Dollar Gains for Second Week as Bulls Look Past Decline in GDP

30 May 2015 | Author: | No comments yet »

5 Things to Know About the Economy This Week.

The U.S. economy shrank during the first quarter as another brutal winter highlighted the fragility of the nearly six-year-old expansion, a historically choppy stretch during which the nation has struggled to thrive in an uneven global environment. U.S. gross domestic product was revised lower Friday as a widening trade gap and soft consumer spending dragged on economic performance in the first three months of 2015.The dollar had the biggest back-to-back weekly gains versus the yen since November, shrugging off downbeat U.S. economic data as investors see the Federal Reserve moving closer to raising interest rates this year. That was far worse than the agency’s initial estimate that showed 0.2% growth, marking an abrupt reversal from the prior nine months when growth surged and the economy appeared on the verge of a long-delayed breakout.

This is the third time since 2009, when the Great Recession ended, that the economy has contracted quarter to quarter. “There was a plethora of issues early in the year that weighed on economic activity – namely, the West Coast port disruptions, low energy prices, the stronger dollar and inclement winter weather,” Lewis Alexander, chief U.S. economist at Nomura investment bank, wrote in a research note Friday, though he clarified that the reported contraction “overstates the drag from these factors.” GDP reports are subject to a series of revisions. Bulls are counting on an improved U.S. jobs market and signs inflation is picking up to lead to higher borrowing costs, while central banks in Japan and the euro region keep applying monetary stimulus to revive their economies. “It’s kind of like a Hollywood script which you know the plot already — you have a weak first quarter, you get a stable second quarter, and you get a rebound in the second half of the year,” Minh Trang, a senior foreign-exchange trader at Silicon Valley Bank in Santa Clara, California, said by phone. “Yellen and other Fed presidents have all been fairly hawkish. While bad weather once again probably contributed to last quarter’s slump, other impediments were also at work — including a swelling trade deficit caused by a strong dollar and plunging investment in oil exploration following the drop in fuel prices.

They’re all talking about rate hikes, that’s been pushing the dollar up.” The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, climbed 1 percent this week to 1,191.94, adding to last week’s 2.6 percent advance. The greenback has risen almost every day since May 22, when a key inflation measure climbed faster than economists predicted and Fed Chair Janet Yellen said she expected rates to increase in 2015. Among the details of the first-quarter GDP report, the trade deficit subtracted 1.9 percentage points from growth, the most since 1985, compared with the previously estimated drag of 1.2 points. The central bank is looking for signs of a rebound soon as it plots when and how quickly to raise short-term interest rates, which have been near zero since December 2008 to stir economic growth.

The bureau will update its calculations to make up for possible shortcomings in its seasonal adjustment calculations, but those won’t be available until the second quarter’s GDP drops on July 30. “With our larger reach, we will be able to accelerate the deployment of faster Internet speeds, state-of-the-art video experiences, and fully–featured voice products, at highly competitive prices,” Tom Rutledge, president and CEO of Charter Communications, said in a statement Tuesday. Time Warner has been looking for a suitable buyer ever since pressure from regulators (in part) caused Comcast Corp. to pull out of the buying process earlier this year. The government said last week it was aware of the potential problem and was working to minimize it. “Survey evidence is already pointing to a second-quarter pick-up. The first half of 2015 is shaping up to be one of the weakest six-month stretches of the expansion, with economists predicting annualized growth of between 2% and 3% during the current quarter.

If Charter is allowed to go through with its Time Warner/Bright House deal, it still wouldn’t be nearly as large as the since-abandoned Comcast-Time Warner merger. There is a good chance that we will see a second-quarter bounce-back,” said High Frequency Economics’ chief economist Jim O’Sullivan, who has been the top forecaster in the past two years, according to data compiled by Bloomberg. A measure of domestic demand growth was revised up slightly and business spending on equipment was much stronger than previously estimated, taking some edge off the slump in output.

But the FCC still needs to sign off on the deal, and chairman Tom Wheeler earlier this week issued a statement that said “absence of harm is not sufficient” for approval. A Bloomberg survey of economists forecast that growth will accelerate to a 2.7 per cent pace in the April-through-June period, with household consumption expanding 3.2 per cent. Last quarter’s contraction was smaller than the 2.1 percent fall at the start of 2014, when a prolonged patch of bitterly cold temperatures held back the economy. Mortgage applications are up amid other signs of growing housing demand. “We’re still growing at a relatively steady pace, although one that just doesn’t feel satisfying,” said Richard Moody, chief economist at Regions Financial Corp. “Six years into the recovery, we still really haven’t absorbed all of the idle capacity in the economy. Consumer spending, which drives about 70 percent of economic activity, slowed to annual growth of just 1.8 percent for the quarter, slightly below the government’s first estimate.

When your underlying trend of growth is so slow, it doesn’t take much to just kind of stop the train.” Some of the strongest headwinds facing the U.S. are tied to economic woes around the globe, including the U.S.’s biggest trading partners. Peter Roskam, R-Ill., who chairs a House subcommittee that oversees the IRS, told CNN Thursday that the attack is believed to have originated from Russia. “It’s a problem, no matter where it’s coming from, for the taxpayers and the IRS,” Roskam said Thursday, according to CNN. “It surely doesn’t help matters, though, that it’s coming from Russia, for all the obvious geopolitical reasons.” While not nearly as overblown as the Sony hack believed to have originated in North Korea, the security breach is another example of foreign powers’ ability to hack their way into Americans’ personal information. “This is probably the number one metric the Fed wants to see improvement on,” Anthony Valeri, investment strategist at LPL Financial, says of wage gains. “This is heading in the right direction.” Pay gains in the U.S. have largely been stagnant for several years, and inflation (for which the Consumer Price Index is an indicator) has been almost nonexistent. A labor dispute that disrupted shipping at many West Coast ports has been resolved, which should alleviate supply bottlenecks that depressed manufacturing activity. The various research results indicate first-quarter growth has underperformed the rest of the year by about 1.6 percentage points to 1.7 percentage points on average.

That was the largest drop in a year and the second quarterly fall, as the dollar weighed on multinational corporations and oil prices hurt domestic firms. Despite a few dips here and there, the stock market has continued to chug along. “We wait for when it’s going to break as it slowly grinds higher,” says Linda Duessel, a senior vice president, equity strategist and client portfolio manager at Federated Investors. “I will have a hard time getting bearish on the market or the economy as long as jobs continue to look better.

Multinationals like Microsoft Corp, household products maker Procter & Gamble Co. and health care conglomerate Johnson & Johnson have warned the dollar will hit sales and profits this year. The Bureau of Economic Analysis this month said it’ll make changes to try to minimize the issue, and take this into account when reporting annual benchmark revisions in July.

While a key measure of U.S. corporations’ after-tax profits grew 3.1% over the period, it wasn’t on pace to match the growth of the prior two years. “We have a macro-slowdown around the world,” Stephen Angel, chief executive of industrial gas supplier Praxair Inc., told analysts this past week. “There’s less capital investment. That has raised questions about whether the government is having trouble seasonally adjusting activity in the winter and is over-stating first quarter weakness. Unlike 2014, when growth snapped back quickly after a dismal first quarter, the dollar and investment cuts by energy companies continue to hamstring activity. That meant inventories contributed 0.33 percentage point to GDP instead of the previously reported 0.74 percentage point, suggesting warehouses are not bulging with unwanted merchandise and businesses have latitude to order more goods from factories.

The oil-price drop has boosted consumers’ finances by lowering their gasoline bills, a development expected to boost the economy throughout this year. But the most dramatic effect thus far has been a drop in business investment, with energy companies holding off on drilling and equipment purchases as they deal with squeezed profits. Analysts also say that steadily solid hiring, which has helped cut the unemployment rate to a seven-year low of 5.4 percent, will continue to put money in more people’s hands and fuel spending gains. Revisions to incomes showed wages and salaries rose even more than last reported and the saving rate was the highest since the end of 2012, indicating households can unleash some pent-up demand.

Right at Home Inc., a nursing-care provider for seniors and the disabled, shows the divide between the strong hiring outlook and the struggle to deliver higher-paying jobs that would significantly boost overall economic growth. Rob Chester, owner of a mid-Atlantic franchise of the company, said he’s unfazed by the economy’s latest struggles because of long-term dynamics working in his favor, namely the aging of baby boomers. The franchise plans to hire between 15 and 30 caregivers for a Maryland location this summer. “There’s going to be an increasing demand for this type of service,” Mr. Still, it marked the weakest reading in six months. “The index is still quite high,” Richard Curtin, director of the Michigan Survey of Consumers, said on a conference call after the figures were released. But the jobs aren’t the kind of well-paying positions that provide a bigger economic boost and that previous expansions delivered in greater numbers.

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