Economics summary

The Fed isn’t expected to announce any new signals at the interest rate decision meeting tomorrow. At the previous meeting, the Fed has indicated that the US economic growth has slowed in the first quarter of 2019 from a solid fourth quarter 2018 pace. The GDP numbers released last week have showed that this isn’t the case. GDP growth has increase from 2.2% annualized from the fourth quarter of 2018 to 3.2% in the first quarter of 2019. Though the details in the GDP numbers have showed that the growth is mostly due to net trade, a consequence from the early expedited imports from China in autumn last year in preparation for then expected tariffs increase. Also, the increase in inventory buildup has helped in lifting the GDP growth. Adjusted for the net trade and inventory buildup, the GDP growth is only 1.3%. The domestic demand also has slowed down, even though the data for private spending, released yesterday shows a strong increase at the end of the first quarter. The US PCE

The trade talk between the US and Japan ended last week, and the next trade meeting will be in Beijing next Tuesday. The US Treasury Secretary Steven Mnuchin said yesterday that both the US and China  were nearing a deal , and that the deal could be signed at the end of May. US GDP numbers released on Friday showed a solid growth in the economic activity but still uncertainty about inflation outlook. The annualized quarterly GDP growth was at 3.2% in the first quarter of 2019. The market was expecting a 2.2% growth. The domestic demand had slowed down , while the net trade and inventory buildup had lifted the GDP growth by 1% and 0.7% respectively. The data for the US non-farm payroll will be released on Friday.  The Federal Reserve interest rate decision will be on Wednesday, the growth in GDP deflator  fell below 1% in the first quarter from a year before while core PCE deflator, Fed’s preferred inflation measurement fell from 1.8% in the fourth quarter 2018 to 1.3% in t

Germany’s 10 year-bond yield fell and turned negative yet again yesterday after a disappointing released IFO Business Climate Index data. The market was expecting a small increase in the IFO index in April, instead the index decreased even further from previous month. Both the sub index for current economic assessment and for the next six months expectations had decreased. The falling treasury yield in Germany seems to affect the treasury yield in the US, US 10 year treasury yield is at the moment around 2.532% (it was around 2.80% at the beginning of 2019). Even though the US stock markets are now back at the all time high since last autumn, the treasury yield hasn’t risen as much. The reason can be that the Fed is taking a break in it’s planned contractionary monetary policy, but it can also be other factors that have been slowing down the treasury yield. One of the other factors can be what is called term premium. When the investors in the financial markets are risk av

In autumn last year, the combination of fear for global economic growth and for increasing contractionary monetary policy had led to sharp decline in the stock markets. Now the growth optimism and an expansionary monetary policy are lifting the stock markets. The Fed’s change in the monetary policy from having it on autopilot to that the Fed will listen more to the market signals also had contributed in lifting the stock markets. Economic indicators from China have been positive lately. China’s credit impulse (which shows new debt compared with the previous year) has been rising, indicating that Chinese government won’t let the slowdown in economic growth to continue. This is good news for the financial markets, because China has a large impact on the global economy. According to the surprise index, made by Citibank, which measures how much of a surprise (both positive and negative), economic indicators have performed, indicators from China have been positive since the start of A

Yesterday, the oil price had risen sharply. Brent crude rose by 2 dollars a barrel in just a couple of hours. The reason for this was the news that the US won’t be extending the sanctions exemptions for countries buying oil from Iran after the end of May. On November last year, the US left out of the nuclear deal between Iran and six other world powers and re-imposed sanctions on Iran’s core area of economy. The oil price rose sharply after the reimpose until it was announced that eight countries including, China, Japan and India would get exemptions from penalties when buying oil from Iran. This led the oil price to fall down to 35 dollars a barrel in just a few weeks by the end of 2018, the sharpest decline since the 2014 oil price crash. Due to this, the ongoing volatility in the oil price shouldn’t come as a surprise. 2 dollars a barrel price drop isn’t considered a dramatic drop, the price stabilizes at 74.2 dollars a barrel. The reason for this is because The US has be

Bank of America reported a better than expected quarterly earnings , similar to Goldman Sachs and JP Morgan, earnings were negatively affected by the high volatility in the financial market, which led to weak trading results and banking fees. These loses were more than offset by the increase in net interest yield, a key metric of profitability for banks and the increase growth in lending. The numbers weren’t as great as JP Morgan’s, but were better than Citigroup’s, who had a weakest lending growth of the three banks. The banks earnings and the positive results from theirs retail sectors give an impression of solid growth in the US economy for the first quarter. A strong labor market, an ok hourly earnings growth, all indicate that the economic growth will continue. The long-term interest rates have fallen, and indicates a weaker profitability for banks, but can increase the activity in the housing market, which in turn increases lending growth. In Europe, the Dutch banking c

Not many surprises from the economic indicators yesterday. The US NY Empire State Manufacturing Index rose more than the market expected in April. Though the optimism about six month outlook fell to the lowest level in three years. The US Net Purchases of US Treasury Bonds and Notes showed that China had increased its holding of US treasuries for the third consecutive month in February. In total, foreign bond investment in the US increased by 51 billion dollars. China and Hong Kong accounted for 6 billion of these. Most of China holdings in the US treasuries were through foreign institutions that hold the treasuries for their clients. Accounted for these institutions, China’s holding in US treasuries declined in February. China’s foreign exchange reserve isn’t a political mean in trade negotiation, it reflects China’s current account and the central bank’s assessment of the domestic liquidity. When the current account is worsened, it leads to a reduction in the foreign excha

China’s exports numbers were released on Friday. The numbers were better than the market expected, with an increase in exports to the US. Looking at the first quarter, the numbers showed a weaker development in exports. Imports also declined and showed that the growth in China’ GDP for the first quarter was thanks to the net exports. Also, the numbers for debt growth were released on Friday, China’s credit impulse (which shows new debt compared with the previous year) was increasing, indicating that the economic growth in China might increase in the upcoming months. For the upcoming days: Germany ZEW Current Conditions data will be released tomorrow and news from the trade talk between the US and China might emerge this week. From the US, we will get the numbers for industrial production for March. The US manufacturing sector has been doing quite well in the past few months due to high domestic demand, but a strong US currency and weak economic growth from outside the US have

Even though the UK has gotten an extension on the Brexit deadline, the discussion between the Conservative party and the Labour party continues. Theresa May has signaled that there is a possibility of compromise between the two parties. One of the conditions for the EU to accept the extension is that the UK participates in the EU-election on the 23 rd of May. Even though the trade talk between the US and China is moving toward the end, there will most likely be more trade conflicts up ahead. Earlier this week, Donald Trump threatens to implement tariffs on EU imports i n response to Airbus subsidies. The member countries of the EU have approved a trade negotiation with the US, even though France has refused to approve the negotiation, due to the US isn’t   a part of the Paris Agreement. The US and Japan will be meeting for trade negotiation next week in Washington, the US will probably try to reduce the trade deficit with Japan. Free access to the Japanese market for the US

The UK has received a Brexit extension of six months to the 31st of October . The result is a compromise between Theresa May’s wish of moving the deadline to the 30 th of June and the president of the EU council, Donald Tusk ‘s proposal of one year extension. This means the UK might need to participate in the EU’s election next month, something that the UK doesn’t wish to do. The signals from yesterday’s ECB interest rate decision meeting were similar as the meeting in March. The key ECB interest rates were kept unchanged throughout 2019, or to sustained a convergence of inflation level close to 2%. The ECB was expecting the underlying inflation to rise in a long run. The downside risk in the economy was still high, but according to Mario Draghi, the risk of a recession was low. He said that the inflation expectations had fallen due to a negative risk premium and not due to de-anchoring from ECB’s monetary policy. He also said that the ECB still had plenty of instruments to s

Regarding Brexit, Friday will be the deadline for the UK where 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 president of the EU council, Donald Tusk, has urged the EU leaders to give the UK up to a year to sort Brexit. Some of the EU leaders want to see more commitment from the UK that reflects its situation as a withdrawing member state, before they can approve one year extension. Indices for 10 th of April.  T he IMF’s downward adjusted global economic growth outlook and risks of trade conflict between the US and Europe have led to a negative close in the US and the Asian stock markets yesterday. Dow: -0.7% (9 th of April) S&P 500: -0.6% (9 th of April) Nasdaq: -0.6% (9 th of April) Nikkei: -0.7% (10 th of April) Chinese indices: -0.4% (10 th of April) STOXX Europe 600 Index: +0.26% (10 th of April) This post is sponsor

The Federal Reserve has recently signaled that due to the muted inflation growth, it would like to wait and see how the economy evolves before rising the target rate. It has also signaled that it will let the inflation rate grow higher than the objective rate of 2% before rising the target rate. With weaker outlook in the economic growth, and inflation near target level, another rate hike is less likely in this economic cycle. The risk of a recession in the US economy has been high due to many companies have high corporate debt, and corporate earnings that are just enough to cover the cost of debt. Now that the Fed has signaled an unchanged target rate, the cost of debt will be less than previously expected, and the probability of a recession has lessened. Economic indicators from the Eurozone (new orders, capacity utilization and corporate earnings) have showed that the declining economic growth has persisted since autumn 2018, longer than what the market has expected. A rat

The US labor market is back on track, but the wage growth disappoints . The government shutdown has led to an unusual strong employment in January, and unusual weak in February. The data for March shows a more normalization of the employment. Nonfarm payrolls has increased by 196 000, over market’s expectation of 177 000. This summer, the current US economic expansion will be going in for the longest period of expansion in history, in the light of that, the growth in employment is considered strong. Though the US average hourly earnings disappoints, and only increases by 0.1% from February to March, making the annual wage growth to fall by 0.2% to 3.2%.   Even though the US labor market is still strong, the wage growth doesn’t seem to growth as strongly. At the last ECB interest rate decision meeting, the ECB had downward adjusted the economic growth sharply, postponed the rate hike and introduced new longer term refinancing operations. The economic indicators released after the

The US president, Donald Trump, said yesterday that a trade deal between the US and China would be reached in four weeks . He said that many of the main issues had been agreed. As mentioned in the last two previous posts, Liu He is in Washington and have been in talk with Robert Lighthizer and Steven Mnuchin. The talk started on Wednesday and will be continued today. Trump said that the deal should be ready in four weeks, maybe a couple more additional weeks for the drawn up of paperwork. He also said that there were still differences that needed to be bridged. Germany’s factory order fell by 4.2% from January to February. The market was expecting an increase of 0.3%. The decline for the last two months had led the factory orders to the lowest level in two years (paywall) . The decline was from difference countries and sectors , export orders were weaker than domestic orders, especially orders from countries outside the Eurozone. Orders on automobiles fell sharply in last

As mentioned in yesterday’s post, the trade negotiation between the US and China is coming to an end. Both countries have agreed on several issues, but there are two major issues that still remain. (paywall) One involves the already implemented tariffs on Chinese goods by the US, and what will happen to these tariffs after the trade deal is signed. China wants to see these removed as soon as possible, while the US wants to keep some of the tariffs in place, to have the pressure on China to comply with the deal. The second issue involves the terms of enforcement of the deal. Many of the demands proposed by the US will be difficult to monitor and measure. Example of this is how to measure China’s effort to protect US companies intellectual rights. One of the challenges facing foreign companies in China is the Chinese judicial system which is not independence from the Chinese Communist Party, and where the courts of first instance (Local people’s courts), which handle the intell

China’s Caixin General Services PMI was 54.4 in March, rose from 51.1 in February. The increase was stronger than the market had expected, though the sub-index for employment fell to the lowest level in six months. Growth in operating costs were higher than price charged by services firms. Looking at the data together with the manufacturing PMI released on Monday, the total PMI from China has increased from February to the highest level since June 2018. Japan’s Nikkei service PMI declined by 0.3 points to 52. The Vice Premier of China, Liu He, is meeting with the US Secretary of The Treasury, Steven Mnuchin, and the US Trade Representative, Robert Lighthizer today. The trade deal is rumored to be already done, except for two major issues  (paywall): The terms of enforcement mechanism and the removal of the already imposed tariffs on Chinese goods by the US. The British Prime Minister, Theresa May, and the leader of the Labour and the leader of the opposition, Jeremy Co

The US ISM Manufacturing PMI rose by 1.1 points to 55.3 in March, thus gaining back some of the decline in February. The increase was broad among sub-indexes, with highest increase in the sub-index for employment. The PMI index has downshifted from an already high value, but still shows a solid growth in the US manufacturing sector. The Eurozone Manufacturing PMI confirmed the downward outlook in the manufacturing sector in Europe. The PMI was 47.5, lower than the preliminary estimate, and showed contraction in the manufacturing industry. The PMI in most of the countries in the Eurozone declined, some declined more than the preliminary estimates. PMI in Germany was at 44.1, 0.6 points lower than the preliminary. The financial markets were less affected by the Eurozone PMI, but more by the positive PMI from the US and China. The stock exchange, both in the US and Europe rose yesterday, also the Asian stock exchange closed in positive today. Indices for 2nd of April. Do

China’s Caixin Manufacturing PMI rose from February to 50.8, just above the borderline value of 50 . The value is better than expected. Nikkei Manufacturing PMI also rose from February to 49.2, the value still signaling a contraction in the manufacturing industry, but not as much as previous month. PMI data from a numbers of countries had been released today. More about this on tomorrow’s post. World Trade Organization’s report will be published this week. Due to the ongoing trade tension, the report will get much attention. PMI data for service sector will be released on Wednesday. The Vice Premier of China, Liu He, will be meeting with the US Secretary of The Treasury, Steven Mnuchin, and the US Trade Representative, Robert Lighthizer, on Wednesday. On Thursday the ECB will release the Accounts from the latest Monetary Policy Meeting. The highlight of the week will be the US Non Farm Payrolls on Friday. The market is expecting a growth of 175 000 employed in March. The gro