Deflation a concern for Europe and the NFL
Northwestern Mutual Wealth Management Company
For perhaps the first time ever, the European Central Bank and the NFL had a problem in common last week — deflation. While the NFL’s Commissioner Roger Goodell dithered over “deflategate,” the ECB’s President Mario Draghi finally took a decisive step, authorizing an open-ended, trillion-euro quantitative easing program to resuscitate the eurozone. The anticipation of the ECB’s taking action, as well as the act itself on Thursday, drove the major stock indexes up for the first time in three weeks, but on Friday there was something of a pullback over concern about the possible impact on the American economy if the ECB’s printing all of that new money.
Europeans have long been hoping that the ECB would launch a Fed-like campaign to jolt their economy to life, but, unlike his counterparts at the Fed, Mr. Draghi had to try and keep 19 member nations happy, including Germany, which has been dead-set against QE. More recently, though, with the eurozone on the brink of another recession and inflation falling into negative numbers, he had to act. The scale of the program surpassed expectations, though some opine that the ECB waited too long. In any case, in an effort to spur growth and raise the rate of inflation, Mr. Draghi said the ECB would buy €60 billion ($69 billion) in government bonds and debt each month, beginning in March and ending in September 2016. The end date, he added, could be extended if inflation still isn’t near the bank’s target of 2% by then. He said, however, “What monetary policy can do is to create the basis for growth. But for growth to pick up, you need investment. For investment, you need confidence. And for confidence, you need structural reforms. It’s now up to the governments to implement these structural reforms.” One consequence of the move is that the euro continued its descent against the dollar: over the last six months it has dropped 15% to its lowest point in a decade, and some analysts think it could fall to one-to-one parity for the first time since 2002. That means that European goods will be less expensive than American exports, taking a bite out of the recent rebound in the U.S.
With QE now on the calendar, Europe has another major issue to confront as of this morning. The left-leaning and anti-austerity Syriza party won a decisive victory in yesterday’s elections in Greece. The party’s leader, Alexis Tsipras, who’s likely to be the new prime minister, declared, “The verdict is clear: We will bring an end to the vicious circle of austerity.”
Obama goes long
In his sixth State of the Union address, and his first since the GOP took control of Congress, President Obama threw down the gauntlet, saying that now that the recession is squarely behind us, it is time to “turn the page” and focus on such initiatives as free community college tuition and a tax break for the middle class, both of which would be paid for with higher taxes on wealthier Americans and businesses. The president also reemphasized other priorities, such as immigration reform and climate change, but the GOP’s response was, at best, tepid. His plans to raise taxes were dismissed as non-starters.
China comes up short
China’s growth slowed in 2014 because of weaker exports and a less torrid real estate market. Now the government is looking to consumer spending to get back on track. Growth was 7.2% in the fourth quarter and 7.3% for the year, short of the government’s target of 7.5%. The last time growth was below 7.5% was in 1998 when, in the wake of the Tiananmen Square massacre, China was hit with international sanctions.
A new variable for oil
The death of King Abdullah of Saudi Arabia, the Organization of the Petroleum Exporting Countries’ (OPEC) biggest producer, caused oil prices to rise. However, the new leader, King Salman, promptly stepped in to say he said would adhere “to the correct policies which Saudi Arabia has followed since its establishment,” meaning he would maintain high production and low prices to avoid losing further market share.
Last week, it was the World Bank forecasting a global slowdown. This week the International Monetary Fund joined the chorus, cutting its estimates for growth in 2015 to 3.5% from 3.8%, its biggest downward revision in three years. The IMF lowered its forecast for the eurozone, Japan, China and Latin America, though the biggest reductions came for those oil-producing nations hurt by the recent drop in the price of crude, including Russia and Saudi Arabia.
Mixed news about housing
The Commerce Department said that new home construction rose 4.4% in December from the month before to an annual rate of 1.09 million, the highest level in nine years. Single family starts improved 7.2% from November, the biggest rise in more than six years. That said, building permits were down 1.9% in December from the month before to an annual rate of 1.03 million. The National Association of Realtors announced that existing-home sales rose 2.4% in December to an annual rate of 5.04 million, but for all of 2014, sales were off 3.1%, the first annual decline in four years. In other news, the Labor Department said that first-time jobless claims fell 10,000 to 307,000, and the four-week moving average increased 6,500 to 306,500.
A look ahead
The Fed will have its first meeting of the year on Tuesday and Wednesday at which it’s expected to leave its benchmark rate unchanged. Committee members will also be keeping an eye on the government’s first estimate for fourth-quarter growth on Friday, estimated to come in at 3.1%. In addition, there will be updates on durable and capital goods orders, the S&P/Case-Shiller Home Price Index, new and pending home sales, and manufacturing and composite PMIs.
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