NEW$ & VIEW$ (28 NOVEMBER 2013)

Chicago PMI Stronger Than Expected

Following last month’s surge, economists were expecting some giveback in this month’s Chicago PMI report, and that is exactly what we saw today.  While economists were expecting to 60.0 from last month’s reading of 65.9, the actual decline was considerably less as the headline reading came in at 63.0.  (…)

Pointing up Beware! Inventories jumped.

German Unemployment Rises Fourth Month in Uneven Recovery

The number of people out of work climbed a seasonally-adjusted 10,000 to 2.985 million, after gaining by a revised 3,000 in October, the Nuremberg-based Federal Labor Agency said today. Economists predicted no change, according to the median of 33 estimates in a Bloomberg News survey. The adjusted jobless rate was unchanged at 6.9 percent.

Spain Household Spending Snaps Declines Amid Recovery

Spanish household spending grew in the three months through September for the first time in six quarters, helping end a two-year recession amid continued export growth.

Household spending increased 0.4 percent from the three months through June, when it declined 0.1 percent, while exports rose 2.2 percent after a 6.4 percent gain in the previous quarter, the Madrid-based National Statistics Institute said today.

Gross domestic product rose 0.1 percent in the third quarter, the office said, confirming an Oct. 30 estimate. The economy contracted 1.1 percent from a year earlier. (…)

ECB warns of risks posed by Fed tapering

The European Central Bank on Wednesday issued a stark warning over the threat posed by the scaling back of US monetary stimulus, calling on eurozone policy makers to do more to prepare for the market shocks from Federal Reserve “tapering”.

In its latest financial stability report, the ECB said the risks to the eurozone’s financial system from outside the currency bloc had grown since May due to the Fed’s talk of scaling back its $85bn of monthly bond purchases – despite a general improvement in market conditions.

“Starting in May, there was a significant repricing in global bond markets, which took place largely because of changing monetary policy expectations in the United States – with increased foreign exchange market volatility and stress borne largely by emerging market economies,” the ECB said. (…)

The ECB said the eurozone’s institutional investors were more exposed to bond markets than the region’s banks, but that it was difficult to know where the risks of ultimate losses were greatest.

“It cannot be ruled out that ultimate exposures are concentrated among a limited number of entities which may now be more vulnerable to any further severe market shock,” the ECB said.

It added that the recent turbulence meant that policy makers needed to ensure banks, insurers and pension funds could cope with a “normalisation” of yields from their current historically low levels. (…)

The ECB said weak bank profitability and persistent financial fragmentation still presented a threat to stability. Banking union would be “an important contribution” to resolving these hurdles. (…)

Unforeseen bank recapitalisations also posed a threat. “Although provisioning is increasing, it has barely kept pace with the deterioration in asset quality, on average, highlighting a potential further need for additional reserves to strengthen bank balance sheet resilience in case asset quality deteriorates further.” (…)

Euro-Zone Private-Sector Lending Declines

Private-sector lending fell by 2.1% in October from the previous year, the ECB said Thursday, following a 2% drop in September. A broad measure of money supply slowed sharply to just 1.4% year-over-year growth, suggesting inflationary pressures remain absent in the euro bloc.

Loans to firms declined by €12 billion ($16.3 billion) on the month in adjusted terms in October, after a decline of €10 billion in the previous month. Loans to households rose by €1 billion on the month after an increase of €6 billion in the previous month.

Eurozone Inflation Rises

Annual inflation in Spain rose to 0.3% in November from no change the previous month. Belgium’s rate also increased slightly. Data from German states suggest that annual consumer-price growth in Europe’s largest economy increased to 1.5% this month from 1.2% in October, according to BNP Paribas.

As a result, economists say annual euro-zone inflation likely increased slightly in November from October’s four-year low reading of 0.7%—a figure that prompted the ECB to reduce its key lending rate earlier this month to 0.25%. The ECB targets annual inflation of just below 2% over the medium term.

Canada Emerging From Biggest Slowdown Since Recession

The Bank of Canada estimates that over the past two years the economy’s output gap — a measure of unused capacity — has grown from about zero to 1.5 percent of gross domestic product, and that gap won’t close for another two years because of weak global demand for the nation’s exports.

“We’re slowly crawling our way out,” said David Tulk, chief macro strategist at Toronto-Dominion Bank’s TD Securities unit. “I would still venture to say we’re vulnerable to a host of downside surprises.”

GDP probably grew at an annualized pace of 2.5 percent in the three months ended September, the biggest gain since the third quarter of 2011, according to the median estimate of 18 economists surveyed by Bloomberg. That’s up from 1.7 percent growth in the second quarter, when the economy was hurt by flooding in Alberta and a construction strike in Quebec.

Economists project a temporary slowdown to 2 percent in the fourth-quarter before the economy accelerates to average quarterly growth of 2.5 percent in 2014, according to separate estimates compiled monthly by Bloomberg.

After an initial burst following the recession, Canada’s economy began to slow last year amid weak global demand for its goods, a slump in business investment and temporary factors such as maintenance shutdowns in the oil industry, flooding and strikes. Canada has averaged annualized quarterly growth rates of 1.3 percent since the start of 2012, less than half the pace seen over 2010 and 2011.

The country’s benchmark stock index has risen 7.6 percent this year, trailing the 26.7 percent advance in the U.S. Standard & Poor’s 500 Index. The Canadian dollar has lost 6.4 percent against its U.S. counterpart in that period. The nation’s government bonds are down 1.5 percent in 2013, compared with a 2.2 percent drop for U.S. Treasuries, according to Bank of America Merrill Lynch indexes.

A 126,300 rise in employment this year puts the country’s labor market on pace for its third worst annual result in the past 12 years. Inflation has been below the Bank of Canada’s 2 percent target for 18 consecutive months, the longest stretch outside of recessions since the late 1990s. Weak inflation has assumed “increasing importance,” the Bank of Canada said in its last statement on Oct. 23 when it left its 1 percent benchmark rate unchanged.

The slowdown prompted Governor Stephen Poloz last month to drop language about the need for future interest rate increases.

Whether the economy can tighten economic slack will depend on a recovery in trade. Net exports — the difference between shipments abroad and imports — has been a drag on the economy every year since 2009, according to Bank of Canada reports.

Trade was probably also the biggest factor restraining third-quarter growth, economists estimate, with Canada averaging trade deficits of C$920 million ($868 million) in the three months ended September, the highest quarterly gap in a year. (…)

Bank of Canada Senior Deputy Governor Tiff Macklem said in a speech last month the economy will need to expand by at least 2.5 percent in order to begin absorbing the “current material degree” of slack.

To get there, business investment and net exports will need to contribute at least 1 percentage point to growth, he said. The central bank is confident Canada is on that path.

It projects Canada’s expansion will accelerate to 2.6 percent in 2015, of which 1.1 percentage points will come from exports and business investment, closing the output gap by year-end.

“The Bank expects that a better balance between domestic and foreign demand will be achieved over time and that growth will become more self-sustaining,” Poloz told lawmakers on Oct. 29 in Toronto. “This will take longer than previously projected.”

Why Goldman Sachs recommends shorting the loonie

As The Globe and Mail’s Scott Barlow reports, the Wall Street giant forecasts the Canadian dollar will sink to 88 cents U.S. One of its reasons is that Canada has been running a current account deficit.

There are other reasons, but that one tops the list.

“Since the global financial crisis, significant external imbalances have built up in the Canadian economy,” Goldman said.

“In 2008, the current account balance fell from a surplus of 1 per cent of GDP to a deficit of 3 per cent – and it has remained stable at this level since then,” the bank said in its report.

“The main reason for this has been a decline in manufacturing exports, which fell by about 30 per cent during the crisis.”

Over the past several quarters, Goldman added, money flowing into Canada has slowed markedly, and interest rates are low, and expected to stay there.

“It is also important to highlight that the Canadian dollar remains clearly overvalued on our … fair value model,” the bank said.

“Combined with the weak current account position, there are therefore good fundamental reasons for a weaker CAD,” it added, referring to the currency by its symbol.

Goldman’s forecast for the loonie, as Canada’s dollar coin is known, is lower than most. Chief currency strategist Camilla Sutton of Bank of Nova Scotia, for example, projects the dollar, which has been hovering just below 95 cents U.S. of late, will sink to 93 cents by mid-2014, and then pick up again. (…)

“Canada’s current account gap of just over 3 per cent of GDP is manageable, but continues to suggest the Canadian dollar is overvalued,” said senior economist Robert Kavcic of BMO Nesbitt Burns.

“A stronger U.S. economy and softer loonie should help narrow the gap somewhat in 2014.”


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