Daily Economy Watch keeps an eye on events that affect your hard asset portfolio. View archives.
Sterling hits 31-year low on Brexit
-- The British pound fell to a 31-year low against the U.S. dollar on Monday on anxiety over the aftermath of Britain's decision to quit the European Union, while the euro also dipped. Sterling hit $1.3151, its lowest level since mid-1985 and marking an 11.5 percent fall from the currency's closing level on June 23, the day of the referendum. Analysts predicted more downside for sterling as traders monitored the fallout of the vote and how it would affect the European economy.
"By no means is the collapse of the cable over," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York, referring to the sterling/dollar exchange rate. "The trade in the pound continues to be on the downside until the market gets some sort of resolution." A likely fresh move for Scottish secession, and the response of the EU and its ability to contain calls by anti-EU parties across the continent, in part combined to make matters worse for sterling. See full story. Analysts said sterling had further room to fall since markets were reluctant to act in response to the referendum vote and were in a "wait and see" mode ahead of reactions from European policymakers.
Why gold may hit $1,500 by year’s end
-- Gold’s impressive rally Friday offered a taste of what may be in store for the precious metal, as some analysts say it’s just a matter of time before prices top $1,500 or even $1,900 an ounce. Futures prices for the metal soared by as much as $100 an ounce on an intraday basis Friday as the United Kingdom’s historic vote to leave the European Union sent investors scrambling for a safer place to park their money. But the decision, known as Brexit, has vast implications for global financial markets, economies and currencies as well as for monetary policies among the world’s major central banks. That means gold could soon have many more reasons to rally.
“The market’s fearful reaction has made Brexit the most stressful event investors have seen since the Lehman Brothers bankruptcy in September 2008,” said David Beahm, chief executive of Blanchard and Co. “This is a major negative for global markets, and gold is positioned for long-term price growth because of ... the Brexit vote and other negative global financial conditions.” While the outcome of the U.K.’s historical referendum roiled stock markets around the world and European stocks posted their worst daily drop in nearly eight years on Friday, gold benefited from its perceived safety in financial crises. “Brexit is a once-in-a-lifetime event,” said Ned Schmidt, editor of the Value View Gold Report. “All arguments against holding gold have now been crushed.” He expects gold to continue its climb, and head to $1,400 an ounce, with prices eventually topping $1,900 next year. See full story.
Stocks rise as Brexit seen unlikely
-- The three major U.S. stock indexes rose about 1 percent each to record their biggest percentage gains in a month as investors grew confident that Britain would choose to remain in the European Union in Thursday's referendum. Markets across the globe have been rattled over the past two weeks as investors speculated about the consequences of Britain's exit, including the unraveling of the bloc. The "Remain" camp has found 52 percent favor, according to an Ipsos MORI poll conducted on Tuesday and Wednesday. The final result of the referendum will be known on Friday.
U.S. markets also took solace in Fed Chair Janet Yellen's two-day testimony this week when she expressed optimism about the economy and downplayed the chances of a recession this year. "Regardless of the outcome in the UK, we will see a relief rally in the U.S. today and tomorrow," said Mohannad Aama, managing director, Beam Capital Management in New York. "I think we'll continue to go up tomorrow even if a "Leave" vote prevails because there's a lot of money in the sidelines ... and that will be routed to safer havens and that includes U.S. stocks." See full story.
Home sales hit 9-year high
-- Sales of previously owned homes increased in May to the highest level in nearly a decade, another sign of durable demand in the housing market despite ongoing headwinds. Existing-home sales rose 1.8% to a seasonally adjusted annual rate of 5.53 million, the National Association of Realtors said Wednesday. That was 4.5% higher compared to a year ago and the highest pace since February 2007. Economists surveyed by MarketWatch had forecast a 5.55 million rate, and April’s pace, previously reported as 5.45 million, was revised down fractionally to 5.43 million.
Though sales are strong, constrained inventory continues to dog the market, pushing prices higher and out of reach of many buyers. The median price in May was $239,700, 4.7% higher than a year ago. The housing market’s recovery from the financial crisis has been bifurcated, noted Action Economics’ Michael Englund in a research note. The median price is being skewed upward by stronger activity in the higher-priced segment of the market. “This cycle’s faster recovery in the sale of higher-priced homes likely reflects the greater financing options for high income households and businesses who can buy real estate with cash,” Englund wrote. See full story.
Yellen: Fed cautious due to hiring, Brexit
-- The Federal Reserve's ability to raise interest rates this year may hinge on a rebound in hiring that would convince policymakers the U.S. economy isn't faltering, Fed Chair Janet Yellen told lawmakers on Tuesday. In testimony before Congress that expressed general optimism about the economy and played down the risk of a recession, Yellen nevertheless said the Fed will be cautious about interest rate increases until it is clear the job market is holding up. Immediate risks, like the potential fallout from Britain's June 23 vote on whether to leave the European Union, could darken the U.S. economic outlook, she told the Senate Banking Committee, as could a downturn in productivity growth that may prove a permanent drag on the economy.
"Without a doubt, in the last several months a number of different metrics suggest ... a loss of momentum in terms of the pace of improvement," Yellen said. "We believe that will turn around, we expect it to turn around, but we are taking a cautious approach and watching very carefully to make sure that that expectation is borne out before we proceed to raise interest rates further." Her comments suggest the U.S. central bank is unlikely to raise rates at its next policy meeting in late July, since it will only have one additional monthly employment report in hand by that time. They also demonstrate how a new sense of uncertainty has taken root as Fed policymakers come to grips with a broadening realization that the economy's potential appears to be weaker than previously thought. See full story.
Stocks surge as Brexit worries wane
-- U.S. stocks trimmed opening gains but remained firmly in positive territory Monday, following the lead of European markets as polls showed support swinging back toward the U.K. remaining a member of the European Union ahead of a referendum. The so-called Brexit vote is set for Thursday and investors have been following it closely for fear that an exit of Britain from Europe’s trading bloc could unsettle global markets. The Dow Jones Industrial Average, which had climbed as much as 271 points in early trade, was up 191 points, or 1.1%. The S&P 500 index gained 20 points, or 1%, with a broad swath of sectors climbing. Of the 10 main sectors, seven were up 1% or more, while utilities were the only laggards, down 0.2%. The Nasdaq soared 62 points, or 1.3%, to 4,862.
“I’m not sad to see this rally,” said Randy Frederick, managing director of trading and derivatives at Schwab Center for Financial Research. “This is a pretty substantial rally after being pretty oversold,” he said, referring to investors’ tendency to dump stocks on rising fears around Brexit, or a British exit, from the EU. Some market participants attributed Monday’s early gains to investors who have made bearish bets that stocks would continue to be pressured by Brexit fears now being caught flat-footed as surveys indicate U.K. voters may favor retaining their EU membership. See full story.
Dollar falls as investors reassess Brexit risk
-- The dollar lost ground against its main rivals Friday, as worries that the U.K. might leave the European Union in next week’s referendum somewhat abated when both sides temporarily suspended their campaigns following the murder of a British lawmaker. Speculation that the hiatus would bolster support for the “remain” vote strengthened the pound which rose to $1.4279 Friday morning, its highest level this week, after tumbling to a more than two-month low early Thursday. And the euro rose to $1.1282 from $1.1226 Thursday.
But with investors dialing back their expectations for an early rate increase by the Federal Reserve and the yen vulnerable to selling pressure as a haven asset, “a bunch of investors are looking for (the dollar’s) downside,” said Amatatsu. On Friday, St. Louis Fed President James Bullard said the U.S. central bank only needs to raise rates once through the end of 2018, as the current economic trend of tepid 2% growth, coupled with a low unemployment rate and quiet inflation are likely to persist. See full story.
Consumer price gains slow
-- Consumer prices rose in May largely because of higher gasoline prices and rising rents, though the cost of many other staples such as groceries were flat or declined. The government’s tool to measure the cost of living, known as the consumer price index, climbed 0.2% in May and has risen three straight months, the government said Thursday. Yet while the cost of some things such as shelter and medical care continue to increase, inflation more broadly remains muted.
The consumer price index has risen just 1% in the past 12 months, well below the level the Federal Reserve believes is healthy for the economy. Inflation has been on the low side for years, however, and there’s little sign that prices are about to soar. “Inflation is not picking up, even with energy prices moving higher over the past few months,” economists at PNC Financial Services wrote in a note to clients. See full story.
Go-slower approach prevails at Fed
-- The Federal Reserve on Wednesday left interest rates unchanged and signaled it’s likely to take an even slower approach on raising the cost of borrowing against a backdrop of slower U.S. job creation and fresh worries about economic events abroad. Although investors expected the Fed to leave rates unchanged, the central bank’s more gingerly approach contrasted sharply with rosier comments of top officials just a few months ago. In mid-afternoon trades, yields on U.S. Treasurys tumbled to a three-and-a-half-year low. Stock prices were modestly higher.
By and large, Chairwoman Janet Yellen and other Fed VIPs still believe the economy is on solid footing. The Fed trimmed its estimate of U.S. growth in 2016 to 2% from 2.2%, but left its long-run forecast intact. Yet Yellen also expressed concern in a press conference after the Fed meeting about the low level of U.S. business investment and said “vulnerabilities in the global economy remain.” She acknowledged the pending U.K. vote, known as Brexit, on whether to leave the European Union was a factor in the Fed’s decision to stay its hand. The U.S. and global economic outlook suggests “our cautious approach to policy remains appropriate,” Yellen said. See full story.
Dollar, yen rise as Brexit fears mount
-- The dollar strengthened against most of its rivals on Tuesday — with the notable exception of the Japanese yen — as investors feared U.K. voters could unleash turmoil in global markets by choosing to leave the European Union in a referendum set for next week. The ICE U.S. Dollar index, a measure of the buck’s strength against a basket of six rival currencies, was up 0.5% to its strongest level in 11 days. The greenback recently traded at ¥105.91 after trading at ¥105.64, a five-week low, earlier in the session. By comparison, the greenback bought ¥106.05 late Monday in New York.
“Risk off” remained the dominant theme in global markets as stocks in Europe and Asia again headed lower, while U.S. stock futures pointed to a fourth straight day of losses on Wall Street. Meanwhile, global bond yields continued to drop, with the German 10-year bund yield turning negative for the first time ever. Investors had largely discounted the risk of Brexit until about two weeks ago, when opinion polls started showing rising support for an “out” vote. The referendum is set for June 23. ”In the last two weeks, opinion polls are showing a momentum toward the leave camp. That’s sparked a bit of panic in the market,” said Alvin Tan, a currency strategist at Societe Generale. See full story.
Brexit, Fed fears weigh on stocks
-- World stock markets fell while the safe-haven yen firmed on Monday amid concerns that Britain may be on the verge of voting to leave the European Union in a referendum that is two weeks away. Uncertainty over the outcome of this week's policy meeting of the U.S. Federal Reserve added to the cautious tone. Though traders predict the U.S. central bank will not raise interest rates this week, investors will be looking for clues about when the Fed might may make a rate move.
A vote by Britain to leave the 28-member EU, dubbed "Brexit," could tip Europe back into recession, putting more pressure on the global economy. "Brexit would present the first formal challenge to the current global economic order and could spark a much wider and more dangerous fracture of the European Union," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York. U.S. stocks ended lower for a third straight session as investors braced for the Fed meeting and Britain's referendum. See full story.
Stocks drop on on oil, global growth
-- A sharp drop in oil prices and global growth worries sent jitters through Wall Street, leading the three major U.S. indexes lower for the second straight day in volatile trading on Friday. After three days of gains, losses in the past two sessions have pushed the Nasdaq into the red for the week, while the S&P 500 and the Dow are roughly flat. Oil prices fell 2.5 percent as traders booked profits after a rally earlier this week pushed prices to their highest in 2016, and as the dollar regained lost ground. [O/R]
Financial stocks came under pressure again as global issues, including uncertainty over interest rate hikes and the impending vote on Britain's membership in the European Union, sent investors flocking to safe haven assets. The yield on government bonds fell globally, to record lows in some cases. Gold, another safe haven, hit a fresh three-week high. See full story.
Soros bearish, sees market shifts
-- Billionaire investor George Soros has become more involved in trading at his family office, concerned about the outlook for the global economy and the risk that large market shifts may be at hand, according to a person familiar with the matter. Soros, 85, has been spending more time in the office directing trades and recently oversaw a series of big, bearish investments, said the person, who asked not to be identified discussing private information. Soros Fund Management LLC sold stocks and bought gold and shares of gold miners last quarter, anticipating weakness in various markets, according to a government filing.
The octogenarian and philanthropist, who built a $24 billion fortune through savvy wagers on markets, has taken a dim view of the world economy and particularly of China. In April, Soros said China’s debt-fueled economy resembles the U.S. in 2007-08, before credit markets seized up and spurred a global recession. Most of the money that banks in China are supplying is needed to keep bad debts and loss-making enterprises alive, Soros said at the time. n January, the former hedge-fund manager said a hard landing in the Asian nation was “practically unavoidable,” adding that such a slump would worsen global deflationary pressures, drag down stocks and boost U.S. government bonds. See full story.
Dollar at five-week low boosts commodities
-- The U.S. dollar fell on Wednesday on waning expectations of a near-term interest rate hike and an index of world equity markets advanced to a six-week high. Commodities rallied on the weaker dollar and crude oil futures hit fresh 2016 highs on persistent worries related to supply outages. The dollar fell to a five-week low against a basket of currencies as traders reduced bets of an imminent U.S. interest rate increase following a poor jobs report and perceived dovish comments from the Federal Reserve Chair Janet Yellen.
Crude oil futures traded above the psychologically important $50 mark for the third consecutive day on supply worries related to sabotage of oil facilities in Nigeria. Prices pared gains briefly as glut concerns resurfaced after U.S. data showed a surprise build in gasoline supplies. Energy Information Administration data showed the U.S. crude oil inventories fell for the third consecutive week but gasoline and distillate stockpiles posted a surprise build as refiners ramped up output. See full story.
Weak productivity remains a drag
-- U.S. nonfarm productivity fell less sharply than initially thought in the first quarter and labor-related costs surged for a second straight quarter as companies hired more workers to raise output, suggesting profits could remain under pressure. The Labor Department said on Tuesday productivity, which measures hourly output per worker, contracted at an annualized rate of 0.6 percent, instead of the 1.0 percent pace the government reported last month. Productivity fell at a 1.7 percent rate in the fourth quarter. The revision for the first quarter, which reflected modestly higher output than previously estimated, was in line with economists' expectations.
"Despite subdued wage growth, low productivity growth means that companies still face significant labor costs for producing an extra unit of output," said Blerina Uruci, an economist at Barclays in New York. "Fast-rising unit labor costs have been associated with weak profits for companies in recent years." The weakness in productivity partially explains the divergence between the economy's anemic performance at the start of the year and a fairly strong labor market, marked by average monthly job gains of 196,000 in the first quarter. See full story.
Fed's job index negative for 5th month
-- The measly 38,000 gain in new jobs in May might not be the only bad news on the labor front. The slowdown in U.S. job creation in the past few months is likely to persist during the summer, according to a pair of employment bellwethers. A Federal Reserve index that tracks 19 labor-market indicators was negative in May for the fifth straight month. The last time the so-called labor market conditions index performed so poorly was in the waning stages of the Great Recession in early 2009. Another employment gauge compiled by the nonprofit Conference Board also declined in May, to 126.81 from 128.53 in April. “Its continued weakness suggests that job growth will remain modest in the coming months,” said Gad Levanon, the board’s chief economist for North America.
On Friday, the government said just 38,000 were created in May, though the gain would have twice as large if not for a major strike at Verizon last month. Even if the strike is factored out, the pace of hiring was the weakest in two and a half years. What’s more, the paltry number of new jobs created in May followed a lackluster 123,000 gain in April. Net hiring has slowed to a 116,000 average in the past three months from post-recession high of 282,000 in December. The disappointing May employment report is expected to deter the Fed from raising interest rates in June and possibly July, Fed watchers say. See full story.
Jobs growth slowest in nearly 6 years
-- The U.S. created just 38,000 new jobs in May and nearly half a million people dropped out of the labor force, raising doubts about the strength of the economy and possibly forcing the Federal Reserve to scuttle plans to raise interest rates this summer. The increase in hiring was the smallest since the fall of 2010. Economists polled by MarketWatch had predicted a gain of 155,000 nonfarm jobs. Most industries eliminated jobs last month, the first time that’s happened in several years. In another bad sign, temp employment fell by 21,000 and it’s down 64,000 so far this year, the Labor Department said Friday.
The dropoff in temporary work in 2016 is the sharpest of the seven-year-old recovery and might be a sign that hiring is likely to remain soft. Temp hiring usually increases when the economy is strong, with many of those workers eventually getting hired full time. “Very disappointing,” said JJ Kinahan, chief strategist at TD Ameritrade. “That’s two months in a row of disappointing job reports. We are heading in the wrong direction. The government marked down the number of new jobs created in April to 123,000 from 160,000. March’s gain was lowered to 186,000 from 208,000. See full story.
Private sector adds 173,000 jobs in May
-- Private-sector employment gains accelerated slightly in May as employers added 173,000 jobs, Automatic Data Processing Inc. reported Thursday. The gain was slightly higher than the 165,000 job gains expected by economists polled by MarketWatch. ADP tweaked April’s gain to 166,000 from a prior estimate of 156,000.
In May, economists expect the government’s report to show fewer payroll gains than the ADP survey. Economists surveyed by MarketWatch expect the government’s report to show that nonfarm payroll rose by 155,000 last month, down from 160,000. That would be the weakest job gains since last September. See full story.
World factories stuck in low gear
-- Global manufacturing activity remained stuck in a rut last month with factory output from Asia, Europe and the Americas barely improving as producers struggled to bring in new orders, surveys released on Wednesday showed. Speculation in recent weeks that the U.S. Federal Reserve will raise interest rates in the next few months, concerns about Chinese economic growth, and worries that a possible British exit from the European Union, are all factors that have knocked confidence. "The world economy will meander along at its slowest pace since the financial crisis for a second year in a row in 2016 as it is ensnared in a "low-growth trap", the OECD said on Wednesday, urging governments to boost spending.
Global manufacturing growth stalled last month as new orders barely accelerated, forcing factories to run down backlogs and cut back on staffing levels, a survey showed on Wednesday. JPMorgan's Global Manufacturing Purchasing Managers' Index (PMI), produced with Markit, came in at 50.0 last month, right on the level that separates growth from contraction, compared to 50.1 in April. "The May PMI data suggest that the global manufacturing sector remains in a low gear. Indices for output, new orders and the headline PMI were all at, or barely above, the stagnation mark," David Hensley, a director at JPMorgan said. See full story
Consumers spending jumps in April
-- Consumer spending leaped 1% in April to mark the biggest gain in almost seven years, as Americans splurged on new cars and trucks. Higher gas prices also contributed. The increase in spending exceeded Wall Street expectations. Economists polled by MarketWatch had forecast a 0.7% increase. Higher spending was triggered in large part by a snapback in auto sales in April after a slower March, the government said.
Consumers are able to spend a bit more because of a rush of new job creation in the past several years and an improvement in income growth. Incomes rose by 0.4% for the third time in the first four months of 2016. Yet the news wasn’t all good. Americans also dipped into their savings to fund some of their purchases. The savings rate in April fell to 5.4% last month after hitting a four-year high of 5.9% in March. See full story.