Month: December 2018

Now in its 10th year, America’s economic expansion still looks sturdy. Yet the partial shutdown of the government that began Saturday has added another threat to a growing list of risks. 

The stock market’s persistent fall, growing chaos in the Trump administration, higher interest rates, a U.S.-China trade war and a global slowdown have combined to elevate the perils for the economy. 

Gregory Daco, chief U.S. economist at Oxford Economics, said he thinks the underlying fundamentals for growth remain strong and that the expansion will continue. But he cautioned that the falling stock market reflects multiple hazards that can feed on themselves. 

“What really matters is how people perceive these headwinds — and right now markets and investors perceive them as leading us into a recessionary environment,” Daco said. 

Many economic barometers still look encouraging. Unemployment is near a half-century low. Inflation is tame. Pay growth has picked up. Consumers boosted their spending this holiday season. Indeed, the latest figures indicate that the economy has been fundamentally healthy during the final month of 2018. 

Still, financial markets were rattled Thursday by President Donald Trump’s threat to shut down the government unless his border wall is funded as part of a measure to finance the government — a threat that became reality on Saturday. As tensions with the incoming Democratic House majority have reached a fever pitch, Trump warned Friday that he foresees a “very long” shutdown. 

The expanding picture of a dysfunctional Trump administration grew further with the surprise resignation of Defense Secretary James Mattis in protest of Trump’s abrupt decision to pull U.S. troops out of Syria — a move that drew expressions of alarm from many Republicans as well as Democrats. 

How markets and government officials respond to such risks could determine whether the second-longest U.S. expansion on record remains on course or succumbs eventually to a recession.

A closer look at the risks: 

Administration chaos 

It has been a tumultuous few days, even for a White House that has been defined by the president’s daily dramas. 

Trump faces an investigation into Russian interference in the 2016 elections that has led to indictments and criminal convictions of some of his closest confidants. He is coping with a wave of top staff defections, having lost both his chief of staff and defense secretary. He is in the process of installing a new attorney general. 

Then there is the partial government shutdown that Trump himself has pushed. 

The shutdown is unlikely to hurt economic growth very much, even if it lasts awhile, because 75 percent of the government is still being funded. S&P Global Ratings estimates that each week of the shutdown would shave a relatively minuscule $1.2 billion off the nation’s gross domestic product. 

Still, the problem is that the Trump administration appears disinclined to cooperate with the incoming House Democratic majority. So the federal support through deficit spending that boosted the economy this year will likely wane, Lewis Alexander, U.S. chief economist at Nomura, said in his 2019 outlook. 

That, in part, is why the economy is widely expected to weaken from its roughly 3 percent growth this year, which would be the strongest performance since 2005. 

Tumbling stocks

Stock investors have been trampled since October, with the Dow Jones industrial average sinking nearly 15 percent. The plunge followed a propulsive winning streak for the stock market that began in 2009. But investors are internalizing all the latest risks, including Trump’s trade war with China and higher borrowing rates, and how much they might depress corporate profits and the economy.  

“Markets people are forward-looking, so they’re taking into account the latest information,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics. 

Markets can often fall persistently without sending the economy into a tailspin. But O’Sullivan warned of a possible feedback loop in which tumbling stock prices would erode consumer and business confidence, which in turn could send stocks sinking further. At that point, the economy would likely worsen, the job market would weaken and many ordinary households would suffer. 

Trade war

For economists, this may pose the gravest threat to the economy. Trump has imposed tariffs against a huge swath of goods from China, which has retaliated with its own tariffs on U.S. products. These import taxes tend to dampen economic activity and diminish growth. 

“The trade war with China is now the biggest impediment to U.S. economic growth,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in his forecast for the first half of 2019. 

In part because of the taxes Trump imposed on Chinese imports, manufacturing growth appears to be slowing, with factory owners facing higher costs for raw materials. The president has held off on further escalating tariffs to see if an agreement, or at least a lasting truce, can be reached with China by March. 

Any damage from trade wars tends to worsen the longer the disputes continue. So even a tentative resolution in the first three months of 2019 could remove one threat to economic growth. 

Interest rate hikes 

The Federal Reserve has raised a key short-term rate four times this year and envisions two more increases in 2019. Stocks sold off Wednesday after Chairman Jerome Powell laid out the rationale. Powell’s explanation, in large part, was that the Fed could gradually raise borrowing costs and limit potential U.S. economic growth because of the job market’s strength. 

The Fed generally raises rates to keep growth in check and prevent annual inflation from rising much above 2 percent. But inflation has been running consistently below that target. 

If the central bank were to miscalculate and raise rates too high or too fast, it could trigger the very downturn that Fed officials have been trying to avoid. This has become a nagging fear for investors. 

Global slowdown 

The world economy is showing clear signs of a downshift, with many U.S. trading partners, especially in Europe and Asia, weakening or expected to expand at a slower speed. Their deflating growth can, in turn, weigh down the U.S. economy. 

Several other global risks abound. There is Britain’s turbulent exit from the European Union. Italy appears close to recession and is struggling to manage its debt. China, the world’s second-largest economy after the U.S., is trying to manage a slowdown in growth that is being complicated by its trade war with Trump. 

“Next year is likely to be challenging for both investors and policymakers,” Alexander, the Nomura economist, concluded in his outlook. 
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U.S. President Donald Trump has discussed firing Federal Reserve Chairman Jerome Powell, Bloomberg reported Saturday.

Citing four people familiar with the discussions, Bloomberg reported Trump has become more frustrated with Powell after months of stock market losses and the central bank’s interest rate hike on Wednesday.

Advisers reportedly have warned Trump that firing Powell would further roil financial markets, yet they said Trump has discussed the matter many times in the past few days.

The sources who spoke with Bloomberg on condition of anonymity were not convinced Trump would fire Powell, and were hopeful the president’s anger over the situation would subside over the holidays.The White House and the Federal Reserve have declined to comment.

A firing of Powell would come after weeks of heavy losses in the markets. On Friday, equities closed their worst week since 2011, with the S&P 500 Index plummeting more than 7 percent and the Nasdaq Composite Index plunging into a bear market.

Trump has been busy shaking up his administration since the November midterm elections. He has announced the departures of Attorney General Jeff Sessions, White House Chief of Staff John Kelly, Interior Secretary Ryan Zinke and Defense Secretary James Mattis.
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After almost 10 years, Wall Street’s rally looks like it’s ending. 

Another day of big losses Friday left the U.S. market with its worst week in more than seven years. All of the major indexes have lost 16 to 26 percent from their highs this summer and fall. Barring huge gains during the upcoming holiday period, this will be the worst December for stocks since 1931. 

There hasn’t been one major shock that has sent stocks plunging. The U.S. economy has been growing since 2009, and most experts think it will keep expanding for now. But it’s likely to do so at a slower pace. 

As they look ahead, investors are finding more and more reasons to worry. The U.S. has been locked in a trade dispute with China for nine months. Economies in Europe and China are slowing. And rising interest rates in the U.S. could slow its economy even more. 

Dreadful month

Stocks are now headed for their single worst month since October 2008, when the market was being battered by the global financial crisis. 

December is generally the strongest time of the year for U.S. stocks. Traders often talk about a “Santa rally” that adds to the year’s gains as people adjust their portfolios in anticipation of the year to come.  

But not this year. 

No sector of the market has been spared. Large multinational companies join smaller domestic ones in their losses. And huge high-tech companies, once the best-performing stocks on the market, are now leading the way lower.  

Technology’s huge popularity during the recent boom years made it even more vulnerable as investors’ moods turn sour. Amazon, Facebook, Apple, Netflix and Google’s parent company, Alphabet, have seen their market values fall by hundreds of billions of dollars. 

“If you live by momentum, you die by momentum,” said Sam Stovall, chief investment strategist for CFRA. 

The Nasdaq composite, which contains a high concentration of tech stocks, has sunk almost 22 percent from its record high in late August. Several big technology companies, notably Facebook and Twitter, have also suffered as a result of scandals over matters such as data privacy and election meddling, and traders worry that the industry will face greater government regulation that could increase costs and affect their profits. 

The major U.S. indexes fell 7 percent this week and they’ve sunk more than 12 percent in December. 

Global slowdown

Investors around the world have grown increasingly pessimistic about the global economy’s prospects over the next few years. It’s widely expected to slow down, but traders are concerned the cooling might be worse than they previously believed.  

After a sharp early gain Friday, the S&P 500 index retreated 50.84 points, or 2.1 percent, to 2,416.58. The S&P 500, the benchmark for many index funds, has fallen 17.5 percent from its high in September. 

The Dow Jones industrial average sank 414.23 points, or 1.8 percent, to 22,445.37. The Nasdaq skidded 195.41 points, or 3 percent, to 6,332.99. The Russell 2000 index of smaller-company stocks lost 33.92 points, or 2.6 percent, to 1,292.09. 

European markets rose slightly and Asian markets were mixed.  

The price of oil has also fallen sharply in recent weeks, down 40 percent from the high it reached in October, amid concerns over a glut in the market and the slowing economy. 

On Friday the price of U.S. crude slipped 0.6 percent to $45.59 a barrel in New York. Brent crude, the standard for international oil prices, fell 1 percent to $53.82 a barrel in London. 
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The Canadian economy expanded by a greater-than-expected 0.3 percent in October from September, pushed higher by strength in manufacturing, finance and insurance, Statistics Canada data indicated Friday.

Analysts in a Reuters poll had predicted monthly GDP would increase by 0.2 percent. Fifteen of the 20 industrial sectors — which Statscan says represents around 80 percent of the economy — posted gains.

The release could well be a pleasant surprise for Bank of Canada Governor Stephen Poloz, who complained earlier this month that economic data heading into the fourth quarter were weaker than expected.

The manufacturing sector grew by 0.7 percent on higher output of machinery, primary metals, chemicals and food. The finance and insurance sector advanced by 0.9 percent on increased activity in bond and money markets.

Wholesale trade grew by 1.0 percent, while utilities were up 1.5 percent on unseasonably cold weather that contributed to higher electricity demand for heating purposes.
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Plans to build another privately-financed power station in Nigeria to help end decades of chronic blackouts have been delayed because of concerns about persistent shortfalls in payments for electricity across the sector.

The $1.1 billion Qua Iboe Power Plant being developed by energy infrastructure company Black Rhino and the state-owned Nigerian National Petroleum Corporation won’t get a green light by the end of 2018 as planned and it was unclear when the deal might close, NNPC told Reuters.

The delay is a setback for Africa’s biggest oil producer where 80 million people don’t have access to grid power supplies and it exposes the difficulties in attracting private investment to a sector that successive governments have tried to reform.

The uncertainty surrounding the 540-megawatt Qua Iboe plant stems from the difficulties Nigeria’s first privately-financed independent power project — the 460-megawatt Azura-Edo plant — has encountered since it came online this year.

Azura was meant to be a model for a string of independent power plants financed by international investors. To give them confidence to invest in the first major plant since the power sector was privatized in 2013, the World Bank provided a safeguard known as a partial risk guarantee — meaning the lender would step in if Nigeria defaulted on payments.

Under the current system, the government-owned Nigerian Bulk Electricity Trading company (NBET) buys power from generators and passes it on to distributors who then collect money from customers and reimburse NBET.

But because NBET is not paid in full for the power it buys, generators such as Azura have been partly reimbursed from an emergency central bank loan fund created to keep the sector afloat.

NNPC told Reuters one of the reasons the Qua Iboe plant (QIPP), which is due to be built in the southern state of Akwa Ibom, had been delayed was because NBET appeared reluctant to commit to new projects to avoid increasing its liabilities.

“The continued delay relates to the current cashflow challenges at NBET, as highlighted by the Azura project,” a spokesman for NNPC said in an emailed statement. “This concern is justified by the fact that NBET is yet to see an improvement in collections from DISCOs [distribution companies].”

NBET did not immediately respond to a request for comment on NNPC’s statement about QIPP.

NBET chief executive Marilyn Amobi told Reuters in November that it was hard for the company to work because of poor infrastructure and shortfalls in cash from distributors needed to reimburse generators.

“You don’t have the infrastructure, you don’t have the financial position to do it, you don’t actually have the products, and you don’t have the grid,” she said.

World Bank conditions

NNPC said another problem for QIPP was that the World Bank had made a partial risk guarantee, similar to the one that helped Azura attract investors, contingent on the government’s implementation of an agreed power sector recovery plan.

“In theory it is okay, but the risk is there are delays in the approvals which may impact QIPP,” NNPC said. Power ministry officials and the World Bank have been in talks about long-term structural changes needed to trigger the release of a $1 billion loan to help pay for reforms.

A World Bank spokeswoman said the loan had yet to be submitted to its board for approval and that the Washington-based lender considered the recovery plan to be “critical for de-risking the sector for private investments.”

Problems that need to be tackled include decaying infrastructure, mounting debts, low tariffs for electricity and a dilapidated government-owned grid that would collapse if all the country’s power generators operated at full tilt.

Even though NBET has an agreement to buy 13 gigawatts (GW) from power generators, the system can only cope with distributors sending out an average of 4 GW, according to the ministry of power.

The World Bank spokeswoman confirmed any future guarantees for independent power plants (IPPs) would be linked to the plan’s implementation – because the economic and financial viability of generation capacity expansion was at risk.

A spokeswoman for Black Rhino, which is one of private equity firm Blackstone’s portfolio companies, declined to comment on NNPC’s announcement of a delay to QIPP. When the project was unveiled, Nigerian cement giant Dangote Group was named as a joint venture partner – along with Black Rhino and the Nigerian National Petroleum Corporation.

But a Dangote executive told Reuters on condition of anonymity that the company, owned by Africa’s richest man, Aliko Dangote, had pulled out.

“The huge debt level, and, the fact the IPPs are not making profits, is another reason for prospective investors to be deterred,” he said. “Further, collecting revenue from the distribution companies is also becoming a mirage.”

A Dangote Group spokesman declined to comment on the delay to QIPP, or whether the company had pulled out.

‘Illiquid and insolvent’

The payment problems in the Nigerian power sector were thrust into the spotlight in March when four generating companies filed a lawsuit against the government and Azura.

To ensure the generating companies were paid in full throughout 2017 and 2018, the government created a 701 billion naira ($2.3 billion) loan fund at the central bank to guarantee payments. When the fund was established in 2017, Azura wasn’t part of the calculations.

But when Azura started producing electricity, the fund was also used to pay the new plant to ensure the terms of loan deals guaranteed by the World Bank were not breached. As a result, the other companies were told they would only receive 80 percent of the sums owed, according to the lawsuit filed in March.

The four energy companies want the fund to reimburse them in full, rather than allocating part of the money to the new plant. Azura declined to comment on payments for power generated.

“If the central bank wasn’t paying, the system would collapse,” an official at a multilateral lender said on condition of anonymity. “Qua Iboe IPP would enter a system that is illiquid and insolvent. The liquidity is being provided by the central bank.”

The official said QIPP would need the same partial risk guarantee Azura received to get off the ground, but the handling of payments to Azura by the Nigerian authorities so far meant there was little appetite to offer the same support.

Fola Fagbule, senior vice president and head of advisory at Africa Finance Corporation (AFC) — one of the multilateral lenders that invested in Azura — agreed that the Qua Iboe project would struggle without payment guarantees.

“What you have is an insolvent system,” he said. “It is really difficult to make a case for a project on that scale.”

A person with direct knowledge of QIPP who declined to be named said Azura’s experience was damaging international investors’ view of Nigeria, Africa’s most populous nation.

“There has to be some understanding of how the sector is going to be able to afford new electrons coming into the grid,” the person said. “[Those involved] do not want QIPP to build a project that could just end up in a default situation.”

‘Knotty issues’

Nigeria’s privatized power sector typically does not use meters to provide invoices, bill collections are low and energy tariffs have remained fixed for three years, meaning customers receive unsustainably cheap electricity.

The effect, say industry experts, is that electricity distribution companies recover so little revenue from customers that they pay less than a third of what they owe to generating companies – and that’s why debts have ballooned.

Sunday Oduntan, spokesman for the Association of Nigerian Electricity Distributors, said debt levels in the sector were caused by the artificial suppression of tariffs. He said there was a 1.3 trillion naira ($4.2 billion) market shortfall that meant distributors were unable to invest in improvements.

“You cannot be selling a product below cost price and expect high remittance. The shortfall in the sector is because of the lack of a cost-reflective tariff,” said Oduntan, who speaks on behalf of Nigeria’s 11 electricity distribution companies.

Debts across the sector partly stem from a currency crisis that took hold in 2016, just months after Azura secured its financing. The bulk of power company costs are in U.S. dollars but customers pay for power in naira.

The naira lost about 30 percent of its value against the U.S. dollar in June 2016 but the devaluation was not factored into a government tariff structure that has remained unchanged. Louis Edozien, permanent secretary in the ministry of power, told Reuters there was evidence tariffs must rise, but it was also the responsibility of distributors to improve their collections, partly through better metering and infrastructure.

As for the future of QIPP, the state oil company said it would take six to eight months from whenever NBET executes an agreement to purchase power from the plant before a final investment decision could be taken.

The NNPC spokesman said there were a number of other “knotty issues”, including the completion of a transmission line from the project site. He said QIPP had now agreed in a major concession to pay $20 million for it to be finished.

He also said there was a disagreement between QIPP and the central bank about the exchange rate at which power producers could buy U.S. dollars with naira. He said this had been escalated to the minister of finance.

With the $1 billion World Bank power sector loan on hold for now, the government is considering putting another 600 billion naira into the central bank fund to pay generators when the initial amount runs out early next year, sources said.

It was not clear how the central bank loans to the sector would be repaid.

Central Bank Governor Godwin Emefiele told Reuters that payments from the fund could be made up to February and that the bank was holding talks with World Bank officials.

“The loan negotiations are still in progress with no terminal date yet fixed,” the power ministry’s Edozien said.

($1 = 306.6000 naira)
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US growth in the July-September quarter was slightly slower than previously reported, dragged down by the large drop in exports amid President Donald Trump’s multi-front trade wars.

With hundreds of billions of goods hit by retaliatory tariffs, US exports fell by the largest amount since early 2009 at the height of the global financial crisis.

Gross domestic product expanded by 3.4 percent in the third quarter rather than the 3.5 percent previously reported, due in large measure to the 4.9 percent drop in exports, five-tenths more than the Commerce Department originally estimated.

Goods exports dropped 8.1 percent, the biggest decline since the first three months of 2015.

Trump’s aggressive trade policies, and especially the tariff retaliation from China, has impeded exports, with soybean sales nearly grinding to a halt. The strong US dollar also has made American goods more expensive.

The smaller rise in consumer spending, largely the result of lower fuel costs, also contributed to the downward revision to GDP growth, the Commerce Department said.

Meanwhile, residential investment fell 3.6 percent, only partly offset by 1.1 percent gain in non-residential, or business, investment, data borne out by the slowdown in home construction and sales.

Other data show fourth quarter growth is shaping up to be even more sluggish. Purchases of durable goods — big ticket items like appliances, vehicles and machinery — rose in November compared to October, but much less than expected.

Orders were up 0.8 percent last month, less than half the increase economists had forecast, according to a separate Commerce Department report. That follows a big drop in October, and will drag on GDP in the final quarter of 2018.

Excluding transportation goods, durable goods orders fell 0.3 percent compared to October, and when defense is removed, the drop was 0.1 percent.

Orders are still 8.4 percent higher than they were through November 2017, but have been on a declining trend for three months.
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