IEA Expects Acceleration of Global Oil Demand

Global oil demand will grow by 1.3 million barrels a day in 2014 to 92.5 million barrels a day, the International Energy Agency (IEA) said Tuesday in its monthly report. That would come after a 1.2 million barrels a day gain in 2013 to 91.2 million, the IEA said.

This acceleration likely will be supported by “stronger economic momentum as the year progresses,” the agency added. It also said surging U.S. oil production could hit a wall in the coming years if the nation maintains its ban on crude exports.

Also Tuesday, the People’s Bank of China pumped 255 billion yuan (about $43 billion) into money markets via a repurchase program, hoping to address the demand for cash before the upcoming Chinese New Year and ease fears of a credit crunch, according to state media outlet Xinhua.

Meanwhile, analysts said a fall in U.S. crude inventories has provided some support for crude prices.

“The fundamentals for WTI crude oil still look supportive for prices in our view, at least in the near term,” said Timothy Evans, an energy analyst for Citi Futures, in a recent note.

U.S. crude inventories have dropped 41.2 million barrels over the past seven weeks, and possibly will be followed by another draw of “1-2 million barrels” in the week ended Jan. 17, according to estimates by Evans.

On Monday, the U.S. and European Union lifted some sanctions on Iran. The move comes after the country stopped enriching uranium, as part of a November deal that Tehran has reached with world powers to halt its nuclear development in exchange for limited sanctions relief.

But analysts at Commerzbank Commodity Research emphasized in a note Tuesday that “this easing of sanctions will have only limited immediate impact on the oil market.” In addition, the analysts said oil prices were getting a lift from a more measured view of Libyan production.

“The expectation of a rapid normalization of oil production in Libya has given way to a more realistic appraisal of the situation,” the Commerzbank analysts wrote. “Despite the fact that the Libyan prime minister announced that the oil terminals in the east of the country, which have been shut down for months, would be opened within days, this is hardly feasible in practice.”

U.S. On Pace for Best Growth Since 2005

Think the disappointing U.S. jobs report for December has dampened the optimism of economists about the New Year? Think again.

Most economists think the dismal 74,000 increase in net hiring last month was a fluke caused by poor weather and seasonal-adjustment problems that will soon be revised away or prove to be an aberration.

The way those with a sunnier view see it, the road is clear for the U.S. to produce its fastest spurt of growth since the Great Recession. There’s no big crisis in Washington brewing, U.S. households are better off financially and businesses are raking in the profits. Nor are there any major global threats to the economy on the horizon.

Consider the new forecast by top economists at the nation’s leading bank firms. They predicting the U.S. economy will hit 3% growth in 2014 for the first time in nine years.

The forecast by the advisory panel of the American Bankers Association is no outlier, either. A rising number of economists predict the U.S. will meet or beat the 3% threshold.

“We see 2014 as somewhat of a breakout year,” Christopher Low, chairman of the ABA’s 13-member panel and chief economist of FTN Financial, told MarketWatch.

President Barack Obama, faced with sagging poll numbers, hopes economists are right and he’s telling the public the same thing.

“I say this can be a breakthrough year for America,” Barack Obama said in a speech late last week. “The pieces are all there to start bringing back more of the jobs that we’ve lost over the past decade.”

Government, heal thyself

So what makes 2014 different?

For starters, Washington is on track to pass budget bills to fund the government through the next two years and no new tax increases are coming down the pike. For the first time in five years Republicans and Democrats appear ready to play nice and avoid a wrenching fiscal fight that would undermine the economy again.

“A new leaf has been turned over,” said Peter Hooper, chief economist of Deutsche Bank. “And this is huge.”

Of course, Washington may find other ways to hold back growth. Some economists fret the new health-care law could have a negative impact on hiring and spending. Others say the federal government has been too tardy to get behind the boom in U.S. energy production, depriving the economy of even more jobs and growth.

Still, the budget truce is expected to give businesses more confidence and allow them to better map out their spending, hiring and investment decisions for the next few years.

That’s no small thing. Investment only rose about 2.3% in 2013, less than half the rate of the prior year. Economists believe the government shutdown in October and the bitter fight over tax rates at the end of 2012 kept companies largely on the sidelines.

Business leaders might not like all the decisions coming out of Washington, but they hate uncertainty even more. The budget deal gives them certainty.

Against that backdrop, economists predict companies will more than double their investment in 2014 in equipment, machines, plants and the like. If so, that would further solidify the foundation for the economy to grow.

“Now that the policy uncertainty has been reduced, we should see business investment pick up,” said George Mokrzan, director of economics at Huntington National Bank in Ohio.

Trickle-down economics?

For American workers and millions of unemployed, that’s also a good thing.

Lots of jobs tend to be created when companies raise investment. More people have to be hired to build new offices or to meet the increase in demand for business equipment such as computers or machine tools.

What’s more, companies usually have to offer higher wages to attract good workers as the pool of available labor shrinks. That also gives people who already hold jobs the ability to ask for higher pay or the leeway to go work some place else.

By and large, such an option hasn’t been available to most workers since the end of the 2007-2009 recession. Worried about losing their livelihoods, many Americans have stayed longer in the current jobs than they expected or have accepted meek increases in their yearly salaries.

To be sure, no one is predicting that worker paychecks will start looking like winning Powerball tickets. The average hourly wage of U.S. employees only rose a scant 0.2% in the past 12 months, adjusted for inflation. The pace of hiring would have to surge to trigger a steady rise in salaries.

Such a scenario is unlikely in 2014. The ABA economic panel, for example, projects hiring will climb to an average of 200,000 a month this year, just a little better than the roughly 180,000 average in both 2013 and 2012.

Still, even a modest improvement in hiring could put upward pressure on wages, help American families and brighten the nation’s outlook. The U.S. is projected to add at least 2 million jobs for the fourth straight year, pumping more money into the economy and moving it closer to its historical growth average of 3.3%.

How long it takes to get back there, however, is still a dicey question. And the soothing talk of economists has to be taken partly with a grain of salt. Economists on Wall Street and inside the Federal Reserve have repeatedly forecast faster growth at the start of each year since 2010, only to see those predictions dashed.

Potential pitfalls

What might lead to another disappointment in 2014? For one thing, the Fed’s move to end a massive economy-stimulus program by the fall could push interest rates higher and dampen resurgent sectors of the economy such as autos and housing whose sales are fueled by borrowing.

“I do think there has to be some fallout,” Low said.

The labor market, for its part, has shown occasional bouts of weakness. Companies have boosted hiring in the first few months of each New Year since 2011, only to cut back by summer.

What the nation needs is an uninterrupted period of strong job creation. As the dwindling number of bearish economists point out, more than 20 million people who want a good full-time job still can’t find one. That’s depressed wages for all Americans and gives companies the upper hand over its employees.

A large share of the 7.5 million new jobs created since 2010, what’s more, are in lower-paying industries such as retail or hospitality. Millions of American still have great trouble just making ends meet.

The persistently soft labor market, in the bearish view, largely explains why the current recovery has been the weakest in the postwar era — and why boom times are still not just around the corner.

China’s Economic Growth Slows, In Line with Forecasts

China’s economy slowed its growth slightly in the October-December quarter, with the result just above what most economists had expected.

Markets offered a briefly positive reaction to the result, along with other data for December, which were mostly in line with forecasts, though the improvements soon melted away.

China’s gross domestic product was 7.7% higher than a year earlier, the National Bureau of Statistics said Monday.

The rate marked an easing from 7.8% growth in the July-September quarter but beat a forecast gain of 7.6%, according to separate polls from Reuters and The Wall Street Journal.

On a quarterly basis, the economy grew 1.8%, slowing from 2.2% in the previous three months.

“The slowdown in the fourth quarter was caused by decelerating investment growth,” wrote RBS chief China economist Louis Kuijs. “Growth of what we consider largely credit-based investment — in infrastructure and real estate — has eased since June 2013, alongside the deceleration of expansion of” credit for the entire economy.

More numbers, few surprises

Among other data released Monday, industrial production slowed to 9.7% annual growth in December, from November’s 10% gain. The Wall Street Journal and Reuters surveys put the median forecast at 9.8%.

December retail sales increased by 13.6% compared to the year-earlier period, after a 13.7% rise in November, with the result matching the projected increase from the Reuters survey.

As Beijing lies under a blanket of smog, a group of NGOs and research institutes has released a study showing that industrial polluters consistently breach emission standards.

Urban fixed-asset investment (FAI), reported only on a year-to-date basis, was up 19.6% in 2013, after the January-November reading showed a 19.9% rise. The Wall Street Journal had tipped a 19.8% rise. The metric is closely watched as a proxy for construction activity in China.

The FAI statistic was probably the most negative of the numbers, Bank of America-Merrill Lynch economists said, estimating that on a monthly basis, growth fell to 17.1% in December from 18.2% in November.

However, they added that “there are usually quite significant FAI data revisions at year-end,” and the drop could be much less than suggested by Monday’s results. And judging by China’s cement output, which they saw as a better barometer of construction, “we believe housing and infrastructure spending could have stayed relatively stable ... over the past couple of months.”

Policy may hold course

As for the policy implications of the data, the Merrill Lynch economists expect little change to Beijing’s economic stance in 2013.

“We expect the Chinese government to set the same targets on GDP growth, consumer price index inflation and M2 [money-supply] growth in 2014 as those in 2013, at 7.5%, 3.5% and 13.0% respectively,” they wrote, forecasting “the government to maintain neutral monetary policies and execute slightly more proactive fiscal policy in 2014.”

RBS’s Kuijs agreed, saying that “policy makers are implementing a monetary tightening in order to rein in credit growth and financial risks. Barring a worsening growth outlook, we expect them to continue doing that.”

“Nonetheless, risks remain, including with implementation,” he added. “Indeed, the slowdown in overall FAI growth towards the end of 2013 calls for scrutiny of the data in the months ahead.”

Treasurys Inch Lower on Continued Taper Path

Treasury prices edged mostly lower Tuesday as the haven government debt market priced in the Federal Reserve’s continued wind-down its $85 billion in monthly bond-buying.

The 10-year note yield, which rises as prices fall, was up half a basis point on the day at 2.834%, continuing to trade in a range with little new data on tap this week. The 5-year note yield rose 1.5 basis points to 1.644%, while the 30-year bond yield fell a basis point to 3.747%.

Global leaders meet for a conference in Davos this week, but the impact of the events on markets is likely to be limited.

Longer maturity yields have been rising slower than intermediate maturities, which are most sensitive to shifting monetary policy.

A Wall Street Journal Report by Jon Hilsenrath late Monday suggested that the Fed was on track to continue reducing its purchases when it meets next week. The central bank said in December that it would trim its monthly bond buying by $10 billion. When the Fed’s policy committee meets next week it is likely to reduce by another $10 billion to $65 billion, Hilsenrath wrote.

The Fed has been happy that the unemployment rate continues to fall, and data show a more positive pace of economic improvement. Meanwhile, stocks continue to climb, and the interest-rate futures market still signals fed funds rate hike timing that is roughly in line with the Fed’s expectations. The central bank has said it will hold its key policy rate near zero until well after the unemployment rate drops below 6.5% (it is now 6.7%).

“Against a backdrop of economic strengthening in 2014, it remains prudent to expect moderate interest-rate increases in the coming months, with varying impacts on fixed-income assets, depending on their interest-rate sensitivity,” said William Riegel and Lisa Black of TIAA-CREF, in a note.

Also this week, global business leaders and central bankers will meet for an annual conference in Davos, Switzerland. The events, however, have limited consequence for the market, strategists say.

“In past years, there have been many buzz phrases and few real economy or market-moving revelations coming from Davos. For 2014, the Forum will be focusing on developing economies and global poverty—which suggests that, once again, the short-term actionable news coming from the Alps will be again limited,” said Guy LeBas, chief fixed-income strategist at Janney Capital Markets, in a note.

The Treasury Department will sell $15 billion in 10-year Treasury inflation-protected securities, or TIPS, on Thursday. TIPS are meant to protect against inflation by increasing in principal value alongside the rising cost of goods. TIPS have underperformed in recent months due in part to a rising rate environment and subdued inflation in the U.S.

Gold Slumps as Investors Cash in on Recent Gains

Gold backed away from five-week high territory on Tuesday as a stronger dollar and lack of momentum triggered a sell button for investors who have been riding it higher. Platinum also reversed in the wake of a recent run inspired by potential strikes in South Africa.

Trading floors were closed on Monday in observance of the Martin Luther King Jr. holiday. Gold reversed gains seen in electronic trading overnight.

Gold futures ended last week with a bang, settling to their highest level in more than five weeks -- $1,251.90 an ounce -- as a move lower for most U.S. equities and a decline in consumer sentiment shined a positive light on the precious metals’ investment appeal.

South Africa's Association of Mineworkers and Construction Union (AMCU) plans to strike at the world's top three platinum producers, hitting over half of global output.

But gold fell as investors returned from the long holiday weekend to push equities higher. Keith McCullough, chief executive officer of Hedgeye Risk Management, said gold loved the move down for bond yields last week, but isn’t happy with a rise in yield on the 10-year note.

A stronger dollar overnight also weighed on the metal. The dollar rose to a four-month high via the dollar index earlier after comments from The Wall Street Journal’s Federal Reserve watcher Jon Hilsenrath said more tapering could be coming as soon as next week.

Elsewhere in metals trading, platinum for April delivery backed off an earlier surge of around 2.3%. The metal had hit levels not seen since October on weekend news South African platinum miners plan to begin an open-ended strike on Thursday as they seek higher pay. Platinum pulled back along with gold.

In a note on Tuesday, Goldman Sachs cut its platinum estimates for 2014 and 2015, to $1,450 an ounce from $1,463 an ounce and to $1,506 an ounce from $1,519 an ounce, respectively. It cut forecasts for 2016, 2017 and 2018 as well. Its palladium forecast was cut for 2014 to $770 from $795 an ounce.

While the platinum forecast is improving, said Goldman analysts, a weaker south African rand will weigh. “Palladium will continue to benefit from auto demand growth, but will also likely be price-capped on a weaker rand and availability of significant above-ground stocks,” the analysts said.

IMF Boosts 2014 Global Growth Outlook

The International Monetary Fund on Tuesday revised its global economic growth outlook for the year upward on the back of stronger U.S., euro-zone and Japanese growth, but said deflation and financial sector risks could still undermine a full recovery, reports MarketWatch.

"The recovery is strengthening," IMF Chief Economist Olivier Blanchard said in remarks prepared for the fund's latest World Economic Outlook report.

The IMF raised its 2014 global growth forecast to 3.7%, up 0.1 percentage point from its last outlook in October.

Mr. Blanchard said the drag from budget belt-tightening around the globe is diminishing as the financial system slowly heals and uncertainty among investors in decreasing.

Still, he said, it is "a weak and uneven recovery."

Unlike in the past several years following the 2008 financial crisis, advanced economies are fueling global growth as emerging market growth largely slows.

The U.S. leads the recovery. The IMF raised its forecast for U.S. economic growth this year by 0.2 percentage point to 2.8%, though it downgraded its 2015 outlook by 0.4 percentage point to 3% amid ongoing fights in Congress over the federal balance sheet and spending.

Given the slow return to economic health and the potential global shocks to emerging market economies from higher borrowing rates, the IMF has called for the U.S. Federal Reserve to carefully communicate its exit from years of easy money policies. Last week, IMF Managing Director Christine Lagarde suggested that the Fed's current exit path is broadly appropriate. The fund said it expects the Fed to start raising interest rates in 2015.

The fund is less sanguine about Europe, however, where officials warn that rising risks of falling prices threaten to stall the anemic recovery. Although the fund raised its growth forecast for the U.K., Germany and Spain, Mr. Blanchard said "Southern Europe continues to be the more worrisome part of the world economy."

While exports are strong in the southern euro-zone countries, demand is slack, suffering from weakness among banks, companies and productivity, and more budget tightening is needed.

To avoid deflation, the IMF said more can be done by the European Central Bank to stimulate growth in the 18-member currency union. Also, the ECB's bank balance sheet review is likely the area's most important short-term task, the IMF said.

In Japan, the IMF raised its growth forecast for the year by 0.4 percentage point to 1.7%. It said Japan's government will continue to face the challenge of trimming its budget enough to reassure investors while not slowing the recovery.

The fund also raised the growth forecast for the world's second largest economy, China, by 0.3 percentage point to 7.5%. Mr. Blanchard said, however, that among all the emerging markets the main challenge is China's need to contain escalating risks in the financial sector without excessively slowing growth.

The IMF downgraded its outlook for many other major emerging market economies. Most notably, it cut Russia's growth forecast for the year by 1 percentage point to 2% and Brazil's growth outlook by 0.2 percentage point to 2.3%.

Stronger growth in advanced economies should boost demand for emerging market exports enough to offset an expected rise in borrowing costs as the U.S. Fed begins to wind down its easy-money policies this year, the fund said.

Still, Mr. Blanchard said that while some of the rise in interest rates has already been factored into investors' outlook for emerging markets, "we can expect complex capital movements across countries for some time to come."

Emerging market economies with weak economic policies are likely to be most affected, he said.