Wednesday, December 7, 2011

‘Buy French’ Becomes Crisis Battle Cry in France

By Helene Fouquet - Dec 7, 2011 6:52 PM GMT+0800

With France’s economy slowing and joblessness at its highest in 12 years, politicians are turning to a well-worn credo: “Buy French.”

France is entering the height of its holiday spending season with politicians egging consumers on to buy “Made in France” products to keep jobs at home. Consumer spending, which accounts for 56 percent of the $2.56 trillion economy, may create jobs if the French buy local goods, says Francois Bayrou, a centrist candidate in the presidential elections next year.

“My proposal is to rectify our country’s brand image, to encourage consumers to buy French and to support very small-and medium-sized companies,” Bayrou said in a posting on his website today, ahead of the official announcement of his candidacy this afternoon.

As the European debt crisis rips through France, President Nicolas Sarkozy, who faces an election in April and May next year, is struggling to cap unemployment. Joblessness is the biggest concern for French people, ahead of wages and pensions, according to a CSA survey for BFM radio in November.

Sarkozy’s Union for a Popular Movement party unveiled its platform last month, saying it wants “Made in France” to become a trademark that’s as recognizable as “Made in Germany.” His Socialist Party rival Francois Hollande has made creating jobs at home a cornerstone of his campaign.

A poll last month showed that more than 50 percent of French people are willing to pay more for a “Made in France” product. The willingness is even greater in the purchase of food products, at 78 percent, according to the Opinion Way survey for the monthly Terra Eco.
‘Economic Solidarity’

Buying products that are local rather than low-cost is driven largely by “national economic solidarity,” the poll showed.

A separate Ifop survey for Cedre, an association to promote local entrepreneurs, showed that French consumers are ready to pay 5 to 10 percent more for domestic products.

Goods manufactured in France are on average 15 to 25 percent more expensive than in countries such as China, according to Vincent Gruau, head of Paris-based Cedre.

“The crisis is pushing French people to realize they must stop being na├»ve; they understand that to keep jobs at home they must consume locally,” said Gruau, who also heads Majencia, an office-supplies maker.

The number of people actively looking for work in France has jumped by 91,500 to 2.82 million since the start of the year, figures published last month by the Labor Ministry show.
Record Trade Deficit

The Organization for Economic Cooperation and Development said Nov. 28 that French unemployment will exceed 10 percent next year and gross domestic growth in the euro-zone’s second- largest economy will expand no more than 0.3 percent. That’s less optimistic than Sarkozy’s target of 1 percent. The unemployment rate was 9.7 percent at the end of September.

The push to buy local products also comes as France’s trade deficit rose to 72 billion euros ($97 billion) in the year through October, heading toward an annual record.

The rising shortfall has prompted calls from Sarkozy for greater “reciprocity” in trade. He has suggested that the European Union block products from countries that don’t have the same labor, quality and environmental standards as the region.

Socialist lawmaker Arnaud Montebourg, who was defeated in the Socialist presidential primaries, has gone so far as to call for “de-globalization.”

Earlier this year, the far-right National Front party candidate Marine Le Pen, who ranks third in presidential polls, promised to create 500,000 jobs over a five-year period using “strategic planning” and a protectionist economic policy.
‘Patriotic Purchase’

Hollande, the frontrunner in the presidential race, is visiting a 20-person Montceau-Les-Mines, France-based factory today to celebrate the return of the production of an electronic cooking recipes tablet called “Qook” to France from China.

Meanwhile, in spite of the economic slump, French people will spend 1.9 percent more on Christmas shopping this year from 2010, according to a November study from Deloitte LLP. They’ll shell out on average 606 euros on gifts, food and socializing, compared with 449 euros for Germany, Deloitte said.

French leaders want them to spend it on goods produced at home, making the ”Made in France” leitmotiv pervasive.

A recent advertisement for Renault SA’s Megan car showed off French quality with a spoof of an Opel ad that praised German technology and reliability.

“It’s a funny ad, but it’s a symptomatic one,” said Gruau. “We laugh because we have hang ups about our industrial capability. Germans don’t; they are proud of their industry.”

As French Christmas shoppers flock to department stores and browse the Internet for presents, they’ll find websites touting Gallic products.

“To make a patriotic purchase, the solution is offer a gift produced in France!” says, a Montpellier-based online gift shop that sells liquor, umbrellas, shoes and jewelry.

Monday, November 7, 2011

European Stocks, U.S. Futures Decline on Italy

By Sarah Jones - Nov 7, 2011 8:07 PM GMT+0800

European stocks resumed their losses after a report that Italian Prime Minister Silvio Berlusconi said he’s not planning on stepping down.

The Stoxx Europe 600 Index slipped 0.6 percent to 238.3 at 12:06 p.m. in London. In response to earlier reports that he may quit within hours, Berlusconi denied that he’s stepping down, Ansa said, citing comments from the premier.

“We are all looking for the next policy maker’s speech,” Robert Talbut, chief investment officer at Royal London Asset Management, said in an interview with Bloomberg Television. “There is an enormous amount of uncertainty around how this crisis is going to play out.”

Monday, October 10, 2011

Asian Stocks Rise After U.S., Europe Shares Jump on Debt Pledge; Rio Gains

By Shani Raja - Oct 11, 2011 8:42 AM GMT+0800

Asian stocks rose, driving a regional benchmark index higher for the fourth straight day, after U.S. and European shares jumped in response to a pledge by German and French leaders to stem Europe’s debt crisis.

Rio Tinto Group, the world’s second-largest mining company by sales, rose 1.6 percent in Sydney. Korea Zinc Co. surged 6.5 percent in Seoul. Mitsubishi Corp., which gets 43 percent of its revenue from commodities trading, gained 2.9 percent in Tokyo, while Sony Corp., Japan’s largest exporter of consumer electronics, jumped 5.2 percent. Japanese markets resumed trading today after a public holiday yesterday.

The MSCI Asia Pacific Index gained 1.1 percent to 114.94 as of 9:25 a.m. in Tokyo, led by exporters and mining companies as commodity prices advanced after German Chancellor Angela Merkel and French President Nicholas Sarkozy pledged at the weekend to deliver a plan to recapitalize the Europe’s banks and address Greece’s sovereign-debt crisis by Nov. 3. More than four stocks rose for each that fell on the gauge.

“There is hope that if a comprehensive European bank package is announced, the damage on the real economy will be less than currently expected,” said Belinda Allen, a senior investment analyst at Colonial First State Global Asset Management in Sydney, which oversees about $145 billion. “That would be better news for global growth and commodity demand.”
Estimated Earnings

The MSCI Asia Pacific Index dropped 17 percent this year through yesterday, compared with a 5 percent loss for the S&P 500 and a 14 percent decline for the Stoxx Europe 600 Index. Stocks in the Asian benchmark were valued at 11.6 times estimated earnings on average, compared with 12 times for the S&P 500 and 10 times for the Stoxx 600.

Australia’s S&P/ASX 200 Index gained 0.4 percent today, South Korea’s Kospi Index climbed 2.2 percent and Japan’s Nikkei 225 Stock Average advanced 2 percent.

Futures on the Standard & Poor’s 500 Index slid 0.1 percent today. In New York yesterday, the gauge rose 3.4 percent, its biggest rally since August, with all 10 industry groups advancing. The S&P 500 last week rebounded from the threshold of a bear market on optimism Europe will tame its debt crisis and after U.S. economic data improved.

The Stoxx Europe 600 Index completed its biggest four-day gain since 2008 yesterday.

“Commodity prices and stocks fell sharply over the last few months on worries Europe would blow up, causing a collapse in global growth,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has almost $100 billion under management. “The pledges from Merkel and Sarkozy help provide confidence that this won’t happen.”

Copper futures for December delivery climbed 2.9 percent on the Comex in New York yesterday and gold futures rose 2.1 percent, while crude oil for November delivery gained 2.9 percent. The London Metal Exchange Index of prices for six industrial metals, including copper and aluminum, added 1.7 percent for its third straight daily gain.

Tuesday, September 6, 2011

Swiss franc falls sharply after SNB sets target rate

LONDON, Sept 6 | Tue Sep 6, 2011 4:15am EDT

(Reuters) - The Swiss franc fell sharply and Swiss shares rose on Tuesday after the Swiss National Bank set an exchange rate target at 1.20 francs per euro.

The euro soared 7 percent on the day to 1.220 francs, according to electronic trading platform EBS, from around 1.1270 francs, while the dollar jumped the same amount against the Swiss currency to 0.8579 francs.

The Swiss National Bank said on Tuesday it would set a minimum exchange rate target of 1.20 francs to the euro and would enforce it by buying foreign currency in unlimited quantities.

Switzerland's share benchmark SMI extended gains to trade 3.2 percent higher at 5,306.54 points. It traded at 5,209.77 points before the announcement. (Reporting by London Markets Team)

Monday, August 29, 2011

Big Banks Bet Crude Oil Prices Would Fall in 2008 Run-Up, Leaked Data Show

By Matthew Leising and Silla Brush - Aug 29, 2011 12:00 PM GMT+0800

Just before crude oil hit its record high in mid-2008, 15 of the world’s largest banks were betting that prices would fall, according to private trading data released by U.S. Senator Bernie Sanders.

The net positions of the banks undermine arguments made by Sanders that speculative trades on Wall Street drove oil prices in 2008, said Craig Pirrong, director of the Global Energy Management Institute at the University of Houston. Retail gasoline reached a record $4.08 a gallon on July 7, 2008, and oil peaked at $147.27 a barrel on July 11 that year.

“If you believe the banks are jerking around the market and the market is going the way they were trading, the price should have been lower,” Pirrong, who reviewed the data, said in an interview.

The records of oil futures and derivatives trades in the first half of 2008 were compiled by the Commodity Futures Trading Commission and made public Aug. 19 by Sanders. Banks including Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Morgan Stanley and UBS AG collectively held 229,460 net short contracts compared with 101,537 net long contracts, the data show. Short trades make money if prices fall.

Sanders, a Vermont Independent, and other supporters of curbs on speculation have said the CFTC documents demonstrate the need for the agency to complete its rule on so-called position limits. The Dodd-Frank regulatory overhaul enacted last year requires the CFTC to limit traders’ positions in exchange- traded and over-the-counter derivatives for oil, natural gas, wheat and other commodities.
‘Major Reason’

In an Aug. 22 letter to CFTC Chairman Gary Gensler, Sanders said the 2008 data showed that banks and other speculators harmed the economy. “We now know that excessive oil speculation is a major reason why oil prices have risen so sharply,” he wrote.

Asked to comment specifically on the analysis of the banks’ positions, Warren Gunnels, senior policy adviser to Sanders, declined, saying the senator’s office would need more information from the industry and regulators. “The bottom line is that we need the CFTC to obey the law, do its job and eliminate excessive oil speculation,” Gunnels said in an interview.

The position-limits rule, first proposed by the agency in January, spurred more than 13,000 public comments filed with the CFTC from supporters including Delta Air Lines Inc. (DAL) and opponents including Barclays Capital.

The data released by Sanders lists transactions by more than 200 traders, offering a dated but rare glimpse into an opaque market. It was collected by the CFTC for a Sept. 11, 2008, report on the run-up in oil prices. The agency said at the time that the data had limitations and, while it was the best available snapshot of trading, it might not be definitive.
‘Utmost Concern’

When the agency told Congress in 2008 that its review found no evidence that non-commercial trading had driven the spikes in prices, three House Democrats questioned the conclusion and sought the underlying data about companies and their positions.

The CFTC data was kept confidential until Sanders publicized it. John Damgard, president of the Futures Industry Association, said in an Aug. 19 statement that the release was of “utmost concern” to the trade group’s members and could “seriously jeopardize the CFTC’s ability to gather information from market participants and carry out its market surveillance mission.”

The CFTC and its inspector general should investigate if any laws were broken because of the leak, the association said on Aug. 25.

Sanders has suggested he acted in part to counter the CFTC’s assertion when it released its January proposal that it needed more data on the private over-the-counter swaps market to implement position limits on contracts that settle outside of the current month.

Sanders’ office said the data he released included both exchange-traded and over-the-counter transactions. “It is my understanding that the CFTC is still claiming that it cannot impose strict speculation limits because it does not have enough information,” Sanders said in the Aug. 22 letter to Gensler. That, Sanders said, is “laughable.”

Steve Adamske, CFTC spokesman, declined to comment on Sanders’s letter.

The swaps market was largely unregulated until those trades helped fuel the 2008 credit crisis. Dodd-Frank, enacted last year, aims to reduce risk, boost transparency and give regulators access to databases of information about exchange- traded and private trades.
Meeting the Burden

Opponents of the position-limit proposal have argued that the agency doesn’t have enough data and that regulators haven’t demonstrated that excessive speculation is driving prices.

“The commission has not met its burden of showing that the proposed position limit regime is ‘necessary’ and ‘appropriate,’” Craig S. Donohue, chief executive of CME Group Inc. (CME), the world’s largest futures exchange, wrote in a March 28 letter to the CFTC.

The agency has come under the opposite pressure from Senators Maria Cantwell, a Washington Democrat, Carl Levin, a Michigan Democrat, and Sanders, among other lawmakers. “The CFTC is breaking the law” by not meeting the Jan. 17 deadline set by Dodd-Frank, Sanders said in the Aug. 22 letter.

The agency may vote to complete the position-limit rule as early as Sept. 22, Gensler said Aug. 25. The regulation has split the agency’s five commissioners: Jill E. Sommers, a Republican, opposed the January proposal, while Scott O’Malia, a Republican, and Michael V. Dunn, a Democrat, supported seeking further public comment even as they registered concerns about imposing trading limits. Bart Chilton, a Democrat, has urged the agency to implement the trading curbs.
Offset Positions

All banks included in the data released by Sanders held both long and short positions, which when offset against each other provide a net view of expectations of where oil prices were headed. Credit Suisse held the largest net-short position at 109,655 contracts, which was 2.7 times as large as the largest net long position of 41,338 lots held by Deutsche Bank. Each lot represents 1,000 barrels of oil.

“Goldman Sachs, Morgan Stanley (MS) and other speculators on Wall Street dominated the crude oil futures market causing tremendous harm to the entire economy,” Sanders said on Aug. 19. Mark Lake, a spokesman at Morgan Stanley, and Andrea Raphael, a spokeswoman at Goldman Sachs, declined to comment.
Limited Data

Pirrong, who has consulted for exchanges and whose research on derivatives regulation has been published by the industry, said that one of the limitations of the CFTC data is that it doesn’t distinguish between banks’ trading positions for their own accounts and those handled for clients.

The aggregate position of the more than 200 traders was net short by 36,327 contracts, according to the data. T. Boone Pickens, the billionaire Texas hedge-fund manager, had 145,257 lots and was net short 1,983, according to the data.

A separate set of CFTC data provided to Bloomberg News by Sanders’s office on Aug. 24 shows commodity index fund investments holding net long positions on Dec. 31, 2007, March 31, 2008 and June 30, 2008. The data, also collected for the CFTC’s 2008 report, shows index funds, institutional investors, sovereign wealth funds and other clients all holding net long positions expecting crude oil to rise.

A third set of data released by Sanders showed six hedge and pension funds with crude positions exceeding so-called accountability levels -- which are set by exchanges, not the CFTC. Traders that exceed accountability levels may be required to provide information about the positions to exchanges, while not necessarily facing hard limits on the overall size of the transactions.

The data shows non-commercial trades on exchanges and in private over-the-counter markets. D.E. Shaw & Co., the now $21- billion hedge fund, and Caisse de Depot et Placement, now Canada’s biggest pension fund, held net short positions. Meanwhile, Bridgewater Associates LP, the hedge fund founded by Ray Dalio, expected crude prices to increase.

Bank Long Short Difference

Deutsche Bank 273,403 232,065 41,338
Goldman Sachs 451,997 419,324 32,673
UBS AG 100,206 82,383 17,823
Lehman Brothers 154,507 146,165 8,342
Barclays 277,461 276,731 730
Credit Agricole 89,346 88,715 631
Total= 101,537

Credit Suisse 81,638 191,293 -109,655
JPMorgan 200,062 245,261 -45,199
BNP Paribas 106,994 123,944 -16,950
Societe Generale 141,186 155,518 -14,332
Bank of America 50,893 62,412 -11,519
Macquarie Bank 42,611 51,820 -9,209
Citigroup 87,070 94,943 -7,873
Morgan Stanley 312,527 320,223 -7,696
Merrill Lynch 115,396 122,423 -7,027
Total= -229,460

Dollar Undervalued in Purchasing Parity

By Allison Bennett and Catarina Saraiva - Aug 29, 2011 11:46 AM GMT+0800

The dollar is poised for its biggest monthly gain since May, reclaiming its status as a haven while Switzerland and Japan boost efforts to weaken their currencies.

The greenback has appreciated 1.2 percent in August against a basket of the developed world’s nine most-traded exchange rates, according to data compiled by Bloomberg. That compares with a decline of 14 percent in the world’s reserve currency from this time last year through July.

Demand for U.S. assets is rising even though the Federal Reserve has pledged to keep its benchmark interest rate near zero through mid-2013 and Standard & Poor’s cut the nation’s credit rating from AAA. The two other currencies considered havens in times of financial and political strife -- the Swiss franc and yen -- are under siege by their governments and central banks after strengthening to records.

“The dollar is a buy through the end of the third quarter,” Nick Bennenbroek, head of currency strategy in New York at Wells Fargo & Co., the third-most accurate forecaster in the last six quarters as measured by Bloomberg, said in an Aug. 23 telephone interview. “The yen and the Swiss franc are very expensive and the dollar is very cheap and it’s the only major central bank that is not standing in the way of a currency advance.”

The dollar strengthened 0.1 percent to 76.64 yen last week, and rallied 2.7 percent versus the franc to 80.63 centimes. The Bloomberg Correlation-Weighted Currency Index for the dollar closed at 89.4521, up from 88.3486 at the end of July. The U.S. currency bought 76.68 yen today and gained 0.4 percent to 80.96 centimes.
Purchasing Power Parity

Even with the gains, America’s currency is 47 percent too weak against the franc and 31 percent undervalued compared with the yen, based on an index developed by the Organization for Economic Cooperation and Development in Paris that measures currencies using prices for similar goods and services in two countries.

The dollar may continue to appreciate as the Swiss National Bank and Bank of Japan intervene to stem gains and currencies of commodity-producing nations such as Australia, New Zealand and Canada lose some of their luster amid a global economic slowdown.
‘Dollar Is Cheap’

“The dollar is cheap against the G-10 small currencies like Australia, Canada, New Zealand, Sweden, Norway, Swiss and also against the yen,” Greg Anderson, a senior currency strategist at New York-based Citigroup Inc., said in a telephone interview Aug. 14. “If we have continued turbulence with commodities and equities selling off, the dollar is a short-term buy.”

America’s currency is 37 percent below fair value against the Australian dollar and 20 percent versus the Canadian dollar, according to the OECD index.

The dollar has mainly weakened since Fed Chairman Ben S. Bernanke signaled last year at an annual conference sponsored by the Federal Reserve Bank of Kansas City that the central bank may boost the economy by printing money and buying bonds. It purchased $600 billion of Treasuries between November and June, contributing to a 6.25 percent drop in the U.S. currency as measured by Bloomberg Correlation-Weighted Indexes.
Fed’s Toolbox

Bernanke said at an annual forum in Jackson Hole, Wyoming, on Aug. 26 that the central bank still has tools to stimulate the economy without providing details or signaling when or whether policy makers might deploy them.

Slowing growth in the U.S. and the Fed’s pledge to keep its target rate for overnight loans between banks at a record low of zero to 0.25 percent until mid-2013 may constrain the greenback. Citigroup lowered its 2011 U.S. growth estimate to 1.6 percent from 1.7 percent, and Goldman Sachs Group Inc. said it saw a one-in-three chance of a recession as it cut its gross domestic product forecast to 1.7 percent from 1.8 percent.

“Until we can get to a point where the dollar can demonstrate some independent strength, like the economic data justifies the Fed to provide some interest rate support, we don’t think the dollar can shine,” Robert Sinche, the global head of foreign exchange strategy at Royal Bank of Scotland Group Plc, said Aug. 24 in a telephone interview from Stamford, Connecticut.

RBS predicts the dollar will trade at $1.45 versus the euro by the end of the third quarter, from $1.4499 last week, and at $1.06 against the Australian currency, from $1.0573.
Increased Dollar Demand

Demand for the U.S. currency has increased as S&P’s Aug. 5 downgrade of the nation’s credit rating to AA+ caused stock markets to gyrate and sent investors to the safety of Treasuries. Investors repudiated the ratings company’s assertion that the U.S. was less creditworthy, driving 10-year note yields to record low 1.9735 percent on Aug. 18. The dollar appreciated the last month against all but one of the 16 most-traded currencies as tracked by Bloomberg, falling versus the yen.

“The downgrade obviously caused a big risk-aversion theme that is still en vogue,” Blake Jespersen, the director of foreign-exchange at Bank of Montreal in Toronto said Aug. 24 by telephone.

Strategists don’t expect the dollar to falter in the slowing economy. It will remain unchanged on average by the fourth quarter against currencies of the Group of 10 Nations, according to estimates of strategists compiled by Bloomberg.
Main Reserve Currency

The dollar represents 60.7 percent of the world’s currency reserves, compared with 26.6 percent for the euro, which has the next biggest portion, according to the International Monetary Fund in Washington. That leaves investors with few alternatives as the Swiss National Bank and Bank of Japan step up their efforts to curb gains in their currencies, according to Jespersen.

“The SNB and the BOJ have been very aggressive, not only in talk but in action, and therefore safe-haven flows are being allocated more toward the U.S. dollar,” Jespersen said.

Gains of 10 percent in the Swiss franc and 4.5 percent for the yen in the past three months have weighed on the export- reliant economies and prompted the central banks to take action to curb further appreciation.

The SNB lowered its target for three-month franc London interbank offered rate, or the rate banks charge to lend to each other in Swiss francs for three months, to “as close to zero as possible” on Aug. 3. It said it may take further steps.

The yen has erased all its losses since the Bank of Japan intervened Aug. 4 and expanded monetary stimulus by 10 trillion yen ($130.5 billion). Finance Minister Yoshihiko Noda introduced a $100 billion funding program last week for Japanese businesses intended to encourage the exchange of “yen-denominated funds to foreign currencies.”

“There are few currencies left to buy that don’t mind going up,” Kit Juckes, head of foreign-exchange research in London for Societe Generale SA and the second-most accurate currency forecaster as measured by Bloomberg said in an interview last week. “How much weaker can the dollar get?”

Tuesday, August 16, 2011

Industrial Production in U.S. Rose 0.9% in July

By Jillian Berman - Aug 16, 2011 9:52 PM GMT+0800

Industrial production in the U.S. climbed in July by the most this year as carmakers started to shake off the effects of the disaster in Japan and higher temperatures boosted utility use.

The 0.9 percent increase in production at factories, mines and utilities followed a revised 0.4 percent gain that was more the previously estimated, figures from the Federal Reserve showed today. Economists projected a 0.5 percent rise in July, according to the median estimate in a Bloomberg News survey. Factory output rose by the most in four months.

Production of business equipment picked up, showing gains in the industry that led the recovery may be sustained even as manufacturers contend with a slowdown in consumer spending and exports. Factories have also kept a tight rein on inventories, limiting the need for large-scale cutbacks that could trigger an economic slump.

“Given some of the other negatives in the economy, I think you still have to point to manufacturing as a bit of a bright spot,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, who correctly predicted the gain. Production was bolstered “by a beginning of the recovery in the auto sector. Manufacturing excluding motor vehicles was still up. Not great, but a decent outcome.”

Forecasts for industrial production in the Bloomberg survey of 85 economists ranged from gains of 0.1 percent to 1 percent.

Stocks declined after the report on growing concern over a global growth slowdown after Germany said its economy almost stalled in the second quarter. The Standard & Poor’s 500 Index fell 1.3 percent to 1,189.24 at 9:51 a.m. in New York. Treasury securities rose, sending the yield on the benchmark 10-year note down to 2.28 percent from 2.31 percent late yesterday.
Housing Starts

The housing market is still struggling, separate figures from the Commerce Department showed today. Housing starts dropped 1.5 percent in July to a 604,000 annual rate.

Manufacturing output increased 0.6 percent last month, led by gains at the nation’s automakers, the Fed’s report showed.

Production of automobiles and parts surged 5.2 percent last month, a rebound from the supply-chain disruptions that resulted from the March earthquake in Japan, the Fed report showed. Manufacturing excluding motor vehicles climbed 0.3 percent after a 0.2 percent gain in the prior month.

Motor-vehicle assemblies rose to 8.73 million units at an annual rate in July from 7.89 million, today’s report showed. Cars and light trucks sold at a 12.2 million annual pace in July, up from 11.4 million annual rate a month earlier, Autodata Corp. said last week. Deliveries at Detroit-based General Motors Corp. climbed 7.6 percent from the same month in 2010 to 214,915.
Second Half

“Although the economy has clearly lost some momentum, we do believe that it will continue to recover, but more gradually than we had originally anticipated as we move through the second half of the year,” Don Johnson, GM’s vice president of U.S. sales said on an Aug. 2 conference call.

Business equipment production rose 0.6 percent in July following a 0.2 percent gain in June. Output of computers and electronic products increased 0.5 percent after a 0.8 percent decline in June. Furniture production rose 0.7 percent after a 2.4 percent decrease.

Capacity utilization, which measures the amount of a plant that is in use, increased to 77.5 percent, the highest since August 2008, from 76.9 percent in June. The gauge compares with the average of 79.5 percent over the past 20 years.

Mining production, which includes oil drilling, rose 1.1 percent after a 1.2 percent gain. Utility output increased 2.8 percent, the most this year, after a 0.8 percent gain.
Heat Wave

Temperatures soared across the U.S., with July records in Texas and Oklahoma, according to the National Climatic Data Center. Last month, temperatures were “above normal” or “much above normal” in 41 of the 48 contiguous U.S. states, it said.

The U.S. economy grew at a 1.3 percent annual rate during the second quarter after almost stalling in the previous three months, according to Commerce Department figures. Fed policy makers pledged to keep the benchmark interest rate near zero to bolster a recovery that’s moving “considerably slower” than expected, policy makers said in a statement last week.

The drop in the value of the dollar could boost confidence among manufacturers. A weaker dollar benefits American companies by making their products more attractive to buyers overseas. The dollar dropped 7.9 percent in the 12 months ended in July against a weighted basket of currencies from the country’s biggest trading partners.
Growth Overseas

Peoria, Illinois-based Caterpillar Inc., the world’s largest construction- and mining-equipment maker, posted increased profits and sales in the second quarter, largely due to growth overseas, the company said July 22.

“China is doing a good job of balancing growth and inflation, and our expectations for China remain positive,” Chief Executive Officer Douglas Oberhelman said in the statement. “While we’ve seen some softening of growth in China, dealer deliveries to end users were up in the second quarter of 2011 compared with the second quarter of last year."

U.S. Sovereign Debt Rating Is Affirmed by Fitch at AAA; Outlook Is Stable

By Will Daley - Aug 16, 2011 9:21 PM GMT+0800

Fitch Ratings affirmed its AAA credit rating on the U.S. and said the outlook on the long-term ratings is stable.

Standard & Poor’s on Aug. 5 cut the U.S. credit rating to AA+ from AAA, saying lawmakers failed to cut spending enough to reduce record deficits. S&P dropped the ranking after warning on July 14 that it would reduce the rating in the absence of a “credible” plan to lower deficits even if the nation’s debt limit was lifted.

Fitch said Aug. 2 that the U.S. is under review as the nation’s debt burden increases at a pace that isn’t consistent with an AAA sovereign credit rating.

Moody’s Investors Service affirmed the U.S.’s top Aaa ranking on Aug. 8 in part because the dollar’s status as the main reserve currency allows it to support higher debt levels than other countries. Lawmakers’ agreement on Aug. 2 put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years was a “positive step” toward addressing the nation’s record deficits, Steven Hess, the senior credit officer at Moody’s in New York, said Aug. 8 in a telephone interview.

Monday, August 1, 2011

House Passes $2.1 Trillion U.S. Debt Ceiling Plan

By James Rowley and Catherine Dodge - Aug 1, 2011 4:21 PM PT

The House approved legislation to raise the U.S. debt limit by at least $2.1 trillion and cut federal spending by $2.4 trillion or more, one day before a threatened default.

The House voted 269-161 for the plan negotiated by leaders and President Barack Obama over the weekend. Ninety-five Democrats voted in favor and 66 Republicans in opposition. The measure goes to the Senate for a final vote planned tomorrow.

“We’re coming up to a deadline we all must recognize: default,” said Representative Paul Ryan, a Wisconsin Republican and chairman of the Budget Committee. “Both parties got us in this mess; both parties are going to have to work together to get us out.”

Ryan called the spending cuts connected to the debt-ceiling increase “a huge cultural change” for Congress.

Representative Gabrielle Giffords, the Arizona Democrat wounded in a shooting attack, drew a long standing ovation as she arrived to vote for the measure, making her first appearance on the House floor since the Jan. 8 assault in Tucson.

Final approval in the Senate would send the debt-limit measure to Obama for his signature and conclude a months-long battle over raising the $14.3 trillion debt ceiling and reining in government spending.
‘Not One Red Cent’

“It’s hard to believe we are putting our best foot forward with the legislation that comes before us today,” said House Democratic leader Nancy Pelosi of California. “Not one red cent” will come from the wealthiest Americans to cut the deficit, she said. Still, she said she supports the plan because it ends economic uncertainty and prevents cuts in Social Security and Medicare.

Treasuries rose, pushing the yields on 10-year notes to the lowest level since November, as an index showed U.S. manufacturing expanded in July at the slowest pace in two years.

Yields on benchmark 10-year notes fell five basis points, or 0.05 percentage point, to 2.74 percent at 5:02 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities due in May 2021 gained 14/32, or $4.38 per $1,000 face amount, to 103 8/32.

U.S. stocks slumped. The Standard and Poor’s 500 lost 0.4 percent to 1,286.94 at 4:19 p.m. in New York after climbing as much as 1.2 percent earlier. The Dow Jones Industrial Average retreated 10.75 points, or 0.1 percent, to 12,132.49 today after rising 139 points.
Averting Crisis

Democrats and Republicans praised the agreement for averting an economic crisis, even as both sides said the compromise fell short of their goals.

Republicans called the bill a step in the right direction while saying government spending wasn’t pared enough. Democrats expressed concern about making deep spending cuts in a fragile economy and not spreading the sacrifice to the nation’s wealthiest through higher taxes.

“I am voting for this bill not because I like this bill,” said Representative Steny Hoyer, the second-ranking Democrat in the House. “Default for the United States of America is not an option. This would affect all of the people I represent and all of the people of this country.”

Both parties worked today to sell the deal to their rank and file.

“We’re very optimistic we’re going to do well,” Senate Republican leader Mitch McConnell, of Kentucky said after a meeting where he briefed Senate Republicans on the plan.
No Tax Increase

House Republican leaders cast the deal as a victory because it doesn’t raise taxes and makes most of the spending cuts they sought.

“It gives us the best shot that we’ve had in the 20 years that I’ve been here to build support for a balanced budget amendment to the Constitution,” to put “fiscal handcuffs” on Congress, House Speaker John Boehner of Ohio told reporters.

Ryan said his party got two-thirds of the cuts to discretionary spending that it wanted.

“This legislation is typical for compromise legislation,” said Senate Majority Leader Harry Reid, a Nevada Democrat. “Neither side got what they wanted.”

Senator Mark Warner, a Virginia Democrat, said he will support the legislation though it doesn’t do enough to tackle long-term spending and revenue. Warner, one of a bipartisan group that offered a $3.7 trillion deficit-cutting plan, said, “This doesn’t get us to the core problem of how do we take on tax reform, how do we take on entitlement reform.”
Defense Spending Cuts

Senator Lindsey Graham, a South Carolina Republican, said he won’t support the plan in part because of cuts to defense spending. Initially, the Defense Department could see $325 billion in cuts over 10 years as part of the bill’s first round of deficit-cutting, similar to what the Obama administration has proposed, according to an administration official. It’s the second phase of $1.5 trillion in cuts envisioned, with about half coming from national security, that could jeopardize Defense Department operations.

“If fully implemented, the consequences to our nation’s defense infrastructure would be severe,” Graham said in a statement. “What has happened to the party of Reagan who viewed the primary purpose of the federal government was to provide a strong national defense?”

The overall plan would save $2.1 trillion over the next 10 years, according to the nonpartisan Congressional Budget Office.
Money Out of Pockets

Representative Brad Miller, a North Carolina Democrat, said the immediate spending cuts will contract the economy. The measure “is going to take money out of the economy, it is going to take money out of people’s pockets,” he said.

The Treasury Department has said it will reach the borrowing limit and run out of options for avoiding default tomorrow without action by Congress.

“The threat of default is now for certain off the specter of this economy, no longer a headwind” for the U.S. economy, Gene Sperling, director of the National Economic Council, said today on Bloomberg Television.

The measure would raise the debt ceiling in two installments, sufficient to serve the nation’s needs into early 2013. The framework would cut $917 billion in spending over a decade, raise the debt limit initially by $900 billion and assign a special congressional committee to find another $1.5 trillion in deficit savings by late November, to be enacted by Christmas.
Constitutional Amendment

If Congress met that deadline and deficit target, or voted to send a balanced-budget constitutional amendment to the states, Obama would receive another $1.5 trillion borrowing boost.

In the case of Congress failing to take either step, or not producing debt savings of at least $1.2 trillion, the plan allows the president to obtain a $1.2 trillion debt-ceiling extension. That would trigger automatic spending cuts across the government -- including in defense and Medicare -- to take effect starting in 2013. The Medicare cuts would only affect provider reimbursements, not benefits.

An initial $400 billion increase in borrowing authority couldn’t be blocked under the deal. While Congress would get a chance to avert both debt-limit increases through disapproval resolutions, there’s little chance opponents could muster the two-thirds majorities needed in both chambers to override Obama’s veto.

Both sides made concessions. Republicans dropped their insistence on withholding some of the borrowing authority until future spending cuts had been made and a balanced budget amendment to the Constitution had been passed by both chambers of Congress.

The White House agreed to forgo an automatic tax increase, a sticking point for Republicans, as one of the consequences to kick in if no debt-reduction law was enacted by Christmas.

Even so, Obama has an opportunity to increase revenue in the future if he opts to allow the tax cuts enacted under George W. Bush to expire as scheduled in 2013. He could veto legislation to extend those cuts -- producing an estimated $3.5 trillion.

White House officials said the enforcement mechanisms will help them press Obama’s agenda as further deficit reductions are made, including additional tax revenue.

The automatic spending cuts would include deep reductions in the defense budget, which Republicans oppose. That measure preserves leverage for Democrats in committee negotiations, the officials told reporters on condition of anonymity.
Spending Cuts Delayed

Because any spending cuts would be delayed until 2013, timed to coincide with the expiration of the Bush tax cuts, Republicans would have an added incentive to agree to overhaul taxes, which Democrats want to use for raising revenue.

Republicans argue that while the super-committee could propose tax increases, it wouldn’t likely do so because the rules of the deal require that it assume -- as the CBO does -- the Bush tax cuts expire as scheduled at the end of 2012. That would mean that to count any new revenue toward deficit reduction, the committee would need to both erase the Bush tax reductions and then generate additional revenue on top of that.

In addition to guaranteeing a vote on the balanced-budget constitutional amendment between October and the end of the year, the agreement could give Republicans a chance to renew their push for the measure at the height of 2012 campaigns.

Sunday, July 10, 2011

Geithner Says He Wants Biggest Deal Possible on Deficit Cuts

By Ian Katz and Susan Decker - Jul 10, 2011 11:33 PM GMT+0800

Treasury Secretary Timothy F. Geithner said the Obama administration wants the most comprehensive deficit-cutting deal possible and reiterated that failing to raise the debt limit could have “catastrophic” consequences.

“We have to find a way to pass an agreement, but the president is going to keep working toward the largest deal we can do, because that’s the right thing for the country,” Geithner said today on NBC’s “Meet the Press” program.

Obama and congressional leaders are seeking a deficit- slashing deal to pave the way for a vote in Congress to increase the government’s $14.3 trillion debt limit, a move the Treasury Department says is needed by Aug. 2 to avert a default on the nation’s financial obligations.

Geithner said Congress has no alternative to raising the debt limit and there are no “constitutional” delays available. A default resulting from failure to raise the ceiling could do “catastrophic” damage to the U.S. economy, he said.

Some Democrats in Congress have discussed the idea of claiming presidential authority to continue borrowing without congressional approval based on an interpretation of the Constitution’s 14th Amendment.
Boehner’s Proposal

House Speaker John Boehner said yesterday he will pursue a smaller deficit reduction accord than the one that President Barack Obama is seeking because the White House won’t approve a bigger deal without tax increases.

Boehner told the president yesterday that he wants to pursue a deal along the lines of that being discussed by the working group led by Vice President Joe Biden.

Obama was spending the weekend at Camp David, the presidential retreat in Maryland, and will return today for further debt talks with congressional leaders.

Geithner, in a separate appearance on the CBS program “Face the Nation,” said the outlines of a deal must be completed in the next two weeks to make the Aug. 2 deadline. The Obama administration won’t accept a deal that puts the “burden” on the middle class and elderly, he said.

An agreement without any “tax reforms, without revenues” would force “terribly deep cuts in benefits to Medicare beneficiaries,” Geithner said. The House Republicans’ budget proposal, “when fully phased in,” would increase the average cost to Medicare beneficiaries by $6,500 a year, he said.
‘Balanced’ Approach

“That’s like a $6,500 tax increase on elderly Americans,” Geithner said. “So the only way to do this is in a balanced way.”

Geithner reiterated that he will remain Treasury secretary for the “foreseeable” future, without being more specific. Geithner has signaled to White House officials that he’s considering leaving after a debt-limit deal is reached, Bloomberg News reported June 30, citing three people familiar with the matter.

Senate Minority Leader Mitch McConnell, a Kentucky Republican, said on “Fox News Sunday” that he also favors “the biggest deal possible. We’re just not going to raise taxes in the middle of this horrible situation.”

Senator Jim DeMint, a South Carolina Republican, said Geithner has “been irresponsible” in his comments on the impact of failing to raise the debt limit. Any deal should include a pledge to let states vote on a constitutional amendment requiring the federal government to balance its budget each year, DeMint said on “Fox News Sunday.”

White House Chief of Staff Bill Daley, speaking on ABC’s “This Week” program, said “there’s no question in my mind” that congressional leaders “will not allow the first default in the history of the country to occur.”

Sunday, June 19, 2011

EU to Discuss Greek Plan That Skirts Default Risk

By Tony Czuczka - Jun 19, 2011 7:36 PM GMT+0800

European finance ministers meet today to hammer out a new Greek bailout package watertight enough to avoid triggering a default that German Chancellor Angela Merkel says would be uncontrollable.

Officials must figure out how to design a plan that will encourage investors to roll over expiring Greek debt after Merkel on June 17 ended a standoff with the European Central Bank over restructuring the country’s debt load. Talks start at 6 p.m. in Luxembourg and continue tomorrow. EU leaders meet on June 23-24, where Spanish Prime Minister Jose Luis Rodriguez Zapatero expects a “political commitment” to aid Greece.

“Now comes the tricky part,” said Tullia Bucco, an economist at Unicredit Global Research in Milan. “This proposal is fraught with difficulties in identifying ways to provide banks with incentives to rollover their bonds. Any deterioration in bond conditions via new coupons below market rates would be seen by rating agencies as the trigger of a credit event.”

Stocks, bonds and the euro jumped after Merkel on June 17 ended a feud with the ECB that roiled markets. Highlighting the risks still facing the euro region, Greek Prime Minister George Papandreou must win a parliamentary confidence vote this week that could delay the next austerity round, and Moody’s Investors Service said on June 17 it may cut its Aa2 rating on Italy.
Lehman Experience

Merkel said yesterday in Berlin that policy makers must make sure the Greek crisis doesn’t infect the rest of the euro region and spark a new global financial crisis.

“We all lived through Lehman Brothers,” she told a meeting of activists from her ruling Christian Democrat party. “I don’t want another such threat to emanate from Europe. We wouldn’t be able to control an insolvency.”

Luxembourg Prime Minister Jean-Claude Juncker, who chairs today’s talks, says the ECB must agree on a new Greek plan.

“If we made a move that would be rejected by the ECB, by the rating agencies and therefore the financial markets, we risk setting the euro area aflame,” La Libre Belgique quoted Juncker as saying in an interview published yesterday.

German officials have indicated that a final agreement on Greece may not come until July 11.
Form of Default

The risk is that any accord will still be classified as a form of default by rating companies, effectively cutting Greek banks off from emergency ECB funding. Fitch Ratings said on June 15 that a rollover would prompt it to cut Greece’s sovereign rating to “restricted default.” The bonds themselves would still avoid default and be left at “a low non-investment grade probably in the region of CCC,” it said.

Dutch central bank Governor Nout Wellink told NRC in an interview published yesterday that banks and pension funds may lose money if they contribute on a voluntary basis to another Greek rescue.

Greek debt is graded B+ at Fitch. Standard & Poor’s on June 13 cut its rating on Greece by three levels to CCC, branding it with the world’s lowest debt grade.

EU officials have discussed incentives for investors to reinvest the proceeds of their maturing bonds into new debt, according to people familiar with the situation. They include giving investors preferred status, higher coupon payments or collateral as inducements to buy bonds replacing Greek debt maturing between 2012 and 2014, they said.

The yield on Greece’s two-year bond, which topped 30 percent for the first time on June 16, fell 90 basis points to 28.79 percent the next day. The signs of flexibility from Germany sent the euro up as much as 1 percent to $1.4339.
Zapatero Prediction

Spain’s Zapatero said in St. Petersburg yesterday that he expects investors to contribute voluntarily to a new Greek rescue in a “commonsense” way.

Merkel said on June 17 she is now willing to accept that the so-called Vienna initiative of 2009, which encouraged western banks to continue funding their eastern European units, may be a model for private-investor participation in the new Greek aid package.

That marked a reversal from the position set out by her finance minister, Wolfgang Schaeuble, who had insisted that Greek bond maturities be extended by seven years. The approach met ECB resistance and led to credit-rating company warnings that the move was tantamount to default, stalling efforts to craft an aid package.

ECB President Jean-Claude Trichet said today in Kiel, Germany, that a widening of global imbalances poses challenges for international policy makers. He didn’t speak about Greece.
Cabinet Changes

Officials will be meeting two days after Papandreou announced a Cabinet reshuffle that included replacing Finance Minister George Papaconstantinou in a bid to get rebelling allies to back the 78 billion-euro ($112 billion) austerity plan that the EU and the International Monetary Fund have made a condition for new aid.

Papandreou named Evangelos Venizelos, his defense minister and a former rival for leadership of the ruling Socialist party, to replace Papaconstantinou. He then called for a vote of confidence in his new government that will probably be held the evening of June 21.

Today, Papandreou said he requested the confidence vote to be able to have a stronger hand in talks with the EU. Greece is at a “critical crossroads” and its debt and deficit are a national problem that require national coordination, he said at the beginning of a three-day debate in Athens on the motion.
‘Genuine Problem’

Greece’s inability to return to the markets next year for financing is an “unforeseen threat” and the government is in talks with other EU nations to find a solution for the country’s funding needs, Papandreou said.

“The new government has a duty to complete the talks,” he told lawmakers in comments televised live on state-run Vouli TV. “It is a genuine problem.”

Greek opposition leader Antonis Samaras, leader of New Democracy, the largest opposition party, said he won’t back Papandreou in the confidence vote and demanded early elections.

Merkel is still pushing for private investors to play a “substantial” role in any new package, without specifying what that would look like.

“Let us try to get together a substantial contribution in this participation of private creditors,” she said in Berlin yesterday. “But we don’t do this on the street, we don’t do this in press conferences, we do this in serious talks with those making the contribution.”

European estimates put Greece’s 2012-14 financing gap at as much as 170 billion euros ($243 billion). It would be filled by about 45 billion euros of loans, plus 57 billion euros in unspent aid from the 2010 bailout, roughly 30 billion euros in asset-sale proceeds and about 30 billion euros from creditors.

Tuesday, June 7, 2011

Chairman Ben S. Bernanke Speech At the International Monetary Conference, Atlanta, Georgia

June 7, 2011

The U.S. Economic Outlook

I would like to thank the organizers for inviting me to participate once again in the International Monetary Conference. I will begin with a brief update on the outlook for the U.S. economy, then discuss recent developments in global commodity markets that are significantly affecting both the U.S. and world economies, and conclude with some thoughts on the prospects for monetary policy.

The Outlook for Growth
U.S. economic growth so far this year looks to have been somewhat slower than expected. Aggregate output increased at only 1.8 percent at an annual rate in the first quarter, and supply chain disruptions associated with the earthquake and tsunami in Japan are hampering economic activity this quarter. A number of indicators also suggest some loss of momentum in the labor market in recent weeks. We are, of course, monitoring these developments. That said, with the effects of the Japanese disaster on manufacturing output likely to dissipate in coming months, and with some moderation in gasoline prices in prospect, growth seems likely to pick up somewhat in the second half of the year. Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.

As is often the case, the ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming quarters. A range of positive and negative forces is currently influencing both household finances and attitudes. On the positive side, household incomes have been boosted by the net improvement in job market conditions since earlier this year as well as from the reduction in payroll taxes that the Congress passed in December. Increases in household wealth--largely reflecting gains in equity values--and lower debt burdens have also increased consumers' willingness to spend. On the negative side, households are facing some significant headwinds, including increases in food and energy prices, declining home values, continued tightness in some credit markets, and still-high unemployment, all of which have taken a toll on consumer confidence.

Developments in the labor market will be of particular importance in setting the course for household spending. As you know, the jobs situation remains far from normal. For example, aggregate hours of production workers--a comprehensive measure of labor input that reflects the extent of part-time employment and opportunities for overtime as well as the number of people employed--fell, remarkably, by nearly 10 percent from the beginning of the recent recession through October 2009. Although hours of work have increased during the expansion, this measure still remains about 6-1/2 percent below its pre-recession level. For comparison, the maximum decline in aggregate hours worked in the deep 1981-82 recession was less than 6 percent. Other indicators, such as total payroll employment, the ratio of employment to population, and the unemployment rate, paint a similar picture. Particularly concerning is the very high level of long-term unemployment--nearly half of the unemployed have been jobless for more than six months. People without work for long periods can find it increasingly difficult to obtain a job comparable to their previous one, as their skills tend to deteriorate over time and as employers are often reluctant to hire the long-term unemployed.

Although the jobs market remains quite weak and progress has been uneven, overall we have seen signs of gradual improvement. For example, private-sector payrolls increased at an average rate of about 180,000 per month over the first five months of this year, compared with less than 140,000 during the last four months of 2010 and less than 80,000 per month in the four months prior to that. As I noted, however, recent indicators suggest some loss of momentum, with last Friday's jobs market report showing an increase in private payrolls of just 83,000 in May. I expect hiring to pick up from last month's pace as growth strengthens in the second half of the year, but, again, the recent data highlight the need to continue monitoring the jobs situation carefully.

The business sector generally presents a more upbeat picture. Capital spending on equipment and software has continued to expand, reflecting an improving sales outlook and the need to replace aging capital. Many U.S. firms, notably in manufacturing but also in services, have benefited from the strong growth of demand in foreign markets. Going forward, investment and hiring in the private sector should be facilitated by the ongoing improvement in credit conditions. Larger businesses remain able to finance themselves at historically low interest rates, and corporate balance sheets are strong. Smaller businesses still face difficulties in obtaining credit, but surveys of both banks and borrowers indicate that conditions are slowly improving for those firms as well.

In contrast, virtually all segments of the construction industry remain troubled. In the residential sector, low home prices and mortgage rates imply that housing is quite affordable by historical standards; yet, with underwriting standards for home mortgages having tightened considerably, many potential homebuyers are unable to qualify for loans. Uncertainties about job prospects and the future course of house prices have also deterred potential buyers. Given these constraints on the demand for housing, and with a large inventory of vacant and foreclosed properties overhanging the market, construction of new single-family homes has remained at very low levels, and house prices have continued to fall. The housing sector typically plays an important role in economic recoveries; the depressed state of housing in the United States is a big reason that the current recovery is less vigorous than we would like.

Developments in the public sector also help determine the pace of recovery. Here, too, the picture is one of relative weakness. Fiscally constrained state and local governments continue to cut spending and employment. Moreover, the impetus provided to the growth of final demand by federal fiscal policies continues to wane.

The prospect of increasing fiscal drag on the recovery highlights one of the many difficult tradeoffs faced by fiscal policymakers: If the nation is to have a healthy economic future, policymakers urgently need to put the federal government's finances on a sustainable trajectory. But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery. The solution to this dilemma, I believe, lies in recognizing that our nation's fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk. At the same time, establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence.

The Outlook for Inflation
Let me turn to the outlook for inflation. As you all know, over the past year, prices for many commodities have risen sharply, resulting in significantly higher consumer prices for gasoline and other energy products and, to a somewhat lesser extent, for food. Overall inflation measures reflect these price increases: For example, over the six months through April, the price index for personal consumption expenditures has risen at an annual rate of about 3-1/2 percent, compared with an average of less than 1 percent over the preceding two years.

Although the recent increase in inflation is a concern, the appropriate diagnosis and policy response depend on whether the rise in inflation is likely to persist. So far at least, there is not much evidence that inflation is becoming broad-based or ingrained in our economy; indeed, increases in the price of a single product--gasoline--account for the bulk of the recent increase in consumer price inflation.1 Of course, gasoline prices are exceptionally important for both family finances and the broader economy; but the fact that gasoline price increases alone account for so much of the overall increase in inflation suggests that developments in the global market for crude oil and related products, as well as in other commodities markets, are the principal factors behind the recent movements in inflation, rather than factors specific to the U.S. economy. An important implication is that if the prices of energy and other commodities stabilize in ranges near current levels, as futures markets and many forecasters predict, the upward impetus to overall price inflation will wane and the recent increase in inflation will prove transitory. Indeed, the declines in many commodity prices seen over the past few weeks may be an indication that such moderation is occurring. I will discuss commodity prices further momentarily.

Besides the prospect of more-stable commodity prices, two other factors suggest that inflation is likely to return to more subdued levels in the medium term. First, the still-substantial slack in U.S. labor and product markets should continue to have a moderating effect on inflationary pressures. Notably, because of the weak demand for labor, wage increases have not kept pace with productivity gains. Thus the level of unit labor costs in the business sector is lower than it was before the recession. Given the large share of labor costs in the production costs of most firms (typically, a share far larger than that of raw materials costs), subdued unit labor costs should remain a restraining influence on inflation. To be clear, I am not arguing that healthy increases in real wages are inconsistent with low inflation; the two are perfectly consistent so long as productivity growth is reasonably strong.

The second additional factor restraining inflation is the stability of longer-term inflation expectations. Despite the recent pickup in overall inflation, measures of households' longer-term inflation expectations from the Michigan survey, the 10-year inflation projections of professional economists, the 5-year-forward measure of inflation compensation derived from yields on inflation-protected securities, and other measures of longer-term inflation expectations have all remained reasonably stable.2 As long as longer-term inflation expectations are stable, increases in global commodity prices are unlikely to be built into domestic wage- and price-setting processes, and they should therefore have only transitory effects on the rate of inflation. That said, the stability of inflation expectations is ensured only as long as the commitment of the central bank to low and stable inflation remains credible. Thus, the Federal Reserve will continue to closely monitor the evolution of inflation and inflation expectations and will take whatever actions are necessary to keep inflation well controlled.

Commodity Prices
As I noted earlier, the rise in commodity prices has directly increased the rate of inflation while also adversely affecting consumer confidence and consumer spending. Let's look at these price increases in closer detail.

The basic facts are familiar. Oil prices have risen significantly, with the spot price of West Texas Intermediate crude oil near $100 per barrel as of the end of last week, up nearly 40 percent from a year ago. Proportionally, prices of corn and wheat have risen even more, roughly doubling over the past year. And prices of industrial metals have increased notably as well, with aluminum and copper prices up about one-third over the past 12 months. When the price of any product moves sharply, the economist's first instinct is to look for changes in the supply of or demand for that product. And indeed, the recent increase in commodity prices appears largely to be the result of the same factors that drove commodity prices higher throughout much of the past decade: strong gains in global demand that have not been met with commensurate increases in supply.

From 2002 to 2008, a period of sustained increases in commodity prices, world economic activity registered its fastest pace of expansion in decades, rising at an average rate of about 4-1/2 percent per year. This impressive performance was led by the emerging and developing economies, where real activity expanded at a remarkable 7 percent per annum. The emerging market economies have likewise led the way in the recovery from the global financial crisis: From 2008 to 2010, real gross domestic product (GDP) rose cumulatively by about 10 percent in the emerging market economies even as GDP was essentially unchanged, on net, in the advanced economies.3

Naturally, increased economic activity in emerging market economies has increased global demand for raw materials. Moreover, the heavy emphasis on industrial development in many emerging market economies has led their growth to be particularly intensive in the use of commodities, even as the consumption of commodities in advanced economies has stabilized or declined. For example, world oil consumption rose by 14 percent from 2000 to 2010; underlying this overall trend, however, was a 40 percent increase in oil use in emerging market economies and an outright decline of 4-1/2 percent in the advanced economies. In particular, U.S. oil consumption was about 2-1/2 percent lower in 2010 than in 2000, with net imports of oil down nearly 10 percent, even though U.S. real GDP rose by nearly 20 percent over that period.

This dramatic shift in the sources of demand for commodities is not unique to oil. If anything, the pattern is even more striking for industrial metals, where double-digit percentage rates of decline in consumption by the advanced economies over the past decade have been overwhelmed by triple-digit percentage increases in consumption by the emerging market economies.4 Likewise, improving diets in the emerging market economies have significantly increased their demand for agricultural commodities. Importantly, in noting these facts, I intend no criticism of emerging markets; growth in those economies has conferred substantial economic benefits both within those countries and globally, and in any case, the consumption of raw materials relative to population in emerging-market countries remains substantially lower than in the United States and other advanced economies. Nevertheless, it is undeniable that the tremendous growth in emerging market economies has considerably increased global demand for commodities in recent years.

Against this backdrop of extremely robust growth in demand, the supply of many commodities has lagged behind. For example, world oil production has increased less than 1 percent per year since 2004, compared with nearly 2 percent per year in the prior decade. In part, the slower increase in the supply of oil reflected disappointing rates of production in countries that are not part of the Organization of the Petroleum Exporting Countries (OPEC). However, OPEC has not shown much willingness to ramp up production, either. Most recently, OPEC production fell 1.3 million barrels per day from January to April of this year, reflecting the disruption to Libyan supplies and the lack of any significant offset from other OPEC producers. Indeed, OPEC's production of oil today remains about 3 million barrels per day below the peak level of mid-2008. With the demand for oil rising rapidly and the supply of crude stagnant, increases in oil prices are hardly a puzzle.

Production shortfalls have plagued many other commodities as well. Agricultural output has been hard hit by a spate of bad weather around the globe. For example, last summer's drought in Russia severely reduced that country's wheat crop. In the United States, high temperatures significantly impaired the U.S. corn crop last fall, and dry conditions are currently hurting the wheat crop in Kansas. Over the past year, droughts have also afflicted Argentina, China, and France. Fortunately, the lag between planting and harvesting for many crops is relatively short; thus, if more-typical weather patterns resume, supplies of agricultural commodities should rebound, thereby reducing the pressure on prices.

Not all commodity prices have increased, illustrating the point that supply and demand conditions can vary across markets. For example, prices for both lumber and natural gas are currently near their levels of the early 2000s. The demand for lumber has been curtailed by weakness in the U.S. construction sector, while the supply of natural gas in the United States has been increased by significant innovations in extraction techniques.5 Among agricultural commodities, rice prices have remained relatively subdued, reflecting favorable growing conditions.

In all, these cases reinforce the view that the fundamentals of global supply and demand have been playing a central role in recent swings in commodity prices. That said, there is usually significant uncertainty about current and prospective supply and demand. Accordingly, commodity prices, like the prices of financial assets, can be volatile as market participants react to incoming news. Recently, commodity prices seem to have been particularly responsive to news bearing on the prospects for global economic growth as well as geopolitical developments.

As the rapid growth of emerging market economies seems likely to continue, should we therefore expect continued rapid increases in the prices of globally-traded commodities? While it is certainly possible that we will see further increases, there are good reasons to believe that commodity prices will not continue to rise at the rapid rates we have seen recently. In the short run, unexpected shortfalls in the supplies of key commodities result in sharp price increases, as usage patterns and available supplies are difficult to change quickly. Over longer periods, however, high levels of commodity prices curtail demand as households and firms adjust their spending and production patterns. Indeed, as I noted earlier, we have already seen significant reductions in commodity use in the advanced economies. Likewise, over time, high prices should elicit meaningful increases in supply, both as temporary factors, such as adverse weather, abate and as investments in productive capacity come to fruition. Finally, because expectations of higher prices lead financial market participants to bid up the spot prices of commodities, predictable future developments bearing on the demands for and supplies of commodities tend already to be reflected in current prices. For these reasons, although unexpected developments could certainly lead to continued volatility in global commodity prices, it is reasonable to expect the effects of commodity prices on overall inflation to be relatively moderate in the medium term.

While supply and demand fundamentals surely account for most of the recent movements in commodity prices, some observers have attributed a significant portion of the run-up in prices to Federal Reserve policies, over and above the effects of those policies on U.S. economic growth. For example, some have argued that accommodative U.S. monetary policy has driven down the foreign exchange value of the dollar, thereby boosting the dollar price of commodities. Indeed, since February 2009, the trade-weighted dollar has fallen by about 15 percent. However, since February 2009, oil prices have risen 160 percent and nonfuel commodity prices are up by about 80 percent, implying that the dollar's decline can explain, at most, only a small part of the rise in oil and other commodity prices; indeed, commodity prices have risen dramatically when measured in terms of any of the world's major currencies, not just the dollar. But even this calculation overstates the role of monetary policy, as many factors other than monetary policy affect the value of the dollar. For example, the decline in the dollar since February 2009 that I just noted followed a comparable increase in the dollar, which largely reflected flight-to-safety flows triggered by the financial crisis in the latter half of 2008; the dollar's decline since then in substantial part reflects the reversal of those flows as the crisis eased. Slow growth in the United States and a persistent trade deficit are additional, more fundamental sources of recent declines in the dollar's value; in particular, as the United States is a major oil importer, any geopolitical or other shock that increases the global price of oil will worsen our trade balance and economic outlook, which tends to depress the dollar. In this case, the direction of causality runs from commodity prices to the dollar rather than the other way around. The best way for the Federal Reserve to support the fundamental value of the dollar in the medium term is to pursue our dual mandate of maximum employment and price stability, and we will certainly do that.

Another argument that has been made is that low interest rates have pushed up commodity prices by reducing the cost of holding inventories, thus boosting commodity demand, or by encouraging speculators to push commodity futures prices above their fundamental levels. In either case, if such forces were driving commodity prices materially and persistently higher, we should see corresponding increases in commodity inventories, as higher prices curtailed consumption and boosted production relative to their fundamental levels. In fact, inventories of most commodities have not shown sizable increases over the past year as prices rose; indeed, increases in prices have often been associated with lower rather than higher levels of inventories, likely reflecting strong demand or weak supply that tends to put pressure on available stocks.

Finally, some have suggested that very low interest rates in the United States and other advanced economies have created risks of economic overheating in emerging market economies and have thus indirectly put upward pressures on commodity prices. In fact, most of the recent rapid economic growth in emerging market economies appears to reflect a bounceback from the previous recession and continuing increases in productive capacity, as their technologies and capital stocks catch up with those in advanced economies, rather than being primarily the result of monetary conditions in those countries. More fundamentally, however, whatever the source of the recent growth in the emerging markets, the authorities in those economies clearly have a range of fiscal, monetary, exchange rate, and other tools that can be used to address any overheating that may occur. As in all countries, the primary objective of monetary policy in the United States should be to promote economic growth and price stability at home, which in turn supports a stable global economic and financial environment.

Monetary Policy
Let me conclude with a few words about the current stance of monetary policy. As I have discussed today, the economic recovery in the United States appears to be proceeding at a moderate pace and--notwithstanding unevenness in the rate of progress and some recent signs of reduced momentum--the labor market has been gradually improving. At the same time, the jobs situation remains far from normal, with unemployment remaining elevated. Inflation has risen lately but should moderate, assuming that commodity prices stabilize and that, as I expect, longer-term inflation expectations remain stable.

Against this backdrop, the Federal Open Market Committee (FOMC) has maintained a highly accommodative monetary policy, keeping its target for the federal funds rate close to zero and further easing monetary conditions through large-scale asset purchases. The FOMC has indicated that it will complete its purchases of $600 billion of Treasury securities by the end of this month while maintaining its existing policy of reinvesting principal payments from its securities holdings. The Committee also continues to anticipate that economic conditions are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets. In this context, monetary policy cannot be a panacea. Still, the Federal Reserve's actions in recent years have doubtless helped stabilize the financial system, ease credit and financial conditions, guard against deflation, and promote economic recovery. All of this has been accomplished, I should note, at no net cost to the federal budget or to the U.S. taxpayer.

Although it is moving in the right direction, the economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established. At the same time, the longer-run health of the economy requires that the Federal Reserve be vigilant in preserving its hard-won credibility for maintaining price stability. As I have explained, most FOMC participants currently see the recent increase in inflation as transitory and expect inflation to remain subdued in the medium term. Should that forecast prove wrong, however, and particularly if signs were to emerge that inflation was becoming more broadly based or that longer-term inflation expectations were becoming less well anchored, the Committee would respond as necessary. Under all circumstances, our policy actions will be guided by the objectives of supporting the recovery in output and employment while helping ensure that inflation, over time, is at levels consistent with the Federal Reserve's mandate.

1. Through April, personal consumption expenditures (PCE) inflation over the previous six months was 3.6 percent at an annual rate; excluding gasoline, inflation over that period was 2 percent. Over a 12-month span, inflation through April was 2.2 percent; excluding gasoline, it was 1.2 percent.

2. In the Thomson Reuters/University of Michigan Surveys of Consumers, the median reading on expected inflation over the next 5 to 10 years was 2.9 percent in May after having averaged 2.8 percent in 2010. In the Survey of Professional Forecasters (SPF) compiled by the Federal Reserve Bank of Philadelphia, the median projection for PCE inflation over the next 10 years was 2.3 percent in May, up from the 2.1 percent average reading last year. The equivalent SPF projection for CPI inflation was 2.4 percent, versus 2.3 percent in 2010. The 5-year forward measure of inflation compensation derived from TIPS stood at about 2-3/4 percent in May, down noticeably from the levels observed toward the end of 2010.

3. The GDP data cited here are from the International Monetary Fund's World Economic Outlook database. The difference between the advanced and emerging market economies is also evident in the statistics on industrial production, which is perhaps more directly relevant to the demand for commodities. According to the CPB Netherlands Bureau for Economic Policy Analysis, from March 2009 to March 2010, industrial production rose 26 percent in the emerging market economies and 11 percent in the advanced economies.

4. A portion of commodity use in the emerging market economies serves as inputs to the production of exports, some of which are ultimately consumed in advanced economies.

5. As natural gas is difficult to transport overseas, the increased supplies of natural gas in North America have not translated into significantly lower prices abroad. In the first quarter of 2011, natural gas prices in the United States were less than half of those in Germany.

Thursday, May 26, 2011

Pound Gains to a Two-Month High Against Euro; IMF May Not Give Greece Aid

By Emma Charlton - May 26, 2011 11:37 PM GMT+0800

The pound reached an 11-week high against the euro after a European Union policy maker said the International Monetary Fund may not give Greece its next portion of aid, boosting the relative appeal of the U.K. currency.

Britain’s pound appreciated to the highest in two weeks versus the dollar after a report showed the U.S. economy grew less than economists forecast. A gauge of U.K. consumer-services companies dropped to minus 23 in the three months through May from minus 11 in the quarter through February, data showed today. The Bank of England left borrowing costs at a record low of 0.5 percent this month because some policy makers said an increase in interest rates might hurt consumer confidence.

“We’re seeing these comments come out, and that’s weakening the euro against the pound,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “There is still nervousness around in the market with respect to the dollar and anything that is to do with the economic outlook.”

Sterling gained 0.4 percent to 86.26 pence per euro as of 4:36 p.m. in London, after reaching 86.11 pence, the strongest since March 11. It appreciated 0.5 percent to $1.6348, after touching $1.6377, the most since May 12. It was 0.4 percent weaker at 132.93 yen.
‘IMF Rules’

“There are specific IMF rules and one of those rules says that IMF can only take action when the refinancing guarantee is given over 12 months,” Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said today at a conference. “I don’t think that the troika will come to the conclusion that this is given,” he said, referring to the representatives from the IMF, European Central Bank and European Commission who assess Greece’s progress.

The dollar dropped against the yen and euro as data showed the U.S. economy grew at a 1.8 percent annual rate in the first quarter, less than the 2.2 percent forecast by economists in a Bloomberg survey.

The pound weakened against the euro earlier today after the consumer-services report, which showed a gauge of U.K. companies such as hotels and restaurants, fell to the lowest since November 2009.

U.K. central bank officials are locked in a debate over whether to tighten monetary policy after inflation accelerated to 4.5 percent in April, the fastest since 2008. While the European Central Bank and Sweden’s Riksbank have already started raising rates, Bank of England Governor Mervyn King says it’s too soon because the recovery remains weak. Advocates of a rate increase say the price surge risks becoming embedded in the economy unless policy makers act.

U.K. Exports

The pound strengthened against the dollar and the euro yesterday as a report showed U.K. exports helped the economy resumed growth in the first quarter, outweighing the biggest slump in consumer spending in almost two years.

Sweden’s SEB AB advised selling the pound against the euro, saying the Bank of England won’t be able to raise interest rates without harming exports that boost the economy.

“Yesterday’s gross domestic product report underlines that a hike from the BOE is impossible within a foreseeable future,” Richard Falkenhall, a Stockholm-based currency strategist, wrote in an e-mailed note today. “Higher rates would probably strengthen the pound, at least short term, and hurt the only part having a positive impact on growth -- external demand. Domestic demand is extremely weak.”

U.K. government bonds were little changed, with the yield on the 10-year gilt down one basis point to 3.32 percent and the two-year note yield at 0.93 percent.

Sunday, May 15, 2011

Obama Says U.S. Default May ‘Unravel’ Global Finances

By Roger Runningen and James Rowley - May 16, 2011 1:11 AM GMT+0800

President Barack Obama said failure to raise the U.S. debt ceiling by early August might disrupt the global financial system and plunge the nation into another recession.

If investors “around the world thought the full faith and credit of the U.S. was not being backed up, if they thought we might renege on our IOUs, it could unravel the entire financial system,” Obama said on a segment taped for today’s “Face the Nation” program on CBS. “We could have a worse recession than we’ve already had.”

Obama is reaching out to Republican and Democratic lawmakers to win approval of an increase in the debt ceiling. The government projected this month that the $14.3 trillion debt limit will be reached tomorrow. Treasury Secretary Timothy Geithner says that while he can juggle accounts for a time, he will run out of options for avoiding default by early August.

Republicans including House Speaker John Boehner of Ohio and Senate Minority Leader Mitch McConnell of Kentucky are seeking trillions of dollars of spending cuts and no tax increases in exchange for supporting a higher debt limit. Obama on April 13 proposed a long-term deficit-reduction package of about $4 trillion over 12 years. It includes $2 trillion in spending cuts, $1 trillion in tax increases and $1 trillion in reduced interest payments.
‘Totally Irresponsible’

Boehner, who in a May 9 speech demanded spending cuts greater than the amount of any debt-ceiling increase, said today that he understood “what the president was saying about jeopardizing the full faith and credit of the United States.”

“Our obligation is to raise the debt ceiling,” he said on CBS’s “Face the Nation.” “But to raise the debt ceiling without dealing with the underlying problem is totally irresponsible.”

Obama appointed Vice President Joe Biden to lead negotiations with congressional leaders to try to strike a deal on reducing debt and deficits. The small group of negotiators has met three times with Biden. The president held separate talks with Senate Republicans and Democrats May 11 and May 12.

“I’ve said, ‘Get them in a room, hammer out a deal, and make sure that we don’t even get close’” to defaulting on the nation’s debt, Obama said.

Debt reduction must be “balanced” and include tax increases, Obama said.
‘Shared’ Burden

“Are we going to make sure no single group -- not seniors, not poor folks, not any single group -- is carrying the whole burden? Let’s make sure the burden is shared,” Obama said on the CBS program, which was taped May 11 in Washington for broadcast today.

Obama said he would resist cuts in such areas as medical research; infrastructure such as roads, bridges or railroads; or college loans for needy students.

“My hope is that Congress is going to say, ‘This is so serious, we can’t play politics with it,’” Obama said. “Have faith that usually after trying everything else, we end up doing the right thing.”

Obama’s statement “makes me think he is really not serious about tackling the big problems that face our country,” Boehner said. “He’s talking about it, but I am not seeing real action yet.”

Still, Boehner said he was optimistic that the talks led by Biden would yield an agreement on legislation to cut spending and extend the government’s borrowing authority.
‘Opportunity to Act’

“We don’t have to wait to the eleventh hour” like Congress did last month to extend federal spending and avoid a government shutdown, Boehner said. “But I am not going to walk away from this moment” of “opportunity to act” to make serious spending cuts, he said.

“At the end of this process, it’s going to have to come to that,” Boehner said of extending the government’s borrowing authority.

The speaker said that “for quite a while” he has privately discussed with Obama his idea for making drastic spending cuts and changes in entitlements like Medicare and other programs in tandem with raising the debt ceiling.

Boehner said he told Obama, “‘Let’s lock arms and jump out of the boat together.’ I am serious about dealing with this. And I hope he is just as serious.”

One of Boehner’s predecessors as House speaker, Republican presidential candidate Newt Gingrich, said on NBC’s “Meet the Press” that Congress should “avoid default if you possibly can” but that the president shouldn’t get “a blank check.”

McConnell, appearing today on CNN’s “State of the Union,” said he wants extension of the debt limit coupled with broad- reaching fiscal reforms.

“We need to do something significant,” he said. “We need to impress the markets, impress foreign countries that we’re going to get our act together, and astonish the American people that the adults are in charge in Washington and are actually going to deal with this issue.”

Thursday, May 5, 2011

Australia Prepares to Tighten Fiscal Policy in Hit to Consumers

By Gemma Daley - May 5, 2011 10:01 PM GMT+0800

Australia’s government next week will unveil spending cuts aimed at assuring a return to a budget surplus, helping the nation’s central bank contain inflation at the expense of growth in the economy’s 20th year of expansion.

Treasurer Wayne Swan is scheduled to detail on May 10 the programs to be trimmed even after Australia’s costliest natural disasters and a currency appreciation that may undermine export competitiveness. The steps are designed to strengthen the fiscal position of a country reliant on Chinese demand for its minerals that has left what officials call a “patchwork” economy.

The plans would leave the government’s fiscal stance supporting monetary policy in the developed nation with the highest borrowing costs. Prime Minister Julia Gillard may be trying to head off rate rises that would add to challenges for an administration with a 15-year-low public approval rating.

“Officials are worried they will be blamed for rate hikes,” said Helen Kevans, an economist at JPMorgan Chase & Co. in Sydney. “This surplus promise is a political imperative and it’s the one promise they don’t want to break.”

JPMorgan says the government may toughen rules for 800,000 people on the disability pension, scrap or reduce welfare payments, cut family-tax incentives, stop higher-paid workers from receiving a private health-insurance incentive and pare back medical-testing payments.
Consumption Drag

Such steps would add to a drag on consumer spending after households boosted savings rates in the aftermath of the global financial crisis. Retail sales fell in March for the first time in five months, sending shares lower for Myer Holdings Ltd. (MYR), David Jones Ltd. (DJS) and Woolworths Ltd. (WOW) Yesterday’s retail report spurred some economists to predict a first-quarter contraction.

“The main impact of the budget on the economy will be quite contractionary in terms of growth,” said Brian Redican, senior economist in Sydney at Macquarie Group Ltd., Australia’s biggest investment bank. “The imposition of a flood levy is going to ensure that consumers stay in their holes.”

Swan has described it as a “tough” budget as the government tries to deliver a surplus in the year ending June 30, 2013, to improve its reputation for fiscal stewardship. Flooding across Australia, Tropical Cyclone Yasi, bushfires, an 18 percent gain in the local dollar from a year ago against the U.S. currency and slower consumer spending have seen revenue fall by A$6.5 billion ($6.9 billion) since a November budget forecast.
Levy for Recovery

The flood levy, applying a range of increases in income taxes, is forecast to raise about A$1.8 billion. Deloitte Access Economics forecasts the budget gap will shrink to A$21.7 billion in the 2011-12 fiscal year, from A$51.4 billion deficit this year.

Standard & Poor’s and Moody’s Investors Service, which have awarded the nation their top investment grade, have said the government could delay the budget surplus and not affect ratings.

The bonds have lured Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co. He said May 3 investors should prefer Australian and Canadian government debt and shun U.S. Treasuries.

Australia will tighten fiscal policy by 3.7 percentage points of gross domestic product in the two years through 2012, the second-steepest reduction in deficits in the world, the International Monetary Fund predicted last month. GDP rose 0.7 percent in the fourth quarter, accelerating from 0.1 percent in the previous three months.

Rate Increases

The tightening would add to a monetary brake on the economy that has amounted to a 175 basis point cumulative increase in the benchmark interest rate from October 2009 to November last year. The Reserve Bank of Australia has kept the cash rate target unchanged at 4.75 percent since then.

“Interest rates have to go up, but that will have enormous damage on some sectors of the economy that aren’t doing so well,” said Gerry Harvey, executive chairman of No. 1 furniture and electrical retailer Harvey Norman Ltd.

Harvey said consumers of his items had “never had it so good” with a stronger dollar making imported electronics cheaper. By contrast, industries such as manufacturing and tourism are hurting under the currency gains, Treasurer Swan has said.

All told, a tighter fiscal stance is appropriate given job gains and strength in commodity exports, according to Art Woo, director of Asia sovereign ratings at Fitch Ratings. “Australia probably needs a combination of tightening to take place in both fiscal and monetary policy,” he said.

Worst Since ‘96

Separate efforts by the Gillard administration to impose a tax on mining companies’ profits and charge companies for their pollution to reduce greenhouse emissions have proven unpopular. Those who would choose the Labor Party as their first pick in an election fell to 31 percent, the lowest since May 1996, according to a Nielsen opinion survey of 1,400 people published in the Age newspaper on April 18.

“Voters are turned off by the carbon tax, the mining tax and the flood tax,” said Nick Economou, political analyst at Melbourne’s Monash University. “The government is drowning and because of its tenuous hold on power, this budget won’t save it,” he predicted.

Japan Monetary Base Jumps 23.9% In April

by RTT Staff Writer 5/5/2011 7:58 PM ET


(RTTNews) - The monetary base in Japan climbed 23.9 percent on year in April, the Bank of Japan said on Friday, standing at 121.893 trillion yen. That follows a 16.9 percent annual expansion in March.

Banknotes in circulation added 3.7 percent on year, while coins in circulation rose just 0.1 percent. The current account balances surged 123.4 percent on year, including a 109.3 percent annual spike in reserve balances.

The adjusted monetary base climbed a seasonally adjusted 119.5 percent annualized to 119.740 trillion yen.

Thursday, April 21, 2011

Obama Says U.S. Probing Speculators, Traders in Oil Markets

By Nicholas Johnston and Roger Runningen - Apr 21, 2011 12:29 PM PT

President Barack Obama said a Justice Department probe will examine the role of “traders and speculators” in oil markets and how they contribute to high gas prices.

“The attorney general’s putting together a team whose job it us to root out any cases of fraud or manipulation in the oil markets that might affect gas prices, and that includes the role of traders and speculators,” Obama said today in Reno, Nevada. “We are going to make sure that no one is taking advantage of American consumers for their own short-term gain.”

The administration today created a working group to explore whether oil and gasoline prices are being driven higher by illegal manipulation.

The group, which includes representatives of federal agencies and state attorneys general, will check for fraud, collusion or misrepresentation at the retail and wholesale level, the Justice Department said in a statement today. The group also will examine investor practices and the role of speculators and index traders in oil futures markets.

Obama faces political pressure over rising gasoline prices. Crude oil futures have increased 22 percent and gasoline surged 34 percent this year as Middle East unrest reduced supply and the global economic rebound bolstered fuel demand. Both futures contracts touched the highest levels this month since the records reached in 2008.
Gasoline Prices

The average price nationwide of regular gasoline at the pump was $3.84 a gallon yesterday, the highest since Sept. 16, 2008, AAA said on its website.

“It hurts. Every time you go to work a big chunk of your paycheck is eaten up,” Obama said. “This gas issue is serious.”

The president is on a cross-country trip to sell his deficit reduction plan, speaking today in Reno after earlier holding town-hall discussions in Palo Alto, California and Annandale, Virginia.

The White House and House Republicans have offered separate plans to reduce cumulative budget deficits by $4 trillion, over 12 years and 10 years respectively.

“We have to tackle this challenge,” Obama said today in Reno. “We’re going to cut spending in a way that’s fair” without damaging investments in such items as medical research and basic science, he said.
Bond Yields

While the deficit dominates political debate in Washington, bond market yields in the U.S. are lower now than when the government was running a budget surplus a decade ago even as Treasury Department data show that the amount of marketable debt outstanding has risen to more than $9 trillion from about $4.3 trillion in mid-2007. The yield on the benchmark 10-year note is below the average of about 7 percent since 1980 and the average of 5.48 percent in 1998 through 2001, the last time the U.S. had a budget surplus, according to Bloomberg Bond Trader prices.

Ten-year yields fell 1 basis point, or 0.01 percentage point, to 3.40 percent at 2:32 p.m. in New York, according to Bloomberg Bond Trader prices. The Dow Jones Industrial Average rose 0.2 percent to 12,481.69 at 3:14 p.m., after surging 1.5 percent yesterday to its highest closing level since June 2008.

In addition to negotiations between the administration and Congressional Republicans over long-term federal spending, Congress must soon act to raise the federal debt limit.
‘Immediate Spending Cuts’

Virginia Representative Eric Cantor, the No. 2 Republican in the U.S. House, said today that his party won’t agree to a debt-limit increase “without binding budget reforms and immediate spending cuts.”

Asked about Cantor’s comment, White House press secretary Jay Carney told reporters traveling with Obama on Air Force One that it’s “risky” for Cantor to suggest that “if he or others did not get what they wanted, that they would then throw the government into default.”

While traveling in the western U.S., Obama is attending fundraising events in San Francisco and Los Angeles that are expected to bring in between $4 million and $5 million. The president returns to Washington tomorrow.