Ukraine began military drills as Russian forces tightened their hold on the Crimean peninsula and the Foreign Ministry in Moscow warned of “lawlessness” in the former Soviet republic’s eastern provinces.
Russia’s incursion into Ukraine has led to record options trading in a security that tracks corn, reflecting concern that supplies from the third-largest exporter will be disrupted if tensions escalate.
U.S. corn futures traded in Chicago are approaching a bull market and reached a six-month high last week as pro-Russian forces seized control of the Crimean peninsula, triggering speculation that demand for American exports will increase if Ukraine’s supplies become threatened.
Ukraine’s escalating crisis may boost demand for U.S. supplies, according to the U.S. Grains Council. While ports are open and vessels are loading, farmers may hold on to commodity supplies as a hedge against a declining currency, it said.
Exports from the U.S. surged 81 percent in the week ended Feb. 27 and sales have increased fivefold in the past four weeks compared with a year earlier.
A quick resolution to the Ukrainian crisis could ease sharp gains in corn prices, according to Don Roose of U.S. Commodities Inc. Prices jumped 5.5 percent last week, the largest increase since May.
Ownership of calls on the Teucrium Corn Fund (CORN) rose 333 percent percent since Jan. 21 to a record 23,360 on March 6, while open interest for puts increased 81 percent to 6,677. Among the 10 most-owned contracts on the corn fund, nine were calls, according to the data. -(Bloomberg)
LONDON (MarketWatch) — Europe’s benchmark stock index trended lower in choppy action on Monday, as investors weighed surprisingly weak Chinese export data, deal news from France and more taper talk from the U.S.
The Stoxx Europe 600 index XX:SXXP -0.17% slipped 0.2% to 332.33. On Friday, the benchmark ended with its first weekly loss since January after a week marked by increased tensions between Russia and Ukraine.
Also getting market attention, U.S. Federal Reserve Bank of Philadelphia President Charles Plosser told a panel in Paris that the U.S. central bank may have to speed up the pace of tapering its bond purchases to take into account the improving economy. Plosser, who is a voting member of the Federal Reserve’s policy committee, said that reducing the asset purchases is a step in the right direction, “but the pace may leave us well behind the curve if the economy continues to play out according to the FOMC forecasts”. -(Marketwatch)
European Central Bank officials aren’t happy with the recent strength of the euro, ECB Governing Council member Christian Noyer said Monday
"It’s clear that when the euro starts to strengthen it creates additional downward pressure on the economy and additional downward pressure on inflation. Both cases are not warranted at the moment," Mr. Noyer said in an interview with Bloomberg TV. "We are clearly not very happy at the moment."
He added a plan to encourage banks in France to bundle up packages of small-business loans and sell them to investors—an effort to make more credit available to firms—is nearing fruition. Banks should have new products available by the end of March or early April, he said.
Mr. Noyer said this securitization plan could then become a template for other countries where small businesses are struggling to get loans. - (Marketwatch)
NEW YORK (MarketWatch) — Federal Reserve officials are shifting their outlook on how to normalize monetary policy, according to a report by The Wall Street Journal’s Jon Hilsenrath on Monday . After a prolonged period of bond-buying stimulus programs and near-zero benchmark interest rates, the central bank is considering how to exit those policies. The potential new plan involves paying interest on excess reserves in the banking system, as well as holding down rates through a “reverse repos” tool in which the Fed trades with firms outside the banking system who lend it cash in return for interest. That’s a contrast with a previous plan to drain reserves from the system by letting Treasurys and mortgage-backed securities roll off its balance sheet as they mature, as well as using other technical tools, according to Hilsenrath. - (Marketwatch)
TRIPOLI (Reuters) - Libya threatened on Saturday to bomb a North Korean-flagged tanker if it tried to ship oil from a rebel-controlled port, in a major escalation of a standoff over the country’s petroleum
Below is a concise 2-page report recapping economic data from the U.S., Europe, and Asia released in February. My next report will cover recent geopolitical events (Ukraine; droughts in South Asia, etc.)
Investors are interpreting worsening economic data in major economies as transitory and manageable. Upcoming months will be key in discerning the genuine trend.
China’s exportsfell the most since the global financial crisis, dealing another blow to confidence as Communist Party leaders meeting in Beijing assess the risk from the nation’s first onshore bond default.
Shipments abroad dropped 18.1 percent from a year earlier, the customs administration said in Beijing yesterday, trailing the median estimatefor a 7.5 percent increase in a Bloomberg News survey of 45 economists. Imports rose 10.1 percent, more than projected, leaving a trade deficit of $23 billion, the biggest in two years.
Distortions in the data from the Lunar New Year holiday and fake invoicing that inflated numbers last year make it harder to assess the true picture. As the nation chases a 7.5 percent annual growth target, set at last week’s meeting of the National People’s Congress, officials need to contain stresses in the financial system from the credit boom that began with stimulus measures in 2008.
“People see a lot of negative news coming out of China: growth momentum is slowing and when there is a default of one company they tend to think it’s going to be a systemic problem and spill over into the rest of the economy,” said Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong. “These numbers may support their negative views, that even external demand may not be that strong.”
Even so, the drop in exports isn’t as bad as it appears when taking into account the holiday, the inflated base of last year’s numbers, and a weather-related “soft patch” in the U.S. economy, said Ding, whose forecast of an 8.5 percent decline in sales was closest to the customs figure.
Trade will be a “clear drag” on growth in the first quarter and the yuan should weaken this week, said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole SA in Hong Kong. “The trade data explain some of the downward pressure on the yuan in February — it can be justified not only by central bank guidance but by actual deterioration of demand and supply in the forex market.”
Analysts’ estimates for February exports ranged from a drop of 8.5 percent to a 14.4 percent increase. The decline, after a 10.6 percent gain in January, was the biggest since August 2009.
The increase in importscompares with the median forecast for a 7.6 percent gain and a 10 percent advance in January. The trade deficit compared with the median projection for an excess of $14.5 billion and a $14.9 billion surplus a year earlier.
“We will probably have to wait for next month’s data to get a true picture of the export situation but we shouldn’t worry too much,” said Wang Tao, chief China economist at UBS AG in Hong Kong, one of three analysts to predict a decline in overseas sales.
Exports for January and February combined declined 1.6 percent, the most for that period since 2009, according to previously released data, and compared with a 23.6 percent gain a year earlier. Wang estimates the underlying growth rate was about 6 percent.
Economists were split last month over whether January’s trade figures showed a re-emergence of inflated export invoices to disguise capital inflows after authorities started a crackdown in the second quarter of last year. The yuan’s decline last month may help squeeze out the practice, according to Australia & New Zealand Banking Group Ltd. — (Bloomberg)
Ouch. So the interpretations are as follows. Weather in the U.S., a high base last year, and holidays skewed the numbers. Furthermore the larger trade deficit is a sign that rebalancing is taking place, a necessary step in establishing a sustainable recovery.
The less benign interpretation is that external demand, a pivotal pillar that the Chinese leadership is depending on to smoothly carried out their reforms (a topic I covered in my macro outlook at the beginning of the year), has weakened considerably. A lower Yuan is an attempt to rectify the situation [currency wars?].
(Reuters) - President Vladimir Putin rebuffed a warning from U.S. President Barack Obama over Moscow’s military intervention in Crimea, saying on Friday that Russia could not ignore calls for help from Russian speakers in Ukraine.
After an hour-long telephone call, Putin said in a statement that Moscow and Washington were still far apart on the situation in the former Soviet republic, where he said the new authorities had taken “absolutely illegitimate decisions on the eastern, southeastern and Crimea regions.
"Russia cannot ignore calls for help and it acts accordingly, in full compliance with international law," Putin said.
Putin denies that the forces with no national insignia that are surrounding Ukrainian troops in their bases are under Moscow’s command, although their vehicles have Russian military plates. The West has ridiculed his assertion.
The most serious east-west confrontation since the end of the Cold War - resulting from the overthrow last month of President Viktor Yanukovich after violent protests in Kiev - escalated on Thursday when Crimea’s parliament, dominated by ethnic Russians, voted to join Russia. The region’s government set a referendum for March 16 - in just nine days’ time.
European Union leaders and Obama denounced the referendum as illegitimate, saying it would violate Ukraine’s constitution.
Obama announced the first sanctions against Russia on Thursday since the start of the crisis, ordering visa bans and asset freezes against so far unidentified people deemed responsible for threatening Ukraine’s sovereignty. Russia warned that it would retaliate against any sanctions.
Japan endorsed the Western position that the actions of Russia, whose forces have seized control of the Crimean peninsula, constitute “a threat to international peace and security”, after Obama spoke to Prime Minister Shinzo Abe.
China, often a Russian ally in blocking Western moves in the U.N. Security Council, was more cautious, saying that economic sanctions were not the best way to solve the crisis and avoiding comment on the legality of a Crimean referendum on secession.
The EU, Russia’s biggest economic partner and energy customer, adopted a three-stage plan to try to force a negotiated solution but stopped short of immediate sanctions.
The Russian Foreign Ministry responded angrily on Friday, calling the EU decision to freeze talks on visa-free travel and on a broad new pact governing Russia-EU ties “extremely unconstructive”.
Senior Ukrainian opposition politician Yulia Tymoshenko, freed from prison after Yanukovich’s ouster, met German Chancellor Angela Merkel in Dublin and appealed for immediate EU sanctions against Russia, warning that Crimea might otherwise slide into a guerrilla war.
Brussels and Washington rushed to strengthen the new authorities in economically shattered Ukraine, announcing both political and financial assistance. The regional director of the International Monetary Fund said talks with Kiev on a loan agreement were going well and praised the new government’s openness to economic reform and transparency.
The European Commission has said Ukraine could receive up to 11 billion euros ($15 billion) in the next couple of years provided it reaches agreement with the IMF, which requires painful economic reforms like ending gas subsidies.
Promises of billions of dollars in Western aid for the Kiev government, and the perception that Russian troops are not likely to go beyond Crimea into other parts of Ukraine, have helped reverse a rout in the local hryvnia currency.
Russian gas monopoly Gazprom said Ukraine had not paid its $440 million gas bill for February, bringing its arrears to $1.89 billion and hinted it could turn off the taps as it did in 2009, when a halt in Russian deliveries to Ukraine reduced supplies to Europe during a cold snap.
In Moscow, a huge crowd gathered near the Kremlin at a government-sanctioned rally and concert billed as being “in support of the Crimean people”.
Pop stars took to the stage and demonstrators held signs with slogans such as “Crimea is Russian land”, “We don’t trade our people for money” and “We believe in Putin”.
Ukrainian Prime Minister Arseny Yatseniuk said no one in the civilized world would recognize the result of the “so-called referendum” in Crimea.
He repeated Kiev’s willingness to negotiate with Russia if Moscow pulls its additional troops out of Crimea and said he had requested a telephone call with Russian Prime Minister Dmitry Medvedev.
But Putin’s spokesman Dmitry Peskov ridiculed calls for Russia to join an international “contact group” with Ukraine proposed by the West to negotiate an end to the crisis, saying they “make us smile”, Russian news agencies reported.
Despite the Kremlin’s tough words, demonstrators who have remained encamped in Kiev’s central Independence Square to defend the revolution that ousted Yanukovich said they did not believe Crimea would be allowed to secede.
Alexander Zaporozhets, 40, from central Ukraine’s Kirovograd region, put his faith in international pressure.
"I don’t think the Russians will be allowed to take Crimea from us: you can’t behave like that to an independent state. We have the support of the whole world. But I think we are losing time. While the Russians are preparing, we are just talking."
Ukrainian television was switched off in Crimea on Thursday and replaced with Russian state channels. The streets largely belong to people who support Moscow’s rule, some of whom have become increasingly aggressive in the past week, harassing journalists and occasional pro-Kiev protesters.
Part of the Crimea’s 2 million population opposes Moscow’s rule, including members of the region’s ethnic Russian majority. The last time Crimeans were asked, in 1991, they voted narrowly for independence along with the rest of Ukraine.
"This announcement that we are already part of Russia provokes nothing but tears," said Tatyana, 41, an ethnic Russian. "With all these soldiers here, it is like we are living in a zoo. Everyone fully understands this is an occupation." - (Reuters)
(Reuters) - The Federal Reserve is not about to back off its highly accommodative policy, though investor predictions of a rate rise by midway through next year are reasonable, an influential U.S. central banker said on Friday.
New York Fed President William Dudley outlined some bright spots in the long U.S. recovery from recession, calling U.S. economic prospects “reasonably favorable.”
But Dudley, a key Fed decision-maker alongside Chair Janet Yellen, stressed that the labor market is still hobbled…
Dudley did not comment specifically on the Fed’s bond-buying policy. And while his comments on the economy were relatively upbeat, his still-dovish stance on policy reinforces the notion that the Fed is nowhere near ready to tighten after more than five years of near-zero interest rates.
The market generally expects the Fed to raise rates “sometime toward the middle of 2015,” he said at Brooklyn College. “I think those are a very reasonable set of expectations based on what we know today, and our economic forecasts.”
According to forecasts published in December, 12 of the Fed’s 17 policymakers expect to start to tighten policy in 2015. Two officials predicted the move would come this year, and three said not until 2016.
Dudley noted that most market participants who closely follow the Fed are expecting a rate rise when the unemployment rate falls to around 6 percent.
Dudley, on a tour of the New York City borough, predicted sustained U.S. growth above 2.25 percent on the horizon, enough to boost the labor market. But he warned of “substantial underutilization” of both labor and capital resources.
"This implies, in turn, that the current, highly-accommodative stance of monetary policy will remain appropriate for a considerable time to come," Dudley told a small library auditorium of students and staff at the college.
The government report showed on Friday that the portion of Americans who either have a job or are looking for work held steady, despite a downward trend in this so-called labor force participation rate.
Dudley said that while the aging of the population is playing a role in the drop, he expects more Americans to return to the workforce. “The decline of the unemployment rate significantly overstates the degree of improvement in the labor market,” he said.
"Exactly where it’s going is not clear at this point," Dudley said. "Obviously we hope that cooler heads prevail." - (Reuters)
Frankfurt — Spring appears to be arriving early for the German economy as industrial production picked up speed in January, official data showed on Friday.
Industrial output expanded by 0.8 percent in January, after inching up by 0.1 percent in December, the economy ministry calculated in preliminary data.
Economic activity jumped by 4.4 percent in the construction sector, 1.1 percent in the energy sector and 0.3 percent in the manufacturing sector, the ministry said. (RCS: MoM basis)
Analysts were cheered by the better-than-expected numbers, particularly after factory orders also surprised to the upside in January.
"German ‘hard’ data confirm what soft indicators like the Ifo index had suggested: Germany’s economy kicked off 2014 on a very strong note," said Berenberg Bank economist Christian Schulz.
The expert said the mild winter weather probably played a role, as could be seen in the surge in construction output.
"The rude health of Germany’s domestic economy should enable Germany, and by extension the eurozone which benefits from German imports, to weather any potential turbulences emanating from the Ukraine crisis," Schulz said.
Capital Economics economist Jonathan Loynes said the new data “provide some hope that the economy’s main growth engine is starting to pick up some revs.”
The numbers “provide a solid base for the first quarter,” he said, but added: “There are reasons not to get too excited.”
The January data were helped by a weather-related boost to construction output “and we still think that the strong euro could temper the recovery even in Germany’s competitive industrial sector,” Loynes said.
ING DiBa economist Carsten Brzeski said German industrial production “returned as an important growth engine in January. This number gets even better when taking into account that December data was revised upwards from a 0.6 percent drop to a 0.1 percent increase.”
Looking ahead, the German economy “should gain further momentum,” Brzeski said.
"With the mild winter weather, the construction sector should be an important growth driver in the first quarter. Whether it is by looking through the window or by analysing economic data, this year, springtime seems to come early to Germany." Brzeski concluded. - (AP)
On a YoY basis, IP just hit its highest since late 2011 at 5%.
The U.S. economy generated 175,000 jobs in February despite harsh winter weather, but the unemployment rate ticked up for the first time in 14 months, the government reported Friday.
The steady pace of hiring last month — it was the biggest increase in three months — suggests the economy has not slowed as much as a recent spate of indicators appear to indicate. The unemployment rate, for example, edged up to 6.7% from 6.6% because more people entered the labor force in search of jobs. That’s usually a sign that workers think more jobs are available.
Yet economists say it may take another month or two to get a good read on the economy’s health because of unusually cold and snowy weather in the early part of 2014.
In February, hiring was strongest in professional services, education and bars and restaurants, the Labor Department said.
Retailers and information-service companies cut jobs.
Average hourly wages, meanwhile, increased 9 cents to $24.31, but the average workweek fell by 0.1 hour to 34.2 hours in a negative sign.
The civilian participation rate was unchanged at 63.0%.
Employment gains for January and December, meanwhile, were revised up by a combined 25,000. The number of new jobs created in January was raised to 129,000 from 113,000, while December’s figure was upped to 84,000 from 75,000. - (Marketwatch)
Overall a good report and better than expectations. Equities are up. The upward revisions were rather “blah” but a rise in the unemployment rate takes away the fear of an overheating in the labor market. This means that inflation may stayed subdued despite improving payroll numbers. Equity markets right now see this as a good development.
BEIJING—A Chinese solar-equipment maker on Friday failed to meet interest payments on a bond, according to a company official there, becoming China’s first domestic corporate bond default.
The default, though small in size, marks the first time a Chinese company has defaulted on a bond traded in the mainland, according to Moody’s Investors Service.
So far, the Chinese government and state-owned banks have largely kept risky borrowers afloat by providing bailouts or debt extensions, keeping borrowing costs low for companies with high debt.
That has led many investors to flock to Chinese corporate bonds on the belief they have an implicit guarantee, helping to fuel growth. Total corporate bonds outstanding rose more than tenfold to 8.7 trillion yuan at the end of January from the end of 2007, allowing even weak borrowers to tap funds at relatively low rates.
The default comes amid broader concerns about the impact of China’s slowdown in economic growth on the rising amount of debt among local government-connected financing vehicles as well as among some Chinese companies. Standard & Poor’s estimates China’s corporate debt could hit $13.8 trillion in 2014, surpassing that of the U.S. as the largest in the world.
The number of people seeking unemployment benefits dropped by 26,000 last week, to a seasonally adjusted 323,000, the lowest level in three months as layoffs remain at prerecession levels.
The Labor Department said on Thursday that the four-week average of applications, a less volatile measure, fell slightly to a seasonally adjusted 336,500. That indicates that firms are cutting few jobs and anticipate steady economic growth despite the winter slowdown. Applications are a rough proxy for layoffs.
Economists have estimated that 145,000 jobs were added last month. But there are signs that this forecast might be optimistic after a pair of lackluster reports released Wednesday suggested that winter storms hampered hiring in February.
A survey by the payroll processor ADP said private businesses added just 139,000 jobs last month. But that figure does not include state, local and federal government workers, unlike the coming Labor Department report. Most economists predict it will show that governments shed workers in February.
And a survey of service companies by the Institute for Supply Management found that its measure for hiring plunged 8.9 percentage points to 47.5, evidence that many companies let go of employees in February. Any reading above 50 indicates expansion in the group’s index. — (NYT)
The ISM Services employment sub-indicator caught my eye. Also notable is that the ISM manufacturing survey’s sub-index is at its lowest since mid last year. Definitely a lot of conflict reports. For example, Rasmussen’s employment indicator just rose to a 7-month high. Open to many interpretations ;-).
Given new market highs, a fast trigger-finger tomorrow on the futures market morning could net you some short-term gains if the report tomorrow disappoints significantly. Lots of people on the bull bandwagon (ie on the same side of the trade). 7:30 am!!!
William Dudley, president of the Federal Reserve Bank of New York, said that while harsh weather will slow growth during the first quarter, it won’t harm the economy enough to merit slowing the tapering of bond purchases.
The winter weather doesn’t prompt “a fundamental change in the outlook,” and “does not rise to the level where you change the taper path,” Dudley said at an event in New York today organized by the Wall Street Journal. “The threshold is pretty high to change it.”
“The economy should do better in 2014 than 2013,” Dudley said, predicting growth of about 3 percent. “The area of question” is the weather, which has been making analyzing economic data “more difficult” and will “depress economic activity” during the beginning of the year.
“As we get into the spring, we’ll see some of these weather effects dissipate,” he said.
Philadelphia Fed President Charles Plosser predicted the U.S. economy will expand 3 percent this year even after the harsh winter.
“I believe that weakness largely reflects the severe winter weather rather than a frozen recovery,” Plosser said today in a speech in London. “So, we must be wary of attaching too much significance to the latest numbers.”
“Unseasonably cold weather has played some role,” Yellen said in reply to a question during Feb. 27 testimony to a Senate committee. “What we need to do, and will be doing in the weeks ahead, is to try to get a firmer handle on exactly how much of that set of soft data can be explained by weather and what portion, if any, is due to softer outlook.”
The Fed should move away from its pledge to consider raising interest rates when unemployment falls below 6.5 percent given it’s “already a little bit obsolete,” Dudley said. Joblessness fell to 6.6 percent in January.
Dudley said he prefers a “qualitative” approach to guidance about the path of interest rates.
“We’re going to have to look at a broad set of labor-market conditions rather than one single indicator,” Dudley said.
The Fed should talk more about what happens after the first interest-rate increase, not just the timing of “liftoff,” Dudley said. Increases in borrowing costs will be “relatively gradual” because of the “persistent headwinds” to U.S. economic growth, he said.
“When you look at the U.S. today, I don’t really see much excess in terms of things that worry me about financial stability,” Dudley said. Still, there are some areas that may be overvalued, such as biotechnology stocks, leveraged loans and farmland, he said. — (Bloomberg)
German factory orders rebounded more than expected in January, driven by demand from outside the 18 countries using the euro.
Domestic orders increased 1.6 percent, while foreign orders overall rose 1 percent. Non-eurozone orders rose 7.2 percent, but orders from within the bloc dropped 8.8 percent.
ING economist Carsten Brzeski says the numbers send two important messages — that the near-term looks positive with industrial production gaining momentum, but that in the long term Germany needs greater domestic demand. - (abcnews.com)
Important to note the dichotomy between euro and non-euro orders.
The data come as Mr. Hollande struggles on nearly every other front. Economic growth is accelerating only slowly after two years of stagnation, the European Unionhas warned that France is falling far behind on its deficit reduction plans, and the president’s popularity has sunk to new lows with local elections just weeks away.
At the turn of the year, Mr. Hollande fought back, promising to forge a pact with business to cut taxes on labor in the hope that would spur investment and recruitment. He secured an initial victory on Wednesday when some labor unions and business groups signed off on plans for companies to make commitments on jobs in exchange for the tax cuts.
Additional tax cuts won’t come in until next year and the promise of a pact has so far failed to translate into the desired confidence boost.
Only 17% of French people are confident Mr. Hollande can resolve France’s problems, a new low for the socialist leader, according to a TNS Sofres’ poll of 1,000 people between Feb. 27 and March 3.
Analysts warned Mr. Hollande will struggle to use the unemployment numbers as a confidence boost as the slight fall in the rate is due mainly to government-sponsored contracts for young people rather than an economic recovery.
"This is a half-victory for François Hollande," said ING economist Julien Manceaux.
The apparent divergence between the quarterly statistics and the monthly data also tempers the boost for the French president.
The outlook for the trend remains bleak: the European Commission recently forecast unemployment will be stuck at high levels through this year and 2015. — (WSJ)
Here’s the bearish spin on the news. Overall, a wash.
France’s unemployment rate fell in the first quarter, handing an unexpected victory to President Francois Hollande, who is trying to revive the nation’s economy.
The unemployment rate dropped to 10.2 percent in the fourth quarter from 10.3 percent, national statistics office Insee said in an e-mailed statement. Economists had expected an increase, according to the median of six forecasts gathered by Bloomberg News.
The first decline in unemployment since Hollande came to power in May 2012 bolsters the Socialist president as he seeks to convince his own lawmakers to back a plan to trim payroll taxes to strengthen French competitiveness. France’s main business lobbies and three unions agreed yesterday to back the president’s plan, labeled “the responsibility pact.”
“The main thing is that unemployment has dropped, even if that drop is slight,” Agriculture Minister Stephane Le Foll said today on I-tele. “This should encourage us to stick to our policies. The French economy is re-starting and we need to support it.” — (Bloomberg)
SYDNEY, March 6 (Reuters) - Australian retail sales surged by the most in almost a year in January and exports jumped to record highs, clear evidence the resource-rich economyis stepping up a gear even as a boom in mining investment cools.
Likewise the country’s A$1.4 billion ($1.26 billion) trade surplus was the largest in almost three years as exports climbed 3.7 percent and dwarfed analyst estimates of A$400 million.
"People are choosing to spend more borrow more and save less, and that’s all too the good," said Michael Blythe, chief economist at Commonwealth Bank of Australia.
"That’s a key transmission mechanism of monetary policy and it shows the stimulus is working," he added. "The next move in rates is now likely to be up, albeit not until late this year."
The revival in retail spending was especially important as the A$270 billion retail sector accounts for 17 percent of Australia’s A$1.5 trillion in annual gross domestic product (GDP) and is the second-biggest employer after the health industry, with 10 percent of all jobs.
Indeed, it was a revival in consumption and a sustained surge in resource exports that lifted Australia’s economic growth to a stronger-than-expected 2.8 percent in the final quarter of 2013, the fastest pace in a year.
Exports continued their stellar run in January to hit a record A$29.8 billion, with farm goods up 5 percent and metal ores such as iron ore rising 3 percent.
Export growth for the year to January accelerated to 20 percent, the fastest in almost three years, as the hundreds of billions spent on mining projects turns into actual output. — (Reuters)
(Reuters) - A U.S. Federal Reserve policymaker who has long criticized its bond-buying stimulus said on Wednesday the program has lasted too long, and there are signs it is now distorting financial markets and encouraging risk-taking.
"There are increasing signs quantitative easing has overstayed its welcome: Market distortions and acting on bad incentives are becoming more pervasive," he said of the asset purchases, which are sometimes called QE.
Fisher, a voter on U.S. monetary policy this year, also praised Mexico’s moves to stimulate growth in the wake of the global recession. As for the United States, he repeated criticisms that the government has failed to take advantage of the five years of easy Fed money, missing its opportunity to restructure debt and to reform entitlements and regulations.
"I do think we have had some short-term weather impact but that can turn around very quickly," Fisher said, adding that warmer temperatures would boost consumption and industry.
Fisher, an outspoken policy hawk, pointed to soaring margin debt and the narrow spreads between corporate and Treasury debt as areas of concern.
In the stock markets, he said price-to-projected-earnings, price-to-sales ratios, and market capitalization relative to GDP are all at “eye-popping levels not seen since the dot-com boom” of the late 1990s.
Fisher said that while the Fed has no “clear plan” for draining some of the $2.5 trillion in reserves that have built up at banks, he was confident the Fed would find a “practicable” way to normalize its balance sheet and avoid inflation. — (Reuters)
In sector after sector and region after region, the weather played havoc on conditions, the report said. There were 119 separate mentions of the word “weather” in the Beige Book.
The assessment is not likely to stop the Fed from continuing its steady reduction in monthly asset purchases.
Fed Chairwoman Janet Yellen said it might be “months” before the Fed gets a good reading of economic conditions.
The Beige Book does “reinforce our bias, and that at the Fed, that the slowdown in economic activity is short-lived,” said Eric Green, global head of rates, foreign-exchange, and commodity research at TD Securities.
The Beige Book said that eight of the 12 Fed districts reported that economic conditions continued to expand though Feb. 24.
Weather impacted retail sales and manufacturing.
Not all of its effects were negative: many districts reported energy production was rising on increased demand. — (Marketwatch)
U.S. ISM non-manufacturing PMI falls to 43-month low of 51.6 in February
Ouch. Employment sub index fell into contraction for first time in 25 months. Looking under the hood of the report, the commentary surprisingly didn’t mention much about the weather, less than 30% of all the commentary. That caught my attention.
According to data released by Markit Wednesday, the composite output index in the euro zone beat expectations to rise to 53.3 in February, up from 52.9 in January and an earlier flash reading of 52.7. A Wall Street Journal consensus had estimated the figure to come in at 52.7. PMI for the services sector was recorded at 52.6, up from a flash estimate of 51.7 and January’s 51.6 reading.
“The survey suggests the region is on course to grow by 0.4-0.5% in the first quarter, which would be its best performance for three years,” Chris Williamson, Markit’s chief economist, said in a statement. — (IBTimes)
In a report, market research group Markit said that its Italian services purchasing managers’ index rose to a seasonally adjusted 52.9 last month from a reading of 49.4 in January. Analysts had expected the index to inch up to 49.8 in January.
Commenting on the report, Phil Smith, economist at Markit said, “These figures, alongside the sister survey data that showed continued growth in manufacturing, support the notion that Italy will see back-to-back quarterly increases in GDP.” - (Investing.com)
(Reuters) - U.S. auto sales in February finished even with the year-earlier period as hefty incentives to lure customers into dealerships late in the month could not overcome cold and snowy weather.
The annualized sales rate for the month finished at 15.34 million vehicles, just short of the 15.4 million expected by analysts polled by Reuters. It was the third month in a row that U.S. auto industry sales were weaker than expected.
Larry Dominique, executive vice president of industry research firm TrueCar, said there are about 80 days of supply on dealer lots, compared with a more desirable level of 60 to 65 days.
Monthly auto sales are typically an early indicator of consumer demand. But January and February are usually two of the slowest sales months every year.
For now, the incentives are not out of control, but Toprak warned, “it might get a bit out of control this summer and beyond if the pace of inventory accumulation does not slow down.”
The frost on sales for January and February will thaw in March as temperatures rise and customers return to showrooms in greater numbers, some industry analysts said.
"Despite all the challenges, it was a robust market," Felice said of February, "and we feel that as we head into March we’ll be in very good shape." — (Reuters)
What’s not mentioned is that car sales actually began weakening in September of last year. So the weather may be masking genuine consumer weakness right now. March looks to be a make or break month for figuring out where the truth actually lies.
Construction spending rose to a seasonally adjusted annual rate of $943.1 billion in January from a revised $941.9 billion in December. Spending is up 9.3% year-over-year. Private construction rose 0.5% month-over month, while public construction spending fell 0.8%. Public construction has been coming back recently and is slightly positive on a year-over-year basis. Year-over-year, private construction is up 12.3%. Residential construction rose 0.9% month-over-month and is up 13.9% year-over-year. Non-residential construction is up 6.5% year-over-year. - (Market Realist)
(Reuters) - The euro zone is not experiencing deflation, but the European Central Bank is alert to potential downside risks to price stability and will act if needed, ECB President Mario Draghi said on Thursday.
Giving no hint of any urgency to take action at the ECB’s policy meeting next Thursday, Draghi said households in the euro area are not deferring purchases, which would be a sign of deflation taking hold.
"With the average euro area inflation rate standing at 0.8 percent, we are clearly not in deflation," Draghi said in the text of a speech entitled ‘The Path to Recovery and the ECB’s Role’.
Draghi, who has previously warned of the risk of inflation getting stuck in a “danger zone” below 1 percent, said cheaper energy contributed to the low inflation rate and added that the ECB saw no evidence consumers were postponing expenditure plans.
The ECB saw the euro zone’s economic recovery taking hold gradually, he said, “albeit at a slow and uneven pace.”
After the ECB’s February 6 meeting, Draghi said the bank had decided not to act while it acquired more information on the growth and inflation outlook and assessed the impact on the euro zone of turmoil in emerging markets.
The ECB has set out two situations that could trigger fresh policy action: a deterioration in the medium-term inflation outlook and an “unwarranted” tightening of short-term money markets.
The central bank has already said it would keep its key interest rates at their present or lower levels. Draghi reiterated this so-called forward guidance, saying “we expect the key ECB interest rates to remain at current or lower levels for an extended period of time.” — (Reuters)
Financial data firm Markit said the final read of its U.S. Manufacturing Purchasing Managers Index rose to 57.1 in February, above both the preliminary read of 56.7 and expectations for a read of 56.6.
The new orders component rose to 59.6 from 53.9, above the preliminary read of 58.8 and the highest read for the subindex since April 2010.
"This to a large extent reflects a temporary rebound after supply chains and production had been disrupted by severe weather,” Chris Williamson, Chief Economist at Markit said in a statement. “While bad weather continued to hamper production at many companies in February, many also reported that weather-related issues were being overcome.”
Williamson added, “The upturn pushes the trend over the last three months to the strongest since May 2012, suggesting that the sector maintained robust underlying growth momentum throughout the winter months.”— (Reuters via CNBC)
(Reuters) - China’s services sector regained some momentum in February but its manufacturing sector struggled, separate surveys showed on Monday, with the divergence adding to the difficulty in assessing the strength of the economy at the start of 2014.
Data for the world’s second-largest economy has been mixed, and the Lunar New Year holidays have made it harder to assess momentum. Weak investment and declining manufacturing PMI readings have been countered by surprisingly buoyant exports and bank lending.
The official non-manufacturing Purchasing Managers’ Index (PMI) rose to a three-month high of 55.0 in February, while the final Markit/HSBC manufacturing Purchasing Managers’ Index fell to 48.5, its third straight decline.
That followed an official manufacturing PMI on Saturday which fell to an eight-month low of 50.2, just above the 50 level that separates contraction from expansion.
"It’s a domestic investment-led slowdown. You see exports strong, so external demand is fine," said Wei Yao, China economist at Societe Generale in Hong Kong. — (Reuters)
’s Finance Minister Lou Jiwei said growth as low as 7.2 percent would meet this year’s target of “about” 7.5 percent as he tried to moderate expectations for an economy at risk from swelling debt.
Expansion of 7.2 percent or 7.3 percent would be consistent with the goal announced yesterday, Lou said at a press briefing in Beijing today as part of the annual meeting of the National People’s Congress, the legislature. The key is employment, not the exact level of growth, he said.
The growing risk of default by Shanghai Chaori Solar Energy Science & Technology Co. may become China’s “Bear Stearns moment,” prompting investors to reassess credit risks as they did after the U.S. securities firm was rescued in 2008, according to Bank of America Corp.
“We doubt that the financial system in China will experience a liquidity crunch immediately because of this default but we think the chain reaction will probably start,” Hong Kong-based strategists David Cui, Tracy Tian and Katherine Tai wrote in a note yesterday. During the U.S. financial crisis, it took a year “to reach the Lehman stage” when investors began to panic and shadow banking froze, the strategists added. —(RCS: Go back to June 2007 when two Bear Sterns hedge funds went bust)
Chaori’s potential failure to pay investors would mark the first bond default in Asia’s largest economy, highlighting the strain in China’s $4.2 trillion bond market after a trust product issued by China Credit Trust Co. was bailed out in January. There haven’t been any defaults in China’s publicly traded domestic debt market since the central bank started regulating it in 1997, according to Moody’s Investors Service.
While everyone was focusing on the threat of tumbling debt dominoes in China’s shadow banking sector, a new threat has re-emerged: regular, plain vanilla corporate bankruptcies
…the Chinese Default Protection Team will have its hands full as soon as Friday, March 7, which is when the interest on a bond issued by Shanghai Chaori Solar Energy Science & Technology a Chinese maker of solar cells, falls due. That payment, as of this moment, will not be made, following an announcement made late on Tuesday that it will not be able to repay the CNY89.8 million interest on a CNY1 billion bond issued on March 7th 2012.
From the FT:
"The company has until March 7th to repay the interest, charged at an annual 8.98 per cent, the company said in a statement. “Due to various uncontrollable factors, until now the company has only raised Rmb 4m to pay the interest,” it said in the statement.
Trading in the Chaori bond, given a CCC junk rating, was suspended last July because the company suffered two consecutive years of losses. The company had a further RMB1.37bn loss in 2013, according to the results it posted on the exchange.”
Just pointing out the obvious here, but how bad must things be for the company to be on the verge of default not due to principal repayment but because two years after issuing a bond, it only has 4% in cash on hand for the intended coupon payment?
More from the FT:
"Though the bond is relatively small, a default could deliver a sharp shock to risk management strategies in China vast corporate debt market, estimated by Standard&Poor’s to be $12tn in size at the end of 2013.
Any default could also slow down new issuance. A Thomson Reuters analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260 per cent, from Rmb1.82tn to Rmb4.74tn, between December 2008 and September 2013.
In January, a Chinese fund company avoided a high-profile default, reaching a last-minute agreement to repay investors in a soured $500m high-yield investment trust, in a case that had sent tremors through global markets.”
Then again, those who follow China’s bond market will know that Chaori’s failure to pay interest would not really be the true first Chinese corporate default: recall as we reported almost exactly a year ago…
So yes: a prior default, and one by a solar company no less. However, going back down memory lane again, ultimately Suntech had the same fate as all other insolvent corporations in China do - it got a post-facto bailout… — (Zero Hedge)
China’s leaders spurred speculation they will allow the country’s $21 trillion debt mountain to inflate after refraining from cutting their annual economic-growth target.
Analysts at Australia & New Zealand Banking Group Ltd. and Nomura Holdings Inc. said authorities will need to loosen monetary policy, after Premier Li Keqiang yesterday announced a goal of 7.5 percent growth, the same target as last year. Li said China will seek an “appropriate” increase in credit.
Any easing would contrast with leaders’ efforts to rein in a $6 trillion shadow-banking industry and control the build-up of local-government debt that followed stimulus measures unleashed in 2008.
“I had hoped that they would pay more attention to curbing the risks but instead they focused on growth,” said Dariusz Kowalczyk, Hong Kong-based economist and strategist at Credit Agricole SA. “They will just have to pay the price of higher leverage and once they start to deal with this in earnest, the costs of solving the issue will be bigger.”
The combined debt of Chinese households, corporates, financial institutions and the government rose to 226 percent of GDP last year, up from 160 percent in 2007, Credit Agricole estimated in a report last month. GDP reached $9.4 trillion in 2013.
This year’s growth target is “flexible and guiding,” the National Development and Reform Commission said in a related report yesterday.
Li, who reiterated that China will pursue a “prudent” monetary policy, announced a target of 13 percent growth in M2, the government’s broadest measure ofmoney supply. That was the same target as last year, when M2 expanded 13.6 percent. The budget deficit as a percentage of GDP will be about the same as last year, Li said at the annual meeting of the legislature in Beijing.
“If they are pursuing a trajectory to slow down the pace of leverage they should target a slower M2 growth,” said Wang Tao, chief China economist at UBS AG in Hong Kong, who previously worked at the International Monetary Fund. “Without doing that it’s not clear.”
Not everyone saw a conflict between the growth target and China’s vow to introduce more market-driven change. Stable economic and labor-market conditions are “conducive for actually implementing the top-down reforms,” Qu Hongbin, chief China economist with HSBC Holdings Plc in Hong Kong, wrote in a note yesterday. “Reform and growth should support each other.” — (Bloomberg)
The focal point is the Government Pension and Investment Fund, the largest of Japan’s public pension funds with assets of Y124tn.
Currently, the GPIF benchmark portfolio is 60 per cent domestic bonds, 12 per cent domestic equities, 11 per cent foreign bonds and 12 per cent foreign equities, with the rest in cash.
The fund has a large chunk of domestic bonds, with an average maturity of six to seven years.
There is a widespread belief in Japan, shared by some in the GPIF, that government bonds are “safe” and stocks are risky, and that bonds are for pension funds and stocks for speculators.
Fifteen years of deflation and the 25-year decline of the Nikkei 225 index have reinforced this belief. There is insufficient consideration of the interest rate risk of long-dated bonds and the benefits of diversifying into a variety of asset classes.
The panel members unanimously agreed that the GPIF bond portfolio is exposed to too much risk from an expected rise in interest rates, a natural consequence of Prime Minister Shinzo Abe’s economic programme and Bank of Japan governor Haruhiko Kuroda’s 2 per cent inflation targeting.
The first and most important recommendation in the panel’s report is that the share of domestic bonds in the GPIF’s portfolio should be lowered, quickly. It should be reduced to 52 per cent as soon as possible, within the permitted deviation range for the benchmark of plus or minus 8 per cent.
The GPIF should then petition to lower the benchmark. The current norm for bond holdings of public pension funds in western countries is about 35-40 per cent (domestic and foreign combined). If the GPIF is to follow the best practice of global pension funds, the domestic bond share should be lowered to about 30 per cent and foreign bonds to 5-10 per cent.
…adopting PAYG may make sense in a country with a rising population, especially of working-age. But that clearly does not apply to Japan.
Any failure to undertake prompt reform will deprive future pensioners of asset growth. The current working generation will face higher contributions and lower benefits due to Japan’s rapidly ageing society. The GPIF offers the best hope of mitigating this adverse effect.
The current GPIF management is violating its fiduciary duty, and the Ministry of Health, Labour and Welfare will violate its mandate of increasing the welfare of workers if it fails to lower the benchmark share of domestic bonds for the GPIF.
So yeah I think this is a pretty big deal and keeps my thesis intact. Rather underreported as truly important news usually is. As Japan’s demographics change, pension funds will become natural sellers of JGBs. It’s important to note that a primary point opposing constant bearishness against JGBs over the past decade it seems was that these bonds were mostly owned by domestic residents and not subject to fickle foreigners. Pension selling marks generally one less buyer on the market.
A few calculations for my notes:
124 Trl Yen at 102.58/$ Ex rate = $1.209 Trl; 60% of that is 725.4 bln. Cut that down to 52% = 628.7 Bln means an initial sell order of JGBs of $96.7 bln. This is assuming that the +-8% corridor isn’t enforced (so the amount to be sold will likely be lower)
Ultimately a reduction of the pension’s bonds holdings by 50% (currently 60% to 30%) would mean an ultimate sell order of $362.70 bln (again assuming corridor isn’t enforced).
“Putin is behaving like the Soviet Union,” Andrei Zubov, a historian and professor in the philosophy department at Moscow State Institute of International Relations, which is affiliated with the Russian Foreign Ministry, said by phone. “He’s practically continuing the Brezhnev Doctrine. The sense of the Brezhnev Doctrine was to say that there’s a certain space outside the Soviet borders which is ours. That’s what Putin is continuing.”
Ukraine occupies a special place in the Russian psyche. Home to the first organized eastern Slavic state, it ceded power to Moscow in the 14th century and remains the stuff of Russian myth. With much of eastern Europe now in the EU and NATO, Ukraine is both Putin’s last line of defense and the nucleus of his planned Eurasian economic union. — (Bloomberg)
President Vladimir Putin’s brinkmanship in Ukraine has already cost some of his closest comrades billions of dollars. The other 144 million Russians may also pay a price.
“Russia will be the big loser of the crisis in Ukraine,” said Timothy Ash, chief emerging-market economist at Standard Bank Group Ltd. in London. “There’ll be a big hit to domestic and foreign confidence, less investment and likely increased outflows, likely losses for Russian banks with exposure in Ukraine, a weaker ruble and weaker growth and recovery.”
The tensest standoff with the West since the end of the Cold Waris exposing the weakness of an economy rebuilt on the back of the energy industry. With oil and gas accounting for more than half of all exports and energy prices stagnant, the growth potential is all but exhausted, prompting officials in Moscow to sound the recession alarm even as the country’s main trading partners recover.
This is what I had in mind after thinking it through (see my initial thoughts here:
"The central bank failed to sound a deflation alert.
“At present there is no reason to expect that overall prices will drop sharply and exert deflationary pressure on the entire economy,” policy makers wrote in their monthly report, signed off by the governor.
That governor was Yasuo Matsushita and the report was published in January 1998. Within six months, Japan’s consumer prices excluding food began falling in a trend that would mark the next 15 years.
The concern now for economists from Barclays Plc to Morgan Stanley and JPMorgan Chase & Co. is that European Central Bank President Mario Draghi risks making the same mistake as the Bank of Japan — publicly playing down a deflation threat — and ultimately may have to introduce quantitative easing.
Among a series of similarities between 1990s Japan and modern-day Europe: Weak economic expansion after a series of shocks? Tick. A reluctance by banks to lend? Tick. A rising exchange rate? Tick. A debatable monetary-policy stance? Tick.
“Until too late, the Bank of Japan didn’t think Japan was going to be entangled with deflation,” said Kenji Yumoto, vice chairman of the Japan Research Institute Ltd. and an economic adviser to the government in the late 1990s. “The ECB still can’t be complacent. Europe is lucky to have Japan’s case study.”
Draghi maintains the euro area isn’t turning Japanese, even as he accepts that soft inflation will linger and the International Monetary Fund warns his economy may be prone to deflation if it’s hit by a shock. Medium-term inflation expectations among economists and in the financial markets remain “firmly anchored” around the ECB’s goal of just below 2 percent, and the region is strengthening, he told reporters Feb. 6 in Frankfurt.
Price pressures in the wake of Europe’s debt turmoil are similar to those following past periods of economic stress and not much worse than in the U.S., Draghi said. The weaknesses that do exist are less pervasive than in 1990s Japan and are mainly in nations, such as Greece, that must rein in prices and wages to restore competitiveness, he added.
“We don’t see much of a similarity with what happened in Japan,” Draghi said. “There’s certainly going to be a subdued inflation — a low inflation — for an extended, protracted period of time, but no deflation.”
Bank lending to companies and households has shrunk for more than 18 months, and financial fragmentation across the region means the ECB’s easy monetary policy isn’t trickling down to all. Stress tests the central bank will conduct this year may encourage a further hunkering down.
Inflation expectations also can be misplaced. A 2012 study by the Bank of Japan found it took until 2003 for economists to predict zero inflation on a long-run horizon. Barclays says while investors are signaling European inflation will be under control in five years, the options market now prices in a 20 percent chance of below-zero inflation in the next 12 months, compared with less than 10 percent six months ago. In some ways, Europe is worse off than Japan because it lacks a single financial market and has been axing budgets.” — Bloomberg
The meeting of the North Atlantic Council, consisting of the ambassadors to NATO of the 28 alliance nations, was called by Poland under the rarely invoked Article 4 of NATO’s founding treaty. That article states that allies can consult “whenever, in the opinion of any of them, the territorial integrity, political independence, or security of any of the parties is threatened.” - (Marketwatch)