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John Rubino: GDP Flat-Lines, Fed Rate Hike Evaporates

By John Rubino, Apr 29, 2015

As pretty much everyone is now aware, US Q1 growth was way below expectations. And the only reason it was even marginally positive was because businesses expanded their inventories at a record rate. Here’s a chart from Zero Hedge comparing the economy’s growth with that of inventories:

Inventory Q1 2015

In other words, if US businesses had just kept inventory levels stable in the first quarter, the economy would have contracted at a 2% rate.

Which once again takes us back to the observation that a strong currency slows down growth by making exports more expensive and therefore harder to sell. Nothing very deep or complicated here, but still apparently beyond the grasp of the economic forecasters who keep expecting an imminent rebound.

Going forward, two things are now virtually certain:

1) That massive inventory build will have to be reversed out in the coming year, which means lower demand for raw materials and, other things being equal, slower growth than would otherwise be the case.

2) The Fed will abandon its (always highly unlikely) promise/threat to raise interest rates in 2015. With growth trending towards zero and national elections coming up, no government in its right mind would tighten monetary policy. So either the dollar falls hard in anticipation (it’s down 1% this morning) or the US takes steps to bring it down.

What to make of all this flailing around? Simply put, the meta-trend towards ever-higher debt and ever less valuable fiat currencies remains in place. Various governments at various times will try to buck this trend, but the results are always and everywhere the same: A rising exchange rate threatens exports, slows growth and forces the errant county back onto the currency war battlefield.

It happened to Switzerland last year and now it’s happening to the US (and via the yuan/dollar peg, China). One more “unexpectedly” weak quarter and we’ll have no choice but to adopt the European negative interest rate, war-on-cash model. American savers will as a result find themselves in an even more uncomfortable spot, either forced to become hedge funds or watch their nest eggs keep shrinking.

This article is written by John Rubino of and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about, please visit:


Euro-Area Bank Lending Increases for First Time Since 2012

Bloomberg, Apr 29, 2015

Lending by euro-area banks to companies and households rose for the first time in three years in a sign that record monetary stimulus is finally reaching the economy.

Bank lending increased 0.1 percent in March from a year earlier, the ECB said in a statement on Wednesday. Loans had posted annual declines in every month since May 2012. Lending climbed 0.2 percent from February.

The ECB has used an array of unconventional tools to encourage credit flows to bolster the region’s sluggish economic recovery. The central bank’s quarterly survey published this month showed the measures are spurring lending even as financial institutions feel the pinch of tighter margins.

“With its more aggressive stance, the ECB is finally bringing the euro zone back to at least trend growth,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Money and credit point to a firming business cycle.”

The euro fluctuated after the report and was up 0.2 percent at $1.1003 at 11:13 a.m. Frankfurt time.

ECB President Mario Draghi told reporters after the April 15 policy meeting that risk aversion among banks has faded. Executive Board member Benoit Coeure said in comments published on the ECB website on Tuesday that “there is no reason to worry about the euro area recovering in 2015 and 2016.”

The central bank has bought covered bonds since October and asset-backed securities since November, and expanded purchases to include sovereign debt in March. It intends to spend a total of 1.1 trillion euros ($1.2 trillion) through September 2016. In addition, it handed 97.8 billion euros in targeted loans to banks on March 19 in the third round of a program designed to boost lending.

The ECB says euro-area economic growth will be 1.5 percent this year and climb to 2.1 percent by 2017 — a pace of expansion the region hasn’t seen since 2007 — as long its monetary stimulus is fully implemented. Draghi has warned that governments should use the opportunity to make reforms to turn a cyclical recovery into a structural one.


Sweden’s Krona Jumps After Riksbank Stands Pat on Interest Rates

Bloomberg, Apr 29, 2015


Sweden’s krona strengthened the most in two months against the euro after the Riksbank unexpectedly kept its key interest rate unchanged.

The krona climbed against all 16 of its major peers after the nation kept the repo rate at minus 0.25 percent on Wednesday, compared with the reduction to minus 0.35 percent predicted in a Bloomberg economist survey. The central bank said borrowing costs “may be cut further” while announcing it would extend its quantitative-easing program by purchasing 40 billion krona ($4.8 billion) to 50 billion krona of additional bonds. A currency tends to depreciate when more money’s in circulation.

“We’ve been a little bit surprised by the market reaction because, while they failed to deliver a rate cut, they did expand the QE program by more than we were expecting,” said Michael Sneyd, a foreign-exchange strategist at BNP Paribas SA in London. “They’ve firmly left the door open to further rate cuts,” which could be carried out “intra-meeting,” before the next scheduled policy gathering, he said.

The krona rose as much as 1.2 percent and was up 0.8 percent at 9.2754 per euro as of 4:31 p.m. London time, its third consecutive day of gains. It surged 2.3 percent to 8.3227 to the dollar, extending its earlier advance after a weaker-than-forecast U.S. growth report.

Sneyd said the Riksbank would be “very committed to preventing a strengthening of the currency,” adding that a rally to 9.1-9.2 per euro may prompt it to intervene.


U.S. GDP Expands at 0.2% Pace in First Quarter

WSJ, April 29, 2015

The U.S. economy slowed sharply at the start of the year as businesses slashed investment, exports tumbled and consumers showed signs of caution, marking a return to the uneven growth that has been a hallmark of the nearly six-year economic expansion.

Gross domestic product, the broadest measure of goods and services produced across the economy, expanded at a 0.2% seasonally adjusted annual rate in the first quarter, theCommerce Department said Wednesday. The economy advanced at a 2.2% pace in the fourth quarter and 5% in the third.

Economists surveyed by The Wall Street Journal had expected growth of 1% in the first three months of this year.

The first-quarter figures repeat a common pattern in recent years: one or two strong readings followed by a big slowdown. Before this year, first-quarter GDP growth had averaged 0.6% since 2010 and 2.9% for all other quarters. That has worked out to moderate overall expansion but no sustained breakout for the economy.

Last year, economists pinned much of the blame for a bad first quarter—GDP shrank 2.1%—on unusually harsh weather. This year, multiple factors appear to be at work, including another bout of blizzards, disruptions at West Coast ports, the stronger dollar’s effect on exports and the impact of cheaper oil.

And while most economists expect another second-quarter rebound, some forecasts are muted. Ahead of Wednesday’s GDP release, for example, J.P. Morgan Chase was predicting only a 2.5% pace in the second quarter.

Wednesday’s report showed consumer spending, which accounts for more than two-thirds of economic output, decelerated to a 1.9% pace in the first quarter, down from 4.4% growth in the fourth quarter.

Households last year were buoyed by strong job growth and tumbling gasoline prices. But fuel costs have crept up since the start of the year and the labor market appeared to downshift in March, damping confidence.

Another key driver of the economy, business spending, also has faltered of late. Nonresidential fixed investment—which reflects spending on software, research and development, equipment and structures—retreated at a 3.4% rate, compared with a 4.7% rise in the fourth quarter.

Energy companies in particular are feeling the effects of cheaper oil. Business investment in structures fell 23.1%, led by a 48.7% contraction for mining sector spending on shafts and wells, Commerce said.

A stronger dollar, meanwhile, has made domestically produced goods more expensive overseas and foreign products cheaper inside the U.S. Combined with disruptions at West Coast ports, trade was constrained. In the first quarter, exports fell at a 7.2% rate, compared with 4.5% growth in the fourth quarter. Imports rose 1.8%, compared with 10.4% in the fourth quarter.

Federal government spending added little to the economy in the fist quarter, expanding 0.3%, compared with a 7.3% fall in the fourth quarter.

And rising inventories contributed 0.74 percentage point to GDP in the first quarter.

Excluding the effect of company restocking, underlying demand in the economy was weak. Real final sales of domestic product, a measure that excludes changes to inventories, shrank at a 0.5% pace, compared with a 2.3% rise in the fourth quarter.

Alongside weak growth in the quarter, prices fell.

The price index for personal consumption expenditures—the Federal Reserve’s preferred measure for inflation—declined at a 2% annual rate, well below the central bank’s 2% inflation target. Core prices, which exclude volatile food and energy components, were up 0.9%, the lowest level since 2010.

The latest reading on the economy arrives in the middle of a two-day Fed meeting where policy makers will weigh the latest data against plans to start raising short-term interest rates. No action is expected from the Fed on Wednesday, but investors will look for clues on the timing for the first rate increase since 2006 in a policy statement due out at 2 p.m. ET.


Greek Banks Get More Funds as ECB Weighs Collateral Discount

Bloomberg, April 29, 2015

The European Central Bank raised the amount of emergency liquidity available to Greek banks, while signaling that access to such funds may become more difficult if bailout talks remain deadlocked.

The Governing Council lifted the cap on Emergency Liquidity Assistance by 1.4 billion euros ($1.5 billion) to 76.9 billion euros on Wednesday, people familiar with the decision said. That follows an increase of about 1.5 billion euros last week. An ECB spokesman declined to comment.

With no speedy deal between Greece and its creditors in sight, the ECB is studying measures to rein in ELA funding to limit risks. Staff have proposed increasing the discounts imposed on the securities banks post as collateral when borrowing, and the Governing Council may discuss the issue at its May 6 meeting.

“When the Eurosystem as a whole gives such support, we have our own collateral rules, we can set them ourselves,” ECB Governing Council member Ardo Hansson told reporters in Tallinn, Estonia. “When it’s ELA, then that’s given by the national central bank, which has some latitude in this matter.”

Intended to counter deposit outflows, Greece’s ELA is provided by the country’s central bank at its own risk, and against lower-quality collateral than the ECB accepts.

Household and business deposits fell 1.9 billion euros in March to 138.6 billion euros, the lowest level since January 2005, according to Bank of Greece data released Wednesday.

Weekly ELA injections reflect deposit outflows, as liquidity buffers are kept at about 3 billion euros to give the Bank of Greece and the ECB time to react in an emergency.

Deposit Outflows

March’s deposits outflow brings the four-month drop to almost 26 billion euros, or about 16 percent of the total, amid growing alarm among savers over the country’s place in the euro area. While the rate of decline has slowed, outflows probably continued into April, as reflected by successive ELA-ceiling increases.

The ECB says that ELA cash can’t be used for state-financing, including t-bills, pointing out that this would be against European Union treaties.

ECB help to Greek banks “can’t continue indefinitely,” Governing Council member Christian Noyer said in an interview on Europe 1 radio on Tuesday. “What’s needed are decisions on fundamental reforms.”

Time is running out for Greek Prime Minister Alexis Tsipras as pensions and salaries loom at the end of the month and the International Monetary Fund awaits payment of almost 1 billion euros in the first half of May. After euro-area finance ministers failed to reach a deal at an April 24 meeting in Riga, Tsipras signaled that he may ask voters to approve an agreement that may not be in line with his campaign pledge to end austerity.

Market Reaction

Greek stocks and bonds have risen this week after the government sidelined Finance Minister Yanis Varoufakis, who had drawn criticism from euro-area partners for his handling of the bailout discussions. The Athens Stock Exchange Index was up 0.6 percent at 2:03 p.m., after rising 1.4 percent on Tuesday and 4.4 percent the day before.

In a televised interview on Monday night Tsipras said the government is doing all it can to show that Greece is willing to make the compromises.

“The negotiations are in the most crucial stage, the final stage,” Tsipras said. “We are making great efforts to cover the distance to reach an agreement. As I said in Brussels, we have covered 70 percent of the distance and we ask them to walk the remaining 30 percent together.”