Fri 13 Apr 2018

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Today at the stock market

bull/bearFinancial stocks led a drop on Wall Street on Friday as results from big banks failed to enthuse and fear of broader conflict in Syria further unnerved investors. The S&P banks index fell 2.6% and the broader S&P financial index lost 1.6%, the most among the 11 major S&P sectors while S&P’s energy sector rose 1.1% with rising oil prices.

  • The S&P 500 index fell 7.69 points, or 0.29%, to 2,656.30
  • The Dow Jones Industrial Average fell 122.91 points, or 0.5%, to 24,360.14
  • The Nasdaq Composite fell 33.60 points, or 0.47%, to 7,106.65.
  • For the week, the S&P 500 rose 1.99%, the Dow rose 1.79%, and the Nasdaq ose 2.77%.
  • Declining issues outnumbered advancing ones on the NYSE by a 1.28-to-1 ratio; on Nasdaq, a 1.64-to-1 ratio favored decliners.
  • Volume on U.S. exchanges was 5.78 billion shares, compared to the 7.22 billion average for the full session over the last 20 trading days.


While the U.S. economy is performing well, geopolitical issues are weighing on stock markets this year.

U.S. stocks extended losses on Friday after the State Department said that it had proof that Syria carried out a recent chemical weapons attack in the town of Douma.

The renewed possibility of a strike in Syria “is enough to cause heartburn for the market,” said Robert Phipps, a director at Per Stirling Capital Management in Austin, Texas. “There’s a ton of uncertainty right now so investors don’t want to go into the weekend particularly long.”

Senior Russian lawmakers said on Friday that the lower house of parliament would consider draft legislation giving the Kremlin powers to ban or restrict a list of U.S. imports, reacting to new U.S. sanctions on Russian tycoons and officials.

Boeing fell 2.4% after a Russian lawmaker said the country may stop supplying titanium to the company. Issues with engines for Boeing’s 787 Dreamliner planes also weighed on the company’s shares.

Finance sector

Shares of JPMorgan Chase & Co, the biggest U.S. bank by assets, dropped 2.7% after the bank’s quarterly profit fell slightly short of expectations. JPMorgan shares were the biggest weight on the S&P 500.

Wells Fargo sank 3.4% after the bank said it may have to pay a penalty of $1 billion to resolve investigations, while Citigroup dropped 1.6% despite beating profit estimates.

Weak loan growth weighed on bank shares, said RJ Grant, head of trading at Keefe, Bruyette & Woods in New York.

“If you didn’t own financials going into the quarter, there was nothing in the numbers today that would make you excited about owning them,” Grant said.

Friday’s bank results kicked off earnings season, with Thomson Reuters data predicting profits at S&P 500 companies increased by 18.6 percent in the first quarter from a year ago, their biggest rise in seven years.Reuters

All major U.S. benchmarks ended lower in lighter than normal trading, with the financial sector pacing losses on a drop of more than 1.5 percent. Wells Fargo & Co. warned that its better than anticipated first-quarter results may change as a settlement with regulators looms, loans dropped and mortgage-banking results trailed predictions. JPMorgan Chase & Co. and Citigroup Inc. posted quarterly earnings that topped analysts’ expectations, but shares of both companies plunged as JPMorgan Chief Executive Officer Jamie Dimon said, “the environment is intensely competitive and lending was flat for the quarter.”

“You’re getting a very high expectation for earnings season, which makes me a little bit nervous,” said Tom Essaye, the former Merrill Lynch trader who founded market newsletter ‘The Sevens Report.’ After banks reported results “and it wasn’t another positive catalyst, you just saw people come in and sell the market,” he said.

The market’s focus also is on political turmoil surrounding President Donald Trump, potential military activity in Syria and trade tensions between the U.S. and China. On Thursday, President Donald Trump expressed optimism on trade deal with China and hinted that the U.S. may rejoin the Trans-Pacific Partnership free-trade deal that he pulled out of shortly after taking office.

“Thus far it’s really all been theater. Where we might actually start to see it show up in the market again is if companies start talking about the effect of the tariffs on their earnings calls. I think it’s fairly likely that it will at least be mentioned. A lot of companies look for reasons to kind of dial down expectations, and this certainly is a very real one, even though it’s theoretical at the moment,” Brad McMillan, chief investment officer for Commonwealth Financial Network, said of the trade issues.

The Stoxx Europe 600 Index rose but retreated from an earlier climb to a 6-week high, led by raw-material producers as industrial and precious metals advanced. Aluminum headed for its biggest weekly increase since at least 1987 on concern U.S. sanctions on Russia’s United Co. Rusal will disrupt supplies.Bloomberg

Market indices

Market indices
^ S&P500 Index today (mouseover for 12 month view) [Chart: Google Finance]

Index Ticker Today Change 31 Dec 17 YTD
S&P 500 SPX (INX) 2,656.30 -0.29% 2,673.61 -0.65%
DJIA INDU 24,360.14 -0.51% 24,719.22 -1.46%
NASDAQ IXIC 7,106.65 -0.48% 6,903.39 +2.94%

Portfolio Indices

USD and AUD denominated indices over the past 52 weeks (Chart: Bunting)
^ USD and AUD denominated indices over the past 52 weeks Chart: Bunting

Index values

Index Currency Today Change 31 Dec 17 YTD
USD-denominated Index USD 3.200 +0.01% 3.068 +4.31%
Valuation Rate USD/AUD 0.78182 +0.17% 0.78528 -0.45%
AUD-denominated Index AUD 4.095 -0.16% 3.909 +4.76%

Portfolio stock prices

Stock Ticker Today Change 31 Dec 17 YTD
Alphabet A GOOGL $1,036.04 -0.13% $1,053.00 -1.62%
Alphabet C GOOG $1,029.27 -0.32% $1,045.65 -1.57%
Apple AAPL $174.73 +0.33% $169.23 +3.25%
Amazon AMZN $1,430.79 -1.23% $1,169.54 +22.33%
Ebay EBAY $39.90 -1.56% $37.76 +5.66%
Facebook FB $164.52 +0.39% $176.46 -6.77%
PayPal PYPL $77.27 -0.25% $73.61 +4.97%
Twitter TWTR $28.76 -0.83% $24.01 +19.78%
Visa V $120.75 -0.27% $114.02 +5.90%
VMware VMW $121.34 -0.67% $125.32 -3.18%



DXY movements
^ Bloomberg Dollar Spot Index (DXY) movements today (mouseover for 12 month view) Chart: Bloomberg

The Bloomberg Dollar Spot Index (DXY) fell 0.1%.

Britain’s GBP rose to the strongest level against the EUR in almost a year against as investors bet on a Bank of England interest-rate hike next month, after the European Central Bank revealed a dovish slant in the account of its Mar 2018 meeting published Thursday:

  • The GBP rose 0.1% to USD 1.4246.
  • The EUR rose 0.1% to USD 1.2339.

Japan’s JPY fell less than 0.1% to 107.37 per USDr.

The yield on 10-year Treasuries fell 2 basis points to 2.8193%.
Germany’s 10-year yield fell 1 basis point to 0.511%.
Britain’s 10-year yield fell 2 basis points to 1.435%.


AUD movements
^ AUD movements against the USD today (mouseover for 12 month view) Chart:

Oil and Gas Futures

Futures prices

Prices are as at 15:49 EDT

  • NYMEX West Texas Intermediate (WTI): $67.25/barrel +0.27% Chart
  • ICE (London) Brent North Sea Crude: $72.42/barrel +0.40% Chart
  • NYMEX Natural gas futures: $2.74/MMBTU +1.90% Chart

flag_australia AU: RBA Financial Stability Review

Press Release Extract [au_rba]



Global economic conditions have remained strong over the past six months, which has helped to further improve the health of the global banking system. However, a range of financial stability risks remain. Long-term government bond yields are still very low, despite generally increasing over the past year or so, which has continued to underpin elevated asset valuations and ‘search for yield’ activity.

In addition, compensation for risk is low for many assets. Current asset pricing suggests that investors see little chance of adverse outcomes, and consequently a detrimental shock could lead to a disruptive and lasting correction in a broad range of markets. This could be triggered by a sharp rise in interest rates in the absence of stronger economic growth arising from, for instance, a jump in realised or expected inflation or a change in investors’ risk appetite.

In China, the authorities continue to make concerted efforts to address risks in the financial system, and a range of further steps were announced over the past six months. This is a positive development because of the importance of the Chinese economy to the Australian economy. However, risks remain elevated given the rapid growth and high level of corporate sector debt as well as the complex and opaque nature of some parts of the financial system.

The improving economic outlook in Europe is strengthening bank profitability, but the stock of non-performing assets in some countries remains high. In parts of Europe and elsewhere, household debt and housing prices remain high after earlier rapid growth.

On the domestic front, concerns about riskier types of new housing borrowing have eased. The prudential measures implemented over recent years have led to a general strengthening in lending standards, and the regulatory limits on investor loans and interest-only lending have reduced the build-up of macro-financial concerns.

The high level of household indebtedness increases the risk of a rise in household financial stress amplifying a shock to the economy.

Most aggregate indicators of financial stress remain low. Some banks have reported that payment arrears have increased for some borrowers transitioning to principal-and-interest repayments at the end of an interest-only period. This partly reflects borrowers taking some time to adjust, though for a small share of borrowers this has reflected difficulty in making the higher repayments. Overall, however, the regulatory measures and broader strengthening of lending standards have contributed to an improvement in the risk profile of new housing lending and the resilience of household balance sheets. They have also contributed to the recent moderation in housing market conditions.

Conditions in commercial property remain an area to watch. It appears that the large stock of apartments reaching completion in Brisbane and other capital cities is being absorbed with little disruption to housing markets, though there have been some reports of settlement failures and delays. Non-residential commercial property prices in Sydney and Melbourne have risen further, with yields falling, in part reflecting in part reflecting ongoing ‘search for yield’ activity. In contrast, in the resource-intensive states conditions in office property markets remain challenging with elevated vacancy rates. More broadly, Australian-owned banks have slowed the growth in their commercial property exposures following a review by the Australian Prudential Regulation Authority (APRA) in Sep 2016, though growth in lending by some foreign banks has remained strong. Lending by non-bank financial institutions to developers and households is growing strongly but remains a small share of total exposures. Conditions in the rest of the business sector continue to strengthen, with profits generally high and leverage contained, including for most firms in the mining-related sectors.

The resilience and overall financial performance of Australian banks has continued to improve. Profits in the second half of 2017 grew from an already high level, in part because of the increase in lending rates implemented by banks following the regulatory measures. Conditions in local and offshore long-term funding markets have also been generally favourable for banks, although there has been a recent rise in bank bill rates. Capital ratios have continued to rise and either already meet or are close to the ‘unquestionably strong’ targets announced by APRA last year and due to come into force in 2020. APRA recently released a discussion paper detailing proposed amendments to the capital framework to better align overall capital levels with the underlying risk of banks’ lending and other activities. This follows the finalisation of reforms to the international Basel III capital framework. With the design of key post-crisis reforms now largely completed, global bodies are increasingly focusing on monitoring the implementation, and evaluating the effectiveness and impact, of the financial reforms.

Conduct in the banking sector is the focus of several inquiries. Notably, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has commenced, the Productivity Commission investigation of competition in the financial system has issued a draft report (7 Feb 2018), and the interim report by the Australian Competition and Consumer Commission on mortgage pricing has been published (15 Mar 2018). Over time, these examinations should enhance accountability and strengthen risk culture in the financial sector. The International Monetary Fund has started work on its five-yearly Financial Sector Assessment Program review of Australia, which will focus on current financial vulnerabilities and the Australian framework for systemic risk oversight.

An important development in recent months was the launching of the New Payments Platform (NPP), which enables very fast payments on a 24/7 basis using a recipient’s email address, phone number or ABN. The NPP will increase the efficiency of the payments system and may support productivity more broadly. It also changes the nature of the risks in the Australian payments system, reducing the delay in receiving funds while increasing the importance of real-time monitoring to prevent financial fraud. Other financial market infrastructures have continued to function effectively.


One area of potential concern is for borrowers at the end of their current (interest only, IO) period. Much of the large stock of IO loans are due to convert to P&I loans between 2018 and 2021, with loans with expiring IO periods estimated to average around $120 billion per year or, in total, around 30 per cent of the current stock of outstanding mortgage credit. The step-up in mortgage payments when the IO period ends can be in the range of 30 to 40 per cent, even after factoring in the typically lower interest rates charged on (principal and interest, P&I) loans.

However, a number of factors suggest that any resulting increase in financial stress should not be widespread. Most borrowers should be able to afford the step-up in mortgage repayments because many have accumulated substantial prepayments, and the serviceability assessments used to write IO loans incorporate a range of buffers, including those that factor in potential future interest rate increases and those that directly account for the step-up in payments at the end of the IO period. Moreover, these buffers have increased in recent years.

In addition to raising the interest rate buffer, APRA tightened its loan serviceability standards for IO loans in late 2014, requiring banks to conduct serviceability assessments for new loans based on the required repayments over the residual P&I period of the loan that follows the IO period. Prior to this, some banks were conducting these assessments assuming P&I repayments were made over the entire life of the loan (including the IO period), which in the Australian Securities and Investments Commission’s (ASIC’s) view was not consistent with responsible lending requirements. As a result, eight lenders have agreed to provide remediation to borrowers that face financial stress as a direct result of past poor IO lending practices. However, to date, only a small number of borrowers have been identified as being eligible for such remediation action. Some borrowers have voluntarily switched to P&I repayments early to avoid the new higher interest rates on IO loans, and these borrowers appear well placed to handle the higher repayments.

Some IO borrowers may be able to delay or reduce the step-up in repayments. Depending on personal circumstances some may be eligible to extend the IO period on their existing loan or refinance into a new IO loan or a new P&I loan with a longer residual loan term. The share of borrowers who cannot afford higher P&I repayments and are not eligible to alleviate their situation by refinancing is thought to be small. In addition, borrowers who are in this situation as a result of past poor lending practices may be eligible for remediation from lenders. Most would be expected to have positive equity given substantial housing price growth in many parts of the country over recent years and hence would at least have the option to sell the property if they experienced financial stress from the increase in repayments. The most vulnerable borrowers would likely be owner-occupiers that still have a high LVR and who might find it more difficult to refinance or resolve their situation by selling the property.

Reserve Bank of Australia, “Financial Stability Review“, 13 Apr 2018 Full Report

flag_europe EU: International Trade in Goods. Feb 2018

Press Release Extract [eu_trade]

Euro area

The first estimate for euro area (EA19) exports of goods to the rest of the world in February 2018 was €177.5 billion, an increase of 3.0% compared with February 2017 (€172.3 bn). Imports from the rest of the world stood at €158.6 bn, a rise of 1.5% compared with February 2017 (€156.2 bn). As a result, the euro area recorded a €18.9 bn surplus in trade in goods with the rest of the world in February 2018, compared with +€16.1 bn in February 2017. Intra-euro area trade rose to €153.7 bn in February 2018, up by 3.9% compared with February 2017.


In January to February 2018, euro area exports of goods to the rest of the world rose to €356.2 bn (an increase of 5.9% compared with January-February 2017), while imports rose to €333.8 bn (an increase of 3.8% compared with January-February 2017). As a result the euro area recorded a surplus of €22.4 bn, compared with +€14.5 bn in January-February 2017. Intra-euro area trade rose to €314.0 bn in January-February 2018, up by 6.5% compared with January-February 2017.

European Union

The first estimate for extra-EU28 exports of goods in February 2018 was €149.2 billion, up by 1.7% compared with February 2017 (€146.7 bn). Imports from the rest of the world stood at €145.9 bn, down by 0.4% compared with February 2017 (€146.5 bn). As a result, the EU28 recorded a €3.3 bn surplus in trade in goods with the rest of the world in February 2018, compared with +€0.2 bn in February 2017. Intra-EU28 trade rose to €277.4 bn in February 2018, +3.5% compared with February 2017.


In January to February 2018, extra-EU28 exports of goods rose to €299.7 bn (an increase of 4% compared with January-February 2017), while imports rose to €316.8 bn (an increase of 3.6% compared with January-February 2017). As a result, the EU28 recorded a deficit of €17.1 bn, compared with -€17.5 bn in January-February 2017. Intra-EU28 trade rose to €567.2 bn in January-February 2018, +6.6% compared with January-February 2017.

Eurostat, “International Trade in Goods. Feb 2018“, 13 Apr 2018 More

flag_usa US: Boston Fed President Eric Rosengren Speech


Last Friday the Bureau of Labor Statistics released the monthly employment report. While only 103,000 new jobs were created in March, the first quarter as a whole held quite strong job growth. Over the first three months of 2018, the U.S. economy added an average of 202,000 jobs per month – which, over the longer run, is roughly twice as many as would be required to keep the unemployment rate stable at current levels of employment, given the growth in the labor force.

This strong first-quarter job growth occurred even though the labor market is already tight, as indicated by an unemployment rate at 4.1 percent, a rate that most economists consider to be below the sustainable rate of unemployment. Consistent with tight labor markets, wages have been rising, albeit gradually – average hourly earnings rose 2.7 percent over the past year, about three-quarters of a percentage point faster growth than in 2013 and 2014.

The tight national labor market is also reflected in New England. When I talk to employers around the Federal Reserve’s First District, which includes the six New England states, I increasingly hear of the difficulty in attracting employees – and more and more business leaders mention the additional tactics their organizations must use to attract the talent necessary to move their businesses forward.

The relative strength of the first-quarter employment growth is consistent with the strong economic forecast provided by monetary policymakers after the Federal Reserve’s FOMC meeting in March. The median forecast of Fed policymakers was for the economy to grow somewhat faster in 2018 than earlier in the recovery – specifically, 2.7 percent in 2018 (versus 2.2 percent on average since the recovery began in the second quarter of 2009).

With this growth projected to be fairly strong, the unemployment rate is expected to fall below 4 percent, with inflation rising close to the Federal Reserve’s 2 percent target by the end of 2018. These forecasts, it should be noted, also incorporate the assumption of two additional 25-basis-point rate increases in the short-term interest rate during the balance of 2018, beyond the one that occurred at the FOMC’s March meeting.

My own views are that labor markets may tighten more than the median SEP forecast suggests, and that inflation is likely to increase a bit more than the current median forecast by FOMC participants. Therefore, I expect somewhat more tightening may end up being needed than is currently reflected in the projected median for the federal funds rate.

Of course, I am talking here about forecasts, not outcomes. Economic forecasts often prove imperfect, with actual results varying from the forecast in part because economists need to make assumptions about variables that are quite hard to predict. Simply put, many important economic decisions are not straightforward. For example, what will happen with tariffs around the world over the course of this year? Will the Organization of the Petroleum Exporting Countries (OPEC) significantly alter its production of oil? And how will foreign economies’ monetary policy change? Many of these questions require the forecasting of political outcomes rather than underlying economic relationships – and this is not an area of comparative advantage for economists.

… We have been undershooting the Federal Reserve’s 2 percent inflation target. This undershooting has been largely due to the decline in the relative price of imports from 2014 to 2016, and the decline in telecommunications prices in early 2017. But that shortfall is forecasted to end soon – and it is notable that Committee members expect an overshoot of the Fed’s inflation target in the medium term.

… The unemployment rate has been declining relatively quickly since the first quarter of 2015, and that Committee members expect the path to level off in the medium term at well below 4 percent. Notably, the median expectation for the longer-run rate of unemployment – usually taken to be policymakers’ estimate of the sustainable rate – is 4.5 percent in the March SEP (the horizontal line). Clearly, policymakers expect very tight labor markets in the short and medium term relative to what we expect to prevail in the longer term.

The median forecast is for three 25-basis-point increases in 2018 (including the increase which followed the March FOMC meeting) and another three in 2019. So again, it is worth noting that the gradual rise of inflation toward – and then above – its target, and the projection for a falling unemployment rate that dips well below its estimated long- run sustainable level, occur despite the gradual tightening of monetary policy assumed in FOMC participants’ forecasts. Importantly, some of the underlying economic strength in these forecasts comes from the projected effects of substantial fiscal stimulus, generated both by tax cuts and by the higher government spending incorporated in the recent federal budget.

In summary, the Committee’s median outlook is fairly optimistic. My own forecast calls for an even more pronounced decline in the unemployment rate, given my expectation that cyclical strength in labor force participation will provide only a partial offset to solid gains in payrolls. Despite this positive outlook, I think it is important to consider the risks around this forecast …

Short-run Risks

The outlook for international trade: While the United States is less dependent on exports for growth than are many of our major trading partners, exports are still a relatively large component of total goods and services produced in the U.S. economy. At roughly 12 percent of total goods and services, exports play a much smaller role in the overall economy than consumption, which is roughly two-thirds of the U.S. economy. But exports play a larger role than, for example, housing, which accounts for roughly 4 percent of the overall economy. Of course, here I am taking a macroeconomic view of the economy; I recognize that some industries and firms will feel more acutely any changes in the export and trade environment.

Some context is important. It would take a significantly broader set of trade actions than those reported to date to materially reduce the roughly $2.4 trillion in annual U.S. exports. Still, spillover effects are possible, beyond just the industries where exports could be affected by possible trade barriers. There could also be indirect economic effects from trade disputes with important, but difficult to measure, impacts. For example, concerns about possible supply disruptions might cause firms to source supplies from other countries – and the new capacity in these other countries could potentially mean less U.S. investment and employment.

A second possible impact is on prices. … Prices of imported goods grew at a slower pace than overall inflation, thus holding down overall inflation over the last several years. Indeed, imported goods prices fell until about the beginning of 2017, in part because of a strong dollar, although that trend appears to be changing more recently. Of course the imposition of tariffs also pushes up prices that consumers pay for goods impacted by the tariff. In addition, actions to avoid possible tariffs can cause precautionary stockpiling, which can disrupt the flow of orders and cause production bottlenecks. Concerns about these possible disruptions likely explain some of the heightened volatility in stock prices of late.

Unemployment: While I expect the unemployment rate to drop to 3.7 percent by the end of this year, it is possible that unemployment will fall even more rapidly in the short-term. An undesirable “boom-bust” scenario may become more likely if unemployment moves far below where we expect labor markets to settle in the long-run. (Consider) the difference between the actual unemployment rate and the Congressional Budget Office’s (CBO) estimate of the natural rate of unemployment from 1970 to the first quarter of 2018… Today, unemployment is already below the CBO estimate of the natural rate … periods in which unemployment dipped significantly and persistently below the estimated natural rate historically have tended to generate conditions that resulted in a recession.

While labor markets provide important indicators of potential unsustainability, it is important to be alert to financial stability issues as well. …The spreads between corporate bonds and 10-Year U.S. Treasuries have fallen to relatively low levels, and several academic studies have highlighted that the investor confidence that generates low credit spreads often precedes subsequent economic reversals.

Let me reiterate that I am not forecasting significant trade disruptions or substantial boom-bust problems. But the risk that they could develop means we must be very carefully monitoring incoming data to see if they indicate an increased probability that these risk scenarios could occur.

Long-run Risks

There are also longer-run risks that should be considered at this juncture in the economy. With monetary policy still relatively accommodative, and fiscal policy quite accommodative, it seems unlikely that the economy would perform poorly in the near term. However, it is important to consider whether some of that accommodation may potentially generate risks that play out over the longer term.

Public Debt One of the risks is illustrated by the CBO projection of public debt levels that was recently released. Gross federal debt as a percentage of GDP … has been rising over the past decade. … This debt-to- GDP ratio will rise to levels not seen since just after World War II. My concern is this: by using up so much fiscal capacity now – by which I mean the ability to lower tax rates or boost federal spending to offset economic weakness – the country risks not having sufficient fiscal capacity in the future when it might be needed. And this lack of fiscal capacity would be particularly troubling if monetary policy could not aggressively offset adverse shocks.

Monetary Policy … There is also some reason to be concerned about how aggressively monetary policy can respond to a large adverse shock. At the onset of most previous economic recessions, short-term interest rates were quite high. This provided plenty of room to reduce interest rates as the economy went into recession. The one time that short-term interest rates reached zero in recent history was in the aftermath of the Great Recession. Once the FOMC cut the short-term policy rate to its effective lower bound, reaching the limit of stimulus from that tool, the Federal Reserve employed its balance sheet to purchase longer-term assets, thus lowering longer-term interest rates and providing further monetary accommodation and stimulus. These actions, which I fully supported, were nonetheless politically controversial and the subject of some debate among economists.

So how much room do we expect to have to lower interest rates in response to future recessions? The Federal Reserve’s SEP includes a forecast of where short-term interest rates will settle in the long run. The most recent median forecast for the longer-run federal funds rate is 2.9 percent, which is quite low by historical standards. The underlying reason for this is that most Committee members expect real interest rates to be quite low, due to a demographically driven slowing in labor force growth coupled with slow growth in productivity. Combined with a 2 percent inflation goal, this implies low long-run, short-term policy rates, implying that on average we could lower rates by less than 3 percentage points in response to a recession. Since in many recessions we lower rates by as much as 5 percentage points, it is quite likely that interest rates would reach zero again in a downturn.

Certainly expanding the Federal Reserve’s balance sheet, and perhaps using other less- conventional monetary policy interventions, can help support the economy, should it be needed. However, several questions and concerns exist. How effective will these unconventional tools be in offsetting adverse shocks? Is there significant opposition among the public and Congress to the Fed using nontraditional tools? How limited will fiscal policy be in buffering an adverse shock or downturn? These questions, while a bit sobering, highlight the need to increase the potential of policy buffers to respond to possible future problems.

Concluding Observations

The outlook for the economy projected by participants in the March FOMC meeting is quite positive. My own forecast is somewhat stronger in terms of unemployment rates and inflation outcomes than the SEP forecast, which is why I am in favor of somewhat more tightening than the median FOMC member. However, a forecast of the most likely outcome is not a promise, and there are important potential risks to that forecast. Disruptive international trade actions or increasing the risk of a boom-bust economy by overextending could, in my view, prove problematic for the economy. And the status of fiscal and monetary “buffers” call into question their ability to work against a shock or downturn.

I am hopeful that the risks I have discussed can be avoided. Assuming these near term risks are avoided, my own forecast is somewhat stronger than the SEP forecast. Of course, I would support a somewhat faster increase in the federal funds rates if that stronger growth does indeed occur. In sum, the economic outlook is good, but we must all be attuned to what could go wrong in the short term and in the long term, and what that implies for appropriate monetary policy.

Eric S. Rosengren President & Chief Executive Officer Federal Reserve Bank of Boston, “The U.S. Economy: An Optimistic Outlook, But With Some Important Risks – Speech given to the Greater Boston Chamber of Commerce Economic Outlook Breakfast 2018“, 13 Apr 2018 (08:00) Full Speech

flag_usa US: Usual Weekly Earnings of Wage and Salary Workers. Q1/2018

Press Release Extract [us_earnings]

Median weekly earnings of the nation’s 113.4 million full-time wage and salary workers were $881 in the first quarter of 2018 (not seasonally adjusted), the U.S. Bureau of Labor Statistics reported today. This was 1.8 percent higher than a year earlier, compared with a gain of 2.2 percent in the Consumer Price Index for All Urban Consumers (CPI-U) over the same period.

Highlights from the first-quarter data:

  • Median weekly earnings of full-time workers were $881 in the first quarter of 2018. Women had median weekly earnings of $783, or 81.1 percent of the $965 median for men.
  • The women’s-to-men’s earnings ratiovaried by race and ethnicity. White women earned 81.2 percent as much as their male counterparts, compared with Black women (92.8 percent), Asian women (78.5 percent), and Hispanic women (85.1 percent).
  • Among the major race and ethnicity groups, median weekly earnings for Black men working at full-time jobs were $723, or 72.5 percent of the median for White men ($997). The difference was less among women, as Black women’s median earnings ($671) were 82.8 percent of those for White women ($810). Overall, median earnings of Hispanics ($675) and Blacks ($696) were lower than those of Whites ($911) and Asians ($1,066).
  • By age, median weekly earnings were highest for men age 35 to 64: weekly earnings were $1,098 for men age 35 to 44, $1,150 for men age 45 to 54, and $1,113 for men age 55 to 64 in the first quarter of 2018. For women, those ages 35 to 44 and 45 to 54 had the highest median weekly earnings, at $880 and $878, respectively. Men and women age 16 to 24 had the lowest median weekly earnings, $563 and $545, respectively.
  • Among the major occupational groups, persons employed full time in management, professional, and related occupations had the highest median weekly earnings—$1,454 for men and $1,054 for women. Men and women employed in service jobs earned the least, $641 and $504, respectively.
  • By educational attainment, full-time workers age 25 and over without a high school diploma had median weekly earnings of $563, compared with $713 for high school graduates (no college) and $1,286 for those holding at least a bachelor’s degree. Among college graduates with advanced degrees (master’s or professional degree and above), the highest earning 10 percent of male workers made $3,894 or more per week, compared with $2,875 or more for their female counterparts.
  • Seasonally adjusted median weekly earnings were $873 in the first quarter of 2018, up from the previous quarter ($854).

Bureau of Labor Statistics, “Usual Weekly Earnings of Wage and Salary Workers. Q1/2018“, 13 Apr 2018 (10:00) More

flag_usa US: Job Openings and Labor Turnover . Feb 2018

Press Release Extract [us_jolts]

The number of job openings was little changed at 6.1 million on the last business day of February, the U.S. Bureau of Labor Statistics reported today. Over the month, hires and separations were little changed at 5.5 million and 5.2 million, respectively. Within separations, the quits rate was unchanged at 2.2 percent and the layoffs and discharges rate was little changed at 1.1 percent. This release includes estimates of the number and rate of job openings, hires, and separations for the nonfarm sector by industry and by four geographic regions.

Job Openings

On the last business day of February, there were 6.1 million job openings, little changed from January. The job openings rate was 3.9 percent in February. The number of job openings edged down for total private and was little changed for government. Job openings increased in finance and insurance (+69,000) and state and local government education (+31,000). Job openings decreased in a number of industries with the largest decreases being in accommodation and food services (-91,000), construction (-56,000), and wholesale trade (-38,000). The number of job openings decreased in the West region.



The number of hires was little changed at 5.5 million in February. The hires rate was 3.7 percent. The number of hires was little changed for total private and for government. Hires decreased in educational services (-48,000). The number of hires was little changed in all four regions.



Total separations includes quits, layoffs and discharges, and other separations. Total separations is referred to as turnover. Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs. Layoffs and discharges are involuntary separations initiated by the employer. Other separations includes separations due to retirement, death, disability, and transfers to other locations of the same firm.

The number of total separations was little changed at 5.2 million in February. The total separations rate was 3.5 percent. The number of total separations was little changed for total private and for government. Total separations increased in federal government (+9,000) but decreased in state and local government education (-17,000). The number of total separations was little changed in all four regions.

The number of quits was little changed at 3.2 million in February. The quits rate was 2.2 percent. The number of quits was little changed for total private and for government. Quits decreased in other services (-41,000). The number of quits was little changed in all four regions.

There were 1.6 million layoffs and discharges in February, little changed from January. The layoffs and discharges rate was 1.1 percent in February. The number of layoffs and discharges was little changed for total private and unchanged for government. Layoffs and discharges decreased in state and local government education (-13,000). The number of layoffs and discharges decreased in the Northeast region.

The number of other separations was little changed in February at 334,000. The number of other separations was little changed for total private and for government. Other separations increased in federal government (+7,000) but decreased in nondurable goods manufacturing (-6,000). The number of other separations was little changed in all four regions.

Net Change in Employment

Large numbers of hires and separations occur every month throughout the business cycle. Net employment change results from the relationship between hires and separations. When the number of hires exceeds the number of separations, employment rises, even if the hires level is steady or declining. Conversely, when the number of hires is less than the number of separations, employment declines, even if the hires level is steady or rising. Over the 12 months ending in February, hires totaled 65.6 million and separations totaled 63.3 million, yielding a net employment gain of 2.3 million. These totals include workers who may have been hired and separated more than once during the year.

Bureau of Labor Statistics, “Job Openings and Labor Turnover. Feb 2018“, 13 Apr 2018 (10:00 EDT) More

flag_usa US: Consumer Confidence Index (Preliminary). Apr 2018

Press Release Extract [ser_uom]
Index Apr 2018 Mar 2018 Apr 2017 M-M% Y-Y%
Index of Consumer Sentiment 97.8 101.4 97.0 -3.6% +0.8%
Current Economic Conditions 115.0 121.2 112.7 -5.1% +2.0%
Index of Consumer Expectations 86.8 88.8 87.0 -2.3% -0.2%

Surveys of Consumers chief economist, Richard Curtin

Consumer sentiment slipped in early April, largely reversing the gains recorded in the prior two months. The small decline was widely shared by all age and income subgroups and across all regions of the country.

Importantly, confidence still remains relatively high, despite the recent losses that were mainly due to concerns about the potential impact of Trump’s trade policies on the domestic economy. Uncertainty surrounding the evolving trade policy has caused many small (and at times inconsistent) changes in expectations. Spontaneous references to trade policies were made by 29% of all consumers in early April, with nearly all the mentions negative (27% out of 29%).

The Expectations Index was just 64.2 among those who made negative comments about trade policies, while among those who made no mention of trade policies, the Expectations Index was 93.9, a substantial difference. Consumers who negatively mentioned trade policies also anticipated that the year-ahead inflation rate would be 0.4 percentage points higher than among those who did not spontaneously mention Trump’s trade policies; there was a differential of 0.2 percentage points for long term inflation expectations.

There were other factors responsible for the small overall April decline, the most important was the expectation of rising interest rates, which slightly slowed the anticipated pace of growth in the economy. Overall, the data are consistent with a growth rate of 2.7% in consumption from mid-2018 to mid-2019.

University of Michigan, “Consumer Confidence Index (Preliminary). Apr 2018“, 13 Apr 2018 (10:00 EDT) More

flag_japan Japan update

Standard & Poor’s Raises Outlook To Positive from Stable

“Japan Outlook Revised To Positive As Stronger Economy Sets The Stage For Fiscal Improvement; ‘A+/A-1′ Ratings Affirmed” 13-Apr-2018 05:01 EDT

Standard & Poor’s raised its outlook for Japan to positive from stable, citing healthier economic growth prospects, the credit-rating company said on Friday.

Nominal growth exceeding 2% and negative effective real interest rates would enable relative debt to stabilize sooner than previously anticipated, S&P said. The outlook could return to stable if growth is weaker than expected and fiscal consolidation slows, it said.

Japan’s sovereign risk is low thanks partly to its large current-account surplus, according to Masamichi Adachi, senior economist at JPMorgan Securities Japan.

The direct impact on Japan of S&P’s change would likely be minimal, Adachi said, but it would confer some confidence that the government’s policies are having their desired effects. “This is sort of a message that S&P believes Abenomics is working well,” he said.Bloomberg

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flag_china China update

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