US unemployment at record low – where is inflation ?

Schwaben small S    Schwaben Blog

 

May 24, 2015

 

Weekly Statistics:

 

Today

Week Ago

Year Ago

 

24-July-15

17-July-15

24-July-14

       
S&P TSX

15,108

14,385

14,534

S&P 500

2,122

2,076

 1,885

DJIA

18,272

17,752

16,511

OIL

$59.45

$52.13

 $92.78

USD vs CAD

0.8318

0.7888

0.9072

Gold

$1,225

$1,160

 $1,296

 

The number of Americans filing new claims for unemployment benefits fell last week to the lowest level in 41 years, pointing towards a strengthening US job market. Initial claims for unemployment benefits dropped 26,000 to 255,000 (seasonally adjusted) for the week ended July 18. Initial jobless claims have an importance in financial markets because unlike continued claims data which measures the number of persons claiming unemployment benefits, initial jobless claims measures new and emerging unemployment. As it is evident from the chart below, the data could be volatile but the latest numbers are at historic lows. The four-week moving average of claims, considered a better measure of labor market trends as it excludes the week-to-week volatility , fell 4,000 last week to 278,500. A number below 300,000 is usually considered a threshold associated with strengthening labor market and the jobless claims have stayed below 300,000 for 17 straight weeks. Persistently low layoffs and greater employment gains will help wage gains and likely support consumer spending. At this point the Federal Reserve is still assessing the health of the US economy before deciding when to raise the interest rates. Unemployment numbers and jobless claims play a key factors in the Fed’s decision making process. The Federal Reserve may raise the interest rates in September should employment continue to strengthen and there are signs of wage gains.  This could possibly bring a small correction in equity prices over the short term.

united-states-jobless-claims July 24 2015

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

Is the Canadian Housing Market and Household Debt on the road to a train wreck ?

Schwaben small S    Schwaben Blog

 

July 17, 2015

 

Weekly Statistics:

Today

Week Ago Year Ago
17-July-15 10-July-15

17-July-14

S&P TSX

14,385

14,385

15,204

S&P 500

2,076

2,076

 1,958

DJIA

17,752

17,752

16,976

OIL

$52.13

$52.13

 $94.36

USD vs CAD

0.7888

0.7888

0.9315

Gold

$1,160

$1,160

 $1,320

 

In not surprising  that the Bank of Canada recently cut its benchmark interest rates by 25 basis points to 0.5 percent from 0.75 percent. This is the lowest level since 2009 when interest rates were at 0.25 percent. The reduction in interest rates also sent the Canadian dollar down to 77.40 cents (US), its lowest level since March 2009, and continued its drop today to another record low since 2009 to 76.97 cents US. Canada’s major banks also followed the central bank and lowered their prime lending rates but only by 15 basis points to 2.7 percent from 2.85 percent. This is the second time this year that the banks have taken a cautious approach to their lending rates after the central bank has slashed the interest rates. Overall, the banks have lowered their prime rates by a total of 30 basis points as compared to Bank of Canada’s reduction of 50 basis points. The lower interest rates have led to a surge in house prices and according to Bank of Canada’s estimates, housing market could be overvalued by as much as 30 percent. Apart from the housing market, consumers’ debt is rising at a record pace while the income is growing

Fig. 1

Cdn Consumer Debt Jul 2015

at much slower pace. Due to low interest rates, consumers are taking on other forms of debts as well in the form of personal lines of credit, credit card loans among other types of debt. Fig 1. The surge in house prices combined with an alarming level of household debt for Canadians has prompted the big banks to lower their prime rates by 20 bps less than the central bank’s reduction of 50 points. In fact in 2007 Canadian versus US household debt to income was about the same. Since then Canadian Household debt to income has risen to 150% from 130% whereas US it has declined to 100% from the same level according to Deutsche Bank Fig. 2. The disparity creates an additional risk premium that adds pressure to the Canadian dollar decline.

Fig. 2

Cdn HH Debt Jul 2015

The collapse in oil prices and subsequent reduction in the investments in the oil patch has created one of the highest trade gaps for Canada and the economy likely contracted by 0.6 percent and 0.5 percent in the first two quarters of 2015 – technically a recession. The recent victory by NDP in Alberta has further prevented the investments in oil sands by creating an uncertainty about the corporate tax structure for the province. In order to close or reduce that gap, the country needs to ramp up its non energy exports. It hasn’t happened so far yet and in a desperate measure to increase Canadian exports, Governor Stephen Poloz is trying to push the loonie lower in order to increase the competitiveness of Canadian exports.  At a time when the Federal Reserve in the US is hinting towards a rate hike, this move by Bank of Canada shows that a growing US economy and a cheaper Canadian dollar could be the way to increase the Canadian exports and reduce the trade gap.

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

Is North American growth slowing or is it just a temporary dip ?

Schwaben small S    Schwaben Blog

 

July 10, 2015

 

Weekly Statistics:

 

 

Today

Week Ago Year Ago
  10-July-15 03-July-15

10-July-14

       
S&P TSX

14,385

14,593

15,114

S&P 500

2,076

2,069

 1,964

DJIA

17,752

17,683

16,915

OIL

$52.13

$52.78

 $95.77

USD vs CAD

0.7888

0.7905

0.9315

Gold

$1,160

$1,169

 $1,342

 

The International Monetary Fund (IMF) has cut its growth projection for the Canadian Economy. According to the IMF’s forecast, Canada’s real GDP will grow at 1.5 percent this year, down sharply from their previous forecast of 2.2 percent in April. In addition to Canada, it also slashed its forecast for the growth of the US economy for 2015 to 2.5 percent from 3.1 percent.  It is no surprise that the collapse in the oil prices is one of the main reasons for this setback but the IMF also pointed to some one-time factors like harsh winter and US port closures for the poor growth in North America. Due to the slump in oil prices, Canada’s international trade numbers for May showed a near-record trade deficit of $3.3 Billion. Exports of energy products are down 35 percent for the year to date compared with the same period a year ago. Although poor economic indicators have led economists to conclude that Canada’s GDP will likely contract again in second quarter, which means technically the Country is in recession, other economic indicators, specifically unemployment rate and housing starts are showing signs of strength. In the recently released unemployment report, Canada shed 6400 jobs but unemployment rate has been steady at 6.8 percent for the last five months. Although a rising trade deficit, because of energy exports and collapse in oil prices, Canada is still able to maintain its unemployment rate, which means that non-energy related industries are creating  jobs and are growing sufficiently to offset other job losses. A rate cut from Stephen Poloz, Governor of Bank of Canada, during his next announcement on July 15 could bring the interest rates down to 0.5 percent from 0.75 percent. This will be the second rate cut after a surprise rate cut in January. At a time when the housing market is already overpriced, a rate cut could cause house prices climb further out of reach for many Canadians.

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

Has Greece come to the end of its Euro participation ?

 

Schwaben small S              Schwaben Blog

 

July 06, 2015

 

Weekly Statistics:

 

 

Today

Week Ago Year Ago
  06-July-15 26-June-15

06-July-14

       
S&P TSX

14,593

14,808

15,172

S&P 500

2,069

2,101

 1,977

DJIA

17,683

17,947

17,024

OIL

$52.78

$59.65

 $96.02

USD vs CAD

0.7905

0.8116

0.9370

Gold

$1,169

$1,174

 $1,320

 

In a historic outcome, the Greeks have overwhelmingly rejected the conditions of a rescue package from their creditors on Sunday. The Greeks were supposed to vote a ‘Yes’ or a ‘No’ on whether to accept their creditors’ conditions of pension cuts and tax increases, and continue being a part of Eurozone or reject their conditions and risk their country’s membership of Eurozone or even European Union.  61% of the Greek population voted ‘No’. Greece has now become the first developed economy to default on its international obligations and it is by far the largest default International Monetary Fund (IMF) has ever faced. The Greek economy is already facing acute crisis with national banks imposing a daily ATM withdrawal limit of 60 Euros and unemployment topping 20 percent.

This default does not necessarily mean that the Greece will be thrown out of the single currency Eurozone however will increase the risk that Greece will turn into a economic and financial tailspin that will force it to revert to a newly created Drachma. Tsipras came to power in January riding high on the promises of ending austerity measures and redefining the Greek economy. So far the economy has not shown any substantial progress and improvement. Although Greece does not play a major role in international trade, its debt default can lead to fear that the default may spread into the other troubled European countries (PIIGS) like Portugal, Italy, Ireland, Greece or Spain. and as a result could cause significantly raise their cost of borrowing. While this scenario is unlikely, in order to contain this contagion, German Chancellor, Angela Merkel, and French President, Francois Hollande met in Paris on Monday.  The image below compares the exposures of different countries to the Greek economy in 2010 to 2014 with Germany, Italy and Spain being the largest creditors to Greece. While Germany’s economy can withstand the default of the Greek economy, it will be the Italy and the Spain, which could face trouble as their economies are already under pressure.

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