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 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

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

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