Gold plunges as markets decline following slower growth in China

Markets tumbled again on Monday, with gold in particular plunging 9.3 percent, its biggest fall since 1980.

Stocks were also hit hard. The S&P 500 fell 2.3 percent, its biggest fall since 7 November.

Weak economic data on Monday contributed to the market declines.

In China, economic growth reportedly slowed to 7.7 per cent in the first quarter from 7.9 percent in the previous quarter.

Fixed-asset investment jumped 20.9 percent in the first quarter from the same period last year. However, this was down from a 21.2 percent increase for the first two months.

Industrial production rose 8.9 percent year-on-year in March and 9.5 per cent for the first quarter as a whole. Retail sales were up 12.6 per cent in March and 12.4 per cent in the first quarter.

US data on Monday were also disappointing. The National Association of Home Builders/Wells Fargo index of builder confidence fell to 42, the lowest since October, from 44 in March. The Federal Reserve Bank of New York’s general economic index fell to 3.1 in April from 9.2 in March.

Central bankers see no bubble, Hussman disagrees but sees value in gold shares

Bloomberg reports that central bankers are not seeing a bubble in equities despite the ultra-easy monetary policies that have been implemented around the world.

Policy makers from the Federal Reserve and the Bank of England said they see few signs of equity price bubbles in the U.S. and the U.K., countering criticisms record stimulus is stoking excessive risk-taking.

“I don’t think we’re in that kind of territory that obviously makes these asset prices unsustainable and at a bubble level,” Bank of England policy maker David Miles said today during a panel discussion at the Boston Fed. While “this is something we have to keep monitoring” at the Fed, “I don’t see” these risks now, Minneapolis Fed President Narayana Kocherlakota said to reporters after speaking at the same forum.

Kansas City Fed President Esther George did warn of risks though earlier this month.

“We should not underestimate the risk of an extended period of zero interest rates and the accompanying incentives that may lead to future financial imbalances,” George said on April 4 in El Reno, Oklahoma. “Such imbalances could unwind in a disruptive manner and cause the labor market recovery to stumble.”

Criticism of central bank policies have been stronger from non-central bankers.

For example, the recent action by the Bank of Japan has triggered the following response reported by Bloomberg:

The Bank of Japan’s “huge bet” by boosting quantitative easing won’t turn the economy around and is instead sending the nation toward default, said Takeshi Fujimaki, former adviser to billionaire investor George Soros...

“By expanding the monetary base to 270 trillion yen, the BOJ is making a huge bet which I think it will ultimately lose,” Fujimaki said in an interview in Tokyo on April 11. “Kuroda’s QE announcement is declaring double suicide with the government. The BOJ will have to share the country’s fate and default together.”

Another critic of quantitative easing has been fund manager John Hussman. In his latest article, he notes an “accelerating eagerness to buy market dips since 2010”.

This tendency reflects a broadening consensus among investors that there is no direction other than up, and that any correction, however small, is a buying opportunity. As investors clamor to buy ever smaller dips at increasing frequency, the slope of the market’s advance becomes diagonal or parabolic. This is one of the warning signs of a bubble...

Undoubtedly, the eagerness of investors to aggressively buy every dip has been driven by the confidence that quantitative easing supports those actions. Still, I doubt that investors have seriously considered the fact that each round of QE has had successively smaller effects...

While Hussman thinks that most assets have become overvalued as a result of quantitative easing, he notes that the recent fall in gold may have made gold shares attractive.

I should note that last week, spot gold fell to 1486, and the Philadelphia gold index (XAU) declined to just 116, down nearly 50% from its 2011 peak. Importantly, this places the ratio of the spot gold price to the XAU at the highest level in history. This fact does not, in and of itself, imply near-term gains in the XAU. However, looking out over horizons of a year or more, an elevated gold/XAU ratio is a strong indicator of subsequent prospective total returns in gold shares.

Gold sinks, US retail sales fall

Markets fell on Friday, with gold in particular falling more than 4 percent to its lowest level since July 2011. Other precious metals and oil also fell, as did stocks. US Treasuries and German bunds rose.

Unexpectedly weak economic data from the US on Friday contributed to the market sell-off.

US retail sales fell 0.4 percent in March, the biggest drop since June. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment declined to 72.3 in April from 78.6 in March.

Meanwhile, inflationary pressure remains subdued. Producer prices fell 0.6 percent in March after having risen 0.7 percent in February.

Europe had positive data to report on Friday though. Industrial production in the euro area rose 0.4 percent in February.

Italy sells bonds at lower yields as global economy gains momentum

The news on Thursday was positive.

In Europe, Italy saw yields decline at its latest bond auction on Thursday. It sold a total of 7.17 billion euros of debt, near the 7.5 billion-euro maximum target.

Even as the European financial crisis remains in check, the European Central Bank said in its monthly bulletin for April on Thursday that “signs of renewed growth momentum have begun to emerge in recent months” for the global economy. This is expected to help the euro area grow its exports and “lead to a gradual recovery in the second part of the year”.

Indeed, on Wednesday, the OECD had reported that its composite leading indicators “point to growth picking up in most major economies”, including the euro area.

And in the US, a report on Thursday provided yet another sign that its economy continues to grow. Jobless claims plunged by 42,000 to 346,000 in the week ended 6 April 6 from 388,000 the previous week.

China's trade falls into deficit but new loans jump

China's trade balance fell into deficit in March, according to a report on Wednesday. Imports rose 14.1 percent from the previous year. Exports were also up 10.0 percent.

In a sign that China's economy is likely to continue growing, a report on Thursday showed that new local-currency lending rose to 1.06 trillion yuan in March from 620 billion yuan in February.

Meanwhile, another report on Thursday showed that Japan's economic recovery also looks likely to continue. Core machinery orders rose 7.5 percent in February, the fastest pace since mid-2011. Orders had fallen 13.1 percent in January.

UK economy ekes out growth in first quarter

It looks like Britain will avoid another recession for the time being. The National Institute of Economic and Social Research has estimated that the UK economy grew 0.1 percent in the first quarter.

Other data on the UK economy on Tuesday were mixed though. While industrial production rose 1.0 percent in February, the trade deficit rose to £3.6 billion from £2.5 billion in January as exports to non-EU countries fell by 4.7 percent.

Another report on Tuesday showed that the trade picture for Germany in February was also not good. While the trade surplus increased to 16.8 billion euros from 13.6 billion euros in January, exports fell 1.5 percent as imports fell by a bigger 3.8 percent.

Meanwhile, China reported on Tuesday that inflation slowed to a rate of 2.1 percent in March from 3.2 percent in February.

Japan's current account returns to surplus, German industrial output rises

With the yen weakening recently following moves by the Bank of Japan to stimulate the economy, hopes have risen for a rebound in Japan's trade balance.

However, a report on Monday showed that Japan's current account balance had already moved backed into surplus in February, its first surplus in four months. The surplus of 637.4 billion yen was well down from the year-ago surplus of 1.2 trillion yen but it reversed the 364.8 billion yen deficit in January.

In further good news for Japan on Monday, the Cabinet Office's economy watchers survey showed that the index for current conditions rose to 57.3 in March from 53.2 in February, its fifth consecutive increase. The future conditions index dipped to 57.5 though from 57.7.

In Europe, Germany reported on Monday that its industrial production rose 0.5 percent in February, rebounding from a 0.6 percent fall in January.

However, in a sign that Europe continues to face problems, Fitch warned Portugal on Monday it could downgrade the country's debt rating deeper into junk territory if last week's rejection of austerity measures by its constitutional court disrupts its fiscal repair plans.

Economies face demographic drag

Employment growth around the world has been weak in the current economic cycle. While this is partly due to cyclical factors, an underlying secular trend in demographics has also been a contributing factor.

On Friday, the United States Labor Department reported that employment rose by 88,000 in March. This is weaker than in recent months but employment growth in the recovery from the last recession has been weak anyway, with employment still significantly below the last cycle peak.

One of the reasons for the weak growth in employment has been the lack of demand growth in the world economy as major banks in developed economies tightened lending standards to try to repair balance sheets stretched by excessive lending in the last economic cycle.

However, another, less-mentioned reason for the weak growth in employment is the slower growth in the labour force itself. Indeed, in some countries, the labour force is shrinking.

For example, while US employment rose by just 88,000 in March, the unemployment rate still fell to 7.6 percent from 7.7 percent in February as the labour force contracted by 496,000.

The outright decline in the US labour force in March may have been an aberration. Over the longer term, the US labour force has still been growing.

Still, the trend in the growth rate is clearly down. In the ten years from March 1983 to March 1993, the labour force grew 16.3 percent. In the ten years from March 1993 to March 2003, it grew 13.5 percent.

In the ten years from March 2003 to March 2013, the US labour force grew just 6.2 percent.

The US is not unique in seeing weak growth in its labour force. Indeed, the demographic trend looks even worse in some of the other major economies.

In an article on 27 March, Bloomberg reported that, based on data from the US Census Bureau, China’s pool of 15- to 39-year-olds fell to 525 million last year, down from 557 million five years earlier. As a result of the slowing growth in the labour force, the report, citing consulting company Hackett Group, said that the gap between manufacturing costs in the US and China has almost halved in the past eight years and will fall to 16 percent this year.

Europe has a similar demographic trend. The database from the Census Bureau shows that the number of 15- to 39-year-olds in countries belonging to the European Union fell to 161 million last year from 169 million in 2007.

As far as shrinking labour forces is concerned, though, no country has had it worse than Japan. Data from Japan's Statistics Bureau show that its labour force peaked back in 1997 and has been on a declining trend ever since.

The number of entrants into the labour force looks set to fall further in the coming years. China, Europe, Japan and even the US have fewer people below age 15 than in the 15-29 age group.

Fewer new workers means lower economic growth is likely. Demographics looks set to remain a drag on economic growth for most of the major economies for several more years.

Yen at risk of rout but Japanese stocks rise amid falls elsewhere

The Bank of Japan's latest moves to stimulate the economy are being met with some skepticism. From Bloomberg:

Billionaire investor George Soros and Bill Gross, who runs the world’s biggest bond fund, said the Bank of Japan plan to end deflation risks weakening the yen.

“If the yen starts to fall, which it has done, and people in Japan realize that it’s liable to continue and want to put their money abroad, then the fall may become like an avalanche,” Soros said today in an interview on CNBC...

Kuroda may have difficulty achieving his inflation goal, Gross said. Group of Seven nations may press Japan to control the pace of the yen’s decline to temper gains in their own currencies, he said...

Nevertheless, in early reaction to the BoJ move, Japanese stocks started strongly on Friday, the Nikkei 225 surging more than four per cent in early trade to its highest level since August 2008. However, it ended the day just 1.6 percent higher.

Other Asian markets mostly closed lower, with South Korean stocks losing 1.6 percent amid tension with North Korea and Hong Kong stocks tumbling 2.7 percent after news of deaths from bird flu in China.

The weakness carried over into the European and US sessions. The STOXX Europe 600 fell 1.6 percent, its biggest drop since October. The S&P 500 initially fell 1.3 percent following a weak US jobs report but recovered later to end the day just 0.4 percent lower.

Among economic data on Friday, the US employment report was the highlight of the day. The weak growth of 88,000 payrolls in March initially drove markets down, although the unemployment rate did fall to 7.6 from 7.7 percent in February as the labour force shrank.

Encouragingly for the US economy, another report on Friday showed that the trade deficit narrowed in February as exports rose 0.8 percent while imports were little changed.

There were also positive data from Japan on Friday. A preliminary reading of the index of coincident economic indicators showed a rise of 0.5 point in February. The index of leading economic indicators rose 2.5 points.

Economic data from Europe on Friday were mixed. Retail sales in the euro area fell 0.3 percent in February. This followed a 0.9 percent increase in January. Moving in the opposite direction, German factory orders jumped 2.3 percent in February after having fallen 1.6 percent in January.

ECB leaves monetary policy unchanged as eurozone services sector deteriorates

Following the market-moving measures taken by the Bank of Japan on Thursday, the European Central Bank's monetary policy meeting later that day proved to be a more sedate affair.

The ECB left its main interest rate unchanged at 0.75 percent. At a press conference after the meeting, ECB President Mario Draghi said that “we will monitor very closely all the incoming information on economic and monetary developments, and assess the impact on the outlook for price stability”.

The weak eurozone economy could still push the ECB into further monetary stimulus though. A report on Thursday showed that Markit's index of services activity for the euro area fell to 46.4 in March from 47.9 in February, pushing the composite index down to 46.5 last month from 47.9 in the previous month.

The Bank of England also left monetary policy unchanged after its meeting on Thursday.

While the UK economy has also been struggling, data on Thursday were positive, with the Markit/CIPS services PMI rising to 52.4 in March from 51.8 in February.

New BoJ governor fires opening salvo in war on deflation

Japan's policy makers seem determined to end deflation, with the Bank of Japan today launching a renewed offensive against it. Bloomberg reports:

Bank of Japan Governor Haruhiko Kuroda began his campaign to end 15 years of falling prices by doubling monthly bond purchases in a bid to reach 2 percent inflation in two years.

With Kuroda presiding over his first meeting, the board today temporarily suspended a cap on some bond holdings and dropped a limit on the maturities of debt it buys. The BOJ will purchase 7 trillion yen ($74 billion) of bonds a month along with more risk assets, the central bank said in Tokyo.

Elsewhere, the case for further monetary easing appears mixed based on Wednesday's economic reports.

In the euro area, a report on Wednesday showed that inflation slowed to 1.7 percent in March from 1.8 percent in February.

In the US, the Institute for Supply Management reported on Wednesday that its non-manufacturing index fell to 54.4 in March from a one-year high of 56.0 in February. ADP reported that private employment rose by 158,000 last month, down from a 237,000 gain the prior month and the smallest increase since October.

On a more positive note, China reported on Wednesday that its official non-manufacturing PMI rose to 55.6 in March from 54.5 in February while HSBC reported that its services index for China rose to 54.3 from 52.1.

US factory orders rise but shrinking eurozone manufacturing may get hit further by Cyprus

Economic data on Tuesday were mixed.

In the US, a report showed that factory orders rose 3.0 percent in February, more than reversing a 1.0 percent decline in January and providing an indication that US economic growth is gaining momentum.

In contrast, manufacturing in the euro area worsened in March with Markit's manufacturing PMI falling to 46.8 in March from 47.9 in February. Chris Williamson, chief economist at Markit, warned in his report that there is concern that the “events in Cyprus . . . will have hit demand further in April”.

Another report on Tuesday showed that unemployment in the region stayed at a record high of 12.0 percent in February, unchanged from January.

In the UK, manufacturing also contracted, although the Markit/CIPS manufacturing PMI did rise to 48.3 in March from 47.9 in February. Another report from the UK showed that mortgage approvals fell in February but the value of mortgage lending rose, as did lending to consumers.

Meanwhile, the saga in Cyprus may not be over despite the country receiving a bailout deal. Tuesday saw Finance Minister Michael Sarris resign amid a probe into the country's financial crisis.

And Cumberland Advisors' David Kotok reminds us: “Contagion starts small, and we may now be witnessing one gathering momentum in the Eurozone.”

US and China show signs of continued growth

Reports on Monday showed continued economic growth in the US and China.

The US data were somewhat mixed.

Manufacturing activity cooled in March, according to the Institute for Supply Management. Its manufacturing PMI fell to 51.3 last month from 54.2 in February.

In contrast, Markit's manufacturing PMI for the US rose to 54.6 in March from 54.3 in February.

Another report from the US on Monday showed that construction spending rose 1.2 percent in February after having fallen 2.1 percent in January.

Earlier on Monday, data had shown accelerating activity in China's manufacturing sector.

The manufacturing PMI from the National Bureau of Statistics and the China Federation of Logistics and Purchasing rose to 50.9 in March, the highest since April 2012, from 50.1 in February.

HSBC's manufacturing PMI for China rose to 51.6 in March from 50.4 in February.

Japan's Tankan shows improvement but Asian property may be topping out amid new curbs

Japan's economy moved out of recession in the fourth quarter but the data since then have been mixed (see, for example, Friday's reports).

The latest indication of a recovery came today. The Bank of Japan's Tankan survey showed that the index for large manufacturers rose to minus 8 in March from minus 12 in December. The index for large non-manufacturers improved 2 points to plus 6.

While Japan is trying to revive its economy, many other countries in East Asia are trying to cool their property markets.

Over the weekend, several Chinese cities introduced new curbs on home purchases. Bloomberg reports:

Beijing, the capital, banned single-person households from buying more than one residence while Shanghai prohibited banks from giving credit to third-home buyers, according to the local administration websites. The two cities will also enforce a 20 percent tax on capital gains from property sales...

The city administration of Shanghai, where new home prices in February rose 3.4 percent from a year earlier, also said it will increase down-payment requirements and interest rates for second-home mortgages. Shenzhen, Guangzhou, Chongqing, Tianjin and Jinan have also published details on the housing curbs.

Meanwhile, James Gruber notes that governments in Hong Kong and Singapore have become “more concerned with property price rises and are willing to act to curb them”. He thinks that it is possible that “property in Hong Kong and Singapore may be close to topping out not just for a few years, but for a decade or more”.

US consumer spending rises, Japanese industrial output falls

US economic data on Friday were positive.

US consumer spending increased 0.7 percent in February, faster than the 0.4 percent rise in January. The increase was partly due to higher gasoline prices. After adjusting for inflation, spending was up 0.3 percent, the same rate as in January.

Meanwhile, personal income resumed growth in February, increasing by 1.1 percent after having declined 3.7 percent in January. Real disposable income rose 0.7 last month after having fallen 4.0 percent the previous month.

To add to the positive consumption picture, another report on Friday showed that the Thomson Reuters/University of Michigan index of consumer sentiment rose to 78.6 in March from 77.6 in February.

Data from Japan on Friday were mixed though.

Japan's jobless rate rose to 4.3 percent in February from 4.2 percent in January.

The country also remained in deflation, with core consumer prices falling 0.3 percent in February from a year ago.

However, household spending rose 0.8 percent in February from a year ago after adjusting for price changes.

Industrial production shrank 0.1 percent in February but manufacturers expect it to rebound 1 percent in March.

Indeed, Markit's manufacturing PMI for Japan rose to 50.4 in March from 48.5 in February, rising above the neutral 50 mark for the first time since May 2012.

S&P 500 hits record high amid mixed economic data

The S&P 500 finally closed at a record high after it rose 0.4 percent on Thursday to hit 1,569.19.

The new high came despite mixed US economic reports on Thursday.

US fourth quarter GDP growth was revised up to 0.4 percent from 0.1 percent.

However, initial claims for unemployment benefits increased 16,000 to 357,000 last week. The four-week moving average rose 2,250 to 343,000.

The Institute for Supply Management-Chicago's business index fell to 52.4 in March from 56.8 in February.

There were also mixed economic data from Europe on Thursday.

In the euro area, loans to the private sector fell 0.9 percent in February from a year earlier, the same rate as in January. The rate of growth in M3 money supply fell to 3.1 percent in February from 3.5 percent in January.

In Germany, retail sales rose 0.4 percent in February but unemployment increased by 13,000 in March.

In the UK, services sector output increased 0.3 percent in January and house prices rose 0.8 percent in March from the previous year but consumer confidence remained unchanged this month from February.

Markets and eurozone economic confidence weaken as Italy remains in deadlock

Even as Cyprus prepares to open its banks on Thursday, investors' concerns shifted back to Italy.

US Treasuries rallied and the euro weakened to a four-month low against the dollar on Wednesday as Italy's Democratic Party leader Pier Luigi Bersani said there was no possibility of a broad coalition to end the deadlock caused by last month’s elections. Italian five-year yields rose 25 basis points, the most in a month, to 3.58 percent.

Disappointing data from the euro area added to the negative sentiment in markets. A report from the European Commission on Wednesday showed that its economic sentiment indicator for the region fell to 90.0 in March from 91.1 in February.

Even US data were not very positive on Wednesday. Pending home sales fell 0.4 percent February. However, it remained at the second highest level since April 2010.

Will the US be the next Cyprus?

Dean Baker raises concerns over the big banks in the US.

Many highly-respected Washington types have been running around for the last three years yelling that because of its large budget deficits, the United States is Greece. Then we learned last week that the immediate danger is the United States being Cyprus...

As the Cyprus crisis was unfolding last week, we also got to see the report of the Senate Permanent Subcommittee on Investigations (pdf) on JP Morgan's losses at its "London Whale" trading division. The report chronicles a series of bad bets on derivatives that were compounded by traders doubling down their stakes. They concealed the size of their losses both to bank officers and regulators. The end result was a $6bn loss...

If the regulators were not able to catch the London Whale's huge gambles before they went bad, why would we think that they will catch the next crapshoot from the Wall Street gang?

Meanwhile, though, the US economy appears to be maintaining some positive momentum for the time being despite some mixed economic data on Tuesday.

Durable goods orders jumped 5.7 percent in February, more than reversing January's 3.8 percent decline. Orders for non-defense capital goods excluding aircraft fell 2.7 percent but this came after a 6.7 percent jump the previous month.

New home sales fell 4.6 percent in February. However, this followed a 13.1 percent surge in January. The combined January-February sales performance was the best two-month showing since August and September 2008.

In another sign of an improving housing market, data from S&P/Case-Shiller showed that home prices in 20 US cities increased 8.1 percent in January from the same time last year, the biggest 12-month gain since June 2006.

However, the Conference Board’s consumer confidence index plunged to 59.7 in March from a three-month high of 68 in February.

Still, the overall trend of the economic data in recent weeks indicates that the US economy continues to grow.

US economy grows as Fed policy gains traction

The US economy appears to be maintaining its growth momentum.

A report from the Chicago Federal Reserve on Monday showed that its national activity index rose to +0.44 in February from -0.49 in January. Although the three-month moving average of the index fell to +0.09 in February from +0.28 in January, the report said that the readings indicate that economic growth “was somewhat above its historical trend”.

Many economists think that the Federal Reserve's monetary policy has been helpful in boosting growth. From Reuters last week:

The Federal Reserve's aggressive easing of monetary policy is proving surprisingly effective at blunting the blow to the economy from tighter fiscal policy, according to economists who have been scrambling to raise their growth forecasts...

"Monetary policy is beginning to gain some traction here," said Tom Higgins, global macro strategist at Standish Mellon Asset Management in Boston.

According to Higgins, if it were not for the monetary stimulus, the economy would probably be facing growth of a 1 percent annual rate or less. As it is, he expects growth to come in at a 2.5 percent pace in the first quarter.

But the Fed's monetary policy works through financial markets, and the increased risk-taking there is becoming obvious. From Bloomberg on Monday:

Money managers from Ares Management LLC to Onex Corp. (OCX) are borrowing at the fastest pace in six years to buy the type of speculative-grade loans that federal bank regulators warned last week is becoming riskier.

Ares, which oversees $59 billion, and Onex’s credit unit are among firms that have raised $22.9 billion of collateralized-loan obligations this quarter, approaching the all-time high of $26.4 billion in the three months ended June 30, 2007, according to Royal Bank of Scotland Group Plc. Leveraged-loan mutual funds have received their two biggest weekly inflows since January.

Cyprus gets bailout deal

An agreement has been reached on Cyprus. Reuters reports:

Cyprus clinched a last-ditch deal with international lenders on Monday for a 10 billion euro ($13 billion) bailout that will shut down its second largest bank and inflict heavy losses on uninsured depositors, including wealthy Russians...

The plan, swiftly endorsed by euro zone finance ministers, will spare the east Mediterranean island a financial meltdown by winding down Popular Bank of Cyprus, also known as Laiki, and shifting deposits below 100,000 euros to the Bank of Cyprus to create a "good bank".

Deposits above 100,000 euros, which under EU law are not guaranteed, will be frozen and used to resolve debts, and Laiki will effectively be shuttered, with thousands of job losses.

Initial market reactions to the news were positive. Asian stocks rose and the euro gained against other currencies.

However, losses last week on concerns over Cyprus had not been very large, so any gains today and subsequent days are also likely to be mild.