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Friday

Nov. 7, 2014
www.bloombergbriefs.com

Yellen, Dudley Speak; Non-Farm Payrolls to Stay Strong

COMMENTARY IN THIS ISSUE

ALEX BRITTAIN, BLOOMBERG BRIEF EDITOR

October non-farm payrolls


are expected to have risen
by 235,000, according to
the Bloomberg survey
consensus. That may be
too low: Josh Wright.

WHAT TO WATCH: New York Fed President William Dudley speaks at a Paris
conference on central banking at 8:15 a.m. U.S. non-farm payrolls at 8:30 a.m. may
show a net gain of 235,000 in October, from 248,000 in September, keeping the labor
market on track for its best year since 1999. Fed policy maker Charles Evans speaks on
the economy at 9:15 a.m. Fed chair Janet Yellen speaks in Paris on economic policy at
10:15 a.m., as part of a panel discussion alongside ECB policy maker Benoit Coeure.
ECONOMICS: Month-to-month industrial production rebounded in Germany in
September and was stagnant in France.
GOVERNMENT: Ukraines east lurched back toward open war as the government in
Kiev and pro-Russian rebels accused each other of starting major offensives.
COMPANIES: Banks including Bank of America and Citigroup asked a U.S. judge to
throw out claims they cheated customers on interest-rate swaps and other transactions.
MARKETS: European stocks headed for a third weekly gain. The Bloomberg dollar
spot index headed for its biggest weekly gain in more than 16 months.
(All times local for New York.)

U.S. Unit Labor Costs Raise Stakes for Monthly Wage Data

The ECB is getting ready


to broaden the types of
assets it purchases. The
obvious candidates are
corporate and sovereign
bonds: David Powell.
Harm Bandholz, chief U.S.
economist at UniCredit, is
interviewed on the
long-awaited pick-up in
U.S. wages and Draghi's
policy plans: Tom Keene.

President Mario Draghi dismissed rumors


there is a faction of dissent among ECB
officials. A commitment to prepare further
policy measures has been signed by the
whole Governing Council, Draghi said
after the ECB held interest rates. For
more, see: NSN NEMLE96TTDSP

TWEET OF THE DAY

Conor Sen
@conorsen

Preliminary estimates indicate the unit labor costs reading, on the margin, may cause the
FOMC to accelerate its adjustments to forward guidance and labor market assessments in
preparing for rate increases next year. In writing its December statement, the FOMC will be
more closely attuned to average hourly earnings in the next two job reports. ULC rose a
slower-than-forecast 0.3 percent in the third quarter, while productivity gained a
larger-than-expected 2 percent. This looks consistent with steadiness in the same-period
Employment Cost Index last week and weak growth in average hourly earnings over the
third quarter. Should average hourly earnings begin to pick up as last weeks ECI wage
component did, look for the policy debate lately about reassessing inflation and labor
conditions to begin parsing the relationship between inflation and wage versus non-wage
compensation. Run ECWB P 545AC74A04AC0144 to view this chart on Bloomberg.
Josh Wright, Bloomberg Economist

Continues to baffle how we have ~280k


jobless claims, record high job openings,
yet a labor market far from full potential.
Details

NUMBER OF THE DAY


73% Share of U.S. metropolitan
areas that saw the median price of an
existing single-family home rise
year-on-year in the third quarter. For
more, see: NSN NEMK0I6TTDT8

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Bloomberg Brief

Nov. 7, 2014

Economics

BIG PICTURE JOSH WRIGHT, BLOOMBERG ECONOMIST


U.S. October Jobs Report Has Potential to Surprise Higher
October non-farm payrolls are expected
to have risen by 235,000, according to the
Bloomberg survey consensus. That
estimate may even be too low, various
indicators hint: rising ADP employment
survey numbers, fresh lows in the
four-week moving average for jobless
claims and NFPs six-month moving
average of 245,000 (including the outlying
August disappointment). Given the
severity of Augusts surprise, an upward
revision to Septembers NFP could also
be in the works. October unemployment
is expected to hold at 5.9 percent.
Other indicators give grounds for NFP
optimism, including seasonal factors,
surveys of consumer expectations and
private sector surveys, from ISM to ADP.
That would be consistent with the
Bloomberg Twitter-based NFP forecast
rising from 194,000 on Nov. 1 to 243,000
on Nov. 6. Recent moves in financial
market prices and reports of trading flows
both support the idea of a higher whisper
number.
Though Bloombergs consensus
unemployment forecast is 5.9 percent,
survey data skew slightly toward a decline
to 5.8 percent. That risk would be most
likely to materialize if the Labor Force
Participation Rate decreased, but since
the LFPR has already declined in each of
the last two months, and last month the
NFP had an encouraging rebound, the
LFPR seems more likely to hold or tick
back up.
Throughout 2014, long-term
unemployment and involuntary part-time
workers have been prominent in policy
makers discussions. During most months
of this year, the two data series have
moved in opposite directions, and that
pattern looks likely to hold.
The average hourly earnings and
weekly hours in the October report will
receive extra-sharp scrutiny for three
reasons. First, todays report will give the
first hard data point for the fourth quarter.
Second, the October FOMC statement
reassessed both inflation and labor
market conditions. Third, other measures
of labor compensation have ticked up. In
preparing its December statement, the
FOMC will be attuned to whether the
more timely AHE or survey measures

Rising ADP Suggests Stronger Jobs Report

View this chart on the Bloomberg Professional service atECWB P 533C02F801F00018

Labor Slack Diminishing Gradually

View this chart on the Bloomberg Professional service atECWB P 533EA59C0F1C00ED

confirm this as a trend.


If average hourly earnings begin to pick
up as the Employment Cost Indexs wage
component did, wage expectations from
surveys of consumers and business
managers may receive additional focus,
as the survey measures of inflation
already have. The most recent survey
data show both sets of expectations close
to their highs since the Great Recession,

but little changed since mid-2014.


One or two strong AHE prints could shift
the debate on wage inflation, but they
wont settle it. While wages are a lagging
indicator, and thus might be seen as a
trigger for rate hikes, Fed Chair Janet
Yellens Jackson Hole speech laid out two
contrasting views on whether wage
inflation would require immediate action.

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Bloomberg Brief

Nov. 7, 2014

Economics

U.S. WEEK AHEAD JOSH WRIGHT, BLOOMBERG ECONOMIST


Retail Sales and Labor
Aftershocks in Spotlight

Retail Sales Growth Back Near 2013 Pace

While the official jobs week ends today,


next week will provide an aftershock of
several important supplementary labor
data releases. The blockbuster report is
retail sales at the end of the week. Import
prices will also be in focus, in light of
recent discussions of the stronger dollar's
effect on a potential return to disinflation.

Retail Sales May Rebound


While both retail sales and personal
spending data were weak in September,
several indicators suggest retail sales will
rebound. These include continued job
growth, lower job losses and higher
personal income, as well as declines in
gasoline and food costs and lower import
prices. These forces have already buoyed
consumer confidence. The Bloomberg
consensus estimate is for a 0.2 percent
October rise.

View this chart on the Bloomberg Professional service atECWB P 534BD3CD01F00043

Quits and Hires Still Lagging

Labor Slack Data May Show


Broad-Based Progress
While both versions of the Feds Labor
Market Conditions Index (LMCI) continue
to show progress, it has slowed in recent
months. Thats particularly true for some
of the most prominent components of
these indexes: measures of job turnover.
The JOLTS report continues to show job
openings stubbornly outpacing job hiring
and quit rates, and the latter two
measures actually declined in August.
Septembers positive jobs report suggests
the corresponding JOLTS report will show
a return to more broad-based progress.

Import Prices to Stabilize


Despite some notable intra-month
volatility, the Feds broad, trade-weighted
dollar index leveled off in October. Still,
ongoing weakness abroad and the lagged
effect from previous months dollar
appreciation leave the Bloomberg survey
of forecasts in a range of minus 2.2
percent to minus 0.3 percent.

View this chart on the Bloomberg Professional service atECWB P 5343F78601F0000B

Major Upcoming Data & Economic Events


COUNTRY

DATE

TIME

EVENT

SURVEY

PRIOR

U.S.

Nov. 10

10:00

Labor Market Conditions Index

U.S.

Nov. 11

7:30

NFIB Small Business Optimism

95

95.3

U.S.
U.S.

Nov. 12

10:00

Wholesale Inventories MoM

0.20%

0.70%

Nov. 13

14:00

Monthly Budget Statement

-$111.7B

U.S.

Nov. 14

8:30

Retail Sales Advance MoM

0.20%

-0.30%

U.S.

Nov. 14

8:30

Import Price Index MoM

-1.80%

-0.50%

U.S.

Nov. 14

9:55

Univ. of Michigan Confidence

87.5

86.9

Source: Bloomberg Survey figures current as of 6 a.m. New York time.

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Bloomberg Brief

Nov. 7, 2014

Economics

GLOBAL WEEK AHEAD BLOOMBERG ECONOMISTS AND BLOOMBERG BRIEF EDITORS


Euro-Area GDP, BOE
Forecasts, China Loans

Euro-Area GDP Growth Stalled in 2Q

Euro-area GDP for the third quarter,


new Bank of England forecasts giving
guidance on the likely path of U.K.
interest rates and Chinese loans and
industrial data are among the highlights
for non-U.S. data in the coming week.

Europe
The euro area and half of its 18
members will report preliminary GDP
figures for the third quarter. These include
the regions top four economies:
Germany, France, Italy and Spain. The
clear deterioration of confidence surveys
in Germany and France during that period
suggests that both economies which
make up half of the currency unions GDP
have hardly grown over that period.
That could weigh on euro-area GDP,
which already stagnated during the
second quarter, and add further doubts
on the regions recovery prospects.
The final reading for October of the
euro-area consumer price index is likely
to confirm a headline reading of 0.4
percent year over year. The figure
compares with the central banks de facto
target of 1.9 percent.
The BOE in its November inflation
report is likely to lower the near-term
inflation forecast, after CPI averaged 0.4
percentage point lower in the third quarter
compared with what the MPC had
predicted in August.

Asia
Chinese loan data are the week's main
draw. The People's Bank of China moved
to underpin flagging growth in October.
Interbank rates stayed low and mortgage
rates for second home buyers were cut.
Set against that is the usual fall in lending
in the final months of the year. With
market expectations shifting toward
enhanced stimulus, a low haul for new
loans might be a major disappointment.
Chinese industrial data are also due.
Pro-growth policies may have boosted
economic sentiment and helped the
recovery. Still, the PMI for October
suggested weakness in manufacturing.

China Credit Growth on Downward Trend

Major Upcoming Data & Economic Events


PLACE

DATE

TIME

EVENT

China

Nov. 9

20:30

CPI YoY

U.K.

Nov. 12

05:30

Bank of England Inflation Report

SURVEY

PRIOR

1.60%

1.60%

--

--

Japan

Nov. 12

23:30

Industrial Production MoM

2.70%

China

Nov. 13

00:30

Industrial Production YoY

8.00%

8.00%

Germany

Nov. 14

02:00

GDP SA QoQ

0.10%

-0.20%

Euro Area

Nov. 14

05:00

CPI YoY

0.40%

0.40%

Euro Area

Nov. 14

05:00

GDP SA QoQ

0.10%

0.00%

China

Nov. 10-15

TBD

Aggregate Financing RMB

887.5B

1050B

Source: Bloomberg Survey figures current as of 6 a.m. New York time.

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Bloomberg Brief

Nov. 7, 2014

Economics

TODAY'S DATA
OVERNIGHT

A Model for China:Korea's Bridge to Higher Income

Asia Pacific
Global funds bought a net 904.7 billion
yen ($7.8 billion) of Japanese stocks in
week ended Oct. 31, the biggest net
purchases since November 2013. Global
funds bought a net 639.6 billion yen of
Japanese bonds last week. Japanese
investors purchased a net 806.6 billion
yen of overseas debt last week, they
were net buyers of overseas stocks
acquiring a net 326.1 billion yen of these
securities.

As Chinas economy continues to grow, it will eventually face the middle-income trap of
deceleration that the World Bank identifies for developing countries where annual per-capita
GDP has reached $10,000 to $12,000. For instance, Brazilian GDP per capita rose only
about 1 percent per year on average from 1980 to 2013. South Korea offers a more
favorable model. It is among a few economies that have joined the high-income group even
as per-capita GDP grew 5-6 percent over the same period. IMF research attributes Koreas
success to solid growth in productivity and capital stock. For a related analysis of China's
growth potential, runNSN NELEDJ6JTSEJ on the Bloomberg Professional Service.
Fielding Chen, Bloomberg Economist

TIME

COUNTRY

EVENT

6:30

Chile

6:30

Chile

Imports Total

8:30

U.S.

Change in Nonfarm Payrolls

8:30

Canada

Unemployment Rate

6.90%

6.80%

8:30

U.S.

Change in Private Payrolls

225K

236K

8:30

Canada

Net Change in Employment

-5.0K

74.1K

8:30

U.S.

Change in Manufact. Payrolls

10K

4K

8:30

U.S.

Unemployment Rate

8:30

U.S.

Underemployment Rate

8:30

U.S.

8:30
8:30

Exports Total

SURVEY

PRIOR

$6,103.00

$5,469.00

235K

248K

5.90%

5.90%

11.80%

Average Hourly Earnings MoM

0.20%

0.00%

U.S.

Average Hourly Earnings YoY

2.10%

2.00%

U.S.

Labor Force Participation Rate

62.70%

9:00

Mexico

CPI MoM

0.55%

0.44%

9:00

Mexico

CPI YoY

4.30%

4.22%

CA

Canadas Prime Minister in China to Discuss Trade

9:15

US

Fed's Evans Speaks on Economy at Chicago Banking Conference

10:15

US

Fed's Yellen Speaks on Policy Since the Crisis in Paris

14:30

US

Fed's Tarullo Speaks on Community Banking Via Video

15:00

U.S.

Consumer Credit

$16.000B

$13.525B

Source: Bloomberg. Surveys updated 5 a.m. New York time.

Malaysian exports rose 2 percent year


on year in September, less than the
median estimate in an economists' survey
for a rise of 3.4 percent.

Europe
Switzerland's October unemployment
rate was 3.1 percent, in line with
forecasts.
German industrial production
rebounded less than analysts forecast in
September, signaling that Europes
largest economy is struggling to recover.
Production, adjusted for seasonal
swings, rose 1.4 percent from August,
when it contracted a revised 3.1 percent,
the biggest decline since January 2009,
the Economy Ministry said. Economists
surveyed by Bloomberg News predicted a
2 percent increase in output. Production
declined 0.4 percent in the third quarter.
The headline figure for the business
sentiment indicator from the Banque de
France was 96 in October, in line with the
consensus forecast. Industrial
production in France fell by 0.3 percent
in September after also dropping 0.3
percent the previous month, on a
year-over-year seasonally-adjusted basis.
Spanish industrial production rose
3.6 percent in September from a revised
minus 2.3 percent in August on a
non-seasonally adjusted year-over-year
basis.
The U.K. goods trade deficit widened
to 9.82 billion pounds ($15.53 billion) in
September from 8.95 billion pounds in
August and by more than analysts
expected.

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Nov. 7, 2014

Bloomberg Brief

Economics

ECONOCHAT
WHAT TO READ

MARKET CALLS

ECONOMIC COMMENTARY AND RESEARCH FROM AROUND THE WEB

The extension of the dollar rally hinges


on U.S. jobs data, said Yuji Kameoka,
chief currency strategist at Daiwa
Securities. If its in line with estimate, we
could see some profit taking and see the
dollar fall back down to 114 yen as
volatility rises.

Cleveland Fed economist Daniel Hartley examines the local multiplier effect of
tradable industries. He notes that "manufacturing employment has become a less useful
proxy for the tradable sector as manufacturing has fallen as a share of employment in
the U.S."
http://goo.gl/Zz5fqq
Writing for VoxEU, Stanford University's Yong-Suk Lee explores who is really affected
by the external sanctions on North Korea. His findings "indicate that when external
sanctions generate hardships in the domestic economy, the urban elites, whether by
disproportionately promoting economic activity or diverting electricity, shields from the
negative impact at a cost to the hinterland population. In short, sanctions that fail to
change the behavior of leaders increase regional inequality at a cost to the already
marginalized hinterlands."
http://goo.gl/m1bnbr
In a paper all New Yorkers have been waiting for, Princeton University's Henry Farber
looks at the labor supply of NYC cab drivers. "There are approximately 180 million trips
taken during approximately 8 million shifts each year in taxi cabs in NYC. About 62,000
drivers had at least one fare in a cab over the five-year period, with about 40,000 drivers
in any single year. About 25,000 drivers worked in all five years," he writes. "There may
be an important difference in the margin on which labor supply can be adjusted on day
shifts versus night shifts. Day shift drivers are more likely to be constrained at the end of
their shift when the cab must be turned over to a night shift driver."
http://goo.gl/PDsLw8

Gerard Satur, CEO of hedge fund MST


Capital, is betting the U.S. dollar will
strengthen against the currencies of
Australian and New Zealand as Chinas
economy slows. The U.S. currency will
extend gains as the Federal Reserve
prepares to raise interest rates amid an
improving economy, according to Satur.
Cooling growth in China, the largest
trading partner for Australian and New
Zealand, will weigh on the two nations
currencies. The Aussie is poised to drop
toward 80 U.S. cents, the weakest since
July 2009, while the kiwi may slide to a
four-year low of 70 cents, he said.

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Bloomberg Brief

Nov. 7, 2014

Economics

ECB WATCH DAVID POWELL, BLOOMBERG ECONOMIST


ECB Set to Expand Purchases as Draghi Shows Control
President Mario Draghi signaled
yesterday that the European Central Bank
is getting ready to broaden the types of
assets it will purchase. The most obvious
candidates are corporate bonds and then
sovereign bonds.
Draghi also appeared unshaken by
recent reports that he is losing control of
the Governing Council. That suggests he
intends to move forward with his plans to
provide monetary stimulus even in the
face of opposition from the hawks.
He read from the introductory statement
at the press conference: Should it
become necessary to further address
risks of too prolonged a period of low
inflation, the Governing Council is
unanimous in its commitment to using
additional unconventional instruments
within its mandate. The Governing
Council has tasked ECB staff and the
relevant Eurosystem committees with
ensuring the timely preparation of further
measures to be implemented, if needed.
He added during the question and answer
session that the ECB knows the risks to
the economy are to the downside and that
the central bank has to be prepared.
Buying corporate bonds would be a
step in the right direction, though it is
unlikely to be a panacea for the ECBs
woes. The move would still probably need
to be followed by purchases of
government bonds.
Draghi made similar hints about the
potential for buying asset-backed
securities in advance of the official
announcement of the launch of those
purchases.
For example, in June, the introductory
statement revealed that the Governing
Council decided to intensify preparatory
work related to outright purchases in the
ABS market to enhance the functioning of
the monetary policy transmission
mechanism. Under this initiative, the
Eurosystem will consider purchasing
simple and transparent asset-backed
securities with underlying assets
consisting of claims against the euro-area

Draghi Reasserted 3 Trillion-Euro Target for Balance Sheet

RunNSN NEMQPZ6JTSEC to see additional charts and data from this analysis on Bloomberg.

non-financial private sector, taking into


account the desirable changes in the
regulatory environment, and will work with
other relevant institutions to that effect.
The official announcement came in
September. It included the intention to
purchase both asset-backed securities
and covered bonds. The latter had been
excluded from previous hints.
The ECB president also signaled
yesterday that he remains firmly in control
of the institution by re-asserting his goal
to expand the central banks balance
sheet to levels seen in early 2012. That
would require an increase of about 1
trillion euros to a total of 3 trillion euros. In
addition, the reference to the size of the
balance sheet appeared in the
introductory statement for the first time.
All members agreed to the inclusion.
A Reuters article released earlier this
week suggested the ECB president
angered his colleagues by announcing
the balance-sheet target when they had
specifically agreed to refrain from stating
a numerical figure for the expansion. It
indicated that internal discontent linked to
Draghis management style was creating
a potential for rebellion.
He also suggested that one of the

ECBs primary indicators for the degree of


balance-sheet expansion required will
continue to be the five-year/five-year
breakeven inflation swap rate. Draghi
said: another point one would have to
look at is the correlation that exists
between the balance sheet size and
inflation expectations.
Draghi cited the fall in inflation
expectations as the catalyst for his dovish
speech at Jackson Hole on Aug. 22. He
said: Over the month of August financial
markets have indicated that inflation
expectations exhibited significant declines
at all horizons. The five-year/five-year
swap rate declined by 15 basis points to
just below 2 percent this is the metric
that we usually use for defining
medium-term inflation.
That figure has fallen significantly since
the speech to 1.85 percent from 1.94
percent. Additional declines would
probably bring forward the date of any
potential new announcements on asset
purchases.
For more on ECB asset purchases, see:
"ECB May Need More Than Corporate
Debt for Sufficient QE"
NSN NDUIDA6TTDSW

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Nov. 7, 2014

Bloomberg Brief

Economics

ORANGE BOOK: CEO ECONOMIC COMMENTS


September Beat Forecasts as GE Declared U.S. 'Best Since Financial Crisis'
RICHARD YAMARONE,
BLOOMBERG ECONOMIST
U.S. economic activity is
advancing on solid growth in
housing, construction
equipment, transport,
household products,
packaging and airlines.
Europe, China and, to an
extent, Japan have exhibited
signs of stagnation, according to comments from
business leaders in quarterly earnings conference
calls. A handful of companies commented on the
disinflationary forces of weaker oil prices. The
CEO Economic Comments Sentiment Index for
the week ended Nov. 7 was 51.06, a slight decline
from the Oct. 31 posting of 51.56. Sub-50
readings suggest contractionary conditions.

General Electric [GE] Earnings Call


10/17/14: The U.S. is probably the best
we've seen it since the financial crisis.
When you look at rail loadings and things
like that, you've got a decent and healthy
U.S. market. Europe is slower, for sure.
But I think most companies, industrial
companies haven't counted on Europe
and Japan for much incremental growth.

Dover Corp [DOV] Earnings Call


10/16/14: We did have some pockets of
unexpected softness in July and August.
However, September business activity
was quite strong and exceeded
expectations. The overall result was
revenue and bookings growth at each
segment. Most notably, fluids delivered
17 percent growth while energy and
engineered systems each grew 8
percent.
SuperValu [SVU] Earnings Call 10/16/14:
From our vantage point, it looks like
inflation was, call it, 2.5 points for the
quarter. Certainly higher in the
perishables, and in particular in meat, but
from our vantage point, from what we

see, we don't see that the increase in


inflation is impacting unfavorably our
gross margins, in fact, the data that I've
been shown suggested the opposite, that
we're able to pass it through.
Delta Airlines Inc. [DAL] Earnings Call
10/16/14: There will be some noise
between the individual months due the
timing of the Thanksgiving holiday with
the Sunday Thanksgiving return traffic
which is our largest revenue day of the
year shifting back into November this
year. For the quarter, we expect
approximately 3 percent capacity growth.
Sonoco Products Co. [SON] Earnings
Call 10/16/14: We do expect molded
resin prices to fall in the fourth quarter.
And when combined with recent market
price increases, we should continue to
see improvement relative to price/cost.
Looking forward, we remain optimistic the
U.S. economy will continue its positive
trend through the fourth quarter, but we
really don't expect any notable
improvement in consumer demand for
packaged food. We're also cautious about
the near term [regarding] the economy in
Europe and in some emerging markets.
United Rentals [URI] Earnings Call
10/16/14: Looking at the U.S. and
Canada as a whole, I would characterize
our current operating environment as
turning upward, with fluctuations in local
and regional markets. The underlying
fundamentals of the recovery look strong,
just as they did when we had our call in
July. This coincides with what we're
hearing from our customers. They're very
optimistic, which is probably the most
valuable indicator of all.
PPG Industries [PPG] Earnings Call
10/16/14: North American businesses
have remained quite strong as we've
been talking aerospace, automotive,
OEM, we're seeing construction activity

that has been, I think, consistently


growing, initially residential now we're
seeing it also in more broadly on the
construction side. So that I would say so
the key end-use markets here in North
America continue to be strong, especially
here in the U.S. What we have seen in
the rest of the world is some moderation
of some of the strongest growth trends.
WD-40 [WDFC] Earnings Call 10/16/14:
Multi-purpose maintenance product sales
in the U.S. decreased 2 percent in the
fourth quarter, but were up 2 percent for
the fiscal year. Sales of multi-purpose
maintenance products in the U.S.
decreased in the fourth quarter primarily
due to the timing of promotional activities
for the multi-purpose maintenance
product.
Advanced Micro Devices [AMD]
Earnings Call 10/16/14: So when we look
overall, clearly the strength in the PC
market has been around commercial,
primarily. When we look at consumer, it's
still choppy. It's weak and there is a
competitive dynamic in there. We are
seeing some weakness in China and the
emerging geographies.
Schlumberger [SLB] Earnings Call
10/17/14: In the economic environment,
the outlook for global GDP growth
softened somewhat during the third
quarter on weaker data from Europe and
China also leading to a slight downwards
revision of the absolute oil demand
outlook. Given the strength of the U.S.
economy and the ongoing efforts to
stimulate and manage growth in Europe
and China, we continue to believe that the
slow but steady recovery in the world
economy is still intact, and that the overall
oil demand situation is largely
unchanged.
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ON THE BLOOMBERG TERMINAL
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Nov. 7, 2014

Bloomberg Brief

Economics

MARKET INDICATORS

Source: Bloomberg. Updated 5:50 a.m. New York time.

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Bloomberg Brief

Nov. 7, 2014

Economics

10

KEENE'S CORNER
Harm Bandholz, chief U.S.
economist at UniCredit,
spoke to Bloomberg's Tom
Keene, Michael McKee and
Brendan Greeley on the
long-awaited pick-up in
U.S. wages and Draghi's
policy plans.

Q: Where are wages? Where is labor's


fair share of the American economic
experiment?
A: One of the most important data
releases that we had over the last several
weeks was last week's employment cost
index. It posted the second solid quarterly
increase in a row. And that is so far the
clearest sign of the long-awaited pick-up
in wages. I think the ECI is the most
relevant labor cost measure, better than
average hourly earnings, and also better
than unit labor costs.
Q: Richard Fisher from the Dallas Fed
told me the number of new hires hasn't
been enough to force up the overall
wage level, and that we should look for
this at the end of the year and into the
early part of 2015. Would you agree?
A: Yes, I'm not surprised that Richard
Fisher expects more wage pressure given
his bias on monetary policy. Traditionally,
the ECI reacted immediately. So far we
have seen a widening gap. In other
words, there is a shortage of skilled

workers, and the ECI has not really


reacted so far. I think it's coming, and I
think it is already coming with a lag.
Q: Is the Bundesbank in any part of the
calculus and discussion that Mr.
Draghi is having?
A: I think they are a very real part of it.
They say the decision to provide more
stimulus is unanimous, so I guess that
includes the Bundesbank. Draghi is
preparing something very clearly here.
First of all, he says obviously it is all data
dependent. That's the same as what the
Fed has been saying. But he has been
hinting to upcoming revisions to the debt
forecast. Those will be released at the
next meeting. And in that context, he says
we may do more.
Q: Did he just accomplish what he set
out to do? The idea that the risks to
the outlook remain on the downside
certainly has affected the markets.
A: He has achieved already quite a lot of
what he wanted to achieve. I mean
euro-dollar is down by more than 10
percent, right? And that is mostly on
announcements. That's a very important
part of the ECB's transmission channel
these days. And as you know, Europe is
more dependent on bank lending than the
U.S. is. But at the same time, he has
made clear the ECB wants to go back to
the balance sheet level of early 2012. I
think he will be measured against this. At
least he has to ramp up the size of the

balance sheet by a couple of hundred


billion. I mean if they get to the $2.7
trillion that we have seen in early 2012 or
not, that's a different question. He has to
deliver. He also said the asset purchases
will last two years. So that's more than
just words. The timing is a little bit
uncertain, when they start doing it. And
what exactly they will buy is not 100
percent clear, but that they will buy a
couple of hundred billion in euros over the
next two years, I think that's clear.
Q: Do people in the markets think that
he can accomplish more, or is the ECB
at basically the limit of its effective
power?
A: I think that's true for most central
banks, that the benefits of QE or any type
of balance sheet policy are limited. You
need something from the fiscal side as
well. I think we're seeing something on
the fiscal side in Europe, but it's not
getting enough attention.
If you look at the four big central banks,
the ECB has been the only one whose
balance sheet has been shrinking over
the last two years.
And again, a shrinking balance sheet
certainly doesn't help in this environment.
So we can talk about the effectiveness,
but a shrinking balance sheet was
certainly counter-productive over the last
couple of years, and Draghi tried to
reverse that.
This interview has been edited and condensed.

Bloomberg Brief: Economics


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