FAB Morning News Summary
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FAB morning news summary Global News • US producer prices fall for first time in nearly 1½ years; jobless claims up for fourth straight week: US producer prices fell for the first time in nearly 1-1/2 years in December amid declining costs for services, which could temper expectations that inflation will accelerate in 2018. The Labor Department said its producer price index for final demand slipped 0.1% last month. That was the first drop in the PPI since August 2016 and followed two straight monthly increases of 0.4%. In the 12 months through December, the PPI rose 2.6% after accelerating 3.1% in November. Economists polled by Reuters had forecast the PPI rising 0.2% last month and increasing 3.0% from a year ago. A key gauge of underlying producer price pressures that excludes food, energy and trade services edged up 0.1% last month. The so-called core PPI increased 0.4% in November. It rose 2.3% in the 12 months through December after increasing 2.4% in November. Weak wholesale prices could stoke fears that the causes of weak inflation will become more persistent and prompt the Federal Reserve to be more cautious about raising interest rates this year. The PPI data came on the heels of a report on Wednesday showing a sharp moderation in import prices in December. In a second report on Thursday, the Labor Department said initial claims for state unemployment benefits increased 11,000 to a seasonally adjusted 261,000 for the week ended Jan. 6, the highest level since late September. Economists had forecast claims falling to 245,000 in the latest week. The labor market is near full employment, with the jobless rate at a 17-year low of 4.1%. The number of people receiving benefits after an initial week of aid dropped 35,000 to 1.87 million in the week ended Dec. 30, the lowest level since December 1973. Source: Reuters • Fed's Dudley worries tax cuts risk overheating US economy; says it adds up to strong case for additional rate hikes: The risk of an overheating US economy in the next few years, partly fueled by tax cuts, reinforces the case for continued gradual interest-rate increases, Federal Reserve Bank of New York President William Dudley said. "While the fact that inflation is below the FOMC’s 2% objective argues for patience, I think that is more than offset by an outlook of above-trend growth, driven by accommodative monetary policy and financial conditions as well as an increasingly expansionary fiscal policy," Dudley said Thursday in remarks prepared for a speech in New York. "Moreover, if the labor market were to tighten much further, there would be a greater risk that inflation could rise 12 January 2018 substantially above our objective," which in turn could force the Fed to raise rates faster and potentially trigger a recession by doing so, he added. Chavan Bhogaita Dudley plans to retire this year when the New York Fed finds a replacement, Head of Market Insights & Strategy following a decade running the bank. Fed officials expect tax cuts signed into law by President Donald Trump last month to boost economic growth Rakesh Sahu this year without putting upward pressure on prices, according to Analyst projections they published after their Dec. 12-13 meeting. Dudley told the audience during a question and answer session that three moves this year Please click here to view our recent “doesn’t seem to be an unreasonable sort of starting point,” though the publications on MENA and Global Markets ultimate pace of policy tightening will depend on how the economy evolves. “If the economy is stronger than we think, if inflation rises more quickly, then I can certainly imagine that we’d do more than we said. If the economy is weaker than we think, or inflation stays stubbornly low, we could do somewhat less than we think,” he said. “So, I think it really depends on how all of these things sort of evolve. But clearly the financial conditions piece “If the economy is stronger than we think, if inflation rises more quickly, then I can certainly imagine that we’d do more than we said. If the economy is weaker than we think, or inflation stays stubbornly low, we could do somewhat less than we think,” he said. “So, I think it really depends on how all of these things sort of evolve. But clearly the financial conditions piece pushes on the side of going faster.” Dudley also said that the tax cuts and recent strengthening of economic momentum prompted him to raise his forecast for US economic growth in 2018 "by about half a percentage point to three quarters of a percentage point to a 2.5% to 2.75% range." The tax legislation accounts for about two-thirds of the upgrade, he said. Faster economic growth from the tax cuts at a time when the labor market is already tight and financial conditions are already easy "suggests that the Fed may have to press harder on the brakes at some point over the next few years," Dudley said. "If the labor market tightens much further, it will be harder to slow the economy to a sustainable pace, avoiding overheating and an eventual economic downturn." Source: Bloomberg • ECB joins central bank chorus hinting at faster tightening: The European Central Bank has indicated it is preparing to cut its crisis-era stimulus programme faster than anticipated, joining monetary policymakers in most developed economies in expressing increased confidence in the global economic recovery. The signal, contained in minutes of the ECB’s December rate-setting meeting published on Thursday, came just days after the Bank of Japan sent a similar message by disclosing it had purchased fewer bonds than investors had expected as part of its quantitative easing efforts. The ECB’s language was characteristically subtle, a Financial Times reported saying, instead of discussing the eurozone’s continued “recovery”, it referred to the bloc’s “expansion”. But the change of wording was enough to send the euro rallying nearly 1% against the dollar and German bond yields rose to near two-year highs. Mario Draghi, the ECB chief, set the bank’s current slow path of tapering its stimulus programme in October, when he announced he would cut bond buying in half to €30bn each month until September. Draghi also vowed to hold borrowing costs at their current record lows until well after the ECB ends its bond buying. The bank has bought a total of €2.3tn of bonds since starting QE in early 2015. But the minutes of the December 14 meeting showed Draghi’s governing council was already reconsidering how the eurozone’s “continued robust and increasingly self-sustaining economic expansion” should weigh on its decision- making, saying the ECB should better communicate its confidence in the region’s growth. “Looking ahead, the view was widely shared among members that the governing council’s communication would need to evolve gradually,” the account said. “The language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in the coming year.” At the December meeting, the ECB’s staff upgraded its forecasts for growth to 2.4% in 2017 and 2.3% in 2018 – the most significant in the history of the bank’s quarterly projections. Households and businesses in the region are expected to keep spending, which investment activity is also forecast to pick up. Most ECB watchers still think QE will continue until September, but expectations of purchases continuing beyond that are diminishing. Like the ECB, the Bank of England and the US Fed have said they expect to tighten their ultra-loose money policies in 2018 in the face of strengthening economic indicators Source: Bloomberg • China’s December exports bests expectations, driving up trade surplus: China’s exports rose more than expected in December, capping a year of stronger trade growth buoyed by a robust global economy. Import growth however slowed dramatically, helping to drive up the country’s trade surplus. The dollar value of outbound shipments from China climbed 10.9% year on year in December, slowing from November’s rate of 12.3% but comfortably besting a median forecast of 9.1% growth from economists surveyed by Reuters. Imports meanwhile grew far less than anticipated, with a year-on-year rise of just 4.5% undershooting expectations of a 13% climb and down substantially from the prior month’s pace of 17.7%. The divergent trends in trade flows boosted China’s trade surplus by about $14bn from the previous month to $54.7bn at the end of 2017, well above a median forecast of $37bn. Full year data for 2017 show exports rose 10.8% in yuan terms while imports surged 18.7%. The 2017 trade surplus stood at 2.87 trillion yuan ($442.3bn). China’s trade surplus with the US rose 13% in 2017. Demand for Chinese products is holding up as growth in major trade partners remains intact, and a feared trade war between China and the U.S. has yet to materialise. An imports boom is being driven by the economy’s unexpectedly robust expansion in 2017, with the nation’s gross domestic product expanding by about 6.9% last year, the official Xinhua News Agency cited Premier Li Keqiang as saying this week. Source: Financial Times; Bloomberg 2 • S&P cuts Brazil debt rating to BB- as pension reform doubts grow: Ratings agency Standard & Poor’s cut Brazil’s credit rating further below investment grade on Thursday as doubts grew about a presidential election in October and a push to trim its costly pension system, seen as vital to closing a huge fiscal deficit.