U.S. Durable Orders Rose 2% in July Orders for long-lasting manufactured goods rose in July for the second straight month, suggesting improving optimism among businesses.
New orders for durable goods—products designed to last at least three years, such as refrigerators and fighter jets—rose a seasonally adjusted 2% in July from June, the Commerce Department said Wednesday. Economists surveyed by The Wall Street Journal had expected growth of just 0.1%.
June’s orders rose a revised 4.1% from May, compared with an earlier estimate of 3.4%.
Core orders—which strip out defense and transportation and are considered a proxy for business spending on equipment and software—rose 2.2% in July, the biggest increase since June 2014. June’s rise in the same category was revised up to 1.4% from a previous estimate of 0.9%. (Table from Haver Analytics)
Small-Business Owners’ Confidence in Economy Wanes Small-business owners’ confidence in the overall economy is fading despite strength in their own operations, a sign the recovery’s gains may be slowing.
For August, the portion of small businesses reporting that the U.S. economy was improving fell to its lowest level since the government shutdown of 2013, according to a monthly survey of small firms by The Wall Street Journal and Vistage International Inc. The survey was completed in mid-August, before concerns about an economic slowdown in China triggered a selloff across global markets. (…)
In the most recent WSJ/Vistage survey, only 42% of the 682 small companies surveyed said economic conditions were better than a year ago, down from 47% in July and a January peak of 67%.
But small-business owners’ waning optimism about the larger economy belies their outlook for their own operations. Fifty-seven percent of small firms surveyed expect their total number of employees to increase over the next 12 months, while 46% forecast growth in investment spending. Nearly three-quarters expect higher revenue over the next 12 months and 57% forecast profitability to rise. (…)
Spanish Consumers Propel Fastest Economic Growth in Eight Years
Household consumption rose 1 percent on the quarter and maintained the pace of expansion at 3.5 percent on an annual basis, the National Statistics Institute said Thursday. Imports increased 2.3 percent in the three months to June, while exports were 1.6 percent higher.
Overall, gross domestic product expanded 1 percent in the second quarter and 3.1 percent from the same period a year earlier, confirming a July 30 estimate and matching a Bloomberg News survey. The Spanish economy has now added eight consecutive quarters of growth.
Fed’s Dudley: Case for September Rate Increase Now ‘Less Compelling’ amid rising concerns about events happening outside of U.S. borders.
(…) But normalization could become more compelling by the time of the meeting as we get additional information” about the state of the economy, he told reporters. (…)
“Incoming data suggest the economy continues to grow at a moderate pace sufficient to cause a gradual tightening of the U.S. labor market,” and recent data on the economy has looked pretty good, Mr. Dudley said. That said, “international developments have increased the downside risk to U.S. economic growth” and the Fed needs to understand how this environment will affect what lies ahead for the U.S., he said.
“I really do hope we can raise interest rates this year,” Mr. Dudley said. But he added, “Let’s see the data unfold before we make any statements when that might occur.” The official also pushed back at those who said the Fed will have to provide more stimulus to the economy via a renewed campaign of bond buying.
“I’m a long way from quantitative easing. The U.S. economy is performing quite well,” the official said.
Mr. Dudley warned about tying the stock market’s woes to the broader economy.
“I don’t have a view on why the stock market is doing what it’s doing,” Mr. Dudley said. “Stock-market movements have to be persistent” to affect the economy, and “short-term volatility doesn’t have much implication” for either growth trends or policy makers’ decisions.
Mr. Dudley expressed optimism that China will be able to deal with its troubles. “The good news there is that the people there are very capable” and have the tools to put things back on track, he said.
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Fed’s George: Market Volatility’s Effect Is Unclear (Bloomberg video)
Gavyn Davies China’s policy failings challenge the Fed
(…) The August turbulence was triggered initially by a renewed collapse in commodity prices. For the most part, this was due to excessive supply in key energy and metals markets, and the sell-off only became extreme when there were panic sales of inventories, and a final unwinding of “commodity carry” trades. This inverse bubble was a commodity market event, not a reflection of weak global economic activity. In fact, taken in isolation, it would probably have been beneficial for world growth, albeit with very uncertain time lags.
However, that reckoned without the China factor. Activity growth in China had rebounded slightly following the piecemeal policy easing in April, but the data available so far for August suggest that the growth rate has subsided again to about 6 per cent, roughly 1 per cent below target. Although this is very far from a hard landing, it undermined confidence.
Furthermore, while overall Chinese activity was not disastrous, the sectors of the economy that were most important for commodities — real estate, construction and manufacturing — were clearly weaker than the expanding services sectors. China pessimists therefore found enough reason to combine commodity price collapses with a weakening manufacturing sector in the country, and claimed that the “inevitable” Chinese hard landing was at hand.
They have claimed this on many occasions in the past, and have always been proved wrong. But, this time, fuel was added to the fire in the form of the maladroit handling of the equity market bubble and the currency devaluation by the Chinese authorities. Suddenly, whatever reputation economic policy makers in China still retained for skill and competence lay in tatters. (…)
China’s economic problems will be a long time in the solving, but in the near term a combination of four initiatives would calm market nerves:
- monetary policy needs to be unequivocally eased to reduce deflation fears; so far, it has only been eased enough to offset the tightening effect of capital outflows;
- the exchange rate needs to find a level that no longer needs support from foreign exchange intervention;
- fiscal policy needs to be relaxed to slow the decline in investment;
- a transfer of debt is needed from the local government sector and the banking sector into the central bank and the central government.
Amid internal political feuds, such a co-ordinated package seems a long way off. (…)
The financial markets have for a while been acting as if they are experiencing an adverse monetary policy shock from the Fed. In the bond market, the real yield has been rising, while inflation expectations have been falling. In the equity market, a long period of flat performance has given way to a sudden collapse. (…)
For the whole of 2015, the markets have refused to believe that the Fed would raise interest rates as early, or as fast, as the Federal Open Market Committee has shown in its “dots” charts for future interest rates. One interpretation is that the markets have placed greater weight on the possibility that secular stagnation is taking hold than the Fed has done.
As commodity prices have collapsed and the mood on Chinese policy has darkened, the markets have increased their belief that a rise in US rates would be inappropriate this year. Yet, until Wednesday’s slight adjustment to official Fed policy by William Dudley, the Fed has shown little sign of wobble in its determination to announce lift-off soon. Hence the collision with market confidence this week.
Some investors are beginning to agree with Mr Summers that another dose of quantitative easing may be necessary, even though Mr Dudley says that “QE4″ is far from his agenda. Others think that markets will be stabilised if the Fed simply abandons its oft-stated expectation that rates will rise this year.
What seems clear is that the Fed’s carefully orchestrated path for tighter policy is no longer consistent with stable financial markets. Something will have to give.
Dalio: The dangerous long bias and the end of the supercycle.
(…) we think that it should now be apparent that the risks of deflationary contractions are increasing relative to the risks of inflationary expansion because of these secular forces. These long-term debt cycle forces are clearly having big effects on China, oil producers, and emerging countries which are overly indebted in dollars and holding a huge amount of dollar assets—at the same time as the world is holding large leveraged long positions. (…)
PBOC Uses Unusual Tool to Tame Yuan Fall Expectations
The intervention by the People’s Bank of China caused U.S. dollar-yuan foreign exchange swaps to fall sharply — a price movement that implies a stronger Chinese currency and lower market interest rates in the world’s No. 2 economy in the future, said the people, who requested anonymity.
The move came after waves of sharp selloffs in the Chinese currency in the offshore market such as Hong Kong’s, where the yuan trades freely, following Beijing’s surprise nearly 2% yuan devaluation on Aug. 11.
Thanks to what is described as “massive” orders from a few commercial banks acting on the PBOC’s behalf, the one-year dollar-yuan swap plunged to 1200 points from 1730 points Wednesday.
In the offshore market, the one-year dollar-yuan swap also dropped to 1950 points from 2310 points Tuesday, following the onshore swaps move.
In the regular foreign exchange market, one dollar is buying 6.4075 yuan, down slightly from 6.4105 Wednesday.
A drop in the price of dollar-yuan swaps, which consist of a spot trade and a forward transaction, would translate into a weaker, comparable spot exchange rate at a predetermined future date. (…)
“In a way, it’s more effective for the central bank to manage people’s outlook of the yuan in the swap market due to the latter’s forward-looking nature,” said the second person familiar with the matter. (…)
China Sells U.S. Treasuries to Support Yuan
The PBOC has sold at least $106 billion of reserve assets in the last two weeks, including Treasuries, according to an estimate from Societe Generale SA.
(…) “By selling Treasuries to defend the renminbi, they’re preventing Treasury yields from going lower despite the fact that we’ve seen a sharp drop in the stock market,” David Woo, head of global rates and currencies research at Bank of America Corp., said on Bloomberg Television on Wednesday. “China has a direct impact on global markets through U.S. rates.” (…)
China Intervened Today to Shore Up Stocks Ahead of Military Parade
Authorities want to stabilize equities before a Sept. 3 military parade celebrating the 70th anniversary of the World War II victory over Japan, said two of the people, who asked not to be identified because the move wasn’t publicly announced. Treasury sales allow the government to raise dollars needed to bolster the yuan after a shock devaluation two weeks ago, according to different people familiar with the matter. (…)
The parade has been planned for months and will provide President Xi Jinping his first opportunity to publicly present himself to the world as China’s commander in chief. Such events, usually held on major anniversaries of the country’s founding, serve as a key ritual in establishing the Communist Party chief’s supreme authority over the country. (…)
Encouraged by a series of articles in state-run media that endorsed equity investment, more than 90 million individual investors now have stock accounts, a constituency that’s bigger than the Communist Party.
The Shanghai Composite has tumbled 42 percent from its mid-June peak through Wednesday as margin traders closed out bullish bets and concern deepened that valuations are unjustified by the weak economic outlook. (…)
Emerging-Market Currency Risk Shifts to Lenders Foreign investors who bought local currency bonds in emerging markets are among the biggest losers of recent selloff.
So far this year, local-currency emerging-market debt has posted a negative total return of 12.3%, counting price action and periodic payments, as measured by the J.P. Morgan GBI-EM Global Diversified index. The losses would extend the losing streak for the asset class into a third year. In contrast, emerging-market bonds issued in hard currencies, such as the dollar and euro, are down 0.6% this year.
Outflows from emerging-market local bond funds are accelerating, amounting to $1.3 billion during the first seven months this year, according to Morningstar Inc. In comparison, emerging-market hard-currency debt bonds lost only $263 million.
Global emerging-market local-currency bond funds tracked by Morningstar are down about 10% on average so far this year, with some down 5% in just the past month, both big declines for bond funds. (…)
Emerging-market countries and companies borrowed a record $1.4 trillion last year and already this year these borrowers have raised $750 billion, according to data from Dealogic.
But instead of selling debt in foreign currencies, which has been at the heart of previous financial crises as an appreciating dollar drove up debt payment obligations at a time when domestic earnings were falling, many countries did much of their borrowing in their own currencies. (…)
Indonesian Stocks Rise Most in Two Years on Government Stimulus
The government announced tax holidays of between 5 and 15 years to new companies across a wide range of industries investing at least 1 trillion rupiah ($71 million), Finance Minister Bambang Brodjonegoro said. (…)
Chemicals, machinery, maritime transport and upstream oil and gas companies will get tax cuts of between 10 percent and 100 percent, Brodjonegoro told reporters in Jakarta on Thursday. The announcement is a prelude to a more comprehensive stimulus package to boost growth, exports and purchasing power, he said.
Indonesian regulators have introduced a number of measures to shore up falling stock prices and a weakening currency, including reducing the limit for a daily drop in share prices, as well as encouraging institutional investors to buy stocks and state-owned companies to buy back their shares.
