August 14, 2014

BOK Cuts Rate for 1^st Time Since May 2013 to Boost Growth

• Risking inflaming record household debt as it backs government efforts to spur the economy
• Lowered the interest rate to 2.25 from 2.5
• Last month, BOK added 11.7 trillion won ($11.3 billion) stimulus
• Lower borrowing costs could encourage households to add to debt that was 135% of disposable income at the end of 2013
• Reduction follows the decision to expand a lending program for smaller firms by 3 trillion won
• Also unveiled the fiscal package and other measures aimed at boosting credit and encouraging companies to distribute more of their profits in wages and dividends
• Lower borrowing costs, combined with looser rules for home mortgages may accelerate the growth of household debt
• The government plans to boost household income and create more jobs to address the debt issue

Thought

Along with additional government stimulus, BOK decreases interest rate to boost economic growth. This decreased interest rate will take time to interfere economy. The government's goal is to expand real estate. Market already expected BOK to cut the rate; the market reflected the rate before it is announced.

China Seen Taking Steps to Aid Growth After Credit Plunge

• China’s ▼ in credit expansion last month and unexpected slowdown in investment spending flashed warnings on growth
• A property slump and dangers from rising bad loans are making it tougher to sustain the growth in China
• Tools include programs such as pledged supplementary lending that can direct credit to the economy, cuts in reserve requirements or interest rates, and fiscal spending on railways and affordable housing

Euro-Area Pickup Stalls as Big Economies Fail to Grow

• GDP was unchanged QoQ; ▲0.7% YoY
• Germany’s economy ▼0.2% QoQ, the first contraction since 2013
• France unexpectedly stagnated. Italy experienced recession with GDP ▼0.2% QoQ
• Spanish economy expanded at the fastest pace since 2007
• Consumer price ▼0.7% MoM compared with ▲0.1% last month; ▲0.4% YoY
• Core consumer price ▼0.8% MoM, and ▲0.8% YoY
• The Ukraine crisis is also weighing on the economies of eastern Europe
• The Czech unexpectedly stagnated last quarter and Romania’s economy ▼1% QoQ
• Polish growth slowed to 0.6% from 1.1%, and Hungary’s expansion cooled to 0.8% from 1.1%, while still beating estimates

Thought

Slow growth in euro area is anticipated and already reflected in the market. All important economic indicators such as PMI, factory orders and retail sales implied that growth in E.U. was slow down (and somehow contracted) in Q2.

As Ukraine crisis eased and additional stimulus is expected from ECB, the second half will rebound its economy. Yet there are sill risks. As U.S. quickly recovers from the recession, it may start tapering sooner than anticipated. It may effect financial market and therefore E.U.

France Risks EU Deficit Clash After Scrapping Targets

• The French government abandoned its 2014 deficit targets after the economy unexpectedly failed to growth for a second straight quarter
• Risking a clash with European partners striving to meet their own fiscal goals
• French GDP stagnated in Q2; 0% changed (forecasted ▲0.1%)
• The European Commission has already allowed France to delay deficit targets twice in the wake of the region’s sovereign debt crisis
• “While the Q2 weakness should remain temporary for Germany, France remains mired in stagnation due to lack of reform. We expect France to continue to underperform the currency area as a whole.”

Jobless Claims in U.S. Rise to Highest Level in Six Weeks

• Jobless claims ▲ by 21,000 to 311,000, the highest in six weeks (forecasted 295,000)
• The jump represents a departure from a run of low readings that showed employers had been holding firm on staffing levels in order to keep up with demand
• More muted firings typically pave the way for acceleration in job growth
• Employers added more than 200,000 workers to payrolls in July for a six straight month – the first time that’s happened since 1997. Employment ▲209,000 after a 298,000 increase in June
• The jobless rate ▲ to 6.2% from almost six-year low of 6.1%
• Job openings ▲ in June to the highest level in more than 13 years

Thought

This jobless claims is announced weekly. It means that it is highly volatile. Yes, jobless claim increased this week yet the job market is significantly improving (yet Yellen said that there is still room for improvement).

London Leads U.K. Housing Slowdown After Carney Warnings

• An index values in London ▼ to 10 from 30 in June, the lowest since March 2011
• Also shows that surveyors have cut their forecast for price growth as stricter lending rules and the prospect of increased borrowing costs weigh on the market
• In July, demand in the capital ▼ at the fastest pace in six years, after a surge in prices over the previous year stretched affordability and prompted concern a bubble may be forming