MacroScope

U.S. growth back in bloom: most accurate Q1 GDP forecasters

PMost are convinced, including Federal Reserve Chair Janet Yellen, that the U.S. economy has already warmed up significantly from a growth deep freeze at the start of the year.

Business inventories were run down to nearly nothing in the first quarter, and were set for a rebound. There also is no sign that consumer spending is about to veer off its recovery path, especially with the job market gradually improving. All of that is likely to underpin better economic growth.

The question is by how much. Growth in the current quarter is forecast to be anywhere from 1.4 percent to 6 percent, according to a Reuters survey of 75 economists taken last week. That is the widest forecast range for U.S. economic growth in all Reuters polls in four years, except for one survey last April.

Typical gauges of uncertainty in financial markets tell a different story. The CBOE Volatility Index touched its lowest in over a year last week. All the while the S&P 500 has been hitting record highs almost daily, which at face value doesn’t give the impression of a lot of doubt about the recovery.

Digging a bit deeper into the numbers, the range of forecasts for Q2 growth is significantly narrower among those who came the closest to getting it right for Q1. That goes from 2.7 percent to 4.2 percent, with the Reuters consensus nearly bang in the middle at 3.5 percent.

Putin desperately seeking gas deal

Ukraine seems to be in something of a holding pattern before Sunday’s election though the question of how those polls can be securely conducted in parts of the country where pro-Russian rebels want to secede remains a very live one.

We reported yesterday from Donetsk where officials working to prepare for the May 25 presidential poll described intimidation and threats from separatists which prompted them to shut down their office. The interior minister in Kiev has said it would be impossible to hold “normal elections” in the regions of Donetsk and Luhansk which are home to nearly 25 percent of the electorate.

Moscow said yesterday that President Vladimir Putin had ordered Russian forces near Ukraine’s eastern border back to their bases, though NATO and the United States said they saw no sign of a pullback.

Scrambling to flesh out skeleton Fed board

“It’s about time” was the general reaction when on Thursday the Senate Banking Committee scheduled a vote on Barack Obama’s nominees for the Federal Reserve board. Not that Stanley Fischer, Lael Brainard and Jerome Powell (a sitting governor who needs re-confirmation) have been waiting all that long; it was January that the U.S. president nominated them as central bank governors, and only a month ago that the trio testified to the committee. The urgency and even anxiety had more to do with the fact that only four members currently sit on the Fed’s seven-member board and one of those, Jeremy Stein, is retiring in a month. The 100-year old Fed has never had only three governors, and the thought of the policy and administrative headaches that would bring was starting to stress people out. After all, the Fed under freshly-minted chair Janet Yellen is in the midst of its most difficult policy reversal ever.

“Boy it would be more comfortable if there were at least five governors and hopefully more” to help Yellen “think through these very difficult communications challenges,” said Donald Kohn, a former Fed vice chair. Former governor Elizabeth Duke, who stepped down in August, said one of the Fed board’s strengths is its diversity of members’ backgrounds. “With fewer people you don’t have as many different points of view on policy,” she said in an interview.

The Senate committee votes on the three nominees April 29. But they can’t start the job until the full Democratic-controlled Senate also schedules a vote and gives them the green light.

Will French numbers add up?

French President Francois Hollande’s cabinet meets to adopt a new debt reduction plan.

After outlining 50 billion euros of savings for 2015-2017 to help pay for consumer and business tax cuts, the government is due to sign off on already delayed deficit reductions to bring it, eventually, to three percent of output as demanded by Brussels.

The European Commission has taken a dim view of any further relaxation, having previously granted Paris two years extra leeway. The French government insists it will meet its targets but appears to be trying to deliver one message to Brussels and another to its electorate, with domestic politics likely to hold sway.

Five days on, Ukraine accord at risk of unravelling

An international agreement to avert wider conflict in Ukraine, brokered only five days ago, is teetering with pro-Moscow separatist gunmen showing no sign of surrendering government buildings and Kiev and Moscow trading accusations over who was responsible for killings over the weekend.

Washington, which signed last week’s accord in Geneva along with Moscow, Kiev and the European Union, said it would decide “in days” on additional sanctions if Russia does not take steps to implement the agreement. U.S. Vice President Joe Biden is in Kiev where he is expected to announce a package of technical assistance.

So far, markets’ worst fears have not materialized but with thousand of Russian troops massed on the frontier with Ukraine and deadly clashes between Ukrainian forces and pro-Russian separatists, it would not take much to change that.

Ukraine inching back to the brink

Pro-Moscow protesters in eastern Ukraine took up arms in one city and declared a separatist republic in another yesterday and the new build-up of tensions continues this morning.

The Kiev government has launched what it calls “anti-terrorist” operations in the eastern city of Kharkiv and arrested about 70 separatists. Moscow has responded by demanding Kiev stop massing military forces in the south-east of the country.

Russia’s own forces remain massed just over the border and Ukrainian President Oleksander Turchinov said Moscow was attempting to repeat “the Crimea scenario”.

Erdogan unfettered

Investors have spent months looking askance at Turkey’s corruption scandal and Prime Minister Tayyip Erdogan’s response to it – purging the police and judiciary of people he believes are acolytes of his enemy, U.S.-based cleric Fethullah Gulen. But it appears to have made little difference to his electorate.

Erdogan declared victory after Sunday’s local elections and told his enemies they would now pay the price. His AK Party was well ahead overall but the opposition Republican People’s Party (CHP) appeared close to seizing the capital Ankara. 

Turkey’s lira has climbed in early trade to its strongest level in two months on the basis that at least there is political continuity. But any rally could prove short-lived with the battle between Erdogan and Gulen likely to deepen and a gaping current account gap already making the economy vulnerable to any financial market turmoil, of which there has been plenty.

A question of energy

After two days in The Hague, Barack Obama moves on to Brussels for an EU/U.S. summit with Ukraine still casting the longest shadow.

Europe’s energy dependence on Russia is likely to top the agenda with the EU pressing for U.S. help in that regard while the standoff with Russia could give new impetus to talks over the world’s largest free trade deal.

Russia provides around one third of the EU’s oil and gas and 40 percent of the gas is shipped through Ukraine. EU leaders dedicated part of a summit to the issue last week and German Chancellor Angela Merkel supported asking Obama to relax restrictions on exports of U.S. gas.

The much-anticipated “capex” boom? It’s already happening, and stocks don’t care

It’s a familiar narrative: companies will finally start investing the trillions of dollars of cash they’re sitting on, unleashing a capital expenditure boom that will drive the global economy and lift stock markets this year.

The problem is, it looks like an increasingly flawed narrative.

For a start, capital expenditure, or “capex”, has already been rising for years. True, the Great Recession ensured it took three years to regain its 2007 peak. But the notion companies are just sitting idly on their mounting cash piles is misplaced. As Citi’s equity strategists point out:.

“The death of global company capex has been much exaggerated.”

A new report from Citi shows that since 2010, global capex has risen 26% to $2.567 trillion. It’s never been higher:

How stiff is EU’s resolve?

Russian troops seized two Ukrainian naval bases, including a headquarters in Sevastopol where they raised their flag. Moscow, continuing to insist it does not control the unbadged militia in Crimea, called for a detained Ukrainian navy commander to be freed, which has now happened. Make of that what you will.

Washington is keeping up the rhetorical pressure. Vice President Joe Biden, in Lithuania, said Russia was travelling a “dark path” to political and economic isolation. U.N. Secretary-General Ban Ki-moon is travelling to Moscow for talks with President Vladimir Putin, Foreign Minister Sergei Lavrov and other senior officials. He will move on to Kiev on Friday. 

More potent may be an EU leaders’ summit today and Friday. After subjecting 21 Russians and Crimeans to travel bans and asset freezes, tougher sanctions are already under consideration and minds have also been focused on ending decades of dependence on Russian gas. It’s a long-term project but one that could deal a hammer blow to the Russian economy if it succeeds.