Friday, April 8, 2011

Weekend links

1--China inflation may hit 6%, no end to tightening, China Daily

Excerpt: Chinese inflation may top an annual rate of 6 percent in the coming months, preventing any relaxation of monetary tightening, the China Securities Journal said on Wednesday, a day after the central bank raised interest rates for the fourth time since October.

"Under severe controls from the central bank, monetary conditions fuelling price rises have clearly been curbed. But inflationary pressure still cannot be overlooked," the newspaper said in a front-page commentary.

"Keeping inflation in check remains the focus of current monetary policy. There is still room for interest rates, the reserve requirement ratio and the exchange rate to move higher," it added.

China increased benchmark one-year deposit and lending rates by 25 basis points on Tuesday, raising suspicions that data next week may show inflation rose more than expected in March.

The newspaper cited market estimates that the consumer price index might have hit a 32-month-high of 5.2 percent in the year to March and that the world's second-largest economy might grow 9.5 percent in the first quarter, relieving any concern that interest rate rises would hurt economic expansion.

"It's unlikely that monetary policy will be loosened in the second quarter or even over a longer period of time," the newspaper said, adding that CPI will probably stay above 5 percent and even hit 6 percent year-on-year in the second quarter.

China might allow the yuan to rise more than 5 percent this year, it said, adding that the country would also need to raise banks' reserve requirements in order to absorb excess cash, partly arising from maturing central bank bills and repos.

2--Ireland will need another bailout, says former IMF director, Guardian

Excerpt: Ireland is unlikely to wrest control of its finances even in 2013 when the current IMF-EU deal runs out and will be forced to seek a second bailout, according to a former IMF executive....

A former deputy director of the International Monetary Fund has predicted that Ireland will need a second bailout in 2013 when the current IMF-EU rescue package runs out.

Barely six months after the country's €85bn deal was sealed, Donal Donovan has said the country could continue to need assistance up to 2015.

He believes a "restructuring" on sovereign debt would be part of a second-stage deal, but Ireland would have to have to meet the already strict requirements laid down under the existing agreement to reduce its giant budget deficit.

But he said a write-down of debt would not come immediately: "You can hardly burn the bondholders in the morning and then expect in the afternoon the same broad class of lenders to come and give new financing to these banks."

3--Deflated inflation expectations, FT Alphaville

Excerpt: Given the attention that inflation expectations received in Tuesday’s release of the latest FOMC minutes, we’re not the least bit surprised that it’s been the topic du jour among analysts (along with other distractions).

We’ll get to them in a moment, but first, here is the key paragraph from the minutes:

Participants expected that the boost to headline inflation from recent increases in energy and other commodity prices would be transitory and that underlying inflation trends would be little affected as long as commodity prices did not continue to rise rapidly and longer-term inflation expectations remained stable. However, a significant increase in longer-term inflation expectations could contribute to excessive wage and price inflation, which would be costly to eradicate. Accordingly, participants considered it important to pay close attention to the evolution not only of headline and core inflation but also of inflation expectations. In this regard, participants observed that measures of longer-term inflation compensation derived from financial instruments had remained stable of late, suggesting that longer-term inflation expectations had not changed appreciably, although measures of one-year inflation compensation had risen notably. Survey-based measures of inflation expectations also indicated that longer-term expected inflation had risen much less than near-term inflation expectations....

But the relevant point is that the measurements all mostly show the same thing now — that despite an increase in expected inflation for this year, longer-term expectations remain either within or very close to a historical range that can be considered normal.....

Here we turn to a recent note from John Kemp:

Political unrest across the Middle East, North Africa and West Africa may eventually burn itself out but the resulting political risk premium will linger. Future supply shocks (droughts, floods and other crop failures) are inevitable.

Pressure from the demand-side will continue. Rapidly rising world consumption has left many commodity markets with only a relatively thin margin of spare capacity and vulnerable to inevitable supply disruptions. Commodity demand is simply outstripping assured supply.

As commodity markets become increasingly financialised and forward-looking they have become progressively more sensitive to estimates of growth prospects over the medium term (2-3 years) and fears about the potential for any supply disruptions over the period. …

It is not clear why he thinks pressure on resources and inflation will decline as the expansion in the United States and around the world matures and the margin of spare capacity across all industrial sectors (including manufacturing) falls. It is more likely inflationary pressures will worsen as the cycle progresses.

We don’t really know what’s going to happen, and the relationship between Fed policy and commodities is a complicated one. But this seems like a point that shouldn’t be ignored. And if Bernanke is going to use the “transitory” line, it would help to hear why he thinks that the slope in the recent rise of commodity prices will soon flatten.

4--Portugal's PM calls on EU for bailout, The Guardian

Excerpt: Prime minister José Sócrates makes last resort plea for a rescue package could total €80bn...Portugal has joined Greece and Ireland on the casualty list of Europe's sovereign debtors after its prime minister, José Sócrates, requested a European Union bailout.

The dramatic decision came in the middle of a political crisis that has left the country in limbo and with spiralling interest rates on its debt.

"I want to inform the Portuguese that the government decided today to ask ... for financial help, to ensure financing for our country, for our financial system and for our economy," Sócrates said in a televised address. "This is an especially grave moment for our country," he added. "Things will only get worse if nothing's done."

Sócrates said that the bailout, which analysts said could be between €70bn (£61bn) and €80bn was "the last resort".

The move was immediately welcomed in Brussels. "This is a responsible move by the Portuguese government for the sake of economic stability in the country and in Europe," the European commission's economic and monetary affairs commissioner, Olli Rehn, told Reuters.

5--A slowing economy with downside risk, Pragmatic Capitalism

Excerpt: Danske Bank, who has been very bullish in recent years, is joining the chorus of banks that is becoming increasingly concerned about a global slowdown. In a recent note they discussed their macro outlook and where they see the risks to the downside:

Summary and outlook

Global leading indicators are showing signs of weakening, but they are still at comfortable levels. US ISM declined modestly from a very high level in March. Likewise, European PMIs still look good, but survey expectations point towards a slowdown in growth. In China the slowdown seems to have taken hold.

We expect the majority of the leading indicators to decline to less expansive levels in the coming months, but to remain at decent levels. However, several factors could temporarily speed up the decline. Rising oil prices, caused by the Middle East turmoil, lead to rising production costs and reduced purchasing power. The disaster in Japan hampers Japanese production and could also disrupt global supply chains. Finally, the recent slowdown in China reduces demand growth from Asia.

6--Sentiment soars to extreme levels, Pragmatic Capitalism

Excerpt: After a brief dip in recent weeks, sentiment has shot back towards its highs. Although I’ve had trouble finding any definitive connections between QE2 and real economic growth, there is one certain connection – QE2 is having an enormous impact on investor psychology. Since QE2 began we have had a persistent optimism in the markets. This is clear in both of the major sentiment surveys I track where sentiment has remained at a permanently “extreme” range throughout QE2.

This week’s readings take us back towards this extreme level. Charles Rotblut of AAII elaborated on the AAII survey:

“Bullish sentiment, expectations that stock prices will rise over the next six months, improved 1.8 percentage points to 43.6% in the latest AAII Sentiment Survey. This was the third consecutive weekly increase and it puts optimism at a seven-week high. The historical average is 39%.Neutral sentiment, expectations that stock prices will be essentially unchanged over the next six months, remained essentially unchanged for the second consecutive week at 27.6%. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 2.2 percentage points to 28.8%. This was the third consecutive decline in pessimism, which is now at a seven-week low. The historical average is 30%.”

7--IMF: ‘Increased Scarcity’ Ahead for Oil Markets, Wall Street Journal

Excerpt: Governments should brace for “increased scarcity” in global oil markets and the risk of additional sharp price increases in the coming years, the International Monetary Fund warned Thursday.

While the effect of scarce supplies may only be a “minor constraint” on the global economic expansion in the medium to long term, the IMF said, “such benign effects on global growth should not be taken for granted since scarcity or its growth effects could be more significant.”

“In practice, it will be difficult to draw a sharp distinction between unexpected changes in oil scarcity and more traditional temporary oil supply shocks, especially in the short term when many of the effects on the global economy will be similar,” the IMF said in a chapter of its World Economic Outlook released Thursday.

The full report will be released next week ahead of the IMF’s spring meeting, where rising commodity prices are expected to be discussed. The fund urged policymakers around the world to ensure their economies are designed to handle unexpected changes in oil supplies and prices — for instance, by reducing fuel subsidies in order to protect governments’ fiscal positions but also strengthening safety nets for the poor — and to encourage policies promoting alternative energy sources.

Strong growth in oil demand from emerging market economies, combined with worries about potential supply disruptions from the Middle East, have pushed prices up more than 25% in the past year. Crude oil in the U.S. traded around $109 a barrel Thursday on the New York Mercantile Exchange, while Brent crude in Europe traded near $122 a barrel.

In a nod to analysts who say global oil production will soon peak or has already started declining, the IMF report acknowledged that maturing oil fields will limit some producers’ ability to add new production capacity.

8--Mind the output gap, David Wessel, Wall Street Journal

Excerpt: Why is the European Central Bank raising rates while the Federal Reserve isn’t? There are a lot of reasons, but one big one: The U.S. has a whole lot more spare capacity — in terms of unemployment workers, idle factories, empty offices and stores — than Europe.

Measuring the gap between an economy’s current output and its potential output if it were at full employment is tricky, even treacherous. The history of measuring these output gaps accurately is awful, and relying on faulty estimates has led central banks astray. But the concept remains a key part of modern central banking. The larger the output gap, the theory goes, the less likely inflationary pressures are to emerge.

Economists at Goldman Sachs — relying on government, OECD and their own calculations — say: “The output gap is larger in the US (at around 6% of GDP) than it is in the Euro-zone, Japan and the UK (each between 3% and 4% of GDP).”

“Reflecting our view that potential output growth has been largely unaffected by the crisis, we expect output gaps to close only gradually,” they add. “Weighting our G4 output gap estimates together with a simplified measure of China’s output gap, we also provide an estimate of the global output gap. A weighted average…suggests that the global economy is currently operating around 4% below potential.”

9--Rising oil prices beginning to hurt US economy, yahoo finance

Excerpt: Just when companies have finally stepped up hiring, rising oil prices are threatening to halt the U.S. economy's gains.

Some economists are scaling back their estimates for growth this year, in part because flat wages have left households struggling to pay higher gasoline prices.

Oil has topped $108 a barrel, the highest price since 2008. Regular unleaded gasoline now goes for an average $3.69 a gallon, according to AAA's daily fuel gauge survey, up 86 cents from a year ago.

The higher costs have been driven by unrest in Libya and other oil-producing Middle East countries, along with rising energy demand from a strengthening U.S. economy.

For consumers, more expensive energy siphons away money that would otherwise be used for household purchases, from cars and furniture to clothing and vacations.

High energy prices are "putting a drain on consumer budgets," says James Hamilton at the University of California, San Diego. "To the extent they're having to spend more on gasoline, they have to make cutbacks elsewhere."

Two-thirds of Americans say they expect rising gasoline prices to cause hardship for them or their families in the next six months, according to a new Associated Press-GfK Poll. The telephone poll conducted March 24-28 had a sampling error margin of plus or minus 4.2 percentage points.

Seventy-one percent say they're cutting back on other expenses to make up for higher pump prices. Sixty-four percent say they're driving less. And 53 percent say they're changing vacation plans to stay closer to home.

Airlines, shipping companies and other U.S. businesses have been squeezed. The rising prices are further straining an economy struggling with high unemployment and a depressed housing market.

"The surge in oil prices since the end of last year is already doing significant damage to the economy," says Mark Zandi, chief economist at Moody's Analytics.

Unlike other kinds of consumer spending, gasoline purchases provide less benefit for the U.S. economy. About half the revenue flows to oil exporting countries like Saudi Arabia and Canada, though U.S. oil companies and gasoline retailers also benefit.

10--Housing market in West nears double-dip,

Excerpt: Home prices in the just-concluded first quarter fell nationwide, but homes in the West had a near double-dip, according to a report Thursday from Clear Capital Inc. of Truckee.

Nationally, prices fell 1.3 percent but in the West plummeted 4.3 percent from a year earlier and has reached double dip territory, the report says.

"The latest data through March supports our view that many markets are continuing to see relief from the significant price declines we observed through January," says Alex Villacorta, director of research and analytics at Clear Capital. "While some markets are already in double dip territory, specifically in the West, widespread fear of a collective fall in market prices is overstated."

"Looking deeper at the disparity between the West and the other regions, we find that the rate of change in REO saturation continues to serve as a leading indicator of home prices," says Mr. Villacorta. "For example, out of all the regions, only the West showed acceleration in its REO saturation from the previous quarter."

11--CoreLogic: House Prices declined 2.7% in February, Prices now 4.1% below 2009 Lows, Calculated Risk

Excerpt: From CoreLogic: CoreLogic Home Price Index Shows Year-Over-Year Decline for Seventh Straight Month

According to the CoreLogic HPI, national home prices, including distressed sales, declined by 6.7 percent in February 2011 compared to February 2010 after declining by 5.5 percent in January 2011 compared to January 2010. Excluding distressed sales, year-over-year prices declined by 0.1 percent in February 2011 compared to February 2010 and by 1.4 percent in January 2011 compared to January 2010. Distressed sales include short sales and real estate owned (REO) transactions.

Despite the continued overall decline, home prices excluding distressed properties are showing signs of stability according to Mark Fleming, chief economist with CoreLogic. “When you remove distressed properties from the equation, we’re seeing a significantly reduced pace of depreciation and greater stability in many markets. Price declines are increasingly isolated to the distressed segment of the market, mostly in the form of REO sales, as the stock of foreclosures is slowly cleared." he said....

This is the seventh straight month of year-over-year declines, and the eighth straight month of month-to-month declines. The index is now 4.1% below the previous post-bubble low set in March 2009, and I expect to see further new post-bubble lows for this index over the next few months.

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