Daily Economy Watch keeps an eye on events that affect your hard asset portfolio. View archives.
Shares plunge on growth, bank fears
-- Stock indexes worldwide stumbled on Thursday on fears over the health of the global economy, with banking shares slumping on both sides of the Atlantic, while safe-haven 10-year Treasury yields hit their lowest since 2012. Concern over sluggish global growth and doubts over central banks' ability to support the global economy pushed the U.S. benchmark S&P 500 and the Dow Jones industrial average down more than 10 percent for the year.
The dollar hit its lowest against the safe-haven yen since October 2014 of 110.985 yen, and was on track for its worst week against the Japanese currency since 2008 on the fears over the health of the global economy. "The key driver is this immense pessimism in asset markets, unwillingness to hold anything but the safest assets," said Steven Englander, managing director and global head of G10 FX strategy at Citigroup. See full story.
Yellen: conditions less supportive to growth
-- Federal Reserve Chairwoman Janet Yellen on Wednesday sounded a bit more cautious about the outlook for the U.S. economy but did not back away from expectations for additional, gradual, interest-rate hikes. In testimony prepared for delivery to the House Financial Services panel later in the morning, Yellen said that financial conditions “have become less supportive to growth.”
If these conditions persist, they could weigh on the economy, the Fed chairwoman said. In addition, there are “downside risks” largely stemming from uncertainty about the health of the Chinese economy. Yellen said. “Should any of these downside risks materialize, foreign activity and demand for U.S. exports could weaken and financial market conditions could tighten further,” she said. See full story.
Oil drops 13% in four session
-- Oil futures finished lower on Tuesday for a fourth-straight session, as lower price outlooks for this year and forecasts for a persistent global glut of supplies sent West Texas Intermediate crude back under $28 a barrel. March West Texas Intermediate crude lost $1.75, or 5.9%, to settle at $27.94 a barrel, after earlier attempts to rebound. Prices have now tallied a lost of more than 13% in four sessions. Based on the front-month contracts, they ended at their lowest level in nearly three weeks. April Brent crude on London’s ICE Futures exchange sank $2.56, or 7.8%, to $30.32 a barrel.
The U.S. Energy Information Administration cut its 2016 forecasts for West Texas Intermediate and Brent crude prices in a monthly report issued Tuesday. The government agency said it expects WTI prices to average $37.59 a barrel this year compared with a previous forecast of $38.54. The EIA also said it expects Brent crude to average $37.52 a barrel this year, compared with a previous forecast of $40.15. “Continuing increases in global oil inventories are expected to keep oil prices under $40 a barrel through August,” said Adam Sieminski, EIA administrator, in a statement. See full story.
Hedge funds losing faith in the dollar
-- Hedge funds and other speculators are losing faith in the long-dollar trade. Net net long positions in the U.S. dollar declined by $5.4 billion to $20.9 billion in the week ended Feb. 2 — and are now less than half of the $44 billion long positions in early December, according to data collected by the Commodity Futures Trading Commission. What’s surprising is that this comes during a period when the Bank of Japan announced it would impose negative interest rates on some new excess reserves and European Central Bank President Mario Draghi has hinted that more easing might follow in March.
Market strategists believe both the BOJ and ECB will further ease their monetary policies before they begin tightening — a view that should support the dollar. But investors have been more focused on what’s happening in the U.S. economy. U.S. growth slowed in the fourth quarter. And a recent parade of weak data has made investors skeptical that the Federal Reserve will follow through on all those interest rates it has signaled through its “dot plot”. Interest-rate markets priced in zero Fed hikes this year after Friday’s lackluster January jobs report. Talk about the possibility of a recession in the U.S. is rising. The Federal Reserve struck an unexpectedly dovish tone at its January meeting, which occurred during the time period covered by the report. See full story.
U.S. jobs growth slows to 151,000
-- The pace of hiring in the U.S. tapered off in January, but wages rose sharply and the unemployment rate dipped below 5% for the first time since 2008 in a mixed report that adds little clarity about the health of the economy. The U.S. generated 151,000 nonfarm jobs in the first month of 2016, the Labor Department said Friday. Economists polled by MarketWatch had expected hiring to slow to 180,000 after big gains at the end of last year. The smaller-than-expected increase could add to growing worries about a weakening U.S. economy and even the possibility of recession.
Yet the January jobs report also offered some good news to suggest the labor market remains healthy enough to keep the economy moving. The unemployment rate, for example, fell a tick to 4.9% the lowest reading in eight years. Wage growth accelerated toward the end of 2015, and it’s climbed 2.5% in the past 12 months, just a hair below the post-recession high set in December. See full story.
Weaker dollar boosts commodities
-- Global equity markets rose on Thursday as diminished expectations of U.S. interest rate hikes this year pushed the dollar lower, which in turned boosted the prices of commodities. The dollar fell for a fourth day on the latest batch of soft U.S. data, while comments from a U.S. Federal Reserve policymaker on Wednesday were viewed as a sign further rate hikes could be delayed. Those comments were buttressed on Thursday by Robert Kaplan, the new head of the Dallas Fed, who said the central bank should be "patient" on rate increases.
"The market is starting to price in anything that is the reverse of the Fed tightening," said Andrew Slimmon, portfolio manager at Morgan Stanley Investment Management in Chicago. "That has implications for obviously oil, but also currencies that continue to weaken relative to the dollar, which is mainly the commodity oriented currencies and emerging markets." The U.S. currency fell 0.8 percent against a basket of major currencies on Thursday and is down 3 percent for the week, on pace for its worst week since May 2009. See full story.
Service sector slows to 2-year low
-- Companies in the U.S. service sector such as retail, banking and health care grew in January at the slowest pace in almost two years, adding to a drumbeat of data suggesting the economy has softened. The Institute for Supply Management said its nonmanufacturing index fell to 53.5% from 55.8% in December. Economists polled by MarketWatch had forecast a 55.2% reading. Any number over 50% indicates more businesses are expanding instead of contracting, but the ISM service index has dropped three straight months and is at the lowest level since February 2014.
The slowdown suggests that weakness among energy producers, manufacturers and major exporters may have spread to the much larger service side of the economy that employs the vast majority of Americans. “This report will only add to fears that the overall economy is weakening,” said Jim O’Sullivan, chief U.S. economist of High Frequency Economics. The survey is compiled from a questionnaire of the executives who buy supplies for their companies; it tends to rise in fall in tandem with the broader economy. See full story.
Stocks slide as oil tumbles again
-- U.S. and European stock indexes fell sharply on Tuesday and buyers sought safe-haven government bonds after another tumble in depressed oil prices. Benchmark Brent crude settled down 4.4 percent, while U.S. crude fell 5.5 percent, settling below $30 a barrel. Hopes faded for a deal between oil-producing nations to curb a massive supply glut. The prolonged crude slide was reflected in results from oil majors BP, whose shares slumped after it posted a $6.5 billion loss for 2015, and Exxon, which posted its smallest quarterly profit in more than a decade.
The major U.S. stock indexes all were down about 2 percent in afternoon trading, led lower by energy shares, while the pan-European FTSEurofirst index also dropped 2 percent. Oil's renewed drag on equities comes as some investors recently have expressed hope that other markets were beginning to diverge from the performance of the beaten-down commodity. "We still haven't broken the correlation between oil and equities and we are yet to find a bottom in oil prices," said Jeff Carbone, co-founder of Cornerstone Financial Partners in Charlotte, North Carolina. See full story.
Global factories parched for demand
-- January surveys of global factory activity released on Monday showed the new year began much as the old one ended, with too much capacity chasing too little demand. Global manufacturing expansion accelerated slightly but remained weak at the start of 2016 as faster growth in developed markets failed to offset a contraction in emerging economies. JPMorgan's Global Manufacturing Purchasing Managers' Index (PMI), produced with Markit, came in at 50.9 last month, just above December's 50.7. The index has been above the 50 mark that separates growth from contraction since late 2012."
China was again the epicenter of disappointment. The official measure of manufacturing fell to its lowest since mid-2012. The weakness also encompassed such bellwethers of high-tech trade as South Korea and Taiwan. Factory growth across the euro zone slowed at the start of 2016 as incoming orders failed to show any meaningful increase, even though companies cut prices at the deepest rate for a year, the Markit survey on Monday. The U.S. Institute of Supply Management (ISM) showed manufacturing activity in January contracted for the fourth month in a row, though at a slightly slower pace, with the index at 48.2 from 48.0 the previous month. See full story.
BOJ stuns markets with negative rates
-- The Bank of Japan unexpectedly cut a benchmark interest rate below zero on Friday, stunning investors with another bold move to stimulate the economy as volatile markets and slowing global growth threaten its efforts to overcome deflation. Global equities jumped, the yen tumbled and sovereign bonds rallied after the BOJ said it would charge for a portion of bank reserves parked with the institution, an aggressive policy pioneered by the European Central Bank (ECB). "What's important is to show people that the BOJ is strongly committed to achieving 2 percent inflation and that it will do whatever it takes to achieve it," BOJ Governor Haruhiko Kuroda told a news conference after the decision.
In adopting negative interest rates Japan is reaching for a new weapon in its long battle against deflation, which since the 1990s have discouraged consumers from buying big because they expect prices to fall further. Deflation is seen as the root of two decades of economic malaise. Kuroda said the world's third-biggest economy was recovering moderately and the underlying price trend was rising steadily. "But there's a risk recent further falls in oil prices, uncertainty over emerging economies, including China, and global market instability could hurt business confidence and delay the eradication of people's deflationary mindset," he said. See full story.
Fed owns up to global risks in statement
-- In the U.S. Federal Reserve's arsenal of tools the characterization of economic risks is heavy artillery, used to flag the moments when major events like the 2003 Iraq war or the near crack-up of the euro zone in 2011 make forecasting even trickier than usual. The U.S. central bank has now put the world on notice that the slide in oil prices and sharp slowdown in global growth may rank as one of those very shocks, capable of changing the Fed's bias from implying a steady set of future rate hikes to one pointing to an extended pause or even a rate cut driven by stubbornly low inflation.
Coming just a month after it began hiking rates for the first time since the financial crisis, the Fed's decision to pull the risk assessment altogether from its statement this week is "a U.S. recession insurance policy," said Bank of the West Chief Economist Scott Anderson. It "opens up the door for a change in the balance of risks...and even an interest rate hike reversal at some point, should the economic and financial outlook turn out to be particularly nasty." It is also a capitulation of sorts, a subtle acknowledgement that events Fed officials have insisted for a year or more would prove of passing importance may be pulling the country toward a new slump. When it raised rates in December, the Fed described risks to the United States as "balanced," which cleared the way for the hike by positing that the economy was just as likely to outperform the Fed's expectations as to do worse. See full story.
Fed less inclined to raise interest rates
-- The Federal Reserve on Wednesday expressed less eagerness to hike interest rates, as the central bank showed concern over both the economy and the faltering stock market. In a dovish statement after a two-day meeting, Fed officials said that inflation was expected to remain “low in the near term” and that the economy has “slowed.” Confidence that inflation would move up to the central bank’s 2% target was a central condition the Fed set out for more rate hikes. As expected, officials kept the Fed funds target range unchanged at between 25 and 50 basis points.
In December, the Fed increased its benchmark interest rate for the first time in nine years and signaled it planned to raise them by one percentage point in 2016. But the economic news since the meeting has tended not to support the four quarter-point rate hikes envisioned. The pace of growth in the fourth quarter, for example, is expected to slow to less than 1% from 2% in the fall. Manufacturers, retailers, energy producers and exporters have all struggled, though overall job creation has remained fairly strong. Capturing even more headlines has been deep slump in stock prices since the start of the new year. Fresh worries about the health of the Chinese economy and the slump in oil prices have helped spawn a major selloff in U.S. equities. The Fed noted it was closely monitoring “global economic and financial developments.” See full story.
Oil climbs OPEC signals supply help
-- Oil futures turned higher on Tuesday on the back of hopes that members of the Organization of the Petroleum Exporting Countries and producers outside the cartel may reach an agreement to cut output to stem the persistent slump in oil prices. March West Texas Intermediate crude rose 74 cents, or 2.5%, to $31.08 a barrel on the New York Mercantile Exchange after tapping a low earlier at $29.25. March Brent crude, the global oil benchmark, traded at $31.39 a barrel, up 89 cents, or 2.9%—recovering from an intraday low of $29.27. Prices got a boost on “the possibility of an emergency OPEC meeting and possible price coordination,” said Robbie Fraser, commodity analyst at Schneider Electric. But “as Iran attempts to rapidly increase exports and Saudi Arabia signals little willingness to cut production, OPEC’s ability to boost prices remains virtually non-existent.”
Still, prices were holding above $31 a barrel after two members of OPEC hinted that they’re ready to curb production if nations outside the group do the same. Kuwait’s OPEC Governor Nawal al-Fuzaia said at an energy conference in Kuwait City that “OPEC is willing to cooperate with producers outside the group if they show that they are serious about cooperating,” according to Dow Jones Newswires. Additionally, the Iraqi oil minister, Adel Abdul Mahdi, said there are signs that top oil exporters Saudi Arabia and Russia have become more flexible in considering a production cut, according to the news outlet. See full story.
Renewed oil drop hurts stocks, dollar
-- A renewed drop in oil prices due to worries about a global supply glut on Monday hurt U.S. and European stock markets and weighed on the dollar following a rebound in those sectors late last week. Anxiety about the drag from tumbling energy prices on global economic growth and central bank policies revived safe-haven demand for the yen, gold and U.S. government debt. Crude oil prices fell 4 percent as Iraq announced record-high oil production feeding into a heavily oversupplied market, wiping out much of the gains made in one of the biggest-ever daily rallies last Friday.
The oil-led market turbulence since the start of 2016 has raised hopes of more aid from major central banks. Last week, European Central Bank chief Mario Draghi signaled the bank was open to more monetary stimulus to combat weak growth and inflation in the euro zone. Traders have bet the Federal Reserve would seek to soothe financial markets after its two-day meeting on U.S. monetary policy that will begin on Tuesday. See full story.
Merrill Lynch: Recession chances rising
-- World stock market losses are approaching $8 trillion so far this year and investors last week poured the most money into government bond funds in a year, suggesting they fear the global economy could tip into recession, Bank of America Merrill Lynch said on Friday. The bank's U.S. economists also said on Friday that the likelihood of the world's largest economy entering a recession in the coming year has risen to 20 percent from 15 percent. While a repeat of the 2008-09 great recession "is a big stretch" and even the one-in-five chance of a normal recession remains low, they cut their 2016 growth forecast to 2.1 percent from 2.5 percent. Reflecting the increasingly bearish sentiment engulfing world markets, some $7.8 trillion was wiped off the value of global stocks in the three weeks to Jan. 21, BAML said.
"We cannot rule out a recession in the next year. Accidents will happen, and we are concerned about the lack of policy ammunition to deal with a major shock," economists Ethan Harris and Emanuella Enenajor said in a note on Friday. "However, when markets are in such a fragile state there is a temptation to lose sight of the economic fundamentals. To us, the economy is okay and recession risks are low," they said. Stocks around the world have had one of their worst Januarys on record, with slumping oil prices, deepening concern over China, and the Federal Reserve's first interest rate hike in a decade all spooking investors. See full story.
Wall Street in relentless selloff
-- Wall Street moved deep into the red on Wednesday, with the S&P 500 hitting its lowest since February 2014 and extending this year's selloff as oil prices continued to plummet unabated. The rout was across the board: all 30 Dow components and all 10 major S&P sectors were in the red, with nine down more than 2 percent. The New York Stock Exchange recorded 1,387 stocks hitting new 52-week lows, while 866 sank to new lows on the Nasdaq, the most on a single day since Aug. 24 for both exchanges.
U.S. crude prices sank 6.6 percent and Brent crude fell 4.7 percent as a supply glut bumped up against bearish financial news that deepened worries over demand. "For your average investor, when they see today's news, it's going to spur some angst and the big question that everybody has is 'Should I be in cash?'," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh. Collapsing oil prices and fears of a slowdown in China, the world's second-largest economy and a key market for U.S. companies, has led to the S&P 500 falling 8 percent this year before Wednesday's losses. See full story.
China's 2015 growth slowest in 25 years
-- China recorded a pronounced deceleration in growth last year, affirming that a multiyear slowdown is biting the world's second-largest economy harder and shows little sign of abating. The growth rate, released by the government on Tuesday, moderated to 6.8% for the fourth quarter and 6.9% for 2015. The annual pace was the weakest in a quarter century, and the quarterly level undershot market expectations, posting its lowest reading since the financial crisis and signaling weakening economic momentum. Tuesday's figures put a grade on a tumultuous year that saw the slowdown's impact spill over to global markets and batter the government's reputation for competent economic management.
Chinese leaders held an economic policy meeting Monday with senior officials. While state media accounts projected a tone of determined optimism, President Xi Jinping also urged the officials "to stabilize short-term growth." Premier Li Keqiang talked of "increasing downward pressure" on the economy, complicated by slack global demand. "The real economy basically hasn't picked up very well," said Nomura Group economist Yang Zhao. "We're going to have a choppier sea ahead of us." With growing debt and too much housing and factory capacity, economists--and even Chinese officials--project a tougher year ahead. See full story.
Oil slumps to 2003 low on Iran
-- Oil prices slumped to a 2003 low below $28 per barrel on Monday as the market anticipated a rise in Iranian exports after the lifting of sanctions against Tehran over the weekend. Responding to Tehran's compliance with a nuclear deal, the United States and major powers revoked international sanctions that had cut Iran's oil exports by about 2 million barrels per day (bpd) since their pre-sanctions 2011 peak to little more than 1 million bpd. Iran, a member of the Organization of the Petroleum Exporting Countries (OPEC), issued an order on Monday to increase production by 500,000 bpd, the country's deputy oil minister said.
Worries about Iran's return to an already oversupplied oil market drove down Brent crude LCOc1 to $27.67 a barrel early on Monday, its lowest since 2003. The benchmark was down 29 cents at $28.64 by 1850 GMT (1350 ET). U.S. crude CLc1 was down 48 cents at $28.94 a barrel, not far from a 2003 low of $28.36 hit earlier in the session. Trading volumes were thin with U.S. markets closed for the Martin Luther King Day holiday. "You can't say this was unexpected but the Iran news is an additional factor that's working against oil prices," said TD Securities analyst Bart Melek, who also pointed to global oversupply and concerns about demand from China. See full story.
Stocks fall in worst start in history
-- U.S. stocks closed sharply lower Friday, locking in the worst 10-day start to a calendar year ever, as oil prices plunged and investors worried about slowing growth in the U.S. During the course of the session, the S&P 500 broke below its Aug. 24 low—which several market strategists said would be tantamount to a major sell signal—to trade at its lowest level since October 2014. The Dow Jones Industrial Average was briefly down as much as 537 points. All Dow components ended in negative territory, as were all 10 sectors on the S&P 500.
Selling began in China after official data showed that new bank loans were lower than expected in December as lenders sharply curtailed activity amid worries about slowing growth and bad debt. A spate of disappointing U.S. data show that both manufacturing and consumer spending are in trouble. Empire State factory index declined sharply in January to its lowest level since the recession. Retail sales declines by 0.1% in December a report on industrial production compiled by the Federal Reserve showed that activity declined for the third straight month. The cost of producing goods and services dropped again. See full story.
U.S. import prices plunge 1.2%
-- U.S. import prices tumbled in December for a sixth straight month as the cost of petroleum and a range of other goods fell further, suggesting a tame inflation environment could persist in the near term. The Labor Department said on Thursday import prices decreased 1.2 percent last month, the largest decline since August, after a revised 0.5 percent drop in November. Import prices have dropped in 16 of the last 18 months, a sign that they will continue to weigh on consumer goods prices. For all of 2015, import prices fell 8.2 percent, the largest calendar-year decrease since 2008.
A strong dollar and a sharp drop in oil prices are keeping imported inflation subdued, leaving overall inflation well below the Federal Reserve's 2 percent target. With the dollar continuing to rise against major currencies and oil prices hovering at 12-year lows, inflation will probably remain benign for a while. Economists say weak inflation together with slowing domestic and global growth could make the Fed cautious about increasing interest rates at its March policy meeting, despite tightening labor market conditions. See full story.
China may slow Fed's interest rate rises
-- Headwinds from China and the world's commodity markets may once again be upending the U.S. Federal Reserve's plans less than a month into its first-in-a-decade tightening cycle. The rout in China's stock market, weak oil prices and other factors are "furthering the concern that global growth has slowed significantly," Boston Fed President Eric Rosengren said on Wednesday. Rosengren, who votes on the Fed's rate-setting committee this year, also said a second hike will face a strict test as the Fed looks for tangible evidence that U.S. growth will be "at or above potential" and inflation is moving back up toward the Fed's 2 percent target.
Chicago Fed chief Charles Evans, who like Rosengren is one of the central bank's most dovish policymakers, expressed similar concerns. "It's something that's got to make you nervous," he said of the drag slower growth in China could have on economies like the United States that don't do much direct trade. Evans also said he was nervous about inflation expectations not being as firmly anchored as a year ago, and added it could be midyear before the Fed has a good picture of the inflation outlook. See full story.
Tumbling oil trades below $30 a barrel
-- Oil fell briefly below $30 a barrel on Tuesday, extending a relentless selloff that has wiped almost 20 percent off prices this year amid deepening concerns about fragile Chinese demand and the absence of output restraint. The day's near 4 percent drop marks a seventh day of losses for oil. Traders have all but given up attempting to predict where the new-year rout will end, with momentum-driven dealing and overwhelmingly bearish sentiment engulfing the market. Some analysts warned of $20 a barrel; Standard Chartered said fund selling may not relent until it reaches $10.
By Tuesday, the crash had become almost self-fulfilling, with speculators too afraid to buy for fear of being burned by another false bottom. Oil has tumbled more than 18 percent this year alone, the worst seven-day run since the financial crisis. The long list of negative factors also includes the weakening economy and ailing stock market of No. 2 consumer China, the rising U.S. dollar, which makes oil more costly, and the surprising resilience of U.S. shale drillers in the face of the price slide. See full story.