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

August 6th, 2014

Italy Recession, German Orders Signal Euro-Area Struggle

• Italy’s economy shrank 0.2% in the Q2 after contracting 0.1% in Q1
• It is a preliminary estimate. Will be updated on Aug. 14 along with Germany, France and Spain
• 74.0% Service industries, 23.9% manufacturing, 2.1% Agriculture
• “Today’s data are a serious reason for concern and confirm that the euro-area recovery is still sluggish at best”
• However, its industrial production ▲0.9% MoM in July; compared with -1.2% in June
• German Factory Orders ▼ 3.2% in June from May
• The E.U. agreed last week on its widest-ranging sanctions on Russia
• Russia counts Germany as its biggest trading partner in Europe
• German Vice Chancellor blocked a deal for Rheinmetall AG to build a military training center east of Moscow in light of the sanctions

Thought
    Even ECB proposes negative interest rate to boost economy and inflation, geopolitical risks and unemployment hold back its effect. For example, even Italy's unemployment rate fell to 12.3% from 12.6% in June, it is still higher than EU unemployment rate (10.4%).

     Germany's factory order has been decreased by geopolitical risks as well. It is not about it's policy or economic environment. Its economy expects to rise once the risks are solved.

U.K. House Prices Rise at Fastest Pace Since 2006

• U.K. house prices ▲1.4% MoM in July (▲0.4% forecasted); -0.4% in June
• “Demand continues to be supported by a continuing economic recovery, growth in employment, improving consumer confidence and low mortgage rates”
• The market is cooling after stricter lending rules took effect; the price may decrease soon
• There is “uncertainty over the true state of the housing market”

U.K. Industrial Production Increases Less Than Forecast

• Industrial Production ▲0.3% in June (forecasted ▲0.6%), when it ▼0.6% in May
• ▲1.2% YoY (forecasted ▲1.5%); ▲2.3% in May
• Output in Q2 rose 0.3%, below 0.4% estimated published in last month’s GDP data
• Manufacturers battling a stronger pound and strains in the euro area
• Last week, new orders survey was 51.5
• Showing that factory growth cooled to the slowest pace in a year in July as new orders and output cooled

Thought
     Since few days ago, IMF kept warning that overpriced housing may hurt U.K. economic expansion. U.K. recently got out from recession and fully expanding its economy. Interest rate, which will be decided tomorrow, will be the key for its future growth. BOE would decline the interest rate if it believes housing price is too high, but it is unlikely that the global economy is yet to be fully expanded.

Trade Gap Shrinks to Five-Month Low as U.S. Imports Drop

• The trade deficit in the U.S. unexpectedly narrowed in June
• The biggest drop in imports in a year
• The economy moved closer to energy independence
• The gap ▼7% to $41.5 billion (forecasted $44.8 billion)
• Imports dropped 1.2%
• The drop in purchases of foreign goods include decline in autos and cellular phones, while petroleum imports were the lowest in more than three years
• Yet it seems like to be rebounded by growing household spending and business investment
• Exports ▲0.15 to a record $195.9 billion
• Sales of civilian aircraft, pharmaceuticals and chemicals were among the biggest gainers
• Mixed signals
• Recent data signal a mixed performance for growth outside the U.S.
• In the U.K. index of services expanded in July to the highest level, while a similar measure in the euro area grew less than initially estimated
• China’s growth accelerated for the first time in three quarters after the government speed up spending and freed up more money for loans to counter a property slump

     It was quite a dynamic day. Even the index stayed almost stayed constant, but there were a lot of ups and downs in the market today. Geopolitical risks hit the market, which contributed to decline industrial sectors. Decline in energy import and oil stock raised energy sector.

Despite recession in Italy and decline in factory order in Germany, EUR/USD stayed almost constant, increased by 0.01%

Japan

The Japanese prime minister Abe came out with three economic plans to expand its economy

1.  Increase in government spending ($182 billion)
2. Radical quantitative easing ($1.4 trillion)
3. Depreciated Yen (19% since 2013)
4. Targeted inflation rate by 2% (increase in sales tax)

It was successful from the beginning.

As we can see, GDP of Japan continuously increases since the second quarter of 2013. It means that fiscal and monetary policy are working well in the economy. The BOJ keeps buying buying bonds which increase money supply that cause inflation. While it keeps interest rate low (0%), it looks for expansion of consumer expenditures.

But there are issues in second quarter. Even Yen has been depreciated by 30% from the peak in fourth quarter of 2011, export was declined by 2% in June. Even more, market survey like PMI, balance trade and retail order declined in past months. It happens after the government decided to increase the tax sale by 8% in April 1st, 2014. The consumer expenditure decreased, which eventually decreased PMI and retail order. Economic growth in China also doesn't look strong enough that eventually decreased Japanese exports by 2.2%.

The core of Abenomics is to restore exports level while increase consumer expenditure. With increase in sales tax, however, economic expansion would stop where it is now. 

Japan trade deficit expands after exports unexpectedly drop from a year earlier

•    Exports ▼2% while imports ▲8.4% YoY
•    Declined 5.1% in electrical machinery exports
•    Exports to U.S. ▼ by 2.2%; automobile shipments ▼ by 6.8%, 3.8% to Asia while ▲ by 1.5% to China and 6.4% to EU

·         Slower Japan inflation in June

•    CPI excluding food ▲ from a year earlier
• ü  CPI ▲ 3.4% in May

·         Japan’s Retail Sales Drop in Challenge to Abe Reflation

• Japan’s retail sales feel more than forecast in June
• Sales ▼0.6% YoY; forecast was ▼0.5%
• In the second quarter, sales ▼7% QoQ
•    Unemployment ▲ to 3.7% (3.5% previous month)
• However, labor force ▲by 120,000 people
• It indicates that the current level of vacancies still points to further declines in the jobless rate in coming month

·         Japan’s output drops most since 2011 as consumers spend less

• Japanese Industrial Output (-3.3% MoM) in June
• ▲0.7% in May
•    The widening impact to the economy of April’s sales-tax increase
•    The manufacturing sector has cut back in response to  a slump in consumer spending and a failure of exports to pick up even after an 19% drop in the yen last year

August 5th, 2014

China Services Index Falls to Record Low

• The services Purchasing Managers’ Index ▼ to 50.0 from June’s 53.1
• Suggesting the government’s stimulus measures are failing to gain traction outside of manufacturing
• Signaled that ▼ home prices and new construction are dragging on services
• They account for almost half of GDP
• Showed the weakest expansion of new business in more than five years
• The services report contrasts with the manufacturing PMI, which ▲ in July to an 18-month high of 51.7
• This survey includes hotels and restaurants, transportation and storage, financial intermediation, renting and business activities and post and telecommunications

Shanghai index ▼ 0.15%















Indonesian Economic Growth Slows Challenge to Widodo

• Indonesia’s economic growth eased to the slowest since 2009 as exports and government spending ▼
• GDP ▲ 5.2% in Q2 YoY; ▲ 2.47% MoM
• Widodo promised 7% economic growth by improving infrastructure and manufacturing
• Export numbers have been coming in below expectations.
• Exports ▼ 1.04% YoY; Mining ▼ 0.15% while government consumption ▼ 0.71%. Household consumption ▲ 5.59% and investment ▲ 4.53%
• Monetary policy
• Subsidies that keep local fuel prices low have spurred energy imports
• Straining the trade balance and tying up funds that could be used to build roads, bridges and railways
• “Bank Indonesia cannot afford to ease monetary policy despite lackluster growth and contained inflation pressures. Focus remains on stability and keeping the current-account deficit in check.”

Euro-Area Services Grew Less Than Initially Estimated in July

• Markit Economics’ Purchasing Managers Index ▲ to 54.2 from 52.8 in June
• A composite index of services and manufacturing increased to 53.8, also lower than previously estimated
• Services indexes ▲ in Germany, France and Spain in July
• In Italy, the gauge ▼ 52.8 from 53.9 in June, which was the highest since 2010
• Markit said the recovery in Italy also “remained solid” last month, with France remaining the euro area’s “laggard,” as a slight rebound in services was offset by a “deepening downturn” at manufacturers

U.K. Services Surge at Fastest Pace in Eight Months

• Its Purchasing Managers’ Index for services, the biggest part of the economy, jumped to 59.1 from 57.7 in June; the highest since November and the 19^th straight month above the 50 level
• “The sustained strength will add to calls for interest rates to start rising later this year”
• A composite index covering services, manufacturing and construction ▲ to 58.8 in July from 57.9 in June

FTSE 100 index ▲ 0.07%















Euro zone June retail sales show strongest YoY rise in seven years

• June retail sales ▲ 0.4% MoM; 2.4% YoY
• The strongest YoY rise since March 2007
• Germany and France see the fastest YoY ▲ since February 2011
• The annual rise was driven by a 3.0% ▲ in sales of non-food products
• Electronics, computers, books or textiles
• Also followed by a 2.0% increase in the volume of sales of food, drinks and tobacco
• Analysts saw modestly improving labor markets in most countries and very low consumer price inflation providing some support to consumer spending over the coming months and help euro zone recovery to gradually gain traction
• Unemployment was the lowest level since September 2012
• Inflation remains in the ‘danger zone’ of below 1% since October last year

Sources: http://www.bloomberg.com/news/2014-08-05/china-services-index-falls-to-record-low.html

http://www.bloomberg.com/news/2014-08-05/u-k-services-surge-at-fastest-pace-in-eight-months.html

http://www.reuters.com/article/2014/08/05/eurozone-economy-retail-idUSL6N0QB2YE20140805
http://www.bloomberg.com/news/2014-08-05/indonesia-s-gdp-growth-slows-in-challenge-to-widodo-expansion.html

S&P 500

August 4, 2014

Banco Espirito Santo Junior Bonds Slide as Bilout Forces Losses

• Portugal will spend 4.9 billion euros to rescue its largest listed bank
• The Bank of Portugal will take control of Bank Espirito Santo’s assets and deposit-taking operations by transferring them to a new company, Novo Banco, into which it will inject money from its Resolution Fund
• The fund will finance the rescue with a Treasury loan to be repaid by Novo Banco’s eventual sale to private investors
• The Portuguese state will lend the fund 4.4 billion euros
• Banco Espirito Santo has been forced to take public money after regulators uncovered potential losses on loans to other companies tied to the Espirito Santo group and ordered the lender to raise capital
• The government funds would only be available as a last resort
• The Portuguese government loan for the BES rescue will use up a large chunk of the 6.4 billion euros left over from a fund earmarked to aid the country’s banks as part of its EU/IMF bailout

Ghana Turns to IMF for Help as Currency Crisis Deepens

• Ghana will seek immediate talks with the IMF to help its currency crisis
• Its currency has plunged 36% against the dollar this year
• The investors lost faith in the government’s ability to curb spending and rein in a current account deficit that’s set to exceed 10% of GDP this year
• Yields on the nation’s Eurobonds due August 2023 fell the most in more than two weeks after President John Dramani Mahama instructed his economic advisers to “open discussions” with the Washington-based lender
• The finance minister said the government preferred a “home-grown strategy” to an IMF loan and planned to sell $1.5 billion Eurobonds by the end of the month
• The Cedi dropped by 6.2% on July 30, the day after he said; it is unsure whether it will seek IMF assistance
• The sale may be delayed if it’s allowed by the IMF or the amount may be smaller than that sought by the government
• The IMF will support the program as soon as a formal request is received
• A weaker currency has spurred inflation to 15% in June, prompting the central bank to increase its benchmark interest rate by 1% to 19% on July 9
• Ghana’s government is struggling to narrow the budget deficit as wages for state workers ballooned to almost 70% of tax income
• Terkper last month revised the 2014 fiscal-gap target to 8.8% of GDP from 8.5%
• The shortfall will probably exceed 10% of GDP for a third consecutive year
• The current-account deficit may average 11.1% of GDP this year
• The shortfall was 12.3% in 2013

China Central Bank Signals No Broad Monetary Easing

• The country’s credit and money supply ▲ rapidly that it will refrain from broader monetary easing to support growth
• “Our existing money supply and credit are already relatively large and their growth is also high.” Said the People’s Bank of China
• The central bank has turned to unconventional tools including relending and selective cuts to banks’ reserve requirement ratios to channel credit to areas highlighted by Premier Li Keqiang, including public housing and small companies
• “Restructuring and reform of the economy remains an arduous task. It’s not appropriate to expand overall liquidity sharply to solve structural problems,” said the PBOC
• The PBOC reiterated its “prudent” monetary-policy stance and pledged to “keep overall liquidity stable while improving its structure”
• It will exploring resolving local-government debt problems in “market-oriented” ways
• The PBOC created a revamped relending tool known as pledged supplementary lending to manage medium-term interest rates and lower the cost of financing for some industries and lenders
• The PBOC conducted a $162 billion transaction with China Development Bank
• “It will “deepen reform” of CDB to support shantytown redevelopment and city infrastructure”

China Services Index Drops to Six-Month Low on Property

• The non-manufacturing PMI ▼ to 54.2 from 55.0 in June
• Highlights the danger a correction in the property market poses to growth in the world’s second-biggest economy and contrasts with a government report last week that showed manufacturing expanded at the fastest pace in more than two years
• The IMF warned that real estate is the biggest near-term risk to the economy
• A gauge of business expectations in the survey ▲ to 61.5 in July from 60.4 in June
• Services accounted for 46.4% of GDP in the first half of 2014
• 1.3% ▲ than the same period a year earlier
• Expansions in services quickened to 8% in the first half from 7.8% in the 1Q
• Compared with a 7.4% pace in manufacturing and construction industries
• Purchasing managers in services industries was 53.1 in June; the highest in more than a year

Sources:

http://uk.reuters.com/article/2014/08/04/uk-portugal-bes-cenbank-idUKKBN0G30TA20140804

http://www.bloomberg.com/news/2014-08-03/portugal-takes-over-banco-espirito-santo-in-6-6-billion-bailout.html

http://www.bloomberg.com/news/2014-08-04/ghana-turns-to-imf-for-emergency-help-as-currency-crisis-deepens.html

http://www.bloomberg.com/news/2014-08-03/china-services-index-drops-to-six-month-low-on-property.html

Dow Jones increased by 0.46%














Korean won appreciated by 0.04%, Japanese yen depreciated (again) by 0.02% against U.S. dollar.

EUR/USD depreciated by 0.04%

Energy sector increased by 1.61%, cons disc sector increased by 1.01% while utilities decreased by 1.23%

August 1, 2014

Philippines Ready to Act for Inflation Goal, Tetangco Says

• The Philippine central bank will take further policy action if there are risks to its inflation target
• It raised its benchmark interest rate for the first time since May 2011, and said the price-gains target for next year could be at risk
• Inflation expectations remain elevated even as liquidity growth is seen to continue to moderate
• Money supply rose 23% in June from a year ago, the slowest pace in a year, while net bank lending eased from a month earlier

So, Philippine government already has increased its reserve requirement twice this year, and yet it couldn't control the inflation rate. It hardly looks like Philippines government will control the inflation rate unless it can get enough food supply from other countries. Even it does so, Philippines government will pay lots of extra money to buy the foods, and it will eventually harm the economic growth.

South Korea exports jump, but cloudy outlook seen prompting rate cut

• S. Korea Trade Balance ▲$2.5 billion MoM; ▲5.5 billion in May
• A combination of still-tepid global demand and weak domestic consumption are causes
• A rate cut may help the economy to boost domestic consumption as well as business sentiment
• Crucially, South Korea’s manufacturers are not selling enough to their biggest export market China. Export to China ▼7.0% in July YoY
• However, sales to U.S. ▲19.4% and to EU ▲11.5%

The Korean government is about to spend $40 billion stimulus, and seem like decreasing interest rate by 25bp. The market index is increasing with that expectation. What I'm afraid is those stimulus would help the domestic spending, but the Korean economy is highly depended on exports. Slow growth in China (so as other countries) and appreciated Korean Won are the issues the Korean government needs to solve as well.

China Manufacturing Gauge Rises to Two-Year High

• China’s manufacturing expanded in July at the fastest pace in more than two years
• PMI was at 51.7 MoM; It was 51.0 in June
• Signaling a pickup in economic growth is strengthening amid government support policies
• Government Stimulus
• Tax cuts for small companies, speeding up public investment and fiscal spending
• The central bank cut reserve requirements for some banks and turned to unconventional tools such as relending to boost credit
• “The economy is clearly improving, driven mostly by government infrastructure investment”

Sources:

http://www.bloomberg.com/news/2014-08-01/china-s-manufacturing-gauge-rises-to-two-year-high.html

http://www.reuters.com/article/2014/08/01/southkorea-economy-idUSL4N0Q627P20140801

http://www.bloomberg.com/news/2014-08-01/philippines-ready-to-act-for-inflation-goal-tetangco-says-1-.html

July 31, 2014

Economy in U.S. grows more than forecast

• The economic expansion in the 2Q picked up where it left off last year, led by ▲ in consumer spending and business investment
• GDP ▲at a 4% in 2Q, exceeding the median forecast, after ▼2.1% in the 1Q.
• The increase matched the average growth rate from July through December of 2013; the strongest six months in a decade
• Policy makers also said slack in the labor market persists even as the economy is picking up, and repeated they will keep interest rates low for a “considerable time” after ending asset purchases
• Surge in inventories ▲1.7% MoM. Stockpiles were rebuilt at a $93.4 billion annualized pace after a $35.2 billion gain in the first three months of the year
• That could mean companies will keep tighter control on the number of goods on hand this quarter, which could cut into economic growth
• Consumer spending, which accounts for almost 70% of the economy, ▲2.5%
• Purchases of durable goods jumped at a 14% annualized rate, the fastest since the 3Q of 2009, when the recovery began
• Companies added 218,000 workers to payrolls in July exceeding the average for the year and showing improving demand is bolstering the job market
• The gain this month followed a 281,000 increase in June that was the strongest since November 2012
• Businesses are limiting dismissals and taking on more workers, spurring consumer confidence and laying the groundwork for a pickup in household spending

EU inflation slowed to 0.4% in July, lowest since 2009

• Euro-area inflation (ECCPEST) unexpectedly slowed in July to the weakest in almost five years, underscoring the European Central Bank’s concerns that the economy is too feeble to drive price growth
• For the past 10 months the inflation rate has been weaker than 1%, less than half the ECB’s goal, while joblessness has remained stubbornly near an all-time high for months
• It looks like inflation will stay under 1% this year
• It is because output gap and the spare capacity in the labor market are so big that they can’t exert much upwards pressure on prices
• For July, the core inflation rate, which excludes volatile items such as energy, food, alcohol and tobacco, clocked in at 0.8%, unchanged from the previous month
• The cost of services ▲ 1.3%
• Stimulus Effect
• The ECB’s announcement to have a negative deposit rate and a program to improve bank lending is its most significant policy to save the euro.
• The ECB warned the economy could take some time to respond to the barrage of stimulus and even left open the door for further action
• While the ECB’s measure have helped push the average yield on bonds from Europe’s most-indebted nations to a record low, they have not yet boosted prices, growth and lending
• The unemployment rate unexpectedly fell in June to 11.5% from 11.6% in May
• Joblessness continued to vary widely across the euro area in June, from a low of 5% in Austria to 24.5% in Spain

Japan’s Average Crash Earnings ▲0.4%

• It was ▲0.6% in May; MoM

Argentina Declared in Default by S&P as Talks Fail

• S&P declared Argentina in default after government missed a deadline for paying interest on $13 billion of restructured bonds
• Talks ended today without an agreement because the banks were unable to come up with a solution for a wider group of holdouts
• All holdout claims would total $15 billion to $20 billion.

Sources:

http://www.bloomberg.com/news/2014-07-30/argentina-defaults-according-to-s-p-as-debt-meetings-continue.html

http://www.bloomberg.com/news/2014-07-31/euro-area-inflation-slowed-to-0-4-in-july-lowest-since-2009.html

http://www.bloomberg.com/news/2014-07-30/economy-in-u-s-grows-more-than-forecast-after-smaller-drop.html