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Stocks rise as Bullard says QE should continue
-- U.S. stocks rose, sending benchmark indexes to records, after Federal Reserve Bank of St. Louis President James Bullard said the central bank should continue its bond buying to boost growth that is slower than expected. The Standard & Poor’s 500 Index gained 0.2 percent to an all-time high of 1,669.17 at 4 p.m. in New York, after falling as much as 0.2 percent earlier. The Dow Jones Industrial Average added 52.14 points, or 0.3 percent, to 15,387.42. “We have a long stretch now with no significant decline and I think that’s going to continue until there is some significant concern about the Fed stopping,” Jason Thomas, chief investment officer of Los Angeles-based Aspiriant, said in a phone interview. Aspiriant is an independent wealth management firm with over $7 billion in asset under management.
The Fed purchases known as quantitative easing should be maintained because financial markets indicate that they are improving financial conditions and can be adjusted based on how the economy changes, Bullard, who votes on the policy-setting Federal Open Market Committee this year, said today according to the text of remarks prepared for delivery in Frankfurt. Fed Bank of New York President William C. Dudley said in prepared remarks for a speech today in New York that he has not decided whether the next move should be to enlarge or to shrink the bond buying program. See full story.
Moody's: U.S. faces downgrade in 2013
-- U.S. policy makers must address debt loads projected to rise later this decade to avoid a 2013 downgrade, even as the latest budget projections are “credit positive,” according to Moody’s Investors Service. The U.S. budget deficit will drop to $378 billion in 2015 from a record $1.4 trillion in 2009, according Congressional Budget Office data. The federal government will post an $642 billion deficit this year, the first time in five years that the shortfall has been less than $1 trillion. Moody’s said Sept. 11 that the U.S.’s top Aaa rating would likely be cut to Aa1 if an agreement on the debt ratio isn’t reached.
“The fact that it showed much lower debt levels going forward, we view as a positive development,” Steven Hess, senior vice-president at Moody’s and based in New York, said today in a telephone interview of the CBO forecast. “More needs to be done on the policy front to address this rising debt ratio.” While projections from the non-partisan budget office forecast the ratio of U.S. debt to gross-domestic-product declining to less than 71 percent by fiscal year 2018, the CBO forecasts the measure will increase “thereafter, pointing to the uncertain long-term outlook if reform of entitlement programs does not take place at some point,” Moody’s said today in a report. See full story.
Consumer sentiment at six-year high
-- Americans felt better about their economic and financial prospects in early May as consumer sentiment rose to the highest level in nearly six years, an encouraging sign after other recent data had suggested broader U.S. growth is cooling. A gauge of future economic activity released on Friday also suggested the expected slowdown will be temporary, with the index rising in April to a near five-year high. Economists expect growth will likely slow in the second quarter from the 2.5 percent pace at the beginning of the year as tighter fiscal policy starts to bite. But recent stronger than expected improvement in several areas, including the labor market and retail sales, has suggested the recovery remains resilient.
"We're still definitely on the recovery path. We expect that this is going to be a very long and gradual recovery," said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida. "Most economists are looking for stronger growth in the second half of the year and into next year." The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment rose to 83.7 from 76.4 in April, topping economists' expectations for 78. It was the highest level since July 2007. See full story.
Evidence mounts on slower U.S. growth
-- The U.S. economy showed fresh signs of slower growth in the second quarter, with factory activity slipping in the mid-Atlantic region while groundbreaking declined at home construction sites. Other data on Thursday showed a spike in new claims for jobless benefits last week as well as soft underlying inflation that could point to weak demand in the economy. "We are seeing a soft start for growth in the second quarter," said Sam Bullard, an economist at Wells Fargo in Charlotte, North Carolina. The data could raise concerns over the impact of a government austerity drive that began in January and the fallout from a recession in the euro zone.
It could also increase pressure on the Federal Reserve to keep its money printing press running on overdrive to support the economy. The Philadelphia Federal Reserve Bank said its gauge of factory activity in the mid-Atlantic region fell to minus 5.2 in May. Negative readings in the index point to a contraction in activity. Drops in new orders and in employment weighed on the index, which covers factories in eastern Pennsylvania, southern New Jersey and Delaware. The report added to recent signs that weakness in manufacturing in March and April extended into May. See full story.
Factory data, PPI flag economy's woes
-- Factory output dropped in April and manufacturing activity in New York state contracted this month, a sign that slowing global demand is weighing on the economy. The anemic growth picture was highlighted by another report on Wednesday showing the largest decline in wholesale prices in three years. The data gives the Federal Reserve latitude to keep priming the economy with an easy monetary policy. "The somewhat sluggish economic growth and limited inflation are the equivalent of rocket fuel for the Fed," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
U.S. Treasury debt prices rose on the reports and the dollar retreated from 4-1/2 year highs against the yen as investors fine-tuned their bets on Fed policy. Stocks on Wall Street trended higher while gold prices fell to their lowest in nearly a month. Manufacturing production fell 0.4 percent last month after declining 0.3 percent in March, the Fed said. That pushed overall industrial output down by 0.5 percent, more than unwinding March's 0.3 percent advance. Economists had expected industrial output to fall only 0.2 percent last month. The drop in factory output, which accounts for more than 70 percent of industrial production, was broad-based and in keeping with data earlier this month that showed factory payrolls failed to expand last month. See full story.
U.S. stocks advance on increased optimism
-- U.S. stocks rose, sending the Standard & Poor’s 500 Index to its eighth record high in the past nine sessions, on increased optimism over growth in the world’s largest economy. The S&P 500 advanced 1 percent to 1,650.39 at 4 p.m. in New York. “There’s an encouraging pattern of continued growth in the economic data,” Alan Gayle, a senior strategist at RidgeWorth Capital Management, which oversees about $48 billion of assets, said in a phone interview. “What is helping the market is the belief that downside risks to stocks are limited right now.” Confidence among small businesses climbed in April to a six-month high as the outlook for the economy and sales brightened, the National Federation of Independent Business’s optimism index showed today.
Tepper, co-founder and owner of Appaloosa Management LP, said in an interview on CNBC that he is still bullish and the economy is getting better. Tepper, who led Institutional Investor’s ranking of the top earners in hedge funds last year with $2.2 billion, said in January in a Bloomberg Television interview that the U.S. “is on the verge of an explosion of greatness.” Equity futures slumped earlier as JPMorgan Chase & Co. reduced its second-quarter growth forecast for the Chinese economy to 7.8 percent from 8 percent and the full-year estimate to 7.6 percent from 7.8 percent. It cited weak domestic demand suggested by April data, after reports yesterday showed China’s fixed-asset investment unexpectedly decelerated last month while industrial output trailed estimates. See full story.
U.S. retail sales rebound in April
-- Americans boosted purchases in April on a wide range of retail goods, apparently taking advantage of lower gas prices. Retail sales rose a seasonally adjusted 0.1% last month, the Commerce Department said Monday. Consumers are the main driver of U.S. growth and retail sales account for a big chunk of their spending Sales were much higher if gas stations are excluded, however, and that’s a good thing for consumers and the economy. Savings at the gas pump allow consumers to spend more on other goods and services instead of basic necessities.
“Lower gasoline prices and the current low-inflation environment in general are helping to offset the impact of higher taxes and encourage households to raise spending in other areas,” said economist Andrew Grantham of CIBC World Markets. Improved retail sales in April seemed to indicate the economy has not cooled off as much as other data suggest. Sales have been up and down in the first four months of 2013, largely because of fluctuating gasoline prices, but they generally signal mild economic growth. Economists polled by MarketWatch had forecast a 0.6% decline in retail sales. U.S. stocks fell despite the better-than-expected report. See full story.
U.S. stocks rise for third week
-- U.S. stocks rose Friday as Wall Street racked up a third week of record-setting gains while considering global monetary easing and as finance ministers started a two-day meeting. The Dow Jones Industrial Average added 35.87 points to 15,118.49, its highest close ever. Also finishing at an all-time high, the S&P 500 index added 7.03 points to 1,633.70, with health care the best performing and energy the worst performing among its 10 sectors.
“My sense is that we will see some weakness in the very short term, but that weakness will set up the markets for the next push higher, eventually carrying the S&P 500 towards the 1,700 mark by July,” said Jeffrey Saut, chief investment strategist at Raymond James & Associates. A steep decline in commodity prices slammed shares of energy and natural-resources companies, while the dollar rose to a four-and-a-half-year high against the Japanese yen. In its monthly budget statement released Friday afternoon, the Treasury reported the U.S. tallied its largest budget surplus in five years last month, when tax payments come due. See full story.
Jobless claims hint at stronger market
-- The number of Americans filing new claims for jobless aid fell last week to its lowest level in nearly 5-1/2 years, signaling labor market resilience in the face of fiscal austerity. The job market buoyancy, flagged last week by a relatively strong April employment report, eased fears of an abrupt economic slowdown. "We are not getting a slowing in the second quarter. The claims data provide another set of confirmation that the labor market is healing," said Michael Strauss, chief economist at Commonfund in Wilton, Connecticut. Initial claims for state unemployment benefits fell 4,000 to a seasonally adjusted 323,000, the lowest level since January 2008, the Labor Department said on Thursday.
The third weekly decline confounded economists' expectations for a rise to 335,000. Layoffs remained contained even as other parts of the economy such as manufacturing showed strain from belt-tightening in Washington. "No sign of a summer swoon in the labor market this year yet. We think the economy is strong enough to stand on its own two feet," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. The government said last week that employers added 165,000 workers to their payrolls in April and that hiring in the prior two months was much stronger than previously believed. The jobless rate dropped to a four-year low of 7.5 percent. See full story.
Fed to be tested as inflation drifts below target
-- With the inflation rate about half of the Federal Reserve's 2.0 percent target, the central bank is facing a major test and some experts wonder whether it will eventually need to ramp up its already aggressive bond buying program. The Fed cut official interest rates effectively to zero in late 2008 during the financial crisis. Since then, it has bought more than $2.5 trillion in bonds to bolster an anemic economic recovery and speed up the decline in unemployment. Despite those actions, its favored inflation gauge, the Personal Consumption Expenditures (PCE) price index, has fallen to a 3-1/2 year low of 1.0 percent.
Further, by the Fed's own forecasts, inflation is likely to remain short of the central bank's target for years. "They say that they're going to set monetary policy in a way that ensures future inflation will be 2.0 percent," said Justin Wolfers, an economics professor at the University of Michigan's Gerald Ford School of Public Policy. "Right now, they expect it to be lower than that, and unemployment to be unconscionably high, so the Fed's own framework says that they need to take more stimulative action." That could happen, if the drop in inflation persists. See full story.
Dow above 15,000 on stimulus optimism
-- U.S. stocks rose, sending the Dow Jones Industrial Average to its first close above 15,000, on optimism over global central bank stimulus and better-than- estimated corporate earnings. The Standard & Poor’s 500 Index rose 0.5 percent to 1,625.96 at 4 p.m in New York, its fourth straight record close. The Dow added 87.01 points, or 0.6 percent, to 15,055.90. The gauge briefly surpassed 15,000 for the first time on May 3. “This is a QE-fueled market,” Steven Bulko, the New York- based chief investment officer of Lombard Odier Investment Management’s $1 billion long/short 1798 Fundamental Strategies Fund, said by telephone. “You’re just not seeing sales based on allocation into any other asset class because of the relative unattractiveness of everything other than equities. That’s putting in place a firm bid to the equities market.”
Fed Chairman Ben S. Bernanke has injected more than $2.3 trillion into the financial system since 2008. The Fed is currently buying $85 billion of debt each month under a policy of so-called quantitative easing. Bank of Japan Governor Haruhiko Kuroda last month began a campaign to end falling prices in a bid to reach 2 percent inflation in two years. The European Central Bank cut its main refinancing rate last week. Global equities rose today as the Reserve Bank of Australia cut its benchmark interest rate to a record low of 2.75 percent. See full story.
ECB ready to cut rates again
-- European Central Bank President Mario Draghi said policy makers are ready to cut interest rates again if needed after reducing them to a record low last week. “We will be looking at all the data that arrives from the euro-area economy in the coming weeks and if necessary, we are ready to act again,” Draghi said in a speech in Rome today. “Monetary policy will remain accommodative.” The euro fell half a cent on the comment to $1.3057 and European stocks pared losses. The Frankfurt-based ECB on May 2 cut its benchmark rate by a quarter point to 0.5 percent, and Draghi said then that officials have an “open mind” about taking the deposit rate, currently at zero, into negative territory.
“The Governing Council has decided for the first time to look openly at the possibility of reducing the interest rate on the deposit facility to less than zero,” he said today. “There are many complications. There are many consequences that we must take into account and study closely. The Governing Council has decided to analyze these consequences in order to be ready to act if needed.” Draghi said last week’s decision was supported by the fact that “macro-economic weakness has spread to parts of euro area where so far the transmission of monetary policy has never been questioned.” See full story.
Jobs resilience eases growth concerns
-- Employment rose faster than expected in April and hiring was much stronger than previously thought in the prior two months, a sign of resilience that should help the economy absorb the blow from belt-tightening in Washington. Nonfarm payrolls rose by 165,000 jobs last month and the unemployment rate fell to 7.5 percent, the lowest level since December 2008, the Labor Department said on Friday. The job counts for February and March were revised up by a net 114,000. "This bolsters the case that the U.S. economy will be able to survive the combined headwinds of sequestration and a deepening recession in Europe," said Scott Anderson, chief economist at Bank of the West in San Francisco.
Investors on Wall Street cheered the data, which beat economists' expectations for a 145,000 jobs gain and a steady 7.6 percent reading on the unemployment rate. U.S. stocks rallied, with the Standard & Poor's 500 index and the Dow Jones industrial average rising to intraday record highs. The dollar rose more than 1 percent against the yen, while Treasury debt prices fell. Payrolls rose by 138,000 jobs in March, 50,000 more than previously reported, and job growth for February was revised up by 64,000 to 332,000, the largest increase since May 2010. But the gains last month were far below the 206,000 jobs per month average of the first quarter, the latest evidence the economy is cooling, even if not as quickly as earlier feared. Indeed, the data provided a number of signs of a loss of momentum. See full story.
Fed open to expanding QE
-- Facing the risk of a fourth straight summertime slowdown, Federal Reserve officials raised the prospect of increasing the monthly pace of bond buying above $85 billion to guard against any slump in growth or employment. The Fed’s statement yesterday that it’s “prepared to increase or reduce the pace of its purchases” was a signal that its $3.32 trillion balance sheet is a flexible tool for monetary policy that can be adjusted up or down, like interest rates. The statement, released in Washington, countered discussion of the timing of a reduction in purchases at the Fed’s March meeting.
“There is more uncertainty so they probably wanted to correct a single-minded focus on tapering,” said Roberto Perli, a partner at Cornerstone Macro LP, a research firm in Washington, and former member of the Fed board’s Division of Monetary Affairs. At the same time, policy makers need to see more data before deciding whether to step up the pace of asset purchases, Perli said. Stocks and Treasury yields declined yesterday after reports showed that U.S. manufacturing in April expanded at the slowest pace this year and companies took on the fewest workers in seven months. The reports added to evidence that the world’s largest economy is slowing this quarter after picking up speed in the first three months of the year. See full story.
Dollar extends fall after Fed statement
-- The U.S. dollar extended losses on Wednesday after the Federal Open Market Committee kept monetary policy unchanged but emphasized it could accelerate or slow asset purchases as needed. The ICE dollar index, a measure of the greenback’s moves against six other major currencies, fell to 81.530 from 81.760 on Tuesday. “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes,” the Fed said in its statement. The prospect of more quantitative easing for longer should be negative for the dollar, said Eric Green, global head of rates, FX and commodity research at TD Securities.
“These are subtle changes but very important in terms of how the Fed is trying to message itself right now,” he said. “No fundamental change in policy just a willingness to be sufficiently flexible to provide solace to Americans that the ‘Bernanke put’ is very much in place.” Many European and Asian markets were closed Wednesday for the Labor Day holiday. Domestic data earlier on Wednesday also was of interest to investors. The U.S. private sector added 119,000 jobs in April, the smallest gain since September, according to data from Automatic Data Processing Inc. Separately, the ISM manufacturing index fell to 50.7 last month. See full story.
Dollar drops on weak data as Fed meets
-- The dollar fell versus most major peers as business activity in the U.S. unexpectedly shrank for the first time in more than three years amid bets the Federal Reserve won’t slacken its bond buying under quantitative easing. The euro climbed against the dollar, reversing earlier losses, amid speculation that action by the European Central Bank on May 2 will bolster the 17-nation region’s economy. The yen gained versus the greenback, paring a monthly loss, as U.S. Treasury 10-year note yields touched the lowest level this year. The Fed opened a two-day policy meeting today.
“The disinflationary tendencies that are building into the U.S. and the risk that the debate shifts to expanding rather than tapering QE has conspired to keep the U.S. under pressure,” Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London, said in a phone interview. “The fact we’ve now seen U.S. 10-years testing the lows of the year is keeping the U.S. dollar on the defensive.” The Dollar Index fell to a two-month low after the MNI Chicago Report’s business barometer fell to 49 in April, the lowest since September 2009. A reading of less than 50 signals contraction. See full story.
Ebbing inflation means more easy money
-- Slowing inflation is giving central bankers scope to provide the world economy with more liquidity and lower interest rates for longer, all in the name of price stability. European Central Bank President Mario Draghi may cut his benchmark rate to a record low as soon as this week as ebbing price pressures let him deliver more stimulus to the euro area’s recession-riddled economy. Federal Reserve Chairman Ben S. Bernanke at a policy meeting that starts tomorrow might have more room to press on with asset purchases as the argument against that strategy is undercut by waning inflation risks. Their counterparts from New Zealand to Canada also have more reason to keep policy loose.
The odds of disinflation are mounting as the world economy slows anew and commodity prices slide, defying forecasts that easy money would trigger an acceleration of prices. More than half of the world economy, including the U.S. and the euro area, instead confronts inflation below the central banks’ desired levels, according to Ethan Harris, co-head of global economics research at Bank of America Corp. in New York. “There is a developing inflation problem: undesirably low inflation,” said Harris, a former Federal Reserve Bank of New York economist. “For central banks, this increases the pressure to maintain super-easy monetary policy.” See full story.
Growth falls short, weakness ahead
-- The economy regained speed in the first quarter, but not as much as expected, heightening fears it could struggle to cope with deep government spending cuts and higher taxes. Gross domestic product expanded at a 2.5 percent annual rate, the Commerce Department said on Friday, after growth nearly stalled in the fourth quarter. Economists had expected a 3.0 percent growth pace. "It wasn't the bang-up start to the year we had hoped for, and the signals from March suggested that we will only decelerate from here," said Avery Shenfeld, chief economist at CIBC World Markets in Toronto.
Growth rebounded in the early part of 2013 but data ranging from employment to retail sales and manufacturing weakened substantially in March. It appears the factory sector slowed further in April and many forecasters expect the economy's softness to persist into the third quarter before a convincing revival emerges, given belt-tightening in Washington. A 2 percent payroll tax cut expired at the start of the year and $85 billion in mandatory spending cuts, known as the sequester, started to take hold at the beginning of March. Second-quarter growth is expected to come in around a 1 percent pace, with growth for the full year seen around a sluggish 2 percent, about the same as in the prior three years. See full story.
Fed debates extending bond buying
-- Debate among Federal Reserve policy makers is shifting away from the timing of a reduction in bond buying to the need to extend record stimulus as inflation cools and 11.7 million Americans remain jobless. At their meeting last month, several members of the Federal Open Market Committee advocated slowing purchases and stopping them by year-end. Since then, seven have voiced support for maintaining the current pace, including five who vote on the policy making panel: Governor Daniel Tarullo, New York Fed President William C. Dudley, James Bullard of St. Louis, Chicago’s Charles Evans and Boston’s Eric Rosengren.
“We heard a lot of discussion earlier in the year on the timing of tapering,” Ward McCarthy, chief financial economist at Jefferies Group LLC. in New York and a former Richmond Fed economist, said in a Bloomberg Radio interview yesterday. “Some of the more recent developments -- the slowdown in the economy, the somewhat disquieting inflation data -- has taken that off the table for now.”With the Fed far from meeting its mandates for stable prices and full employment, policy makers next week will probably affirm a pledge to keep buying bonds until the job market improves “significantly,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington and a former Fed economist. “It’s going to be full throttle until the end of this year,” said Gagnon, referring to the purchases that have pushed the Fed’s balance sheet to a record $3.3 trillion. The FOMC plans to meet April 30-May 1. See full story.
Durable goods point to sluggish economy
-- Orders for long-lasting U.S. manufactured goods recorded their biggest drop in seven months in March and a gauge of planned business spending rose only modestly, the latest signs of a slowdown in economic activity. Durable goods orders slumped 5.7 percent as demand fell almost across the board, the Commerce Department said on Wednesday. The drop in orders for these goods - items from toasters to aircraft that are meant to last three years or more - followed a 4.3 percent rise in February. "We have seen a considerable loss of momentum in the economy and that has been obvious in the round of data we had over the last four weeks or so," said Jacob Oubina, a senior U.S. economist at RBC Capital Markets in New York.
The drop, which was double what economists had expected, provided a fresh indication of cooling at factories that had played a central role in the economy's recovery from recession. It also joined a range of other data covering items from employment to retail sales that have shown the economy lost a step at the end of the first quarter. The slowdown, which economists have dubbed the spring swoon, has been largely blamed on belt-tightening in Washington as the government tries to slash its bloated budget deficit. Uncertainty over the impact of deep government spending cuts, known as the sequester, could be making businesses more cautious about rolling out capital projects. See full story.
China’s recovery falters as PMI cools
-- China’s manufacturing is expanding at a slower pace this month on weakness in global and domestic demand, fueling concern that the world’s second-biggest economy is faltering. The preliminary reading of 50.5 for a Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics compared with a final 51.6 for March. The number was also below the median 51.5 estimate in a Bloomberg News survey of 11 analysts. A reading above 50 indicates expansion. China’s stocks slumped as the data provided further evidence of an economic slowdown after weaker-than-estimated numbers for gross domestic product last week prompted banks including Goldman Sachs Group Inc. to cut full-year forecasts.
In Washington, central bank Governor Zhou Xiaochuan said April 20 that a 7.7 percent first-quarter expansion was reasonable and “normal,” highlighting reduced expectations after 10 percent- plus rates during the past decade. “This paints a picture of a continued painfully slow recovery for China’s manufacturing sector,” said Yao Wei, a Societe Generale SA economist based in Hong Kong. “The government needs to help translate the easy liquidity conditions into real growth.” Euro-area services and manufacturing output contracted for a 15th month in April as the currency bloc struggled to emerge from a recession, a report showed today. See full story.
Dealers say no end to QE in ’13
-- Wall Street’s biggest bond dealers see little chance the Federal Reserve will slow the pace of debt purchases designed to boost economic growth before the fourth quarter, even as policy makers face calls to curb the buying. Of the 21 primary dealers that trade with the central bank, 14 said in a Bloomberg News survey that the Fed won’t start to reduce its $85 billion monthly bond buying until the last three months of 2013. Twelve forecast they will end in mid-2014 or later. Fifteen say it will take until at least June 2015 for policy makers to raise the record low benchmark interest rate target of zero to 0.25 percent. Goldman Sachs Group Inc. chief economist Jan Hatzius sees no increase before January 2016.
Fed Chairman Ben S. Bernanke, an academic expert on the seeds of the Great Depression, has pumped more than $2.5 trillion into the economy to fulfill the twin mandates of full employment and price stability. Critics, including officials within the central bank, say the purchases don’t create jobs and risk creating asset price bubbles. The bond market has backed the measures as inflation concerns diminish and investors push Treasury yields to about the lowest this year. “It’s going to take a long time for the slack in the labor market to be unwound,” Hatzius, who was named one of the 50 most influential people in global finance by Bloomberg Markets Magazine in 2011, said in an April 18 telephone interview from New York. “We have inflation below the target for the next two years. We think they’re still going to be missing on the mandate, and if you’re missing on the mandate you’re going to want to do more.” See full story.