Negative Interest Rates In Europe, Depressing Retail Sales And Plunging U.S. Imports, Q.E. Back On The Table (#GotBitcoin?)
Abrupt decline in inbound container volume at California’s big gateways came after shippers pulled forward purchases from Asia ahead of potential new tariffs. Negative Interest Rates In Europe, Depressing Retail Sales And Plunging U.S. Imports, Q.E. Back On The Table (#GotBitcoin?)
U.S. Seaborne Imports to Los Angeles, Long Beach Plunged in February
Seaborne imports into the biggest U.S. gateways for Asia trade fell sharply in February, halting a monthslong shipping surge driven by strong consumer demand and a rush by companies to bring goods into the country ahead of potential new tariffs.
Loaded container imports into the ports of Los Angeles and Long Beach declined a combined 10.2% last month from the same month a year ago. The gateways in February handled 651,180 20-foot equivalent units, a common measure of container shipments, down nearly 75,000 fewer containers from February 2018.
The drop came during the annual pause in China’s manufacturing during the Lunar New Year celebration, when factories typically shut down for several weeks. It also followed a boom in imports into Los Angeles and Long Beach that began early last summer as new trans-Pacific tariffs loomed amid growing trade tensions between the U.S. and China.
The Port of Oakland also reported a 5% decline in imports in February from the year before.
Retailers are “taking a break from the rush to bring merchandise in ahead of tariff hikes now that the increase that was scheduled for March has been delayed,” Jonathan Gold, vice president of supply chain and customs policy at the National Retail Federation, said in a statement. “We are hoping that the delay is permanent and, better yet, that tariffs of the past year will be removed entirely.”
The import surge at the California gateways reached a peak late in the year after U.S. trade officials announced a plan in September to raise tariffs on $200 billion in Chinese imports by 25% on Jan. 1. That was later pushed back to March 2 and now has been postponed while the U.S. and China seek to strike a new trade pact.
During the last three months of 2018, import volume at the ports of Los Angeles and Long Beach rose 9% over the same period a year earlier, and the growth continued in January, long after the holidays that typically trigger stronger shipping volumes in the fall.
Walter Kemmsies, an economist specializing in ports and infrastructure at real-estate firm Jones Lang LaSalle Inc., said most of the February decline was the result of supply chains already stuffed with goods, leaving an “overhang from the rush to overhang to avoid tariffs.”
“Chinese New Year normally gives you a little dip, but it’s usually just a 5 or 6% drop-off from January to February,” said Mr. Kemmsies. Inbound volumes into Los Angeles fell 18.2% from January to February.
Combined exports at the Southern California ports also fell 13.9% in February from a year ago, including a 19.6% decline at the Port of Long Beach to the lowest level since January 2015. Oakland’s export volumes dropped 8.2% from a year ago in February.
A Really Bad Retail Sales Report
The January retail sales report wasn’t just less strong than it appeared; it was downright weak.
Scratch its surface and it is quickly apparent that the January retail sales report wasn’t as good as it appeared at first glance. Dig a little deeper and it actually looks awful.
The Commerce Department on Monday reported that retail sales rose a seasonally adjusted 0.2% in January from December, better than the flat reading that economists expected. A measure excluding sales at motor vehicle dealers, gasoline stations, hardware stores and restaurants—the so-called control group economists use to track gross domestic product—rose a sharp 1.1%.
But there were substantial revisions to December’s already weak figures. December control sales, initially reported down 1.7%, fell 2.3% instead. November sales were revised lower as well, so fourth-quarter GDP probably grew at a slower pace than the 2.6% the Commerce Department reported last month. Even worse, because the December sales drop lowers the starting point for consumer spending this year, first-quarter GDP growth is shaping up to be even weaker. Goldman Sachs economists on Monday lowered their first-quarter GDP growth estimate to 0.5% from 0.9%, for example.
What makes Monday’s report even more troubling is that since it includes holiday spending, December is the most important month for retail sales. January is one of the least. The Commerce Department’s seasonal adjustment factors take this into account, so the rebound in January sales was even less than met the eye.
A rebound in the stock market, the end of the government shutdown and better weather have given people more reasons to spend, so there is hope that there has been some improvement. Until investors see evidence of that, though, they should lower their expectations.
Central Banks Play a Game of Risk Management
Economic-policy makers rush to reduce odds of recession, with limited tool kits.
The world’s central banks are engaged in a major policy reversal to prevent the world economy from sinking into unexpected recession.
Alarmed by an economic slowdown and stress last year in financial markets, they are calling off interest-rate increases sooner than expected and in some cases easing monetary policy.
In many cases, the central bankers are boxed in, with few policy tools available to cushion their economies.
Collectively, though, economists say the central bankers have reduced market risks and helped ease financial conditions in a way that should keep expansions—nearly a decadelong or older in the U.S. and China, while fragile and short-lived in Europe and Japan—going through 2019.
It started with the Federal Reserve. Six months ago, Fed officials thought they would raise short-term interest rates three times in 2019 on the way toward a policy rate near 3.5% in 2020. Fed officials recently signaled they have paused for now, with short-term rates just below 2.5%. Their actions and words strongly suggest they could be done altogether.
The Fed’s reversal after last year’s market turbulence changes the contours of the expansion and helps preserve an outlook for continued growth, said Goldman Sachs Chief Economist Jan Hatzius.
“The Fed was trying to tighten financial conditions gradually (last year) and then it got a much bigger and more rapid tightening than it expected,” he said. He now sees a sharp drag on U.S. economic growth early this year and gradual improvement as the year progresses, rather than the steady slowing he previously expected.
“It could be a year from now we’ll find this was a pause that ultimately doesn’t really change the outcome that much,” he said.
With the Fed taking an easier stance, other central banks have less pressure to raise rates. J.P. Morgan economists see rates 2 percentage points lower in Brazil than they expected a few months ago, and they see India cutting rates. Australia is expected to reduce rates, too, and rate increases are expected to be put off in Canada and the U.K.
“We’re clearly seeing a dovish tilt that is broadening out,” said J.P. Morgan’s chief economist, Bruce Kasman.
Europe and Japan are evidence that the central bankers have little room for error. Last week, the European Central Bank reduced its 2019 projection for inflation to 1.2% from 1.6%, well below its 2% target. It also cut its growth forecast to 1.1% from 1.7%.
In normal times, a central bank would cut interest rates when confronted with such a big inflation miss and deteriorating growth outlook. But the ECB’s target short-term interest rate is already negative and the scope to restart a bond-buying program that ended three months ago constrained. The ECB said it would put off rate increases and expanded a special bank-lending program, but Mr. Kasman found the move inadequate for the moment.
“The ECB is moving here, but its limited toolbox makes it quite vulnerable,” he said.
Because the central bankers have limited room for error, they are more sensitive than they were in decades past to signs that growth or inflation might be slowing more than expected. They call it a “risk management” mindset. They have unlimited space to fight accelerating inflation with higher interest rates and little-to-no space to fight slowing inflation with lower rates. Thus they are doing whatever it takes to avoid such shortfalls.
“Seeing how central banks have adjusted fairly rapidly to the data coming in does reduce some of the downside risks,” said Kristin Forbes, a professor at the Massachusetts Institute of Technology and former member of the Bank of England’s Monetary Policy Committee.
In a paper presented at the Brookings Institution last week, former U.S. Treasury Secretary and White House adviser Lawrence Summers suggested this risk imbalance could now be an entrenched feature of the economic landscape. A neutral interest rate that neither stimulates the economy nor constrains it is 3 percentage points lower than it was a generation ago, he said, putting it closer to zero on a regular basis. That means central banks could be living in a state of high alert for years.
In some respects, the situation mirrors a global slowdown just three years ago that sparked synchronized policy easing by global central banks. The Fed then also led the way, scrapping plans to raise rates several times, instead lifting rates just once at the end of 2016.
Today’s episode is complicated because it involves a broad range of political uncertainties, such as the Trump administration’s confrontations with China over trade and the U.K.’s plan to leave the European Union.
“These are a different kettle of fish from 2016,” said Lewis Alexander, chief U.S. economist for Nomura Securities. “The very stable international policy regime that we’ve been living with for decades may not be as stable as we thought it was.”
Add China’s slowdown to the list of uncertainties for the global outlook. Its policy makers are trying to stimulate growth, too, with an emphasis on fiscal policy. But they are also constrained, fearing that massive stimulus—what they call “flood irrigation” from years past—could lead to excessive borrowing that damages China’s economy in the long run.
In short, the risk may be diminished after the latest reversal by central banks, but it’s hardly gone.
Europe’s Most Important Bond Edges Back Toward Negative Territory
Germany’s 10-year bond yielded as little as a microscopic 0.04% recently, as investors fret about Europe’s growth prospects.
Investors have driven the eurozone’s most closely followed government bond yield close to negative territory for the first time since 2016, underscoring the increasingly bleak outlook for the European economy.
Germany’s 10-year government bonds, known as bunds, yielded as little as 0.04% on Friday, a microscopic return for investors and the lowest level since October 2016 when the region was still emerging from a protracted sovereign-debt crisis.
Sending the yields lower last week were fears that Europe’s economy has slipped back into slow-growth mode, exacerbated by slack demand for European goods abroad and political gridlock at home. The European Central Bank slashed its growth forecasts for this year to 1.1% from 1.7% and all but ruled out raising its benchmark interest rate, currently negative, before the start of next decade at the earliest.
“We’re not going to do any monetary-policy normalization for the next two years,” said Samy Chaar, chief economist for fund manager and private bank Lombard Odier in Geneva. “All open economies have hit a brick wall.”
The realization that negative policy rates are here to stay led investors to pile into bunds and other low-risk government bonds. Beyond Germany, the yield on equivalent French debt drifted to 0.413% on Friday, also its lowest since 2016. That has sent borrowing costs for European corporations lower as well, with the ICE Bank of America Merrill Lynch Europe index yield falling below 5% from 5.5% at the end of last year.
Shorter-term European government bonds never emerged from negative territory after the ECB first experimented with below-zero policy rates in 2016 as a way to dislodge the economy from persistently slow growth. Over 22% of overall debt in the world is still negatively yielding, up from 13% at the beginning of 2016. Japan, Switzerland and Denmark also have negative interest rates.
“Most of the yield curve is already underwater,” said Peter Dixon, an economist at Commerzbank. “The 10-year is the last tip of the iceberg.” He added: “The simple fact is that you’re paying the government to take on their debt.”
Investors buy negative-yielding debt in some cases because they have no other choice. Bond funds follow indexes that include the bonds. Long-term holders like insurers need the bonds to keep capital safe in order to pay expected liabilities. And large bank depositors may find paying the negative interest rate is less than the charges to keep cash as a bank deposit.
Investors can also gain on negative yielding debt if yields continue to go even lower, as the price of the bond increases inversely to the yield. Such capital-appreciation trades were highly profitable in early 2016, when the ECB first unveiled negative rates.
Subzero yields have weighed particularly on the region’s banks, which make money by lending at a greater interest rate than is paid to borrowers. In sign that investors remain skeptical about their profitability, the Euro Stoxx Bank index trades for just 60% of the underlying banks’ book value. Almost all big U.S. banks, which enjoy a positive rate-environment, all trade for more than book value.
Germany is seen as an investor haven thanks to the government’s strong fiscal position. It has enjoyed lower rates than EU peers for years. It runs a budget surplus and its debt as a percentage of the size of the economy has fallen in the past few years, even as it has risen for France and Italy.
“The fact that you have got this expansionary budget being run in Italy and in France increases the preference for German debt for people that are quite risk averse,” said David Slater, a portfolio manager at Trium Capital, the London hedge fund.
Germany bonds are also a scarce commodity. Germany, the Netherlands and Luxembourg are the only AAA-rated government debt in the eurozone. European regulations force banks and insurance companies to stock up on the relatively safe assets.
“It is fundamentally that the proportion of AAA assets in the eurozone is out of whack with what is required by the size of the economy,” said Lyn Graham-Taylor, fixed-income strategist at Rabobank.
At the IMF, Germany Comes Under Pressure To Stimulate Growth
The IMF, backed by the U.S., has pressed Germany and others with budget surpluses to cut taxes or raise spending to prop up growth.
With the global economy slowing and showing signs it may need support, economists are pointing fingers at Germany and a few other countries that are in a position to provide a lot of stimulus but are choosing not to.
What stimulus measures policy makers can use to support their flagging economies was a key issue during weekend meetings at the International Monetary Fund in Washington. In its annual report on global fiscal policies, the IMF singled out Germany, Korea and Australia as places where fiscal stimulus could make sense. Earlier this month, the IMF called on Switzerland to ramp up public spending.
The IMF, backed by the U.S., has pressed Germany and others with budget surpluses to cut taxes or raise spending to prop up growth. Countries with a budget surplus “should certainly make use of it and have the space to invest and to participate in the economic development and growth,” IMF Managing Director Christine Lagarde said, “but not enough has been done on that front.”
Treasury Secretary Steven Mnuchin said he agreed with the IMF’s stance on surplus countries such as Germany. The U.S. is now running large deficits.
The idea behind debt-financed stimulus is that when economies are weak, governments substitute for a lack of private demand through spending or tax cuts. In times of intense stress such as the global financial crisis a decade ago, economists agree that governments should do all they can to prop up growth.
But using large-scale fiscal stimulus to address an economic soft patch has met with resistance from countries like Germany that run a conservative economic policy.
Germany’s finance minister, Olaf Scholz, fired back at criticisms, pointing to his nation’s increased public investment, reduced taxes and higher support for low-income families.
“It would be a very nice service if you could tell the rest of the world that they are demanding something we already did,” he said to a reporter at a press conference Friday. Germany’s stable finances put it in a better position to respond to the next recession, he said, and the current global risks aren’t Germany’s finances but rather “man-made” ones including Brexit and trade disputes.
Korea, meantime, runs an annual budget surplus while Australia is expected to swing to a surplus in the coming years. Unlike in Europe, these economies don’t appear to be in need of much stimulus, and their central banks have scope to cut interest rates if necessary.
Germany and Switzerland are using annual surpluses to cut debt and prepare for expected budget strains from future retirees. Germany’s position is the most relevant among surplus countries given its dominant role in European growth and politics.
If Germany were to launch a big stimulus program, it could encourage deficit countries like France and Italy to ease off measures to bring their budgets closer to balance. European rules set a ceiling on deficits at 3% of gross domestic product, though exceptions are made in times of stress. The U.S. has no such limit.
Germany’s export-dependent economy contracted in the third quarter of last year and was flat in the fourth. A string of weak manufacturing figures suggests it may contract again in the first half of this year. That soft patch will affect the 19-member eurozone, where Germany is the biggest member, and ripple across non-euro countries like Switzerland that rely on Europe for exports.
China’s economic slowdown “has hit the Germany economy hard, and there is a good case for using fiscal policy to smooth [the] adjustment,” said Ken Rogoff, a professor at Harvard University, noting Germany’s “huge latitude” from its low public debt, which equals less than 60% of gross domestic product and could shrink to less than 50%, by 2022 according to IMF estimates.
Germany has run annual surpluses since 2014 and is expected to do so through 2024, according to the IMF. Tax revenues have increased 8% since 2017, faster than welfare spending, and working Germans today pay the second highest level of income tax of all members of the Organization for Economic Cooperation and Development, behind only Belgium.
The U.S. position is in stark contrast to Germany’s despite facing similar problems with old-age spending. The government has pumped the U.S. economy with tax cuts and higher spending with the aim of generating 3% annual GDP growth rates. Annual deficits are over 4% of GDP.
The hope is that by expanding the size of the economy, the U.S. will be in a better position to service its debt down the road. The usual side effects of stimulus—higher bond yields and rising inflation—have failed to materialize, strengthening the argument of the stimulus camp and weakening Germany’s view that it’s best to keep the powder dry for the next recession.
Germany is “currently learning the hard way that they are the only country around playing according to these rules,” said Carsten Brzeski, an economist at ING Bank.
Greece, Once in Crisis, Joins Negative-Rates Club
Debt-laden country sells bonds yielding less than 0% for the first time.
Greece sold debt offering less than 0% for the first time on Wednesday in the latest sign of how far investors will go in a hunt for returns amid a global slump in yields.
The Greek government issued €487.5 million ($535.31 million) of three-month debt at a yield of minus-0.02%. At a previous auction for bills with similar maturity on Aug. 7, the rate was 0.095%.
The move reflects a broader shift in European bond markets in recent years, with investors paying governments from Germany and Switzerland to Italy to hold their money as the European Central Bank cuts borrowing costs to bolster economic growth in the region. That also means investors are being forced to take on more risk to generate returns, with Greece long considered the final frontier.
The nation, which emerged in August 2018 from an eight-year international bailout program following a prolonged debt crisis, has been welcomed back into the bond market with strong demand for its debt. The falling borrowing costs in recent months are a sign that Greece is steadily becoming just another eurozone country in investors’ eyes, after years when its survival in the common currency was in doubt.
“The general monetary-policy environment, not only in Europe but globally, helps issuers that have more debt on their balance sheet,” said Andrey Kuznetsov, senior portfolio manager at Hermes Investment Management. “The weak global macro environment combined with monetary-policy easing and bigger demand for fixed income from an aging population means that to deliver the same return, investors have to take on more risk.”
The ECB took its key benchmark further into negative territory last month as it reduced the interest rate by one-tenth of a percentage point, to minus-0.5%. The monetary authority also launched a sweeping package of bond purchases as concerns about the health of the eurozone economy persist, laying the groundwork for an extended period of easy money.
While the Greek government so far has issued only very short-term debt at a negative yield, other European governments are borrowing through longer-dated debt that pays no interest. Germany, for example, sold 30-year debt at a negative yield for the first time in August.
The yield on the government debt has tracked improvements in the Greek economy, suggesting that debtholders are “not as worried they’re going to lose money as they were in the past,” according to Lefteris Farmakis, a strategist at UBS.
Greece’s economy has been growing at around 2% a year lately, but remains deeply depressed after shrinking by over one-quarter during its financial crisis. Under the bailout program, the country was forced to enact drastic fiscal retrenchment in exchange for loans from other eurozone countries and the International Monetary Fund.
The election of a pro-business, center-right government under Prime Minister Kyriakos Mitsotakis this July has further contributed to a sense that normality is returning.
Still, Mr. Mitsotakis’s ability to loosen crisis-era austerity by cutting taxes remains constrained by the insistence of Greece’s German-led creditors that Athens continue to run budget surpluses.
Doubts remain over the sustainability of Greece’s debt in the long term, because its huge, cheap bailout loans from eurozone governments must eventually be replaced with market financing at uncertain cost. Most investors believe Germany and others won’t let Greece fall back into a crisis and will delay the loans’ repayment if necessary.
“If Greece continues to do well and credit risk continues to go down, you could see rates go even more negative,” Mr. Farmakis said.
Greece’s first issuance after exiting the bailout program, in January, saw the debt office attract demand in excess of €10 billion for a €2.5 billion fundraising round.
Wednesday’s issuance comes a day after Greece raised €1.5 billion from the sale of its existing March 2029 bonds at a yield of 1.50%. That marked a record low cost for its 10-year debt.
“The weak global macro environment combined with monetary-policy easing and bigger demand for fixed income from an aging population means that to deliver the same return, investors have to take on more risk,” Mr. Kuznetsov said.
U.S. Retail Sales Fell in September
Sales fell 0.3% from August in first monthly decline since February.
American shoppers pulled back on spending in September, signaling a key support for the U.S. economy this year could be softening amid a broader global economic slowdown.
Retail sales—a measure of purchases at stores, at restaurants and online—decreased a seasonally adjusted 0.3% in September from a month earlier, the first monthly decline since February, the Commerce Department said Wednesday. Excluding vehicles and gasoline, categories that can be volatile, September retail sales were flat.
Wednesday’s report suggested consumer spending was on less solid footing amid concerns that trade tensions are weighing on the global economy and dampening consumers’ outlook. Consumer spending is the main driver of the U.S. economy, accounting for more than two-thirds of economic output.
“This morning’s report forces eternal optimists to face the possibility household spending may be moderating along with a decline in fundamentals,” Lindsey Piegza, Stifel chief economist, wrote in a note to clients.
September’s decrease in retail sales was driven in part by a 0.9% decline in spending on vehicles, which reflects a pullback from a strong 1.9% gain in August. Lower fuel prices weighed on sales at gasoline stations, which fell 0.7%.
Some economists said the drop in vehicle and gasoline sales paints a more mixed picture than the decline in the headline retail sales number would suggest.
Lower gas prices “aren’t a negative for consumers. That’s actually positive,” said David Berson, chief economist at Nationwide.
He noted that unit vehicle sales rose in September, citing figures from Autodata, in contrast to the dollar decline in vehicle sales reflected in Wednesday’s report.
Sales at nonstore retailers—a proxy measure for online retail sales—fell 0.3% in September, the first decline since December 2018 and one that Mr. Berson characterized as rare.
He said he would need to see “a lot more than one month of data, particularly one month of data that has all these anomalies,” before becoming overly concerned about a slowdown in consumer spending.
Consumers have been buoyed by an unemployment rate at a half-century low and prices that have risen modestly despite a U.S.-China trade war that only recently showed signs of easing. The National Association of Home Builders said Wednesday its housing-market index rose three points in October, to 71 from a revised level of 68 in September, reflecting an increase in U.S. home-builder confidence.
Retail sales can be volatile from month to month, and the broader trend this year has shown steady growth. They rose in August by a revised 0.6%, more than previously estimated. Sales increased 1.5% in the July-through-September period compared with the previous three months.
Yet, September’s slowdown in retail sales followed recent data that have suggested uncertainties around trade are weighing on other parts of the global economy. Personal-consumption expenditures—a separate measure of U.S. consumer spending—slowed more than expected in August. Manufacturing- and service-sector activity in the U.S. and eurozone has also seen a slowdown.
Forecasting firm Macroeconomic Advisers predicted U.S. gross domestic product grew at a 1.3% seasonally adjusted annual pace in the third quarter, compared with a 2.0% annual rate in the second quarter and a 3.1% pace in the first.
Trey Kraus, owner and president at Carltons Men’s and Women’s Apparel in Rehoboth Beach, Del., said he raised prices on almost every item in his store because of U.S. tariffs placed on Chinese imports. The store carries upscale clothing, and Mr. Kraus said the higher prices have deterred some of his customers from buying multiple items at once.
“Even though our business is up year over year, without the [price] increases, I would’ve anticipated five to 10% more in volume than what we are experiencing,” Mr. Kraus said.
Still, he characterized the store’s foot traffic as strong and said he has an optimistic outlook into the first quarter of 2020.
“I believe consumer confidence is still high in spite of a lot of the news that’s out there,” he said. “I don’t know what the statistics say, but that’s what I’m experiencing.”
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