Grexit in Europe versus US growth in North America

 

Schwaben small S    Schwaben Blog

 

June 26, 2015

 

Weekly Statistics:

 

Today Week Ago Year Ago
  26-June-15 19-June-15

26-June-14

       
S&P TSX

14,808

14,653

15,146

S&P 500

2,101

2,110

 1,960

DJIA

17,947

18,014

16,851

OIL

$59.65

$59.51

 $96.43

USD vs CAD

0.8116

0.8140

0.9370

Gold

$1,174

$1,200

 $1,323

An upbeat New Homes sales report for the United States showed further strength of the US economy. Sales of newly built homes rose in May to 546,000 from 534,000 in April. It is the highest level since February 2008 and a solid indicator of a strengthening US housing market. Although this number is still far from the July 2005 peak of 1.4 million (annualized), but the increase in demand shows that builders will ramp up construction this year which would likely strengthen the broader economy.. Americans also boosted their consumer spending at the fastest rate in almost six years. This increase came amid lowest jobless claims in 15 years. All these indicators will help the Federal Reserve decide when to raise the interest rates. These indicators also clearly show that the US economy is set to grow at a decent pace after a dismal performance in the first quarter, which many analysts believe was due to the harsh winter and the strike at the western ports. Although the positive indicators were supposed to help equity markets, the uncertainty of a Greek debt default still kept the investors anxious. After the meeting of the Eurozone’s finance ministers on Saturday, the ministers rejected a Greek request for a one month extension to its bailout. Subsequent to receiving continuous bailouts for the last five years from the European Central Bank (ECB) and the International Monetary Fund (IMF), Greece is finally set to default on its payment of EUR 1.5 Billion to the IMF on Tuesday. The decision not to extend Greece’s bailout came after Athens rejected the policy overhauls and budget cuts demanded by its creditors. At this time, when the US is preparing for an interest rate increase after almost 9 years, the Greek debt default could severely impact the growth prospects of the Eurozone and also plunge other countries like Portugal, Cyprus and other fragile European countries into a recession. The default may also spread fear among North American investors, which could hurt North American equity markets.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

Is the Fed finally raising rates ?

Schwaben small S    Schwaben Blog

 

June 19, 2015

 

Weekly Statistics:

 

  Today

Week Ago

Year Ago
  19-June-15 12-June-15

19-June-14

       
S&P TSX

14,653

14,957

14,604

S&P 500

2,110

2,092

 1,951

DJIA

18014

17,849

16,943

OIL

$59.51

$58.42

 $93.92

USD vs CAD

0.8140

0.8017

0.9051

Gold

$1,200

$1,172

 $1,256

 

In a meeting on Wednesday, the United States Federal Reserve decided to keep its benchmark interest rates near zero but central bankers believe improving US economic growth is likely to warrant one or two interest rate increases before the end of the year. The Fed will take many economic indicators into account before raising the interest rates, first time since 2006. The significant correction in oil prices has led to downward pressure on the US inflation rate. The Fed has been insisting that the tumbling inflation rate is largely a temporary result of weak energy prices. The inflation rate was recorded at 0 percent for the month of May after falling to -0.2 percent in the month of April, first time into negative territory since 2009. The core inflation rate (which excludes some volatile price items) came out at 1.7 percent . The US housing market is also showing signs of strength and annual pace of permits for new construction, a sign of future demand, rose 11.8 percent to  1.28 million, the fastest pace since August 2007. Improving labor market, housing starts and slightly increasing inflation will further help the Fed to make its decision sooner rather than later. The Eurozone is already facing muted or negative growth and now with the Greek debt default crisis on the loom, it would be very difficult for them to handle an interest rate increase from the US. In case the Fed decides to raise interest rates during their next meeting in July or September, investors would obviously prefer to invest in “safer” US dollar denominated investments (with a higher yield) than investing in the troubled Euro area. This could further strengthen the USD against many currencies and also virtually push some countries in Eurozone into the recession. The Fed has four meetings left for the year and according to a survey released by the central bank, only 2 out of 17 Fed officials believe that the bank should wait until 2016 to raise the rates. This clearly shows the increased confidence of the Fed officials in the US economy and now the question remains if they are going to raise interest rates once or twice this year?

US Inflation June 19, 2015

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

Greece getting closer to the edge – what after ?

 Schwaben small S          Schwaben Blog

 

June 05, 2015

 

Weekly Statistics:

 

 

Today

Week Ago Year Ago
  12-June-15 05-June-15

12-June-14

       
S&P TSX

14,742

14,957

14,909

S&P 500

2,094

2,092

 1,930

DJIA

17,899

17,849

16,734

OIL

$59.98

$58.42

 $95.30

USD vs CAD

0.8123

0.8017

0.9210

Gold

$1,181

$1,172

 $1,276

 

The University of Michigan posted a better than expected number for the United States consumer sentiment at 94.6, but major equity indices were under pressure by fear of Greece’s possible debt default. For the first time, senior political leaders of European Union discussed a possible Greek debt default as negotiations between Athens and its creditors stalled ahead of an end of the month repayment deadline. With unemployment hovering around 26 percent, Greece’s situation is deteriorating every month. Greece currently owes $352.7 Billion to foreign investors. About 75 percent of that debt is owned by European Central Bank (ECB) and International Monetary Fund (IMF). While German Chancellor Angela Merkel has repeatedly said that she will keep working to allow Greece to stay in the Eurozone, the German Finance Minister, Wolfgang Schaeuble, is willing to let Greece exit the Eurozone unless its government takes measures to ensure the country’s long-term survival in European Union.  If Greece defaults on its debt, then other smaller economies in Europe like Italy, Cyprus and Spain could face troubles as well. Eurozone is already facing negative or muted growth and many countries are experiencing unusually high double digit unemployment rates . At a time when ECB is actively trying to fend off the deflation in the Eurozone by introducing 1 Trillion Euro bond buying program, a default by Greece would be a major setback and could possibly lead many countries in the Eurozone into recession. In equity markets, sentiment plays a big role in the direction of movement of markets. Impressive growth in the US economy and a growing Chinese economy has instilled a sense of false confidence or a bubble among investors, however with a Greek debt default on the horizon, fear could quickly spread to global markets. Although Greece is not a significant economy and does not play a major role in global trade, its default could have disturbing effects across Europe and North America.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

The Canadian economy in flux – employment and economic activity moving to manufacturing again

Schwaben small S              Schwaben Blog

 

June 05, 2015

 

Weekly Statistics:

 

Today

Week Ago Year Ago
05June-15 29-May-15

05-June-14

S&P TSX

14,957

15,036

14,604

S&P 500

2,092

2,114

 1,951

DJIA

17,849

18,052

16,943

OIL

$58.42

$59.93

 $93.92

USD vs CAD

0.8017

0.7995

0.9051

Gold

$1,172

$1,189

 $1,256

 

Ontario and British Columbia were the largest contributors in job creations in Canada last month, creating 43,900 and 30,600 jobs respectively. The entire Canadian economy added 59,000 jobs in the month of May compared with a loss of 19,700 jobs in April.  In the wake of the oil-price collapse, Alberta saw the biggest decline in employment, losing 6,400 positions, making it the first month of negative job creation since then.. Other oil producing provinces like New Brunswick, Newfoundland and Labrador lost about 9,000 jobs in total. As we have mentioned in our previous Blogs we expected a reversal of fortunes and as such also employment levels of oil producing versus manufacturing provinces with the collapse of oil prices and the concurrent decline in the Canadian dollar. Jeremy Lawson, chief economist at Edinburgh-based Standard Life Investments said “I think it’s pretty clear that the Canadian economy is going to rebalance over the next two to three years.” The unemployment rate has remained unchanged at 6.8 percent from the last four months. The unemployment rate in Canada averaged 7.73 percent from 1966 until 2015. Last month’s gain in employment numbers is the largest since October 2014 when 62,200 jobs were created. A poor first quarter and a drop in interest rates by Bank of Canada led investors to believe that the Canadian economy is headed for more troubles and economists were expecting another interest rate cut from Stephen Poloz, Governor of Bank of Canada. Friday’s data however  will likely cause the Bank of Canada to reevaluate and  declines in interest rates likely have come to an end. This jobs report is a positive signal for Canadian economy and offers a positive outlook for the remainder of 2015.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

Deception in economic data – we need to consider more

Schwaben small S                       Schwaben Blog

 

May 29, 2015

 

Weekly Statistics:

 

Today Week Ago Year Ago
29-May-15 22-May-15 29-May-14
(Midday)
S&P TSX 15,036 15,200 14,604
S&P 500 2,114 2,126  1,920
DJIA 18,052 18,232 16,698
OIL $59.93 $59.93  $93.23
USD vs CAD 0.7995 0.8165 0.9051
Gold $1,189 $1,205  $1,260

 

The Gross Domestic Product (GDP) of the United States contracted at a seasonally adjusted annual rate of 0.7 percent in the first quarter of 2015 instead of 0.2 percent growth, which the government estimated last month. Harsh weather, a stronger dollar and a strike at the western ports of the US could be the possible reasons for this contraction. A rising dollar has curbed US exports by making American goods more expensive for importers and which in-turn has created a trade deficit.  We believe that this contraction is a temporary setback in the growth story of the US and the economy will rebound and grow at a decent pace as it did in 2014, after the US GDP contracted by 2.1 percent in the first quarter of 2014. One of the major economic indicators that we believe is imperative for US growth is the unemployment rate. More than 3 million jobs were created last year, the most since the late 1990s. Also, the real median incomes are up 3% in the past year to about $54,578 in current dollars, the fastest growth since 2007. According to MarketWatch, consumer spending accounts for up to 70% of the US economic activity. With a significant correction in oil prices, and rising incomes, consumers are expected to spend more than they did last year and which can give a boost to the US economic growth. Though the economy is not growing at a significant pace but it is certainly not shrinking over the longer term. The Federal Reserve is debating about raising interest rates (no specified timeline yet) and major economic indicators like housing starts, median income, unemployment numbers etc are all pointing towards a growing and a solid US economy. This will definitely increase the Fed’s confidence in the US economy before they decide to finally raise the interest rates, after 9 years. Considering the current market conditions we believe that a rate hike can be expected in late Q3 or early Q4.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics