US Productivity Falls in Q4 Missing 1 Percent Gain Estimate

U.S. worker productivity unexpectedly fell in the fourth quarter, the first decline since early 2016 and an indication that it be difficult to boost annual economic growth to 3 percent on a sustainable basis.

The Labor Department said on Thursday nonfarm productivity, which measures hourly output per worker, fell at a 0.1 percent annualized rate in the October-December period. That was the first drop and weakest performance since the first quarter of 2016.

Third-quarter productivity was revised to show it rising at a pace of 2.7 percent instead of the previously reported 3.0 percent rate. Compared to the fourth quarter of 2016, productivity increased at a rate of 1.1 percent.

Economists polled by Reuters had forecast productivity rising at a 1.0 percent pace in the fourth quarter.

Productivity increased 1.2 percent in the 2017, the strongest performance since 2015, after dipping 0.1 percent in 2016.

Economists blame soft productivity on a shortage of workers, which could be an obstacle to faster economic growth. The Trump administration has slashed income taxes as it seeks to lift annual economic growth to 3.0 percent.

Other economists also argue that low capital expenditures, which they say has resulted in a sharp drop in the capital-to-labor ratio, is holding down productivity.

There is cautious optimism that the sharp reduction in the corporate income tax rate to 21 percent from 35 percent will boost capital expenditures. Annual economic growth has not surpassed 3.0 percent since 2005. Gross domestic product expanded 2.3 percent in 2017.

via CNBC

UK Manufacturing PMI Fell in January

Britain’s manufacturers showed signs of a slowdown at the start of the year amid rising costs for raw materials, sending factory output to a seven-month low.

The Markit/Cips UK manufacturing PMI index showed activity fell to 55.3 last month from 56.2 in December, missing City forecasts of a further acceleration in growth. However, the PMI remained well above its long-run average of 51.7 and above the 50 mark which separates expansion from contraction.

Britain’s manufacturers have experienced growing demand for orders from China, Japan, the Middle East and North America in recent months. There has also been an upturn in sales in Europe as the continent returns to economic growth after years in the doldrums. The readings come as ministers enter critical talks over trade with Brussels.

However, the upswing in demand for goods has prompted rising global demand for raw materials, pushing up the cost of oil, metals, food and chemicals, and further pressuring manufacturers’ profit margins. The PMI survey showed purchase prices rose at the fastest rate in 11 months in January, and to one of the greatest extents in its history.

The Bank of England is likely to monitor the increase in prices, should companies then push up the cost of goods sold to consumers, which would cause an upturn in inflation at a time when households are already squeezed by weak wage growth and rising prices.

via The Guardian

Construction Spending Rises to All Time High in US

U.S. construction spending increased more than expected in December as investment in private construction projects rose to a record high and federal government outlays rebounded strongly.

The Commerce Department said on Thursday construction spending rose 0.7 percent to an all-time high of $1.25 trillion. November’s construction outlays were revised down to show a 0.6 percent increase instead of the previously reported 0.8 percent advance.

Economists polled by Reuters had forecast construction spending increasing 0.4 percent in December. Construction spending advanced 2.6 percent on a year-on-year basis. It increased 3.8 percent in 2017, the smallest gain since 2011, after rising 6.5 percent in 2016.

In December, spending on private construction projects rose 0.8 percent to a record high of $963.2 billion after increasing 0.7 percent in November. Outlays on private residential projects gained 0.5 percent to the highest level since March 2007 after surging 1.1 percent in November.

Spending on nonresidential structures jumped 1.1 percent in December after climbing 0.3 percent in the prior month.

The government reported last week that spending on nonresidential structures such as oil and gas well drilling rebounded in the fourth quarter after slumping in the third quarter. The economy grew at a 2.6 percent annualized rate in the final three months of 2017, slowing from the third quarter’s brisk 3.2 percent rate.

via CNBC

US Automakers Post Mixed Sales Results in January

Major automakers posted mixed U.S. new vehicle sales figures for January, as American consumers continued to abandon passenger cars in favor of larger, more comfortable pickup trucks, SUVs and crossover models.

U.S. auto industry sales fell 2 percent in 2017 to 17.23 million vehicles after hitting a record high in 2016 and are expected to drop further in 2018 as interest rates rise and more late-model used cars come back to dealer lots to compete with new ones.

General Motors Co (GM.N) reported a 1.3 percent increase in sales for the month, driven by a 16 percent rise in fleet sales. Sales to consumers fell 2.4 percent. The automaker posted strong gains for models such as its Silverado pickup truck and Equinox crossover model, while passenger cars such as the Impala and Cruze continued to struggle.

“All of our brands are building momentum in the industry’s hottest and most profitable segments,” GM’s U.S vice president for sales Kurt McNeil said in a statement.

Ford Motor Co (F.N) posted a 6.6 percent decline in new vehicle sales for January, with retail sales down 4.3 percent. The No. 2 U.S. automaker said its average transaction price rose $2,000, while its average discount to consumers was down $200 versus January 2016.

via Reuters

Dollar Struggles Despite Fed Optimism

Eurozone Manufacturers Still Extremely Bullish Despite Stronger Euro

It’s been a positive start to trading on the first day of the month, with markets in Europe trading well in the green and US futures ticking a little higher as well.

It’s been a busy morning of economic releases and broadly speaking, the data is very positive for the eurozone economy. The region carried some strong momentum into the new year and the latest manufacturing PMIs suggest confidence in the recovery is showing no signs of faltering. The survey for the region as a whole remained at 59.6, slightly shy of last month’s high of 60.1 while still signalling a strong growth outlook for the sector.

The weak euro has played a big role in the strong performance of the sector which has led many to speculate about whether its resurgence over the last year will hinder output going forward. The survey’s we’re seeing suggest manufacturers are not particularly concerned at this stage and are continuing to see strong demand, despite the 20% increase in the value of the euro over the dollar over the last year. The rise against the pound has been far more modest though.

OANDA fxTrade Advanced Charting Platform

UK PMI Slips But Sterling Continues Push Higher

The UK data has been less encouraging as of late and the manufacturing PMI for January was no different, slipping to 55.3 from 56.2 in December. The sector has actually benefited in the post-Brexit world, with the sterling depreciation driving more demand for UK manufactured goods. Unfortunately, it still remains a very small part of the UK economy and the boost seems to be wearing off.

That said, a weaker PMI number this morning did little to shake the pound which is heading back to last week’s highs against the dollar. Cable now finds itself back it pre-Brexit territory, although much of this can be attributed to the greenbacks decline over the last year. The pair found some resistance around 1.4350 but there’s clearly still some bullish appetite there. A break through here could see the pair testing 1.45, which isn’t a million miles from the 2016 highs.

US Data Eyed as Optimistic Fed Fails to Lift the Greenback

The dollar is continuing to have a rough time, even a more optimistic sounding Fed did little to lift the greenback which continues to languish around three year lows. Yields on near-term US debt have risen in the aftermath of the Fed statement, with a rate hike in March now almost entirely priced in and a further two this year around 65% priced in. This would typically be positive for the dollar any gains were short-lived.

There’s plenty more data still to come today, with two manufacturing PMIs from the US as well as unit labour costs, non-farm productivity and jobless claims. Earnings season remains a key focus for investors and some big names are due to report after the close on Thursday, including Amazon, Apple and Alphabet.

Bitcoin Below $10,000 and Looking Vulnerable

Bitcoin is coming under pressure once again today and is trading back below $10,000, a level that has proven difficult to hold below. It’s currently trading down more than 5% on the day though and should we close below here, it could be yet another bearish signal for the cryptocurrency which is already more than 50% below its peak.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Dollar Support Lukewarm despite Fed’s ‘Hawkish-hold’

Thursday February 1: Five things the markets are talking about

Global equities have kicked off the new month mostly in the ‘black’ as capital market participants have decided that the outlook for growth and corporate earnings remains strong enough to suppress concerns about the back up in sovereign yields.

U.S Treasuries have resumed their slide, while the ‘mighty’ U.S dollar trades steady against G10 currency pairs.

Yesterday, as expected, the Fed held the overnight interest rate target range steady between +1.25 – 1.50% in a unanimous vote (9-0). In their accompanying statement, policy makers noted that the U.S labor market had continued to strengthen and they dropped the language on expecting inflation to remain below +2% in near-term. In fact, the statement made few changes from December and affirmed a solid outlook for U.S. growth. It offered little sign that officials’ thinking about the economy has changed materially.

Note: Next up is tomorrow’s U.S non-farm payroll report (NFP), where U.S employers are supposed to have added more jobs in January than a month earlier (+180k vs. +148k).

1. Stocks get the green light

In Japan, the Nikkei share average rallied overnight, rebounding from a six-day losing streak and pushed most sectors into positive territory, as a weaker yen and upbeat corporate earnings drove the benchmark index higher. The Nikkei rose +1.7%, while the broader Topix jumped +1.8%.

Down-under, Australian shares rose overnight, supported by strong gains in mining stocks and financials. The S&P/ASX 200 index climbed +0.9%. In S. Korea, the Kospi index dropped -0.05%.

In Hong Kong, shares weaken as energy and finance stocks fall. At close of trade, the Hang Seng index was down -0.75%, while the Hang Seng China Enterprises index fell -0.94%.

In China, equities were also under pressure, as investors dumped firms, which are expected to report weaker 2017 earnings, and took profits ahead of the upcoming long Lunar New Year holidays. At the close, the Shanghai Composite index was down -0.99% losing ground for the fourth consecutive session. The blue-chip CSI300 index was down -0.71%.

Note: Data overnight showed that growth in China’s manufacturing sector remained solid last month, beating market expectations, as new business led factories to raise output at the start of 2018.

In Europe, regional indices trade higher across the board and in tandem with U.S futures, as corporate earnings support the move higher.

U.S stocks are set to open in the ‘black’ (+0.2%).

Indices: Stoxx600 +0.4% at 397.1, FTSE +0.1% at 7540, DAX +0.4% at 13237, CAC-40 +0.5% at 5507, IBEX-35 +0.5% at 10507, FTSE MIB +0.9% at 23717, SMI +0.4% at 9376, S&P 500 Futures +0.2%

2. Oil rises as OPEC compliance trump’s U.S output, gold lower

Oil is better bid after a survey showed OPEC’s commitment to its supply cuts remains in place, even as U.S production topped +10m bpd for the first time in 48-years.

Brent crude futures are up +49c at +$69.38 a barrel, while WTI crude for March delivery rose +45c to +$65.18 a barrel.

Note: Brent crude rallied +3.3% in January – it was the strongest start to a New Year for five-years.

The week’s EIA report showed the biggest increase in crude oil stocks in 11-months, a rise of +6.8m barrels.

For crude bears, they now have to gage how much U.S production will increase as prices rise.

Ahead of the U.S open, gold prices are under pressure after the Fed left interest rates unchanged, but hinted at hikes later this year. The market would also prefer to take his cues from tomorrow’s U.S payrolls report. Spot gold is down -0.4% at +$1,339.71 per ounce. Yesterday, it touched +$1,332.30 an ounce, its lowest print since Jan. 23.

3. Sovereign yields continue to back up

Yesterday’s FOMC meeting was the last attended by Chair Janet Yellen before she turns over the reins to her successor, Fed Governor Jerome Powell.

Governor Powell will begin his term as chairman on Saturday, and is scheduled to be sworn-in as chairman of the Fed board of governors on Monday.

With the Fed’s three hike ‘dot-plot,’ the odds for a rate increase at the March 20-21 meeting remains at around +78%.

However, yesterday’s FOMC statement hinted that officials might favour more than three-rate increases this year because it offered slightly more conviction that inflation would move higher in 2018.

The yield on U.S 10-year Treasuries has backed up +3 bps to +2.73%, the highest in almost four-years. In Germany, the 10-year Bund yield has climbed +2 bps to +0.72%, the highest in more than two-years, while the U.K’s 10-year Gilt yield has advanced to +1.525%, its highest yield in 21-months.

4. Dollar support remains lukewarm

The USD has ebbed and flowed in the overnight session on market belief that yesterday’s Fed ‘hawkish hold’ has very much been priced-in.

EUR/USD (€1.2433) is back above the psychological €1.24 handle as Euro manufacturing PMI’s this morning support the region’s recovery story.

Note: Beats: France, Swiss, Norway, Czech; misses: Germany, U.K, Spain, Sweden, Poland and in-line: Euro-Zone and Russia.

The single unit is also getting some passive support that eurozone inflation data may have bottomed.

GBP is higher by +0.5% at £1.4245, atop of its strongest level in 19-months, supported by the markets optimism on Brexit talks. Some fixed income dealers are bringing forward their forecast for the next Bank of England (BoE) rate hike to May. It’s conditional on a Brexit transitional agreement next month.

USD/JPY (¥109.73) trades at its overnight highs, underpinned by the Fed’s ‘hawkish-hold’ statement. The pair seems to be locked in a ¥107-110 range.

And following a horrid January for crypto currencies, Bitcoin (BTC) has again edged lower, trading below the psychological $10,000, down-6% at $9,605.

5. U.K manufacturing growth slows

Data this morning revealed an unexpected drop in January U.K manufacturing PMI to a seven-month low of 55.3, down from 56.2 in December and below the market consensus for 56.5.

Digging deeper, Markit (which compiles the survey) said that the reading remained “well above its long-run average of 51.7” and still showed a strengthening in new export order inflows.

Today’s report also revealed a sharp rise in inflationary pressures, with purchase prices rising at the fastest rate in 11-months.

Forex heatmap

With Global Indices Overbought, Is the Bubble About to Pop?

After the financial crisis of 2008/9, the financial markets around the world have seen tremendous growth. Consider the 5-year chart below of the major global indices.

As seen, the NASDAQ has led the way, gaining by more than 150% while the FTSI 100 has been the laggard, gaining by just 18%. This is attributed to the risks posed by Brexit on the UK economy.

At the same time, the CBOE Volatility index, which measures the volatility in the financial markets, has stayed at significant lows as shown below.

The surge in the global stocks markets is associated with the central banks decisions. After the crisis, the global central bankers moved to rescue the economy by introducing low interest rates. They also started a large scale asset purchase in what is known as the quantitative easing. In other words, they printed billions of dollars to buy treasuries and mortgage backed securities.

So far, only the Fed has moved to end the stimulus package. Other banks have issued forward guidance on when they will end the packages.

Another reason why stocks have done well is because of corporate earnings. In the past five years, corporate earnings in the United States and in around the world have risen significantly. For example, in 2010, a company like Facebook was making a few billion dollars in annual revenues. Last year, the company brought almost $30 billion in revenues. At that time, a company like Snapchat never existed. Last year, the company made billions of dollars.

Therefore, corporate earnings and easy money have led the stocks market to grow. Another reason which is less talked about is crude oil. As shown below, the price of crude oil has lost about 32% in the past 5 years. This year, the major indices have continued to break records every day.

For traders, the daily movements of stocks, currencies don’t matter. This is because, they can always buy and sell financial instruments and exit within a short period.

For long-term investors however, these are difficult times because of the difficulty in finding reasonably-valued companies. Some of the most loved companies like Amazon, Tesla, and NVIDIA are overvalued based on multiple valuation measures like ratio analysis. For example, Tesla, which makes electric cars, is currently valued at more than $50 billion, which is close to that of General Motors, which is selling more electric vehicles than Tesla.

From a technical perspective, all the major indices are in the extreme areas of being overbought. Consider the chart of the Dow and NASDAQ below.

Dow Jones Industrial Average

NASDAQ Composite

Hang Seng

The overbought situation is seen among all the major indices.

The challenge at this time is that Central Banks are moving to Quantitative Tightening, which is the opposite of easing. By tightening, they will normalize interest rates and end purchases. Still, the interest rates are at historical lows. In the United States, the administration has brought corporate taxes to significant lows.

For investors, the fear is that markets are in a bubble, which could pop at any time. If it pops, as it happens during periods of tightening, the central banks might not have any options to save the financial market. Historically, when there is a financial crisis, central banks move to lower interest rates while policy makers move to lower corporate taxes. They do all this to stimulate the economy. Now, with interest so low, and with the tax plan passed, it would be difficult for the policy makers to contain a recession if the bubble pops.

The post With Global Indices Overbought, Is the Bubble About to Pop? appeared first on Forex.Info.

USD/CAD Canadian Dollar Higher After Strong GDP and Persistent USD Weakness

The Canadian dollar is higher on Wednesday after the economy accelerated its growth in November. Canadian GDP is posted monthly and showed a gain of 0.4 percent in November. The Canadian economy started 2017 with a bang which led the Bank of Canada (BoC) to raise rates twice before a slowdown in the third quarter. The two 25 basis points rate hikes, the overall strength of the economy, recovery energy prices and a soft US dollar continued to boost the loonie. In 2018 the BoC has hiked once more leaving the benchmark rate at 1.25 percent.

The Canadian currency has enjoyed a strong start to 2018 and is more than 2 percent higher than the USD year to date. The political uncertainty in the US that delayed pro-growth policies until the end of 2017 remain. The fate of NAFTA has kept the Canadian dollar under pressure as the end of the original timeline fast approaches. The negotiations have shown little progress and with only two rounds to go, the end result could be all parties walking away empty handed. Elections in Mexico and the United States this year will further complicate negotiating in such a divisive topic as trade.

usdcad Canadian dollar graph, January 31, 2018

The USD/CAD lost 0.24 percent on Tuesday. The currency pair is trading at 1.2304, a four month high, after the release of the monthly gross domestic product in Canada for November. The 0.4 percent gain is the biggest gain since May 2017 and a signal that growth is back on track after a slowdown in the third quarter.

The U.S. Federal Reserve kept its benchmark interest rate at 1.25 – 1.50 percent on Wednesday. The meeting will mark the last time for Janet Yellen as Chair of the central bank. Jerome Powell will take over next week and with no meeting scheduled for February the Fed is expected to lift rates in March to mark the start of the Powell era.

Prime Minister Justin Trudeau told the CBC earlier that he does not think the US will pull out of NAFTA. The PM is aware that it is a possibility and his government is working on contingency plans. Also today US Secretary of Commerce Wilbur Ross said that the renegotiations are far from being completed at this point. He did recognize that progress has been made, but very little of it in the hard issues.

During his first State of the Union address President Trump mentioned that the US had entered into unfair trade deals and his goal was to turn that page on that period. Pro-growth policies were late to arrive, but after the tax reform gave Trump his first policy victory he intends to build on it by proposing a 1.5 trillion dollar infrastructure spending legislation.

West Texas Intermediate graph

Oil prices are recovering from a drop earlier in the session. West Texas Intermediate is trading at $64.55. The weekly US crude inventories report by there Energy Information Administration (EIA) surged by 6.8 million barrels. The forecast was a mild 100,000 barrels, but it appears the cold weather has slowed down refineries in the south resulting in the buildup. The surprise to the upside was balanced with a larger than expected drawdown of gasoline stockpiles.
Market events to watch this week:

Thursday, February 1
4:30am GBP Manufacturing PMI
10:00am USD ISM Manufacturing PMI
Friday, February 2
4:30am GBP Construction PMI

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

Fed Expected to Leave Rates Unchanged in Last Yellen Meeting

The Federal Reserve may sound a bit more hawkish as Fed Chair Janet Yellen’s tenure comes to an end.

Yellen was presiding over her final meeting, and the Fed’s post-meeting statement will be released at 2 p.m. Wednesday afternoon.

“They’re not going to raise rates this time around. They do want to at least confirm the market’s expectations for a March rate hike,” said Tom Simons, chief money market economist at Jefferies.

Yellen leaves the Federal Reserve after four years as chair, and in that time she began the slow process toward normalizing interest rates and shrinking the Fed’s balance sheet. Viewed through most of her tenure as a dove, Yellen began the process of reversing extreme crisis-level policy. She had previously served as vice chair to her predecessor, Ben Bernanke, and was president of the San Francisco Fed prior to that.

The Fed is not expected to take any rate action at the two-day meeting, and the market has been primed for a March hike, as well as two others later in the year. That fits with the Fed’s forecast for three interest rate increases this year. But that could change under the incoming chair, Jerome Powell, when forecasts and projections are released after the March meeting. Powell has been a Federal Reserve governor.

Economists expect few changes in the FOMC statement, but the changes Fed officials could make might be significant for market expectations.

“I think if they were to put anything that was perceived as dovish into the statement they would be reducing that [March rate hike] probability. It’s going to be a more bullish commentary about the economy and maybe include something on rising inflation expectations,” said Simons.

To really sound hawkish, the Fed may need more proof.

via CNBC

ADP Jobs Report Beats Expectations Sets Stage for NFP on Friday

The new year got off to a strong start for job creation, with businesses adding 234,000 in January, according to a report Wednesday from ADP and Moody’s Analytics.

Economists surveyed by Reuters had been looking for private payrolls to grow by 185,000.

Job creation was concentrated largely in service-related industries, which contributed 212,000 to the total.

Within that sector some of the better-paying industries showed solid gains: Trade, transportation and utilities led with 51,000, education and health services added 47,000 and professional and businesses services contributed 46,000. Leisure and hospitality services also grew by 46,000.

On the goods-producing side, manufacturing added 12,000 jobs while construction saw 9,000 new hires despite the traditionally slow month for the industry.

“The job market juggernaut marches on,” Mark Zandi, chief economist at Moody’s Analytics, said in a statement. “Given the strong January job gain, 2018 is on track to be the eighth consecutive year in which the economy creates over 2 million jobs. If it falls short, it is likely because businesses can’t find workers to fill all the open job positions.”

ADP’s latest count comes with the national unemployment rate at 4.1 percent, though wage pressures remain muted. Economic growth overall has been solid, with the Atlanta Fed projecting the economy to grow 4.2 percent in the first quarter.

via CNBC