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U.S. Economy Expands to 0.5% Pace, Weakest in Two Years

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US economy

The U.S. economy expanded in the first quarter at the slowest pace in two years as American consumers reined in spending and companies tightened their belts in response to weak global financial conditions and a plunge in oil prices.

Gross domestic product rose at a 0.5 percent annualized rate after a 1.4 percent fourth-quarter advance, Commerce Department data showed Thursday. The increase was less than the 0.7 percent median projection in a Bloomberg survey and marked the third straight disappointing start to a year.

Shaky global markets and oil’s tumble resulted in the biggest business-investment slump in almost seven years, and household purchases climbed the least since early 2015, the data showed. While Federal Reserve officials on Wednesday acknowledged the softness, they also indicated strong hiring and income gains have the potential to reignite consumer spending and propel economic growth.

“The fact that personal consumption is a bit on the soft side is a disappointment, especially in light of the low gasoline prices,” said Thomas Costerg, senior economist at Standard Chartered Bank in New York, who correctly projected first-quarter growth. “Consumption seems to be stuck in a low gear.”

Economists’ projections for GDP, the value of all goods and services produced in the U.S., ranged from gains of 0.1 percent to a 1.5 percent. This is the government’s first of three estimates for the quarter before annual revisions in July.

Consumer Spending

Household purchases, which account for almost 70 percent of the economy, rose at a 1.9 percent annual pace last quarter, compared with 2.4 percent in the final three months of last year.

Spending, while slightly better than the 1.7 percent median forecast, was a disappointment in light of the consumer-friendly fundamentals including low gasoline prices, cheap borrowing costs, increased hiring and warmer-than-usual winter weather.

“The first quarter is going to be the worst quarter for consumption for all of 2016,” said Jacob Oubina, a senior U.S. economist at RBC Capital Markets LLC in New York. “With financial markets calming down and retracing all of their losses, the fundamental factors that have driven consumption will continue to do so.”

Jobless Claims

Americans have more job security. A separate report from the Labor Department showed filings for unemployment benefits held last week around four-decade lows. Jobless claims rose to 257,000 from the prior week’s revised 248,000 that were the fewest since 1973.

The GDP report showed disposable income adjusted for inflation climbed 2.9 percent in the first quarter, an improvement from the 2.3 percent gain in final three months of 2015. The saving rate ticked up to 5.2 percent from 5 percent.

The biggest factor weighing on the economy last quarter came from companies. Nonresidential fixed investment, or spending on equipment, structures and intellectual property, dropped at a 5.9 percent annualized pace, the biggest decline since the second quarter of 2009.

Last year’s slump in oil prices that extended into early 2016 led to an 86 percent annualized plunge in capital spending on wells and shafts, the most in records back to 1958.

Investment is also languishing as corporations struggle to boost profits against a backdrop of weak overseas demand and restrained domestic purchases.

Customers in the U.S. also limited orders as companies trim stockpiles to bring them more in line with sales. Inventories subtracted 0.33 percentage point from growth after a 0.22 percentage-point drag in the three months ended in December.

Progress in trimming inventories, along with receding headwinds from abroad and a comeback in the prices of oil and other commodities, may keep investment from deteriorating further.

A dearth of eager overseas customers led to a drop in exports in the first quarter. Trade subtracted 0.34 percentage point from overall growth, the most in a year.

Final Sales

Stripping out unsold goods and trade, the two most volatile components of GDP, as well as government expenditures, so-called final sales to private domestic purchasers increased at a 1.2 percent rate, the weakest advance since the third quarter of 2012.

Government spending rose at a 1.2 percent pace, led by states and municipalities.

If the past two years are any guide, the economy will shake off the first-quarter softness. In 2015, GDP rose 0.6 percent before rebounding to a 3.9 percent pace in the second quarter. A year earlier, the economy shrank at a 0.9 percent rate and then advanced 4.6 percent in the April-June period.

Fed policy makers, after skipping an interest-rate hike for a third straight meeting on Wednesday, suggested they remain upbeat about the underpinnings of U.S. growth. Central bankers also said they will continue to “closely monitor” inflation.

The GDP price index rose 0.7 percent in the first quarter. A measure of inflation tied to personal spending and excluding volatile food and fuel costs climbed 2.1 percent, the most in four years and in line with policy makers’ target.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Markets

Markets Today – Under Pressure, US Data, Oil, Gold, Bitcoin

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

Stock markets have fallen heavily in June so it seems only fitting that they’re ending the month with big losses as reality continues to bite.

There’s no getting away from recession chat and while the heads of the Fed, ECB and BoE didn’t exactly fuel that during their panel discussion on Wednesday, they didn’t do anything to dispel it either. They all know that there’s a strong likelihood of recession this year or next and investors are increasingly accepting that fate as well.

There’s been a plethora of economic data from across Europe this morning, mostly tier two and three, and it was a bit of a mixed bag. The labour market figures, for example, remain strong with the anomaly being Germany but this was heavily distorted by the integration of Ukrainian refugees into the labour market. Underlying numbers remain in good shape even if across the bloc, employment growth is expected to slow.

It’s impossible to ignore the fact that households are being squeezed and we’re seeing that appear in the data, particularly in the UK which will probably fall into recession later this year. But it is unlikely to be alone in that which is why bear-market rallies are proving to be so short-lived.

US inflation boost but spending slips

US inflation data was unusually encouraging ahead of the open. Perhaps that’s getting a little carried away but it didn’t deliver another crushing below so maybe this feeling is actually relief rather than joy. The core reading was a little better than expected at 0.3%, in line with April, while the headline also fell a little short of expectations at 0.6%.

The income and spending data were arguably less encouraging. Earnings rose 0.5% as expected, a slight acceleration from April, while spending rose only 0.2%, a big drop from 0.9% a month earlier and half the forecast. Another sign of the squeeze taking a toll on households? The US economy is among the best positioned to fend off a recession but it’s not completely immune to the cost-of-living crisis. It may be catching up.

Oil lower as OPEC+ sticks to August target

Oil prices are modestly lower on Thursday, further paring recent gains following yesterday’s reversal. As expected, OPEC+ stuck to its planned 648,000 barrel increase in August and refrained from any decision beyond then which could add an element of uncertainty to future targets, particularly given recent reports that even Saudi Arabia and UAE are running near capacity.

The global economic uncertainty doesn’t make planning ahead any easier, either. The prospect of a recession has created more two-way price action in recent weeks, preventing any unsustainable surges in the price of crude as China reopened and the OPEC+ deficit increased. ​

Gold slightly buoyed by inflation data

Gold has been trending lower over the last couple of weeks but remains in its early summer range between $1,800 and $1,870. It’s really struggled for direction over the last couple of months despite the volatility in the broader financial markets. It has been like a deer in the headlights, unable to process and respond to the wicked combination of higher inflation, faster monetary tightening and recession fears.

It received a boost from the slightly softer PCE reading from the US, a rare bit of good news when it comes to inflation data. It’s not exactly a massive win, especially when paired with weak spending but it could be worse. Yields fell a little after the data, enabling gold to get back into positive territory for a while.

Bitcoin crumbling

Bitcoin has been hanging on in there around $20,000 but its resilience may finally be crumbling under pressure, with the cryptocurrency sliding more than 5% today to trade at around $19,000. This could be really bad news for the crypto space and may even trigger much more severe declines in the coming weeks.

The forced liquidation of Three Arrows Capital may have contributed to the latest decline as traders are left to wonder what other leveraged firms will follow in its footsteps. The fear alone could deliver another hammer blow to crypto valuations before the dust settles.

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Crude Oil

Oil Prices Sustain Bullish Run for Fourth Consecutive Session

Global oil prices appreciated for a fourth consecutive session after it became clear OPEC and allies can not meet their production targets any time soon.

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Crude Oil - Investors King

Global oil prices appreciated for a fourth consecutive session after it became clear OPEC and allies can not meet their production targets any time soon.

Brent crude oil, against which Nigerian oil is priced, appreciated to $120 a barrel as of 3:20 pm Nigerian time on Wednesday. Representing an increase of $12 from $108 a barrel traded a week ago.

The U.S. West Texas Intermediate (WTI) rose to $112.37 per barrel, up from $99.33 per barrel a week ago.

The increase in prices was a result of sanctions imposed on about 1/5 of global supply by western nations. Russia, one of the world’s largest crude oil producers, was sanctioned for waging war against Ukraine, and eventually, disrupting the global economy.

“Given that almost 1/5 of global oil producing capacity today is under some form of sanctions (Iran, Venezuela, Russia), we believed there is no practical way to keep these barrels out of a market that was already exceptionally tight,” JP Morgan said in a research note.

This concern over global supply outweighed worries about a weaker global economy ahead of the projected economic recession in developed nations, especially with developed economies raising interest rates to curb escalating inflation numbers.

“Investors made position adjustments, but remained bullish on expectations that Saudi Arabia and the United Arab Emirates would not be able to raise output significantly to meet recovering demand, driven by a pick-up in jet fuels,” said Hiroyuki Kikukawa, general manager of research at Nissan Securities.

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Crude Oil

Oil Price Rally as Major Producers Flag Capacity Limits

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Oil

Oil prices rallied for a third day on Tuesday as major producers Saudi Arabia and the United Arab Emirates looked unlikely to be able to boost output significantly, while political unrest in Libya and Ecuador added to supply concerns.

U.S. West Texas Intermediate (WTI) crude futures rose $1.8, or 1.6%, to $111.36 a barrel by 0644 GMT, extending a 1.8% gain in the previous session.

Brent crude futures climbed $1.9, or 1.7%, to $116.99, adding to a 1.7% rise in the previous session.

The UAE and Saudi Arabia have been seen as the only two countries in the Organization of the Petroleum Exporting Countries (OPEC) with spare capacity available to make up for lost Russian supply and weak output from other member nations.

“A seam of tight supply news bolstered the market. Two major producers, Saudi Arabia and the UAE, are said to be at, or very close to, near‑term capacity limits,” Commonwealth Bank commodities analyst Tobin Gorey said in a note.

UAE Energy Minister Suhail al-Mazrouei said on Monday UAE was producing near maximum capacity based on its quota of 3.168 million barrels per day (bpd) under the agreement with OPEC and its allies, together called OPEC+.

His comments confirmed remarks by French President Emmanuel Macron who told U.S. President Joe Biden on the sidelines of the Group of Seven nations meeting that the UAE was producing at maximum capacity and that Saudi Arabia could increase output by only 150,000 bpd, well below its nameplate spare capacity of around 2 million bpd.

Analysts also warned political unrest in Ecuador and Libya could tighten supply further.

Libya’s National Oil Corp said on Monday it might have to declare force majeure in the Gulf of Sirte area within the next three days unless production and shipping resume at oil terminals there.

Ecuador’s Energy Ministry said the country could suspend oil output completely within the next two days amid anti-government protests. The former OPEC country was pumping around 520,000 barrels per day before the protests.

Those factors underscore shortages in the market, which have led to a rebound this week, countering recession jitters that weighed on prices over the previous two weeks.

But analysts from Haitong Futures said market sentiment remains fragile with people waiting for clearer guidance for the next move and geopolitical factors in focus.

Leaders of the G7 are discussing a potential price cap on Russian oil that would hit President Vladimir Putin’s war chest while also lowering energy prices.

A French presidential official also called on global powers to explore all options to alleviate a Russian squeeze on energy supplies that has spiked prices, including talks with producing nations like Iran and Venezuela.

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