Daily Economy Watch keeps an eye on events that affect your hard asset portfolio. View archives.
BOJ shocks markets with more easing
-- BOJ Governor Haruhiko Kuroda portrayed the board's tightly-split decision to buy more assets as a preemptive strike to keep policy on track, rather than an admission that his plan to reflate the long moribund-economy had derailed. But some economists wondered if pushing even more money into the financial system would be effective as long as consumer confidence continues to worsen and demand remains weak.
"It's clearly a big surprise given Kuroda's repeated insistence that policy was on track and assorted politicians have been warning about the negative side of a weak yen currency," said Sean Callow, a currency strategist at Westpac. "We salute the BoJ for admitting that they weren't going to reach their goals on inflation or GDP, though we do note that the new policy equates to about $60 billion of quantitative easing per month. This perspective does raise the question of just how much impact monetary policy is having." See full story.
Trade, defense buoy U.S. economy
-- A smaller trade deficit and surge in defense spending buoyed U.S. economic growth in the third quarter, but domestic demand slipped, hinting at some loss of momentum. Gross domestic product grew at a 3.5 percent annual pace, the Commerce Department said on Thursday. However, the pace of growth in business investment, housing and consumer spending slowed from the second quarter. "The report was broadly constructive, but with weakness emerging in housing and consumption spending, we expect the pace of growth to slip further in the fourth quarter," said Millan Mulraine, deputy chief economist at TD Securities in New York.
Despite decelerating from the second quarter's robust 4.6 percent growth rate, it was the fourth quarter out of five that the economy has expanded at or above a 3.5 percent clip. The data came one day after the Federal Reserve ended its asset purchasing program and said there was sufficient underlying strength in the economy to continue whittling away at unemployment. The dollar rose against a basket of currencies on the growth data, and U.S. stocks gained. Prices for U.S. Treasury debt also were trading higher. See full story.
Fed ends QE3, sends upbeat signals
-- The Federal Reserve voted on Wednesday to end its bond-buying stimulus program commonly known as QE3 and sent several upbeat signals to markets that it was not worried about global weakness, low inflation or a wobble in financial markets. In the statement, the Fed left unchanged its pledge that rates would remain near zero for a “considerable time.” But it qualified the statement, saying that if the economy improves faster than expected, than the first rate hike could come sooner than anticipated.
The statement also made a major change to the Fed’s view on labor markets. Instead of seeing “significant underutilization” in the labor market, which was in the September statement, the Fed now said that underutilization in labor resources “is gradually diminishing.” On inflation, the U.S. central bank dismissed concern with the drop in inflation expectations seen in financial markets. It said that surveys of longer-term inflation expectations have “remained stable.” It said that low inflation has been held down by low energy prices and “the likelihood of inflation running persistently below 2% has diminished somewhat since early this year.” See full story.
Dollar declines after weak data
-- The dollar fell on Tuesday on disappointing U.S. durable goods and home price data ahead of a Federal Reserve policy meeting. Given recent signs of slowing in U.S. business activity and with inflation below the Fed's 2 percent target, analysts and traders widely expect the U.S. central bank to telegraph it would be unlikely to raise rates before mid-2015, although it will likely end its third round of quantitative easing. The Federal Open Market Committee, the Fed's policy-setting group, begins a two-day meeting on Tuesday and is scheduled to release a statement at 2 p.m. EDT Wednesday.
"The data definitely missed expectations, but the market is still treading water until after the FOMC meeting," said David Rodriguez, quantitative strategist at DailyFX in New York. The U.S. Commerce Department said orders for big-ticket items such as airplanes fell 1.3 percent in September following an 18.3 percent plunge in August. Analysts had expected a 0.5 percent rise last month. On the real estate front, S&P and Case-Shiller reported their index of home prices in 20 U.S. cities fell 0.1 percent in August, contrary to an expected 0.1 percent rise. See full story.
Services, pending home sales slower
-- U.S. services sector activity dipped to a six-month low in October, while manufacturing output in Texas dipped, pointing to some moderation in economic growth early in the fourth quarter. Other data on Monday showed contracts to buy previously owned homes rebounded less than expected in September, an indication that the housing recovery remains gradual. "Home sales are probably not going to do much but business activity in general is still pointing to a solid underpinning for the U.S. economy," said Jacob Oubina, senior U.S. economist at RBC Capital Markets in New York.
Financial data firm Markit said its preliminary or 'flash' services sector purchasing managers index slipped to 57.3 last month, the lowest reading since April, from 58.9 in September. A reading above 50 signals expansion in the vast services sector. The index, which was dragged down by a fall in a new business sub-index, has declined for four straight months. "The October readings indicate that the pace of economic growth looks set to moderate in the fourth quarter, down to perhaps 2.5 percent," said Chris Williamson, chief economist at Markit in London. See full story.
Home sales more modest after revisions
-- Purchases of new houses in the U.S. rose in September, and revisions showed the magnitude of the unfolding recovery was more modest. Sales (increased 0.2 percent to a 467,000 annualized pace, in line with the median forecast of economists surveyed by Bloomberg, Commerce Department data showed today in Washington. The August rate of 466,000 was 7.5 percent weaker than previously estimated, and data for the prior two months also were revised down.
Home sales are struggling to accelerate as Americans find mortgages difficult to obtain and wage gains barely keep pace with inflation. The recent drop in borrowing costs will probably help prop up the residential real estate market heading into 2015, which will give the world’s largest economy a lift. “This was going to be a very lengthy recovery for the housing sector, and we still have a long way to go,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida, the second-most accurate new-home sales forecaster over the past two years, according to data compiled by Bloomberg. See full story.
Eurozone manufacturing grows
-- The euro-area economy may have moved one step away from another recession. A Purchasing Managers’ Index showed manufacturing in the region unexpectedly grew this month, while Spain’s economy showed signs of a further recovery, with third-quarter unemployment dropping to the lowest level since 2011. In Germany, factories rebounded from a slump in September. “The euro-zone recovery still has some legs,” said Martin van Vliet, an economist at ING Bank in Amsterdam. “However, even if the recovery has not ground to a complete halt, growth remains much too weak for anyone’s comfort.”
The 18-region economy failed to grow in the second quarter, and European Central Bank President Mario Draghi has warned of a deflationary spiral of falling prices, with households postponing spending. While the PMI reports lifted stocks and the euro, they also highlighted weak spots as manufacturing demand fell and French factories continued to struggle. See full story.
CPI means Fed can keep rates low
-- The cost of living in the U.S. barely rose in September, restrained by decelerating prices for a broad array of goods and services that signal the Federal Reserve can keep interest rates low well into 2015. The consumer-price index climbed 0.1 percent after decreasing 0.2 percent in August, a Labor Department report showed today in Washington. Over the past year, costs increased 1.7 percent, the same as in the 12 months through August. While plunging fuel costs are one reason for the restraint in pricing, clothing retailers, medical-care providers and airlines are also among those keeping a lid on charges.
With inflation falling short of the Fed’s goal, policy makers need not rush to raise rates even as the world’s largest economy shows no sign of succumbing to a slowdown in global growth. “Inflation remains very tame,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York, and the top forecaster of the consumer price index over the past two years, according to data compiled by Bloomberg. “For now, it gives the Fed the green light to keeping monetary policy accommodative. Over the long haul, they’d prefer to see inflation go up a little.” See full story.
ECB looking at corporate bond buys
-- The euro fell sharply against the dollar on Tuesday after Reuters reported the European Central Bank was looking at buying corporate bonds as soon as December in its efforts to revive the stagnating euro zone economy. The move, if realized, would expand the private-sector asset-buying program the ECB began on Monday, adding to the number of new euros the bank can put into circulation without politically controversial purchases of government bonds. "Headlines on the market today about the ECB potentially buying corporate bonds has reinvigorated attention on the downside for the euro," said Richard Cochinos, head of Americas G10 FX strategy at Citi in New York.
"What the headlines have done is remind the market that essentially policy is dynamic and alternative options could potentially be considered,” he said. "That reinforces market confidence in (ECB chief) Mr Draghi's pledge to increase the bank's balance sheet by a significant amount," said Lee Hardman, a strategist with Bank of Tokyo-Mitsubishi in London. "The ECB is still under pressure to do more." See full story.
European leaders pivot to debt crisis
-- European leaders jolted by the sudden return of debt-crisis turmoil will gather for talks in Brussels this week as they attempt to restore investor confidence in the euro area. After a week when European stocks went into meltdown, leaders including German Chancellor Angela Merkel and French President Francois Hollande will meet for a two-day summit beginning Oct. 23 with the region’s economy back on the agenda.
“It’s a wake-up call to the entire euro-zone leadership that the strategy that they have been following, with a strong fixation on the fiscal deficit targets, is not working,” Charles Dallara, the former chief of the Institute of International Finance, said in an interview Oct. 17. The EU’s 28 leaders prepare to meet as echoes of the crisis that emerged in Greece in late 2009 reverberate around them, with a slump in government bonds in peripheral countries and a global stock-market decline of more than $3 trillion so far this month. The economy of the 18-nation euro area stagnated in the second quarter and inflation, at 0.3 percent last month, isn’t seen returning to the European Central Bank’s target of just under 2 percent before 2017. See full story.
Sentiment rises despite Ebola fears
-- While the appearance of the deadly Ebola virus in Texas is worrying the nation, it has yet to lead Americans to take a more cautious view over how to spend their money, data suggested on Friday. The Thomson Reuters/University of Michigan index of consumer sentiment unexpectedly rose in early October to its highest level since July 2007. Separate data showed groundbreaking for new homes rose more than expected last month, and taken together the reports pointed to solid U.S. economic growth.
"The underlying strength of the U.S. economy remains intact," said David Berson, an economist at Nationwide Mutual Insurance in Columbus, Ohio. "If it were not for Ebola and geopolitical concerns, these (sentiment) numbers would be higher." The data for the sentiment survey was collected between Sept. 25 and Oct. 15, a period in which Americans have been barraged by news of Ebola's spread in West Africa, where it has killed thousands, and its appearance in the United States. See full story.
Fed official wants to keep up QE
-- The Federal Reserve should keep buying bonds for longer than planned in the face of volatile markets and falling inflation expectations, a top U.S. central banker said on Thursday, even as another Fed policymaker warned against an over-reaction. James Bullard, president of the St. Louis Fed, is the only official at the central bank to publicly suggest putting on hold the Fed's widely telegraphed plan to halt its asset-purchase program later this month. Yields on U.S. bonds, which have plunged the last few days, rebounded after his comments. "We can go on pause on the taper at this juncture and wait until we see how the data shakes out into December," Bullard said on Bloomberg Television. "Inflation expectations are dropping in the U.S. and that is something that a central bank cannot abide."
"A reasonable response by the Fed in this situation would be to invoke the clause ... that says the taper was data dependent," he added.Encouraged by strengthening U.S. growth and falling unemployment, the Fed has incrementally tapered its bond buying program from $85 billion originally to $15 billion this month. It was set to shutter the program at a policy meeting Oct. 28-29, a plan that Fed Chair Janet Yellen may well stand by. See full story.
U.S. data signal delayed Fed rate hike
-- The U.S. dollar hit a three-week low against the euro and a more than one-month low against the yen on Wednesday after weak U.S. economic data on retail sales and producer prices heightened concerns that the Federal Reserve would delay its first rate hike. Commerce Department data showed U.S. retail sales dropped 0.3 percent in September, while the Labor Department said prices received by U.S. producers fell 0.1 percent in September, the first decline in more than a year. The data bolstered traders' views that the U.S. Fed would hold off on raising rates from rock-bottom levels. A rate hike is expected to boost the dollar by driving investment flows into the United States.
"The tone right now is to bet that the Fed will wait longer," said Thierry Albert Wizman, global interest rates and currencies strategist at Macquarie Ltd in New York. "The outperformance of the dollar over the past several months was largely related to the expectation that growth would outperform in the U.S.," said Brian Daingerfield, currency strategist at the Royal Bank of Scotland in Stamford, Connecticut. "The concern that U.S. growth momentum will slow has been heightened," he said. See full story.
Germany slashes growth forecasts
-- Germany slashed its growth forecasts for this year and next, citing a weak global economy amid a series of international crises, in a step that follows a slew of poor data for Europe's biggest economy. The economics ministry cut its forecast for economic growth this year to 1.2% from an earlier forecast of 1.8%, and to 1.3% for 2015 from 2% previously. "The German economy is in choppy waters concerning foreign trade," Sigmar Gabriel, minister for economics and energy, said in a statement.
The cut for 2014 was broadly expected after the economics minister warned in a radio interview in late September that growth could come in below the earlier 1.8% forecast, given the tensions between Russia and Ukraine. In Tuesday's statement, the ministry said achieving better growth next year will depend on international factors improving, but added that Germany's robust jobs market and domestic demand remain intact. The government's latest forecast comes after the closely watched ZEW survey showed a sharp drop in economic sentiment and follows several weak German data releases, notably August's steepest on-the-month fall in exports since the 2009 recession. See full story.
Fed’s Fischer warns on global growth
-- Treasury note futures rose as comments from Federal Reserve Vice Chairman Stanley Fischer fueled speculation the central bank may push back the timing for raising interest rates. Money-market derivatives signal that the central bank won’t increase its almost-zero policy rate target until the fourth quarter of 2015. While the Fed is set to end its bond-buying this month, the prospect of monetary tightening has been tempered by concern regarding flagging global economic growth.
“If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise,” Fischer said in an Oct. 11 speech at the IMF’s annual meetings in Washington. Minutes of the Fed’s September meeting released Oct. 8 showed authorities highlighted concern that deteriorating growth abroad and a stronger dollar may hurt the domestic economy by curbing exports and damping inflation. See full story.
Inflation descends near danger zone
-- Federal Reserve officials are hunting for new tactics to raise price increases to their target as slowing global growth, cheaper commodities and flat wages sound warnings that inflation is descending toward the danger zone. The Fed needs a clear strategy for getting the inflation rate higher after falling short of its 2 percent target for 28 consecutive months. Now, as longer-run inflation expectations erode in financial markets, the Federal Open Market Committee is shifting its focus toward prices after putting its main emphasis on jobs for months. Several officials worried that “inflation might persist below” the committee’s target for “quite some time,” minutes from the Sept. 16-17 meeting said.
Too-low inflation “is getting to be a real issue again,” said former Fed Governor Laurence Meyer. With inflation at 1.5 percent according to the Fed’s preferred index, Meyer said FOMC policy makers aren’t likely to raise interest rates, even if the economy approaches full employment, defined as a jobless rate of 5.2 percent to 5.5 percent. Unemployment was 5.9 percent last month. “The timing of the first rate hike is all about inflation,” said Meyer, now a senior managing director at Macroeconomic Advisers LLC in Washington. See full story.
Stocks plunge on growth concerns
-- The Standard & Poor’s 500 Index plunged the most since April, erasing its biggest rally this year, on concern that slowing growth in Europe will hurt the American economy as the Federal Reserve ends its bond purchases. The S&P 500 dropped 2.1 percent to 1,928.26 at 4 p.m. in New York, after rallying 1.7 percent yesterday. The Russell 2000 Index sank 2.7 percent. Both gauges had their worst day since April. The Dow Jones Industrial Average lost the most since February, sinking 334.78 points, or 2 percent, to 16,659.44. That cut its gain this year to 0.5 percent.
“The fear is that global interest rates are so low that there’s risk of deflation, and the economic recovery, which has shown some steady progress, is now deteriorating,” Timothy Ghriskey, who helps oversee $1.5 billion as chief investment officer for Bedford Hills, New York-based Solaris Asset Management LLC, said in a phone interview. “The news out of Europe is nothing new, but it’s come to front and center now with Draghi’s new comments.” Equities extended losses today after European Central Bank President Mario Draghi said there are signs the euro-area’s economic growth is slowing and policy makers must lift inflation from an “excessively low” level. Separately, a report by four economic institutes said Germany’s economy is on the verge of recession. See full story.
Fed weighs concerns over stronger dollar
-- Several top Federal Reserve officials wanted last month to rewrite their guidance that short-term interest rates were likely to stay low “for a considerable time” but held off in part because of concern that the market would view that as a fundamental shift in policy, according to minutes of the meeting released Wednesday. The central bankers were also worried about the economic impact of the stronger dollar. The Fed staff trimmed its medium-term GDP forecast because of the stronger currency.
Some Fed officials said that persistent weakness in Europe would lead the dollar to strengthen too much, pinching exports. The stronger currency was also seen as potentially slowing the expected gradual increase in inflation. They also fretted about slower growth in China and Japan as well as unrest in the Middle East and Ukraine. The market took a dovish tilt to the minutes, with U.S. stocks extending gains after the 2 p.m. Eastern release. Fed officials discussed how to change the guidance, with several ideas floated, but all generally agreed it would be a challenge to do so without sending unintended signals to markets. See full story.
IMF cuts global outlook
-- The International Monetary Fund cut its outlook for global growth in 2015 and warned about the risks of rising geopolitical tensions and a financial-market correction as stocks reach “frothy” levels. The world economy will grow 3.8 percent next year, compared with a July forecast for 4 percent, after a 3.3 percent expansion this year, the Washington-based IMF said. U.S. growth is helping lead a worldwide acceleration that’s weaker than the fund predicted 2 1/2 months ago as the outlooks for the euro area, Brazil, Russia and Japan deteriorate.
“In advanced economies, the legacies of the pre-crisis boom and the subsequent crisis, including high private and public debt, still cast a shadow on the recovery,” the IMF said in its latest World Economic Outlook. “Emerging markets are adjusting to rates of economic growth lower than those reached in the precrisis boom and the postcrisis recovery.” The outlook buttressed the case made by IMF Managing Director Christine Lagarde, who warned last week that officials need to act to prevent a prolonged period of sluggish growth, a trend she called the “New Mediocre.” Raising growth in emerging and advanced economies “must remain a priority,” the IMF report stated. See full story.
Eurozone sentiment falls in October
-- Sentiment in the euro zone dropped for a third consecutive month in October, hitting its lowest level since May 2013, suggesting the single currency bloc will fall into recession, a survey by Sentix showed on Monday. Sentix research group's index tracking morale among investors in the euro zone tumbled to -13.7 in October from -9.8 the previous month. That undershot the consensus forecast in a Reuters poll for a reading of -11.5. "While expectations were only just below the zero-mark in September, they are now clearly in negative territory and that means a technical recession in the euro zone - two consecutive quarters of contraction - is ever more likely," Sentix said in a statement.
"It's conspicuous that neither the European Central Bank's rhetoric nor its measures were able to drive up investors' expectations of the economy this month," Sentix added. Last week the ECB laid out plans to buy rebundled packets of debt within weeks to shore up the flagging euro zone economy and its president said the bank would do more if needed. See full story.
Stagnant wages support Fed patience
-- Even as unemployment slips below 6 percent, Federal Reserve policy makers have a reason to keep interest rates near zero: inflation is too low and wages aren’t growing. Average hourly earnings were unchanged in September and up 2 percent over the past 12 months, according to today’s employment report from the Labor Department, which showed the jobless rate dropped to a six-year low of 5.9 percent. “The earnings data was the weak spot,” said Thomas Costerg, economist at Standard Chartered Bank in New York. “Fed officials such as Chair Janet Yellen, Vice Chair Stanley Fischer and New York Fed President William Dudley are likely to call for continued patience” on interest rates.
Costerg said Fed officials will also note that market measures of inflation expectations have fallen over the past two months after gains in the dollar and plunging prices of crude oil and other raw materials signaled slowing global growth. The Bloomberg Commodity Index (BCOM) is down 6.3 percent this year. Investors expect inflation to average 1.61 percent over the next five years, down from 2 percent at the start of August, according to differences in yields on government inflation-indexed bonds and U.S. Treasuries of similar maturity. While the labor market is improving, stagnant wages are keeping a lid on prices. See full story.
ECB stands pat on rates
-- The European Central Bank kept interest rates unchanged at record lows Thursday, as officials wait to see if aggressive stimulus measures announced in June and September are enough to boost inflation from ultralow rates and provide a lift to the eurozone's fragile economy. The ECB left its main refinancing rate, the rate it charges on its regular loans to banks, at 0.05%, an all-time low that it set at its previous meeting in September. The deposit rate on overnight bank deposits parked at the ECB was kept at minus 0.2%. ECB President Mario Draghi signaled after last month's cuts that the central bank had reached the bottom on interest rates.
Last month, the bank also announced a purchase program of bundles of bank loans known as asset-backed securities and covered bonds. Mr. Draghi is expected to announce more details about these plans at a news conference in Naples, Italy, starting at 2:30 p.m. local time. The ECB typically holds two meetings a year away from its Frankfurt headquarters. The aim of the new purchase programs--as well as a four-year loan facility to banks at extremely low rates--is to boost the ECB's balance sheet by up to EUR1 trillion ($1.3 trillion) and convince financial markets and the public that inflation will get back to the ECB's goal of just under 2%, despite being at a five-year low of 0.3% last month. See full story.
Weak demand hits global factory activity
-- Dwindling demand hurt factory activity across much of Asia and Europe in September, and mixed manufacturing indicators in the Americas on Wednesday raised the chances of slower global economic growth in the months ahead. China's manufacturing sector barely expanded, while Britain's slumped, and the drop in new orders did not even spare Germany, the strongest member of the euro zone currency bloc, or France, its No. 2 economy.
Eurozone factories' final September purchasing managers' index from private data vendor Markit was 50.3, down from 50.7 in August, and its lowest reading since July last year, as new orders contracted for the first time in more than a year. The U.S. manufacturing industry expanded in September, though at a slower pace than in August. See full story.