Showing posts with label Economic Indicators. Show all posts
Showing posts with label Economic Indicators. Show all posts

Saturday, August 24, 2019

European investors find a bright spot in Brexit's murk: gilts

By Virginia Furness and Tommy Wilkes

LONDON (Reuters) - Volatile sterling and the prospect of a damaging no-deal Brexit aren't hurting demand for British government bonds among foreign money managers, who are betting the debt will outperform if the UK does end up making a disorderly exit from the European Union.

The rally in British debt since June has halved yields on 10-year bonds, and while the moves are part of a global scramble into top-rated assets, a chunk of the new buyers are overseas managers positioning for no-deal Brexit, according to investors and bankers with experience of managing sovereign bond sales.

Added to this are relatively attractive yields -- 10-year gilts, as UK bonds are known, yield 0.55% (GB10YT=RR), compared with -0.65% for the 10-year German bund, or 0.15% for Spanish equivalents.

"You see (overseas) investors thinking very simply: where can I still get yield from," said David Zahn, head of European fixed income at Franklin Templeton.

Zahn, who has been buying gilts as a Brexit hedge, said this was a more attractive trade than betting against the pound -- the currency could rebound after Britain leaves the EU.

"If you see a no-deal Brexit, gilts will outperform," he said.

Bank of England data show foreign investors poured 7.3 billion pounds ($8.87 billion) into gilts in June, the latest month for which figures are available. Cumulative inflows since April were 19 billion pounds. Last year from April to June, non-residents added 1.5 billion pounds to gilts.

Monthly numbers can be volatile and are not seasonally adjusted. Redemptions of maturing bonds in one month can also distort data.

BoE figures show that cumulative inflows from overseas on a 12-month rolling window topped 32.8 billion pounds in June -- the highest since September 2017.

(Graphic: Foreign investment into British government bonds link:

Two London-based bankers told Reuters European buyers had been looking to diversify away from negative-yield home markets. In countries such as Sweden and Germany, all government bonds yield less than 0%, meaning investors are guaranteed to lose money if they hold bonds to maturity.

The bankers said the gilt trade had gained in popularity after Boris Johnson became prime minister in July and pledged to leave the EU by Oct. 31 with or without a transition agreement.

Asian investors have also been buying, one of the sources said, speaking on condition of anonymity.

Despite increased foreign buying, the source cautioned that domestic investors, who dominate the market, accounted for most of the new purchases.

For foreign managers, the cost of hedging sterling risk can wipe out any yield advantage from gilts. For euro-based buyers, for example, 10-year gilt yields approach the -0.6% that German Bunds pay, after hedging.

What investors are banking on is that after a disorderly Brexit, gilts will rally sharply.

"We are long gilts at the moment, we have set up a spread: long gilts versus short Bunds," said Marc Kersten, portfolio manager at German asset manager Union Investment.

A Brexit shock would sharply lower gilt yields because Britain's economy would be hit far worse hit than the euro zone's, he predicted. He said he would load up on more gilts if they sell off.


Currently, money markets expect only a quarter-point interest rate cut in Britain by March 2020, compared with more immediate easing priced in for the United States and euro zone.

BoE policymakers have said rates could move either way after a no-deal Brexit. But most investors expect the central bank to slash rates quickly and even resume money-printing stimulus to stave off recession. Data show UK output already contracted in the second quarter.

"The outlook for the UK economy is challenged and the prospect of any interest rate hikes seems vanishingly small," said Sunil Krishnan, head of multi-asset funds at Aviva (LON:AV) Investors. "The flow of funds does show euro zone investors remain significant participants in the gilt markets."

A spokesman for the UK Debt Management Office said the increase in overseas gilt holdings may reflect investors rebalancing portfolios after recent sterling weakness.

Not everyone thinks buying gilts makes sense.

Alex McKnight, a portfolio manager at GAM Investments, recommends betting on a plunge in sterling instead of buying gilts, because the currency was likely to fall further with a no-deal Brexit than it would rise with a positive outcome.

Fund managers also warn that higher government spending to offset damaging Brexit consequences would actually boost yields, especially on longer-dated bonds. Some fear that any move toward higher spending in Germany and elsewhere would end the global bond rally.

"The moves in gilts could be quite violent downward, but then quickly reversed," said Colin Harte, multi-asset strategist at BNP Paribas (PA:BNPP) Asset Management.

(Editing and additional reporting by Sujata Rao; editing by Larry King)

Original Article

Friday, August 23, 2019

Take Five: G7 set for communique-tion breakdown

(Reuters) -


Has there been a time in recent decades when the Western world was so divided? Trade, climate change, exchange rates, government spending, Brexit, dealings with China, Iran and Russia - there doesn't seem to be an issue that all members of the wealthy G7 group of nations agree on. So far apart are their views that the Aug. 24-26 Biarritz G7 summit is expected to be the first since 1975 to end without the usual joint communique.

Summit host France's president, Emmanuel Macron, has put climate change center-stage for the event. But on that and most other subjects, U.S. President Donald Trump is an outlier. Locked in a trade war with China, he has floated the idea of tariffs on imports from the EU and elsewhere, and his suggestion to re-admit Russia to the G7 has met with opposition from other members.

Macron's new tax on U.S. tech firms has also irked Trump, who has threatened retaliation on French wine exports.

Another issue investors will watch for is whether any mention is made of fiscal stimulus, above all in Germany, something Chancellor Angela Merkel has hesitated over.

Finally, it will be the first outing on the global stage for Britain's Prime Minister Boris Johnson who, after somewhat discouraging meetings with Merkel and Macron, might be looking forward to a friendlier exchange with Trump over Sunday breakfast. It remains to be seen, however, how POTUS reacts to Johnson's own plan for a digital tax and his agreement with other European leaders on the Russia issue.

(Graphic: Deforestation in Brazil's Amazon (NASDAQ:AMZN) rainforest png link:


One typically expects markets to be somewhat dozy during the dog days of August. But for bond traders there has been no respite.

This month saw global debt yields tumble to new record lows, with the market value of negative-yielding debt worldwide shooting up to $16 trillion. The whole summer has been marked by a broad flight-to-quality, with record 3-month inflows of $155 billion into bond funds, according to Bank of America Merrill Lynch (NYSE:BAC).

The month's milestones included the U.S. Treasury bond yield curve's first inversion since 2007. The gap between 2-year and 10-year yields has since 'normalized' - meaning 10-year bonds yield more than their shorter-dated counterparts - though barely so. It's not that recession risk has declined; but markets have paid attention to the fact that Federal Reserve policymakers and the last Fed meeting minutes indicate many within the U.S. central bank oppose a sustained cutting cycle.

In other firsts, entire yield curves in the Netherlands, Germany and Sweden sank into negative territory for the first time. Germany auctioned its first negative-yielding 30-year bond, and Denmark launched the world's first negative interest rate mortgage.

The sub-zero party faces a potential challenge from the possibility that European governments might loosen their purse strings in a last-ditch bid to shore up flailing economies. Even Germany might ditch its cherished balanced budget policy and take on more debt, Reuters reported. But markets can probably rest easy for now; finance minister Olaf Scholz has hinted at a meager 50 billion euro package to be deployed during a crisis.

(Graphic: Govt bond yield curves below zero link:


The second reading of U.S. gross domestic product, due on Thursday, largely contains tweaks to data already in plain view – consumer spending, business investment and inventories. But one fresh data point will show how corporate America's profits fared in the second quarter. After robust growth in 2018 thanks partly to the Trump administration's tax cuts, profits slid year-on-year in Q1 by the most since 2016. If earnings from publicly traded U.S. companies like those in the S&P 500 Index are any guide, the April-June period should show a modest improvement but it won't be anything like last year.

A couple of sectors also bear watching for signs of fatigue – or a lift – from Trump's trade policies. Manufacturers' Q1 profit growth slowed sharply from the brisk pace of late 2018, and we could well see the softness extend into Q2. But fabricated metals producers, whom Trump aimed to help with punitive tariffs on steel and aluminum imports, bucked the softer trend with 30% year-on-year profit growth, the strongest rate in nearly seven years. Their Q2 numbers might again provide some cheer.

(Graphic: Fading tax cut tailwinds? link:


On Sept. 12, European Central Bank boss Mario Draghi will chair his penultimate policy meeting. For most of the eight years he has spent at the helm, euro zone inflation has undershot targets and data on Aug. 30, an advance consumer inflation reading, should underscore how far off the ECB target of below but close 2% the bloc remains.

The data will probably be seen as underscoring the need for more measures to kick-start price growth. Data since the last ECB last met has been dismal, and accounts of its July 25 meeting have reinforced that the bank is preparing to unleash support.

Analysts polled by Reuters reckon core inflation data, stripping out unprocessed food and energy, which the ECB scrutinizes in policy decisions, fell to 1.0% in August, slipping further from July's 17-month low of 1.1%.

A narrower measure that excludes alcohol and tobacco prices is also seen declining further.

Such stubbornly soft inflation will likely stir debate about the need to amend the ECB's inflation target, in favor of a more flexible goal that would open the door to even bigger stimulus. The data might also re-ignite calls for Germany to start spending more.

(Graphic: Inflation link:


China's normally steady yuan has dropped 2 percent within 2 weeks and is almost at 7.1 per dollar, a 2008 crisis low. Having fallen almost 3% year-to-date it could weaken further in the coming week if Trump sends the euro sliding with tariffs on European Union exports. What's more, the next batch of U.S. tariffs - a 10% levy on many Chinese imports - is set to take effect soon.

A short yuan trade looks like a no-brainer. From global growth and trade to China's domestic economy and interest rate policy, everything argues for a weaker yuan. And while Chinese authorities aren't forcibly depreciating their currency to offset declining exports, state-run banks' operations only hint at efforts to massage the decline rather than arrest it.

As for the latest interest rate reforms aimed at lowering lending rates in the economy, they have just come into effect, but banks' prime rate slipped just 6 basis points. Rates may fall further in coming weeks, but the feeling on the ground is that will happen only if the Fed hints at deeper rate cuts.

(Graphic: China's weakening yuan link:

Original Article

German Industry Is Being Battered By a Perfect Storm

© Reuters.  German Industry Is Being Battered By a Perfect Storm© Reuters. German Industry Is Being Battered By a Perfect Storm

(Bloomberg) -- Deep in Europe’s manufacturing core, a German company is taking radical steps to cope with a perfect storm that has sent traditional economic pillars into a tailspin and put the country on the verge of recession.

Huebner GmbH -- a 73-year-old supplier of rubber and plastics that employs 3,300 people around the world -- is selling its unit that makes accelerator pedals, key pads and auto-body parts after getting squeezed by Germany’s carmakers. Instead, it’ll focus on public transport and -- in a completely new endeavor -- making lasers.

The move reflects how Europe’s largest economy -- reliant on exports and a world leader in the century-old industries of cars, machines and chemicals -- is at a critical juncture. It’s being hit by U.S. President Donald Trump’s protectionism and Brexit uncertainty just as companies struggle with a high-risk transition to greener products and smarter digital factories.

The German economy shrank in the second quarter and could do so again this quarter. The latest warning sign came on Thursday, when a nationwide gauge showed orders at factories and services companies dropping at the fastest pace in six years. More German companies now expect output to fall rather than rise over the next 12 months, the first time that’s happened since 2014.

With day-to-day business roiled by geopolitical power plays, German giants like Siemens AG (DE:SIEGn), BASF SE (DE:BASFN) and Daimler AG (DE:DAIGn) have been forced to lower profit forecasts and seek ways to cut costs. Smaller brethren like Huebner say they’re being pushed too hard in the fallout.

The shift to new markets was made because big manufacturers are mistreating suppliers by “forcing them into ever lower prices,” said Chief Executive Officer Reinhard Huebner, son of the founder who fled the advancing Russian army in the 1940s before starting the Kassel-based company.

Products such as the folding bellows that connect bus and tram carriages are “a better and safer place” than the auto industry as cities around the world invest more in public transport, he said.

Small and medium-sized enterprises such as Huebner make up the so-called Mittelstand, which accounts for 35% of corporate revenue and 58% of jobs in Germany. Often family-owned, they don’t have the cash buffers to sit out a downturn. Nor are they well-positioned to address structural challenges like a dramatic shift in the underpinnings of modern manufacturing.

“The SMEs are more-or-less sandwiched” between big companies and their customers, said Andreas Fehler, a spokesman for the Chemical Association of Baden-Wuerttemberg. “They deliver to the automotive or machinery industry, and these are the industries, well, we’ve seen in the last weeks how they’ve been holding up -- and this is a problem.”

The ultimate challenge facing German manufacturing is the transition to so-called Industry 4.0. The concept refers to the so-called fourth industrial revolution as manufacturers around the globe go digital. The aim is to combine robotics, machine learning, cloud computing, big data and the Internet of Things to create smart factories capable of better, more efficient production.

While Germany originated the term, the country is ill-equipped to deal with the transition, with deficiencies in everything from software training to Internet infrastructure.

Amid complaints about a lack of government support and a shortage of trained labor, the Mittelstand is falling behind on research and development efforts, according to a report by the Bavarian Chamber of Commerce. The state, home to BMW and Audi, only hit its goal of R&D outlays accounting for 3% of GDP thanks to spending by big companies.

Giving voice to mounting concerns over the country’s competitiveness, more than 50,000 people attended a June rally in Berlin organized by industrial union IG Metall. The goal was to prod the government to help prevent widespread layoffs from the technology shift.

While political issues such as Brexit and trade tensions are distorting measures such as the exchange rate and raw materials prices, making economic judgments “incalculable,” companies still need to look further into the future, according to Olaf Wortmann, an economic expert at the German Mechanical Engineering Industry Association.

“It’s pretty gruesome right now,” said Wortmann. “Merely waiting isn’t enough. You can prepare by trying to address all the technical challenges. But simply waiting won’t do it.”

Rubber to Lasers

For Huebner, that’s meant investing in lasers. The project -- far removed from the molding it’s done for decades -- started in 2014 with a series of acquisitions. The photonics unit now has 70 employees, with manufacturing locations in Stockholm and at its headquarters in Kassel and sales offices in Silicon Valley and the U.K. The company’s products are used for holographic films for augmented reality glasses and biomedical research.

Sales, which have doubled since the unit was established, are “growing like hell,” said Ingolf Cedra, Huebner’s managing director for materials and photonics.

He’s optimistic that Germany, which successfully rebuilt after the ravages of war and absorbed the communist east after the Berlin Wall fell 30 years ago, will ultimately weather the current turbulence.

“German industry has a fantastic chance in combining the mechanical expertise, in designing the machinery and merging that with clever software solutions,” said Cedra. “I do believe that the Mittelstand -- driven by machinery business, mechanical engineering -- they have a chance, and they will take the chance.”

Original Article

Primary dealers get record low share of U.S. 30-year TIPS supply

Primary dealers get record low share of U.S. 30-year TIPS supplyPrimary dealers get record low share of U.S. 30-year TIPS supply

NEW YORK (Reuters) - The U.S. Treasury Department on Thursday awarded primary dealers their smallest ever share of 30-year Treasury Inflation Protected Securities at an auction as investors took majority of the supply, Treasury data showed.

Primary dealers, or the top 24 Wall Street firms that do business directly with the Federal Reserve, received 10.63% of the $7 billion in 30-year TIPS offered , resulting in their yield to be sold at 0.501%, which was the lowest yield at an auction of this maturity since October 2012.

Indirect bidders which include fund managers and foreign central banks were allotted 81.62% of the 30-year TIPS supply, marking their second-largest share ever at such an auction.

Direct bidders which include smaller bond dealers and certain large investors acquired 7.75% of the supply, which was their biggest share since June 2017.

The ratio of bids to the amount of 30-year TIPS offered came in at 2.70, the strongest reading on overall demand since June 2017.

Original Article

Thursday, August 22, 2019

U.S. 30-year mortgage rates fall to lowest since Nov 2016: Freddie

(Reuters) - Borrowing costs on U.S. 30-year fixed-rate mortgages fell to their lowest level since November 2016 in line with the recent decline in bond yields because of trade and recession fears, Freddie Mac said on Thursday.

The interest rates on 30-year mortgages averaged 3.55% in the week ended Aug. 22, down from 3.60% a week earlier and 4.51% a year ago, the mortgage finance agency said.

Original Article

Euro zone business growth recovers, but outlook worsens: PMIs

By Rahul Karunakar

BENGALURU (Reuters) - Euro zone business growth picked up a touch in August, helped by brisk services activity and as manufacturing contracted at a slower pace, but trade war fears knocked future expectations to their weakest in over six years, a survey showed.

Despite increasing worries about a global slowdown, the U.S. and China have shown no sign of backing down in their trade war.

That has pushed businesses to be less hopeful of a significant acceleration in economic activity anytime soon, which will in turn underscore policymakers' pledges for more accommodative policy.

IHS Markit's Euro Zone Composite Flash Purchasing Managers' Index (PMI), seen as a good guide to economic health, climbed in August to 51.8 from 51.5 in July and above 51.2 predicted in a Reuters poll. Anything above 50 indicates growth.

The composite future output index measuring overall business optimism sank to 55.5, its lowest since May 2013, from 58.8 in July.

"The dynamics of the euro zone economy were little changed in August, with solid growth in services continuing to hold the wider economy's head above water despite ongoing manufacturing decline," noted Chris Williamson, chief business economist at IHS Markit.

"While the rate of overall expansion ticked up, we're still looking at GDP only rising by between 0.1% and 0.2%, based on the PMI data for the third quarter so far."

There was a modest revival among firms operating in the bloc's dominant services industry. The flash services PMI rose to 53.4 from July's 53.2, above the 53.0 expected in a Reuters poll.

Still, in another sign of scant optimism in boardrooms, a business expectations sub-index fell to a near five-year low of 57.3 from 61.2 in the previous month.

Factory activity contracted for the seventh month in a row, although at a slower rate than the previous month, with the related index rising to 47.0 from 46.5 in July, beating the 46.2 forecast in a Reuters poll.

An index measuring output, which feeds into the composite PMI, came in at 47.8, marking a slower pace of contraction than the 46.9 logged in July.

However, the future output index which measures optimism among factories fell to 51.0, its lowest since November 2012.

"The lack of a quick rebound from the recent economic slowdown has impacted firms' confidence... It appears that companies are braced for a sustained period of weakness, and as a result are showing greater reluctance to take on additional staff," added Williamson.

Original Article

German businesses continue to underperform in August: PMI

BERLIN (Reuters) - Germany's private sector continued to struggle in August as a manufacturing recession dragged on and activity in the services sector eased slightly, a survey showed on Thursday, suggesting Europe's largest economy is heading for a recession.

Markit's flash composite Purchasing Managers' Index (PMI), which tracks the manufacturing and services sectors that together account for more than two-thirds of the economy, edged up to 51.4 from 50.9 the previous month.

This beat the consensus forecast of analysts surveyed by Reuters, who had expected a weakening to 50.5.

Still, Phil Smith from IHS Markit said the data was not strong enough to dispel the threat of another minor contraction in gross domestic product in the third quarter.

The German economy contracted 0.1% in the April-June period due to a plunge in exports, and sentiment indicators are suggesting hardly any improvement for the three months from July to September.

"Germany remains a two-speed economy, with ongoing growth of services just about compensating for the sustained weakness in manufacturing," Smith said.

The survey showed that overall job creation in the private sector slipped to a five-year low while business expectations about future output turned negative for the first time since late 2014.

(The story adds dropped word 'to' in headline.)

Original Article

Japan August manufacturing shrinks for fourth month as export orders fall: flash PMI

TOKYO (Reuters) - Japanese manufacturing activity shrank for a fourth straight month in August as export orders fell at a sharper pace, a preliminary business survey showed on Thursday.

But services sector activity expanded at the fastest pace in nearly two years, suggesting resilient domestic demand is continuing to offset some of the strong external pressures on the economy.

The Jibun Bank Flash Japan Manufacturing Purchasing Managers' Index (PMI) rose to a seasonally adjusted 49.5 from a final 49.4 in the previous month, but stayed below the 50.0 threshold that separates contraction from expansion for a fourth month.

Factory output and total new orders contracted again, though at a slightly more moderate pace than in July.

Other key activity gauges in the PMI report offered a mixed picture. Employment expanded, while the backlog of work index rose to an eight-month high, though it remained in contraction.

A separate survey showed Japanese service activity expanded. That, in turn, helped lift a composite PMI index that includes both manufacturing and services.

The Jibun Bank Flash Japan Services PMI climbed to 53.4 in August, from a final 51.8 in July on a seasonally adjusted basis, and the highest level since October 2017.

"Solid growth seen in GDP so far this year could stretch into the third quarter, providing a timely boost before the fourth quarter, which is likely to be adversely impacted by the consequences of a sales tax hike," said Joe Hayes, economist at IHS Markit, which compiles the survey.

The growth seen in the services sector was in line with GDP figures released this month that showed the world's third-largest economy grew an annualized 1.8% in the second quarter largely thanks to robust household consumption and business investment.

If sustained, solid growth in services could help offset external pressure on the export-reliant economy, which has been hit by weak global demand and the U.S.-China trade war.

Japan's exports slipped for an eight month in July, dragged down by China-bound shipments of car parts and semiconductor production equipment,

Separately, Japanese manufacturers' confidence turned negative for the first time since April 2013, the Reuters Tankan survey showed.

The Jibun Bank Flash Japan Composite PMI advanced to 51.7 from 50.6 the previous month.

Original Article

UK employers' pay deals hit 10-year high: XpertHR

LONDON (Reuters) - Major British employers gave average pay rises of 2.6% to staff in the three months to July, the highest pace of increase in more than 10 years, data from industry consultants XpertHR showed on Thursday.

Annual pay settlements in Britain began to rise roughly a year ago as the lowest unemployment rate since the mid-1970s put pressure on employers to retain staff, but deals had been stuck at around 2.5% in recent months.

The increase in the latest data represented the strongest rise since the three months to December 2008.

XpertHR noted signs of caution among employers with less than a quarter of awards higher than the same group of employees received at their previous pay review while 43% were lower.

XpertHR analyst Sheila Attwood said it was too soon to declare the start of a sustained increase in pay awards.

The Bank of England has said the tight labor market means it is likely to raise interest rates gradually, assuming Britain can avoid the economic shock of a no-deal Brexit.

Original Article

Wednesday, August 21, 2019

Increased external risks fuel German business uncertainty: ministry

BERLIN (Reuters) - The German economy is facing increased headwinds from abroad and this is fuelling business uncertainty, the finance ministry said on Thursday, adding that the so far robust labor market is showing first signs of cooling.

Export-oriented manufacturers in Europe's largest economy are suffering from weaker foreign demand, growing trade tensions and uncertainty over Brexit.

"External risks have increased significantly and are fuelling business uncertainty," the finance ministry said in its monthly report, adding that early indicators pointed to a sustained slowdown in the industrial sector.

Record-high employment, inflation-busting pay hikes and low borrowing costs have supported Germany's domestic economy so far, with household spending and construction providing a certain buffer against external shocks.

"The labor market situation is still favorable, but employment growth is slowing," the ministry cautioned. Forward-looking indicators were pointing to a further slowdown in employment growth, especially in manufacturing.

The economy contracted by 0.1% quarter-on-quarter from April to June. The Bundesbank warned on Monday that overall economic output could have continued to shrink over the summer, raising the specter of a technical recession.

The finance ministry said tax revenues of the federal government and the 16 regional states rose 2.3% year-on-year from January to July. That was slightly below the projected rise of 2.4% for the whole year.

The sluggish tax take could complicate Finance Minister Olaf Scholz's efforts to keep the federal government's budget balanced, increasing the pressure to ditch the self-imposed policy goal of not taking on new debt.

Original Article

Fed Members Not All-In on Further Rate Cuts: Fed Minutes

© Reuters.  © Reuters. - Federal Reserve policymakers highlighted concerns about slowing global growth and trade tensions as headwinds, but stopped short of suggesting that a series of rate cuts should follow, according to the minutes of the Federal Reserve’s July meeting released Wednesday.

"Most participants viewed a proposed quarter-point policy easing at this meeting as part of a recalibration of the stance of policy, or mid-cycle adjustment, in response to the evolution of the economic outlook over recent months," the Fed minutes showed.

The Fed suggested that the best course of action would be to remain "flexible" and monitor incoming economic data amid uncertainty over when risks weighing on the economy, including the U.S.-China trade war would be resolved.

"In their discussion of the outlook for monetary policy beyond this meeting, participants generally favored an approach in which policy would be guided by incoming information and its implications for the economic outlook and that avoided any appearance of following a preset course," according to the release of the minutes.

The Federal Reserve cut its benchmark rate by 25 basis points to a range of 2.0% to 2.25% from 2.25% to 2.5% on July 31.

At its July meeting, the Federal Reserve cited “the implications of global developments for the economic outlook as well as muted inflation pressures” as reasons for cutting rates for the first time since the 2008.

But the decision to lower rates was not unanimous, the minutes showed. Esther George and Eric Rosengren dissented largely because economic indicators suggested the economy remained somewhat robust.

The minutes drew a muted reaction in markets, with many looking to Fed Chairman Jerome Powell's speech at Jackson Hole, Wyo. on Friday for further clues on monetary policy. Some also claimed the minutes were largely a non-event as the July meeting took place before President Donald Trump proposed to slap new tariffs on China. The tariffs, however, have been pushed back to Dec. 15 from from Sept. 1.

“If (Powell) believes that risks may warrant a ‘somewhat’ lower path for policy, then a 25bp cut will be confirmed and market pricing, which currently rests above that level, will need to adjust,” Morgan Stanley said in a note.

Powell has faced relentless pressure from Trump to deliver a big rate cut.

Trump claimed earlier this week that Powell had a “horrendous lack of vision" and called on the central bank to slash rates by 100 basis points and renew “some” quantitative easing. Today he likened Powell to a golfer that can’t putt with “no touch.”

The Fed, in its July statement, pledged to end its balance sheet shrinking program at the end of the month, two months earlier than initially anticipated.

Original Article

First-time U.S. home buyers face supply struggle as rates fall

© Reuters. A real estate sign advertising a new home for sale is pictured in Vienna, Virginia© Reuters. A real estate sign advertising a new home for sale is pictured in Vienna, Virginia

By Richard Leong

(Reuters) - Mortgage rates are at a three-year low and housing price appreciation has cooled, but many Americans seeking to buy their first home are facing tough times.

Why? There just aren't enough homes for sale.

Developers have struggled to build enough new homes, especially at entry-level prices, because of land and labor shortages and rising material costs.

The supply tightness has been compounded by retirees "aging in place" and Baby Boomers content to make additions to their current homes, rather than moving, analysts said.

"The problem for first-time buyers is still supply," said Doug Duncan, chief economist at Fannie Mae in Washington.

There were 1.89 million previously owned homes on the market in July, down from 1.92 million in June and 1.6% from July 2018, the National Association of Realtors said on Wednesday.

On the other hand, starts on new single-family homes edged up 1.3% in July to an annualized rate of 876,000 units in July, the fastest pace in six months, the Commerce Department said last week.

First-time buyers bought 559,000 single-family homes in the second quarter, down 4% from a year ago, a report from Genworth Mortgage Insurance released on Wednesday showed.

Weaker first-time home sales came at a time while the broader market has recovered a bit from the downdraft in late 2018.

"This represents a shift in housing market dynamic dating back to 2012," Genworth chief economist Tian Liu said in the report. "For the first time, the year-over-year growth rate in home sales to first-time homebuyers underperformed the overall single-family housing market, which was down 2 percent year-over-year."

GRAPHIC: U.S. home prices vs 30-year mortgage rate -


The decline in home borrowing costs and weaker home price growth should buffer first-time homebuyers as housing stocks remain tight, analysts said.

The mild pickup in wage growth, now at a 3% annual pace, should also help.

"It's a plus for first-time buyers," Fannie Mae's Duncan said.

The interest rates on conventional 30-year mortgages, or those with loan balances of $484,350 or less, averaged 3.90% in the week ended Aug. 16. This was the lowest reading since November 2016 and down from 4.81% a year earlier.

Mortgage rates have fallen in recent weeks in step with bond yields as investors have piled into low-risk government bonds to shield their money because of fears about a recession and trade tensions between China and the United States.

While borrowing costs fell in the second quarter, first-time homebuyers paid about half a percentage point more than other buyers, Genworth's Liu said.

Even as the costs to acquire a home have fallen somewhat, the lack of homes for sale will persist as a major impediment for first-time buyers to achieve their "American Dream."

"In a lot of places, homes for sale are still limited," Duncan said.

Original Article

U.S. home sales jump, boosted by lower mortgage rates

© Reuters. A home is seen in the Penn Estates development where most of the homeowners are underwater on their mortgages in East Straudsburg© Reuters. A home is seen in the Penn Estates development where most of the homeowners are underwater on their mortgages in East Straudsburg

By Jason Lange

WASHINGTON (Reuters) - U.S. home sales rose more than expected in July, boosted by lower mortgage rates and a strong labor market, signs the Federal Reserve's shift toward lower interest rates was supporting the economy.

A separate report released by the Labor Department on Wednesday suggested the level of employment in the country was slightly lower than previously estimated, taking a bit of the shine off the labor market.

Despite headwinds from a global economic slowdown, the U.S. housing market appears to be strengthening.

The National Association of Realtors said existing home sales rose 2.5% to a seasonally adjusted annual rate of 5.42 million units last month. July's sales pace was revised slightly higher to 5.29 million units from the previously reported 5.27 million units.

Economists polled by Reuters had forecast existing home sales would rise to a rate of 5.39 million units in July.

Last month's increase left existing home sales, which make up about 90 percent of U.S. home sales, higher than they were a year earlier for the first time in 17 months. The U.S. home market slipped into a rut last year as the U.S. central bank continued a rate-hiking campaign.

After raising rates in December, the Fed later signaled it was done with the tightening, and by July the central bank switched gears completely, cutting rates for the first time since 2008 in a bid to keep a global downturn from causing a U.S. recession.

The rate cut came despite the U.S. unemployment rate being at its lowest level in nearly 50 years. The Labor Department reported on Wednesday that the overall level of employment was 0.3% lower in March, or 501,000 fewer jobs, than previously estimated.

This preliminary estimate will be refined and incorporated early next year into the Labor Department's estimates for job gains through 2019, which have been robust although on average slower than in 2018.

Last month, existing home sales rose across the country except for the Northeast, the NAR said.

The 30-year fixed mortgage rate dropped to an average of 3.77% in July from more than a seven-year peak of 4.94% in November, according to data from mortgage finance agency Freddie Mac. The average rate fell to 3.6% in the Aug. 15 week and rates could decline further as the Fed is expected to cut rates in September due to concerns about economic weakening.

There were 1.89 million previously owned homes on the market in July, down from 1.92 million in June and a 1.6% decrease from July 2018. The median existing house price increased 4.3% from a year ago to $280,800 in July.

At July's sales pace, it would take 4.2 months to exhaust the current inventory, down from 4.4 months in June. A six-to-seven-month supply is viewed as a healthy balance between supply and demand.

Original Article

Canada Inflation Holds Steady at 2%, Tempering Case for Rate Cut

© Reuters.  Canada Inflation Holds Steady at 2%, Tempering Case for Rate Cut© Reuters. Canada Inflation Holds Steady at 2%, Tempering Case for Rate Cut

(Bloomberg) -- Inflation in Canada was firmer than expected last month, keeping underlying price pressure right at the central bank’s target and giving policy makers one less reason to consider immediate interest rate cuts.

Annual consumer price inflation was 2% in July, matching June’s pace, Statistics Canada said Wednesday from Ottawa. Economists had expected inflation to slow to 1.7%. Core inflation, a better gauge of underlying pressure, unexpectedly ticked up slightly to 2.03%.

Key Insights

  • While sharp movements in gasoline prices have generated volatility in Canada’s headline inflation number, underlying price pressure has been remarkably stable near the Bank of Canada’s 2% target for well over a year. This suggests a largely benign environment for inflation.
  • Stronger inflation dynamics in Canada are one reason why economists and markets are anticipating fewer cuts, and a slower pace of reductions, by the Bank of Canada than the Federal Reserve. Markets are pricing in just one rate cut this year in Canada, even though some analysts have begun to speculate a cut could take place as early as the next rate decision in September due to growing global trade tensions.
  • The expectation had been price gains would ease over the summer months, with the Bank of Canada projecting annual inflation to temporarily fall to 1.6% in the third quarter before returning to 2%. Wednesday’s numbers suggest inflation dynamics have been stronger than policy makers had predicted.
Canada’s currency rose after the release, climbing 0.3% to C$1.3278 against its U.S. counterpart at 8:41 a.m. in Toronto. Two-year bond yields jumped 4 basis points to 1.39%.

“It’s an argument against a September rate cut, but they’ll still have to respond with stimulus if the global economy slows significantly,” Andrew Kelvin, senior Canada rates strategist at Toronto Dominion Bank.

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  • On a monthly basis, consumer prices rose 0.5%, well above analyst projections for a 0.2% gain.
  • On a seasonally adjusted basis, prices rose 0.4%, after a 0.1% drop in June. Since February, monthly seasonally adjusted price inflation has averaged almost 0.3%, double the monthly averages recorded in recent years.
  • The average of three measures of core inflation tracked by the Bank of Canada rose slightly to 2.03% in July, from a downwardly revised 2.0% in June. The common rate was at 1.9%, the median rate was 2.1% and the trim rate was 2.1%.
  • Air transportation and travel tours was the biggest upward contributors to monthly CPI, along with gasoline and digital computing equipment and devices.
Original Article

U.S. home refinancing activity hits three-year high: MBA

NEW YORK (Reuters) - U.S. homeowners filed the most applications to refinance their current mortgages in over three years as 30-year borrowing costs slipped to their lowest levels since late 2016, the Mortgage Bankers Association said on Wednesday.

The Washington-based group's seasonally adjusted index on mortgage refinancing activity edged up 0.4% to 2,754.7 in the week ended Aug. 16, which was its highest since July 2016.

Interest rates on 30-year, fixed-rate mortgages averaged 3.90%, down 3 basis points from the prior week. This was their lowest reading since the week of Nov. 4, 2016.

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UK posts small budget surplus as government spending rises before Brexit

LONDON, Reuters) - Britain posted a smaller-than-expected budget surplus in July as government expenditure rose, underlining budget constraints on new Prime Minister Boris Johnson as he promises to boost spending ahead of Brexit.

The surplus, excluding state-owned banks, stood at 1.319 billion pounds, compared with 3.562 billion pounds in July 2018, official data showed on Wednesday.

This was well below the median forecast of 2.7 billion pounds in a Reuters poll of economists.

July is traditionally a surplus month for the public finances, driven by income tax payments from individuals.

While most tax receipts were up a little compared with a year ago, government spending was 2.6 billion pounds higher, a 4.2% annual increase. Purchases of goods and services and staff costs drove most of the rise.

For the first four months of the financial year starting in April, Britain has borrowed 16.0 billion pounds, up 60% compared with a year ago although the deficit as a share of the economy remains small compared with a decade ago.

In the longer-term, the outlook for the public finances is clouded by Brexit and uncertainty around government spending.

Prime Minister Johnson has made billions of pounds of new spending commitments in his first few weeks in office, even before the potential costs of a disruptive, no-deal Brexit are taken into account.

Ratings agency Moody's said on Aug. 1 that some of the announcements raised "further questions about the government's commitment to addressing the legacy of debt bequeathed by the financial crisis."

Finance minister Sajid Javid will give more details of the plans soon, before a full annual budget later in the year - assuming that a no-confidence vote in the government and an election do not intervene before then.

The Office for National Statistics said sales and income tax receipts were up slightly compared with a year ago, but corporation tax revenue for the first four months of the 2018/19 fell 0.1% -- the first drop for any comparable April-July period since 2013/14.

Johnson declined during his leadership campaign to back the government's existing fiscal rules, which aim to keep the deficit below 2% of GDP during normal economic times, and ensure debt falls as a share of GDP.

Javid has said he will respect this rule but the government has said the longer-term future of the fiscal rules is "under review".

Original Article

House prices would flounder in six months after no-deal Brexit: Reuters poll

By Ross Finley

LONDON (Reuters) - Britain's drifting property market would probably take a hit from a disorderly Brexit, with average prices slipping about 3% nationally in the ensuing six months and as much as 10% in London, a Reuters poll of housing experts found.

Roughly 85% of respondents said both UK and London house prices would fall in the six months subsequent to leaving the European Union without an agreement.

But if Britain departs the EU with a transition deal - the scheduled leave date is Oct. 31 - house prices are due a mild 1.5% lift over the following two quarters. They would rise 1.4% in the capital.

Results from the Aug. 13-20 survey show an otherwise tepid outlook for national price rises in coming years, at rates not far off an already-mild consumer price inflation rate and despite the recent sharp fall in sterling.

Indeed, the results suggest that foreign demand for property will be weaker than in previous years where declines in the pound have spurred buying, particularly in London, as it makes housing cheaper for those holding stronger currencies.

The survey also indicates in the near-term at least that housing, the bedrock of British household wealth, is not likely to give a lift to the economy, which contracted for the first time in 6-1/2 years in the second quarter.

Indeed, an overwhelming majority of respondents who answered an additional question in the first Reuters UK housing market survey since Boris Johnson took over as prime minister said risks to the housing market were skewed to the downside.

"Despite the new PM and team in government there are big icebergs ahead, not least the apparent willingness to leave the EU without a deal," said property market consultant Henry Pryor. "This is likely to spook the markets before it reassures them."

At the same time, there are fundamentals cushioning the market from falls. Hansen Lu, analyst at consultancy Capital Economics, notes the ongoing shortage of homes, which nearly always underpins British house prices.

Mortgage rates are also very low and not set to rise any time soon despite hawkish rhetoric in past months from Bank of England policymakers, and recent wage gains have lifted household spending power somewhat.

"Both factors are helping to prevent the current slump in house price growth from developing into an outright fall in prices. Yet on the other hand, Brexit uncertainty, as well as the high level of house prices relative to incomes, continues to weigh on buyer demand," said Lu.

Others, like Tony Williams (NYSE:WMB) of Building Value, are more sanguine about the overall housing market's prospects following Britain's impending departure from the EU, no matter how rough.

"With no-deal, there will be a knee jerk action in which demand will fall followed by prices over the first six months of the UK's new status," notes Williams. "That said, life after a no-deal Brexit will revert to type."

Average UK house prices are forecast to rise 1.0% this year, 1.8% next and 2.7% in 2021, little changed from 1.2%, 2.0% and 2.5% in a survey taken in May.

London house prices, already down 5% from their recent peak, are due to fall 2.0%. They are not due to rise at all next year, followed by a 2.0% lift in 2021, a slightly weaker view than what was predicted a few months ago.

Capital Economics' Lu notes that with these recent falls and some recent wage gains outstripping inflation, London's average house-price-to-earnings ratio has slipped to 12 times from a recent peak of 13.4.

"That adjustment, while welcome, is still small relative to past house price gains. With Brexit uncertainty set to bite further and mortgage interest rates at their floor, we think London's fall in house prices has further to run."

(Polling by Manjul Paul and Richa Rebello with additional analysis by Sumanto Mondal; Editing by Mark Heinrich)

Original Article

Tuesday, August 20, 2019

It's the Fed, but the world will have its say

© Reuters. FILE PHOTO: U.S. President Donald Trump leaves the Rose Garden with Jerome Powell, his nominee to become chairman of the U.S. Federal Reserve at the White House in Washington© Reuters. FILE PHOTO: U.S. President Donald Trump leaves the Rose Garden with Jerome Powell, his nominee to become chairman of the U.S. Federal Reserve at the White House in Washington

By Howard Schneider

WASHINGTON (Reuters) - The U.S. Federal Reserve has a purely domestic mandate, answerable to an elected Congress and facing nearly daily demands from an outspoken president.

But the fate of recent Fed policy decisions may have been written far outside the borders of the United States. As much as officials felt they could raise interest rates last year because U.S. economic conditions seemed ripe for it, the about-face in the last few months has shown just how bound the Fed has become to the rest of the world.

GRAPHIC: The weight of the world on the Fed -

"We have become interconnected in a way that we are almost in a prisoner's dilemma - stuck in this equilibrium where no one can escape" from a decade of low interest rates, said Raghuram Rajan, a former Reserve Bank of India governor and current professor at the University of Chicago Booth School of Business.

"Nobody wants to be ahead of the pack," and risk the types of changes the Fed has had to deal with, from an appreciating currency to renewed volatility in asset markets, Rajan said.

Whether it was China's choice to battle President Donald Trump's trade war on a tit-for-tat basis, foreign companies' dependence on cheap dollar debt, or European and Japanese officials' inability to get their economies off the mat, external forces ultimately proved too much for the Fed.

After a fitful, three-year rate hiking cycle, the U.S. central bank was forced to shift gears late last year and is now lowering borrowing costs, joined by 19 other central banks whose collective policy easing emphasizes the point.

When global policymakers gather this week at the Fed's annual conference in Jackson Hole, Wyoming, aside from fly fishing and hiking they'll think at length about whether their prison sentence amounts to a life term. Can they return to a time when economic and monetary policy conditions could diverge among countries and major currencies?

Increasingly, the answer seems to be no.

Forces like aging populations in advanced countries, low productivity growth and other hard-to-change dynamics appear to be holding down interest rates and inflation. Meanwhile, the dollar's role has only grown, as neither the highly managed Chinese yuan nor the moribund euro have proved competitive alternatives for corporate finance or safe-haven investment.

With a global slowdown taking grip, the central bank may find its tools more limited in scope and impact than in the past – a chief reason the Fed is reviewing issues like how it might again use programs like bond buying once considered unorthodox but now in the mainstream.

"There is not enough monetary policy space to deal with the next downturn," a team from the BlackRock (NYSE:BLK) Investment Institute that included former Fed Vice Chairman Stanley Fischer wrote recently.


The Fed has long been the world's de facto central bank, but the decade since the last financial crisis has shown interest rates are more than ever globally determined, said Maurice Obstfeld, an economics professor at the University of California, Berkeley, and a former International Monetary Fund chief economist.

The Fed, in that environment, isn't free to choose its targets without factoring in the wider world, or act without understanding whether other countries will be impacted in ways that would ultimately hurt back home.

The low global rates environment "makes a case for the Fed to loosen even if the U.S. economy is strong," as it recently did, said Obstfeld, who presented a key paper on the topic at a recent Chicago Fed conference. "The rest of the world is going to matter a lot."

The Fed's effort to go its own way and tighten policy between 2015 and last year opened an interest-rate gulf between the United States and rest of the world. In turn, the dollar appreciated, and a mercurial president took notice.

"The Fed Rate, over a fairly short period of time, should be reduced by at least 100 basis points," Trump tweeted this week in his latest call for lower rates. He, too, chimed in on the Fed's global impact, saying current U.S. policy was "sadly hurting other parts of the world."

Even if the Fed's global role is recognized, deciding what to do about it may be difficult.

Rajan has called in the past for more direct coordination among the world's central banks, but acknowledges the political difficulties of that at a time when nationalist sentiment runs strong.

But if credit conditions and interest rates are now more closely bound, and movements in exchange rates felt more acutely, the case for coordination becomes stronger, said Adam Posen, a former Bank of England policymaker and the current president of the Peterson Institute for International Economics.

Just in the last decade, the European Central Bank and the Fed have twice been out of sync - early in the crisis when the ECB kept policy tight and even tried to raise rates early on, and over the past few years when the Fed pursued its rates "liftoff."

The policy challenges faced by most central banks over that time may have made the message clear.

"There is a limit to what one central bank can do, even if you are the Fed," Posen said. "If monetary and credit conditions are moving in the same direction there are probably large gains to be had with coordination."

Original Article

Mexican first-half foreign direct investment estimated lower than 2018 total

Mexican first-half foreign direct investment estimated lower than 2018 totalMexican first-half foreign direct investment estimated lower than 2018 total

MEXICO CITY (Reuters) - Mexico's Economy Ministry said on Tuesday that its preliminary estimate for foreign direct investment in the country in the first half of this year was $18.102 billion, which if confirmed would be down from $21.5 billion in the first half last year.

Some 43% of the investment so far in 2019 was in manufacturing, followed by nearly 13% in commerce and almost 10% in financial services, the ministry said in a statement.

Nearly 38% came from the United States, trailed by Canada, Spain, Germany and Belgium.

The preliminary estimate was 1.5% more than last year's preliminary figure for foreign direct investment in Mexico in the first six months of 2018, the ministry said.

Original Article

Hedge fund manager Kyle Bass sees 'shallow recession' potentially in 2020: CNBC

(Reuters) - Hedge fund manager Kyle Bass told CNBC on Tuesday that he sees a "shallow recession" potentially in 2020, also adding that he thinks U.S. interest rates will follow the global interest rates all the way down to zero.

"We're the only country that has an integer in front of our bond yields. We have 90% of the world's investment-grade debt. We actually have rule of law and we have a decent economy. All the money is going to come here," Bass, founder and chief investment officer at Hayman Capital Management, said in the interview

Original Article