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Thursday
April 6, 2017
April 6, 2017
Trump-Xi Meet; Jobless Claims; ECB Meeting MinutesBy Ben Baris and Geoff King
What to Watch: President hosts Chinese President at his Donald Trump Xi Jinpingoceanfront Mar-a-Lago club in Palm Beach, Florida, for two days. It’ll be the first meeting between the two heads of state. Secretary of State will also Rex Tillersonattend. Federal Reserve Bank of San Francisco President speaks at the John Williamsannual ECB and its Watchers conference in Frankfurt, Germany on a 9:30 a.m. panel called “Do monetary policy frameworks need to be adjusted in a world of (potentially) low natural real interest rates? If so, how?”
Economics: March , reported by Challenger, Gray and job cut announcementsChristmas, are reported at 7:30 a.m. may decline to 250,000 in Initial jobless claimsthe week ended April 1 from 258,000 the week prior, according to the Bloomberg consensus forecast, 8:30 a.m. The publishes the account of its European Central BankMarch policy meeting at 7:30 a.m.
Government: U.K. Prime Minister will meet European Council Theresa MayPresident face-to-face for the first time since she began Britain’s formal Donald Tuskdeparture from the EU. At May’s Downing Street office in London, from 8 a.m.
Companies: The Colorado State University Tropical Meteorology Project provides its first 2017 Atlantic Ocean at 10 a.m. It’s watched by traders and hurricane forecast industry for indications on how active the season will be, which can have an impact on oil refineries, agriculture and transportation.
Markets: followed declines in Asia and the U.S. on the prospect of European stocksthe Federal Reserve shrinking its balance sheet this year. The weakened after euro ECB President signaled the bank will stick by its current monetary policy.Mario Draghi
(All times local for New York.)
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Commentary in This Issue
The FOMC minutesrevealed plans for balance-sheet unwind beginning to coalesce, which could impact the timing of rate hikes in the second half: Carl Riccadonnaand Yelena Shulyatyeva.
The robust March ADP report employment
suggests that the recent labor market strength could be more than an anomaly related to weather conditions: Yelena Shulyatyeva and Carl Riccadonna.
America’s industry was running autofull throttle at the end of 2016, with sales at the fastest pace in more than 11 years — now the 'Check Engine' light is on: Vince Golle.
Quote of the Day
"One rate is fully baked hikein. There’s the possibility of a second hike, but I don’t know how we get there."
— Todd Colvin, senior VP at Ambrosino
Brothers in Chicago, on 2017 rate-hike odds
(link to terminal))
Credit Watch
Mexico investors expect a sovereign credit and should be downgradewatching closely for changes in outlook, said , Guillermo Ortizchairman of ’s Grupo BTG PactualMexico and Latin American units and former central bank governor. (Link to terminal)
Big Picture
Treasuries Yield Curve Steepens on Fed Balance Sheet Plan
The yield curve from five to 30 years steepened for a fifth straight session, the longest streak since September, to 114 basis points, after minutes from the Federal Reserve’s March meeting revealed most officials backed a policy change that would begin shrinking the central bank’s $4.5 trillion balance sheet later this year. It’s the widest spread between the maturities since February. “People interpret balance sheet run off to mean less hikes,” said Priya Misra, head of global rate strategy at TD Securities. New York Fed President William Dudley has said normalizing the balance sheet could be a substitute for boosting the central bank’s benchmark.
— Brian Chappatta, with assistance from Elizabeth Stanton
Economics 2 April 6, 2017
Big Picture
Fed Minutes Show Balance-Sheet Unwind Taking ShapeBy Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Intelligence economists The minutes of the March FOMC meeting showed that policymakers had not significantly changed their economic assessment from the prior meeting, validating the notion that they acted, in part, out of concerns related to inflating values of risk assets.
The minutes also revealed plans for balance-sheet unwind beginning to coalesce, which could impact the timing of fed funds rate hikes in the second half.
While policymakers emphasized little change to the outlook, the characterization of risks appeared to be starting to tilt toward the upside due to an improving international outlook and the prospect for fiscal stimulus in the medium term.
Plans to shrink the central bank’s balance sheet remained unsettled as of the March meeting, but broad parameters began to take shape — specifically with regard to a start date near the end of this year. The minutes made it clear that policymakers want to avoid rattling the markets, so they are likely to begin the unwind in a well telegraphed and gradual fashion.
In light of their implementation target forlater this year, it is likely that more specific details will be revealed around midyear; this would give Fed Chair Janet Yellen theopportunity to clearly communicatepolicymakers’ intentions through the June post-meeting press conference, the July semiannual testimony before Congress and, potentially, at the late-summer Fed summit in Jackson Hole.
If Fed officials continue to stress the end-of-year timeline to start shrinking thebalance sheet, this will likely alter the timing of their third rate increase for 2017.
Prior to the release of the minutes, market participants favored the two remaining rate hikes to occur in June and December. However, recent comments from New York Fed President William Dudley suggest that rate hikes could temporarily pause as balance-sheet unwind begins, thereby implying a fourth-quarter halt.
As such, if the economic data come in slightly stronger-than-expected through midyear, the previously-expected fourth-quarter hike could be pulled forward into
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the third quarter. Both time and the data will tell.
The most significant new information in the minutes was expanded detail regarding the direction of balance-sheet unwind talks, as well as its stage of development. The Fed staff provided briefings on a range of alternative strategies, including an outright termination of reinvestment and different treatment for Treasuries relative to mortgage backed securities.
While the plans are not settled, policymakers were in clear agreement that the eventual approach should be “gradual and predictable” as well as “passive.” Fed officials want QE unwind to run in the background as they actively manage monetary policy through interest-rate changes.
Only one meeting participant appeared to favor outright sales, while the majority favor only allowing maturing/redeemed assets (or a portion thereof) to roll off the balance sheet.
Regarding the intended timing for balance-sheet unwind to start, “most participants” expected it to be “appropriate later this year.”
BI Economics continues to anticipate a “modulated” unwind, whereby policymakers allow a set amount of assets to roll off the balance sheet over a specified period of time, while the remaining assets are reinvested. Simply allowing all maturing assets to roll off
would create a choppy unwind and an irregular pace of policy tightening — something that the Fed clearly wishes to avoid. Additionally, meeting-participants appeared to be inclined to favor equal treatment of Treasury securities and MBS, rather than pushing to unwind one before or more aggressively than the other.
In the assessment of economic conditions, policymakers repeatedly mentioned that the decision to raise rates did not reflect any material change to the outlook, evident in the message Yellen emphasized in her post-meeting press conference: “The economic outlook had changed little since the January–February FOMC meeting.”
Nonetheless, the minutes revealed that about half of the participants incorporated some assumptions about fiscal policy in their projections even though “several participants now anticipated that meaningful fiscal stimulus would likely not begin until 2018.” Policymakers also now seem to feel more optimistic about the global outlook — “the downside risks associated with the global economic outlook […] diminished over recent months.”
The minutes also stressed the role of financial conditions in motivating policymakers to take action at the last meeting. Many participants noted equity valuations, with some expressing that they were “quite high.”
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Labor Market
Fed Balance Sheet Security Holdings
Economics 3 April 6, 2017
Labor Market
Robust ADP Hiring Points to Strong March PayrollsBy Yelena Shulyatyeva and Carl Riccadonna, Bloomberg Intelligence economistsThe ADP employment report for March registered a robust pace of hiring in the private sector, suggesting that the recent strength in the labor market could be more than an anomaly related to mild weather conditions at the start of the year.
Construction jobs, which typically wouldhave seen the largest swing, retraced onlymodestly in March and still indicate solid hiring growth. Hiring in the manufacturingsector paints a similar picture.
The exceptional strength in this ADP employment report bolsters expectations for another strong payrolls reading for March, signaling that hiring momentum is accelerating, and that the impact from winter storm Stella could have been minimal.
The recent acceleration in hiring momentum also implies that the slowdown in economic growth in the first quarter could prove to be temporary, and GDP is indeed a “noisy indicator,” as Fed Chair Janet Yellen recently noted.
The ADP measure of private-sector job growth surged to 263,000 in March, far exceeding the consensus forecast of 185,000. This was the highest reading since December 2014 (284,000). The previous month was revised down from 298,000 to a still robust 245,000 pace.
Following last year’s revisions to the methodology, the latest ADP and revised BLS data are more closely correlated, implying a greater chance for March payrolls to exceed consensus expectations for 180,000.
The composition of growth by the private sector is insightful with regards to how the industry breakdown is reflected in the BLS report. Remarkably, goods employment continued to run strong, posting another hefty gain of 82,000, building on a 100,000 rise in the previous month, which follows two years of essentially no job growth. Manufacturing contributed 30,000, while construction added a whopping 49,000 jobs in March, retracing only slightly from a 49,000 pace during the previous month.
A pickup in the goods-producing sector,despite the March weather disruptions due to winter storm Stella, is a signal that business optimism in the survey data is
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passing through into the hard data. In the services sector, more highly-paid professional and business services continue to add jobs at a solid pace with a 57,000 gain in March on the back of a 51,000 increase prior.
The bulk of the recent acceleration appears to be driven by small and medium-sized companies, as growth among large firms remains stable: Large companies added 45,000 jobs, while medium-sized firms contributed 100,000. A significant pickup in hiring at small companies — 118,000 up from 87,000 prior — is reflective of the segment’s sizable increase in sentiment regarding
hiring intentions.Solid hiring, as reflected in this ADP
report, supports the Fed’s willingness to look through the noisy data that points to a significant slowdown in economic growth in the first quarter.
Strong hiring trends signal a solid rebound in second-quarter GDP and the second half of this year. The pickup in goods-producing hiring and among small businesses brings new evidence of sentiment data filtering into actual economic activity and points to another solid gain in March’s payrolls released on April 7.
Auto Sector
ADP and BLS Non-Farm Payrolls
ADP Private Payroll Survey by Industry
Economics 4 April 6, 2017
Auto Sector
Peak Auto? These Charts Point to Industry, U.S. Economy ConcernsBy Vince Golle
America’s auto industry was running full throttle at the end of 2016, with sales at the fastest pace in more than 11 years. Now the 'Check Engine' light is on. Purchases of cars and light trucks declined in March even as automakers employed heavy incentives to spark demand and reduce inventory. The economic implications of the sector’s slowdown will probably be more modest but are likely to include production cutbacks, tempered consumer spending and fewer employment opportunities on the nation’s assembly lines.
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Data & Events
Overflowing Lots
The industry certainly has a lot of vehicles to move — the number of unsold autos would last 3.16 months at the February sales rate, the highest inventory during any economic expansion since 1989.
Peak Share of Retail Sales?
Fewer purchases of cars and trucks will show up in consumer spending and economic growth in the first quarter. Since the early months of the expansion, autos have become a larger share of the total value of retail sales. While the share reached a recent peak of 21.1 percent in December, a drop in Americans walking through dealer showrooms may indicate a change. Further declines in sales will have a “negative but not huge” effect on gross domestic product, according to economists at Goldman Sachs. Consumer spending on cars and parts accounts for 2.6 percent of GDP. If auto sales gradually ease to an annual trend rate of 15 million over the next two to three years, it would reduce annualized economic growth by about 0.05 to 0.1 percentage point per year, the firm’s Daan Struyven and Jan Hatzius wrote April 4 in a note.
Slamming on the Brakes
There probably wasn’t much progress clearing dealer lots in March either. Instead of the pace of deliveries picking up as analysts projected, the annualized sales rate adjusted for seasonal trends, slowed from a year earlier. Even more troubling is automakers keep boosting incentives and purchases are still slipping.
Downshift
Slower demand and bumper-to-bumper inventory mean automakers will dial back production schedules. It started in January, with manufacturing volume dropping by the most since just after the last recession, according to data from the Bureau of Economic Analysis, which produces the nation’s GDP report. Auto output climbed an annualized 7.6 percent in the fourth quarter. Without that push, GDP would have expanded 1.9 percent, rather than 2.1 percent.
Economics 5 April 6, 2017
Data & Events
TIME COUNTRY EVENT SURVEY PRIOR
7:00 Brazil FGV Inflation IGP-DI MoM 0.00% 0.06%
7:00 Brazil FGV Inflation IGP-DI YoY 4.78% 5.26%
7:30 U.S. Challenger Job Cuts YoY — -40.00%
7:30 Euro Area ECB account of the monetary policy meeting — —
8:30 Canada Building Permits MoM 1.30% 5.40%
8:30 U.S. Initial Jobless Claims 250k 258k
8:30 U.S. Continuing Claims 2030k 2052k
9:45 U.S. Bloomberg Consumer Comfort — 49.7
10:20 Brazil Vehicle Production Anfavea — 200385
10:20 Brazil Vehicle Sales Anfavea — 135665
10:20 Brazil Vehicle Exports Anfavea — 66268
Mexico Vehicle Production AMIA — 301475
Mexico Vehicle Exports AMIA — 240909Source: Bloomberg. Surveys updated at 5:00 a.m. in New York.
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Calendar
Click on the to see the full range of economists' forecasts on the terminal. highlighted releases
Overnight
Mario Draghi sought to quash the idea that the European Central Bankwill begin tightening policy sooner than planned, saying that inflation in the euro area isn’t strong enough for officials to start signaling such a shift. “We have not yet seen sufficient evidence to materially alter our assessment of the inflation outlook — which remains conditional on a very substantial degree of monetary accommodation,” the ECB President said today in a speech.
German rebounded factory ordersfrom their steepest decline in eight years in a sign the recovery in Europe’s largest economy remains intact. Orders, adjusted for seasonal swings and inflation, rose 3.4 percent in February, after slumping a revised 6.8 percent in January, data today from the in Berlin Economy Ministryshowed. The typically volatile reading compares with a median estimate for a 4 percent gain in a Bloomberg survey. Orders were up 4.6 percent from a year earlier, when adjusted for working days.
India unexpectedly raised the while keeping the reverse repo rate
unchanged, effectively benchmarktightening policy to step up the fight against accelerating inflation. The reverse repo rate was raised to 6 percent from 5.75 percent while the benchmark repurchase rate was kept steady at 6.25 percent, the Reserve
said today in a Bank of Indiastatement. No economist in Bloomberg surveys had predicted the move to shrink the corridor. "Underlying inflation pressures persist, especially in prices of services," the RBI said in the statement. "The future course of monetary policy will largely depend on incoming data on how macroeconomic conditions are evolving."
Europe
Asia
One of the Legs of Mexico Growth Has Started to Get Wobbly
Mexico's remittances from the U.S. fell 1.45 percent year-over-year in February, the first negative turn in 10 months. Despite media reports of increased deportations, which affect remittances, Mexican government data showed those at a record low in February. The remittance dip may signal that undocumented workers are using alternatives to send money amid fears of being tracked and detained. If so, this measure may be less reliable as remittances, otherwise strong with the U.S. economy, bypass this formal measure.
— Julie Chariell and Carlo Villasenor, Bloomberg Intelligence analysts
Economics 6 April 6, 2017
Bloomberg Brief: Economics
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