US weekly initial jobless claims fell by 14,000 to 289,000 last week

Weekly initial jobless claims fell by 14,000 to 289,000 last week, below the 304,000 level that economists surveyed by Bloomberg had expected, as the prior week's figure was upwardly revised by 1,000 to 303,000. Moreover, the four-week moving average, considered a smoother look at the trend in claims, declined by 4,000 to 293,500, while continuing claims decreased by 24,000 to 2,518,000, north of the forecast of economists, which called for a level of 2,512,000. 

Treasuries are higher in late-morning action despite the employment data, with the yield on the 2-year note nearly unchanged at 0.45%, while the yields on the 10-year note and the 30-year bond are declining 2 basis points to 2.45% and 3.25%, respectively. 

In the final hour of trading, the U.S. economic calendar will yield the release ofconsumer credit, forecasted to show consumer borrowing was $18.7 billion during June, down from the $19.6 billion posted the month prior. 

Source: Schwab

ECB says Ukraine crisis threatens EU recovery, keeps rates low

The Ukraine crisis has heightened risks to the euro zone's weak and uneven economic recovery, and a tit-for-tat sanctions war could compound the problem, the European Central Bank said on Thursday as it held borrowing rates at record low levels.

ECB President Mario Draghi cited instability across the Middle East as well as tensions between Russia and Western countries over the conflict in Ukraine among factors weighing on growth in the single currency area. Moscow has retaliated for European Union sanctions by halting imports of food from Europe.

At a news conference after the bank's monthly policy-setting meeting, he stressed the ECB was ready to resort to quantitative easing - printing money to buy securities - if the outlook for inflation fell further. But he brushed off July's 0.4 percent reading, the lowest in more than four years, as a glitch due to temporary energy and food price falls.

"Geopolitical risks are heightened, are higher than they were a few months ago. And some of them, like the situation in Ukraine and Russia will have a greater impact on the euro area than they ... have on other parts of the world," Draghi said.

Having cut interest rates to record lows in June, the euro zone's central bank kept them steady, waiting to see whether schemes such as the ultra-cheap four-year loans to banks it will launch in September will prompt them to lend more.

The decision by the ECB's Governing Council, with representatives from the 18 countries that use the euro, had been expected by economists.

Many are now shifting their attention to next year, when they hope the ECB will follow the United States and other major central banks in launching a quantitative easing programme.

Draghi explicitly mentioned that option along with the possibility of buying asset-backed securities (ABS), despite the stated reluctance of Germany's influential Bundesbank.

"I can only reaffirm that the Governing Council is unanimous in its commitment to also use unconventional measures like ABS purchases, like QE, if our medium-term outlook for inflation were to change," the ECB chief said.

The ECB expected strong take-up for next month's flood of cheap money for banks to lend to businesses, he said, adding that real interest rates in the euro zone would remain negative for far longer - up to five years - than in the United States.


EVENTS

While Thursday's news conference did not signal any change in policy, some economists said events could make the ECB act.

"The euro zone is at a crossroads and the economy can go either way," said James Knightley, an economist with ING.

"We are starting to see some signs of stagnation and the geopolitical situation is adding to the risks. Can the weaker euro and better credit conditions offset that? If they don't, that will force the ECB's hand."

Russia has banned imports of fruit and vegetables from the European Union in retaliation for sanctions against Moscow, while NATO warned this week that Moscow could use the pretext of a humanitarian mission to invade eastern Ukraine.

Nonetheless, many economists do not expect a reaction from Frankfurt unless there is a dramatic turn for the worse.

"The geopolitical situation is increasing risks to the economy but we don’t expect them to change course until next year," Societe Generale economist Anatoli Annenkov said.

"We expect the ECB to launch an asset purchase programme early next year, buying private-sector rather than government bonds at the outset. But for the time being, they are going a different route to encourage lending."

In June, the ECB became the first major central bank to charge banks for holding their deposits overnight, a step designed to stop them hoarding cash and lend instead.

Apart from Ukraine, the euro zone faces other hurdles.

Data this week showed Italy, the bloc's third-biggest economy, has slipped back into recession while the Bundesbank says even powerhouse Germany stagnated in the second quarter.

Italian Prime Minister Matteo Renzi has led calls to move away from spending austerity to adopting looser EU budget rules, but has been rebuffed by Berlin.

Draghi, an Italian, weighed into the debate by saying that those countries that have carried out the most convincing structural economic reforms were reaping the best rewards in higher growth - an implicit rebuke to Italy and France.

He urged euro zone governments to stick to EU deficit reduction rules and not throw away the gains of fiscal consolidation.

In France, the region's second biggest economy which is also struggling, President Francois Hollande said the ECB and Germany must do more to boost growth and fight a "real deflationary risk" in Europe. 

Asked about mounting French calls for a weaker euro to stimulate growth, Draghi listed reasons why conditions were ripe for a fall in the euro's exchange rate, including divergent interest rate prospects with the United States.

Low prices are partly a result of spending cuts and lower wages, reforms the ECB does not want to hinder. But if prices get stuck at low levels, the ECB insists it is ready to act.

Source: Reuters

Russia retaliates with bans on food imports from EU, U.S.

Russian Prime Minister Dmitry Medvedev laid out the details of his country’s response to Western sanctions on Thursday, banning imports of a wide range of foods and considering wider retaliatory measures.

“Fulfilling the presidential order, I’ve signed a government decree. Russia imposes a total ban on deliveries of beef, pork, fruit, vegetables, poultry, fish, cheese, milk and dairy products,” Medvedev said, opening the weekly government session.

Medvedev said Russia won’t import those products from the European Union, the U.S., Australia, Canada and Norway for one year, adding that the decision could be reviewed before the end of 12-month period.

Medvedev said Russia has also prohibited Ukrainian airlines from making transit flights over Russia’s airspace to Azerbaijan, Georgia, Armenia and Turkey. He said Moscow is considering imposing similar restrictions on EU and U.S. companies, banning them from transit flights over Siberia to Asia.

The moves are the latest sign of defiance from the Kremlin in the face of growing Western pressure to end its support for pro-Russia separatists fighting in Ukraine. By targeting imported foods, the Kremlin is sending the message that the country is ready to make sacrifices in order to stand up to the West.

At the same time, the import bans will have a limited impact on the bulk of Russia’s population, which relies mainly on domestic foods and imports from other former Soviet countries.

The food ban would hit farmers in Eastern Eurohpe, but would have little impact on the EU’s overall economy.

Source:Marketwatch

WSJ:Both declining bank lending and heavy debt burdens are hurting the euro zone economic recovery.

Both declining bank lending and heavy debt burdens are hurting the euro zone economic recovery.

On the one hand, economists argue the recovery is being held back because debt burdens remain far too high. Total public- and private-sector debts are equal to more than 400% of gross domestic product in Ireland and Cyprus, and over 300% in Spain, Portugal and Greece. And the stock of bad debts now equals 50% of loans in Cyprus, 33% in Greece and 16% in Italy, 14% in Spain and 11% in Portugal. On the other hand, economists also warn the economy is weak because it is being starved of new credit: Bank lending shrank by another 1.8% in the year to the end of June in the euro zone. In Spain, it fell by 8% in the year to the end of May, in Portugal by 7% and in Italy, Cyprus and Ireland by 4%, according to Morgan Stanley.

Deleveraging, it seems, is both the solution to the euro zone's problems and the source of all its woes.

 The deleveraging can be done in two ways.

 A good deleveraging is when balance sheets are restructured and bad debts written off. This way, viable businesses and creditworthy households should be able to borrow from healthy banks to fund productive investment. The economy grows and the burden of debt falls.

 A bad deleveraging is when governments, households and companies try to tackle excessive debts by cutting spending and overindebted banks refuse to lend so that the economy shrinks and the burden of debt rises, creating a vicious spiral.

What can be done to speed up the process of good deleveraging? There are three requirements: first, banks must write down their loans to realistic valuations and raise any capital needed to absorb the losses; second, banks need access to a robust insolvency regime that will allow them to swiftly restructure bad debts, if necessary by forcing companies and households into bankruptcy; third, there needs to be an abundant supply of equity capital so that banks can unload restructured assets from their balance sheets.

True, the European Central Bank's Comprehensive Assessment of the 131 largest euro-zone banks—comprising an asset-quality review and stress test—is supposed to address the first of these problems. Encouragingly, in the year since the ECB plan was announced, euro-zone banks have raised more than €40 billion ($53.72 billion) of capital via equity issues and asset sales