Economics summary

At the press conference, the ECB encourages governments with fiscal space to act in an effective manner to soften the economic downturn. Countries with high public debt, should let the automatic stabilizers from prudent policies and a structural balance, to operate freely. Draghi believes in the policy of negative rates, and that the positive effects from this policy outweigh its side effects. He denies that there are disagreements in the Governing Council about the decision made in September. The PMI for October from the EU Area hasn’t worsened. France shows improvements in the PMI data with value over 50 both in manufacturing and service sectors. PMI data from Germany shows a little improvement in the manufacturing sector but the service sector still weakens. The manufacturing index is at 41.9 showing a downward trend while the service sector is at 51.2. The data for US durable goods orders is lower than expected in September. Orders ex transport and defence decline by 0.5 ...

The British parliament has started the process of approving Boris Johnson’s Brexit bill. The first voting is approved by 329 vs 299 votes. Though Johnson has failed to the approval for the swift timetable that would have allowed the bill to pass the House of Commons by Thursday, thus making it less likely for the bill to be passed before the Brexit deadline of 31 st of October. The British’s CBI Industrial Trends Orders shows a fall to -37, the lowest value since the financial crisis, the index for the expected output increases while the rest of the indexes show a decline. The US’s existing home sales have declined by 2.2 percent from August to September, the decline is more than expected by the financial markets. The US housing market has been on a positive trend with increasing sales, housing constructions, positive sentiments in the sector, and increasing price for existing homes. Housing investments have been on a decline for the past six quarters, but this has changed t...

On Saturday, the British parliament is withholding the final decision of the revised Brexit deal and forcing Boris Johnson to ask the European Council for an extension to the 31 st of January. Instead the parliament has greed on Oliver Letwin’ amendment, which states that there wont be a no deal Brexit until the parliament has agreed on the revised Brexit deal this week. And on Saturday night, Boris Johnson has sent an unsigned letter to the European Council asking for a Brexit delay as well as a personal letter to the Council asking the EU leaders not to delay Brexit. The US stock exchange has closed in negative on Friday after Johnson & Johnson has to recall 33 000 bottles of baby powder in the US after health regulators found trace amounts of asbestos in a bottle purchased online. Boeing has admitted that two of its employers in 2016 misled the FAA about the 737 Max and its technical system. Weaker than expected Chinese economic indicators also contributes to the negative...

China’s balance of trade shows a fall in exports by 3.2 percent, comparing to a year ago and the imports fall by 8.5 percent, the first fall since May this year. China is the largest contributor to world economic growth, through the weaker imports, China’s economic decline is affecting the rest of the world economy, such as the Euro area. The Euro area’s industrial production for  August has risen by a little more than the markets have expected. The industrial production in the Euro area has been weakening since the start of 2018. Finland is currently holding the council of the EU presidency. At a press conference with the European Council President elect, Charles Michel, the Finnish prime minister, Antti Rinne, says that The EU needs more time to reach a Brexit agreement. Boris Johnson is hoping to seal a Brexit deal before the EU summit on Thursday, so that he will be able to present it to the British Parliament on Saturday for approval, in doing so, he won’t need to postpo...

Last week’s flash PMI estimates for the EU area and yesterday’ final PMI numbers are indicating that the weakening in the manufacturing sector isn’t country specific, but rather the weakening is across countries. The decline in Germany’s manufacturing sector is less than expected by the financial markets, while the decline in France is higher than expected. The same goes for Spain and Italy. The UK’s PMI index has increased by 0.9 to 48.3 and is more than expected, though 48.3 still indicates a weaker outlook. The US Manufacturing PMI has increased to 51.1 while the ISM index declines by 1.3 percent to 47.8, the lowest value since 2009. Despite weakening activities in the manufacturing sector for the developed countries, for the developing countries the outlook is still positive. The global PMI value in the manufacturing sector has risen from August to September. Past months’ decline has been due to weaker growth in the global trade. The WTO has updated its global trade forecast ...

The US House of Representatives continues the impeachment inquiry against Donald Trump. The inquiry has been launched after President Donald Trump’s 25 th of July phone call with the Ukraine President Volodymyr Zelensky has been revealed, and that the conversation is about Trump pressuring Zelensky to investigate Trump’s political opponent, Joe Biden and his son. The secretary of state, Mike Pompeo, also is one of the people that have been listening in on the conversation. It is also revealed that the White House has curbed access to the content of the conversation between Trump and the Australian prime minister. The Senate Majority Leader, Mitch McConnell, would have no choice but to take up impeachment if the House of Representatives passes the articles charging the President with crimes. Boris Johnson is to present the Brexit plans to the EU leaders. He is expected to propose new plans for the Irish border. There have been talks about implementing customs checkpoints 10 miles...

The Bank of Japan keeps its monetary policy unchanged while indicating further expansionary policy in the future. Swiss National Bank has downward adjusted its growth and inflation outlook while keeping the interest rate unchanged at -0.75%. Bank of England also keeps the interest rate unchanged at 0.75%. The central bank says that the underlying growth of the British economy has slowed, and excess capacity has opened within companies. Exports and investments are weighted down by weaker global growth and Brexit uncertainties, respectively. Growth in consumer spending remains resilient due to an increase in real household income. The fiscal policy for 2020 to 2021 is expected to increase the economic growth by 0.4% in the upcoming years. If the Brexit deal goes smoothly, and with some recovery in global growth, the central bank judges that it will increase the interest rate at a gradual pace. In the event of a no deal Brexit, the monetary policy response would be in either dir...

As expected, the Federal Reserve has lowered the federal funds interest rate by 25 basis points to a range of 1.75% to 2%. The opinions of the FOMC members are divided, similar to the July meeting, three members have voted no to the decision of lower the interest rate, Esther George of Kansas City and Eric Rosengren of Boston both prefer to keep the interest rate unchanged, while James Bullard of St. Louis wants a 50 basis points cut. Seven of the members are expecting at least one more cut this year of 25 basis points,   five members are expecting a hike of 25 basis points by the end of this year while the last five members are expecting unchanged interest rate. At the press conference, Jerome Powell states several times that the future path of the target range for the federal funds rate will depend on incoming information for the economic outlook, and that the FOMC is not on a preset course, he also says that its difficult to have a hardened expectations about where the rat...

According to a research paper published by the federal reserve’s board of governors, the uncertainty that is created by the trade conflict can lower the GDP growth by 1% in the period from end of 2018 to early 2020. Economic indicators have been showing lower investments and exports and weaker growth in employment, mainly in the manufacturing sector. The data for industrial production in  August has showed a stronger increase in production than expected, the production has been 0.6% from July to August. Comparing to August 2018, this year’s production is 0.4% lower. Consumer spending and the activity in the service sector, though, are still strong. The interest rates in the US money markets has increased by 10% in a short amount of time, four times than the Fed’s rate. This pushes the Fed’s benchmark lending rate to rise above its targeted range, thus forcing the Fed to make an emergency injection of liquidity through market interventions. Through repo auction, the Feds has...

Prior to the attack on Saudi’s oil production facility, the long term treasury yields have been rising. But due to current event and increase in uncertainty, the long term yields are now again declining.  Market’s expectations for tomorrow’s Fed interest rate decision meeting still haven’t changed. The market is quite certain that the Fed will cut interest rate by 25 basis points tomorrow, and 50% probability of another rate cut at the next meeting on the 30 th of October. Yesterday’s speech by the ECB’s chief economist, Philip Lane, indicates that he is confident with the volumes of debt purchases, and that they are consistent with the parameters of the APP program for an extended period of time and the ECB’s guidance of interest rates outlook is still the most powerful monetary policy measure. NY Empire State Manufacturing index data that has been released yesterday shows that the manufacturing activity has been lower than expected for September. Indices for 17 t...

The weekend’s attack on Saudi petroleum processing facility has led the oil price to soar and with  the highest movement in percentage since Iraq’s invasion of Kuwait in 1990. The reason for this strong rise in oil price is because a significant amount of Saudi’s oil production is put to a halt. Aramco says the attack has cut the oil production by 5.7 million barrels a day, which is more than half of Saudi’s daily oil production, and more than 5 % of global oil supply. Saudi Arabia produces more than 10 % of the global oil supply, as well as it is the world largest oil exporter. Both the US and the IEA says that they are standing ready to tap emergency oil reserve if necessary. Saudi Arabia will also most likely have an emergency meeting with OPEC to discuss an increase in oil production. So, even though the oil production has fallen sharply from the Saudi Arabia, the global oil supply won’t be declining by 5% a day. The attack shows that the tension has become high i...

As of November, the ECB will be purchasing 20 billion euros worth of debt a month. Even though the amount is lower than what the markets have expected of 50 billion euros, the bond yield still declined immediately after the announcement. Unlike previous announcements of debt purchasing, this announcement doesn’t give a time horizon of when the purchasing will end. The ECB says the debt purchasing will be as long as necessary. The deposit rate is reduced even further to minus 0.5% from minus 0.4% with potential further rate cuts in the future. The ECB says the interest rates will be at the present level or lower until the inflation converges to the goal of 2%. Banks and lenders also get exemption from negative rates for some of their deposits at the ECB. ECB’s TLTRO program has also been changed. The loan’s maturity is extended from two years to three years. The interest rates of the loan is lowered from 10 basis point above the average interest rate to the average interest ra...

The UK prime minister, Boris Johnson announced yesterday that he would shut down the British parliament for five weeks in September and October. The British parliament is currently on a summer break until the 3 rd of September. The parliament members will be returning to work for a week before they are suspended until the 14 th of October. From the 14 th of October, there will only be less than three weeks before the UK will have to leave the EU, with or without a Brexit deal. Johnson says he has to shut down the parliament to prepare for the Queen’s speech which will be held at the opening of the parliament to mark the beginning of a new parliamentary session. Johnson will try to get a new Brexit deal before the deadline of 31 st of October. After meeting with the EU-leaders, Johnson seems to agree on the Brexit deal that Theresa May has negotiated forth, except that the current backstop plan with the Irish border has to change. The current backstop plan risks of locking...

Recent auctions of the 2 years US treasury notes have been keeping the 2 year treasury yield from declining. Similar to how a strong demand increases the bond price and decreases the bond yield, a strong supply would decrease the bond price and increase the bond yield. Due to this, the 2 year treasury yield has risen more than the 10 year treasury yield. This makes the yield curve to invert. Inverted yield curve has been a reliable indicator for economic recessions. Italy’s 10 years treasury yield has also declined. Bond yield decreases when there is high demand for treasury bonds. Investors in the financial markets tend to seek assets in safe haven countries, such as treasury bonds of Germany, France and the US, when there are uncertainty in the market , thus making the price of treasury bonds to rise and the treasury yield to fall. Lately, bond yield of countries that usually are not considered as safe haven, like Greece, Italy and Portugal have been falling more sharply than f...

The FOMC Minutes from July’s interest rate decision meeting was released yesterday. The Minutes showed that the participants agreed on the wording Powell had used at the meeting, like how the lower target range for the federal funds rate was a part of a recalibration of the stance of policy, or mid-cycle adjustment, and not a start of series with rate cut. Two of the participants preferred to maintain current target range for the federal funds rate, while a couple of the participants indicated they would have preferred a 50 basis point cut. Since the July meeting, the trade conflict and market volatility had escalated. The financial markets had priced in a 25 basis point rate cut on the September interest rate decision meeting, and a small probability of a 50 basis point rate cut. Indices for 22 nd   of August Dow: +0.9% (20 th of August) S&P 500: +0.8% (20 th of August) Nasdaq: +0.9% (20 th of August) Nikkei: -0.1%   (22 nd of August) Chinese indi...

News about Germany readying a fiscal policy plan to counter a possible economic downturn had gotten a lot of attention yesterday. German finance minister, Olaf Scholz said on Sunday that the government could come up with 50 billion euros in stimulus to prevent an economic crisis. The stimulus would target strengthening public spending, and the goal of the stimulus would be to keep the unemployment from rising. The US had given Huawei another 90 days with set of exceptions that protected the US customers from ban on doing business with Huawei. The Secretary of Commerce, Wilbur Ross said that US companies doing business with Huawei needed more time to find new solutions. The next deadline would be 19 th of November. Also, additional 46 subsidiaries of Huawei were added to the ban list. Trump’s economic adviser, Larry Kudlow, stated on the past weekend interview that there was no recession in sight. The chief of the Federal Reserve Bank of Boston, Eric S. Rosengren, also had sim...

The IMF didn’t support the US’s accusation of China being a currency manipulator.   Last week the US had accused China for manipulating the yuan to achieve trade advantage over the US companies. The accusation came after the Chinese central bank let the yuan depreciate after recent tariffs hike on Chinese goods. On Friday, the IMF released the annual review of China’ economic policies. The report concluded that the level of the yuan was in line with China’s economic fundamentals. The report went on and said that China should keep its exchange rate flexible and market determined to help absorb the tariff shock. Argentina’s primary elections on Sunday resulted in victory for country’s centre-left opposition leader. This led to uncertainty in the financial markets of the country to yet again to be in a difficult economic situation. Argentina had been in several economic recessions. The country had been in recession 16 of the last 50 years as well as 22 signed loan agreements wit...

The industrial production in Germany fell by 1.5 percent from May to June adjusted for seasonal fluctuations. The decline was larger than expected by the financial markets. The energy and construction sectors showed an increase, otherwise Germany’s production fell by 1.8 percent. Overall, the data showed that the industrial production for the second quarter of 2019 fell by 1.9 percent from the previous quarter, which would mean that Germany’s GDP would be declining in the second quarter. The energy and construction sectors had showed solid growth, public spending and investments expected also to show solid growth after a weak first quarter as well as net exports. These variables might be enough to keep the GDP growth positive in the second quarter. China’s balance of trade for July showed a 3.3 percent export increase from July 2018. The financial markets were expecting a decline of 1 percent, after the -1.3 percent decline year on year from June 2018 to June 2019. Imports fe...

The Chinese yuan had this morning weakened to 7 CNY per USD for the first time in 10 years (9 th May 2008). The depreciation came after the People’s Bank of China (PBOC) set the yuan reference rate at 6.9225 CNY per USD before the market opened, the weakest level since December 2018. It could be interpreted as the Chinese government was using its currency as a mean in the current trade conflict with the US. The PBOC stated that its currency policy was unchanged, and the depreciation came due to expectations of tariffs against China. The Federal Reserve cut the federal funds rate by 0.25% to 2.25% last week, as expected by the financial markets, and disappointed those who expected a higher cut than 0.25%. The stock market fell after the interest rate decision meeting, and kept falling after Donald Trump announced further escalation of the trade conflict by increasing the tariffs on Chinese goods. US non farm payrolls for July published last week was as the market had expected...

At yesterday’s interest rate decision meeting, the ECB kept the interest rates unchanged at 0% for the refinancing rate and -0.4% on deposit rate, as expected by the financial markets. Mario Draghi had also indicated an announcement of a more expansive monetary policy on the next meeting in September. The reason the ECB was waiting with the rate cut was, according to Draghi, that the ECB would like to wait for the next economic projections, releasing in September, before taking any action. He also said that the decision to handle the current economic situation was complex and needed more preparation. This last statement indicated that a possible rate cut decision would be accompanied by new economic stimulus like another quantitative easing and changes in the ECB’s current liquidity system which could make banks pay less interest on their reserve in the Central Bank. On the question about the ECB’s constraints of the capital key and the issuer limit , the ECB didn’t discuss about...