Today: The ECB’s unity: Draghi’s show? U.S. oilmen blinking. Bulls are back bears near extinct.
- October Nonfarm Payrolls: +214K vs. consensus +231K, +256K previous (revised from 248K).
- Unemployment rate: 5.8% vs. 5.9% consensus, 5.9% previous.
U.S. Productivity Rises at 2.0% Pace in Third Quarter The productivity of U.S. workers rose modestly in the third quarter, reflecting a steady but unremarkable pace of economic expansion.
Compared to one year earlier, productivity is sluggish, up just 0.9%.
Unit labor costs rose as a 2.3% increase in hourly compensation slightly exceeded the increase in productivity. Adjusted for inflation, hourly compensation rose 1.2% in the quarter and is up 1.4% over the last four quarters. Still, compared to one year earlier, unit labor costs rose 2.4%, a two-year high.
German Industrial Production Rises Less Than Economists Forecast German industrial production rebounded less than analysts forecast in September, signaling that Europe’s largest economy is struggling to recover.
Production, adjusted for seasonal swings, rose 1.4 percent from August, when it contracted a revised 3.1 percent, the biggest decline since January 2009, the Economy Ministry in Berlin said today. Economists surveyed by Bloomberg News predicted a 2 percent increase in output. Production declined 0.4 percent in the third quarter. (…)
Manufacturing output increased 1.7 percent in September after dropping 4.2 percent in August, with production of investment goods up 4.5 percent, according to today’s report. (…)
At the same time, exports surged 5.5 percent in September from the previous month, marking the biggest increase since May 2010, the Federal Statistics Office in Wiesbaden said today. (…)
ECB Unites Over Deflation Threat The European Central Bank sent a strong signal that it is prepared to act more aggressively to combat ultralow inflation by buying large amounts of private-sector debt and perhaps even government bonds.
The central bank’s policy makers are unanimous in their readiness to back more stimulus if needed, ECB President Mario Draghi said at his monthly news conference. He added that officials all expect the central bank’s balance sheet—the amount of assets it holds—to rise toward early 2012 levels, implying an increase of up to €1 trillion ($1.24 trillion).
Mr. Draghi has made similar comments of his own accord on the balance sheet, but its inclusion in the introductory statement to the news conference means the entire 24-member Governing Council approved it. In a sign of the bank’s unity, Bundesbank President Jens Weidmann —a harsh critic at times of ECB policies—played a central role in crafting that language, according to a person familiar with the matter. (…)
Wait, wait. Later in the article:
Mr. Weidmann doesn’t see the balance-sheet statement as an explicit target, rather it is an expectation, according to the person familiar with the matter.
Mr. Weidmann is open to new steps, the person said, but this would require a significant erosion in the economic and inflation outlook. (…)
This “precision” on Weidman’s real state of mind was found nowhere else. I tried the FT, Spiegel, Bloomberg, Guardian, Telegraph, nothing in these papers other than this “unanimous unity”. Mario Draghi may be trying to paint the Germans into a corner. Ambrose Evans-Pritchard wrote a very interesting piece Wednesday well worth your time (Mario Draghi’s efforts to save EMU have hit the Berlin Wall). Some extracts:
Mario Draghi has finally overplayed his hand. He tried to bounce the European Central Bank into €1 trillion of stimulus without the acquiescence of Europe’s creditor bloc or the political assent of Germany.
The counter-attack is in full swing. The Frankfurter Allgemeine talks of a “palace coup”, the German boulevard press of a “Putsch”. (…)
We now learn from a Reuters report that Mr Draghi defied an explicit order from the governing council when he seemingly promised to boost the ECB’s balance sheet by €1 trillion. He also jumped the gun with a speech in Jackson Hole, giving the very strong impression that the ECB was alarmed by the collapse of the so-called five-year/five-year swap rate and would therefore respond with overpowering force. He had no clearance for this. (…)
“Whatever it takes” in full swing. If that does not scare you…
(…) During conference calls Thursday with reporters, both companies gave early indications that an October agreement with lenders could lead to expanded mortgage access. The agreement, reached with the companies and their regulator, the Federal Housing Finance Agency, clarifies some of the penalties lenders could face for making loans that end up not meeting the companies’ standards.
Fannie Mae Chief Executive Timothy J. Mayopoulos said in an interview that some lenders, including large ones, have told him “that they will definitely proceed to make the kinds of loans that we want—to more fully deliver to our full credit box” while others expressed continuing concerns about litigation.
Fannie and Freddie have yet to release specific guidelines reflecting the broad agreement. Mr. Mayopoulos said that Fannie planned to release the guidelines soon, while Freddie Mac officials said that the company hoped to release those guidelines this month. (…)
Separately in October, FHFA chief Mel Watt, Fannie and Freddie announced that the companies would soon begin to guarantee some loans on homes with down payments of as little as 3%, something that Fannie Mae had largely abandoned last year and that Freddie had not pursued for several years.
The regulator has yet to finalize details of the low-down-payment programs. Freddie Mac CEO Don Layton said that his company planned to open the guarantees to a broad spectrum of borrowers, rather than limit it to a certain subset. There had been earlier speculation that the programs could be limited to certain groups, such as first-time home buyers. Mr. Mayopoulos said that Fannie wasn’t ready to announce the details of what its program will encompass. (…)
Service sector activity fell for the sixth time this year in October, reversing an upturn that had been recorded in September, according to PMI data produced by Markit. The drop in activity was the largest since April, when the economy was hit by the introduction of a higher sales tax.
The disappointing service sector news follow manufacturing results, which showed growth of goods production slowing closer to stagnation in October.
A GDP-weighted average of the two surveys’ output indices slumped from a six-month high of 52.8 in September to 49.5 in October. By dropping below 50, the index signalled a marginal contraction of private sector business activity during the month, the first such deterioration since May.
Having therefore indicated that GDP will have rebounded in the third quarter after the 1.8% decline recorded in the three months to June, the economy is in danger of sliding back into a downturn in the fourth quarter.
The drop in the service sector survey data highlights the weakness of domestic demand in Japan, something which was also revealed in the manufacturing survey. However, one of the major effect of the ‘Abenomics’ stimulus plan has been a striking depreciation of the yen against the US dollar, which has made Japanese goods more competitively priced in many overseas markets. This resulted in goods export orders rising in October at the fastest rate since December of last year.
With the announcement of additional asset purchases in late October, bringing the Bank of Japan’s quantitative easing programme up to ¥80 trillion per annum, the further depreciation of the currency as well as the financial stimulus should help engender stronger economic growth in coming months.
An additional factor is the weather. With Japan having been hit by a series of ‘super typhoons’ in October, business was disrupted to a greater extent than usual for the time of year. The impact of weather disruptions was cited by many domestically-focused companies as having materially affected trading. The return of more normal weather conditions should therefore herald a bounce-back of business activity in November, especially in the service sector.
Other survey indicators also hint at the possibility of growth picking up again. In the manufacturing sector, the amount of goods purchased for use in future production showed the sharpest rise since March. Backlogs of uncompleted orders also rose in the manufacturing sector to the greatest extent since March, suggesting a developing pipeline of work to undertake.
However, any future growth may be disappointingly modest. Employment barely rose in both sectors in October, suggesting limited appetite to take on extra staff to boost capacity, and expectations of business activity in the service sector for the year ahead deteriorated compared to September.
OPEC May Act if Oil Falls to $70 OPEC would likely lower the ceiling on its collective production if oil prices fall to $70 a barrel, a level most of the group’s members don’t expect to see this year, according to several of the group’s officials.
(…) “At $70 a barrel, there will be panic in OPEC. We have become used to living with $100 a barrel,” said one OPEC official, speaking on the sidelines of the meeting. Were prices to fall to “$70 a barrel, there will be action from OPEC,” according to another OPEC official.
(…) At a news conference in Vienna on Thursday, OPEC Secretary-General Abdalla Salem el-Badri said the group is “concerned, but we are not panicking.” Mr. el-Badri blamed market speculators for the sharp oil-price drop, saying “fundamentals don’t deserve this price decline.”
Both major crude benchmarks fell Thursday. Mr. el-Badri’s statements were overshadowed by reports that Libyan officials expect production at the country’s biggest field, El Sharara, to restart soon, recovering quickly from a rebel attack the day before. (…)
The shutdown of 300,000 barrels a day of Libyan supply Wednesday following an attack by rebel militias on a key oil field there has damped any appetite for an actual production cut.
“Libya has done the cut for us,” said one OPEC official, who had previously advocated a reduction of 500,000 barrels a day.
Even so, OPEC itself expects its output to fall over the medium term as oil supply grows elsewhere, mainly thanks to rising U.S. shale-oil production. In its annual energy outlook, OPEC said its crude production would fall by 1.8 million barrels a day by the end of 2017 to 28.2 million barrels a day from 30 million barrels a day this year.
Drillers Cut Expansion Plans as Oil Prices Drop New Rigs in Question From Texas to North Dakota; ‘We’re in a Battle with Saudi Arabia’
Continental Resources Inc., a major oil producer in North Dakota’s Bakken Shale, said Wednesday that the company wouldn’t add drilling rigs next year. ConocoPhillips Co. said that next year’s budget would fall below the $16 billion spent this year, dropping plans for some new wells in places such as Colorado’s Niobrara Shale.
Pioneer Natural Resources Co. signaled that it might delay adding rigs in Texas unless oil prices rebound. (…)
Houston-based EOG Resources Inc., which is considered one of the industry’s most efficient oil companies, said this week that existing wells in its core areas, such as the Eagle Ford Shale of South Texas, can produce a 10% rate of return after taxes even if oil drops to $40 a barrel.
If prices hover around $80, EOG said it could fully fund the drilling it has planned for the Eagle Ford, North Dakota’s Bakken Shale and parts of the Permian Basin in West Texas and New Mexico. But the company might cut back on drilling in less profitable areas of Texas, including the Barnett and Wolfcamp shales. (…)
Many companies have taken on substantial amounts of debt and some are trying to tap expensive, fringe regions in places such as the Tuscaloosa Marine Shale in Louisiana and Mississippi.(…)
With the S&P 500 hitting new all-time highs again this week, the bulls are back out in force. According to the weekly survey from the American Association of Individual Investors (AAII), bullish sentiment rose to 52.69% this week, up from last week’s reading of 49.4%. This is the highest reading of bullish sentiment we have seen all year. It is also the 6th highest reading of bullish sentiment in the current bull market and only the 17th time it has exceeded 50% since March 2009.
While bullish sentiment is at a lofty level, the decline in bearish sentiment was even more extreme. In the latest week, bearish sentiment dropped from 21.07% down to 15.05%. This is the lowest level of bearish sentiment in the entire bull market, and just the 10th time bearish sentiment dropped below 20%.