Daily Economy Watch keeps an eye on events that affect your hard asset portfolio. View archives.
Euro falls near yearly low
-- The euro was nearing its softest level of the year on Friday as an aggressive, European Central Bank-inspired selloff entered its second day. The shared currency fell 0.6% to $1.0550 in recent trade, compared with $1.0612 late Thursday in New York. On Thursday, the European Central Bank surprised investors by announcing that it would reduce its monthly bond purchases to €60 billion ($64 billion) beginning in April. Market strategists had widely expected the central bank to extend the program, which was set to expire in March, at its present €80 billion ($85 billion) pace for most of 2017.
In addition, Draghi said the central bank’s governing council had not discussed tapering its asset purchases, while also saying that the central bank would begin buying bonds with yields below the ECB’s deposit rate of minus 0.4%. These comments show that, despite the reduction, Draghi and company have made a long-term commitment to ultraloose monetary policy, said Jane Foley, senior currency strategist at Rabobank. “Even if they were to taper more, we’re seeing a large amount of additional stimulus,” Foley said, adding that the additional liquidity could provide a cushion for European assets heading into a year rife with political uncertainty. See full story.
ECB easing to be lower, longer
-- The European Central Bank trimmed back its asset buys in a surprise move on Thursday but promised protracted stimulus to aid a still fragile recovery, and dismissed any talk of tapering the program away. With still no sign of a sustained rebound in underlying inflation and heightened political risk from looming elections in four of the euro zone's five biggest economies, the ECB promised to keep borrowing costs depressed longer than predicted, even reserving the right to raise back purchases if the outlook sours. Although the cut in the volume of monthly assets buys suggests a concession to conservative countries such as Germany and the Netherlands, the underlying message was seen as dovish, catering to nations on the periphery and a boost for financial markets.
Catching financial markets off-guard, ECB President Mario Draghi said the bond buys would be cut to 60 billion euros a month from 80 billion euros starting April but they would go on until the end of 2017, three months longer than expected. "There is no question about tapering," Draghi said. "We can even go back to 80 (billion)... there’s a range of options." "The key message... is to show that there is no tapering in sight, to show that the ECB is going to stay in the market, to show that we will continue to exert pressure on market prices," Draghi added. See full story.
Oil Extends Slide on U.S. Supply Outlook
-- Oil fell in New York on speculation that OPEC production cuts will bolster U.S. shale production, and amid signs that the organization won’t insist all its partners deliberately reduce output.
Futures fell 1 percent in New York after declining 1.7 percent on Tuesday, the first drop in five days. The Energy Information Administration increased its U.S. oil output forecast for this year and next, and domestic explorers last week raised the number of rigs in action to the most since January. OPEC will accept natural output declines as part of the 600,000-barrel-a day reduction agreed with non-members, rather than insist they intentionally cut, according to three officials familiar with the matter.
For the full story: https://www.bloomberg.com/news/articles/2016-12-07/oil-holds-near-51-as-u-s-supplies-fall-before-opec-cut-meeting
Oil falls 2% on OPEC skepticism
-- Oil prices on Tuesday fell for the first session since OPEC agreed to cut output last week after data showed crude production rose in most major export regions and on growing skepticism that the cartel would be able to reduce production. After rising over 15 percent over the four sessions since the Nov. 30 OPEC meeting, Brent futures fell $1.06, or 1.9 percent, to $53.88 a barrel by 1:26 p.m. EST (1826 GMT). U.S. West Texas Intermediate crude futures fell $1.05, or 2 percent, to $50.74 per barrel. The Brent front-month contract has outperformed the U.S. contract since the OPEC meeting, with its premium over WTI reaching $2.29 a barrel earlier on Tuesday, its widest since August.
"Reaction to the OPEC news was overdone. All they did was agree to cut output that they had added recently," said Phil Davis, managing partner at venture capital firm PSW Investments in Woodland Park, New Jersey. OPEC's output set another record high in November, rising to 34.19 million barrels per day (bpd) from 33.82 million bpd in October, according to a Reuters survey. See full story.
Evans sees period of rising rates
-- Citing rising 10-year U.S. Treasury yields and his forecast for about 2.25 percent economic growth next year, Chicago Federal Reserve President Charles Evans said on Monday he expects interest rates to continue to rise as the economy improves. "We are on the cusp of a period of rising interest rates," Evans told reporters after a speech in Chicago. The yield on the benchmark 10-year Treasury note, which has risen to about 2.4 percent from below 2 percent before President-elect Donald Trump's surprise Nov. 8 victory, suggests markets are pricing in somewhat higher U.S. inflation, Evans said.
Evans has long been concerned that inflation, running at about 1.7 percent, is too low. He noted on Monday that while the U.S. labor market is "kind of tight," wage growth is weak. Still, Evans is optimistic that conditions are ripe for inflation to rise back to the Fed's 2 percent target, especially given the policies that the incoming Trump administration has "earmarked" for the next few years. Trump has said he plans to cut taxes and improve U.S. bridges, roads and tunnels. The Fed is widely expected to raise rates at its policy meeting next week, and attention is now focused on how fast it will increase them next year as Trump begins to put his new policies in place. See full story.
U.S. jobless rate hits 9-year low
-- The U.S. unemployment rate fell much more than expected in November, hitting a nine-year low, as the economy added 178,000 new jobs in the month, U.S. government data showed on Friday. Markets had a mixed reaction to the latest figures. U.S. stock futures held modest losses, Treasury yields fell and the dollar retreated in the immediate wake of the report. Wall Street had forecast an increase of 200,000 in nonfarm payrolls for the month, according to a MarketWatch survey. The unemployment rate had been expected to hold steady at 4.9%.
Despite the strong drop in the unemployment rate, some details of the report were seen as soft. The payrolls count over the prior two months was revised lower by a cumulative 2,000. And average hourly earnings slumped 0.1% in November after a sharp 0.4% rise in the prior month. This was the first decline since December 2014. See full story.
Oil, Treasury yields surge
-- Brent crude futures rose to a 16-month high on Thursday on the heels of OPEC's agreement a day earlier to cut output, while Treasury yields continued to climb following the weakest monthly performance for global bonds in almost 13 years. The benchmark 10-year U.S. Treasury yield jumped to its highest since July 2015 to start the month, after Bank of America Merrill Lynch's Global Broad Market Index fell 1.76 percent in November -its steepest monthly percentage drop since a 2.06 percent fall in July 2003. Bets on faster inflation in the United States, on the back of higher oil prices and the expected policies of the incoming Trump administration, have sent Treasury yields soaring.
"You’re seeing the market pricing in higher inflation in the near term," said Gennadiy Goldberg, interest rate strategist at TD Securities in New York. The 10-year U.S. Treasury yield US10YT=RR hit a session high at 2.492 percent. Benchmark 10-year notes last fell 21/32 in price to yield 2.4426 percent.Yields were pressured higher after data showed U.S. factory activity accelerated to a five-month high in November amid a pickup in new orders and production, offering more evidence that the economy gained further momentum early in the fourth quarter. See full story.
Oil jumps 8% on OPEC deal
-- Oil prices soared more than 8 percent on Wednesday to the highest in a month as some of the world's largest producers agreed to curb production for the first time since 2008 in a bid to support prices. Crude prices were also on track to have risen over 5 percent this month but were are unlikely to skyrocket further in reaction to the deal, and may even be short-lived, traders and analysts said. The Organization of the Petroleum Exporting Countries, which accounts for a third of global oil supply, agreed to cut production by around 1.2 million barrels per day (bpd), or over 3 percent, to 32.5 million bpd, from January.
Brent crude futures for January delivery rose $3.68 to $50.06 a barrel, a 7.9 percent gain. The January contract expires Wednesday. Brent futures for February LCOc2 rose 9.2 percent, or $4.35 to $51.68 a barrel. Oil prices will continue to strengthen on the deal, but sharp gains will be limited as market skepticism lingers about how effective the cuts will be. See full story.
Oil suffers nearly 4% loss
-- Crude-oil futures suffered a nearly 4% loss Tuesday, with U.S. prices logging their finish in two weeks, pressured by growing doubts that the world’s biggest oil producers will reach a deal to cut global output. All eyes are on the Organization of the Petroleum Exporting Countries meeting on Wednesday in Vienna. Internal discord could derail producers’ plans to reach an agreement limiting output, which has outpaced demand for more than two years. In September, OPEC agreed on targets that would have translated into production cuts of 200,000 to 700,000 barrels a day. Analysts say if the Wednesday meeting ends inconclusively, oil prices could fall as low as $35 a barrel.
Oil prices edged up overnight after Iran and Iraq signaled they were willing to hold output steady. Both countries had previously said they wanted to increase output. But a Tuesday Reuters report, citing OPEC sources, said a meeting of technical experts on Monday couldn’t resolve differences between Saudi Arabia and Iran and Iraq over the mechanics of implementing output reductions. See full story.
Oil jumps in choppy trade on OPEC outlook
-- Oil rallied Monday, reversing an early selloff, as traders attempted to gauge the potential for members of the Organization of the Petroleum Exporting Countries to agree this week on a plan to curb crude output. Oil initially lost ground as hopes faded that OPEC members would be able to complete a deal to curb output. Prices took a hit after Saudi Arabia said it won’t meet with Russia and other non-cartel members. But futures later rebounded on signs other OPEC members are making a last-ditch effort to save the deal. Phil Flynn, senior market analyst at Price Futures Group, said there were underlying suspicions the Saudi reluctance was merely a negotiating tactic.
On the New York Mercantile Exchange, light, sweet crude futures for delivery in January jumped $1.26, or 2.7%, to $47.32 a barrel, after flipping between gains and losses earlier. January Brent crude on London’s ICE Futures exchange advanced $1.18, or 2.5%, to $48.42 a barrel. The moves follow drops of 4% and 3.6% for crude and Brent, respectively, on Friday, when Saudi Arabia said it wouldn’t attend a Monday meeting with non-OPEC until there was “a clear decision within OPEC” on the issue of production cuts. Some OPEC members have looked to Russia to join in by trimming its output. See full story.
Durable goods rise 4.8% in October
-- Orders for long-lasting goods made in the U.S. soared 4.8% in October largely because of stronger demand for commercial aircraft, but business investment is still not showing much spark. The increase in new orders for durable goods — the fourth in a row — topped the 3.3% estimate of economists surveyed by MarketWatch. A slew of fresh bookings for Boeing helped spur a 94.1% spike in new orders for passenger planes, Commerce Department data show. Aircraft orders often swing sharply from month to month and can obscure trends in business spending. Demand for new autos slipped 0.6%.
If the aircraft and auto industries are omitted, orders for durable goods increased a much smaller 1% in October. “The underlying details in the report were lackluster in October,” said Joshua Shapiro, chief economist at MFR Inc. A key measure of business investment known as core capital-goods orders, meanwhile, rose a modest 0.4% in October after a big drop in the prior month. See full story.
Home sales hit 9-1/2-year high
-- U.S. home resales rose in October to their highest level in more than 9-1/2 years amid pent-up demand, offering more evidence of a pickup in economic growth early in the fourth quarter. While a recent surge in mortgage rates could hurt the housing market next year, the impact is likely to be modest given a labor market that is at or close to full employment. The National Association of Realtors said on Tuesday existing home sales increased 2.0 percent to an annual rate of 5.6 million units last month, the highest level since February 2007. September's sales pace was revised up to 5.49 million units from the previously reported 5.47 million units.
Economists polled by Reuters had forecast sales slipping 0.5 percent to a 5.43 million-unit pace in October. The NAR attributed the surprise rise in sales last month to "unrealized pent-up demand" after would-be buyers were held back by tight supply over the summer. Sales were up 5.9 percent from a year ago. Last month, existing home sales rose in all for regions. The report came on the heels of data last week showing a surge in housing starts. It also added to strong reports on retail sales and the labor market as well as improving manufacturing surveys in suggesting that the economy continued to gain speed early in the fourth quarter. See full story.
Dollar pulls back after 10-day streak
-- The U.S. dollar weakened slightly against its major rivals on Monday as traders paused for breath following 10 straight days of gains for the currency, the longest winning streak for the greenback in over three years. The buck has been supported by continued expectations for higher interest rates by the Federal Reserve, as well as by the prospect of fiscal stimulus following the election of Donald Trump. The U.S. dollar index hit its highest level since April 2003 last week, and the dollar briefly hit a fresh multimonth high against the yen during Asian trading hours. Since the election, the dollar index is up 3.6%, and “it’s difficult to know how much further this bull can run especially that it’s driven by animal spirits, and yet no fundamental evidence,” Hussein Sayed, chief market strategist at FXTM wrote in a note. “However, when everybody turns bullish, this is the time when you should get worried.”
Investors locked in expectations of a U.S. rate increase and bought the dollar and sold the yen based on comments by New York Federal Reserve President William Dudley on Friday, analysts said. He said inflation expectations were “well-anchored.” “Even though investors are concerned about a sharp rate rise and inflation expectation, market participants almost fully expect rate-hike action, so it’s quite natural that exchange and interest rates are being affected,” said Yunosuke Ikeda, FX strategist with Nomura Securities in Tokyo. See full story.
Dollar strongest since 2003
-- The U.S. dollar climbed on Friday to its highest level since 2003 on continued bets on faster inflation and higher interest rates, while Treasuries resumed a selloff that left benchmark yields on track to post their steepest two-week increase in 13 years. A growing perception that the economic policies of U.S. President-elect Donald Trump will lift consumer prices pushed the dollar higher, weighing on crude and other commodities.
Last week's unexpected U.S. election victory from political neophyte Donald Trump has led to a repricing of assets, most notably in currency and bond markets. Federal Reserve policymaker James Bullard said on Friday he is leaning toward supporting a rate rise in December, adding that a plethora of potential changes under Trump could affect future policy. See full story.
CPI boosts rate hike chances
-- U.S. consumer prices recorded their biggest increase in six months in October on rising gasoline costs and rents, suggesting a pickup in inflation that potentially clears the way for the Federal Reserve to raise interest rates in December. Prospects for a rate hike next month also got a boost from other data on Thursday showing first-time applications for unemployment benefits tumbling to a 43-year low last week and housing starts surging to a nine-year high in October. The reports painted an upbeat picture of the economy early in the fourth quarter and came as Fed Chair Janet Yellen told lawmakers that the U.S. central bank could lift borrowing costs "relatively soon."
"Today's data give the Fed more evidence to support a rate hike next month," said Alan MacEachin, corporate economist with Navy Federal Credit Union in Vienna, Virginia. "The only thing standing in the way at this point would be a disastrous jobs report in early December, a remote possibility at best." The Labor Department said its Consumer Price Index increased 0.4 percent last month after rising 0.3 percent in September. In the 12 months through October, the CPI advanced 1.6 percent, the biggest year-on-year increase since October 2014. The CPI increased 1.5 percent in the year to September. See full story.
Dollar index hits 13-year high
-- The U.S. dollar rose against its major rivals on Wednesday, hitting a 13-year high as the greenback’s post-election rally continued. The dollar has been on a sharp upward trajectory since the U.S. election as markets price in their expectation that a Trump administration would boost fiscal spending, stoke inflation, and increase government debt. The yield on 10-year U.S. Treasury has jumped, part of a global selloff of bonds, also helping lift the U.S. currency. The ICE U.S. Dollar Index, which measures the currency against a basket of six currencies, was up 0.4%. The index is on track for an eighth straight daily advance and earlier traded as high as 100.53, its strongest since April 2003, according to FactSet data.
“Trump’s presidential triumph may be the best event that has happened to the dollar index this year,” wrote Lukman Otunuga, a research analyst at FXTM. “The surprise victory swiftly heightened expectations of a U.S. rate hike in December while boosting optimism towards an improvement in domestic economic growth under Trump’s administration.” Despite the uptrend, the rally has shown signs of stalling, suggesting investors may view the move as have gotten ahead of itself. See full story.
Oil prices soar on renewed OPEC hopes
-- Oil prices jumped more than 5 percent on Tuesday, bouncing back from multi-month lows on renewed expectations that OPEC will agree later this month to cut production to reduce a supply glut that has weighed on prices for more than two years. Saudi Energy Minister Khalid al-Falih is expected to travel to the Qatari capital, Doha, this week for meetings with oil-producing countries on the sidelines of an energy forum, sources familiar with the matter told Reuters. The Organization of the Petroleum Exporting Countries is due to meet on Nov. 30 to hammer out the terms of a deal to limit output. An outline deal was reached in September but negotiations on the detail are proving difficult, officials say.
Traders and analysts also pointed to a report from Monday about a last ditch effort by OPEC to bring the world's top producers together to rein in production, saying it triggered a wave of short covering. "Clearly the market is now seeing increased chances of an OPEC production cut," Commerzbank analysts said in a note. "There is doubtless considerable pressure to take action, as the oversupply will not reduce itself." News of an attack on a major oil pipeline in Nigeria, the Nembe Creek Trunk Line in the southern Niger Delta, gave an additional push to prices. See full story.
Dollar jumps to one-year high
-- U.S. dollar strengthened against most major currencies, with a key dollar gauge hitting its highest in a year Monday, as investors priced in policy shifts expected to be undertaken during Donald Trump’s presidency in the U.S. The U.S. Dollar Index, which tracks the greenback’s performance against six other currencies, rallied 1%, its strongest level since late November 2015, according to FactSet data. The dollar gauge briefly touched 100.22. The index was on track for it sixth consecutive advance, its longest win streak since a six-session run in early May.
“The driving force continues to be the anticipated shift toward more fiscal stimulus, while confidence grows of Fed rates hikes, with the second in the cycle expected to be delivered next month,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in a note. “The magnitude of the US stimulus the investors seem to be assuming will pass a Republican-controlled Congress has spurred a shift out of bonds, emerging markets, and gold,” Chandler said. See full story.
Dollar rises to nine-month high
-- The dollar rose to its highest in nine months against a basket of major currencies on Friday and was on track for its best week in a year as investors packed on bets that the administration of President-elect Donald Trump would pump up U.S. inflation. Backed by a stronger-than-expected U.S. consumer sentiment report and solid gains against the euro and Canadian dollar, the dollar index rose to its highest since Feb. 1. Investors expect Trump's proposals to deport illegal immigrants, cut free-trade deals and unleash large fiscal stimulus measures will boost U.S. inflation.
The dollar also extended gains against the Chinese yuan and Mexican peso to historic levels on expectations that emerging markets will suffer most if Trump turns his protectionist rhetoric into action. Expectations of rising U.S. price pressures if Trump delivers on promises to boost public spending and put barriers on cheap imports have driven Treasury yields higher and boosted the dollar since his victory on Tuesday, with emerging market currencies having borne the brunt of the selling as they are expected to suffer from the U.S. shift. See full story.
Trump victory raises inflation expectations
-- The dollar climbed to a 3-1/2-month high against the yen on Thursday as markets weighed the election of businessman Donald Trump for U.S. president and how his policies could affect economic growth. The greenback rose by more than 1 percent on the day to 106.94 yen for the first time since July. The dollar also rose substantially against a basket of major world currencies, touching its highest level in more than two weeks and hovering just below levels last seen in early February.
"It’s a continuation of the post-election response," said Ian Gordon, FX strategist at Bank of America Merrill Lynch. "For us, the clean sweep of both the White House and the Congress by the Republicans is a clear signal that we are going to get a pretty significant fiscal stimulus in 2017 and that is going to be bullish for (interest) rates." Expectations that Trump's policies would boost spending and inflation helped U.S. long-dated Treasury yields rise to their highest levels in more than 10 months. Yields on benchmark 10-year notes and 30-year bonds had their largest one-day rise in years on Wednesday and added to gains on Thursday ahead of a 30-year bond auction. Higher interest rates for U.S. Treasuries raise the value of the dollar by making dollar-denominated assets more attractive to investors. See full story.