Daily Economy Watch keeps an eye on events that affect your hard asset portfolio. View archives.
Fed vows patience on rates
-- The Federal Reserve said it will be patient on the timing of the first interest-rate increase since 2006, replacing a pledge to keep borrowing costs near zero for a “considerable time,” and raised its assessment of the labor market. “The committee judges that it can be patient in beginning to normalize the stance of monetary policy,” the Federal Open Market Committee said today in a statement in Washington, replacing a calendar-based phrase with language that gives it more flexibility to respond to economic data. It said the new guidance is “consistent” with its previous “considerable time” wording.
The reference to “patience” signals policy makers “are trying to give themselves more flexibility,” said Jay Bryson, global economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “This puts the onus on the data and they can interpret what patience means.” The labor market “improved further,” the Fed said. “Underutilization of labor resources continues to diminish,” it said, dropping the word “gradually” used in its previous statement. In a press conference following the statement, Fed Chair Janet Yellen said central bankers will react to economic data as they unfold. While the Fed is “unlikely to begin normalization process for at least the next couple of meetings,” she said, “the timing of the initial rise in the fed funds target as well as the path for the target thereafter are contingent on economic conditions.” See full story.
Rate jump fails to stop ruble crash
-- The ruble plummeted into a freefall, losing as much as 19 percent as panic swept across Russian financial markets after a surprise interest-rate increase failed to stem the run on the currency. The ruble sank beyond 80 per dollar, a record low, before rebounding after Economy Minister Alexei Ulyukayev denied speculation that the government would turn to foreign-exchange restrictions to stop Russians from converting money into dollars. It was trading at 68 per dollar, down 5.4 percent on the day, at 8 p.m. in Moscow. Bonds and stocks also tumbled, with the RTS equity gauge dropping the most since 2008.
“I am speechless,” Jean-David Haddad, an emerging-market strategist at OTCex Group in Paris, said in an e-mailed message. He said policy makers need to consider currency controls as “the last solution” to halt the ruble’s 52 percent plunge this year. “What a failure for the central bank.” The scope and speed of the ruble’s retreat indicate policy makers are losing control of the situation as the six-month, 49 percent tumble in oil robs President Vladimir Putin of the hard currency he needs to sustain an economy that’s faltering under the weight of international sanctions. The selloff in Moscow is spreading across the globe, prompting nervous investors to pull money from other developing nations amid concern that Russia’s financial struggles and the tumble in oil signal a global economic slowdown. See full story.
Dollar up ahead of Fed
-- The U.S. dollar rose against the euro on Monday on expectations that the Federal Reserve will take a less-dovish stance on monetary policy at the end of a two-day meeting on Wednesday, while risk aversion on lower oil prices underpinned the yen. Bets that the Fed would take a less-accommodative stance on monetary policy and remove the phrase "considerable time" in reference to its timeline for raising rates supported the dollar. Analysts said the Fed could do so on signs of improvement in the U.S. economy, including the labor market.
"The market is setting up for a less-dovish-sounding FOMC this week," said Martin Schwerdtfeger, a foreign exchange strategist at TD Securities in Toronto. Higher interest rates are expected to boost the dollar by driving investment flows into the United States. The dollar's gains against a basket of major currencies, including the euro and Swiss franc, did not carry over to the Japanese yen, which rose against the greenback despite Japan's Prime Minister Shinzo Abe and his ruling coalition securing an election win on Sunday. See full story.
Wholesale prices fall more than forecast
-- Wholesale prices in the U.S. fell more than forecast in November, led by the biggest drop in energy costs in more than a year, signaling inflation pressures remain weak even as the world’s largest economy is expanding. The 0.2 percent decrease in the producer-price index followed a 0.2 percent advance in the prior month, a Labor Department report showed today in Washington. The median forecast of 75 economists surveyed by Bloomberg called for a 0.1 percent decline. Costs were up 1.4 percent over the past 12 months, the smallest year-to-year gain since February.
Oil at a five-year low and slowing overseas markets will subdue prices in the production chain that feed into the cost of living. Persistently weak inflation has allowed Federal Reserve policy makers, who are scheduled to meet next week, room to keep interest rates near zero after ending monthly asset purchases in October as the economy strengthens. “Pipeline inflation pressures are weakening,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, who correctly projected the drop in costs. “The weakness isn’t too surprising given the sharp drop in energy prices, and the stronger dollar is exerting downward pressure. We are going to see PPI stay low.” See full story.
Retail sales climb 0.7% in November
-- Plunging gasoline prices have allowed cash-strapped consumers to spring for restaurant meals in the last few months. Now, they’re hungry for more than dinner. Retail sales climbed 0.7 percent in November, the most in eight months, with demand improving in 11 of 13 major store categories. The gains come as the average price of a regular gallon of gasoline has sunk 29 percent from this year’s peak in April, giving Americans a few extra dollars to spend each week.
At first, consumers probably considered the relief in gas prices to be temporary, largely relegating that marginal income to dining out, said Steven Blitz, chief economist at ITG Investment Research Inc. in New York. Now households may perceive the plunge at the pump to be longer lasting and are comfortable broadening their spending to items including books and electronics, he said. “Initially it’s considered transitory -- it’s found money -- and it looks like that went to restaurants,” Blitz said. “The hint that we get in November is that some of this money looks like it financed discretionary spending. That could be because it’s the holidays, and it could be because people think the drop in gas prices is permanent.” See full story.
Oil Price Hit by OPEC Numbers
-- Oil took a fresh drubbing today as OPEC reduced its estimate for 2015 demand, Kuwait offered new discounts to Asian customers and the Saudi oil minister questioned the need for a production cut.
“Why should I cut production?” Ali Al-Naimi, Saudi Arabia’s oil minister, said in response to reporters’ questions today in Lima, where he’s attending United Nations climate talks. “This is a market and I’m selling in a market. Why should I cut?”
The Organization of Petroleum Exporting Countries cut the forecast for how much crude it will need to produce next year by about 300,000 barrels a day to 28.9 million a day, the least since 2003. The group’s three largest members, Saudi Arabia, Iraq and Kuwait, are offering oil to Asian buyers at the deepest discounts in at least 6 years.
For the full story: http://www.bloomberg.com/news/2014-12-10/opec-says-2015-demand-for-its-crude-will-be-weakest-in-12-years.html
China debt curbs spur market tumble
-- China stepped up efforts to curb the expansion of opaque local-government debt, sparking a tumble in riskier bonds and fueling the stock market’s biggest retreat in five years. Bonds rated below AAA or sold by issuers graded lower than AA are no longer allowed for use as collateral in short-term loans obtained through repurchase agreements, the nation’s clearing agency for exchanges said yesterday. Notes issued by local government financing vehicles paced losses in lower-rated debt today, while the nation’s benchmark stock index sank 5.4 percent as some investors sold liquid assets as an alternative source of cash.
While the change caught traders off guard, authorities in the world’s second-largest economy are trying to rein in the use of lightly-regulated LGFVs as they promote the development of a more transparent municipal bond market. Fitch Ratings Ltd. estimates local government liabilities have climbed to about 30 percent of gross domestic product as cities and provinces take on debt to sustain growth amid the nation’s weakest annual expansion since 1990. Investors had “under-priced the credit and liquidity risks,” said Ken Hu, the Hong Kong-based chief investment officer for Asia-Pacific fixed income at Invesco Ltd., which which oversaw $790 billion of assets at the end of October. “It’s definitely a wake-up call.” See full story.
OECD: Eurozone at risk of contraction
-- Economic growth is set to slow in the eurozone, according to leading indicators released Monday by the Organization for Economic Cooperation and Development, placing the currency area at risk of a slide back into contraction. The Paris-based research body said its gauges of future economic activity--which is based on information available for October--also pointed to slowdowns in the U.K. and Russia, while suggesting growth in most of the world's other large economies will remain at current rates over coming months.
The leading indicators add to concerns that economic activity may once again start to decline in the eurozone. The currency area emerged from 18 months of falling output in the second quarter of 2013, but has struggled to embark on a significant recovery. Its economy grew by just 0.2% in the third quarter, having expanded by 0.1% in the second. "In the euro area the CLI (composite leading indicator) continues to indicate a loss of growth momentum, particularly in Germany and Italy," the OECD said. "Stable growth momentum, however, is expected for France." See full story.
U.S. added 321,000 jobs in November
-- The U.S. added 321,000 new jobs in November to mark the biggest gain in nearly three years, extending the strongest streak of hiring in several decades. Virtually every industry added employees, and many of the new jobs were in fields that pay well. Hiring was also revised up by a combined 44,000 in the prior two months, offering more evidence that the U.S. economy could be gearing up for its best year of growth in 2015 since the end of the Great Recession.
The nation’s unemployment rate, meanwhile, held steady at a six-year low of 5.8%, the Labor Department reported Friday. The acceleration in hiring and plunging unemployment rate, however, have yet to translate broadly into rapidly rising wages for workers, the telltale sign of a full-blown recovery. What might be holding back wage growth is a large pool of some 18.1 million people who want a full-time job but still can’t find one. See full story.
It’s official: America is now No. 2
-- There’s no easy way to say this, so I’ll just say it: We’re no longer No. 1. Today, we’re No. 2. Yes, it’s official. The Chinese economy just overtook the United States economy to become the largest in the world. For the first time since Ulysses S. Grant was president, America is not the leading economic power on the planet. It just happened — and almost nobody noticed. The International Monetary Fund recently released the latest numbers for the world economy. And when you measure national economic output in “real” terms of goods and services, China will this year produce $17.6 trillion — compared with $17.4 trillion for the U.S.A.
As recently as 2000, we produced nearly three times as much as the Chinese. To put the numbers slightly differently, China now accounts for 16.5% of the global economy when measured in real purchasing-power terms, compared with 16.3% for the U.S. This latest economic earthquake follows the development last year when China surpassed the U.S. for the first time in terms of global trade. See full story.
Private hiring shy of forecasts
-- U.S. private employers added 208,000 jobs in November, falling short of economists' expectations, a report by a payrolls processor showed on Wednesday. Economists surveyed by Reuters had forecast the ADP National Employment Report would show a gain of 221,000 jobs. October's private payrolls were revised up to 233,000 from the previously reported 230,000. Private employers have now added jobs for 57 straight months at an average rate of about 186,000 per month.
"The labor market continues to make steady progress," Ahu Yildirmaz, vice president and head of the ADP Research Institute, said on a conference call following the data's release.The ADP figures come ahead of the U.S. Labor Department's more comprehensive nonfarm payrolls report on Friday, which includes both public and private sector employment. Economists polled by Reuters are looking for total U.S. employment to have grown by 230,000 jobs in November, up from 214,000 in October, with private-sector hiring seen at 218,000 compared with 209,000 the month before. The unemployment rate is seen holding steady at 5.8 percent, its lowest since July 2008. See full story
Dollar index highest since March 2009
-- The ICE U.S. Dollar Index reached its highest level since March 2009 Tuesday as global economic data highlighted the increasing disparity between growth in the U.S. and elsewhere. The dollar Index, a measure of the greenback’s strength against a basket of six currencies, was up 0.76% to 88.6150.The largest driver of the index’s gains was the euro, which hit a 28-month low against the dollar as investors sold the shared currency ahead of Thursday’s meeting of the European Central Bank’s Governing Council.
Win Thin, head of emerging-market currency strategy at Brown Brothers Harriman & Co., said the dollar’s broad rally Tuesday is a sign that the trend that began over the summer remains intact, despite some consolidation seen over the past few sessions. The dollar hit a fresh record high against the ruble Tuesday after Russia’s economy ministry warned the country will slip into recession in 2015, and that the ruble will likely remain weak. West Texas Intermediate crude oil remained below $70 a barrel, which also weighed on the ruble. See full story.
Black Friday sales tumble 11%
-- Even after doling out discounts on electronics and clothes, retailers struggled to entice shoppers to Black Friday sales events, putting pressure on the industry as it heads into the final weeks of the holiday season. Spending tumbled an estimated 11 percent over the weekend from a year earlier, the Washington-based National Retail Federation said yesterday. And more than 6 million shoppers who had been expected to hit stores never showed up.
Consumers were unmoved by retailers’ aggressive discounts and longer Thanksgiving hours, raising concern that signs of recovery in recent months won’t endure. Retailers also were targeted by protesters, who called on consumers to boycott Black Friday to make a statement about police violence. Still, the NRF cast the decline in a positive light, saying it showed shoppers were confident enough to skip the initial rush for discounts. Consumer spending fell to $50.9 billion over the past four days, down from $57.4 billion in 2013, according to the NRF. It was the second year in a row that sales declined during the post-Thanksgiving Black Friday weekend, which had long been famous for long lines and frenzied crowds. See full story.
U.S. data point to slowing growth
-- U.S. consumer spending rose modestly in October and a measure of business spending plans fell for a second straight month, suggesting some slowing in the pace of economic growth. But other data on Wednesday showed consumer confidence approaching a 7-1/2-year high in November, a reminder of the economy's relative resilience in the face of faltering global demand. "Momentum is weakening in the fourth quarter. While there is no reason to be pessimistic, it curbs some of the enthusiasm we had seen after the strong growth of the past two quarters," said Thomas Costerg, an economist at Standard Chartered Bank in New York.
The soft figures suggest anemic wage growth continues to weigh on spending, which economists thought would get a lift from falling gasoline prices. Income increased 0.2 percent in October after a similar gain in September. In another report, the department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, declined 1.3 percent in October for a second straight month. The drop in so-called core capital goods orders points to an ebbing in the robust pace of spending on equipment in the second and third quarters, and suggests the economy is not fully immune to Japan's recession and cooling growth in China and Europe. See full story.
Consumer confidence retreats in November
-- One month after hitting its highest level in seven years, consumer confidence unexpectedly retreated in November, a sign that consumers are less optimistic about the U.S. economy as the holiday shopping season begins, the Conference Board reported Tuesday. An overall gauge of consumer confidence fell to 88.7 in November from 94.1 in October, the New York-based research group said. The drop erased all of October’s gain and left the index at its lowest level since June.
The decline in November was primarily due to reduced optimism about the short-term outlook, said Lynn Franco, director of economic indicators at the Conference Board. “Consumers were somewhat less positive about current business conditions and the present state of the job market; moreover, their optimism in the short-term outlook in both areas has waned,” Franco said. See full story.
GDP in Q3 likely to be lowered
-- The U.S. probably didn’t grow quite as fast in the third quarter as originally estimated, but that’s unlikely to prevent the economy from posting another solid performance in the waning months of 2014. Economists polled by MarketWatch predict gross domestic product will be shaved to 3.3% from 3.5% when the government updates its third-quarter figures for the first time. The revised GDP report will be issued Tuesday at 8:30 a.m. Eastern.
Milder growth in exports and business investment are seen as primary reasons for the downward revision. Consumer spending, on the other hand, still appears to have been fairly firm in the third quarter and a bevy of reports point to an increase in household purchases in the last three months of the year. Consumer spending drives more than two-third of U.S. economic activity. See full story.
China’s central bank cuts interest rates
-- China cut lending rates for the first time in more than two years, in an acknowledgment that its piecemeal efforts to bolster its flagging growth have failed. The People’s Bank of China said it cut its benchmark one-year loan rate by 0.4 percentage point to 5.6%. The last time China cut lending rates was July 2012. The PBOC also cut its benchmark one-year deposit rate by 0.25 percentage point to 2.75% and gave banks greater flexibility in setting deposit rates, allowing them to offer interest of 1.2 times the benchmark rate instead of 1.1 times. Such a move could help banks attract deposits, potentially giving them the ability to lend more.
The surprise move by the People’s Bank of China on Friday comes amid wide expectations that the world’s No. 2 economy could miss its annual growth target — set this year at about 7.5% — for the first time since the late 1990s. Growth in investment, factory production, exports and retail sales all slowed in October. The economy grew by 7.3% year-over-year in the third quarter, its slowest pace in more than five years. Still, Beijing had refrained from more drastic measures such as an across-the-board lending-rate cut like Friday’s move or a massive spending binge like the one that spurred growth following the 2008 global financial crisis. See full story.
U.S., Eurozone, China sound growth warnings
-- Surveys sounded warning bells for the global economy on Thursday as euro zone businesses grew less quickly than any forecaster expected, and China and U.S. factories lost momentum. The downbeat data, alongside evidence of further price-cutting, will add to calls for more policy action from the European Central Bank, while the first drop in Chinese manufacturing output for six months will heap similar pressure on authorities in Beijing. "It does reinforce the case for quantitative easing from the European Central Bank," said Alan Clarke, European economist at Scotiabank, of the euro zone PMIs.
In China, the world's second biggest economy, the HSBC/Markit manufacturing PMI reading showed a drop to a six-month low of 50.0 in November. The factory output sub-index fell to 49.5, its first contraction since May. The U.S. manufacturing sector growth also slowed in November, falling to its lowest rate since January while a gauge of new orders also fell for a third straight month, an industry report showed on Thursday. See full story.
Fed worries about inflation expectations
-- Many Federal Reserve policy makers last month said they should be on the lookout for signs of a decline in expectations for inflation, minutes of their meeting show. “Many participants observed the committee should remain attentive to evidence of a possible downward shift in longer-term inflation expectations,” according to a record of the Oct. 28-29 Federal Open Market Committee meeting released today in Washington. “Some of them noted that if such an outcome occurred, it would be even more worrisome if growth faltered.”
Fed Chair Janet Yellen and her colleagues last month focused on improvements in the labor market when they announced an end to their stimulative bond purchases. They also said that the risk of inflation remaining persistently below their goal had ebbed. The minutes show the members “continued to expect inflation to move back to the committee’s 2 percent target over the medium term as resource slack diminished in an environment of well-anchored inflation expectations.” Consumer prices as measured by the Fed’s preferred gauge have slowed to a gain of 1.4 percent in September from a year earlier and have remained below the target for 29 consecutive months. See full story.
Wholesale inflation up, trend muted
-- U.S. producer prices unexpectedly rose in October, but the underlying trend continued to point to a benign inflation environment that could bolster the Federal Reserve's resolve to keep interest rates very low a bit longer. The Labor Department said on Tuesday its producer price index increased 0.2 percent, driven by a jump in prices for services, after slipping 0.1 percent in September.
However, the so-called core PPI, which excludes food, energy and trade services, edged up only 0.1 percent after dipping 0.1 percent in the prior month. "There is no inflation pressure building that could cause the Fed to want to move earlier in terms of their (rates) lift off," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.The U.S. central bank has kept its short-term rates near zero since December 2008, and most economists expect the first rate hike in mid-2015. See full story.