US Budget deficit has come off from peaks of USD 1.4 trillion seen in 2009 to levels of USD 492 billion in 2014, a drop of 65%. The period October 2013 to July 2014 saw budget deficit down 24% year on year to levels of USD 460 billion. US financial year is October to September. Forecast deficit for financial year 2014 is USD 492 billion.
Tax revenues grew 8% while government spending grew 1% leading to fall in budget deficit. US economy is witnessing growth led by job gains and rising equity and home prices. The ultra loose monetary policy followed by the Fed since 2008 when it brought down interest rates to all time lows of close to zero percent and took up its balance sheet size by 4x through asset purchase programs has worked on the economy.
US economy saw 209,000 jobs added in July 2014 against June numbers of 281,000 jobs Unemployment rate stood close to six year lows at 6.2% against 6.1% seen in June. The US economy has added over 1.5 million jobs in this calendar year and unemployment rate has come off from 6.6% to 6.2% over the last seven months. The Fed is first ending its bond purchase program that is currently at USD 25 billion a month by October 2014 and will then consider rate hikes from record low levels of 0% to 0.25%.
US equities are trading at close to record highs and have gained over 35% since 2012 while home prices across states have risen by 25% in the 2012-2014 period.
US core PCE (Personal Consumption Expenditure) that is the Fed’s preferred gauge of inflation, rose annualized 1.49% in June against 1.5% in May and 1.4% seen in April. CPI (Consumer Price Index) rose 2.1% June, similar to May levels and from 2% levels seen in April while core CPI that is CPI stripped of food and energy rose 1.92% in June from 2% in May and 1.8% levels seen in April. Fed’s inflation threshold is 2%.
Eurozone inflation as measured by the CPI was at 0.4% in July 2014 against 0.5% levels seen in June and May and 0.7% seen in April and 0.5% seen in March. ECB target for inflation is 2%. Eurozone unemployment rate fell to 11.5% in June from 11.6% in May and levels of 11.7% seen in April and 11.8% seen in March and from record highs of 12.2% seen a few months ago. Eurozone industrial output fell 0.3% in June from a fall of 0.1% seen in May from 0.8% growth seen in April and a fall of 0.4% seen in March.
Manufacturing index stayed flat in July at calendar year 2014 lowest level of 51.8. Manufacturing activity in the Eurozone is growing but pace is slow.
ECB cut policy rates to record lows of 0.15% from 0.25% in its June 2014 policy and also cut the discount rate to negative 0.1% from 0% to discourage banks from keeping money with the ECB and encourage them to lend to the economy. ECB has announced a Euro 400 billion refinance facility for banks to boost lending and this will go up to Euro 1 trillion going forward. ECB is contemplating a Fed like QE (Quantative Easing) to spur economic growth and prevent deflation.
China Manufacturing index rose to 18 months high in July 2014 while exports rose 14.5% in July against 7.2% rise in June and against 7% rise seen in May. Imports fell 1.6% in July from 6% rise seen in June and against a fall of 1.6% in May. Trade surplus rose to record USD 47.3 billion in July from USD 31.6 billion in June and against USD 35.6 billion seen in May. CPI Inflation for July was 2.3% similar to June levels and against four months highs of 2.5% seen in May. Growth risks for China are seen ebbing given positive date but risks remain in form of investment bubbles.
Japan manufacturing activity fell in July 2014 from June levels but manufacturing activity is growing all the same as the index stayed above 50 levels. CPI Inflation fell marginally to 3.3% in June after it rose to a 32 year high of 3.4% in May from 3.2% seen in April, well above the Bank of Japan target rate of 2%. Inflation stripped of sales tax increase was 1.3% in June.
Japan’s exports fell 2% in June from a fall of 2.7% seen in May, the first fall in 15 months after rising 5.1% in April. Imports rose 8.4% in June from a fall of 3.6% in May and from 3.4% rise seen in April 2014. Japan recorded a trade deficit for the 24th straight month. Japan’s fiscal and monetary stimulus coupled with trade deficits should keep the Yen weak.