Bank of Japan Introduces Negative Interest Rates Japan’s central bank introduced negative interest rates for the first time, in an attempt to keep the economy from sliding back into deflation and stagnation.
(…) After three years of BOJ asset purchases,inflation expectations in Japan are sagging, and recent volatility in global markets has threatened to undo some of what the BOJ had achieved with its extraordinary easing: a weaker yen and higher stock prices.
BOJ Gov. Haruhiko Kuroda said the decision to introduce negative rates was meant to limit the risk that global conditions would derail the central bank’s efforts to change Japan’s “deflationary mindset.”
“Risks were growing that the slowdown in the Chinese, emerging and resource-producing countries, which has caused volatility and instability in financial markets since the beginning of the year, may hurt confidence among domestic companies,” he said. (…)
The Bank of Japan is now the second major central bank to set negative interest rates, joining the European Central Bank, which first did so in 2014. The central banks of Sweden, Denmark and Switzerland also have negative interest-rate policies.
The introduction of negative rates once again signaled Mr. Kuroda’s willingness to shock markets. He denied in recent days that the bank was considering negative rates. (…)
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Stocks Rally on BOJ Surprise Cut A surprise interest rate cut from Japan’s central bank boosted stocks around the world, capping a turbulent month for financial markets.
OIL
Russia Energy Minister Says Producers May Discuss 5% Cut Talks in February would assess changes in market situation
Russian Energy Minister Alexander Novak said oil producers could discuss a 5% cut to oil production at talks in February, adding that it’s too early to talk of any agreement.
“There are very many questions, on checking cuts, from what base to count from. In order to start working through these issues, we need general agreement, it’s too early to talk about that. That’s the subject of the meeting and discussion (in February),” he told reporters, according to state news agency TASS.
Mr. Novak said there was no decision yet as to whether the meeting, proposed by Venezuela, would be attended by ministers or lower level officials.
The FT adds important color:
Russia ready to discuss oil output cut with Opec
Mr Novak pointed out that at a previous meeting between Opec and non-Opec countries, a 5 per cent output cut had been discussed. Asked whether the same proposal was now on the table, he said: “That is precisely the subject for debate.” (…)
A cut of 5 per cent by Russia and Opec would remove more than 2m barrels at day of production and help rebalance an oversupplied market.
Signs of a shift in the Russian camp have been mounting this week, with a number of senior executives at private Russian oil companies saying they saw a need to talk with Opec. But senior Opec delegates are wary of what may be Russian posturing.
“There is an idea that has been floated by Algeria and Venezuela for a long time to cut 5 per cent, but there is no Saudi proposal on the table,” said a senior Gulf Opec delegate.
“As said before Saudi Arabia is willing to cooperate with others to stabilise international oil market,” he added.
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Crude Oil Prices Waver as Downside Risks Loom Oil prices wavered as investors digested news that major producers could cooperate on production cuts to alleviate the global glut of crude.
(…) A senior OPEC official, however, refuted the claim and many analysts remain skeptical of the chances of such an agreement. (…)
(…) “We’re ready to discuss the issue of cutting oil output volumes” but not ready for a decision, Novak said in an interview with Bloomberg Television. “We’re ready to consider the possibility; this should be a consensus. If there’s a consensus, it makes sense.” (…)
“There’s no set date” for a meeting, Novak said. “As far as I understand they are discussing it with other possible participants.” Russia has taken part in such consultations with before and “nothing new happened,” he said. (…)
Novak said he has confirmed that Russia would participate in any talks. Four OPEC delegates said yesterday there’s no gathering planned.
“It’s hard for me to say” if there will be a meeting, Novak said. Until this week, Russia, which relies on energy for more than 40 percent of its budget revenue, had repeatedly stated its goal of keeping crude production stable even as prices tumbled. Still, this month’s price slump has put the country under increasing financial pressure. The Finance Ministry says the nation’s budget deficit, already at a five-year high in 2015, may widen this year as the rout deepens.
Russia last met with Saudi Arabia in November and there have been no approaches since, Novak said. “Saudi Arabia’s position has always been, as they have publicly commented, that the market will balance itself at lower oil prices,” he said.
Russia may adjust its forecast for stable Russian oil output in 2016, Novak said, citing lower prices since the Energy Ministry last collected data from the industry.
Welcome to the new oil order (Ed Morse, global head of commodities research at Citi.)
(…) On paper the US might produce 9.3m barrels a day against Russia’s 11.1m b/d and Saudi Arabia’s 10.3m b/d. Add everything that looks and smells and is used as oil and the US is the biggest of the lot, producing 14.8m b/d versus the kingdom’s 11.7m b/d, versus. Russia’s 11.5m b/d. (…)
The new world is one of three giant producers whose combined liquids output is about 40 per cent of world markets. All three of them play a role and one of them — the US — cannot constitutionally play a role to constructively counteract market forces. Indeed it is the very embodiment of market forces.
The three giants of the oil market are about the same size. But size is only one element. Who makes decisions is another. In the Kingdom of Saudi Arabia there is one decision maker on who turns the valves on and off. In Russia it is a bit more complicated, but at the end of the day it’s a government that’s basically in charge.
The third and biggest of the giants, the US, has production based on competitive decisions of hundreds of independent producers, which now, unshackled, can sell oil at home or abroad.
That makes an enormous difference, especially when considering the nature of marginal production in the US, which comes from shale resources. These rocks are not only superabundant, but they can be exploited at a relatively low cost. Just compare an offshore well at $170m with a vertical shale well that costs under $5m, with a five-year payout for a successful deepwater well versus a mere five-month payout for a shale play. And multiply a single, individual shale well by hundreds of wells and hundreds of decisions and you get a new world order.
With productivity gains in the US rising and costs of exploitation falling in a deflationary environment, if the traditional producers succeed in reining in production, prices will rise and US drilling will resume and US production will again surge.
Whatever the gossip might be about the need and potential for the old world players to collude to put a floor under prices, at least the leaders in Saudi Arabia understand that it is not that simple — especially now with Chinese oil demand stagnating and Iranian production rising.
If they cut production they confront two problems — a potential loss of market share to Iran, which rightly and righteously believes that others have taken their market share during their years under sanctions, and a subsidy to US independents whose production can grow by 1m b/d in a year or so, once prices rise. (…)
EARNINGS WATCH
Yesterday, there were 52 company reporting representing 12.3% of the S%P 500 market cap. In terms of market cap, we are now at the middle of the earnings season.
- 182 companies (51.2% of the S&P 500’s market cap) have reported. Earnings are beating by 4.9% (+4.6% yesterday) while revenues have missed by 0.3%.
- Expectations are for a decline in revenue, earnings, and EPS of -3.5%, -4.1%, and -2.3% (-3.0%). EPS is on pace for -0.1%, assuming the current 4.9% beat rate for the remainder of the season. This would be +6.2% (+5.9%) excluding Energy.
U.S. Durable Goods Orders Tumbled 5.1% as Global Demand Remains Weak Demand for long-lasting factory goods sharply declined in December—falling 5.1%—in the latest signal the U.S. manufacturing sector is suffering in the face of global headwinds.
Demand for long-lasting manufactured products made in the U.S. fell 5.1% in December from a month earlier, and declined 3.5% for all of 2015, the Commerce Department said Thursday. The annual decline in durable-goods orders is the largest outside a recession on records back to 1992. (…)
December’s pullback in demand for durable goods was led by a 29.4% decline in civilian aircraft orders, a highly volatile category. But even outside transportation, orders fell 1.2% during December and were down 2.6% for all of last year.
A closely watched proxy for how much businesses are spending on new equipment—orders for nondefense capital goods excluding aircraft—fell 4.3% in December from the prior month. The category was down 3.9% in 2015 from a year earlier. The pullback on capital investments was the largest outside a recession since 2002.
That makes it 2 consecutive negative months after November’s –1.1% drop in non-def capex ex-aircrafts.
Why the Manufacturing Contraction Might Not Signal a Recession Demand for manufactured products sank sharply last year, a rare occurrence outside a recession. But that doesn’t necessarily mean the six-and-a-half-year-old expansion is about to end.
U.S. Pending Home Sales Are Little Changed
The National Association of Realtors (NAR) reported that pending sales of single-family homes ticked 0.1% higher in December (+3.1% y/y) following November’s 1.1% decline, which was initially reported as -0.9%. The December sales volume was 4.9% below the peak in May. Expectations, according to a Wall Street Journal survey, were for an increase of 0.6%.
Regionally, December sales were mixed and most reversed their change in November. Sales in the Northeast jumped 6.1% following a 2.5% decline while sales in the Midwest declined 1.1% after a 0.8% gain. Sales in the South fell 0.5% following a 1.3%increase. Continuing lower by 2.1% were sales in the West after a 6.2% drop.
The homeownership rate, not seasonally adjusted, ticked up slightly to 63.8% from 63.7% in the third quarter, according to estimates published Thursday by the Commerce Department. It is also up from a 48-year low of 63.4% in the second quarter. (…)
Mr. McLaughlin pointed to a significant improvement in the homeownership rate among people ages 35 to 44, who were among the worst hit during the foreclosure crisis. The homeownership rate among that group increased to 59.3% from 58.1%. (…)
The rate at which new renter households are being formed has fallen off sharply. The number of renter households increased by just 300,000 year-over-year in the fourth quarter. In the third quarter, the number of renter households increased by 1.3 million.
Some 162,000 new owner households were formed between the fourth quarter of 2014 and 2015, up slightly from 123,000 new owner households in the third quarter. (…)
Blackstone Thinks It’s Time to Buy The market’s recent tumble has private-equity firms reaching for their checkbooks, if Blackstone Group LP’s latest results are any indication.
(…) “New investments have become much more attractive” as many companies’ shares have fallen 30% to 40% from recent highs and tighter credit markets limit their access to capital, Blackstone President Hamilton “Tony” James said on a conference call Thursday to discuss the firm’s fourth-quarter results. (…)
Blackstone said it stepped up its buying of real estate, companies and debt in the last three months of the year as the prices of stocks, debt and other assets fell. (…)
Blackstone executives characterized the recent market swings as driven by investor jitters over slowing global economic growth, rising interest rates and tumbling commodity prices. However, they said they don’t expect to see a recession in the U.S. “I don’t think the world is ending,” said Mr. Schwarzman said Thursday. “I think we’re going through an adjustment and people like ourselves, who own long-term things and add enormous value, end up at the end of the day being mega winners.”