The Wall Street Journal's Daily Report on Global Central Banks for Friday, April 18
"Central banks in the United States and around the world must end their complacency and respond preemptively to the threat [of deflation] by monitoring inflation rates and undertaking aggressive monetization." -- John Makin, American Enterprise Institute.
HIGHLIGHTS
Da Costa's Take: Fed Policy and the China Question Mark; BOJ Plays Down Consumption Drop; Bank of England Says Its QE Worked Better Than Thought; Ex-NY Fed Regulator Alleges She Was Fired For Critical Goldman View; China Home Price Rises Slow For Third Month
DA COSTA'S TAKE
The Federal Reserve's forecast for a stronger U.S. economic expansion of around 3% this year is predicated on the resolution of a budget battle that raged for much of 2013. Fiscal tightening last year helped keep gross domestic product growth just under 2%, not enough to allow a weak job market to extend its irksomely slow recovery. With things looking up in the world's largest economy, the worry clouds have drifted quietly to No. 2: China. The latest figures show why. Home prices fell for a third straight month, compounding worries that overbuilding has led to a real estate bubble. Moody's Analytics estimates that as much as one quarter of gross domestic product comes from construction and other real-estate linked activities. Economic growth slowed to 7.4% in the first quarter and, while that figure beat expectations, concerns about potential massaging of the data dented optimism. China does not pose a direct risk to the U.S. banking system per se, because its capital markets remain relatively insulated from global money flows. However, a sharp slowdown in an $8 trillion behemoth would likely have serious knock-on effects on global economic performance. For now, the China issue has not permeated Fed policy debates in a major way. The central bank remains focused on winding down its bond-buying program in a gradual manner while promising to keep interest rates low until inflation and unemployment are moving closer to levels consistent with its dual mandate. Any further deterioration in the Chinese outlook, however, would surely bump it up a few notches on the central bank's watch list.
MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD
BOJ Plays Down Consumption Drop. The Bank of Japan stuck to its bullish view of the economy Thursday, saying a decline in consumption following a rise in the sales tax at the start of April has been within expectations. A markedly different view was expressed by the government the same day, however, as it downgraded its assessment of the economy due to concerns about the impact of the higher tax. Coming after recent remarks by BOJ Gov. Haruhiko Kuroda ruling out imminent further monetary easing, the central bank's latest quarterly report on local economies underlines its confidence that the economy can withstand the headwinds from the higher tax. "Consumer spending remains in a good shape," said Shigeki Kushida, head of the bank's Osaka branch in western Japan. Bank of England Says Its QE Worked Better Than Thought. Did the Bank of England's asset-purchase program have more pop than previously thought? A new paper from the central bank itself says it did. Past studies estimated the central bank's first £200 billion ($336 billion) of bond buying, or "quantitative easing," lifted U.K. gross domestic product by around 1.5% and raised the annual rate of inflation by around one percentage point. The BOE's first phase of bond-buying, known as QE1, lasted from March 2009 to Jan. 2010. A second phase, QE2, began in October 2011. In all, the bond-buying over the two periods totaled £375 billion. A new study published Thursday by Monetary Policy Committee member Martin Weale and BOE economist Tomasz Wieladek took a different methodological approach and estimated QE1 in the U.K. lifted GDP by 2.5% and raised the level of prices by 4.2%. The authors noted that their work appears to show the easing had a bigger effect on inflation than other studies found, a finding they said could be a fluke. Ukraine Central Bank Has No Plans for Forex Intervention: Chairman. The National Bank of Ukraine hasn't enough forex and gold reserves to support the national currency, said the chairman on Thursday. "We have no plans for interventions on the market, our forex and gold reserves are sufficient by the international standards, but not enough to support the hryvnia," Stepan Kubiv wrote on his Facebook page. He added the central bank will complete the audit of its reserves by May 1. The bank said that in mid-March its reserves stood at about $15 billion. Putin Sees No Need to Rush in Changing Budget Policy, Given Risks. Russian President Vladimir Putin said Thursday he wouldn't rush to change the country's budget policy in light of capital flight and a weakening ruble. The government is seeking ways to kick-start the country's flagging economy, which could contract if the Ukrainian crisis and sanctions against Moscow keep capital outflows at levels seen so far this year. The economy ministry has called for an easing of the so-called fiscal rule, under which the government puts much of the revenue generated by high oil prices into special rainy-day funds. But the finance ministry says it isn't feasible to pump money into the economy, which bled more than $60 billion in net outflows in the first quarter. Turkish Economy May Grow Slightly Below 4% in 2014: Central Bank Governor. The Turkish economy may grow slightly below the government's 4% target for this year, but a revision isn't needed at the moment, central bank Governor Erdem Basci said on Thursday. "There may not be a great slowdown in domestic demand as much as expected ... Until now, we see that indicators suggest economic growth would be mildly below 4% this year," Mr. Basci said at the central bank's annual ordinary general assembly in Ankara. He said the country's inflation rate will peak in May before it begins slowing down in June. Turkey's annual inflation rate rose to 8.39% in March from 7.89% in February, according to the data from the state statistics agency. Ex-N.Y. Fed Regulator Alleges She Was Fired For Critical Goldman View. A former bank examiner who is suing the Federal Reserve Bank of New York for allegedly firing her for her views on Goldman Sachs Group Inc. asked the federal judge in the case to disclose more detailed information about her husband's current work with the firm. In a letter filed Friday, an attorney for the former examiner, Carmen Segarra, requested that U.S. District Judge Ronnie Abrams, who is presiding over Ms. Segarra's case, provide a "more complete disclosure" about her husband's relationship with Goldman. Judge Abrams's husband, Greg Andres, is a partner at law firm Davis Polk & Wardwell LLP and is currently representing the firm on an issue that couldn't be determined. U.S. Worker Earnings Climb at Fastest Pace Since 2008 in Q1. American workers finally starting to see some decent wage increases? A report Thursday offers hope, showing incomes picked up at a healthy pace in the first three months of the year. The weekly earnings of the typical full-time worker rose 3% in the first quarter compared to a year earlier, the fastest pace since 2008, the Labor Department said. That translated into median earnings--the point at which half of all workers made more and half made less--of $796. When you adjust for inflation, median earnings are now at their highest level since the second quarter of 2012. Even better is that the earnings growth far outpaced the 1.4% year-over-year rise in consumer prices as measured by the Labor Department. http://s.wsj.net/public/resources/im...0417153137.jpg
China Home Prices Rise Slowly For Third Month. Growth in residential property prices across large- and medium-size Chinese cities slowed further in March as lending limits and discounts undercut demand, according to analysts and property developers. Average new-home prices in 70 of China's larger cities rose 7.3% from a year earlier in March, according to calculations by The Wall Street Journal based on survey data released Friday by the National Bureau of Statistics. Prices rose 0.2% on a month-to-month basis, compared with about 0.3% in February. Yuan Depreciation Is Deeper Than You Think. The U.S. Treasury is up in arms about China's move to devalue the yuan, which the Treasury folks, in a semiannual report, called "unprecedented." That may be an overstatement intended to put pressure on China to reverse course and start the yuan appreciating again. But guess what? The yuan depreciation this year is probably steeper than you think. Surging Loans to China Could Pose a Risk to Hong Kong's Economy. Slowing growth in China's massive economy has raised concerns that the rest of Asia would suffer if China continues to lose momentum. Rapid growth in lending to the mainland would seem to put Hong Kong at particular risk in case China's economy experiences a "hard landing." Of course, few analysts expect Chinese growth to slow sharply. More likely is a gradual deceleration, after data Wednesday showed China's gross domestic product growth slowed to 7.4% in the first quarter of the year, from 7.7% in the final quarter of 2014. Most analyses have focused on how slower Chinese growth would impact Asia through the trade channel. Even by that metric, Hong Kong--which sends 28% of its exports to China--would appear to be among the most exposed. Chile Central Bank Keeps Monetary Policy Rate At 4.0%. Chile's central bank kept its monetary policy rate unchanged at 4.0% on Thursday, after cutting the key interest rate in the previous month. The central bank said in a statement that its decision took into account that economic activity has recovered in developed economies, while emerging markets have seen moderate growth. "The outlook continues to be for moderate growth in emerging economies, which is relevant for the price of copper and other metals," the central bank said. Chile is the world's biggest producer of copper. The central bank also said that recent data confirm a slowdown in Chile's economy. It said it continues to expect Chile's annual inflation rate to be converge back to around 3%. Wealthiest Households Accounted for 80% of Rise in Incomes In Recession's Aftermath. The rich got richer, the poor got poorer. A recent article by Labor Department senior economist Aaron Cobet highlights the sharp disparity between the wealthiest and poorest Americans in the aftermath of the 2007-2009 recession. "While average income has returned to pre-recession levels, income gains have been distributed unevenly," Mr. Cobet said. The economist mined Labor Department data to show that the top 20% of earners accounted for more than 80% of the rise in household income from 2008-2012. Income fell for the bottom 20%. http://s.wsj.net/public/resources/im...0417112015.jpg
RESEARCH
BOE Economists See Firm Survival as Key to Productivity Puzzle. An unprecedented period of low productivity growth in the U.K. may partly be explained by the fact that fewer businesses collapsed in the years following the financial crisis than during previous recessions, according to economists at the Bank of England. The key to the "productivity puzzle" is central to determining how the U.K. economy and central bank policy is likely to evolve over coming years. If the decline in productivity was temporary--as many policy makers believe--the economy can grow for some time to come without generating much inflation. If something more fundamental has happened to lower the output of British workers, the recovery will quickly generate a rapid rise in consumer prices. In a paper published by the BOE Friday, four of its economists use data on individual firms to try to describe what happened to productivity after 2008. They find that the share of firms experiencing a decline in output but stable employment rose in the years following the crisis, largely because business failures were much lower than in previous downturns. Cooperation, Conflict, and the Emergence of a Modern Federal Reserve. A new paper from the Cleveland Fed argues that the concept of central bank independence has shifted over time. "The Federal Reserve System is a model of an independent central bank, with the authority to resist political pressure and act in the long-term best economic interest of the country," writes Owen Humpage, a senior economic advisor specializing in international economics in the bank's research department. "But this has not always been the case. In the past--and not too distant past at that--U.S. monetary policy has frequently yielded to other governmental requirements. Even for the modern Federal Reserve, independence is a nuanced, mutable and, ultimately, fragile concept, but one that is essential to maintain." COMMENTARY
Are Rich-Country Central Banks Being Too Meek? John Makin of the American Enterprise Institution argues that the threat of deflation is real throughout the advanced world. "Inflation is falling in the United States, Europe, and China, suggesting a real threat of impending deflation that could cripple the global economy," he writes in a policy note. "Central banks in the United States and around the world must end their complacency and respond preemptively to the threat by monitoring inflation rates and undertaking aggressive monetization."
BASIS POINTS
-The construction, sale and outfitting of apartments accounted for nearly a quarter of China's gross domestic product in 2013, Moody's Analytics calculates. -Treasury prices accelerated losses Thursday, pushing benchmark yields up more than 8 basis points after a round of strong data stoked market doubts about the Fed's promise to keep rates near zero. The yield curve was at its flattest since 2009. -Italian industrial orders dropped 3.1% in February, as both foreign and domestic demand slipped, underscoring the fragility of the economic recovery in the euro-zone's third-largest economy.-Dow Jones Newswires -"Hungarian tribes 1,500 years ago were well known for their three unique skills: brain surgery, hospitality and gastronomy." -Gyorgy Matolcsy, head of Hungary's central bank
Sales of newly build homes plunged in March, the latest sign of a faltering U.S. housing market that has struggled to maintain its momentum in the last year.
New-home sales dropped 14.5% from February to a seasonally adjusted annual rate of 384,000, the Commerce Department said Wednesday. February's rate was revised up slightly to 449,000.
March's figure was the lowest annual pace since last July and was below expectations. Economists surveyed by The Wall Street Journal had forecast sales would reach a 450,000 annual pace last month.
Sales of new homes represent a small portion of houses purchased in the U.S. and can be subject to large revisions. But the report provides a more up-to-date reading of the housing market than other gauges because it tallies sales at the moment a contract is signed rather than its closing.
New home sales had been trending up for much of 2011 and 2012 but have been more volatile over the last year. Would-be buyers have faced rising mortgage rates, surging house prices and stringent lending standards. Over the winter, unusually cold temperatures and snowstorms kept many construction sites shuttered.
March new-home sales were down 13.3% from a year earlier. The median price of a new home reached its highest level ever in March at $290,000, the report said, up 11.2% from February.
The spring buying and selling season is crucial for the U.S. housing market because families want to settle into a school district by the end of the summer. But recent data suggest a slow start so far this year.
Sales of previously owned homes, which account for more than 90% of total sales, fell slightly in March and were down 7.5% from a year earlier, according to a National Association of Realtors report earlier this week. NVR, which builds homes under the brands Ryan Homes and others, said its sales contracts signed in the first quarter were down 5.3% from the same period a year earlier.
A measure of homebuilder confidence rose slightly in April but remained below 50, according to the National Association of Home Builders. That's the dividing line between generally positive and generally negative comments.
Still, there are signs sales could pick up in the months ahead. Builders started construction on more homes for the second straight month in March, a separate Commerce Department report said last week. U.S. housing starts rose 2.8% last month, fueled by single-family home construction.
The Federal Reserve is expected to keep short-term interest rates near zero into 2015. But mortgage rates have risen in the last year since the central bank signaled it would begin pulling back its easy-money policies. A 30-year fixed-rate mortgage had an average interest rate of 4.4% at the end of March, up one percentage point from last spring, according to Freddie Mac.
It might not be just Russia's reserve diversification chatter that's driving up the euro. Citi strategists in a note also pointed out that the currency's move higher might be due to the ECB's excess liquidity hitting a multi-year low and EONIA at its second highest level this year. "EONIAs are growing in tandem with money market volumes indicating that the money markets are healing and segmentation abating. This dampens the prospects for ECB action on money market rates and keeps EUR supported across the board," Valentin Marinov, currency strategist at Citi says. Neil Mellor, credit strategist at BNY Mellon, also says: "Whether the market is right to cast doubt on impending ECB action is an interesting question. The Council is in the grip of German reservations about further stimulus (and the path towards debt monetisation), which has left [Mario] Draghi with Hobson's choice: namely to downplay the (clear) risks of deflation.
By Josie Cox
Sterling has swept higher, close to $1.70, in fact. The euro is on the up. The yen has been too. The New Zealand dollar has cranked higher to the point where its central bank governor is talking about the possibility of intervention. The glue here is the queasy US dollar. But why is the buck under pressure? This was supposed to be the dollar's big year.
Goldman Sachs points to 'Dark Matter'. BNY Mellon reckons people are hunting for excuses to sell.
Here is a quick rundown of what strategists and analysts are saying:
Robin Brooks and Fiona Lake, strategists at Goldman Sachs: "One possibility is all the talk about 'secular stagnation,' which may be seeing more focus after last week's large drop in the participation rate [in the non-farm payroll data]. We don't think so. After all, even with participation back to late-2013 levels, the unemployment rate is down from above 7.0% late last year to 6.3% now. In short, this is a picture where employment growth is driving declines in the unemployment rate -- a strong picture, in other words. That leaves something else in the market, a mystery flow, which we think of as Dark Matter. Our prime candidate for this is China's reserve accumulation, which [...] leads foreign flows into US Treasuries by up to one year. There is a lot of conjecture here, admittedly, but we think it is possible that the shift of past reserve accumulation into Treasuries is weighing on longer-dated yields (and the dollar)."
Jens Nordvig, currency strategist at Nomura: "Perhaps, the dollar downward pressure is related to the ongoing (underlying) liquidity creation in the US, and the lack of liquidity absorption by the U.S. equity market in 2014. Perhaps, the increased momentum of carry trading is playing a role, as the dollar remains the funding currency of choice and as low volatility is increasing the attractiveness of carry. Perhaps, [it is] a story about forward-looking investors having to reduce risk, due to broader performance issues. The dollar bull case was about better growth and the prospect of monetary policy tightening in the future. But if the forward-looking investors have reduced capacity to be involved in long U.S. dollar trades, perhaps we need to get closer to the actual tightening before the U.S. dollar can actually take off."
Lee Hardman, currency analyst at Bank of Tokyo Mitsubishi UFJ: "The ongoing decline in U.S. yields despite building evidence that a strong economic rebound is underway in the U.S. is serving to undermine confidence in the U.S. dollar. However, the release [on Tuesday] of the weaker than expected U.S. trade report for March will likely lead to a further downward revision to growth in the first quarter following the weaker construction spending report released late last week. As a result it appears likely that the economy may even have contracted modestly in the first quarter."
Valentin Marinov, currency strategist at Citigroup: "This is a sign that investors just want to avoid unnecessary risk given that the surprising lack of U. S. dollar outperformance of late. There has been some solid data out of the U.S. recently and the market has positioned ahead of that. Given the lack of strong positive response in the dollar, however, investors are now starting to adjust their positioning."
Neil Mello, currency strategist at BNY Mellon: "The story, in many respects, has been unchanged for some time. In February, a very disappointing non-farm payroll number jolted the currency and it has basically been trending lower since. Investors now seem to be looking for any excuse to sell. Throughout the Ukrainian crisis, for example, there have been a number of days when there was heightened risk aversion and the MICEX sold off in favor of the euro, rather than the dollar. I think that until the Fed can speak about a turn in the cycle in very convincing terms, investors will keep selling the dollar. In real terms, the U.S. dollar is a poor store of value relative to the euro or sterling. The yen, for example, compared to the dollar, is experiencing very little downwards pressure with very supportive ministry of finance data. Our data shows that Tuesday saw some of the highest purchases of yen since last summer."
Steven Saywell, currency strategist at BNP Paribas: "The key issue here is that despite stronger than expected payrolls, we're not seeing a pick-up in U.S. yields. We're still bullish on the dollar so we're quite frustrated at the price action. That said, I don't think it will take much of us to see an appreciation in the dollar. We would just need to see a more strong data."
Peter Kinsella, currency strategist at Commerzbank: "The US dollar is proving incapable of benefitting from significant improvements in US data. Despite decent prints in ISM, ADP and NFP data, the dollar actually weakened. It is clear that the Fed's forward guidance policy is successfully keeping a lid on rate hike expectations. Thus, the dollar is treated with a benign neglect and tends to sell off, even with better US centric data. At the same time risky assets and higher yielding currencies are buoyed by the better data / sentiment. So what you end up with is a situation where good data are bad for the dollar yet good for higher yielding currencies."
Persistently low US inflation has been a worry for some Fed officials because it could be a signal of underlying weakness in the economy. Labor Department this morning said prices for imported goods sagged in April, falling 0.4% from the prior month and 0.3% from a year earlier. Fed chair Yellen has said there are temporary factors pulling down inflation; last week while testifying on the Hill, she specifically cited "the declines seen in non-oil import prices" as softness that "will probably be transitory." But if it's going to pass, it's not happening quite yet.
we achieved good pips.
