EU Officials Say Stimulus Exit Unlikely Before 2011


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They are worried raising rates will further support the euro.

And they all seek a quick return to ‘fiscal responsibility’

This all should insure the Eurozone remains characterized by high unemployment and elevated systemic risk


EU Officials Say Stimulus Exit Unlikely Before 2011

By Svenja O’Donnell and Chris Burns

Oct. 1 (Bloomberg) — European Union finance chiefs said the pace of recovery means they probably won’t withdraw stimulus measures before 2011 as they grapple with rising unemployment and the effects of the euro’s gains.

“We look with concern to the exchange-rate developments and the impact of our ability to export,” Portuguese Finance Minister Fernando Teixeira dos Santos said today in an interview with Bloomberg Television at a meeting of European finance chiefs in Gothenburg, Sweden. “But we should expect markets to react appropriately to the fundamentals of our economy.”

The finance officials are discussing the form and timing of exit strategies after spending billions of euros in emergency measures to drag the economy out of its worst recession in 60 years. While there are signs the recovery is under way, it may not be sustained enough to permit a withdrawal of these measures before 2011, ministers said.

“We have to prepare exit strategies, of course, and we shall see if these strategies can be implemented then in 2011,” Luxembourg’s Jean-Claude Juncker said after leading a meeting of euro-area finance chiefs today. “We shall see whether this situation becomes more stable by then.”

The euro, which has gained 13 percent in the past seven months against the dollar, traded at $1.4544 at 2:10 p.m. in London today, down from $1.4640 in New York yesterday.

Euro’s Advance

The ministers discussed the euro’s advance in preparation for a Group of Seven meeting in Istanbul this weekend, European Central Bank President Jean-Claude Trichet told a press conference.

“We had a discussion as usual preparing for the meetings in Istanbul,” Trichet said. “There is very strong sentiment that we have a shared interest in a strong and stable international financial system and excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.”

Trichet also said exit plans should be implemented once the recovery is under way, “in our own view the latest in 2011,” he said.

The euro-area economy may expand 0.2 percent in the current quarter and 0.1 percent in the three months through December, the commission said on Sept. 14. In the second quarter, the economy contracted just 0.1 percent as Germany and France returned to growth.

Jobless Rate

Europe’s unemployment rate rose to a 10-year high of 9.6 percent in August, data showed today, as companies continued to cut jobs even as the recession eased. The European Commission forecasts the euro-area jobless rate will reach 11.5 percent next year.

“It’s clear we have to keep economic policy very expansionary in the coming period to really be sure of establishing a recovery,” Swedish Finance Minister Anders Borg said today. “At the same time, this is the time to start designing and communicating exit strategies,” he said, adding that it’s “clear that fiscal policy in Europe is not sustainable.”

France’s budget deficit will widen next year to a record, the government projected yesterday, as President Nicolas Sarkozy cuts business taxes and spending on jobless benefits climbs. Spain this week posted the largest budget shortfall in at least nine years.

This afternoon the euro-area officials were joined by finance ministers from the rest of the European Union as well as central bankers from the 27 EU nations. Included on their agenda is the banking industry and financial- supervision proposals. The Committee of European Banking Supervisors is due to present the results of stress tests carried out on the banking industry.

Reducing Deficits

Officials should focus on reducing deficits over raising interest rates, Jean Pisani-Ferry, director of Bruegel, a Brussels-based study group, said in a presentation to ministers in Gothenburg today.

“In view of the public finance costs of large deficits, budgetary consolidation should be given priority over monetary tightening,” Pisani-Ferry said in the report, co-written with Juergen von Hagen and Jakob von Weizsaecker. “For this to succeed, governments need to start fiscal consolidation swiftly in 2011 with the withdrawal of the stimuli.”

This afternoon the euro-area officials were joined by finance ministers from the rest of the European Union as well as central bankers from the 27 EU nations. Included on their agenda is the banking industry and financial-supervision proposals. The Committee of European Banking Supervisors is due to present the results of stress tests carried out on the banking industry.


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PCE/Claims


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Yes, not looking good!


Karim writes:

Attached is the Fed’s favored inflation measure, the core PCE deflator.

Putting aside that 1% is the lower end of their defacto ‘comfort zone’, the speed of the move is as much a concern as the level.

  • M/M Core PCE was 0.09%
  • Personal income and wage and salary income were both 0.2% m/m, but are down -2.6% and -5.2% y/y respectively.
  • Initial claims up 17k to 551k (prior week revised +4k).
  • Total Ongoing Claims (continuing+extended+emergency) +35k


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Chinese Export Prices/Anecdotals


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>   
>   (email exchange)
>   
>   On Thu, Oct 1, 2009 at 7:27 AM, wrote:
>   
>   May be of interest-from JPM China weekly-so much for lower dollar being inflationary!
>   

Details suggest that:

the fall in export prices is rather broad-based across manufactured goods, including chemicals, metal products, machinery and

equipment, telecom products, autos, handbags, and shoes. Indeed, feedback from exporters in coastal areas showed that

although orders from the EU and the US have been increasing, importers are very sensitive to prices and have been negotiating

prices aggressively. The general trend is consistent with our view that although external demand, especially from the G-3

economies, is experiencing a cyclical rebound, the bounce is from unprecedented lows. As such, there is still plenty of slack in

the global economy and the large output gap is depressing the pricing power of producers everywhere.

and Japan has to be seeing the same thing.

Won’t surprise me if they start buying dollars and test the US admin’s resolve on that issue

Be nice if they do and help sustain our real terms of trade!


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Q3 Update


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With quarter end now behind us,
I am watching for signs of:

The gold bubble bursting
Equity sell off after quarter end window dressing
Crude leveling off after quarter end window dressing
Dollar strength with lingering Eurozone problems and global concern about losing US market share
Post clunker and post first time home buyer credits softening those series
BMA and rates curves flattening
Accelerating M and A
More political unrest as real terms of trade continue to deteriorate


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