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.

Soverign and Bank lending

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

Are the industrial provinces gaining the loss of the West ?

Schwaben small S                Schwaben Blog

 

May 22, 2015

 

Weekly Statistics:

Today

Week Ago Year Ago
22-May-15 15-May-15 22-May-14
(Midday)
S&P TSX

15,200

15,108

14,702

S&P 500

2,126

2,122

 1,892

DJIA

18,232

18,272

16,543

OIL

$59.93

$59.45

 $93.14

USD vs CAD

0.8165

0.8318

0.9072

Gold

$1,205

$1,225

 $1,297

 

According to Statistics Canada, the number of people receiving employment insurance (EI) benefits rose to 517,900 in March 2015 compared with 515,300 in March 2014. This is the first year-over-year increase since 2010. In March EI benefits rose by 8.9 percent to 38,800 while in February, the second straight month of more than 20 percent increase and the biggest rise since recession, surging to 29.4 percent. This was the fifth consecutive monthly increase for Alberta. Saskatchewan, Nova Scotia, Newfoundland and Labrador, which benefitted from the surge in crude oil prices, also saw larger increases in EI beneficiaries while British Columbia, Ontario and Prince Edward Island had smaller increases and benefits declined in Quebec by 1.5 percent from February. Alberta and Saskatchewan were major job creators during the last few years primarily because of the surge in crude oil prices however during the last year the crude prices have fallen by about 40% from their peak in June 2014 and therefore the rising fortunes of Alberta and Saskatchewan were expected to have a correction. The newly elected NDP government has promised to work with employers in the province but economists and financial commentators are still not confident of the government and are forecasting more troubles for the province in the near future.

Across the border, in the US, the number of EI beneficiaries fell in March and is pointing towards a strengthening labor market. While the US labor market is strengthening, Canadians are still feeling the pain because of last year’s collapse in oil prices.  Last year’s drop in the loonie should have strengthened manufacturing in Ontario and Quebec but no substantial gains in labor market have been recorded yet. Yesterday S&P 500 closed at a record high of 2,130.82 beating its previous high of 2,129.2 from Monday. This shows the increased confidence and optimism of investors but the low volumes in US indices paint a different picture. The low volumes could mean that people are being cautious and skeptical of further growth in equity markets. It could also mean that investors are waiting for the quarterly earnings season to see if the companies are really growing or it was the growth fueled by the availability of cheap money.

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

US economy stronger than expected but what does this mean for inflation and interest rates ?

Schwaben small S                            Schwaben Blog

 

May 15, 2015

 

Weekly Statistics:

Today

Week Ago Year Ago

15-May-15

08-May-15

16-May-14

S&P TSX

15,108

15,170

14,534

S&P 500

2,122

2,116

 1,885

DJIA

18,272

18,191

16,511

OIL

$59.45

$59.45

 $92.78

USD vs CAD

0.8318

0.8265

0.9072

Gold

$1,225

$1,188

 $1,296

The number of Americans filing new claims for unemployment benefits unexpectedly fell last week, pointing towards a strengthening US job market. Initial claims for unemployment benefits dropped 1,000 to 264,000 (seasonally adjusted) for the week ended May 9. Initial jobless claims have 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. Economists polled by Reuters had forecasted claims rising to 275,000 last week. As it is evident from the image below, the data could be volatile but the latest numbers are still near historic lows. A number below 300,00 is usually considered a threshold associated with strengthening labor market. The four-week moving average of claims, considered a better measure of labor market trends as it churns out the week-to-week volatility , fell 7,750 last week to 271,750. This was the lowest level since April 2000. Persistently low firings and greater employment gains should help a gain in wages and support consumer spending. The Federal reserve is still assessing the health of US economy before deciding when to raise the interest rates and unemployment numbers and jobless claims play a key role in that. Now that it’s almost certain that the Fed is not raising rates in June, majority of financial commentators are placing their bets on a rate hike in September. While US economy has overall shown signs of strength, flat retails sales and very low inflation rate could still make Fed to wait a little longer before finally raising interest rates.

US Jobless Claims May 15, 2015

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

Markets stronger than expected before weekend

   Schwaben very small S                                         Schwaben Blog

 

May 8, 2015

 

 

Weekly Statistics:

Today

Week Ago Year Ago
08-May-15 01-May-15

09-May-14

S&P TSX

15,170

15,339

14,534

S&P 500

2,116

2,108

 1,878

DJIA

18,191

18,024

16,583

OIL

$59.45

$59.26

 $91.07

USD vs CAD

0.8265

0.8222

0.9072

Gold

$1,188

$1,177

 $1,304

On Friday morning European markets surged about 2.5% on the conservative victory in England starting markets on a good note that continued in North America after the job market in US has rebounded on employment gains for the month of March. The employers added 223,000 new positions in April compared to a gain of 85,000 in March (initially reported as 126,000). Economists were expecting a gain for 224,000. The majority  of gains came from professional and business services (added 62,000 jobs), health care (added 45,000 jobs) and construction (added 45,000). The average hourly earnings for employees rose by 0.1% and have now grown by 2.2% in the last twelve months. This was below the economist’s estimate of 0.2%. The unemployment rate moved down to 5.4% and is closer to Fed’s expectation of “full employment”, which it pegs around 5.2%. This is the lowest unemployment rate since 2008. Michael Dolega, senior economist at TD Economics, said “The report was more or less a Goldilocks one, healthy enough to assuage fears that an abrupt slowdown in the US economy is upon us, but not strong enough to bring forward the Fed hike meaningfully”. The labor participation rate remained virtually unchanged at 62.8%, up 0.1% from participation rate. Over the last twelve months, it has stayed within a range of 62.7% and 62.9%, still near the lowest level since the late 1970s. Many economists now think that the first-quarter woes were temporary and the economy will rebound this spring, as it did last year from a first-quarter contraction. While the increasing gains in job numbers point towards the strengthening US economy but the slow growth in hourly wages paints a different picture. This absence of wage pressure will keep the Fed from raising the rates in June and it led to a rally in equity markets with all the major indices up more than 1%. While the Fed may not hike interest rates in June, a September rate hike is still on the table and this will be the first rate hike since 2006.

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

Is the US slowing or is it just a strong dollar ?

Schwaben S

Schwaben Blog

 

May 1, 2015

 

Weekly Statistics:

Today Week Ago Year Ago
01-May-15 24-Apr-15

02-May-14

S&P TSX

15,339

15,408

14,765

S&P 500

2,108

2,118

 1,881

DJIA

18,024

18,080

16,512

OIL

$59.26

$57.40

 $90.86

USD vs CAD

0.8222

0.8207

0.9072

Gold

$1,177

$1,180

 $1,304

 

The US economy stalled in the first quarter with Gross Domestic Product (GDP) increasing at an annual rate of only 0.2%. That was a big drop from last quarter’s 2.2% growth and the weakest growth in last one year. A survey of 86 economists by Bloomberg had a median forecast of economic growth of 1%.   While harsh weather dampened the consumer spending, it was a stronger dollar that further weakened the economic growth. The dollar’s more than 4.5% gain against US’s main trade partners in the first quarter led to in an increase in trade deficit from $471.4 Billion to $522.1 Billion. This subtracted 1.25% points from the first quarter growth. What many economists and analysts have not considered though is that a rise in U$ against other currencies will suppress reported earnings of foreign subsidiaries and hence understate the “real” operating earnings that companies have earned. In other words lower corporate earnings are a result of currency losses rather than lower corporate earnings. Diane Swonk, chief economist at Mesirow Financial in Chicago said, “ The US economy has yet to demonstrate the self-sustaining resilience that the Fed wants to see before raising the interest rates”.  The Fed officials met on Wednesday and noted for the fist time that non-energy imports were keeping inflation below its target of 2%, which indirectly implies the impact of a stronger dollar. The Fed clearly stated its intention to be data-driven while deciding for hiking the interest rates. This will be the first time since 2006, if the Fed decides to raise the interest rates. It means that from now on rates could be hiked in any of the Fed’s meeting. During previous meetings of the Fed, financial commentators and economists interpreted that interest rates could be increased in June or September but with the recent announcement, Fed has cleared the rumours regarding rate hike.

Meanwhile the US job markets showed signs of improvement as the wages for private sector employees increased by 0.7% in the first quarter and were up 2.8% in the last twelve months. This is the biggest gain in more than six years. The Labor department also reported that the number of claims for job less benefits fell to the lowest level since 2000. The number was 262,000 versus a consensus estimate of 290,000, well below the 300,000 mark that economists have been using as a benchmark. While this shows that the US economy is improving well but the slow growth in GDP tells a different story. This confused sentiment has led to an increased volatility in equity markets and fear amongst investors.

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