Monthly Archives: December 2010

Trichet cmnts

Posted on by

Translation- they keep funding on an as needed basis, at least for now.

*DJ ECB Trichet: The ECB Is Meeting Its Resposibilities
*DJ ECB Trichet: Important That Deficit Targets Are Met
*DJ ECB Trichet: Spain Should Deepen Labor Mkt Reform
*DJ ECB Trichet: Bank Stress Tests Are Very Useful
*DJ ECB Trichet: Stress Tests Important To Do On Regular Basis
*DJ ECB Trichet: Investors Don’t Yet Appreciate Postive Actions Taken
*DJ ECB Trichet: We Permamently Watch Commodities Prices
*DJ ECB Trichet: Spain One Of Countries That Needs Deficit Cuts

Share

Bond Vigilantes Could Target US: Roubini

Posted on by

As a kid growing up I would have thought big time university professors would know better than this.

It should be obvious to him that markets follow expectations of future Fed policy, they don’t cause it.
The fed funds rate changes only when the Fed votes to change it, and the NY Fed has a good enough understanding of its own monetary operations to implement the FOMC’s will. The fact that under Geithner they never could hit a fed funds target is another story for another time, but rest assured it had nothing to do with bond vigilantes.

Yields are probably going up for two reasons. The first is the expectation that fiscal expansion does work and therefore the Fed is more likely to hike that much sooner. Note that GDP forecasts being raised by most all economists, who also were ready to lower forecasts if the tax cuts are allowed to expire.

The currency is a public monopoly, and as a simple point of logic (not theory or ideology) a monopolist sets two prices. One is how the item exchanges for itself, what Marshall called the ‘own rate’ and for the currency is the interest rate.

In other words, the Fed/govt. sets the entire term structure of risk free rates, one way or another, whether it likes it or not and/or knows it or not.

A monopolist also sets the terms of exchange for his item vs all other things, which for the currency is called the ‘price level’.

In other words, the price level is necessarily a function of prices paid by govt. when it spends, also whether it knows/likes it or not.

(Kindly send this along to the good professor if you have his contact info.)

Bond Vigilantes Could Target US: Roubini

Economist Nouriel Roubini on Wednesday voiced concern over a compromise on extending tax cuts struck by US President Barack Obama and Republican leaders, saying the agreement could expose the US to bond vigilantes who will drive up the price of yields.

Bond vigilantes – the term was coined by economist Ed Yardeni in the 1980s to describe major investors who demand higher yields to compensate for the perceived risks resulting from large deficits – could derail the country’s precarious recovery, some economists say.
Roubini, who has been dubbed Dr Doom since he accurately forecast the latest financial crisis, said on Twitter: “Obama-GOP tax deal costs $900 billion over two years. US kicking the can further down the road. Are bond vigilantes starting to wake up?”

Republican leaders and the White House agreed earlier this week to extend tax cuts on all income groups for two years and extend unemployment benefits in a deal which they hope will spur economic growth and cut unemployment.

Roubini is not alone in thinking the deal could worsen the US deficit and put the country at risk.

Chinese central bank adviser Li Daokui said on Wednesday the fiscal health of the United States was worse than Europe’s, and that the dollar had so far been shielded from trouble because markets are still focused on debt-laden European countries.

US bond prices and the dollar would fall when the European situation stabilizes, Daokui said.

Share

German Exports Declined in October as Euro-Area Demand Eased

Posted on by

As previously discussed, German jobs are dependent on exports to the rest of he euro member nations.

This means down deep Germany has a large vested political interest in keeping them funded, real terms of trade be darned.

It’s the old:

‘It’s my brother, he thinks he’s a chicken’

‘Have you taken him to a doctor?’

‘No’

‘Why not?’

‘We need the eggs.’

So odds are still that the euro zone keeps muddling through, funding itself ultimately through the ECB as needed, while they all continue on center stage acting like adolescents with their silly games that continue to disrupt both their region and the rest of the world.

German Exports Declined in October as Euro-Area Demand Eased

Dec. 8 (Bloomberg) — German exports unexpectedly dropped in October as Europe’s sovereign debt crisis and a cooling global economy curbed demand.

Sales abroad, adjusted for working days and seasonal changes, fell 1.1 percent from September, when they rose 3 percent, the Federal Statistics Office in Wiesbaden said today.

Economists had forecast stagnation in October, according to the median of 14 estimates in a Bloomberg News survey. Imports rose 0.3 percent.

Austerity measures across the euro region are eroding demand for German goods in the country’s biggest export market.

Factory orders from within the single-currency area dropped for a second month in October, the Economy Ministry said yesterday.

Still, unemployment at an 18-year low is boosting consumption at home, putting the recovery in Europe’s largest economy on a firmer footing.

“Exports will slow considerably just as domestic demand picks up,” said Costa Brunner, an economist at Natixis in Frankfurt. “Rising employment is boosting private consumption and wage deals suggest disposable incomes will rise.”

Exports increased 19.8 percent in October from a year earlier, today’s report showed. Sales to countries within the 16-member euro area rose 12.7 percent in the year, while shipments to countries outside the European Union gained 28.4 percent.

Share

DJ Moody’s:US Rating Could Be Negatively Affected by Tax-Cut Extension

Posted on by

Just in case you thought Moody’s knew anything about sovereign debt.

And how about those Democrats are using deficit terrorist rhetoric to try to fight back against the Republicans.

*DJ Moody’s Says US Sovereign Debt Rating Stable For Now
*DJ Moody’s:US Sovereign Debt Rating Stable Following Tax-Cuts Decision
*DJ Moody’s:US Rating Could Be Negatively Affected Over Longer Term By Tax-Cut Extension

DJ Moody’s Says US Sovereign-Debt Rating Stable For Now
12/07/10 12:51

NEW YORK (Dow Jones)–Moody’s Investors Service said Tuesday that the United States’ top sovereign-debt rating is stable for now, but could be negatively affected by the extension of tax cuts and if the government can’t get its growing debt under control.


Moody’s senior credit officer Steven Hess said the country’s stable outlook wouldn’t be affected by Monday’s deal to extend current tax rates for two years, reduce the payroll tax for a year, and extend unemployment benefits.


He was speaking in a telephone interview with Dow Jones Newswires Tuesday.
Moody’s rates the debt of the world’s biggest economy at Aaa, its highest rating. The stable outlook means that rating is unlikely to be changed in the next one to two years.


However, Hess said the country’s outlook could worsen if the tax cuts are extended further and no other measures, such as spending cuts, are taken to get the ballooning deficit under control.


If the current tax cuts are extended again, “clearly that makes the long-term outlook more negative” for the U.S. rating, Hess said.

Share

Fiscal Package

Posted on by

Yes, at the better end of expectations, but still a small net tax increase as of year end. No actual relief for anyone.

And that’s best case. They haven’t actually passed it yet.

Austerity still going strong in the euro zone and the UK.

And China still working on slowing things down to fight inflation.

Oil prices are up which will slow things down some but not generate enough inflation for the Fed to care.

So doesn’t look like anything out there to move the needle on growth or inflation enough to get the Fed to hike any time soon.


Karim writes:

Definitely at the better end of expectations, for both the tax cuts and the unemployment benefits…

(CNN) — President Barack Obama presented congressional Democratic leaders Monday with a proposed deal with Republicans that would extend Bush-era tax cuts for two years and unemployment benefits for 13 months while also setting the estate tax at 35% for two years on inheritances worth more than $5 million, a senior Democratic source told CNN.

The deal also includes a temporary 2% reduction in the payroll tax to replace Obama’s “making work pay” tax credit from the 2009 economic stimulus package for lower-income Americans, the senior Democratic source said.

As currently crafted, the deal would prohibit amendments by either party, according to the source, who spoke on condition of not being identified by name.

Share

comments on inflation in China

Posted on by

When the western educated offspring do what they’ve been taught to fight inflation it can all go very wrong.
Their main tool, whether they know it or not, directly or indirectly, is higher interest rates, which only directly makes the inflation worse
through the cost channel and interest income channel, which further weakens the currency/raises costs through the import channel as well.

And at the same time inflation tends to tighten up fiscal balance that can cause a crash.

Also, I received this comment today:

“The Chinese government will take every opportunity to blame foreigners for inflation (and any other problem that crops up) this a well worn strategy.

It is widely believed in China that QE2 has caused the current increase in inflation. The reality is that inflation is being caused by an increase in energy costs. Also because agriculture now uses much more energy than it once did as a result of modernization, food prices are now largely a derivative of energy prices. Taken together, food and energy make up most of the increase in the CPI.

Some more data points: I spoke with a cab driver here in Shanghai yesterday about the rumored across the board fare increase from 12 to 15 yuan and he said if it occurs it will be to offset higher energy costs. There is also news that several major domestic oil producers have been caught selling at prices above the allowed level.”

Share

Non-Mfg ISM

Posted on by


Karim writes:

Details firm-especially new orders and employment (highest level since Oct 2007)



Nov Oct
Composite 55.0 54.3
Prices Paid 63.2 68.3
New Orders 57.7 56.7
Employment 52.7 50.9
Export orders 59.5 55.5
Imports 54.5 54.0
  • “Business remains steady; outlook for fourth quarter is good.” (Information)
  • “Trending favorable — see more activity toward additional staff and capital expenditures for 2011.” (Finance & Insurance)
  • “Business is stable. Customers are exerting a lot of pressure to lower prices.” (Agriculture, Forestry, Fishing & Hunting)
  • “Slight uptick in orders, but nothing to indicate sustainability.” (Professional, Scientific & Technical Services)
  • “This business cycle is cause for continued caution for the foreseeable future. We would like to see some settling of unemployment, retail and home sales — none of which appear to be either forthcoming or predictable. We anticipate continued uncertainty and retrenchment.” (Retail Trade)
Share

Thoughts on the fx swap lines data releases

Posted on by

>   
>   (email exchange)
>   
>    On Thu, Dec 2, 2010 at 3:51 AM, Mike wrote:
>   
>   It seems it was around 7 trillion notional. Do you know the durations?
>   

No, haven’t read any details. I recall they were relative short but were extended maybe more than once.

>   
>   If they didn’t act would the entire fx market have come to a halt.
>   

Libor setting would have been higher for as long as the BBA kept the weaker banks in the basket.

>   
>   Given that this lending is unsecured, what happens if a foreign central bank doesn’t pay?
>   

The lender has no recourse and takes a loss.

>   
>   Are there any constraints on this lending?
>   

Just political. A nation can lend, spend, or toss down a rat hole any amount of it’s own currency it wants.

>   
>   Finally, would clearing all fx swaps have prevented the fx “run” if the fed had
>   backstopped the clearinghouses?
>   

Not sure which ‘run’ you are referring to?

But getting short a currency, spot or forward, means you are borrowing it, directly or indirectly, and none of the currencies in question are ever ‘quantity constrained’. What triggered the swap lines was the desire of the Fed to get libor settings lowered.

The large dollar borrowing funded by the Fed swap lines was done because foreign banks with presumed credit issues were bidding up libor and driving up the libor settings which was driving up home mortgage and other rate settings in the US. The Fed brought the rates down by facilitating lending at lower rates to those weaker credits via the ECB and other CB’s. (That would have been my last choice on how to get those US rates down, but that’s another story.)

Does this help?

Share

Inflation in China

Posted on by

What I see is more evidence of an inflation problem in China that they are now trying to blame on something other than themselves to prevent the historical regime change from inflations of the past.

The problem is, of course, the don’t fundamentally understand how a currency works, which reduces the odds of being able to reverse their inflation without a recession.

Beijing’s Focus on Food Prices Ignores Broader Inflation Risk

By Keith Bradsher

November 17 (NYT) — Zhou Xiaochuan, the governor of the central bank, had said earlier on Tuesday that the amount of money racing through the global economy was putting pressure on emerging economies that want to control inflation. And Yao Jian, a commerce ministry spokesman, said at a press conference on Tuesday that the government would tighten scrutiny of foreign investment so as to prevent too much money from pouring into China as foreign investors seek higher returns than are currently available in the West.

Imposing price controls and other administrative controls on the Chinese economy runs counter to the steps recommended by many Western experts. They have suggested that China should further deregulate its economy, let the renminbi appreciate and otherwise rely on market forces to tame inflation.

Share