Monthly Archives: July 2015
Fed steady on rates. Timing of first rate hike remains data dependent. Gold edges higher.
29-Jul (USAGOLD) — Steady as she goes.
As I suggested in this morning’s DMR, inflation remains the sticking point.
Also, note that they dropped “energy prices appear to have stabilized” because they have been trended lower pretty much since they made that statement in June.
Gold is up modestly on what is being interpreted as a modestly more dovish statement.
The Daily Market Report: Gold Narrowly Confined Ahead of FOMC Statement
29-Jul (USAGOLD) — Gold is narrowly confined going into today’s FOMC policy statement. That statement will come out at 2:00PM ET.
Given the ongoing unevenness of U.S. economic data, there’s probably not much incentive for the Fed to materially alter the verbiage in the statement. The implication will be that the Fed remains on track for a small rate hike sometime before the end of the year, contingent on the data leading up to that point.
The Fed may express some more optimism about the labor market given some improvement in the headline numbers on that front. However, Ms. Yellen has already acknowledged that NFP, the unemployment rate and claims data don’t tell the whole story.
The inflation outlook on the other hand is much more clear cut. It remains well below the Fed’s target of 2%, with little to suggest there will be upward pressure on prices anytime soon. In fact, the inflation outlook has deteriorated markedly in recent weeks, exacerbated by rising growth risks in China.
Wages were mentioned less than ten times in June Fed minutes, while inflation received 110 mentions — @popdemoc
— Pedro da Costa (@pdacosta) July 29, 2015
The juxtaposition of the jobs and inflation outlooks prompts Wall Street Journal FedWatcher Jon Hilsenrath to says this “potentially sets up the Fed and markets for a cliffhanger policy meeting in September.” In other words, a September lift-off is hardly a sure-thing; and that’s even before factoring in the uncertainty associated with China and Greece.
Uncertainty associated with Greece you ask: Wasn’t that problem kicked down the road? Hardly.
When the Greek Parliament agreed to austerity measures 2-weeks ago, it was merely a requirement before actual negotiations for the country’s third bailout could begin. Those negotiations apparently are not going so well. Creditors are reportedly asking for further concessions, but PM Tsipras is saying he won’t promise anything beyond was already been agreed to.
Meanwhile, Tsipras is apparently having a hard time whipping a large portion of his party into line. An emergency meeting of the ruling Syriza party has been called and the PM is already issuing threats of a snap election. A new election would threaten to set back, or completely undermine any progress toward that next bailout.
With Greece’s next big bond payment due on August 20, there’s not much room for further messing around. And let’s be honest here: Even if the third bailout is secured, the Greek problem isn’t really resolved. It’s just punted a little ways down the road.
Tsipras Challenges Party Rebels With Threat of Snap Greek Ballot
29-Jul (Bloomberg) — Greek Prime Minister Alexis Tsipras took on dissenters within his own party, warning he’ll call an election unless backbenchers who oppose his deal with creditors fall into line or give up their seats.
“I’m the last person who would want elections,” the 41-year-old premier said in an interview Wednesday with Sto Kokkino, a radio station linked to his party. “If I don’t have a parliamentary majority, though, we will be forced to head to a snap vote.”
After five years of austerity, two bailouts, and the deepest recession in more than half a century, the premier is asking voters and lawmakers to extend the budget restrictions that he himself had pledged to end when he came to power in January. Greece has no other viable option to but to accept the demands of its creditors, he says.
…According to Piccoli, the internal quarrel within the governing party could derail talks between Greece and its creditors, as the two sides rush to seal an agreement before a payment on bonds held by the European Central Bank comes due, on August 20.
“The risk of unforeseen intra-Syriza developments that could delay, and at worst derail, the ongoing talks between Athens and its international creditors cannot be discarded,” Piccoli said.
[source]
PG View: If Greece ends up with a new government the deal could be off and the whole negotiation process may have to start all over. Unfortunately, the timeline is likely far too short to allow for a new agreement to be struck before the country defaults yet again.
Greece is having trouble agreeing to the bailout it agreed to
29-Jul (BusinessInsider) — So, Greece might not be fixed.
According to Greek newspaper Kathimerini, Greece’s Syriza party — the party of Greek prime minister of Alexis Tsipras and the leader of Greece’s current government — has called an emergency meeting to wrangle the party’s left-wing constituents who don’t want to agree to another bailout.
…But the problem now is that the agreement Tsipras struck with Greece’s creditors wasn’t in itself a new bailout, but merely an agreement that laid the groundwork for negotiations on a new bailout. And now Syriza — and by extension the Greek government — can’t get its house in order.
[source]
PG View: Greece isn’t fixed? Was there ever any doubt about that?
US NAR pending home sales -1.8% to 110.3 in Jun, well below expectations of +0.9%, vs negative revised 112.3 in May.
China stocks bounce back as intervention restores stability
29-Jul (Reuters) — Chinese shares bounced back more than 3 percent on Wednesday, as Beijing’s latest efforts to prop up values restored a measure of stability to its unruly stock market.
After a dramatic plunge of more than 8 percent in Chinese stocks on Monday, China’s securities regulator announced probes into share “dumping” and pledged to buy stocks to calm the market, while the central bank hinted at more policy easing.
That followed moves in recent weeks in which the authorities temporarily banned shareholders with large stakes from exiting their positions and issued a string of warnings against short-selling, or betting on falls in its domestic “A-share” market.
“The possibility for A shares to rebound in the following month is quite big given liquidity is rich in the market now and short-selling ability has been largely curbed,” said Zhang Qi, an analyst at Haitong Securities in Shanghai.
[source]
PG View: Look at a chart, today’s rebound is hardly indicative of “stability”. I think Reuters is a little too optimistic with that headline.
Gold Steady as Market Braces For Fed Decision
29-Jul (Wall Street Journal) — Gold prices were stable on the London spot market Wednesday, as the market braced for the latest U.S. decision on interest rates.
The London spot gold price was practically flat at $1,095.70 a troy ounce in morning European trade, according to FactSet. Spot silver was also steady at $14.6400 an ounce.
The bullion market is focused on Wednesday’s release of the latest monetary policy statement from the U.S. Federal Open Market Committee. Any signs that the Fed may move as soon as September would likely lead to gains for the U.S. dollar, and losses for gold prices.
[source]
PG View: I suspect there’s not much reason at this point to indicate any change in guidance, but it seems that a minimal rate hike this year is already priced into both the dollar and gold.
Gold easier at 1094.28 (-1.58). Silver 14.65 (-0.047). Dollar better. Euro lower. Stocks called higher. US 10yr 2.28% (+3 bps).
Chinese Stocks Just Created a New Headache for Janet Yellen
28-Jul (Bloomberg) — Exit strategies used to be the preoccupation of Pentagon planners. Nowadays, it’s more a province for central bank watchers, since the Federal Reserve gorged on trillions of dollars of mortgage and government debt.
And in that economic realm, China has just added a new conundrum. The dependence of the nation’s stock market on official support was exposed Monday with the biggest drop since 2007 amid speculation aid had been dialed back. The Shanghai Composite Index fell 1.7 percent Tuesday even after China pledged to keep up efforts to “stabilize” the market.
China’s actions in the past month add a new asset to those whose prices depend on policy-maker fiat — from European and Japanese government bonds to U.S. mortgage securities.
[source]
The Daily Market Report: Gold Consolidates as Markets Await Cues from Fed
28-Jul (USAGOLD) — Gold is consolidative as the Fed begins their two-day meeting. The market continues to hope for greater clarity on the timing for the Fed’s first rate hike in nearly a decade.
I’m not sure they’re actually going to get that, given the continued unevenness of the recent economic data. I suspect the Fed will continue to play things close to the vest, implying they still think a rate hike may be appropriate this year, while maintaining all the caveats to give themselves a way out of such a move.
Think about that though: The last time the Fed raised rates was June 29, 2006. That’s 109 months ago. My eldest son was barely one-year-old at the time. I’m sure if you predicted at the time that the easing campaign that ultimately led to ZIRP, along with QE1, 2 and 3, would last until late-2015 (and possibly beyond), people would have thought you crazy.
Today we saw that housing price gains have stalled. Consumer confidence unexpectedly plunged in June. A Gallop survey showed that economic confidence has fallen to a 10-month low. The CRB (commodities) index is now down 11.5% so far this year, trading near 52-week lows; which is inactive of deflation.
While there have been some bright spots in the data as well, as whole this does not seem to be a particularly conducive time to start tightening monetary policy. If the Fed were to pull the trigger and growth suffered, they might conceivably have to about-face immediately and cut back to the zero-bound.
That won’t do much to inspire confidence in the Fed. In hindsight it appears that the Fed missed an entire tightening cycle, although to be fair, the economy never really met their objectives for tightening. It doesn’t meet those objectives now either, so the last thing they want to do now is kill-off any momentum the economy might have.
Recall that the economy contracted in Q1! The advance report for Q2 GDP comes out on Thursday, one day after the FOMC policy statement. Consensus is running around +2.7%, but some key forecasters have been negatively revising their outlooks in recent weeks. The rest of this week should be interesting.
Greek Economy Faces Total Collapse As Doctors Flee, Retail Sales Plunge 70%
28-Jul (ZeroHedge) — Back in May we outlined the cost to the Greek economy of each day without a deal between Athens and creditors.
At the time, a report from the Hellenic Confederation of Commerce and Enterprises showed that 60 businesses closed and 613 jobs were lost for each business day that the crisis persisted without a resolution.
Since then, things have deteriorated further and indeed, with the imposition of capital controls, businesses found that supplier credit was difficult to come by, leading to the very real possibility that Greece would soon face a shortage of imported goods, something many Greeks clearly anticipated in the wake of the referendum call as evidenced by the lines at gas stations and empty shelves at grocery stores.
[source]
PG View: How could this be? Greece has received €240 bln in bailouts in the last 5-years, plus a €7 bln bridge loan to tide them over until they can hopefully free up €86 bln for a third bailout. Does anyone really think that €86 bln is going to alter the ultimate fate of Greece?
U.S. consumer mood sours, home price growth stalls
28-Jul (Reuters) — U.S. consumer confidence took its biggest tumble in four years in July on a less upbeat jobs outlook, while home appreciation in major cities stalled in May, suggesting a spring pause in housing demand.
The disappointing data comes as Federal Reserve policymakers meet to consider whether the U.S. economy is strong enough to warrant an end to the Fed’s near zero interest rate policy, perhaps as soon as September.
The Federal Open Market Committee, the U.S. central bank’s policy-setting group, is meeting on Tuesday and Wednesday.
The Conference Board, an industry group, said on Tuesday its index of consumer attitudes fell to 90.9 this month from a downwardly revised 99.8 in June. It fell far short of a forecast reading of 100.0.
The latest figure was the lowest since September 2014, while the decline was the steepest since August 2011. The report’s jobs hard-to-get index rose to 26.7 from June’s upwardly adjusted 26.1.
[source]
PG View: Not exactly an environment conducive to a rate hike . . .
Economic confidence at 10-month low in poll
28-Jul (TheHill) — An index measuring economic confidence fell to a 10-month low in a Gallup survey released Tuesday.
Gallup’s Economic Confidence Index dropped to -14 last week, which was the lowest level recorded since last September.
The index has been on a downward trajectory since late January when the index peaked at +5, which was the highest weekly score since Gallup began tracking economic confidence in 2008.
Since mid-March, the index has consistently been in negative territory.
[source]
PG View: Between this poll and today’s announcement that consumer confidence plunged in June, it just doesn’t strike me as a particularly good environment to be raising rates. We’ll see what the Fed has to say about that tomorrow.
James Grant tells why he owns gold coins
ValueWalk/7-23-2015
“[G]old is an investment in monetary and financial disorder – not a hedge. You look around the world and you see exchange rates are properly disorderly, when you look around the world of lending and borrowing — we are in a regime of price control by another name, so-called zero percent rates and quantitative easing by the world central banks – we are in one of the most radical periods of monetary experimentation in the annals of money,”
USAGOLD note: James Grant has a way with words. He gets our attention by telling us gold is not a hedge and while cleverly telling us that it is a hedge. Grant goes on to say in the linked Kitco interview that he owns Krugerrands, tells us why he believes gold is a buy in the wake of the latest correction [“Mr. Market having a sale. . .”] and that he is “bullish indeed” on the future price of gold. I should add that the Krugerrand is one of several options on the gold coin market and a visit with one of our associates can help clarify the choices.
Marc Faber: Gold Is ‘Insurance if the Banking System Fails’
28-Jul (NewsMax) — Marc Faber, publisher of The Gloom, Boom & Doom Report, says nearly all asset markets are overvalued so it’s best just to stash away your cash right now and you’ll be poised to buy when market bubbles finally pop.
But he does suggest allocating 25 percent of your investment portfolio to gold.
“Gold is insurance if the banking system fails,” he said at the CFA Analyst Seminar in Chicago in a presentation titled, “Inflating Asset Markets and Deflating Real Economic Activity? Strategies for Global Investors.”
“As an investor I’d like to own something outside the banking system, and that includes real estate, art and gold,” he was quoted by Pensions & Investments Online as saying.
[source]
US consumer confidence plunged to 90.9 in Jun, below expectations of 100.0, vs negative revised 99.8 in May (was 101.4).
US Markit services flash PMI rose to 55.2 in Jul, above expectations, vs 54.8 in Jun.
How the Greek Deal Could Destroy the Euro
27-Jul (New York Times) — The July 13 deal offering more financing for Greece has been billed as a last-minute step back from the brink, but the threat of a “temporary exit” from the euro proposed by a German coalition government has shaken the foundation of the euro in a far more fundamental way than meets the eye.
It has undermined what little Franco-German cooperation was left in economic affairs; it has made the single currency as it stands politically indefensible in France; and it has substantially increased the risk of euro exit across the monetary union. In short, the prospect of Grexit today has made a French, or even German, exit tomorrow far more likely.
These tensions are not new. Germany always thought of the euro as an improved exchange-rate mechanism built around the Deutsche mark, and France had bold but vague ambitions of a real international currency that would enhance the effectiveness of Keynesian economic policy. These fundamental differences were papered over at the launch of the euro because both François Mitterrand and Helmut Kohl agreed that the single currency should first and foremost serve as a means toward the greater aim of European political integration.
[source]
Gold Prices Steady; Some Safe-Haven Buying
28-Jul (Wall Street Journal) — Gold prices steadied on the London spot market Tuesday, as another tumultuous day on the Chinese stock market worried investors and fuelled some safe-haven buying.
The London spot gold price was practically flat at $1,093.65 a troy ounce in morning European trade, according to Factset. Spot silver was up 0.3% at $14.6200 an ounce.
“There’s still some uncertainty in the market, which it should benefit from,” said Carsten Fritsch, an analyst at Commerzbank.
…“We assume that the slump in equity markets that began in mid-June and the fall in gold prices themselves will generate increased interest in buying gold in the second half of the year, which should lend support to the gold price,” Commerzbank said.
[source]
Chinese investors feel ‘trapped in the stock market’
28-Jul (Reuters, via BusinessInsider) — Mrs Zhu is just the type of investor the Chinese government should worry about as it tries to engineer a turnaround in the country’s stock markets, whose massive swings have heightened fears for the country’s financial health.
One of millions of retail investors trapped by the market crash in June who prefer to hold losing positions rather than take a loss, Zhu is just waiting for indexes to rise so she can sell.
“I will sell all my shares tomorrow if there is a chance,” said the government clerk, who almost hit the sell button last week after markets had recovered somewhat from June’s slump. But because she was still set to take a loss, she held on.
“I am pretty sure that if the government does not come to rescue us, the situation will get much worse,” she said.
Zhu’s way of thinking is so common there a Chinese phrase for it. “Tao lao” once meant being captured by a lasso, but is now most commonly used to mean “trapped in the stock market”, which implies an investor cannot sell out of a losing position.
…For Beijing, the biggest worry is that investors who were once patient are now so rattled by the big market swings that they are ready to accept losses just for peace of mind.
“Yesterday all my stocks hit limit down and I lost 20 percent of my money. Today all my stocks fell limit down again!” said student Liu Fangrui.
“I managed to sell them all at a loss today, and so I lost 320,000 yuan in two days. I don’t have confidence on the market any more. I don’t want to get into the market again.”
[source]