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

August 7th, 2014

ECB Holds Rates as Ukraine Turmoil Menaces Recovery Hopes

• The ECB kept interest rate unchanged at record lows as Ukraine crisis gets worse
• Deposit rate -0.1% and marginal lending rate 0.4%
• Draghi says that conflict in Ukraine and sanctions against Russia is hurting trade
• “The euro-zone recovery is very fragile and the macro situation fluid. Expect Draghi to elaborate on spillover risks from the Russia-Ukraine crisis.”
• Large-scale asset purchases are an option for dealing with a severe economic shock
• The Bank of England’s Monetary Policy Committee also kept its key interest rate unchanged
• At a record-low 0.5% while its bond-purchase plan stayed at $631 billion

Thought
    Market would expect an additional stimulus to boost economy. Even Italy's recession and ▼ German factory order was due to geopolitical risks, it is obvious that euro-area is not expanding as what it expected.
     Unemployment rate is still high, consumer spending and inflation rate are still below is target. Will E.U. go over the financial crisis (even though it is going over now) soon without additional monetary/fiscal policy? I doubt it. Tensions are getting higher everyday and there are pessimistic economic data showing that its monetary policy is not working enough.

Jobless Claims Fall as Average Drops to Eight-Year Low

• Fewer Americans filed applications for unemployment benefits
• A sign the labor market continues to gain momentum
• ▼14,000 to 289,000 (forecasted ▲ to 304,000)
• Companies are holding on to more workers in an effort to keep up with increased orders and stronger consumer demand, contributing to a virtuous cycle of growth as the economy accelerates
• Fewer layoffs and more jobs would support further gains in income and household spending
• U.S. employers added more than 200,000 works to payrolls in July
• Climbed by 209,000 after 298,000 gain in June, while the jobless rate ▲ to 6.2%
• More Americans entered the labor force seeking work
• Federal Reserve policy makers are monitoring the labor market’s progress as they wind down their stimulus program. Yet they  said that there is still room for improvement

Thought
     Consumer and household spending takes about 70% of economy. As more people seek for job and hired, it is more likely that consumer and household spending will rise. It is also a good sign that the Fed thinks that there is a room for improvement in the labor market. It means that the Fed will keep the low interest rate while purchasing bonds.

Consumer Credit in U.S. Rise on Demand for Car, Student Loans

• ▲$17.3 billion in consumer credit followed a $19.6 billion in May
• Non-revolving loans, including borrowing for cars and college tuition, climbed $16.3 billion
• Revolving credit, which includes credit-card balances, ▲$914.5 million, the smallest advance since February, after a $1.74 billion gain in May
• Stronger employment and gains in home values are giving households the confidence to borrow and make big-ticket purchases such as cars and appliances
• Banks also are showing greater willingness to lend, which could boost consumer demand

Thought
     Even consumer credit declined compared with last month, it still raised by $17.3 billion this month. While labor market shows a significant improvement, other data like manufacturing PMI (55.8 in July), Core Durable Goods Order increased 1.4% in June and Consumer Confidence level increased to 90.9 in June as well.
     So I believe that lower level of consumer credit is not a big concern since the economy is expanding; people don't need to use a lot of credits to buy things. Of course, it is related with household spending but other data shows that household spending is increasing.

S&P500 ▼0.56%, and DJIA ▼0.46% as well. Utilities, which was declined by 1.28% yesterday, had a comeback rise by 1.14%. Russian sanction on U.S., 28 nations of E.U., Australia and Canada on their meat, fish, fruits and other food was one of the main issues in the market. Despite jobless claim was lower than forecast, it wasn't big enough to stop the decline.

USD has been appreciated by 0.03%. Geopolitical risk gets greater and there was no surprise in ECB monetary policy committee. Yet, Draghi speech suggested that economic contraction in EU is temporarily made no big change in EUR/USD currency market.

Sources:

http://www.bloomberg.com/news/2014-08-07/ecb-holds-rates-as-ukraine-turmoil-menaces-recovery-hopes.html

http://www.bloomberg.com/news/2014-08-07/jobless-claims-in-u-s-fall-as-average-drops-to-eight-year-low.html

http://www.bloomberg.com/news/2014-08-07/consumer-credit-in-u-s-rises-on-demand-for-car-student-loans.html