Daily Economy Watch keeps an eye on events that affect your hard asset portfolio. View archives.
ECB open to more stimulus
-- The European Central Bank left ultra-loose monetary policy unchanged on Thursday but kept the door open to more stimulus in December, firmly shooting down any talk of tapering its 1.7 trillion euro asset-buying program. Offering few clues to the euro zone central bank's next move, ECB President Mario Draghi left a wide range of options on the table and emphasized that a long-awaited rise in inflation is predicated on "very substantial" monetary accommodation. Struggling to stave off deflation, the ECB has provided unprecedented stimulus for years. It has cut rates into negative territory, buys 80 billion euros worth of bonds each month and has offered banks free loans, all with the aim of boosting inflation back to the ECB's target of just under 2 percent.
In a possible argument for even more easing, Draghi warned on Thursday that an expected rise in inflation in the coming month would be driven mostly by the fading effect of past oil price falls, raising doubts whether it will be sustainable. "There are no signs yet of a convincing upward trend in underlying inflation," Draghi told a news conference. But he also said that any decision about the ECB's policy stance would be left until December, when the bank would have to decide whether to extend its bond buys, now due to end in March. See full story.
Beige Book sees modest to moderate growth
-- The U.S. economy is continuing to meander along, a report released Wednesday showed. The Federal Reserve’s so-called Beige Book, a collection of anecdotes about the economy gathered before the central bank makes interest-rate decisions, said the U.S. economy in most of the country grew at a modest to moderate rate. The area covered by the New York Fed saw no growth, the report said. Elsewhere, the outlooks were mostly positive. The Beige Book, based on information collected on or before Oct. 7, fits with a raft of so-called hard data showing the U.S. economy expanding at a steady but unspectacular rate.
The Fed’s survey reported the strong dollar weighing on exports, an uptick in retail spending, improved demand for services, a growing real-estate market, and stability in the hard-hit oil and natural-gas sector. Wage growth was reported to be “fairly steady,” but some companies in a number of sectors — including manufacturing, hospitality, health care, truck transportation, and sales — reported difficulty hiring. Again, that fits with other economic data, showing wage growth gradually increasing at the same time that job openings are near record levels. Overall price growth was “mild.” A report released this week showed consumer prices growing 1.5% in the 12 months ending September. See full story.
Inflation rises by most in five months
-- More expensive gas and rising housing costs boosted consumer inflation in September by the largest amount in five months, keeping the Federal Reserve on the cusp of raising U.S. interest rates. The consumer price index climbed 0.3% last month, the government said Tuesday. That matched the forecast of economists polled by MarketWatch. The cost of shelter — rent, new homes and previously owned homes — rose at the fastest pace since May. Energy prices, mainly gas, also posted the biggest increase since early spring. That largely accounted for higher consumer inflation in September.
Over the past year, consumer prices have advanced 1.5%, the largest 12-month gain since late 2014. Higher inflation is expected to spur the Federal Reserve to raise interest rates soon, most likely before the end of 2016. Excluding food and energy, consumer prices rose a lesser 0.1% last month. The cost of medicare care increased by the smallest amount since March, though prescription drug prices jumped 0.8%. Real or inflation-adjusted hourly wages, meanwhile, fell 0.1% in September. Hourly pay has risen a scant 1% in the past 12 months. See full story.
Weak utilities cap industrial production
-- U.S. industrial production barely rose in September as a rebound in manufacturing and mining output was offset by surprisingly weak demand for utilities, pointing to a moderate acceleration in economic growth in the third quarter. Still, the mixed report from the Federal Reserve on Monday suggested that the industrial sector downturn has probably run its course. Gains in output are likely to be muted as the sector remains constrained by the lingering effects of the dollar's past rally, a collapse in oil prices and weak global demand. "It is hard to have a full-blown, strong economic expansion if the manufacturing sector is hurting and that has been the case this year," said Joel Naroff, chief economist at Naroff Economic Advisers in Holland, Pennsylvania.
The Fed said industrial output edged up 0.1 percent last month after declining 0.5 percent in August. Last month's gain was in line with economists' expectations. Industrial production rose at an annual rate of 1.8 percent in the third quarter, the first quarterly increase since the third quarter of 2015. The report came on the heels of data on Friday showing a mild increase in core retail sales in September, which prompted the Atlanta Fed to cut its third-quarter gross domestic product estimate by two-tenths of a percentage point to a 1.9 percent rate. The economy grew at a 1.4 percent pace in the second quarter. See full story.
Wholesale prices rose in September
-- Wholesale prices in the U.S. rose by more than projected in September, helped by higher costs for energy and food and indicating inflation may be picking up. The producer-price index increased 0.3 percent, the first gain in three months, after being little changed in August, a Labor Department report showed Friday. The median forecast of economists surveyed by Bloomberg called for a 0.2 percent gain.Federal Reserve officials are watching for consumer inflation to make sustained progress toward their 2 percent annual target as they consider raising interest rates by year-end.
From a year earlier, producer prices increased 0.7 percent, the most since December 2014, after being little changed in the prior 12-month period. Energy costs rose 2.5 percent from the prior month, and food prices showed a 0.5 percent gain. Excluding food and energy, wholesale prices climbed 0.2 percent from the previous month following a 0.1 percent rise. Those costs rose 1.2 percent from September 2015. See full story
China’s banks may need nearly $2 trillion
-- A relentless rise in borrowing by China’s largest companies could eventually require a capital injection of nearly $2 trillion to clean up the country’s banking sector, according to S&P Global Ratings. “The ever-increasing level of corporate debt is intensifying risks because of weakening borrower credit quality,” said Terry Chan, an analyst at S&P Global Rating, in a note. A team of analysts led by Chan projected that China’s current pace of debt growth could taper off in a couple of years as the economy increasingly shifts away from a manufacturing-led model toward a consumption-driven structure.
“In our base case, credit growth would moderate by a third less by the year 2020. Even so, problem credit-to-total credit could double to 10% from our 2015 estimate of 5.6%,” said Chan. Still, there is a risk that the increasing emphasis on consumption and services industries may further fuel companies’ demand for credit. In the worst case scenario, bad debt could surge to as much as 17% of total loans, requiring $1.7 trillion in new capital, equivalent to 16% of gross domestic product. Since the global financial crisis, China’s total debt has jumped to 220% of GDP as of 2015 from 168% in 2009, with corporate debt accounting for a lion’s share, according to S&P Global Ratings data. See full story.
Fed minutes show inflation doubts remain
-- Several voting Federal Reserve policymakers judged a rate hike would be warranted "relatively soon" if the U.S. economy continued to strengthen, according to the minutes of the Fed's September policy meeting released on Wednesday. The minutes also said "it was noted that a reasonable argument could be made either for an increase at this meeting or for waiting for some additional information on the labor market and inflation."
Although Fed policymakers disagree on whether the current 1.7 percent inflation rate is sufficiently close to their 2 percent objective, many voting members remarked that "there were few signs of emerging inflationary pressures." Since the meeting, Chair Janet Yellen and several other Fed policymakers have said they expect a rate hike by year-end should the labor market and inflation continue to strengthen. See full story.
Brexit-tainted British pound tumbles
-- The pound fell nearly 2% against the dollar on Tuesday, accelerating a recent downward trend that has taken the currency to multidecade lows as Brexit fallout worries intensify. The dollar was broadly higher against the euro and other major rivals, though it weakened against the yen following a pronounced rally against the Japanese currency last week. The strength against the euro came as a recent string of U.S. economic data was deemed positive enough to preserve the Federal Reserve’s timetable for raising interest rates.
Last week, the pound suffered a “flash crash” that took the currency down 6% in a matter of minutes. The crash was seen as validating investor concerns over the downside potential of the currency, which remains at levels last seen in 1985. See full story. “When you see a spike lower like we saw last week, it isn’t uncommon to go back and test those levels,” Chandler said. The weakness on Tuesday “is a continuation of the themes we saw last week.”
Oil hits one-year high
-- Oil prices jumped as much as 3 percent on Monday, with Brent hitting one-year highs, after Russia said it was ready to join OPEC in curbing crude output and Algeria called for similar commitments from other non-OPEC producers. Sentiment was also boosted by a rally in Wall Street shares and news that work was underway for the launch of the first sovereign bond issue of No. 1 crude exporter Saudi Arabia before the eventual listing of the kingdom's state-oil company Aramco. Brent crude hit its highest level since Oct. 12, 2015, reaching $53.73 a barrel, before paring gains to $1.25, or 2.4 percent.
U.S. West Texas Intermediate crude rose its highest since June 10 at $51.60, before easing back to $51.33, up $1.52, or 3 percent. Russian President Vladimir Putin said an output freeze or even a production cut were likely the only right decisions to maintain energy sector stability. "Russia is ready to join the joint measures to cap production and is calling for other oil exporters to join," Putin said, speaking at an energy congress in Istanbul. See full story.
U.S. job growth slows again
-- U.S. employment growth eased for the third straight month in September and the jobless rate rose, but the slowdown was not expected to prevent the Federal Reserve from raising interest rates later this year. The Labor Department's report on Friday suggested the economy was on firm ground, but not growing so swiftly as to knock the U.S. central bank off its game plan of raising borrowing costs only gradually. Nonfarm payrolls rose by 156,000 last month, down from a gain of 167,000 in August. The unemployment rate ticked up a tenth of a percentage point to 5.0 percent as more Americans rejoined the labor force.
Fed Vice Chair Stanley Fischer, speaking at an event in Washington, said the jobs report was "close" to ideal, showing employment growth was neither too fast nor too slow. When asked whether job creation last month was a "Goldilocks" outcome, Fischer said: "It's pretty close." He did not address the Fed's rate hike plans directly. But his comments seemed consistent with what some policymakers have described as its "base case" - a rate increase at the December policy meeting. See full story.
Dollar strengthens on robust U.S. data
-- The U.S. dollar gained on Thursday against a basket of currencies, hitting its strongest level in more than two months and pressuring gold prices, as strong labor market data gave support to a possible U.S. interest rate hike later this year. U.S. Treasury yields rose to three-week highs, ahead of the closely watched U.S. jobs report due out on Friday. In an encouraging sign for the labor market, data on Thursday showed the number of Americans filing for unemployment benefits unexpectedly fell last week to near a 43-year low.
Oil prices continued to climb, with U.S. crude breaking through $50, helped by news of an informal meeting among the world's biggest producers on output cuts and a surprise drop in U.S. crude stockpiles. Strong U.S. jobs numbers could cement expectations of a Federal Reserve rate increase later this year and ripple through markets. Economists polled by Reuters forecast nonfarm payrolls to increase by 175,000. Traders were betting on a 64 percent chance the Fed will hike rates in December, up slightly from a day earlier, according to the CME FedWatch website. See full story.
ISM services surge to 11-month high
-- U.S. services sector activity rebounded to an 11-month high in September, an encouraging sign for economic growth that may increase the prospect of a Federal Reserve interest rate hike this year. The Institute of Supply Management (ISM) said on Wednesday its non-manufacturing activity index surged to a reading of 57.1, the highest level since October 2015. Last month's reading followed a disappointing drop in August. Economists polled by Reuters had forecast the index rising to 53.0. A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of U.S. economic activity.
"These data help the case for the Fed tightening again before too long," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York. Improvement in the index was broad-based with business activity and the employment sub-indices reaching 11-month highs. It followed similarly upbeat news on Monday when ISM reported U.S. factory activity shrugged off weakness in August. The dollar strengthened against a basket of currencies following the data on Wednesday. U.S. stocks were trading higher, while prices of U.S. Treasuries were largely weaker. See full story.
Pound hits 31-year low on Brexit fears
-- The British pound tumbled to its lowest level against the dollar since 1985 on Tuesday, as worries about Brexit—the U.K.’s decision to leave the European Union—continued to weigh on the currency. The U.S. dollar rose against its rivals in what one analyst described as a turn to safety amid the uncertainty stemming from the United Kingdom, though other traditional havens—including U.S. Treasurys and gold—lost ground. The dollar retreated from its highs of the day against the euro following reports that the European Central Bank was likely to wind down its bond purchasing program before the scheduled March 2017 conclusion. According to Bloomberg, the unnamed ECB officials didn’t exclude the possibility that the bond-buying program could be extended past that date.
In other currencies trade, the ICE U.S. Dollar Index—a measure of the buck against a basket of major currencies—was up 0.5% at 96.18. “The weakness in the pound and the broad-based demand for the dollar are connected,” said Lien. “People are seeking safety in the greenback as a result of the fears in the U.K.” Adding to the day’s concerns, the International Monetary Fund trimmed its growth forecasts for the U.S., as well as Canada and Mexico. No change was made to the IMF’s global growth forecast. See full story.
Two Fed GDP trackers show growth wilting
-- The U.S. economy got off to a roaring start in the third quarter, statistically speaking, but the glow has clearly faded. The Atlanta Federal Reserve’s GDPNow chopped its forecast for U.S. growth to 2.2% on Monday, well below its 3.5% estimate a month ago. A similar undertaking by the New York Fed suggests gross domestic product will expand at a 2.2% clip in the three months running from July to September. The Atlanta and New York Fed forecasts are based on statistical models tied to high-frequency economic reports. What’s the source of the reduced performance? Retail sales, consumer spending, manufacturing and construction were all weaker than expected toward the end of the quarter.
Now, 2.2% growth isn’t terrible. Indeed, it’s slightly faster than the economy has grown since a recovery got underway in mid-2009 after the end of the Great Recession. It’s also a marked improvement upon the 1.4% and 0.8% growth rates in the first two quarters of 2016. Still, such a modest growth rate assures the U.S. economy will fail to reach the 3% mark for an unprecedented 11th straight year. The last time the economy grew faster than 3% was 2005. Before the current recovery, the economy had grown an average of 3.3% per year. See full story.
Consumer spending drop clouds rate outlook
-- U.S. consumer spending fell in August for the first time in seven months while inflation showed signs of accelerating, mixed signals that could keep the Federal Reserve cautious about raising interest rates. The Commerce Department said on Friday that consumer spending, which accounts for more than two-thirds of U.S. economic activity, fell 0.1 percent last month after accounting for inflation. Analysts polled by Reuters had expected a 0.1 percent gain.
Fed Chair Janet Yellen said last week she expected the U.S. central bank would raise rates once later this year to keep the economy from eventually overheating. Prices for fed funds futures suggest investors see almost no chance of a hike at the Fed's next policy meeting in early November and roughly even odds of an increase at its mid-December meeting, according to CME Group. The Atlanta Fed said growth appeared on track to accelerate to a 2.4 percent annual rate in the third quarter, according to its closely watched GDPNow forecasting model. It had forecast growth of 2.8 percent for the period earlier this week. See full story.
Deutsche Bank crisis threatens global markets
-- Europe’s problems with some of its largest financial institutions could spill over into the rest of the global market. Deutsche Bank’s shares were sinking on Thursday on a report that a group of hedge funds were reducing their exposure to the giant financial institution
On Wednesday, one financial blogger, Wolf Richter, wrote that deep-seated concerns about Deutsche Bank’s ability to raise enough cash to give the market comfort that it is on a sound footing speaks to a larger problem that Europe’s embattled banking sector must combat. Richter, the editor of financial blog site Wolf Street, said “the banking crisis [in Europe] has the potential to transmogrify into a financial crisis.” He went onto say: “All it takes is for one of the big [banks] to suddenly topple. The flow of credit would freeze up instantly. In an economic system that depends on credit, and whose lifeblood is credit, such an event is a financial crisis.” See full story.
Consumer confidence hits 9-yr high
-- Consumer confidence rose in September to the highest level since before the last recession on optimism about the labor market, according to a report from the New York-based Conference Board on Tuesday. Confidence index increased to 104.1 (forecast was 99.0), the highest since August 2007, from a revised 101.8. Present conditions gauge rose to 128.5, also highest since August 2007, from 125.3
The survey may bode well for consumer spending, which has cooled after a robust second quarter, reflecting resilient labor market conditions and steady income growth. The assessment of the availability of jobs is consistent with data showing vacancies at a record high nationwide, suggesting that wages could see further gains. “Consumers are more upbeat about the short-term employment outlook, but somewhat neutral about business conditions and income prospects,” Lynn Franco, director of economic indicators at the Conference Board, said in a statement. “Overall, consumers continue to rate current conditions favorably and foresee moderate economic expansion in the months ahead.” See full story.
Wall Street rises after presidential face-off
-- Consumer and technology stocks including Amazon led gains on Wall Street on Tuesday as some investors deemed Democrat Hillary Clinton to have won a presidential debate against Republican rival Donald Trump. The S&P 500 technology sector rallied 1.13 percent, powered by a 2-percent gain in Microsoft and a 1.14-percent rise in Facebook. Amazon.com increased 1.98 percent and the consumer discretionary index gained 0.93 percent higher after a report showed that the consumer confidence index for September rose to its highest level in nine years.
Following the first of three presidential debates on Monday, Trump vowed to hit Clinton harder after she put him on the defensive. With six weeks until the Nov. 8 vote, some investors see the neck-and-neck contest sparking volatility in sectors including health insurers, drugmakers and industrials. "From a market perspective, rightly or wrongly, there is an understanding that Mrs Clinton would be a safe pair of hands, that there's very little uncertainty there," said Brad McMillan chief investment officer for Commonwealth Financial in Waltham, Massachusetts. See full story.
Stocks sag before U.S. presidential debate
-- Stock prices around the world fell on Monday ahead of the first U.S. presidential debate between Hillary Clinton and Donald Trump, while oil prices rose in advance of an informal OPEC meeting in Algeria on hopes for an output cut. Half of America's likely voters will rely on the presidential debates to help them make their choice between the two major U.S. party nominees in the Nov. 8 election, according to a Reuters/Ipsos poll released on Monday.
"Investors are acting extremely nervous with regards to the debate ... and it highlights the fact that the markets are not focusing on the health of the economy, interest rates and geopolitical events," said Robert Pavlik, chief market strategist at Boston Private Wealth. In afternoon trading, the Dow Jones industrial average was 157.86 points, or 0.86 percent, lower at 18,103.59, the S&P 500 was down 17.59 points, or 0.81 percent, to 2,147.1 and the Nasdaq was down 47.23 points, or 0.89 percent, lower to 5,258.51. See full story.
Manufacturing gauge slips to 3-month low
-- Manufacturing activity in September grew at the slowest pace in three months as purchasing managers blamed weak new orders and the strong dollar, according to data released Friday. The Markit flash U.S. manufacturing purchasing managers index fell to 51.4 in September from 52, marking the lowest level since June. Any reading above 50 indicates improving conditions—what’s been the case for the last seven years.
That said, the PMI reading was close to the postcrisis low of 50.7, reached in May, Markit indicated. “Softer new-order gains are the main concern in the latest PMI survey, and this could act as a drag on production growth into the final quarter. Alongside reports of subdued domestic demand, a renewed dip in export sales also held back growth momentum in September,” said Tim Moore, senior economist at IHS Markit, in a statement. See full story.
Dollar weakens in wake of Fed decision
-- The dollar lost ground against most of its rivals on Thursday, weakening for a second straight session as investors continued adjust to the Federal Reserve’s vote to hold off on raising interest rates this month. Fed chief, Janet Yellen, signaled that a rate hike was likely by year’s end. While she reiterated that the case for a hike is stronger due to the economy picking up and employment staying firm, market participants haven’t to been convinced. The U.S. central bank didn’t raise rates at the end of its September meeting on Wednesday, a decision that wasn't seen as a surprise.
“With the U.S. likely to post another year of modest growth, we do not expect the divergence that would be necessary to trigger a significant [dollar] rally,” UBS analysts wrote in a note on Thursday. “We continue to think the dollar has peaked on a trade-weighted basis versus [developed market] currencies, the euro in particular.” The ICE U.S. Dollar Index, a gauge of the buck’s strength against a half dozen rivals, was down 0.4% to 95.13, extending its decline of about 0.5% on Wednesday. The WSJ Dollar Index, a measure of the dollar against a basket of major currencies, was down 0.4% at 86.06. See full story
Fed keeps rates steady
-- The U.S. Federal Reserve left interest rates unchanged on Wednesday but strongly signaled it could still tighten monetary policy by the end of this year as the labor market improved further. The Fed said U.S. economic activity had picked up and job gains were "solid" in recent months. "The case for an increase in the federal funds rate has strengthened," the U.S. central bank said in a statement following a two-day policy meeting. It added that its rate-setting committee had decided against raising rates "for the time being," until there was more evidence of progress toward its employment and inflation objectives.
The Fed has held its target rate for overnight lending between banks in a range of 0.25 percent to 0.50 percent since December, when it raised borrowing costs for the first time in nearly a decade. The central bank has appeared increasingly divided over the urgency of raising rates. On Wednesday, Kansas City Fed President Esther George, Cleveland Fed President Loretta Mester and Boston Fed President Eric Rosengren dissented on the policy statement, saying they favored raising rates this week. See full story.
Fed poised to cut long-run rate forecast
-- U.S. Federal Reserve policymakers are set this week to again cut their forecasts for how high interest rates will need to go in an economy where output, productivity and inflation are growing at a slower pace than in past decades. It would be the fourth time in 15 months that the U.S. central bank has been forced to admit its estimate of this so-called neutral rate was too optimistic, raising questions about the health of the economy in the coming years. The Fed, however, still insists low interest rates and its large balance sheet of bonds are sufficient to continue bolstering economic growth.
Conversations with Fed officials suggest some will cut their predictions for the longer-run rate at this week's monetary policy meeting, with the median forecast possibly falling to 2.75 percent. It was 3.75 percent in June 2015 and 4.25 percent four years ago. The Fed is expected to leave its benchmark overnight interest rate unchanged following its two-day meeting on Wednesday, according to a Reuters poll of economists. See full story.