Daily Economy Watch keeps an eye on events that affect your hard asset portfolio. View archives.
Growth cools in fourth quarter
-- U.S. economic growth cooled in the fourth quarter as previously reported and after-tax corporate profits took a hit from a strong dollar, which could undermine future business spending. Gross domestic product expanded at a 2.2 percent annual rate, the Commerce Department said on Friday in its third estimate of GDP. That was unrevised from the forecast the government published last month. Businesses throttled back on inventory and equipment investment, but robust consumer spending limited the slowdown in the pace of activity. The economy grew at a 5 percent rate in the third quarter.
After-tax corporate profits declined at a 1.6 percent rate last quarter after increasing at a 4.7 percent pace in the third quarter. Corporate profits from outside the United States fell at an 8.8 percent rate, the steepest decline since the 2007-2009 recession. "Slower profit growth could mean slower investment in the coming months," said Thomas Costerg, an economist at Standard Chartered in New York. See full story.
Oli tops $50 on Saudi airstrikes in Yemen
-- Oil futures jumped past $50 a barrel on Thursday, headed for their fifth straight daily gain as Saudi Arabian airstrikes in Yemen raised fresh concerns over potential disruptions to crude supplies. Saudi Arabia and other Gulf nations launched airstrikes against rebel forces in Yemen’s capital and across the country. The strikes began Thursday morning, hours after Yemen’s president, Abed Rabbo Mansour Hadi, fled the southern port city of Aden by boat when Iranian-backed Houthi militants closed in.
“Saudi Arabia, the biggest and most important oil producer in the Middle East, is now in an armed conflict,” said Bjarne Schieldrop, chief commodities analyst at SEB Markets, in a note. “Just the headline of this happening is driving chilling fears into the bones of all oil consumers.” That said, Schieldrop doesn’t expect the conflict in Yemen to have much of an impact on oil supply. Still, although Yemen isn't a very big producer of crude oil, it is adjacent to the Bab el-Mandeb Strait, one of the world’s main transit points for seaborne trade. Its closure could prevent oil tankers from the Persian Gulf from reaching the Suez Canal and block the quickest route for tankers from North Africa to Asia, according to the U.S. Energy Information Administration. See full story.
Weak business spending signals tepid growth
-- U.S. business investment spending plans fell for a sixth straight month in February, likely weighed down by a strong dollar and weak global demand, leading economists to further lower their first-quarter growth estimates. The Commerce Department's durable goods report on Wednesday was the latest data to suggest economic growth braked sharply early in the year, in part due to bad weather and a now-settled labor dispute at the country's busy West Coast ports. While economists largely view the slowdown in activity as temporary, softer growth could prompt the Federal Reserve to delay raising interest rates until later in the year.
"Today's report provides strong evidence that the manufacturing sector is feeling some considerable heat from the stronger dollar," said Anthony Karydakis, chief economic strategist at Miller Tabak in New York. The Commerce Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, dropped 1.4 percent last month after a downwardly revised 0.1 percent dip in January. Morgan Stanley cut its Q1 GDP forecast to a 0.9 percent rate from 1.2 percent. The Atlanta Federal Reserve Bank's model forecasts a growth pace of only 0.3 percent for this quarter. The economy expanded at a 2.2 percent rate in the fourth quarter. See full story.
U.S. consumer inflation firming
-- U.S. consumer prices rebounded in February as gasoline prices rose for the first time since June, and there were also signs of an uptick in underlying inflation pressures, keeping the Federal Reserve on course to raise interest rates this year. The economy, which has been on the back foot in recent months, received another boost from other data on Tuesday showing new home sales surged to a seven-year high in February and manufacturing activity gained some momentum in March. The upbeat reports came despite harsh weather and a strong dollar, which have contributed to slowing economic activity early in the first quarter.
"It doesn't corroborate the further disinflation story. There is some chance economic activity is going to pick up a little bit this spring, but it's not really clear how much and that matters for the timing of the first rate hike," said Guy Berger, an economist at RBS in Stamford, Connecticut. The Labor Department said its Consumer Price Index increased 0.2 percent last month after dropping 0.7 percent in January, ending three straight months of declines in the index. In the 12 months through February, the CPI was unchanged after slipping 0.1 percent in January, as the impact of an earlier plunge in global crude oil prices lingers. See full story.
Dollar weakens further on rate-hike bets
-- The dollar traded lower against its rivals Monday after recording its largest weekly percentage decline against the euro since October 2011. Several analysts, including Société Générale’s Kit Juckes, said that traders are trimming bets that the dollar will strengthen against its rivals, driving further weakness in the buck as traders expect the Federal Reserve to raise interest rates later, and more gradually, than previously thought. “I’m sure we’ll see positioning data over the next couple of weeks that will take the long-dollar position down by a significant hunk,” Juckes said.
According to data from the Commodity Futures Trading Commission, released on Friday, dollar-long positions declined to $40.5 billion in the week ended Tuesday, down from $44.7 billion the previous week. In November, net dollar-long positions hit $49.4 billion, its highest level since 2008. In a speech to the Economic Club of New York, Federal Reserve Vice Chairman Stanley Fischer said Monday that an increase to the Federal funds rate is likely warranted this year, but that investors should not expect steady raises after the first move. The dollar inched higher as he spoke. See full story.
Dollar struggles anew on U.S. rate view
-- The dollar fell on Friday, on track for its worst weekly performance in more than two years against the euro, undermined by expectations U.S. interest rates will rise much slower than expected. The greenback was also on pace for its largest weekly loss in two months against the Swiss franc and yen, two days after the Federal Reserve downgraded its projections for growth and inflation. That doused investor expectations of a June rise in U.S. interest rates.
In mid-morning trading, the euro rose 1.2 percent against the dollar to $1.0788. It was up nearly 3 percent this week, on track for its largest weekly gain since October 2011. In what seems to be the first signs of cracks appearing in what had been a united front among the major banks, HSBC on Thursday raised its euro forecast to $1.20 by end-2017, arguing that the dollar's explosive rally was nearing its end.But the bearish view on the euro remained intact with the European Central Bank in the midst of quantitative easing. See full story.
HSBC: Dollar’s meteoric rise may be over
-- The U.S. dollar’s eight-month long roller-coaster ride is about to head downhill, analysts at HSBC said Thursday. Strategists at British bank have raised their euro forecasts, becoming the first major bank to predict a resurgent euro by the end of next year. They now see the euro rising to $1.10 by the end of next year — and $1.20 by the end of 2017. That is a contrast with a dour forecast from Goldman Sachs issued just last week. Goldman updated their forecast, saying that they saw the euro hitting parity by September, and falling to 80 cents by year-end 2017.
HSBC’s David Bloom, one of the report’s authors, said that while the rally may have some more room to run, the fundamentals suggest that the market has already priced in easing abroad — and is underestimating the potential impact of slowing domestic growth. “People are saying we don’t have to worry about data because the central banks are anchored — but currencies aren’t just about interest rate differentials, they’re not just about policy differentials,” Bloom said. “The U.S. economy is surprising to the downside aggressively. Don’t ignore it.” See full story.
Fed scales back pace of rate hikes
-- The Federal Reserve took another step to make its first rate hike since 2006 but also indicated it may take a slower upward descent than previously indicated. As expected, the U.S. central bank dropped its pledge to remain “patient” about raising rates in a statement released Wednesday after a two-day policy meeting. In the statement, the Fed said it would hike rates when it has “seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term.” Only two of the 17 Fed officials think the U.S. central bank will not move later this year. See text of statement.
The statement stressed that the U.S. central bank has not decided when to move. A rate move in April is unlikely, the Fed said. So, in essence, as many Fed officials wanted, the U.S. central bank opened the door for at least a discussion of a rate hike as soon as June. In a dovish signal, Fed officials sharply revised down their expected path of interest rates this year and next. The Fed seemed less sanguine about the economic outlook. The central bankers trimmed their forecasts for gross domestic product in 2015 and said growth “has moderated somewhat.” See full story.
Dollar down again on weak data
-- The dollar fell for a second straight day on Tuesday, weighed down again by unexpectedly weak U.S. economic data as the Federal Reserve started a two-day policy meeting. The dollar index was on pace for its largest two-day loss since early February. Investors do not expect any change to the Fed's benchmark interest rate, which has been pinned between zero and 0.25 percent for six years. But they anticipate the Fed dropping the word "patient" from its statement to describe its approach to raising rates later this year.
However, the mixed batch of U.S. economic data in the first quarter and the dollar's strength could delay an interest rate increase many see happening in June. "We see the Fed still being data-dependent especially after we have been seeing mixed data in the first quarter," said Mark McCormick, currency strategist, at Credit Agricole in New York. "We therefore see a lift-off in rates possibly in September, not June, and the dollar's strength, which acts like a rate hike, has helped the Fed take its time in raising rates." See full story.
Weak factory data suggest softer growth
-- U.S. manufacturing output fell in February for the third straight month as the production of automobiles and a range of goods tumbled, the latest indication of slower economic growth in the first quarter. Activity has softened in recent months, constrained by a harsh winter, strong dollar and lower crude prices, which have forced companies in the oil field to either postpone or cut back on capital expenditure projects. Weak demand overseas and a now-settled labor dispute at U.S. West Coast ports also was a drag. "This is a very toxic cocktail for U.S. manufacturing. We could see some of these headwinds lasting for a few months, the first half of the year will be quite difficult," said Thomas Costerg, an economist at Standard Chartered Bank in New York.
The weak factory data came ahead of the Federal Reserve's policy meeting on Tuesday and Wednesday, where economists expect officials at the U.S. central bank to drop the phrase "patient" from their so-called forward guidance on interest rates. Factory production slipped 0.2 percent last month after declining 0.3 percent in January, the Fed said on Monday. The report joined dour retail sales, construction and housing starts data, which recently prompted economists to slash their first-quarter GDP growth estimates to as low as a 1.2 percent annualized pace. The economy grew at a 2.2 percent rate in the fourth quarter. See full story.
PPI falls for fourth straight month
-- Wholesale prices in the U.S. unexpectedly declined in February for a fourth consecutive month, reflecting cheaper food and a slump in profit margins among wholesalers and retailers. The 0.6 percent decrease in the producer price index followed a 0.8 percent drop the prior month, a Labor Department report showed Friday. The median estimate in a Bloomberg survey of 73 economists called for a gain of 0.3 percent. The so-called core measure, which strips out volatile food and fuel, also decreased 0.5 percent.
Inflation in the U.S. has decelerated as a rising dollar cheapened the cost of imports and crude oil slumped. Federal Reserve policymakers are awaiting signs that inflation will move back up toward their target as they consider raising interest rates for the first time since 2006. “Inflation is very much controlled in this environment, and we have a rising dollar that’s going to put downward pressure,” said Robert Brusca, president of Fact & Opinion Economics in New York, whose forecast for a 0.2 percent decrease in the price index was among the closest in the Bloomberg survey. “The Fed very much wants to get inflation up into its target zone so that it can be more comfortable with where policy is, but it’s just not happening.” See full story.
Retail sales drop for third month
-- Sales at U.S. retailers fell in February for the third month in a row, a poor performance that can be partly blamed on bad weather but that also raises questions about whether the economy can grow much faster. Retail sales fell a seasonally adjusted 0.6% last month in the wake of even larger declines in January and December, the government reported Thursday. The last time sales have fallen three straight months was in mid-2012. The disappointing report surprised Wall Street, but the price of stocks and bonds both rose. Economists polled by MarketWatch had expected a 0.3% gain in retail sales, which account for about one-third of overall consumer spending. Consumption in turn is responsible for as much as 70% of the nation’s economic activity.
Although Americans increased spending in the fourth quarter at the fastest rate in four years, the nearly six-year-old economy recovery has been marked up sharp swings in consumer behavior. The economy is unlikely to grow much faster if Americans remain generally tight-fisted — retail sales have been growing more slowly over the past few years than they normally do. Unlike in January and December, the decline in sales last month cannot be blamed on lower spending at gasoline stations that resulted from the big plunge in oil prices in the second half of 2014. Sales at gasoline stations jumped 1.5% last month — the first increase since May — as fuel prices rose in February for the first time since last summer. Many economists have been expecting Americans to use their gas savings to purchase other goods and services. But so far other retailers clearly haven’t benefited much, if at all. See full story.
Euro’s slide toward parity accelerates
-- The euro’s depreciation against the dollar accelerated Wednesday, pushing it closer to parity with the dollar, as expectations for a June Fed rate increase drew more investors to the already-crowded dollar trade. The euro traded as low as $1.0560, a nearly 12-year low, but rebounded to $1.0599 in recent trade. That compares with $1.0700 late Tuesday in New York. The euro was down 1% against the dollar Wednesday morning, following a 1.4% decline Tuesday. If the euro slides below $1.0501, it will be its weakest exchange rate against the dollar since January 2003. The euro has lost 12% against the dollar in 2015, according to FactSet.
The dollar has risen against nearly all of its rivals on the expectation that the Federal Reserve could raise interest rates this year. “I think the dollar rally is driven by two major themes,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange. “The more U.S.-centric theme is the view that the Federal Reserve will raise interest rates around the middle of this year, underscored by strong payrolls report on Friday,” Esiner said. “The other half is that central banks around the world are content to leave interest rates at rock-bottom levels, or are actively easing monetary conditions to fight deflationary pressures and spur some growth in their economies.” See full story.
Pace of dollar’s rally is rattling markets
-- It is probably not the dollar’s unrelenting march higher that is unsettling U.S. stock investors, but it might be the speed of the rally. “I think what people are concerned about is the pace of the dollar strength,” Douglas Borthwick, managing director at Chapdelaine Foreign Exchange, in a phone interview, on Tuesday. “Countries can always adapt to currencies strengthening or weakening, but certainly as the dollar strengthens very, very quickly it leaves very little chance for others to adapt,” he said.
On a trade-weighted basis, the dollar remains far from its highs in the mid-1980s and early 2000s, but the pace of the rise over the past half year is the second fastest in the last 40 years, noted David Woo, forex strategist at Bank of America Merrill Lynch, in a note. In the end, it all seems to come down to context. If the dollar rises because investors are confident about the future of the economy, then stocks can rise, too, as was the case in the late 1990s. If the dollar is rising because investors are frightened and scrambling for safety, then it is no surprise that stocks and other assets perceived as risky tend to suffer, such as during the 2008 financial crisis. See full story.
Eurozone sentiment hits 7 1/2-year high
-- Sentiment in the euro zone surged to its highest level in 7-1/2 years in March as investors heartened by the European Central Bank's bond-buying program brushed off concerns about the economic turmoil in Greece. Sentix research group's index tracking morale among investors and analysts in the euro zone climbed to 18.6, its highest level since August 2007, from 12.4 the previous month. That was far higher than the Reuters consensus forecast for a reading of 15.0 and beat even the highest estimate for 17.5.
"The euro zone economy is showing definite signs of life," said Manfed Huebner, managing director at Sentix, adding that low oil prices and the weak euro were helping euro zone countries to get back on their feet. The ECB is due to start purchasing bonds on Monday in a bid to hoist euro zone inflation from below zero back toward its goal of just under 2 percent, and to boost economies in the 19-country bloc. See full story.
Economy gains 295,000 jobs in February
-- The U.S. economy churned out a robust 295,000 jobs in February, reducing the nation’s unemployment rate to the lowest level in almost seven years and extending the best stretch of job creation since the mid-1990s. The latest employment report offers more proof the economy is likely to continue to chug along in the wake of the biggest spurt of hiring since the Clinton era. Many economists think the U.S. might achieve 3% annual growth in 2015 for the first time in a decade. The unemployment rate fell to 5.5% from 5.7%, marking the lowest level since May 2008 in the early stages of the Great Recession. In a mixed bag, more people found jobs, but more people also dropped out of the labor force.
Despite a prolonged surge in hiring, the wages of U.S. workers still aren’t growing very fast. Hourly wages rose 3 cents, or a scant 0.1%, to $24.78 — a disappointment after a sharp 0.5% uptick in January that was boosted in part by a number of states raising their minimum wage. Over the past 12 months wages have risen a mediocre 2%, down from 2.2% in January and just two-third as fast as they usually grow when the economy is expanding rapidly. Earnings have to rise faster to spur the economy to new heights, and analysts expect all the new hiring to eventually to deliver more pay for workers, but the slow pace of wage growth remains a puzzle. See full story.
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.