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Markets await Fed The Federal Reserve's policy-making panel meets today amid growing signs of a sputtering recovery and mounting fears of deflation, prompting speculation over whether the U.S. central bank might unveil new measures. The Fed will not change its benchmark interest rate from its historic low near zero, and isn't expected to for quite some time. But economists wonder whether the central bank signal some other action, such as buying more U.S. Treasuries, when it announces its decision at 2:15 p.m. ET.
"I think this is a Fed that is potentially on hold for years," said Scotia Capital economist Derek Holt. "Double dip remains a highly possible outcome for the U.S. economy. It is already losing growth momentum from the initial spurt offered by the stabilization of the inventory and production cycle and initial stimulus effects. Going forward into 2012-13, the downsides could well become more acute. Shadow housing inventories will constrain house prices for years yet, with the sinking realization by U.S. households that they face a permanent - not transitory - wealth shock yet to come."
Mr. Holt and his colleague Gorica Djeric cite seven reasons why the Fed should not buy more Treasuries. Among them are the fact that the move didn't work the first time, and that such a move risks backfiring by sending a signal of heightened concern while having little in the way of tools to fight the slowdown. "That doesn't mean that such a move is impossible ... We think, however, that the Fed is likely to judge such a move with deep skepticism this go around, and to instead signal increased concern about the growth environment but remain faithful to the picture of a gentle, sub-par recovery while expressing cautious optimism that the economy lies beyond emergency conditions."
- Market Lab: Fed needs time to see how the economy plays out
- David Rosenberg: Evidence suggests recovery far from normal
Productivity slips in U.S. The days of rapid increases in productivity in the U.S. have come to an abrupt halt. Productivity among non-farm businesses fell in the second quarter at an annual pace of 0.9 per cent, according to the U.S. Labor Department today. That's the first decline since the depths of the recession in late 2008. Since then, productivity has marked up strong gains, ending with 3.9 per cent in the first quarter of the year. To date in the current recovery, The Wall Street Journal notes, American businesses have met higher demand primarily by squeezing more from existing workers, though that appears to be changing.
"If firms are forced to hire more workers to expand output further, rather than relying on productivity gains, personal incomes would rise at the expense of weaker corporate profits," said Paul Ashworth, senior U.S. economist at Capital Economics in Toronto." Whether this would benefit the recovery is debatable, however, since households are proving just as reluctant to spend their incomes as businesses."
Markets dip on China data Global stock markets are struggling this morning after trade numbers from China suggested its economic growth is slowing and in advance of the Federal Reserve meeting, which carries more speculation than normal. In Asia, the Nikkei 225 closed just slightly lower, down 0.2 per cent, while major European indexes were all down and futures pointed to a soft opening in New York. London's FTSE 100 was down about 0.4 per cent, the Paris CAC-40 down 0.8 per cent and Germany's DAX down 1 per cent. Dow Jones industrial average and S&P 500 futures also dipped, though by well under 1 per cent.
"After a positive finish on Wall Street yesterday, all of those gains have been lost overnight and the expectation is for the Dow to start around 55 points lower this afternoon," said Anthony Grech, head of Research at IG Index. "All eyes are on the Fed meeting today with some expecting another injection of stimulus for the economy - at the moment it does feel like stock markets need some sort of positive shock to try and awaken some sort of enthusiasm again."
China's trade surplus balloons Playing into the market weakness are numbers showing growth in imports slowed rapidly in China in July, raising fears that the engine of the world's recovery will require less from its trading partners. Imports still rose by 22.7 per cent from a year earlier, but that's down sharply from the 34.1-per-cent pace in March and well shy of what economists had expected. Exports, in turn, showed much stronger growth, surging 38.1 per cent and pumping up the trade surplus to its highest level in 18 months, $28.7-billion (U.S.).
"In China the trade surplus rose to an 18-month high in July, with annual imports slowing by a third, which seems to suggest that the Chinese economy continues to slow down," said CMC Markets analyst Michael Hewson. "Analysts had expected imports to climb by about 30 per cent. This fear of a continued slowdown has weighed on risk appetite elsewhere, with the Australian dollar sliding back, and helping the U.S. dollar rebound against the euro and pound."
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How China's numbers could play out The surge in Chinese exports, and the wider overall trader balance, will no doubt raise the hackles of those in the United States who have complained bitterly about the low level of China's currency. Other countries have also pressed Beijing to allow the yuan to rise, which it has done, though the currency has gained only marginally. Today's data will only serve to heighten tensions between China and its trading partners over the level of the yuan, which is also known as the renminbi.
"China's July trade data suggest that global demand is still strong while the domestic economy is flagging," said Mark Williams, senior China economist at Capital Economics in London. "With the trade surplus not far off a record high, China's critics overseas are unlikely to understand the need to move so slowly on the renminbi. The decline in China's trade surplus in 2009 and the consequent support China gave to global demand has reversed at a startling pace ... If the usual seasonal pattern is a guide, the surplus will continue to rise over the second half of the year."
Housing starts dip in July Housing construction in Canada dipped in July by 1.6 per cent, largely because of a slowdown in single family homes. The annual rate of housing starts fell to 189,200 units from a revised pace of 192,300 a month earlier, Canada Mortgage and Housing Corp. said today. "Housing starts moved lower in July, largely due to a decrease in urban single starts and a reduction in rural starts," said CMHC chief economist Bob Dugan. "Multiple starts partially offset this moderation."
Separately today, Bank of Nova Scotia said in a new report that the global recovery in real estate prices is losing momentum, with both demand and prices slipping in the second quarter. The market was sideswiped by moderating global growth, financial market turmoil and weak job creation.
"After rebounding sharply earlier this year, the downward trend in homebuilding activity seen over the past three months should not come as a shock," said Toronto-Dominion Bank economist Dina Cover. "Starts running ahead of the household formation rate (estimated at 175,000-180,000 units) can only be temporarily sustained when prices are rising rapidly. This is no longer the case.
"Indeed, the moderation in starts is consistent with a cooling in the overall housing market. Existing home sales have been trending down since the start of this year - with the decline accelerating in May-July - while prices have been losing modest ground since May. In turn, lower home prices have dampened the incentive for homebuilding. With prices expected to slide a bit further, fewer home starts are likely to hit ground."
- Housing starts slip in July
- Global housing rebound loses steam
- New house prices rise slightly in July
RBC shops U.S. insurance unit Royal Bank of Canada is trying to sell its U.S. insurance business, The Globe and Mail's Tara Perkins reports today. Working through investment bankers at Goldman Sachs Group Inc., Canada's biggest bank has been scouting for buyers for the business, reportedly likely to fetch less than $1-billion, for some time. RBC paid some $580-million (U.S.) for Liberty Life Insurance Co. in 200.
RIM wins Saudi reprieve Research In Motion Ltd. has won a reprieve from Saudi telecom regulators who had threatened to shut down its BlackBerry Messenger service. The Saudis have been meeting with RIM officials, pressing for access to encrypted data and vowing to block Messenger if they couldn't get it. Other countries, such as the United Arab Emirates and India, have also been pressing the Waterloo, Ont.-based technology giant for access. Saudi Arabia's Communications and Information Technology Commission said it was making sufficient progress in talks with RIM to allow Messenger to continue.
From today's Report on Business
- Dismal July job figures under fire
- China starts a green attack
- Oil sands toxins growing rapidly
- Boyd Erman: Why insurers are the least qualified to predict markets
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