OPEC March Crude Output Down 30,000 Bbl/Day to 29.205 Mln

With supply following demand, as with any monopolistic arena, it looks like the world crude oil balance remains very much neutral leaving the Saudis in full control as swing producer where they set prices and let quantity adjust to market demand.

Stable crude prices with 0 interest rates, high excess capacity and low aggregate demand should keep inflation at bay indefinitely, with productivity increases making deflation the greater risk.

EU Daily

The institutional structure puts the Eurozone in a very awkward position.

The higher deficits desired by the economy to restore non govt net financial assets at the same cause a deterioration in the credit worthiness of the member nations running the deficits, which seems to limit the process as these to two forces collide in a counterproductive, unstable and turbulent manner.

The higher member nation deficits also are a force that moves the euro lower which can continue until exports somehow resume via the foreign sector reducing its net financial euro assets as evidenced by a pickup in net euro zone exports. That process can be drawn out and problematic as well in a world where global politics is driven by export desires from all governments.

EU Headlines:

Trichet Expects Investors to ‘Recognize’ Greek Moves

Italian Consumer Prices Rose in March on Energy Costs

Europe Inflation Jumps More Than Economists Forecast

Euro Area Needs to Substantially Improve Governance, EU Says

German Unemployment Unexpectedly Declined in March

German Machine Orders Jumped 26% in February on Foreign Demand

France’s 2009 deficit hits record high 7.5 percent of GDP

Japan 3/31/10 year end

The adjustments beginning April 1 could be substantial after this year’s year end adjustments in Japan added to the usual month end and quarter end global adjustments.

I’d guess this was the time for a lot of clean up adjustments in Japan from prior years due to more favorable valuations and a return of market functioning.

Today (3/31) is a fiscal year end in Japan and most of the financial institutions are happy with their results as equity is much higher than a year ago (NKY: 11,089 vs 8,109 last year) and JGB yields are almost the same level (10yr JGB: 1.40% vs 1.35% last year)

Tax Receipts Rebound as 15 Biggest States See Gain

>   
>   (email exchange)
>   
>   On Tue, Mar 30, 2010 at 2:27 PM, Jason wrote:
>   
>   State tax receipts are reportedly up…
>   

Yes, federal looking like they’ve bottomed as well.

Definitely looks like activity has bottomed.

And still feels like we are going the way of Japan, but too early to tell.

>   
>   Granted we are still well below 2008 peak revenue levels
>   
>   and the budget crisis is far from over.
>   
>   But Muni CDS remains near the wide end of the range when compared with
>   Corporate IG:
>   
>   Still looks like a great trade to me…
>   

Tax Receipts Rebound as 15 Biggest States See Gain



By Dunstan McNichol


March 30 (Bloomberg) — The two-year slide in tax

collections that opened a $196 billion gap in U.S. state budgets

has stopped, easing pressure on credit ratings and giving leeway

to lawmakers as they craft spending plans for next year.

The 15 largest states by population forecast a 3.9 percent

gain in tax revenue in fiscal 2011, budget documents show. The

50 states on average may increase collections by about 3.5

percent, the first time in two years the figure is expected to

grow, said Mark Zandi, chief economist at Moody’s Economy.com,

California took in 3.9 percent more since December than

projected in January, Controller John Chiang said this month.

New York got $129 million above forecasts in its budget year

through February, according to a report from Comptroller Thomas

DiNapoli. In New Jersey, the second-wealthiest state per capita,

January sales-tax collections were 1.9 percent higher than a

year earlier, the first annual increase in 19 months,

forecasters said in a report last month.

“This time last year, we were sliding down a mountain,”

said David Rosen, chief budget officer for the New Jersey

Legislature. “I don’t think we are now; it’s stabilized.”

States collected about $79 billion less in sales, income

and corporate taxes in 2009 than in 2008, the U.S. Census Bureau

said today in a report, as the economy struggled through its

deepest slump since the Great Depression. Emergency spending

cuts and tax increases became routine during the recession that

began in December 2007.

‘Panic Mode’

The end of the collections crash will ease fiscal strains

that led New York-based Moody’s Investors Service to lower the

ratings of five states last year, after no downgrades in 2008.

It will also enable governors and legislators to draw up budgets

for fiscal 2011, which starts July 1 for most states, with more

confidence that money they plan to spend will arrive.

“As long as revenues were sliding, budgeters were in a

panic mode,” said Zandi, whose West Chester, Pennsylvania-based

company provides economic analysis to businesses, government and

investors. “It’s not as scary when revenues are rising.”

States’ combined budget gaps will still total $180 billion

in fiscal 2011 and $120 billion in fiscal 2012, the Washington-

based Center on Budget and Policy Priorities estimates.

Economic Growth

This fiscal year, the 15 largest states expect to collect

11 percent less taxes than in fiscal 2008, budget proposals

show. It won’t be until 2013 that revenue returns to 2008

levels, said New Jersey’s Rosen and Barry Boardman, the North

Carolina General Assembly’s chief economist.

Collections of personal income and sales taxes, the two

largest components of state revenue, fell by 17 percent and 7

percent, respectively, last year compared with 2008, according

to the Census Bureau. Declines were less steep in the fourth

quarter than earlier in the year, with income taxes dropping by

4.7 percent to $59.9 billion and sales taxes sliding by 2.8

percent to $71.7 billion.

Corporate taxes increased 3.4 percent to $9.1 billion in

the fourth quarter, the Census Bureau said, after declining in

seven of the previous nine quarters.

Combined state and local tax collections climbed to $360.1

billion during the final three months of 2009, the first year-

over-year gain in five quarters and an almost 1 percent boost

from the same period in 2008, according to the agency.

State coffers are beginning to get a boost from an economy

that expanded at a 5.6 percent annual rate in the fourth quarter

of 2009, the most in six years. That’s stopped the drop in sales

tax collections, which generated $23 billion less last year than

in 2008, according to the Census Bureau.

Predictability a ‘Positive’

Arizona, which sold state buildings and canceled health

insurance for 47,000 children as collections this fiscal year

fell 34 percent below 2007 levels, said its January revenue was

$14.2 million above projections, the first time since March 2007

that collections exceeded forecasts.

Virginia recorded a 31.6 percent increase in corporate

taxes through February, it said on March 11. Governor Robert

McDonnell, a Republican who took office in January, increased

this year’s revenue projections by $82.5 million last month.

Improved revenues may help states replenish reserves, curb

borrowing for expenses and strengthen their debt ratings, said

Robin Prunty, credit analyst for Standard & Poor’s in New York.

“Just having predictability is a positive from a credit

standpoint,” Prunty said.

“We’ve seen the worst,” said Philip Condon, who oversees

about $9.4 billion in municipal bonds for DWS Investments in

Boston. “While it may not be great, it’s getting better.”

California Sale

DWS was among the buyers of last week’s $3.4 billion

issuance of taxable California bonds, its first such sale since

November. A scarcity of municipal debt, coupled with indications

that California’s revenue decline may have reached bottom,

attracted investors and drove down bond yields, Condon said.

“The recent uptick in revenue collections certainly didn’t

hurt us,” said Tom Dresslar, a spokesman for Treasurer Bill

Lockyer in Sacramento.

Forty-five states reduced outlays for health care, the

elderly and disabled and primary and higher education in 2008

and 2009, the Center on Budget and Policy Priorities said.

Lawmakers now may be able to restore spending or avoid

further reductions. California’s Chiang this month scrapped a

plan to delay tax refunds after revenue exceeded projections for

three months. In January, an impasse over the state’s $20

billion budget imbalance led S&P to cut its credit rating to A-,

the lowest of any state.

“The fact that revenues are performing better I think is

certainly the first bit of good news we’ve heard in a long

time,” said Amy Doppelt, a San Francisco-based managing

director at Fitch Ratings who follows California. Fitch last

year downgraded more than 200 municipal issuers, the most ever,

according to a March 25 report from the rating company.

Negative Outlook

S&P lowered its rating on California, Illinois and Arizona

last year and has a negative outlook on those and four other

states. Moody’s cut those three plus Nevada and Ohio, its first

state downgrades since Michigan in 2007. It’s negative on 15,

including five of the 10 largest: Florida, Illinois,

Pennsylvania, Ohio and Michigan.

Jobless rates in 18 states including Florida and Rhode

Island exceeded the national average of 9.7 percent in February.

Unemployment in most states is about double pre-recession

levels, according to the Labor Department.

Michigan, with the nation’s highest unemployment rate at

14.1 percent in February, is in its 10th year of job losses and

expects to end fiscal 2011 with the fewest jobs in 24 years.

“As the employment situation continues to be weak, income

tax revenues will continue to lag,” the Center on Budget and

Policy Priorities said in a Feb. 25 report.

Pension Expenses

As workers lose income, states face rising expenses for

Medicaid and other social services. Through March, they had

borrowed $37 billion from the federal government to cover

unemployment benefits, the Treasury Department said.

States face a $1 trillion gap between assets in public

pension plans and their obligations to retirees, a Feb. 18 study

by the Washington-based Pew Center on the States said. Illinois

borrowed $3.5 billion in January to finance its pension

contribution, which led Moody’s and S&P to cut their ratings to

the second-lowest of any state.

More Jobs

“You can’t exclude the expense side,” said Howard Cure,

New York-based director of municipal research for Evercore

Wealth Management LLC, which oversees $1.7 billion, half in

fixed-income municipals. “What really would alleviate that

situation is more jobs.”

States also have to prepare for the June 2011 end of help

from the American Recovery and Reinvestment Act, which will

provide them with about $140 billion of aid since its inception

in February 2009.

“States may have reached the end of the beginning of a

multiyear fiscal crisis,” the Nelson A. Rockefeller Institute

of Government in Albany, said in a January report. “The best to

be hoped for in 2010 may be the beginning of the end.”

ECB rate hike discussion will compound funding issues

ECB’s Liikanen Says Interest Rates Won’t Stay Low

By Diana ben-Aaron

March 29 (Bloomberg) — European Central Bank Governing Council member Erkki Liikanen said interest rates won’t stay at the current level indefinitely, Maaseudun Tulevaisuus reported, citing an interview.

While low rates have eased the economic slowdown, households and businesses shouldn’t count on them forever, Liikanen was quoted as saying by the Helsinki-based newspaper. He declined to say when or by how much rates would increase.

“We decide the key central bank rate in the ECB council according to the requirements of the economic situation,” Liikanen said.

Rasmussen polls

65% Now Hold Populist, or Mainstream, Views

55% Favor Repeal of Health Care Bill

I find his polls as good as any. He shows 54% favor repeal of the new health care law, with 70% of seniors against the Medicare cuts.

The lack of understanding of the monetary system is taking an increasing both economically, politically and socially.

With almost 20% of the workforce unable to find full time work, and near record low capacity utilization in general, our leaders saw fit to raise taxes and cut spending which will lower demand and undermine their political careers to ‘pay for’ a very modest spending increase of about $100 billion a year, and with delays, of the perhaps additional $1 trillion of fiscal adjustment needed to get us back to full employment in a reasonable time frame.

Also, part of the rise in costs goes to insurance reserves which are a demand leakage.

The politics get uglier by the day, and from watching the news over the weekend the loudest health care protest seems to be over the expense and how it will add to the size of the deficit. Seems this means more ‘fiscal responsibility’ is on the way, including letting the tax cuts expire next year and maybe even a VAT which is an absurdity under any circumstances, apart from a desire to cut consumption.

Add to that the reality of the eurozone actually offering Greece nothing of value, opening the way for wider credit spreads spreading to the entire eurozone.
It also looks like their combined deficits are now large enough for the added non govt financial assets to now be driving down the euro independent of the credit issues. This continues until exports increase sufficiently for the automatic stabilizers to tighten fiscal balances. They aren’t anywhere near there yet.
Additionally, the dollar index chart is beginning to pick up a bid from commodities traders as well.

US Taxes

From the articles of Confederation, March 1st, 1781.
We had the right tax, but the wrong way to implement it:

VIII.

All charges of war, and all other expenses that shall be incurred for the common defense or general welfare, and allowed by the United States in Congress assembled, shall be defrayed out of a common treasury, which shall be supplied by the several States in proportion to the value of all land within each State, granted or surveyed for any person, as such land and the buildings and improvements thereon shall be estimated according to such mode as the United States in Congress assembled, shall from time to time direct and appoint.

The taxes for paying that proportion shall be laid and levied by the authority and direction of the legislatures of the several States within the time agreed upon by the United States in Congress assembled.

Text of Greek Deal

As before, this is in fact another statement that indicates no checks are to be written.

The purpose is probably the hope that it be read as a statement of support which will facilitate continued funding of Greek debt.

It is a clear statement that no funding is available until Greece fails to find funding elsewhere. However, understood but unstated, is that the process of finding funding is necessarily that of price discovery. Greece, like all borrowers, simply offers securities at ever higher rates until it finds the needed buyers. Failure, in theory, is defined as the rate reaching infinity with no buyers. At that time, the euro members would step in with a loan offer at a non concessional rate which would then presumably be infinity.

This makes no sense at all, of course. The statement is in fact a statement that Greece must first drive rates to infinity before euro zone member loans are available. In other words, it’s a statement that says Greece is on its own, and that they will stand by without taking action as observers of the standard market default process of Greek funding rates going into double and then triple digits as happens to all failed borrowers of externally managed currencies, including nations with fixed exchange rates.

“In this context, Euro area member states reaffirm their
willingness to take determined and coordinated action, if
needed,
to safeguard financial stability in the euro area as a
whole, as decided the 11th of February.

As part of a package involving substantial International
Monetary Fund financing and a majority of European financing,
Euro area member states, are ready to contribute to coordinated
bilateral loans.

This mechanism, complementing International Monetary Fund
financing, has to be considered ultima ratio, meaning in
particular that market financing is insufficient.
Any
disbursement on the bilateral loans would be decided by the euro
area member states by unanimity subject to strong conditionality
and based on an assessment by the European Commission and the
European Central Bank. We expect Euro-Member states to
participate on the basis of their respective ECB capital key.

The objective of this mechanism will not be to provide
financing at average euro area interest rates, but to set
incentives to return to market financing as soon as possible by
risk adequate pricing. Interest rates will be non-concessional,
i.e. not contain any subsidy element. Decisions under this
mechanism will be taken in full consistency with the Treaty
framework and national laws.”

Claims/Bernanke on asset sales


Karim writes:

Initial claims fall 14k to 442k; with downward revisions to past few weeks allowing 4wk avg of initial claims to move to 453.8k; the lowest since 9/08.

This is the part that Bernanke omitted in today’s testimony that was included in his Feb 10 testimony.

“I currently do not anticipate that the Federal Reserve will sell any of its security holdings in the near term, at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery. ”

Now just has sequencing more open-ended:

“In any case, the sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments and on our best judgments about how to meet the Federal Reserve’s dual mandate of maximum employment and price stability.”

DGO/Home Sales


Karim writes:

Durables data was firm.

  • Shipments ex-aircraft and defense (proxy for current qtr business capex) up 0.8%; stands 2.2% above Q4 avg; implication is real capex up 5-6% in q1 after 13.3% gain in q4
  • Orders ex-aircraft and defense (proxy for future capex) up 1.1%

New home sales down 2.2% (prior mth revised to -8.7% from -11.2%); level of new home sales of 308k (annualized) makes new all-time low for 2nd straight month. As a % of the overall economy, hard to see housing go much lower!