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Highlights
BLACKSTONE'S TAKE: ECB TO STAY THE COURSE EVEN AS GROWTH PICKS UP
Wednesday brought the first eurozone growth reading since the European Central Bank announced, and later launched, its one-trillion-euro-plus quantitative easing program.
The end result was...not bad.
Gross domestic product expanded 0.4% from the previous quarter between January and March, or 1.6% at an annualized rate, according to Eurostat. That was a bit below expectations for 0.5% quarterly growth but still better than growth rates achieved in the U.S. and U.K. for the first time in four years.
ING Bank economist Peter Vanden Houte summed it up this way: "Growth is clearly broadening across the eurozone. That said, the jury is still out whether eurozone growth has reached enough escape velocity to see a self-sustained recovery."
First the good news.
The economic recovery looks real, albeit still quite modest. Spain has emerged as the 19-member euro bloc's growth engine with annualized growth around 3.6% (0.9% quarterly), supporting the ECB's contention that economic reforms and wage restraint are the best way to restore competitiveness and ensure growth.
The bloc's second-biggest economy, France, recorded a robust expansion of 2.2% annualized, raising hopes that it will be more of a contributor to activity in the region. Italy exited stagnation with slightly better than expected growth.
Now the bad news.
Given the amount of stimulus hitting the eurozone, it should be doing better. In addition to the ECB's asset purchase program--which has brought public and private borrowing costs lower--oil prices fell sharply in the early part of the year, a twin boost to households and businesses. And the euro fell sharply late last year and in early 2015, a boon to exporters. Against that backdrop, 1.6% growth looks lackluster.
And Germany's growth rate came in below expectations. This isn't too big of a worry given that low unemployment, a buoyant housing sector and low borrowing costs should support activity in coming quarters. Still, the region will have trouble getting growth above 2% without more of a contribution from its largest economy.
Greece's economy contracted for a second-straight quarter, putting it back in recession and casting more clouds on its future in the euro.
More broadly, eurozone growth doesn't appear sufficient to put much of a dent in unemployment. A worrying note: despite France's robust growth last quarter, employment fell slightly.
The GDP report should ease concerns in financial markets that the ECB may be forced to end its QE program, or taper the purchases, before September 2016. Growth doesn't appear strong enough to lift inflation back toward the ECB's target near 2% anytime soon. There is still a lot of slack in this economy.
And it bolsters the case ECB officials have been making lately that while their policies have helped the economy turn the corner, structural reforms are necessary to deliver a lasting recovery.
-By Brian Blackstone
MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD
Democrats Greet Shelby Banking Bill With Skepticism. An opening gambit by Senate Banking Committee Chairman Richard Shelby (R., Ala.) to ease regulatory restrictions on smaller banks and increase scrutiny of the Federal Reserve was met with skepticism by Democrats, portending a rough road for a bill that would make the most significant changes to financial regulation since the 2010 Dodd-Frank law. While elements of the draft legislation unveiled on Tuesday are supported by both parties, congressional Democrats and the Obama administration criticized the bill as an overreach that could roll back some of the fundamental protections implemented after the 2008 financial crisis.
Fed's Biggest Fears Don't Materialize in Overhaul Legislation, Yet. Chairwoman Janet Yellen and other Fed officials haven't exactly welcomed the idea of overhauling the central bank. But many of the proposals that most raised their hackles didn't make it into draft legislation unveiled Tuesday by Sen. Richard Shelby (R., Ala.). Still, Fed watchers noted the risk that more divisive measures could be introduced as the bill makes its way through Congress, such as restrictions on the Fed's emergency lending power and a General Accountability Office audit measure known as Audit the Fed.
Hiring a New York Fed Chief Could Take a While. Mr. Shelby's bill draft bill would make the New York Fed president subject to Senate confirmation. The idea has picked up bipartisan support but ignores the fact that neither the White House nor the Senate has a great track record of moving quickly to fill vacancies among financial regulatory agencies. That means that the top job at the New York Fed could be filled by a deputy for long stretches of time. There are already two vacancies on the seven-member Fed board of governors.
Fed's Williams: No Pressure to Act on Rates. "There's no pressure to decide on the future path of policy today, so I am still in 'wait and see mode.' With a keen eye on the data," said San Francisco Fed President John Williams Tuesday. Mr. Williams reiterated his view that a rate increase is "on the table" at all Fed meetings now. He also expressed optimism about an economy "with good momentum, that's nearing full employment, with an inflation trend that's running about 1 1/2 %."
Fed Officials Tell Markets The Training Wheels Are Off. After years of telling markets what to expect on the interest rate front, Fed officials are telling traders and investors to figure the outlook on their own. The influential presidents of the New York and San Francisco regional Fed banks seemed eager Tuesday to offer lessons in how market participants should be thinking about central bank policy.
House Committee Chairman Subpoenas New York Fed Over Debt Ceiling Plans. House Financial Services Committee Chairman Jeb Hensarling (R., Texas) sent subpoenas on Monday to the Federal Reserve Bank of New York and the Treasury Department seeking documents about the Obama administration's contingency planning for a possible government debt default. In October 2013, congressional reluctance to raise the federal government's borrowing limit, or so-called debt ceiling, raised the possibility the Treasury would run out of money to pay all its bills, creating worries it might default on its debt payments. Treasury officials have said they had contingency plans for such an event, but haven't disclosed them.
Job Openings Down But More Are Quitting. The number of job openings in the U.S. fell from a 14-year high but more Americans quit their jobs in March, according to a Labor Department survey released Tuesday. Fed Chairwoman Janet Yellen has said she pays close attention to the rate of voluntary quits as a key measure of workers' confidence in the economy.
Eurozone GDP Growth Accelerates, Boosted by France, Italy. A return to expansion in France and Italy helped boost eurozone economic growth in the first three months of 2015 to its fastest pace in almost two years, broadening a modest revival that had previously been heavily reliant on Germany.
ICYMI: Eurozone GDP Liveblog .
Charting the Eurozone Economy .
ECB Coeure: Global Economy Seeing Divergence in Monetary Policy Cycles. The divergence between the monetary policies of large economies is elevated but not unprecedented, European Central Bank executive board member Benoit Coeure said on Wednesday, adding that central bankers must be mindful of the side-effects of their policies.
Bank of England Cuts U.K. Growth Forecasts. The Bank of England cut its growth forecasts for the U.K. economy Wednesday, but signaled it remains on course to lift its benchmark interest rate from its historic low in the middle of next year.
Kuroda Plays Down Rising Rates. Bank of Japan Gov. Haruhiko Kuroda on Wednesday played down rising domestic long-term interest rates, saying they are still at levels that are stimulative for the economy. Japan's government bonds market fell in recent sessions as jumps in German government bond yields rendered JGBs relatively less attractive for global investors--Dow Jones Newswires.
Greece Makes IMF Payment with IMF Reserves. Greece drew on its holdings of a special International Monetary Fund currency known as Special Drawing Rights to make a loan repayment of around EUR750 million ($836.7 million) to the IMF Tuesday, buying the country's government some more time to negotiate a deal with creditors on new financing. The Greek government has spent weeks negotiating with its lenders, which include the European Central Bank.
Lack of Inflation Could Force More Policy Easing at Riksbank. The Swedish central bank, the world's oldest, is under pressure to cut interest rates further after a flickering inflation revival flickered out in April. The country's consumer price index fell 0.2% over last year, a Swedish statistics agency said Tuesday. The central bank has set its benchmark interest rate at minus 0.25% and launched a bond-buying program but Gov. Stefan Ingves, in minutes of the bank's most recent meeting, did not rule out more easing.
RBNZ Warns on Strong Kiwi.Reserve Bank of New Zealand Governor Graeme Wheeler told a parliamentary committee Wednesday that the central bank still views the strong New Zealand dollar as "unjustified and unsustainable." Earlier Wednesday, the central bank's twice-yearly financial stability report also referred to the Kiwi dollar as "above its sustainable level." That it left out the word "unjustified" caught some analysts by surprise --Dow Jones Newswires.
GRAPHIC CONTENT
(MORE TO FOLLOW) Dow Jones Newswires
May 13, 2015 07:10 ET (11:10 GMT)
Overall Debt Levels Flat in First Quarter. U.S. household debt -- including mortgages, credit cards, auto loans and student loans -- inched up 0.2% between January and March to $11.85 trillion, the smallest increase since the second quarter of last year, when debt levels declined, according to the New York Fed. The numbers show that Americans remain hesitant about piling on more debt, despite low interest rates. Weak borrowing could constrain spending and economic growth.
FORWARD GUIDANCE
-Central Bank of Iceland releases a policy statement
RESEARCH
How Much finance is Too Much? Emerging economies stand to benefit from greater financial market openness to foreign investment but only up to a point, according to a new paper by staffers at the International Monetary Fund. "The analysis uncovers evidence of 'too much finance' in recent years -- that is, beyond a certain level of financial development the benefits to growth begin to decline and costs in terms of economic and financial volatility begin to rise," they write. But most developing countries have yet to reach that point, which means they still stand to gain from more financial services and products.
COMMENTARY
What's Behind the Bund Yield Spike? The Journal's Greg Ip writes that the recent increase in German bond yields is due not only to the eurozone's strengthening economy but also to an unintended consequence of the European Central Bank's loose monetary policy in an environment where trading tactics can turn even the slightest swings in the bond market into a big sell-off. "Central bankers need to be careful before assuming that market prices reflect fundamental developments," Ip writes. "Many saw the big drop in German bond yields until mid-April as a ringing affirmation of the success of the European Central Bank's bond-buying program. Similarly, some will see the recent selloff as evidence of failure. Neither sentiment is true."
Greece Moves Closer to an Accident. Mohamed El-Erian takes a look at Greece's loan repayment to the IMF Tuesday and is not reassured. "At best, it is another attempt to prolong the muddling through, despite the escalating costs and steadily diminishing effectiveness," he writes for Bloomberg View. "As a result, conditions on the ground continue to slowly slip out of the control of Greek and European policy makers." El-Erian sees the probability of a "financial accident," dubbed a "Graccident," increasing, a "particularly frightening" scenario for Greece.
BASIS POINTS
-U.S. small business owners were more confident in April after a March drop, according to the National Federation of Independent Business' small-business optimism index. Hiring also picked up even though employers said they could not find qualified workers.
-Treasury Saw the Largest Monthly Budget Surplus in Seven Years Last Month. Tax collections tend to be higher in April because of tax filings but last month's $157 billion budget surplus is $50 billion more than in April 2014 and the fifth largest monthly surplus on record.
- Iceland's central bank left interest rates unchanged on Wednesday as it signaled that borrowing costs may need to rise as soon as next month as wages and domestic demand pick up.
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(END) Dow Jones Newswires
May 13, 2015 07:10 ET (11:10 GMT)
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