Economics summary

One of the factors behind the decline of the long treasury yield could be from the Fed's interest rate decision meeting on the 21 st of March where it had announced that the balance sheet reduction program would slow down from May and end in September , and after that it would reinvest the principal payments from MBS holding in treasury securities . ( what is MBS? ).Two of the Federal Reserve representatives were trying to increase market confidence yesterday, St. Louis Fed President Bullard said yesterday that a rate cute was still premature to talk of , while New York Fed President, John C. Williams said that inverted yield curve no longer is a good indicator for a recession (paywall to read the article). The US GDP growth rate grew by 2.2% in the fourth quarter of 2018. The market was expecting a growth of 2.6%. Consumer spending and business investment rose less than expected, also residential investment fell more than expected. In comparison, the GDP growth for previou

The President of the European Central Bank signaled at the speech yesterday that rate hike from the ECB would be postponed. He also said that the ECB would reflect possible measures to mitigate the side effects of low interest rates. The speech led to further decline of Germany’s treasury yield to -0.08%. The yield was already below zero due to last week PMI data. US 10 year treasury yield also fell to 2.35%, lowest in 15 months. The market is expecting a 78% probability of a rate cut in the US during the end of this year. The British parliament still can’t agree on a Brexit solution . None of the eight indicative Brexit alternatives got a majority. The most popular alternative was of customs union which got 268 votes of 320 votes needed. Theresa May offered to resign if her Brexit deal got the majority, but still, her deal didn’t get the majority. US balance of trade shows a surprisingly positive numbers in January. Deficits narrowed more than expected to 51.1 bn. dollars.

US investors are expecting two interest rate cuts during the upcoming two years. This means the market are expecting a sharp decline in the economic growth. Economic indicators do not seem to indicate that the US economy is closing to a sharp decline in growth. Atlanta Fed’s model has estimated the GDP growth to be 1.3% for the first quarter, a decline from 2.8% in the forth quarter. Some of the factors that contributed to the lower estimate is the government shutdown in January. US Housing Starts for February fell by 8.7% from January. Bigger decline than expected, but this was after a big increased from December to January. Looking at the past two months, the Housing Starts had increased. Building Permits fell in the last two months, indicating a weak outlook for housing constructions. Consumer Confidence numbers released by the Conference Board declined a little in March from a strong increase in February. Assessment of current conditions declined in March. Optimism about

The index for volatility (VIX) has been showing expectations of low volatility since the beginning of 2019, even with ongoing geopolitical uncertainty (Brexit, trade conflict, etc.) The expectations of low volatility earlier this year can be seen as a result of central banks’ changes in their monetary policies and of macroeconomic indicators that have been giving few surprises. All this was up until last week when the Fed and the ECB both have projected lower growth in future outlook, plus the weak PMI from Germany. The PMI data had given doubt if there were temporarily factors that had been slowing the economic growth. Central Bank Put has become an established term in the financial market in the past few years. Central banks would implement untraditional monetary policies to encourage risk taking in the financial markets, weak macroeconomic data had led to positive response from the financial market, weak data means more expansionary monetary policy from central banks

Manufacturing PMI (flash estimate) from Germany showed a weaker than expected value. The market expectations were of 48, but the result was 44.7, thus confirming that German industry is in a recession. The value was the lowest since July 2012, and the decline was the sharpest since June 2011. The index for production and employment fell more than the main index did. Index for new orders fell to 40, while index for new export orders fell below 40, lowest value since the financial crisis. This shows that there are external factors that have contributed most to the slow down of the German’s industry. China’s economic development has a high correlation with the development in the Eurozone, when there is a slowdown in the Chinese’s economy, as it has been the past 6 months, the economy in the Eurozone, also slows down. Also the slowdown in the UK’s economy due the prolonged Brexit uncertainty, can also have contributed negatively to the Eurozone economy. Even though German’s indus

After gotten her Brexit deal voted down by the British parliament twice, the British prime minister, Theresa May, had to ask the EU for a delay of Brexit date from the 29 th of March. The UK would like a delay of three months, but the EU offered them two weeks, and some options: The British parliament must approve May’s Brexit deal within a week, then the UK would get the Brexit postponed to the 22 nd of May. If the British parliament doesn’t approve of the Brexit deal, the UK could stay in the EU until 12 th of April, at which point it must make a choice between three options: a hard Brexit (no deal), a long delay of Brexit or canceling of Brexit (revoking Article 50) altogether and stay in the EU. The last option is the least likely option, the first option will have a major economic impact on the UK, the last option, a long Brexit delay, will lead to the UK to have to participate in voting at the 2019 European Parliament election on the 26 th of May. The EU has incre

At the Fed Interest Rate Decision meeting yesterday, the Federal Reserve kept the federal funds target rate unchanged, as expected by the market. The signals about being patient on rate hikes were repeated, and the dot-plot showed only one rate hike in 2020 . Most surprising message was the message about the Fed would slow down the balance sheet reduction program in May, and that the program would end in September. The Fed indicates that the growth in the economic activity has slowed and thus downward adjusted the future economic growth. Job gains have been solid. Inflation has declined, excluded the volatile food and energy prices, inflation remains near the 2% objective. The Fed speaks about a weaker global economic growth, uncertainty and tighter lending terms, and sees weaker rise in inflation. Fed’s dot-plot shows a clear sight of downward adjustment of interest rate from what it had projected in December. Most of the members of the Federal Reserve see unchanged interes

The Federal Reserve is expected to announce an update for its balance sheet reduction plan today. The balance sheet reduction program is expected to come to an end this year. This will be seen as positive for the financial market. When The Federal Reserve reduces its balance sheet, it also reduces the liquidity in the financial market. Central Banks around the world have, in the past 15 years, been supplying liquidity into the financial market by building up their balance sheets. 2018 was the first year where the opposite happened, and the liquidity in the market got tighter, due to the Fed started to reduce its balance sheet, and announced that the reduction would be on autopilot (even though central banks in the Eurozone and Japan were still supplying liquidity into the market). The sighs of tightening in liquidity had led to high volatility in the financial market in 2018. In January this year, The Federal Reserve changed its message, and announced that the balance sheet

The UK’s House of Commons Speaker, John Bercow is ruling out a third voting on Theresa May’s Brexit deal unless there are substantial changes to the deal. Theresa May’s Brexit deal has been voted down twice already. May has hoped that the risk of postponing Brexit would make the Brexit supporters in her political party to vote for her Brexit deal. She also hopes it would be approved during this week before the European Parliament Committee Meetings in Brussel on Thursday. With an approved deal, she would then be able to ask for a postpone of Brexit to the 30 th of June. The EU is going to demand a longer postponing of Brexit than the 30 th June if the Brexit deal doesn’t get approved at the British parliament soon. The EU can also accept changes of Brexit deal demanded by the British parliament, but this scenario is a less likely scenario. NAHB housing index in the US released yesterday shows a decline in the sentiment in the housing market. The index has been falling sha

The stock exchange in the US ended in positive on Friday due to raising optimism of trade agreement between the US and China. China had passed a new foreign investment law on Friday which would give more rights to foreign companies operating in China. Markit Composite PMI(flash estimates) for the Eurozone will be released this week. PMI for the Eurozone has been declining through 2018, from a peak of 58.8 in January 2018 to 51 in January 2019. Value under 50 means a contraction in business conditions. PMI for February was at 51.9. For the investors to regain the optimism in the Eurozone and for them to believe that the downturn in 2018 was due to temporarily factors, the PMI value needs to keep raising. China has been implementing economic measures to keep the activity growth, while the US economy is still strong. Europe is the missing piece to convince the financial market to have a positive outlook in the global economy. Fed Interest Rate Decision will also be held this we

The trade meeting between the US president, Donald Trump and the President of China, Xi Jinping has been postponed to April, and possibly longer. The US trade representative, Robert Lighthizer said in the congressional testimony that there were still challenges in the trade negotiations, the US hadn’t been able to get a breakthrough on some of the trade issues. Trump had said that in the next three to four weeks, there would be more news about the trade talk, and that China had been very responsible and very reasonable. The fact that the parties have gotten more time for the trade talk should be seen as positive. There are many challenges the two countries must agree on. It is also quite demanding for China to have to change their economic structure about trade and business without deviating too much from its economic goals, which could give a shock in the Chinese economy. China has so far been agreeing on less challenges issues, like buying more goods and services from the US,

The industrial production of durable consumer goods in the Eurozone rose by 1.1% in January from December. Including production of energy, the industrial production rose by 1.4%. The market was expecting a 1% increase. Output increased for all categories. Largest increase was in the non-durable goods category( 2% from -2%). Non-durable goods sector is ¼ of the industrial production ex. energy. Capital goods category also had a remarkable increase, even though the automobiles production declined by 5%, this should be seen in context of the Audi strike in Hungary. This can also explain why Germany was the only country of the larger countries in the Eurozone that had a decline in industrial production. France, Italy and Spain all had an increase in industrial production. The economic growth in the Eurozone seems to be on the rise. If the growth in industrial production continues, it would have a neutral contribution to the GDP growth, instead of a negative contribution as it had be

The changes in the Brexit deal didn’t get approved. The Attorney General for England, Geoffrey Cox, had said that the changes in the Brexit deal, wouldn’t change the legal risk of the backstop solution to last indefinitely. The MPs at the House of Commons voted down the changes. 391 MPs voted against, and 242 voted for the changes . 75 of the 391 were conservative MPs. For Theresa May, the lose wasn’t as devastated as in January. May has gained more support from the conservative MPs this time around, due to risk of leaving the EU without any deal would be greater if the Brexit got postponed. The House of Commons will be voting over a hard Brexit (no deal) today. The majority of the MPs is against a hard Brexit. If a hard Brexit gets voted down today, there will be another voting for a postpone of leaving the EU (Article 50) . If this also gets voted down, the risk of a hard Brexit will be even greater. The US core consumer prices rose by 0.1% from January to February, th

The British prime minister, Theresa May and the president of the European Commission, Jean-Claude Juncker had yesterday come to an agreement over changes of the Brexit deal. The changes also included not to make the backstop solution (solution which involves the Irish border, and to avoid a physical border between Ireland and Northern Ireland) a permanent solution. The lawmakers at the House of Commons are voting over the changes today (changes got rejected, details in the next post). Last time the House of Commons voted over the changes of Brexit deal, the changes were voted down. Theresa May couldn’t get her own political party to back the changes. May had said that if the Brexit deal didn’t   get approved , the UK might not even be able to leave the EU. Germany industrial production, month over month, fell by -0.8% from January to February, the market was expecting an increase by 0.5%. The January value got revised up from -0.4% to +0.8%, the underlining trend is still weak.

US nonfarm payrolls increased by 20 000 in February, disappointing the consensus. Last time the nonfarm payrolls increased this small was in May 2016 and September 2017. The market was expecting an increase by 180 000. In comparison, the nonfarm payrolls for January increased by 311 000. The high volatility in these numbers were mostly due to the government shutdown. The shutdown was the longest in the US history, and 800 000 government workers lost their paycheck in January. Some of those 800 000 workers were covered by government benefits, specifically those who had been furloughed. Some federal employees also had to work without pay, and due to the length of the shutdown, many workers had to find temporarily jobs in January. This led to the non farm payrolls increased in January, and explained the numbers of 311 000. Once the shutdown was over, the workers quit their temporarily jobs, and non farm payroll in February declined sharply. Non farm payroll -private sectors incr

The ECB has downward adjusted the GDP growth and inflation considerably, comparing with what it has forecasted in December. For 2019, the GDP   growth is downward adjusted by 0.6% to 1.1%, same level as what the OECD has forecasted of 1%.   President of the European Central Bank, Mario Draghi, states that the economic slowdown was partly due to the global activity and slowdown in external demand by some country and sector-specific factors. The ECB acknowledges that the external, temporarily factors will be slowing down the economy longer than previously anticipated. The ECB is expecting the economic growth to increase in the years to come but the risks for a downturn are still great, and these risks are mostly due to persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets . Even though the unemployment in the Eurozone is falling and the hourly earnings are rising, the inflation forecast has been downwar

The latest interim economic outlook was released by the OECD yesterday, where it had revised and set forecasts for the G20 countries. The OECD expected the global economic growth to be 3.3% this year and 3.4% next year. This was a downward revision from the previous outlook in November, the OECD was referring to the ongoing trade tensions to be one of the factors affecting the economic growth. The downward revisions were particularly significant for the euro area, notably Germany and Italy, as well as Canada and the UK. According to the OECD, the GDP for the eurozone was expected to only be 1% this year, for the UK, the GDP was expected to be 0.8%. These were significant adjustments of -0.8% and -0.6% , respectively, far below what the market had expected (Bloomberg forecasted 1.4% growth for both). For the US, the forecast was still high ,with a forecast growth of 2.6% this year and 2.2% next year. The OECD also downward adjusted the forecasted growth of most of the emerging

The ISM Non-Manufacturing PMI increased by 3 points to 59.7 in February, higher than the market had expected. Markit Eurozone Services PMI got revised up by 0.5 points to 52.8 in February. Markit/CIPS UK Services PMI rose by 1.2 points to 51.3. Also, the PMI in Switzerland and Japan also rose. The same index for China ( Caixin China General Services PMI) fell by 2.5 points to 51.1. BIS’s quarterly review reports that the events at the end of 2018 in the financial markets highlight two features of the economic and financial landscape. One, in the background and little noticed except by practitioners, is the change in the day-to-day functioning of financial markets since the Great Financial Crisis . Financial regulations, unconventional monetary policies and fragmented financial markets have made the theory of covered interest parity to be broken as observed by much larger spikes in interest rates at quarter- to year-end and that uncollateralised rates for overnight transactions a

The market’s expectations of the central banks has changed in these past months. At the end of 2018, the market was expecting a 60% probability that the Fed would rise the federal funds target rate twice in 2019. Now, the market’s expectations have changed, instead of two rate hikes this year, it is expecting rather a rate cut this year. China’s National People's Congress and The Chinese People's Political Consultative Conference have started their 10 days annual sessions ( Lianghui, Two Sessions gathering ). The Chinese government has changed the GDP growth target from “about 6.5%” to between 6 and 6.5%. This implies that the economy is in a weak cyclical phase. Even though the Chinese government just announced new tax cuts for nearly 2 trillion yuan (298bn. dollars), China’s Premier of the State Council, Li Keqiang, said that China would be cautious about the use of the economic stimulus as it had done previously. Indices for 5th of March: The US stock markets start