Category Archives: Italy

Saudi Arabia in talks to boost oil output

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Right, as swing producer/monopolist that’s what they necessarily do- set price and let quantity adjust.

But if quantity demanded exceeds their ability to pump they lose control of price on the upside.

>   
>   (email exchange)
>   
>   On Thu, Feb 24, 2011 at 9:43 AM, Greg wrote:
>   
>   Just like you say about the Saudi’s…..
>   

Saudi Arabia in talks to boost oil output

By David Blair, Jack Farchy and Javier Blas

February 24 (FT) — Saudi Arabia is in “active talks” with European oil companies to meet the production shortfall left by Libya, the clearest indication to date that the leader of the Opec oil cartel is about to boost supplies to stop further rises in the oil price, which surged to near $120 a barrel on Thursday.

Riyadh is asking “what quantity and what quality of oil they [the European refiners] want,” a senior Saudi oil official said on condition of anonymity.

Oil traders said the talks signalled that Saudi Arabia realised that the political crisis in Libya was now an oil supply crisis and that the kingdom needed to act quickly and decisively to stop oil prices hurting the global economic recovery.

“You can only expect the price to go up. It is fear of the unknown. The risks are all to the upside,” one senior oil trader said. “Saudi Arabia needs to respond.”

The kingdom is considering two options for increasing supplies. The first would be to boost Saudi production and send more crude through the kingdom’s East-West pipeline, which links the Gulf region with the Red Sea port of Yanbu, for shipment to Europe.

Another possibility, which is currently only being “studied”, would be a swap arrangement, whereby West African oil intended for Asian buyers is redirected to Europe, with Saudi Arabia stepping in to supply the Asian customers.

West African oil, such as Nigerian crude, is very similar to the gasoline-rich Libyan oil, traders said, noting that West Africa is geographically closer to Europe than Saudi Arabia.

“Right now, there are active talks in order to implement what is needed,” the Saudi oil official added. He stressed that the kingdom retained spare capacity of some 4m barrels a day – more than than double Libya’s entire output which totalled 1.58m b/d in January, according to the International Energy Agency.

Saudi Arabia has not yet decided whether to increase its output in response to Libya’s crisis, the official added, saying it would depend on the requirements of European oil companies.

If it proved necessary for Saudi Arabia to produce more, “then that will happen, there’s no problem at all”, he added.

Traders believe Saudi Arabia has the capacity to boost production by at least 1m b/d with just 24 hours notice, meaning that if a decision was adopted now, the oil tankers could be arriving in Europe within 10 days.

The move by the world’s largest oil producer comes as Eni of Italy, the most active foreign oil company in Libya, said on Thursday that oil production from the North African country has plunged to just a quarter of normal levels.

Increasingly panicked buying drove the price of Brent crude futures, the global pricing benchmark, up 6.7 per cent to a peak of $119.79, the highest since August 2008. Traders and investors feared that the near-total shutdown of Libya’s oil industry would leave the global oil market with little supply cushion should the political crisis spread to another major Middle Eastern oil producer.

Paolo Scaroni, Eni chief executive, on Wednesday made the most pessimistic public assessment to date of the impact of the Libyan crisis on the country’s oil output, saying the country was producing only 400,000 b/d, compared with 1.6m b/d before the violence erupted.

“The real phenomenon is there are 1.2m barrels less on the market,” Mr Scaroni told reporters in Rome, adding that the loss of Libyan production was “not a huge thing, but it is something and there is also a sense of general uncertainty in the region which can be the trigger for speculation”.

The shortfall means the world market is enduring its biggest oil crisis since hurricane Katrina in 2005 knocked out most US oil production in Gulf of Mexico.

Traders believe that Saudi Arabia has the capacity to increase production and also the oil of the right quality to meet the shortfall. The kingdom produces so-called Arab Extra Light and Arab Super Light, which through blending could be made to resemble the high-quality, light, sweet oil produced by Libya.

The Saudi move comes as oil prices reached levels that many economists believe will dramatically slow the global economy and potentially trigger a double-dip recession. Oil prices hit an all-time high of nearly $150 a barrel in mid-2008.

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Is Core Europe Headed for a Hard Landing?

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Is Core Europe Headed for a Hard Landing?

By Michael Darda

Executive Summary: We are increasingly concerned that the eurozone — including the core — is headed for a sharp slowdown. This powerpoint presentation shows that:

• Leading indicators in the eurozone have rolled over. The OECD’s Euro-Area Composite Leading Index has declined for seven consecutive months;

• Euro-area monetary aggregates are weak across the board. Both M1 (narrow money) and M2 (broad money) are contracting on a three-month annualized basis in the eurozone;

• However, euro-area business confidence is nearly back to peak 2007 levels. Despite the ongoing struggles, business confidence is high in the eurozone. However, confidence levels tend to be elevated at cycle peaks and depressed at cycle troughs;

• Weak money growth and strained credit markets suggest a high risk that the euro-area nominal GDP recovery could be stopped in its tracks. Absent a powerful positive shock to the velocity of money, European nominal GDP growth is likely to slow sharply;

• Debt spreads in Spain and Italy are showing a troubling pattern of “higher highs and lower lows”. Despite backing off a bit recently, sovereign debt spreads in Spain and Italy are near record highs. Worryingly, each successive “peak” in spreads has been higher than the previous one while each “trough” has also been higher.

No question austerity will work- that is, it will force negative growth.
Question is just when.
Unless they make fiscal adjustments, but that seems unlikely.

I’m starting to feel a deflationary malaise coming on as the end of year/beginning of new year related activity subsides.

Headline CPI increases to me are mainly just relative value shifts that rob demand for other things,
and are not anywhere near pushing through to core measures which would pass them on to indexed compensation.

But the talk of inflation is just one more thing keeping global authorities thinking they don’t need another ‘fiscal stimulus’ as they continue to push spending cuts and ‘fiscal responsibility’.

Housing going nowhere. Jobs going nowhere as GDP growth only marginally exceeds productivity growth.

Financial sector finding it hard to make a buck as loan demand remains weak and competition is driving down net interest margins and spreads in general. (I’m thinking of holding a walkathon to help them out. Anyone want to kick in a few cents a mile?)

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Italian deficit narrows in third quarter

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Now that Japan has an open door to buy euro to ‘help out’ the region’s finances, and the ECB’s funding terms and conditions forcing deflationary austerity measures that continue to bring euro zone deficits down, I’m itching to buy the euro vs the yen.

At some point, however, and maybe as soon as q3 this year, or even sometime in q2, the austerity in the euro zone will fail to reduce deficits and instead the tightening measures will cause growth to go into reverse and deficits to increase, causing fundamental euro weakness.

But until then, the euro remains fundamentally strong, with technicals/one time portfolio shifts causing the sell offs.

Headlines:
Portugal Finance Minister says no need for bailout
Euro May Decline to 2010 Low Against Yen: Technical Analysis
ECB intervenes as debt crisis deepens
Portugal faces growing tensions
Tensions Rise Before Portugal Auction
Germany May Soften Objections to Euro Fund Increase
German 2011 Construction Sales May Drop, HDB Building Lobby Says
German Trade With China Rose to a Record in 2010
French Business Confidence Rose in December for Fourth Month
Italian deficit narrows in third quarter

Italian deficit narrows in third quarter

(FT) Italy’s public budget deficit narrowed in the third quarter of last year, putting the economy on track to hit government austerity targets of about 5 per cent of gross domestic product in 2010. As a result of austerity measures passed in December, Italy is targeting a public budget deficit of 3.9 per cent in 2011 and 2.7 per cent in 2012. Debt is expected to peak at about 120 per cent of gross domestic product this year, giving the economy ministry little room to manoeuvre. In the third quarter, the public deficit narrowed to 3.2 per cent of GDP compared with 3.9 per cent in the period a year earlier, according to data from the national statistics office. It narrowed to 5.1 per cent of GDP in the first nine months, down from 5.5 per cent a year earlier.

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China Frets About Spreading EU Debt Woes

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Yes, they want to support the euro with their fx reserves to support their exports to that region, but there is no equivalent of US Treasury securities that they can hold.

It’s as if they could only buy US state municipal debt, and not Treasury secs, Fed deposits, and other direct obligations of the US govt with their dollars.

So the only way they can support exports to the euro zone is to take the credit risk of the available investments.

Now add to that their inflation problems.

The traditional export model is to suppress domestic demand with some type of tight fiscal policy, and then conduct fx purchases of the currency of the target export zone.

The euro zone does the tight fiscal but can’t do the fx buying, so the policy fails as the currency rises to the point net exports don’t increase.

China does the fx buying, but has also recently used state lending and deficit spending to increase domestic demand, which increases domestic prices/inflation, including labor, which works to weaken the currency and retard net exports.

So China fighting inflation and the euro zone fighting insolvency both look to keep aggregate demand down for 2011.

And I don’t see the deficit terrorists about to take their seats in the US Congress doing anything to increase aggregate demand either.

So all that and the Fed still failing to make much headway on either of its dual mandates, 30 year 0 coupon tsy’s at about 4.75% (and libor + as well) look like a pretty good place for a pension fund to get some duration and lay low, at least until there’s some visibility from the new US Congress.

China Frets About Spreading EU Debt Woes

By Langi Chiang

December 21 (Reuters) — China urged European authorities to back their tough talk with action on Tuesday by showing they can contain the euro zone’s simmering debt problems and pull the bloc out of its crisis soon.

China, which has invested an undisclosed portion of its $2.65 trillion reserves in the euro, said it backed steps taken by European authorities so far to tackle the region’s debt problems, but made clear it would like to see the measures having more effect.

“We are very concerned about whether the European debt crisis can be controlled,” Chinese Commerce Minister Chen Deming said at a trade dialogue between China and the European Union.

“We want to see if the EU is able to control sovereign debt risks and whether consensus can be translated into real action to enable Europe to emerge from the financial crisis soon and in a good shape,” he said.

Concerns that Europe’s debt problems will spread beyond euro zone’s periphery to engulf bigger economies such as Spain and Italy have weighed on global financial markets this year and taken a toll on the euro.

In part to protect its investments, China has repeatedly expressed its support for the single currency.

In October, Premier Wen Jiabao promised to buy Greek government bonds once Greece returned to debt markets, in a show of support for the country whose debt burden pushed the euro zone into a crisis and required an international bailout.

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ECB, ‘the euro’s monetary guardian’, confirms bond purchase strategy

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Yes, as discussed, looks like the ECB continues to facilitate funding by continuing the same bond purchase strategy, along with dictating terms and conditions.

For the member nations, compliance means continued funding.

Continued funding + compliance with deflationary austerity measures + no ECB buying of fx = euro strong enough to work to keep net exports from increasing.

And the possibility that the ECB decides to change course remains evidenced by the steep yield curves of member nations.

Trichet hints at bond purchase rethink

By Ralph Atkins in Frankfurt and Richard Milne and David Oakley in London

Published: November 30 2010 18:52 | Last updated: November 30 2010 18:52

Jean-Claude Trichet, European Central Bank president, has left open the possibility of the bank significantly expanding its government bond purchases and warned markets not to underestimate Europe’s determination to resolve the escalating eurozone crisis.

The hint that the ECB could recalibrate its response to the unfolding crisis came as the premiums that Italy and Spain pay over Germany benchmark interest rates hit fresh highs since the launch of the euro. The euro’s monetary guardian had already stepped up purchases of Portuguese bonds, traders reported.

Nov-30

The ECB’s bond purchase programme has been controversial within its governing council since its launch in May, with Axel Weber, president of Germany’s Bundesbank, voicing his opposition publicly.

But the pace at which the crisis has spread has altered the debate within the ECB, which could justify stepping up its intervention by arguing governments’ borrowing costs were far out of line with fundamentals, signalling dysfunctioning markets.

Speaking in the European parliament on Tuesday, Mr Trichet would not comment “at this stage” on the bond programme “in the light of the current situation”. But the programme was “on-going” and decisions on its future would be taken by the 22-strong governing council, which next meets on Thursday. He also refused to rule out the possibility of eurozone governments issuing joint bonds, although the ECB was not endorsing such a step.

Since May, the ECB has spent just €67bn under its bond purchase programme. Financial markets, however, see the ECB increasingly as the only institution with pockets deep enough pockets to ease the crisis.

The ECB thinks financial markets are badly mis-pricing risk. Mr Trichet said that “pundits are under-estimating the determination of governments”. Eurozone growth was proving surprisingly strong, and Ireland’s bail-out at the weekend had shown the EU was capable of responding to crisis. “I don’t think that financial stability in the eurozone, given what I know, could really be called into question,” he said.

Willem Buiter, chief economist at Citi, said: “The involvement of the ECB is likely to rise, despite its statements – and probably wishes – to the contrary.” He argued recently that the ECB backed by governments could give the new European bail-out fund a €2,000bn loan.

Gary Jenkins, head of fixed income at Evolution Securities, argued the ECB could try “real quantitative easing” through purchases of €1,000bn-€2,000bn of bonds. “It might be politically unpalatable. But it would be an immediate way of creating a firebreak.”

Mr Trichet has insisted repeatedly that the ECB is not engaged in “quantitative easing” as it has withdrawn liquidity from the financial system equal to the amounts it has spent on bonds, neutralizing any inflationary risks. That policy would almost certainly continue under an expanded scheme.

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China to the Rescue! Wen Offers to Buy Greek Bonds

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Subtitle:

“Ticker Tape Parade for Trojan Horse”

Ordinarily China’s policy of driving exports to a nation with purchases of their currency is met with resistance. The US, for example,
has been chastising nations buying $US, like Japan and China, calling them currency manipulators, outlaws, etc. But China is getting very clever about it, here coming into the euro zone and buying Greek debt as the savior, and possibly even negotiating informal guarantees of repayment or other forms of support from the ECB, to keep the Greek debt off of the ECB’s balance sheet.

In any case, with Chinese buying, the euro zone is finding support for their funding issues, even as this ‘solution’ further drives up the euro and threatens to put a damper on their exports.

As previously discussed, the euro zone’s export driven model lacks the critical ingredient of being able to buy the currencies of the regions to which they wish to export.

All not to forget that imports are real benefits and exports real costs. So what we are seeing is a battle for export markets between nations who haven’t mastered the elementary art of supporting domestic demand and optimizing real terms of trade.

China to the Rescue! Wen Offers to Buy Greek Bonds

October 3 (Reuters) — China offered on Saturday to buy Greek government bonds in a show of support for the country whose debt burden triggered a crisis for the euro zone and required an international bailout.

Premier Wen Jiabao made the offer at the start of a two-day visit to the crisis-hit country where he says he expects to expand ties in all areas.

“With its foreign exchange reserve, China has already bought and is holding Greek bonds and will keep a positive stance in participating and buying bonds that Greece will issue,” Wen said, speaking through an interpreter.

“China will undertake a great effort to support euro zone countries and Greece to overcome the crisis.”

Greece needs foreign investment to help it fulfill the terms of a 110 billion euro (US$150 billion) bailout. This rescued it from bankruptcy in May but also imposed strict austerity measures, deepening its recession.

Greece, which has been raising only short-term loans in the debt market, has said it wants to return to markets some time next year to sell longer-term debt, although the EU/IMF package llows it to wait until 2012.

“I am convinced that with my visit to Greece our bilateral relations and cooperation in all spheres will be further developed,” Wen told Greek Prime Minister George Papandreou earlier in the day.

Greece and China pledged to stimulate investment in a memorandum of understanding and private companies signed a dozen deals in areas like shipping, construction and tourism.

“Our two countries, both historical and modern, have to strengthen our relations in all sectors, to move on and overcome present difficulties,” said Wen, speaking through an interpreter in televised comments.

The investment memorandum does not target specific investment volumes, an official close to Investment Minister Harris Pamboukis said ahead of Wen’s visit.

“We want to build this strategic partnership with China,” the investment ministry official said. “The purpose is not a signature on something big.”

China has said it needs to diversify its foreign currency holdings and has bought Spanish government bonds. In January, Greece denied media reports it planned to sell up to 25 billion euros of bonds to China.

Wen will address the Greek parliament on Sunday and leave early on Monday for Brussels, where he will attend an EU-China summit before going on to Germany, Italy and Turkey.

Clinching business deals with countries such as China and Qatar would help boost confidence among Greek consumers and businesses, economic analysts said.

With the global economic crisis and competition with other Balkan countries increasing, foreign direct investment in Greece fell from 6.9 billion euros in 2006 to 4.5 billion in 2009, according to Investment Ministry figures.

Chinese investment represents a very small proportion of this, excluding a 35-year concession deal China’s Cosco signed in 2008 to turn the port of Piraeus into a regional hub for a guaranteed amount of 3.4 billion euros, according to port authority figures.

Wen is also likely to deal with international pressure on China over its currency exchange policies during his tour.

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EU Daily- The EU is on a financially sustainable path

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Still looks like the strategy for Europe could be functionally very close to my proposal, and fiscally sustainable if they continue on the current path.

This is just inference on my part- I have no information other than what I’ve read online.

The ‘distributions’ the ECB will make will be via buying enough national govt debt in the secondary markets to keep the national govs solvent and able to fund their deficits, at least in the short term markets.

If they determine any member nation is not complying to their liking, they will start threatening to stop buying their debt, thereby isolating them from the ECB credit umbrella, while allowing the remaining nations to remain solvent.

ECB spending on anything is not (operationally) revenue constrained as the member nations are, so this policy is nominally sustainable.

The austerity measures will result in lower growth, and maybe even negative growth, but the solvency issue is gone as long as this policy is followed.

With currency strength and inflation ultimately a function of fiscal balance, the fundamental forces in place that drove the euro to 1.60 vs the dollar remain in place, while the mechanism to remove the default risk that drove the portfolio shifts that weakened the euro is in place.

While restructuring risk remains, it need not be forced by solvency risk. So restructuring need not happen.

Power has shifted to the ECB, presumably under substantial influence of the national govt finance ministers, as the ECB directly or indirectly moves to fund the entire banking system and national govt. deficits.

This is an institutional structure that is fully sustainable financially, with the economic outcome a function the size of the national govt. deficits they allow.

The conflict will remain the money interests in Europe who put currency strength as a priority, vs the exporters who favor currency weakness.

The consensus will be that unions and wages in general must be controlled.

Again, I do not know for sure that the ECB is actually moving in this direction.
They may not be.

Watch closely to see if the buying of national govt. securities remains sufficient to keep the national govts solvent.

(Feel free to distribute)

HEADLINES:

Europe Rebound Stalls in June on Market Strains, Eurocoin Shows
Barroso Says European Leaders Want to Keep Euro ‘Very Strong’
Schaeuble Says Europe Will Meet Deficit Targets, Corriere Says
Merkel faces test in vote for president
Berlin hints at move on pay deal ruling
Germany Trims 3rd-Quarter Debt Sales, Plans Bigger Cuts in 4th
Germany Faces Shortage of Skilled Workers in 2025, Study Says
French Economy Slowed to a Crawl in First Quarter of 2010
French Jobless Claims Increase as Companies Trim Workforces
Lagarde Says Pension Reform Is Priority, Sees AAA Rating Safe
Confindustria Raises Italian GDP Growth Forecast on Euro Drop
Spanish May Producer Prices Advance Most in 19 Months on Oil
Spain May Cut 426-Euro Unemployment Subsidy, Cinco Dias Reports
Greek optimistic on budget deficit reduction

ARTICLES:

Europe Rebound Stalls in June on Market Strains, Eurocoin Shows

(Bloomberg) The euro-area economic recovery stalled in June for a third month amid financial-market “strains.” The Eurocoin index measuring economic expansion in the 16 nations that share the single currency fell to 0.46 percent from 0.55 percent in May, the Center for Economic Policy Research and the Bank of Italy, which co-produce the index, said in a statement. “Recent strains in the financial markets have affected the performance of the indicator,” according to the statement. The index “has however been supported by the new improvement in foreign trade.” The index, which includes business and consumer confidence readings, industrial production, price figures and stock-market performance, aims to provide a real-time estimate of economic growth, according to the report.

Barroso Says European Leaders Want to Keep Euro ‘Very Strong’

June 25 (Bloomberg) — European Commission President Jose Barroso said the region’s leaders are determined to keep the euro a “very strong” currency.

“I have no doubts of the absolute determination of European Union leaders and European Union institutions to keep the euro as a very strong and stable currency,” Barroso said in an interview with Bloomberg Television in Toronto, where he is attending a meeting of leaders from Group of 20 countries.

Against the U.S. dollar, the euro has fallen 19 percent since its Nov. 25 high, trading yesterday at $1.2279 after reaching a four-year low of $1.1877 on June 7.

The 16-nation currency’s “real effective exchange rate has lost close to 10 percent” since its peak in October, the European Commission, the EU executive, said yesterday in its quarterly assessment of the euro-region economy.

The continent’s economic “fundamentals” are good, and Europe’s debt and deficits are smaller than some of its “main partners,” Barroso said, adding investors have been reassured by an almost $1 trillion plan by the euro nations and the International Monetary Fund to backstop the sovereign debt of the region’s weakest members.

It’s “a very important message of confidence that is being conveyed to markets as well,” Barroso said.

Barroso also said that China’s plan to provide more currency flexibility was a “move in the right direction” that increases confidence in the global economy.

Earlier yesterday, Barroso said that exit strategies from fiscal stimulus programs should be gradual, differentiated and “growth-friendly.”

Schaeuble Says Europe Will Meet Deficit Targets, Corriere Says

June 25 (Bloomberg) — German Finance Minister Wolfgang Schaeuble said he has “no doubt” that European governments will hold to their commitments to cut public deficits, Corriere della Sera reported, citing an interview.

“Too-high deficits have to be responsibly reduced,”

Corriere quoted Schaeuble as saying. “We have a shared agreement, and I have no doubt that all will abide by their commitments.”

Merkel faces test in vote for president

(FT) The presidential election – in a specially constituted federal assembly – represents the biggest challenge for Angela Merkel since she formed a government in October combining her own Christian Democratic Union with the liberal Free Democratic party. The combined popularity of the coalition parties has since dropped from 48.4 per cent to 35 per cent, according to a poll published by Stern magazine and the RTL television network. The proportion of voters saying they would vote again for Ms Merkel as chancellor has also dropped to just 39 per cent, her lowest rating for more than three years, according to a Forsa institute poll. Political scientists believe that if Christian Wulff, Ms Merkel’s candidate for the presidency, were to lose the vote on Wednesday to Joachim Gauck, the non-party candidate supported by the SPD and Greens, it could force the resignation of both the chancellor and her government.

Berlin hints at move on pay deal ruling

(FT) The German government on Thursday signalled it was considering legislation to quell protests from both company chiefs and worker representatives over a court ruling that threatens the way they agree wage deals. Judges in Erfurt, eastern Germany, on Wednesday ended a 50-year-old practice of extending in-house wage deals made between an employer and its biggest union to cover all workers in the company doing similar jobs. The judges agreed with a doctor at a hospital in Mannheim who had demanded he be paid according to the national pay deal of the doctors’ union, not the in-house deal agreed by services union Verdi. They said in their verdict that established wage-bargaining practices contravened the right of citizens freely to form alliances. There was no “basic principle” forcing a company “to adopt a uniform wage deal”, they declared.

Germany Trims 3rd-Quarter Debt Sales, Plans Bigger Cuts in 4th

(Bloomberg) Germany will sell 77 billion euros ($94.5 billion) of bonds and bills in the third quarter, 2 billion euros less than forecast in December. A larger adjustment will come in the fourth quarter, assuming the economy stays steady, a finance ministry official said. Finance Minister Wolfgang Schaeuble has pledged to cut net new borrowing by the end of the year. A federal issuance calendar released in December said gross debt sales this year would be a record 343 billion euros ($421.5 billion). The third-quarter debt issuance includes 44 billion euros of bonds and 33 billion euros of bills. Schauble’s ministry said on June 22 that the so-called structural budget deficit will be 53.2 billion euros this year, 13.4 billion euros less than the 66.6 billion euros originally expected. It also said then that net new borrowing this year will be 15 billion euros below the 80.2 billion euros in the 2010 budget plan.

Germany Faces Shortage of Skilled Workers in 2025, Study Says

June 25 (Bloomberg) — Germany faces a shortage of skilled workers in 2025 as the population is shrinking, the Federal Labor Agency’s research institute said.

Due to demographic reasons the size of the German workforce will constantly decrease until 2025 while the number of employed in the services industry may rise by more than 1.5 million, the institute said in a study published yesterday.

By contrast, the number of employees in the manufacturing industry may fall by almost 1 million over the next 15 years, the study said.

German unemployment fell more than twice as much as economists forecast in May as exports from Europe’s biggest economy surged, bolstering the recovery. The number of people out of work declined a seasonally adjusted 45,000 to 3.25 million, the lowest since December 2008, the Labor Agency said June 1.

French Economy Slowed to a Crawl in First Quarter of 2010

Paris (dpa) — The French economy slowed alarmingly in the first quarter of 2010, with gross domestic product (GDP) expanding by only 0.1 per cent, the government’s statistics office Insee said Friday.

The primary reason for the poor result was a drop of 0.2 per cent in domestic demand, compared to an increase of 0.5 per cent in the last quarter of 2009, when GDP rose by 0.6 per cent.

This was the second bit of bad economic news for the government in less than 24 hours. Late Thursday, the Labour Ministry said that the rolls of unemployed had grown by some 22,600 in May, the largest rise in unemployment since the beginning of the year.

Some 2.7 million people were out of work at the end of May, an unemployment rate of 9.5 per cent.

French Jobless Claims Increase as Companies Trim Workforces

(Bloomberg) The number of jobseekers in France climbed in May as manufacturers trimmed payrolls in the wake of the country’s worst recession in more than half a century. The number of unemployed actively looking for work rose by 22,600 last month, an increase of 0.8 percent, the Labor and Finance Ministries said. The total number of jobseekers was 2.7 million. While claims have risen every month this year except in March, national statistics office Insee predicts the economy is about to begin creating jobs again for the first time in two years. “Total employment fell heavily in 2009, dragged down by the drop in activity,” Insee said late yesterday. “It should progress slightly over 2010 as a whole.”

Lagarde Says Pension Reform Is Priority, Sees AAA Rating Safe

June 25 (Bloomberg) — France’s plan to lift its retirement age is a signal to investors about the seriousness of President Nicolas Sarkozy’s intention to cut the budget deficit, Finance Minister Christine Lagarde said.

“The priority is to protect the retirement system,”

Lagarde said today on France Inter radio. “We are also trying to send a message of security to the markets.”

Sarkozy’s government set out proposals last week to raise the minimum age at which workers can tap the state pension to 62 in 2018 from 60 currently. The age at which full benefits are reaped is to rise to 67 from 65 under the plan, which labor unions protested yesterday.

France is the only country among Europe’s five biggest economies not to have presented a detailed savings plan for next year. Britain set out deficit-cutting measures totaling 113 billion pounds ($167 billion) earlier this week and Germany announced cuts of 81.6 billion euros ($101 billion) on June 7.

Sarkozy has committed to reducing the deficit from 8 percent of gross domestic product this year to 6 percent in 2011 and 3 percent in 2013.

Lagarde said “there’s no reason to think” that France’s AAA credit rating is threatened, though she said the country doesn’t have the luxury of time to debate the pension overhaul.

“We have time pressure, it’s not possible to delay,”

Lagarde said. “The public finance situation doesn’t allow for it. We need to take measures quickly.”

Sarkozy and Lagarde join leaders and finance ministers of the Group of Eight later today in Huntsville, Ontario, before meeting their Group of 20 counterparts tomorrow in Toronto.

Confindustria Raises Italian GDP Growth Forecast on Euro Drop

(Bloomberg) Italian gross domestic product will expand 1.2 percent this year and 1.6 percent in 2010, up from previous forecasts of 1.1 percent and 1.3 percent respectively, Confindustria said. The single currency’s 14 percent slide against the dollar this year will “more than offset” the impact of budget cuts worth 24.9 billion euros, which will shave 0.4 percentage points of GDP in 2011 and 2012, Confindustria said. Prime Minister Silvio Berlusconi’s deficit-curbing measures aim to reduce the budget deficit by an additional 1.6 percent of GDP, bringing the shortfall within the EU limit of 3 percent of GDP in 2012 from 5.3 percent last year.

Spanish May Producer Prices Advance Most in 19 Months on Oil

June 25 (Bloomberg) — Spanish producer-price inflation accelerated to the fastest in 19 months in May as higher oil prices boosted energy costs.

Prices of goods leaving Spain’s factories, mines and refineries rose 3.8 percent from a year earlier after a 3.7 percent increase in April, the National Statistics Institute in Madrid said today. That’s the biggest increase since October 2008. From the previous month, prices gained 0.2 percent.

Crude-oil prices rose 8 percent in the 12 months to the end of May, pushing up manufacturers’ costs. Still, with the economy continuing to shrink and the unemployment rate at 20 percent, consumer-price inflation remains restrained. Spain’s underlying inflation rate, which excludes volatile food and energy prices, turned negative in April for the first time on record.

The government forecasts the economy will contract 0.3 percent this year.

Spain May Cut 426-Euro Unemployment Subsidy, Cinco Dias Reports

June 25 (Bloomberg) — Spain’s Labor Minister Celestino Corbacho may cut a 426 euro-a-month ($525) subsidy paid to the unemployed whose two-year, contributions-based jobless benefit has run out, Cinco Dias reported.

The subsidy, which cost the state 1.2 billion euros since it was introduced last year, will be difficult to maintain after August as Spain tries to cut its deficit, the newspaper reported, citing an interview with Corbacho.

Greek optimistic on budget deficit reduction

(AP) Greece’s finance minister on Thursday voiced confidence that the country will meet or even surpass its ambitious targets to slash spending and boost revenues by the end of the year. “Have we won the bet? No,” George Papaconstantinou said. “But we have well-founded hopes and are optimistic that, for the first time in many years, at the end of the year the state budget will achieve or even exceed the targets we have set.” Papaconstantinou said his optimism was based on figures showing a 40 percent deficit reduction during the first five months of the year, as well an expected revenue boost from increased consumer taxes. On Friday the cabinet is set to approve a key draft law on pension and labor reforms. The government says the current pension system is not viable, and if left unchanged would come to absorb 24 percent of GDP in 2050, from the current 12 percent.

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CNBC Video

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Not my first choice of topic, but what they wanted me to discuss.

Currency movements are nearly impossible to accurately forecast due to continuous cross currents.

The overly flattering intro was a pleasant surprise that caught me out for a moment.
And I’ll shamelessly use it selectively to advance the cause.

>   
>   (email exchange)
>   
>   On Sat, Jun 12, 2010 at 10:09 AM, wrote:
>   
>   great…every exposure counts…….question on Euro call to 1.5-1.6 area
>   

Remember this is not ‘trading advice.’ In fact, the charts still look terrible so the portfolio shifting may be further from over than I suspect. It is a statement that the forces that brought the euro to those levels not long ago are still in place, though recently overpowered by the portfolio shifting.

>   
>   my understanding of what you’ve said previously is that the deflationary
>   measures to be followed by Greece, Spain, Portugal, Italy and Ireland would
>   bring about even lower growth in euro block and result in increasing strains
>   on the political union with the possibility of the euro group breaking apart
>   in some fashion with a continuing decline of the currency. Is this correct?
>   

yes.

>   
>   What are you saying now?..thanks
>   

Those same deflationary forces that scare some people out of the currency also make the currency more valuable.

Note that Japan hasn’t done particularly well yet the yen is a very strong currency.

Also, sometimes a nation growing rapidly has ‘automatic stabilizers’ in place that automatically increase tax collections and reduce transfer payments as growing private sector credit expansion fuels the growth. That can firm up a currency as well, as it also attracts equity type portfolio managers due to the growth environment.

Always lots of cross currents!

The eurozone deficits had seemed to have gotten maybe high enough to stabilize growth just as market forces shut down any thoughts of continued fiscal relaxation.

Those higher deficits softened the currency some and then fear took over with the default risk pushing the euro down further and gold up as well, also out of pure fear.

The euro then went low enough to apparently firm up exports, which also tends to firm up the currency.

Tightening up fiscally now puts a lid on growth and even threatens negative growth. The fledgling export recovery will work to shut itself down via euro appreciation with dollar buying-off balance sheet deficit spending and what would at least ‘make the numbers work’- prohibited ideologically.

And with their current monetary arrangements there isn’t much they can do except sit there and suffer the consequences of those arrangements.

The only bright sign is that the ECB may be sneaking towards interest rate targeting for the member nations outstanding debt, which can go a long way towards alleviating fears of credit risk for the national govts. But to do that the ECB has to be buying without notional limits, so it’s too soon to say that’s what’s happening.

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EU News

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Pretty much all bad:

European Unemployment Unexpectedly Increases to 12-Year High

Trichet Says Fiscal Sustainability Fosters Confidence, Growth

By that he means the austerity measures/deficit cutting which only makes things worse.

Trichet Says ECB ‘Fiercely Independent,’ Stable Prices Mandate

Just doing his job.

Trichet sees need for ‘budgetary federation’

He’s sees this as a watchdog to keep deficits down.

Trichet Says ECB Won’t Tolerate Budget Indiscipline Any Longer

He’s concerned about the secondary mkt purchases of greek debt meaning even this very modest support is in question.

ECB’s Noyer Says Rating Firms Aggravating Crisis

Weber Says ECB Bond Purchases Musn’t Exceed ‘Tight Limits’

More talk on limiting ECB purchases.

ECB’s Stark Says Bank May Start Withdrawing Liquidity in July

Doesn’t matter but indicates their attitude.

Nowotny Sees No Risk of Double-Dip Recession due to Austerity

That’s the entire source of the risk of a double dip recession.

Bank of Italy: EU euro defense package can’t last

And calls for a return to the 3% deficit limits.

ECB: Banks Will Suffer Considerable Loan Losses In 2010, 2011

Bank deposits are insured only by the national govts that are already seeing their funding threatened.

ECB warns of ‘hazardous contagion’

True, but they have their channels totally confused.

Trichet Says Second-Quarter Growth May Be Better Than Expected

European Manufacturing Growth Slowed More Than Estimated in May

Germans, ECB Spar Over Bond Plan

After Debt Crisis, New Tension Between ECB, Germany

Survey suggests Germans are unhappy with Merkel

Merkel Says Budget Deficit Looks ‘Moderate’ Versus Spain, U.K.

Still doesn’t get how the UK comp isn’t applicable.

Hypo Real Estate gets more loan guarantees

Spain presses for labor market reform deal

Fitch downgrades Spain’s credit rating

European Loans Post First Annual Increase in Eight Months

German Unemployment Falls Twice as Much as Forecast

German Retail Sales Rose in April on Declining Unemployment

French New Car Sales Fall 12% in May, After 12 Monthly Gains

Italian Unemployment Climbs as Recovery Fails to Create Jobs

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EU Daily | Trichet remains confident in ECB plan

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The euro zone is standing on the deflation pedal hard enough to turn the euro northward when the portfolio adjustments have run their course, which could be relatively soon.

And the indications of growing exports are more evidence the currency could bottom and start to appreciate.

Like Japan, when relative prices get to where exports pick up it causes the foreign sector to get short (net borrowed) in that currency, which tends to cause the currency to appreciate to the point exports fall off.

The ‘answer’ is to buy dollars as Japan did for many years, and China continues to do. And note how strong the yen got after Japan stopped buying dollars- strong enough to keep a lid on exports. But the euro zone ideology won’t allow the ECB to buy dollars should the euro start to appreciate, as that would give the appearance of the euro backing the dollar.

So right now a euro strong enough to slow exports would be highly problematic for a continent already in the midst of a deflationary spiral with its fiscal authority, the ECB, forbidden to offer the needed fundamental support.

The price of gold in euro could be the indicator of this turn of events. The portfolio shifting has driven up that gold price, and a downturn could be the indication that the portfolio shifting is getting played out.

But for you traders out there- I wouldn’t be early or try to call the precise bottom of the euro.

There’s no telling how much more portfolio shifting lies ahead.

Trichet remains confident in ECB plan
Trichet Says Greek Situation Resembled Lehman Collapse
Trichet: economy in deepest crisis since WWII
Stark Says ECB Measures ‘Only Bought Time’
Weber Says Crisis Response Must ‘Respect’ Policy Divisions
Stark Shares Weber’s View on ECB Bond Purchases, FAS Reports
ECB’s Nowotny Says Euro’s Drop of ‘No Specific Concern’
Lagarde Says Greek Debt Restructuring Isn’t an Option, FAZ Says
Berlin calls for eurozone budget laws
Schaeuble Has Plan to Stabilize Euro
Papandreou Says Greece Is a Good Investment, Handelsblatt Says
Spain puts labour reform on agenda
Italy to Make Extraordinaray Spending Cuts, Minister Says
April EU car sales fall as cash-for-clunkers fades

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