that will soon be reversed.
In January, the consumer price index sank by a seasonally adjusted 0.7%, the biggest one-month drop since the end of 2008, the Labor Department reported Thursday. That matched the MarketWatch forecast. The pace of inflation over the past 12 months, meanwhile, fell to negative 0.1%, and it’s down sharply from 2.1% last summer shortly before crude prices collapsed. See full story.
Dollar dips on rate-hike expectations
-- The U.S. dollar inched lower against its main trading partners Wednesday, extending losses from Tuesday’s session, after Federal Reserve Chairwoman Janet Yellen suggested the central bank isn’t ready to raise interest rates just yet. The dollar traded flat against the euro and yen with the euro worth $1.1345 and the buck trading at ¥119, compared with $1.1349 and ¥118.75 Tuesday. The ICE U.S. Dollar Index a measure of the dollar’s strength against a trade-weighted basket of six rival currencies, was 0.2% lower at 94.2650.
A gauge of manufacturing activity in China, released late Tuesday, came in stronger than expected, which helped push the aussie as high as 79 cents, its highest level since late January. China is the world’s largest consumer of iron ore, one of Australia’s largest exports. The dollar was little-changed after Yellen finished her semiannual testimony to the House Financial Services Committee. On Tuesday, Yellen said the Fed wouldn’t raise interest rates until inflation was on track to hit the central bank’s target level of 2%, which pushed back the market’s expectation for the timing of the first interest-rate increase since 2006 and weighed on the buck. “The Fed confirmed that the US economy is improving, but also noted the lack of inflation in the system as well as slack in global growth demand. In short the message from Ms. Yellen was — ‘We are close to normalization, but not quite yet,’” wrote Boris Schlossberg, managing director of FX strategy at BK Asset Management. See full story.
Yellen signals flexible Fed
-- Federal Reserve Chair Janet Yellen said inflation and wage growth remain too low even as the job market improves, and she signaled that a change in the Fed’s guidance on interest rates won’t lock it into a timetable for tightening. “It is important to emphasize that a modification of the forward guidance should not be read as indicating that the committee will necessarily increase the target range in a couple of meetings,” Yellen said in testimony prepared for delivery before the Senate Banking Committee.
“Instead, the modification should be understood as reflecting the committee’s judgment that conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting.” Yellen Tuesday repeated that the Fed’s pledge to be “patient” on beginning to raise the benchmark interest rate means an increase is unlikely for “at least the next couple” of meetings. The central bank adopted the guidance in December and repeated it in January. See full story.
Euro weakens as Greece concerns remain
-- The euro fell against the dollar Monday, as the initial enthusiasm for Greece’s bailout extension gave way to pessimism that the parties involved merely kicked the can down the road. The shared currency recovered somewhat from the day’s low to trade at $1.1351, up from a session low of $1.1295, but down from around $1.1378 late Friday in New York. The euro had jumped to $1.1430 on Friday after eurozone finance ministers agreed on a four-month extension to Greece’s bailout program after weeks of tense negotiations between Greece’s newly elected leftist government and the country’s international creditors. Kathleen Brooks, research director of U.K. and EMEA at Forex.com, said there is still a chance that that Friday’s deal — only an agreement in principle —could fall apart.
“The Eurogroup is not as optimistic [about the deal] as the stock market, it has arranged another meeting for Eurozone finance ministers on Tuesday, just in case the reforms are rejected,” Brooks wrote. Greece has yet to submit a list of proposed reforms to its creditors on which the agreement hinges. Greece’s troika of lenders — the International Monetary Fund, the European Commission and the European Central Bank — must review, and approve, the proposed reforms before the agreement can be finalized. See full story.
Greece scores 4-month extension
-- The eurozone approved a four-month extension on Greece’s bailout Friday, provided Athens submits by Monday details on the reform and budgetary measures it plans to take, Austria’s finance minister Hans Jörg Schelling said. The four-month extension falls short of the six months Greece had requested Thursday and strengthens the hand of the country’s creditors in negotiations for a follow-up deal.
Greece has to submit a list of proposed measures by Monday, which will then assessed by the European Commission, the European Central Bank and the International Monetary Fund by April, Schelling said. Finance ministers will hold conference call Tuesday night to discuss the Greek list of measures. See full story.
Did the Fed just enter the currency wars?
-- The minutes from the Federal Reserve’s meeting last month have foreign-exchange traders wondering whether Janet Yellen has joined the currency wars. Policy makers pointed to the dollar’s rising value as “a persistent source of restraint” on exports in a surprisingly dovish set of minutes published Wednesday. The greenback fell against a broad group of its peers. Central bankers from Europe to Australia have engaged this year in bouts of rate-cutting oneupmanship, leaving the U.S., and possibly Britain, as the only developed nations seen as likely to raise borrowing costs in 2015.
The dollar climbed to its strongest in more than a decade as a result, prompting billionaire Warren Buffett and Goldman Sachs Group Inc. President Gary Cohn to question whether the Fed can now increase rates without damaging the U.S. economy. “The Fed is finding a very subtle way to temper the enthusiasm around the risks of a sustained dollar bull market that gets out of control,” said Alessio de Longis, a macro strategist in New York at OppenheimerFunds Inc., whose division oversees $11.6 billion. “What the Fed is trying to decelerate a bit is this dollar appreciation in order to make sure that the transition to a Fed hiking policy is more gradual.” The currency’s strength makes it “very tough” for the Fed to lift interest rates this year, Buffett, the chairman of Berkshire Hathaway Inc., said this month. See full story.
Fed to keep zero interest rates longer
-- Federal Reserve policy makers judged that risks facing the U.S. economy argued for keeping interest rates near record lows for longer, minutes of their most recent policy meeting showed. “Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time,” according to a record of the Jan. 27-28 Federal Open Market Committee meeting released on Wednesday in Washington.
The committee, while considering risks to be “nearly balanced,” pointed to a strengthening dollar, international flash points from Greece to Ukraine, and slow wage growth as weakening the case for the first rate rise since 2006. The FOMC said after its last meeting it “can be patient” as it considers when to raise the benchmark interest rate, even as it described the labor market as “strong.” A report the following week showed payrolls rose more than forecast in January to cap the strongest three-month gain in 17 years.
Greece to ask for extension Wednesday,
-- Greece will seek an extension to its loan agreement from the rest of the eurozone Wednesday, an official with knowledge of the situation said, marking an apparent shift in the standoff between Athens and its creditors that has raised questions over the country’s future in Europe’s currency union. The extension could be for a period of four to six months to prevent the current rescue deal from expiring at the end of the month, the official said Tuesday, adding that the conditions of the request were still under negotiation.
The comments came shortly after Greek Prime Minister Alexis Tsipras gave a defiant speech in Parliament in Athens, saying his government would move to immediately dismantle overhauls mandated by its rescue deal and calling for European leaders to hold a summit on his country’s funding needs. On Monday, eurozone finance ministers gave Greece an ultimatum to request an extension, after abruptly cutting short negotiations over what conditions could be attached to new aid. The Greek government has so far insisted that budget cuts and economic overhauls mandated by the current rescue deal are hurting its economy and society and that the currency union’s finance ministers haven’t offered sufficient leeway on implementing those measures. See full story.
Greek talks with EU break off
-- Greek aid talks in Brussels ended abruptly Monday as an official from Prime Minister Alexis Tsipras’s government said the euro area’s proposal to extend existing bailout commitments was “absurd” and “unacceptable.” The Greek official, who insisted on not being further identified, issued an e-mailed statement as euro-area finance ministers met in Brussels and reviewed a draft text that said Greece would observe its existing bailout conditions. Negotiations lurched on briefly, before finance ministers called it a night. The meeting of euro-area finance ministers was tense from the outset after weekend talks in Brussels failed to establish common ground.
The Greeks said euro-area officials focused on the old aid memorandum “are wasting their time.” The statement continued: “With these facts, there can be no agreement today” and said the previous deal was “taken off the table” at meetings in Brussels last week. “The insistence of some circles that the new government enforce the memorandum is absurd and unacceptable,” the statement said. Finance ministers from Germany to France nonetheless said that an extension of the existing program was the only short-term option for Greece. See full story.
Global growth threatens dollar’s rally
-- The dollar traded flat against its rivals Friday as shifting growth expectations threatened the dollar’s seven-month long rally. Recent weakness in U.S. data — January retail-sales figures slumped for the second month, and the Labor Department reported a surprisingly high uptick in weekly jobless claims Thursday — contrasted with stronger-than-expected growth in the eurozone economy, and improved growth forecasts from the Bank of England, to weigh on the dollar for a second session. The ICE U.S. Dollar Index, which measures the dollar’s strength against a trade-weighted basket of six rival currencies, was up 0.1% to 94.21750 after sliding nearly 1% in the prior session.
“The recent moves in FX markets have caught many people off guard,” wrote Angus Campbell, senior analyst at FxPro. “Perhaps not to the extent of the [Swiss National Bank] floor removal a month ago, but the dollar strength of last year and the first part of January has come to a grinding halt.” Eurostat said eurozone gross domestic product expanded by 0.3% in the fourth quarter, sending European stocks to multi-year highs and helping to stabilize the euro around the $1.14 level. See full story.
Retail sales slump for second month
-- Retail sales fell in January for the second month in a row as consumers appeared to pocket most of the savings from sharply lower gasoline prices. Retail sales declined by a seasonally adjusted 0.8% last month after a 0.9% drop in December, the government said Thursday. The slow start to sales this year suggests the U.S. economy is likely to grow more slowly in the first quarter after a 2.6% gain in the final three months of 2014. Sales at gas stations slumped 9.3% to mark the biggest pullback since 2008, reflecting a plunge in oil prices that’s reduced the price at the pump to less than $2 a gallon in some parts of the country.
Yet retail sales excluding gas were still flat compared to December, a sign that Americans aren’t using their fuel bonanza to spend more on other goods and services. Instead they are saving more. “Consumers are being very cautious with the money they are saving at the gas stations,” said Andrew Grantham, senior economist at CIBC World Markets. Sales fell at auto dealers, home-furnishing stores, grocery chains, department stores, apparel retailers and outlets that sell sporting goods, the Commerce Department said. See full story.
Euro slides, dollar gains on Greek debt talks
-- The euro hit a seven-year low against the British pound and fell versus the dollar for a second straight session on Wednesday ahead of the outcome of a euro zone finance ministers' meeting as the region and Greece edged closer to a showdown. Any failure to find common ground on Greece's debt burden will likely put more pressure on the euro. Eurogroup Chairman Jeroen Dijsselbloem said on Wednesday ahead of the meeting that he did not expect an outcome from Greek talks, which weighed on the euro further. "I think it's going to be really down to watching the headlines from the Eurogroup," said Vassili Serebriakov, currency strategist at BNP Paribas in New York.
The euro fell 0.1 percent to $1.1309 and shed 0.2 percent against the British pound to 74.03 pence after hitting its lowest in seven years. The dollar hit a five-week high against the yen, bolstered by a rise in Treasury yields. It was last at 120.38 yen, up 0.8 percent. Trade was thin, with Japanese markets closed for a public holiday. Greek Finance Minister Yanis Varoufakis will present the country's demands for an end to its international bailout to the Eurogroup of euro zone finance ministers as well as a transition to a new debt restructuring deal. He will also seek a "bridge agreement" to buy time until June for a full settlement. See full story.
Buck bounces back from Monday’s losses
-- The dollar recovered Tuesday, after depreciating against most of its rivals during Monday’s session. Tumbling commodity prices, a weak reading on year-end manufacturing activity in the U.K., and “growing concerns about the Greek crisis all helped boost the greenback against its major trading partners,” wrote Boris Schlossberg, managing director of FX strategy. Crude-oil futures traded on the New York Mercantile Exchange for March delivery CLH5, -4.71% were down 0.7% to $52.50 in recent trade.
Schlossberg wrote that the euro will likely depreciate further as the market prices in the risk of a Greek exit. “Although the parties have ostensibly until the start of summer to come to some sort of new arrangement, some analysts believe that Greece only has a few weeks left of cash in its Treasury and with ECB refusing to provide further funds the country may be on the verge of financial disaster much sooner than the market thinks,” Schlossberg wrote.
China's imports slump nearly 20% in January
-- China's trade performance slumped in January, with exports falling 3.3 percent from year-ago levels while imports tumbled 19.9 percent, far worse than analysts had expected and highlighting deepening weakness in the Chinese economy. Largely as a result of the sharply lower imports - particularly of coal, oil and commodities - China posted a record monthly trade surplus of $60 billion. The slide in imports is the sharpest since May 2009, when Chinese factories were still slashing inventories in reaction to the global financial crisis. Exports have not produced a negative annual reading since March 2014.
The dismal trade performance will increase concerns that an economic slowdown in China - originally considered a desirable adjustment away from an investment-intensive export model toward one based on domestic consumption - is at risk of derailing. The government is expected to lower its GDP target to around 7 percent this year, after posting 7.4 percent in 2014 - the slowest pace in 24 years. Investors had hoped that the announcement of domestic stimulus spending plans, combined with moves to ease monetary policy, including a reduction in banks' reserve requirement ratios on Wednesday, would restore confidence and boost demand in China's struggling manufacturing sector. See full story.
U.S. adds 257,000 jobs in January
-- The U.S. created 257,000 jobs in January and companies are hiring at the fastest pace since 1997, with evidence emerging that a rapidly improving labor market might finally be leading to higher wage growth. The unemployment rate, meanwhile, edged up to 5.7% from 5.6%, but that’s because people looked for jobs. A healthier labor market typically draws more people into the labor force.
Hiring has boomed since last fall. The U.S. has added an average of 336,000 jobs in the past three months, the fastest clip since 1997 when the Internet economy was taking root. And job creation in November was revised up to show a whopping 423,000 gain, including the biggest spurt of private-sector hiring in 18 years, government figures show. In another good sign, average hourly wages jumped 0.5% in January to $24.75 after declining in December. That’s the biggest gain in six years. See full story.
Stronger dollar bites U.S. growth
-- Economists revised their estimates of U.S. economic growth downward on Thursday after the government reported a jump in the trade deficit during December to its highest level in more than two years. Americans exported less and imported more, in part because the dollar's strength made American goods and services less competitive in the global market. Michael Feroli, chief U.S. economist at JPMorgan Chase, wrote in a client note that he's now estimating that gross domestic product expanded at an annual pace of only 2 percent in the last three months of 2014. Feroli called that figure "a little dispiriting," considering that the economy was being boosted at the time by lower oil prices. (The government's first estimate of annualized GDP growth in the fourth quarter was 2.6 percent.)
"It is not hard to come up with reasons for the weakness in today's report—sluggish foreign growth and a strong dollar are the obvious ones," Feroli wrote. The gap between imports and exports was $46.6 billion in December, up from $39.8 billion in November. A deteriorating trade picture subtracted 1 percentage point from the government's first estimate of fourth-quarter growth. But with the new data, the subtraction is likely to be even bigger, economists said. See full story.
Germany rejects Greek austerity roll-back
-- Greece's new leftist government appealed to the European Central Bank on Wednesday to keep its banks afloat as it seeks to negotiate debt relief with its euro zone partners, but Germany rejected any roll-back of agreed austerity policies. Finance Minister Yanis Varoufakis said after meeting ECB President Mario Draghi in Frankfurt he believed Athens could count on central bank support during the short period it would take to conclude talks with international lenders.
Banking sources told Reuters that two Greek banks have begun to tap emergency liquidity assistance from the Bank of Greece after an outflow of deposits accelerated after the victory of the hard left Syriza party in a general election on Jan. 25. The Greek government wants that funding to continue because if the ECB were to halt it, Greek banks could collapse, forcing the country out of the euro zone. Promising to end five years of austerity, Prime Minister Alexis Tsipras and Varoufakis are meeting senior officials across Europe to seek support for a new debt agreement. See full story.