* Kiwi, Canada’s dollar gaining on ‘improved risk sentiment’
* Swaps traders pricing in lower probability of RBA rate cut
Australia’s dollar led gains in commodity currencies after first-quarter economic growth was stronger than expected, stoking expectations the Reserve Bank of Australia will refrain this month from cutting interest rates again.
The Aussie advanced against all but one of its 16 major peers on Wednesday after a government report showed gross domestic product increased 1.1 percent in the first quarter from the previous three months, compared with the median estimate of 0.8 percent in a Bloomberg survey of economists. The New Zealand dollar climbed for a second day, while the Canadian currency snapped a three-day decline.
“This was a strong headline,” said Gareth Berry, a foreign-exchange and rates strategist in Singapore at Macquarie Bank Ltd. “This reduces the risk of an immediate RBA follow-on rate cut to the cut they delivered in May. They could afford to be a little bit more patient now.”
Australia’s dollar rose for a third day, advancing 0.4 percent to 72.65 U.S. cents as of 7:46 a.m. in London. The kiwi added 0.2 percent to 67.77 U.S. cents, after jumping 1 percent on Tuesday, while the Canadian dollar climbed 0.1 percent to C$1.3081, snapping a three-day, 0.9 percent drop.
The kiwi and the Canadian dollar have gained with “the improved risk sentiment within the commodity block,” which eases pressure for their respective central banks to act, said Robert Rennie, the global head of currency and commodity strategy at Westpac Banking Corp. in Sydney. A gauge of commodities is hovering near a six-month high.
The Australian dollar has weakened about 5.2 percent since May 2, the day before the RBA unexpectedly cut its benchmark to a record 1.75 percent to combat weakening inflation. The central bank will set rates again Tuesday.
The Reserve Bank of New Zealand, which surprised markets with a cut to its benchmark rate in March, will next meet on June 9. Bank of Canada announces its policy decision on July 13.
Swaps traders are pricing about a 46 percent probability that the RBA will cut its benchmark again by August, according to data compiled by Bloomberg. They had been pricing 54 percent odds at the end of last week.
“There are a number of arguments for the Aussie to improve at least in the short term,” said Westpac’s Rennie. “One, we’ve come long way in a short period of time; two, commodities in general look like they are consolidating; and three, the probability of RBA moving this month is falling and today’s data adds a bit to that.”
Gross domestic product, one of the most important economic indicators, may not be too reliable in the near term, Warren Buffett said Monday.
“I think the [quarterly] GDP figures are inherently a little more suspect in terms of being precise, than year-over-year figures,” Berkshire Hathaway’s chairman and CEO told CNBC’s “Squawk Box.”
The U.S. economy grew at a dismal 0.5 percent rate in the first quarter, the Labor Department said Thursday.
“There’s one little thing that many people don’t understand about the GDP figures. Maybe I don’t understand it, but my understanding is they’re sequential figures. You take the figures from one quarter to another and multiply by four. So, if you’re off by a tenth [of a percent] on the seasonal adjustment, that becomes a four-tenths figure,” Buffett said. Still, he added, “that doesn’t negate the fact that business is slow. It’s not negative, but it’s slow.”
* Business investment slumps most in since second quarter 2009
* GDP figures mark third straight sluggish start to a year
The U.S. economy expanded in the first quarter at the slowest pace in two years as American consumers reined in spending and companies tightened their belts in response to weak global financial conditions and a plunge in oil prices.
Gross domestic product rose at a 0.5 percent annualized rate after a 1.4 percent fourth-quarter advance, Commerce Department data showed Thursday. The increase was less than the 0.7 percent median projection in a Bloomberg survey and marked the third straight disappointing start to a year.
Shaky global markets and oil’s tumble resulted in the biggest business-investment slump in almost seven years, and household purchases climbed the least since early 2015, the data showed. While Federal Reserve officials on Wednesday acknowledged the softness, they also indicated strong hiring and income gains have the potential to reignite consumer spending and propel economic growth.
“The fact that personal consumption is a bit on the soft side is a disappointment, especially in light of the low gasoline prices,” said Thomas Costerg, senior economist at Standard Chartered Bank in New York, who correctly projected first-quarter growth. “Consumption seems to be stuck in a low gear.”
Economists’ projections for GDP, the value of all goods and services produced in the U.S., ranged from gains of 0.1 percent to a 1.5 percent. This is the government’s first of three estimates for the quarter before annual revisions in July.
Household purchases, which account for almost 70 percent of the economy, rose at a 1.9 percent annual pace last quarter, compared with 2.4 percent in the final three months of last year.
Spending, while slightly better than the 1.7 percent median forecast, was a disappointment in light of the consumer-friendly fundamentals including low gasoline prices, cheap borrowing costs, increased hiring and warmer-than-usual winter weather.
“The first quarter is going to be the worst quarter for consumption for all of 2016,” said Jacob Oubina, a senior U.S. economist at RBC Capital Markets LLC in New York. “With financial markets calming down and retracing all of their losses, the fundamental factors that have driven consumption will continue to do so.”
Americans have more job security. A separate report from the Labor Department showed filings for unemployment benefits held last week around four-decade lows. Jobless claims rose to 257,000 from the prior week’s revised 248,000 that were the fewest since 1973.
The GDP report showed disposable income adjusted for inflation climbed 2.9 percent in the first quarter, an improvement from the 2.3 percent gain in final three months of 2015. The saving rate ticked up to 5.2 percent from 5 percent.
The biggest factor weighing on the economy last quarter came from companies. Nonresidential fixed investment, or spending on equipment, structures and intellectual property, dropped at a 5.9 percent annualized pace, the biggest decline since the second quarter of 2009.
Last year’s slump in oil prices that extended into early 2016 led to an 86 percent annualized plunge in capital spending on wells and shafts, the most in records back to 1958.
Investment is also languishing as corporations struggle to boost profits against a backdrop of weak overseas demand and restrained domestic purchases.
Customers in the U.S. also limited orders as companies trim stockpiles to bring them more in line with sales. Inventories subtracted 0.33 percentage point from growth after a 0.22 percentage-point drag in the three months ended in December.
Progress in trimming inventories, along with receding headwinds from abroad and a comeback in the prices of oil and other commodities, may keep investment from deteriorating further.
A dearth of eager overseas customers led to a drop in exports in the first quarter. Trade subtracted 0.34 percentage point from overall growth, the most in a year.
Stripping out unsold goods and trade, the two most volatile components of GDP, as well as government expenditures, so-called final sales to private domestic purchasers increased at a 1.2 percent rate, the weakest advance since the third quarter of 2012.
Government spending rose at a 1.2 percent pace, led by states and municipalities.
If the past two years are any guide, the economy will shake off the first-quarter softness. In 2015, GDP rose 0.6 percent before rebounding to a 3.9 percent pace in the second quarter. A year earlier, the economy shrank at a 0.9 percent rate and then advanced 4.6 percent in the April-June period.
Fed policy makers, after skipping an interest-rate hike for a third straight meeting on Wednesday, suggested they remain upbeat about the underpinnings of U.S. growth. Central bankers also said they will continue to “closely monitor” inflation.
The GDP price index rose 0.7 percent in the first quarter. A measure of inflation tied to personal spending and excluding volatile food and fuel costs climbed 2.1 percent, the most in four years and in line with policy makers’ target.
* GDP expands 6.7% as retail, factory output, investment pick up
* Credit surge raises question marks over growth sustainability
China’s economy stabilized last quarter and gathered pace in March as a surge in new credit spurred a property sector rebound while raising fresh questions over the sustainability of the debt-fueled expansion.
Gross domestic product rose 6.7 percent in the first quarter from a year earlier, meeting the median projection of economists surveyed by Bloomberg and in line with the government’s growth target of 6.5 percent to 7 percent for the full year. New credit, industrial output, fixed-asset investment and retail sales picked up in March and beat analysts’ forecasts.
Signs of stabilization in the world’s second-biggest economy and bets on a subdued pace of U.S. monetary tightening have helped lead to recent rallies in oil, metals and global equities. Surging credit in March now shifts concern back to the durability of the recovery, how much financing is propping up zombie companies, and whether the market-driven reforms needed to boost new growth drivers will quicken.
“The economy has stabilized thanks to a flood of liquidity and improved sentiment in the property market,” said Tao Dong, head of Asia economics excluding Japan at Credit Suisse Group AG in Hong Kong. “It is not clear whether the momentum is sustainable. So far, the government seems to be the solo singer. It is critical to re-engage private investment.”
Aggregate financing was 2.34 trillion yuan ($360.7 billion) in March, the People’s Bank of China said, as monetary easing filtered through the financial system. Quarter-on-quarter growth in the first three months of this year was more than double the pace during the prior period, said Tim Condon, head of Asian research at ING Groep NV in Singapore.
“The flip side of strong credit growth is that debt keeps piling up,” said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong. “This can’t continue. The key is efficiency of credit use because we know that some of the credit is used to keep these zombie companies alive.”
Easy credit helped home sales jump 71 percent in March from a year earlier while investment in real estate development rose 6.2 percent in the first quarter.
The government has also upped its fiscal firepower to boost growth. Spending surged 20.1 percent in March while the revenue only increased 7.1 percent, according to Ministry of Finance data released Friday.
Fixed-asset investment jumped 10.7 percent in the first three months from a year earlier, as property construction rebounded. About 30 percent of new non-financial credit flowed to local governments and their investment vehicles in the first quarter, said Harrison Hu, chief Greater China economist at Royal Bank of Scotland Plc in Singapore.
While easing has propped up the economy for now, the rebound will quickly fizzle without continuous policy support, according to Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong.
“With growth stabilizing, this is the chance for officials to press on with reforms,” Neumann said. “Stimulus in the end will mean nothing without far-reaching reforms that ultimately wean the economy off its debt dependency.”
Industrial output expanded 6.8 percent in March from a year earlier and retail sales rose 10.5 percent. The survey-based unemployment rate rose slightly in March to around 5.2 percent, a statistics bureau official said.
The steady pace of China’s deceleration has raised doubts with some analysts. Bloomberg’s monthly GDP tracker, which draws on a range of monthly indicators including electricity production and exports, has shown more pronounced swings, with growth accelerating to 7.11 percent in March from 6.32 percent in January.
China has been making the transition from heavy industries to a services-led and consumption-driven economy, creating new winners in startups and media and losers in fading industries like coal and steel. The government is seeking to reduce overcapacity at heavy industrial plants without derailing the economy or slashing too many jobs.
“With the outlook for most other organic growth drivers still subdued — especially corporate investment and exports — the government will need to continue to rely on stimulus, notably infrastructure investment, to prevent growth from falling below its overly ambitious medium-term growth target of 6.5 percent next year,” Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong, wrote in a note.
Talk about diminished expectations. This morning’s estimate of 1.4% Q4 GDP growth is being hailed as a pleasant surprise. Which is odd, considering that for most of the past century a number this low would have been seen as weak enough to require emergency action.
And that’s just the headline number. Dig a little deeper and the picture — at least when viewed through a non-Keynesian lens — is of a system in crisis. Consider:
Corporate profits are, as today’s Bloomberg puts it, sliding.
Meanwhile (also from Bloomberg),
A firm labor market and low inflation encourage households to keep shopping. Today’s fourth-quarter growth figure reflected more spending on services, particularly on recreation and transportation. “It’s really U.S. consumers who are powering the global economy forward at this point,” said Gus Faucher, an economist at PNC Financial Services Group Inc. in Pittsburgh.
But if companies are earning less money, how likely is it that they’ll step up hiring going forward? Not very. And since today fewer Americans have full time jobs than in 2007 (making the current stellar 4.9% unemployment rate look like a cruel joke) a new round of mass layoffs will make the job market even more dire for anyone hoping to support a family with full-time work.
“If profits remain depressed, the prospects for capex and hiring will come under greater pressure,” Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, wrote in a research note.
What are the chances of profits remaining depressed? Pretty good, considering that two of the big growth drivers of the past few years have been student debt and car loans. The former is, as everyone by now knows, at levels that consign a whole generation of kids to life in their parents’ basements — not a recipe for robust consumption.
Car loans, meanwhile, are starting to look like subprime mortgages circa 2006:
(CNN Money) – Americans with lower credit scores are falling behind on auto payments at an alarming pace.The rate of seriously delinquent subprime car loans soared above 5% in February, according to Fitch Ratings. That’s worse than during the Great Recession and the highest level since 1996.
It’s a surprising development given the relative health of the overall economy. Fitch blames it on a dramatic rise in loans with lax borrowing standards that have helped fuel the recent boom in auto sales. More Americans bought new cars last year than ever before and the amount of auto loans soared beyond $1 trillion.
Fitch points out that the subprime end of the market is where there’s increased competition to peddle loans. The ratings firm flagged an increase in loans to “borrowers with no FICO scores,” lower downpayments, and extended term lending.
Toss in contracting global trade, turmoil in Europe and Latin America, and a grinding multi-month decline in US manufacturing output and the year ahead doesn’t look any better. Here’s the Atlanta Fed’s GDPNow measure of current growth, which shows a huge drop in just the past month:
What does all this mean? Very simply, if you borrow too much money life gets harder and the things that used to work stop working. For a country, lower interest rates no longer induce businesses and individuals to borrow and spend, and government deficits no longer translate directly into more full-time private sector jobs. Growth slows, voters get mad, politics gets crazy, and generally bad times ensue. The only question is why this is a surprise to the people whose choices brought us to the edge of the abyss.
This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit: