Download Economics 05.17.11 Economics Tuesday

Economics 05.17.11
BRIEF
U.S. Industrial Output, U.K. Inflation, Greek Debt
most read on bloomberg
EU Sees Possible Greek Debt ‘Reprofiling’
■■ WHAT TO WATCH:
Industrial production in the U.S. probably
climbed
0.4
percent
in April, economists said, 9:15 a.m.
First Word Daybook:
European finance ministers for the first time floated the idea
Toby Alder
of talks with bondholders over extending Greece’s debtrepayment schedule. U.K. inflation is likely to rise further over
the next few months after accelerating to 4.5 percent in April, Bank of England Governor
Mervyn King said in a letter to Chancellor of the Exchequer George Osborne.
U.K. Inflation Quickens to 4.5%, Forcing King Letter
Strauss-Kahn Falls From Front-Runner to Rikers
Finance Chiefs Back IMF, Focus on Successor
BOE May Ease More as Energy Squeezes Incomes
data reports (new york time)
time
EVENT
Survey
PRIOR
4:30 UK CPI (MoM)
0.70%
0.30%
4:30 UK CPI (YoY)
4.10%
4.00%
5:00 GE Zew Survey (Current Situation)
8:30 US Housing Starts
8:30 US Building Permits
87.5
87.1
569K
549K
587K
594K
0.40%
0.80%
77.60%
77.40%
9:15 US Industrial Production
9:15 US Capacity Utilization
economic-events calendar
ECONOMICS: Housing starts, 8:30 a.m., est. 3.6%. China trimmed its holdings of
U.S. Treasuries for a fifth straight month in March.
■■
COMPANIES: George Soros sold most of his physical gold holdings in the first quarter. Dell earnings, 4:01 p.m.
■■
GOVERNMENT: Dominique Strauss-Kahn is being held without bail at New York’s
Rikers Island jail complex while awaiting his next court appearance on May 20. Euroarea finance ministers endorsed Mario Draghi to take over the ECB in November and
approved a 78 billion-euro aid program for Portugal.
■■
MARKETS: The pound rose versus the euro and the dollar. Spain sold the maximum
amount at a Treasury bill auction and its borrowing costs declined. Oil recovered from
trading at its lowest in a week. China’s one-year swap rate was near a 10-week high.
The yen fell the most in six weeks against the dollar.
TIME
2:30
4:00
4:30
5:00
5:15
6:00
Tuesday
news & Commentary
News
commentary
■■
EC
EC
SP
EC
EC
EC
EU Finance Ministers in Brussels
Van Rompuy Meets China’s Wen
Spain to sell 12mo, 18mo Bills
Luxembourg’s Juncker Speaks
ECB Allotment in 7-Day Tender
WTO’s Lamy Speaks
Big Picture: Commentary by Richard Yamarone, BloomberG Economist
Twelve Reasons to Expect an Economic Turn for the Worse
10Y Spreads: Distance from Highs
10Y Spread Distance From Highs
(Yesterday)
10Y Spread Distance From Highs
(Today)
Europe
France
Belgium
-10.4
-11.7
-21.4
-21.7
-28.2
-29.9
-70.0
-69.6
-73.5
-78.5
Spain
Portugal
-52.7
-52.7
Italy
-24.6
-29.9
Ireland
-39.6
-40.0
Greece
-90
-80
-70
-60
-50
-40
-30
-20
top
TOP currency
CURRENCYperformers
PERFORMERS
One day spot return in percent
South African Rand
Swedish Krona
Australian Dollar
British Pound
Danish Krone
South Korean Won
Euro
Mexican Peso
Canadian Dollar
Singapore Dollar
0.51
0.47
0.46
0.46
0.42
0.42
0.40
0.38
0.37
0.30
-10
0
The weak U.S. recovery that began about
two years ago, according to the National
Bureau of Economic Research, is showing
signs of petering out.
Consumer confidence measures are at
recessionary levels, labor market indicators are spinning their wheels and the
trade deficit continues to widen. None of
this bodes well for the economy.
Just yesterday, economists polled by
the National Association of Business
Economics shaved half a percent from
their 2011 growth estimates, and are now
expecting a 2.8 percent growth rate.
Here are a dozen reasons why the
economy may take a decisive turn for the
worse before year end.
Real incomes and wages are trending
lower. Consumers can’t spend what they
don’t have.
■■
Elevated prices at the pump are eating into
weak incomes, and come at a time when it is
not even peak season for gasoline use.
■■
continued on next page
Keene’s
Corner
1 2 3 4 5 6 7 8 9 10 11 Goldman Sachs’s U.S. economics
analyst Andrew Tilton on what the U.S.
structural budget
deficit is.
Back Page
05.17.11
2
Bloomberg Brief | ECONOMICS big picture Richard Yamarone
continued from page 1
Much of the hiring taking place
is coming with a lot of bargaining.
Would-be employers are saying, “We
can’t pay you $120k, but we’ll offer
you $80k. If you don’t like it, there
are dozens of others who will.”
■■
The Bloomberg Orange Book, a
compendium of economic comments from corporate earnings
calls, is finding that businesses face
difficult year-over-year comparisons.
This portends lower earnings, hiring
and capital expenditures.
■■
Real GDP (Y/Y %)
14
12
10
8
6
4
2
0
-2
-4
More than 44 million Americans
are receiving food stamps. More
than 8 million are getting unemployment benefits. There are only 308
million people in the U.S.
■■
While new order growth has been
strong, much of it is “pre-order,” coming before price hikes scheduled to
take place later in the year. Orders
can and do get cancelled.
-6
1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
■■
The index of leading economic
indicators, on both a quarterly and a
year-over-year basis, is pointing to a
sharp reversal.
■■
The housing depression continues. Unemployment in housing
construction is more than 20 percent
and home prices are still declining.
■■
In commercial real estate, mall
vacancies are at record highs and
some companies are cutting store
sizes, including the “Big Boxes.”
■■
State and local governments still
face tightening finances.
GDP CYOY Index <GO>
Source: NBER, BEA, Bloomberg
Leading Economic Indicators (Y/Y%)
vs. Real GDP Growth (Y/Y%)
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
GDP
-4
-4
LEI
-6
-6
'85
'95
'05
GDP CYOY, LEI TOTL Index <GO>
Source: Bureau of Economic Analysis, The Conference Board
■■
Government financial support for
stimulus is waning, and severe fiscal tightening appears to be on the
horizon. This may create downwards
pressure on income, as the chart on
the difference between real disposable personal incomes and real
incomes less transfers shows.
■■
Government Stimulus Driving Incomes
Incomes,
$Blns
$10,500
$10,000
$9,500
$9,000
Real Dis Pers Income
Every time the year-over-year
pace of real GDP growth has slipped
below 2 percent since 1948, the U.S.
economy has fallen into recession.
Growth slowed to just 2.3 percent in
the first quarter year over year.
■■
Real Incomes (ex-transfers)
$8,500
$8,000
2000
2002
2004
Source: BEA, Federal Reserve Bank of St. Louis, Bloomberg
1 2 3 4 5 6 7 8 9 10 11 2006
2008
2010
PIDSCWT, PIDSPINX Index <GO>
05.17.11
Overnight
Bloomberg Brief | ECONOMICS By Bloomberg News
Global Equity Performance
Sweden was 2.035 million kronor in
April, compared with 2.057 million
kronor in March.
africa
South Africa’s inflation accelerated to 4.2 percent in April from
4.1 percent in March.
■■
Asia
The Reserve Bank of Australia
said a rising currency is helping
contain inflation pressures that may
need to be slowed “at some point”
by higher interest rates, minutes of
its May 3 meeting showed.
■■
Daily Percentage Change of the Global Equity Markets
–8,0% –4,0% –2,0% –1,0% –0,5% –0,25% 0,0% 0,25% 0,5%
Europe
New car registrations in Europe
fell 3.8 percent from a year earlier to
1.13 million vehicles, the European
Automobile Manufacturers’ Association said.
■■
Germany’s index of investor
and analyst expectations dropped
for a third month to 3.1 in May from
7.6 in April, the ZEW Center for European Economic Research said.
■■
political watch
1,0%
2,0%
4,0% 8,0%
U.K. inflation quickened to 4.5
percent in April, the highest level
since 2008, from 4 percent in March.
Core inflation accelerated to a
record 3.7 percent from 3.2 percent.
■■
U.K. house prices climbed 0.9
percent in March from a year earlier
after a 0.5 percent gain in February,
the Department for Communities
and Local Government said.
■■
■■
The average house price in
Tourist spending in New Zealand dropped 6.1 percent in the year
ended March 31 from a year ealrier
to NZ$5.6 billion.
■■
Foreign direct investment in
China climbed 15 percent in April
from a year earlier to $8.5 billion. For
the first four months, the total was
$38.8 billion, a gain of 26 percent.
■■
The State Bank of Vietnam
raised the repurchase rate to 15 percent from 14 percent, effective today.
■■
BY bloomberg news
Money Fund Risks
California Crisis Looms
Berlusconi Vote Setback
Mutual fund executives said
U.S. taxpayers may be exposed
to more risk if regulators push
investors out of money-market
funds and into bank deposits. “Is
the Federal Deposit Insurance
Corp. prepared to add $2.7 trillion
in deposits under its umbrella?”
Vanguard Group CEO F. William
McNabb said. “Are taxpayers
willing to foot the bill if these
banks, now with larger FDICinsured deposits, go bust?” Asset
managers say the proposals will
kill a product vital to the shortterm funding of U.S. corporations,
states and municipalities.
California Governor Jerry
Brown’s revised budget with $6.6
billion more revenue may not avert
a cash crisis looming in July that
may force the state to pay bills
with IOUs for the first time since
2009. Brown proposed asking
lawmakers to keep $9.1 billion of
taxes and fees from expiring, then
having a referendum to validate
the extension in November or
later, when a ballot can be arranged. The state won’t be able to
borrow cash in July or August with
that vote pending unless Brown
and lawmakers agree on spending
cuts, Treasurer Bill Lockyer said.
Italy’s Silvio Berlusconi suffered a setback in local elections
with Milan’s city hall poised to
swing to the opposition as a
weak economy and corruption
charges sapped support for the
prime minister and his allies. Milan
Mayor Letizia Moratti trailed her
rival Giuliano Pisapia 41.6 percent
to 48 percent in the race to control
the government in Berlusconi’s
hometown, preliminary results
showed. Piero Fassino, of the
opposition Democratic Party, was
poised to win the mayoral seat in
the manufacturing center of Turin,
results showed.
1 2 3 4 5 6 7 8 9 10 11 3
05.17.11
Bloomberg Brief | ECONOMICS Market CAlls
FACE
By Bloomberg News
Mohamed El-Erian, chief executive officer
of Pacific Investment Management Co.,
said “deteriorating debt dynamics” will
stoke faster inflation and financial repression in the U.S. as well as at least one
sovereign-debt restructuring in Europe. In a
report, El-Erian raised the prospect of U.S.
policy makers trying to force savers to accept returns below the rate of inflation.
Teppei Ino, an analyst at Bank of TokyoMitsubishi UFJ, said the euro may fall to
a two-month low against the dollar after
dropping below support levels on two
different Fibonacci charts. The euro “easily broke below” $1.4217, a 23.6 percent
Fibonacci retracement of its rally from a
June 2010 low to a May high, as well as
$1.4148, a 38.2 percent retracement of its
advance from a January low to the May
peak, Ino said.
Max Clarke at IDEAglobal forecasts
a 0.9 percent increase in April U.S.
industrial production. It rose 0.8 percent
last month
4
OFF
Russell Price of Ameriprise Financial
predicts a 1.1 percent decline. The consensus forecast is for a 0.4 percent gain,
according to a Bloomberg survey.
Paul Rawkins, senior director at Fitch Ratings, said Iceland may keep its junk credit
rating for as long as two years or until it
can completely lift capital controls that
the government has warned could stay in
place until 2015. Fitch yesterday raised the
outlook on Iceland’s BB+ rating to stable
from negative.
lead to a contraction in construction activity
this year, Mowat said.
Adrian Mowat, chief Asia and emergingmarkets strategist at JPMorgan Chase,
said Chinese economic data suggests that
the risk of a “hard landing” is rising. Residential inventories in China will climb and
Satoshi Yamada of Okasan Asset Management Co. said Japan’s 10-year bond
yields, which hit a six-month low yesterday,
may stop falling as the Federal Reserve
completes its quantitative easing program.
Gayle Berry, an analyst at Barclays
Capital, lowered the 2011 average copper
forecast by 9 percent to $10,412 a metric
ton. The aluminum estimate was raised to
$2,620 a ton.
Top Forecasters of Housing Starts for March 2011
PNC Financial Services Group’s Stuart
Hoffman expects a slight gain in March
housing starts and he said building permits for home construction likely will have
declined in March.
“These are still very low levels,” said
PNC’s chief economist, the top forecaster of housing starts according to
Bloomberg Rankings.
Forecaster
firm
Hoffman said builders remain wary of
undertaking new projects because of the
large inventories of unsold new and existing homes, as well as uncertainty about
home prices.
“Can you get the funding? Can you put
together a project that makes economic
sense?” Hoffman said.
On Monday, industry group National
average
error
1 Stuart Hoffman*
PNC Financial Services Group 28.2500
2 J. Knightley / R. Carnell / T. Brosens ING Financial Markets
29.6000
3 Ryan Wang*
HSBC Securities USA Inc.
30.4667
4 Andreas Busch
Bantleon Bank AG
30.8667
5 Steven Wood
Insight Economics LLC
31.1580
6Nariman Behravesh
IHS Inc.
31.3043
7 Jan Hatzius
Goldman Sachs Group Inc. 31.3208
8 Gabriele Widmann / Rudolf Besch
DekaBank
31.3750
9 Kevin Harris
Informa Global Markets
31.4167
10 John Silvia
Wells Fargo Securities LLC 31.5000
Median Forecast for all 74 Forecasters
*Came closest to March 2011 actual
Association of Home Builders said its
monthly survey of home builders found that
expectations about sales over the next six
months fell from the previous month.
Hoffman said he expects the Northeast
to have seen more housing starts than
the South and the West.
— Aleksandrs Rozens
April
Forecast
as of
May 17
6.2%
4.7%
5.7%
0.2%
3.5%
5%
5.7%
2.9%
6.6%
3.6%
Source: Bloomberg Rankings
Please note italicized names indicate the forecast was submitted unattributed. The individual identified is the chief economist for the firm.
1 2 3 4 5 6 7 8 9 10 11 Methodology
To identify the top forecasters for this index, we
compiled estimates submitted to Bloomberg News
over a two-year period. We calculated the error for
each forecast by subtracting it from the actual figure. Then we totaled up the errors and divided it by
the number of forecasts to derive each forecaster’s
average error. To qualify for the ranking, forecasters must have made at least 15 of the 24 forecasts.
More than 60 forecasters were ranked. Economists
not presently associated with a firm, those who had
not submitted forecasts for more than two months,
and those who had not made at least two consecutive estimates within the last 6 months were
excluded from final ranking.
05.17.11
Bloomberg Brief | ECONOMICS data watch
5
Joseph Brusuelas, Bloomberg Economist
Empire Manufacturing Indicates Slower Growth, Rising Inflation
The Empire Manufacturing Survey
report, the first look at May industrial
production data, indicates that survey participants expect continued, if
slower, growth on the one hand, and
higher inflation and thinning profit
margins on the other. This corroborates data in the recent Institute for
Supply Management Manufacturing
survey that suggested industrial
production likely hit its cyclical peak
earlier this year.
On the plus side, firms still expect
to increase spending on capital
expenditures and technology six
months from now, and the 52.69
in general business conditions
expected six months out is the best
reading since January 2011. The average work week increased to 12.90
in May from 6.41 in April, supporting
more hiring by manufacturing firms.
On the minus side, the general
business index unexpectedly slowed
to 11.9 from 21.70, suggesting some
risk of a sharper deceleration in new
orders over the next several months.
Firms may be worried that continued
Pricing Concerns
100
Price Paid Six Months Hence
Price Received Six Months Hence
80
60
40
20
0
-20
May-02
May-03
May-04
May-05
May-06
May-07
May-08
May-09
May-10
May-11
Source: New York Fed, Bloomberg
consumer deleveraging in the U.S.
and central bank rate increases globally to address rising prices will cool
global economic activity this year.
The report also suggests inflation
is now embedded in firms’ expectations of future economic conditions.
Prices firms paid for inputs soared
to 69.89 in May, the second highest level on record after a reading
of 77.89 in July 2008, from 57.69 in
April. Prices received increased to
27.69 from 26.92 in April.
Survey participants expect prices
paid to be 68.82 six months from
now, and prices received to be
35.48. An increase in expectations
of prices paid by firms is one more
sign of inflation hitting industrial
firms, while a declining outlook for
prices received indicates firms will
have to continue to absorb much
of the hit themselves in the form of
thinner profit margins.
China Trims U.S. Bond Holdings as Democrats, Republicans Argue
China, the biggest foreign owner of
U.S. Treasuries, trimmed its holdings
for a fifth straight month in March
as American lawmakers grappled
with government debt. The Asian
nation owns $1.145 trillion of the
debt, down $9 billion, or less than 1
percent, from the previous month,
according to U.S. government data.
The holdings reached a record
$1.175 trillion in October last year.
Former Chinese central bank
adviser Yu Yongding said last month
that China should stop buying Treasuries because of the risk that the
U.S. may eventually default.
China may “gradually cut its U.S.
Treasuries as it seeks to diversify
its foreign-exchange holdings,” said
Yao Wei, an economist with Societe
Generale SA. She said, “China is
1800
1600
1400
1200
TICS Data May Not Fully Capture PBoC Purchases of USD
Estimate of U.S. Dollar Reserves of China Derived from PBoC Data
(rebased 2001 = 0, USD, bn)
Chinese Holdings of U.S. Securities Reported by TICS (rebased 2001
= 0, USD, bn)
1000
800
600
400
200
0
Jun-01
Dec-02
Jun-04
Source: Bloomberg, PBoC, U.S. Treasury
probably routing trades through
other places such as London,”
meaning U.S. data may not give a
full picture.
1 2 3 4 5 6 7 8 9 10 11 Dec-05
Jun-07
Dec-08
Jun-10
The United Kingdom increased its
holdings by $29.7 billion to $325.2
billion in March.
— Bloomberg News
05.17.11
data watch
6
Bloomberg Brief | ECONOMICS MicHAel McDonough, bloomberg economist
ECB Refrains From Buying Peripheral Bonds Again
The economic woes of Europe’s peripheral nations continue as
the European Central Bank fails to buy their bonds. Since March
the ECB hasn’t bought any of the weaker European economies’
debt even as it begins raising interest rates, removing an important
crutch supporting the peripheries. This is exerting more pressure
on euro-zone officials to come up with a definitive plan to stabilize
the region as the cost of borrowing continues trending upward.
Without more of a proactive response from euro-zone officials’
peripheral yields may re-test their high of 9.3 percent set on April
27, based on the average 10-year yield of Greece, Ireland, Italy,
Portugal, and Spain.
This yield has a history of re-testing previous highs as new
crises surface in the EU, as when a bailout proved necessary
for Portugal, or as previous measures prove inadequate, as the
bailout of Greece now appears to be.
ECB Hasn't Purchased Any Periphery Bonds Since March
18
16
9.0%
ECB Bond Purchases EUR billions (ls)
European Weak Periphery Average 10Y Yield (rs)
14
9.5%
8.5%
8.0%
12
7.5%
10
7.0%
8
6.5%
6
6.0%
4
5.5%
2
5.0%
0
May-10
4.5%
Jul-10
Sep-10
Source: Bloomberg
Nov-10
Jan-11
Mar-11
May-11
Top-Line Inflation Isn’t the Only Price Measure on the Rise in EU
Europe’s headline inflation rose at an annual rate of 2.8 percent
in April, its fastest pace in two years. Core inflation, which has
been relatively tame, is playing catch-up. In April, core inflation
rose to 1.6 percent on an annual basis, above analysts’ expectations of 1.5 percent and up from just 1 percent in February.
Combined with higher headline inflation, this is likely to add
pressure on the ECB to raise interest rates, hurting the peripheral
countries seeking cheaper funding options. Headline inflation has
been above the central bank’s target of 2 percent since December.
According to Bloomberg, analysts forecast the ECB will raise its
main refinancing rate to 1.75 percent by the end of the year, 50
basis points higher than was expected at the beginning of March.
While the ECB did not indicate a rate increase was likely in June
during its May meeting, more data like yesterday’s CPI increase
the chances of a 25 basis point increase on July 7.
European Inflation Continues to Pressure ECB
5.0%
2.7%
ECB Main Refinance Rate (ls)
Eurozone Core CPI y/y (rs)
4.5%
2.5%
2.3%
4.0%
2.1%
3.5%
1.9%
3.0%
1.7%
2.5%
1.5%
2.0%
1.3%
1.5%
1.1%
1.0%
0.9%
0.5%
0.7%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Bloomberg
Greek, Portuguese, Irish Spreads Continue to Widen After Bailout Announcements
European bailouts have yet to narrow the spread between the
10-year bonds of countries that receive them against the European benchmark equivalent German bonds.
The chart rebases the spread for Greece, Ireland, and
Portugal to the day each country announced it would seek a
bailout, with the X axis representing the first 126 trading days after
each announcement.
Spreads in all three countries have widened despite the bailout.
Greek spreads widened the most during the period shown, by
nearly 430 basis points, followed by Irish spreads, which widened
nearly 200 basis points during the 126 trading days following its
announced bailout. Portuguese spreads have widened approximately 75 basis points since it sought a bailout. Rising spreads
highlight mounting risk in the region despite the EU and IMFsponsored backstop.
Bailouts Haven't Been Enough to Narrow Spreads
310
Greek 10Y Spread
280
Irish 10Y Spread
Irish 10Y Spread
250
220
190
160
130
100
70
t
t+11
Source: Bloomberg
1 2 3 4 5 6 7 8 9 10 11 t+21
t+31
t+41
t+51
t+61
t+71
t+81
t+91
t+101 t+111 t+121
05.17.11
Bloomberg Brief | ECONOMICS euro watch
7
David Powell, Bloomberg Economist
Euro Set for Further Declines Versus Dollar as Growth Slows
The euro appears poised to continue its decline versus the U.S. dollar as global economic growth slows
from its recent peak.
The outlook for EUR/USD over the
short to medium term will probably
be heavily influenced by the performance of equity and commodity
markets. The daily correlation between the percentage change of the
exchange rate and that of oil over
the last month stands at 0.76. The
correlation with the S&P 500 is 0.7.
The influence of interest rate differentials has declined. The daily
correlation between the percentage
change of EUR/USD and the absolute change of the spread between
the two-year swap rates in the euro
area and the U.S. is now at 0.51.
(For details, see: {STNI FXCHARTBOOK <GO>}).
Those markets appear to be
reversing as signs emerge that the
global economic expansion is losing
momentum. The JP Morgan Global
Manufacturing PMI Survey, most
recently published on May 3, fell to
55 in April from 55.8 in March and
57.4 in February. Crude oil peaked
on May 2 and has since declined
by about 14 percent. The S&P 500
hit its highest level in almost three
years on the same day and has
fallen by about 2 percent during the
same period.
That is creating a safe-haven bid
for the U.S. dollar and Treasury
Global Economic Growth Showing Signs of Slowdown
60
55
50
45
40
35
JP Morgan Global Manufacturing
PMI Survey
12-Month Average
30
Mar-06 Oct-06 May-07 Dec-07
Jul-08
Feb-09
Sep-09
Apr-10 Nov-10
Source: Bloomberg JPMIGLOB Index <GO>
EUR/USD Breaks Below Support at 1.4217
Source: Bloomberg
1 2 3 4 5 6 7 8 9 10 11 securities. Speculators purchased
26,326 contracts on the U.S. dollar
in the week ended May 10, according to Bloomberg Brief calculations
based on data from the Commodity
Futures Trading Commission. They
also hold large long positions on
short-dated Treasuries. The net long
position on two-year notes stands
at 231,464 contracts, which is three
standard deviations above its oneyear average. The holdings of fiveyear notes total 267,324 contracts,
which is 2.4 standard deviations
above the one-year average.
The current positioning on EUR/
USD of speculators may provide fuel
for further depreciation, even though
that position was reduced by 32,952
contracts to 63,267 contracts during the latest reporting period. The
present level is still the largest net
long position versus the U.S. dollar
among the G-10 currencies, even
surpassing that on the Australian
dollar of 60,844 contracts.
The deteriorating sentiment of
market participants toward EUR/
USD may contribute to the currency pair’s decline. The one-month
25-delta risk reversal skew declined
to minus 1.8 from minus 1.7 over the
last week, a 0.2 standard deviation
move. That follows a 1.1-standarddeviation shift during the previous
seven-day period. The risk reversal
is now 0.7 standard deviations below its one-year average.
From a technical point of view,
EUR/USD appears likely to decline
to at least 1.3770, the 38.2 percent
retracement line of the rally from
the June 2010 low to the May 2011
high, after breaking below support at
1.4217 created by the 23.6 percent
retracement line of that same rally.
A decline below support, currently
at 1.3442, formed by the lower leg
of the channel formation that started
on July 6, 2010, is required to signal
that the currency pair’s rally has
come to an end. That is looking
increasingly likely.
05.17.11
Bloomberg Brief | ECONOMICS Commentary
8
Matthew Lynn, Bloomberg Columnist
Strauss-Kahn’s Downfall Is Chance for IMF Renewal
managing director. John Lipsky, who
is filling in for Strauss-Kahn, is due
to leave his post as deputy at the
end of August.
Tradition states that a European
gets the job. More often than not, it
goes to someone French. Normally,
they are former bankers, finance
ministers or policy makers. There
won’t be any shortage of candidates
in that mold. Christine Lagarde, the
French finance minister, has already
been linked to the job. So has former
Bundesbank chief Axel Weber.
Former U.K. Prime Minister Gordon
‘‘
The top job
should no longer be
a consolation prize for
someone who missed out
on running the
European Central Bank.
‘‘
It couldn’t have come at a worse
moment. A bailout of Portugal was
being completed. Greece was tottering on the edge of default. And
where was the managing director of
the International Monetary Fund, the
man meant to be guiding the world
economy through this chaos?
Dominique Strauss-Kahn was in
a cell in New York’s Rikers Island jail,
awaiting his next court hearing on
charges of sexually assaulting and attempting to rape a hotel housekeeper.
The trial of Strauss-Kahn will finish
his career and transform the race for
the French presidency, for which he
was the leading candidate. It may
well determine the fate of Europe’s
single currency. There is no guarantee that the next head of the IMF
will support the euro with the same
determination that Strauss-Kahn did.
Yet the most significant consequence of the scandal will be the
effect it has on the IMF itself. It has
become painfully obvious that giving
the top job to a French, German or
even British politician who happens
to have some spare time on his
hands is no longer good enough.
The IMF plays the most important
role in the world economy right
now. In the next decade, we will see
multiple sovereign-debt crises stemming from the extravagance of the
last decade. We may also witness
the emergence of a new currency
system. The IMF is the only body
that can provide leadership on both
fronts and that will require someone with different qualifications and
ambitions. For this reason, it should
select internal candidates and
groom a new generation of leaders
from within its own ranks.
Strauss-Kahn does remain innocent until proven otherwise. He denies all charges and his lawyer says
Strauss-Kahn will plead not guilty.
He is entitled to a fair trial, and may
yet emerge from this scandal as a
free man. Still, it seems unlikely he
will remain in office after the case
is over. The IMF will need a new
Brown would love to run the IMF.
No doubt we will be reading about
the relative merits of Spanish central
bankers and Swedish finance ministers fairly soon as the different campaigns get under way. Many of them
would be perfectly good. Lagarde
is smart and experienced, and has
impressed plenty of people with
her skill at helping put together the
rescue packages for the euro. Weber
demonstrated his independence and
integrity at the Bundesbank.
The IMF now needs a new kind of
leader. The top job should no longer
be a consolation prize for someone who missed out on running
the European Central Bank. It also
shouldn’t be a stepping stone to the
French presidency. It should be the
summit of a career.
1 2 3 4 5 6 7 8 9 10 11 There will never be a more important time to overhaul the IMF’s
leadership culture. The sovereigndebt crisis is just starting. Greece,
Ireland and Portugal are only the tip
of a very large iceberg. Far bigger
countries face huge fiscal challenges in the next 10 years. The IMF
will have to anticipate and prevent
defaults from turning into a more
general financial crisis.
At the same time, the dollar’s role
as a reserve currency is in long-term
decline. With the rise of emerging
economies, the U.S. can no longer
maintain its position at the center
of the financial system. At some
point, a new reserve currency will be
needed. It might be based on a basket of currencies or on gold. Perhaps
it will be based on something no has
even thought of yet. Whatever it is,
the IMF will be pivotal to bringing it
into being and stabilizing the global
economy in the dangerous transition
from one system to another.
To do that, the IMF needs to be
allowed to develop its own leadership from within. Central banks
aren’t run by former politicians or
finance ministers parachuted into
the role. Neither are big companies.
They are led by men, and occasionally women, who have made their
careers within those institutions. By
the time they get the top job, they
know the issues, and they know how
they want to tackle them.
The IMF already has a talented
pool of insiders. Whether the managing director comes from Europe
doesn’t matter. What counts is whether he or she has the knowledge,
expertise and vision to do the job.
Strauss-Kahn may well leave his
post in disgrace. Yet if his downfall
can establish the point that the IMF
needs a different kind of leader, he
will have done his colleagues in
Washington an unexpected service.
(Matthew Lynn is a Bloomberg News columnist and the author of “Bust,” a book on the
Greek debt crisis.)
05.17.11
Bloomberg Brief | ECONOMICS 9
News OF Note
EU Sees Possible Greek Debt ‘Reprofiling’ in Follow-Up Aid
European finance ministers for the
first time floated the idea of talks
with bondholders over extending
Greece’s debt-repayment schedule,
saying last year’s 110 billion-euro
($156 billion) rescue has failed to restore the country to financial health.
Europe would consider “reprofiling”
Greek bond maturities as part of a
package including stepped-up sales
of state assets and deeper spending
cuts, Luxembourg Prime Minister
Jean-Claude Juncker said.
“If all these conditions are fulfilled, we can discuss the question
of reprofiling,” Juncker said after a
meeting of euro-area finance chiefs
“It’s not reprofiling or nothing.’’
Introducing that prospect marks a
break in Europe’s strategy, with governments potentially shifting some
costs to bondholders instead of
relying on taxpayer-funded bailouts
to end the debt crisis.
Previously, governments ruled out
writedowns on privately held bonds
before a permanent rescue fund is
set up in mid-2013, and then only
as a last-ditch option for countries
deemed insolvent. A “large restructuring” remains taboo, Juncker said.
To be sure, striking an agreement
with banks to reschedule Greece’s
bond redemptions wasn’t discussed
in the meeting, and finance ministers including Christine Lagarde
of France and Didier Reynders of
Belgium voiced opposition.
“Restructuring, reprofiling — off
the table,” Lagarde said. “We don’t
want to do that,” Reynders said.
— James G. Neuger and Stephanie Bodoni
China Foreign
Investment Climbs
Foreign direct investment in China
climbed 15 percent to $8.5 billion in
April as companies including Star-
bucks and Walt Disney expand to
tap rising incomes. For the first four
months, the total was $38.8 billion, a
gain of 26 percent.
Foreigners are targeting Chinese
consumers as earnings rise and
families move to cities. Inflows add
to the nation’s record $3 trillion
foreign-exchange reserves, complicating efforts to limit gains in the currency and curb inflation. China aims
to increase per capita net income by
more than 7 percent a year in real
terms over the next five years.
— Bloomberg News
Banks Forgo $20.5 Billion
Small banks organized as corporations applied for less than a third
of $30 billion available from a U.S.
program intended to increase smallbusiness lending, according to the
Treasury Department.
A total of 676 banks organized as
so-called C corporations had applied for $9.5 billion of capital under
the Small Business Lending Fund,
a spokeswoman, said. Other types
of banks organized like partnerships
called S corporations, where profit
and losseare passed to shareholders, have until June 6 to apply.
The Treasury program provides the
capital at subsidized rates as low as
1 percent if the banks expand lending to small companies. The capital,
available only to lenders with less
than $10 billion in assets, may generate as much as $300 billion in new
loans, the department has said.
— James Sterngold
Around the Web New research and commentary on the Web
Nancy Folbre, an economics professor at the University of
Massachusetts Amherst, explores how wealthy individuals and
groups are influencing universities to spread their point of view. “In
the marketplace of ideas, people with a lot of money can buy whatever they want, and that’s fine,” she writes at the New York Times
Economix blog. “Unfortunately, they also have the power to influence other people’s ideas in ways that violate principles of justice,
undermine democracy and distort the truth.”
http://economix.blogs.nytimes.com/2011/05/16/economics-for-sale/
Household income uncertainty is rising, particularly among single-earner households and households in the top income quartile, a
Federal Reserve Board discussion paper finds.
http://www.federalreserve.gov/pubs/feds/2011/201125/201125pap.pdf
Economists’ favorite pre-20th Century economist is Adam
Smith, according to an article in Econ Journal Watch. Their favorite
deceased 20th Century economist is J.M. Keynes. And their favorite
living economists are Gary Becker and Paul Krugman, according to
the article, accessible via Greg Mankiw’s blog. It also ranks favorite
economics journals and favorite economics blogs.
http://gregmankiw.blogspot.com/2011/05/poll-of-economists.html
The Web’s best Economics Blogs are on Bloomberg. Click {STNI BESTEcoNomIcSBlogS <go>}
1 2 3 4 5 6 7 8 9 10 11 05.17.11
Market Indicators
Bloomberg Brief | ECONOMICS 10
MSCI EQUITY INDICES
TICKER
COUNTRY
1D
%Chg
LAST PRICE
YTD
%Chg
YoY
%Chg
30D
Chart
FORWARD
PE 12M
10Y GOVERNMENT BOND YIELDS
TICKER
LAST 1D CHG
YIELD
BPS
COUNTRY
North America
MXCA Index
MXUS Index
Canada
U.S.
MXAR Index
MXBR Index
MXCL Index
MXCO Index
MXMX Index
MXPE Index
1697.2
1271.2
0.2%
-0.6%
-0.8%
5.8%
11.1%
17.6%
14.2
13.4
Argentina
Brazil
Chile
Colombia
Mexico
Peru
2957.6
3486.0
2848.4
1143.3
6165.2
1420.4
-0.8% -17.2%
0.4% -7.3%
-0.1% -2.1%
-0.5% 2.8%
0.2% -4.8%
0.7% -21.8%
48.5%
9.5%
40.8%
34.6%
19.5%
16.3%
9.3
10.1
16.8
17.9
14.1
10.9
MXAT Index
MXBE Index
MXCZ Index
MXDK Index
MXFI Index
MXFR Index
MXDE Index
MXGR Index
MXHU Index
MXIE Index
MXIT Index
MXNL Index
MXNO Index
MXPL Index
MXPT Index
MXRU Index
MXES Index
MXSE Index
MXCH Index
MXGB Index
Austria
Belgium
Czech Rep.
Denmark
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Netherlands
Norway
Poland
Portugal
Russia
Spain
Sweden
Switzerland
UK
138.9
53.6
377.0
4115.0
94.6
110.0
106.3
31.7
1338.3
23.7
63.7
80.5
2366.5
1972.0
69.2
966.3
114.2
9066.5
854.7
1753.8
-0.8% -3.9% 13.6%
-0.7% 4.0%
8.6%
-0.1% 11.7%
5.4%
-0.2% 1.1% 14.2%
0.4% -5.5%
6.7%
-0.1% 4.6% 13.5%
-0.6% 2.9% 17.7%
0.0% -9.5% -26.6%
0.1% 10.0% -1.4%
0.1% 6.5% -9.5%
0.2% 7.5% 10.4%
-0.4% 0.6%
5.9%
0.4% -1.9% 15.8%
-0.4% 3.5% 18.4%
-0.1% 2.9% 12.5%
-0.7% 3.7% 26.5%
0.6% 4.8%
9.6%
-0.7% 1.3% 18.2%
-0.4% 1.2%
1.9%
-0.1% 0.6% 12.4%
MXEG Index
MXIL Index
MXJO Index
MXMA Index
MXZA Index
Egypt
Israel
Jordan
Morocco
South Africa
1094.1
264.4
253.3
429.7
811.5
MXAU Index
MXCN Index
MXHK Index
MXID Index
MXIN Index
MXJP Index
MXKR Index
MXLK Index
MXMY Index
MXNZ Index
MXPH Index
MXPK Index
MXSG Index
MXTH Index
MXTR Index
Australia
China
Hong Kong
Indonesia
India
Japan
Korea
Sri Lanka
Malaysia
N. Zealand
Philippines
Pakistan
Singapore
Thailand
Turkey
Latin America
Europe
956.6
67.2
11056.3
4711.3
716.6
517.3
600.9
684.0
566.3
92.8
709.8
327.9
1713.2
438.3
906383.8
10Y US Swap Spread
2Y US Swap Spread
1Y Breakeven Rate
2Y10Y Spread
3M10Y
3M Ted Spread
3M Libor/OIS
EMBI+ Spread
IG Corp Spread
IG HY Corp Spread
Muni Spread
VIX Index
SKEW Index
CBOE VIX Index
CBOE Skew Index
COMMODITIES
LAST
PRICE
GAGB10YR Index
GBGB10YR Index
CZGB10YR Index
GDGB10YR Index
GFIN10YR Index
GFRN10 Index
GDBR10 Index
GGGB10YR Index
GHGB10YR Index
GIGB10YR Index
GBTPGR10 Index
GNTH10YR Index
GNOR10YR Index
POGB10YR Index
GSPT10YR Index
RUGE10Y Index
GSPG10YR Index
GSGB10YR Index
GSWISS10 Index
GUKG10 Index
Austria
Belgium
Czech Rep.
Denmark
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Netherlands
Norway
Poland
Portugal
Russia
Spain
Sweden
Switzerland
UK
1.2% -25.3% -20.3%
-0.4% -6.2% -2.2%
0.1% -8.5% -13.8%
-0.2% -0.4% -1.9%
0.0% -2.3% 13.3%
8.8
9.7
n.a
14.4
11.4
GSAB10YR Index
South Africa
0.8% -1.0%
0.2% 0.9%
-0.6% -1.2%
-0.9% 3.6%
-0.8% -11.7%
-0.1% -8.0%
0.0% 2.3%
0.7% -3.8%
-0.3% 1.0%
0.7% 10.8%
-0.7% -3.9%
0.2% 0.6%
-1.1% -2.8%
-0.2% 6.5%
-0.8% -4.1%
12.3
11.2
15.1
14.0
14.9
13.2
10.3
n.a
14.3
13.4
14.8
7.2
n.a
12.3
10.6
GACGB10 Index
GCNY10YR Index
HKGG10Y Index
GIDN10YR Index
GIND10YR Index
GJGB10 Index
GVSK10YR Index
Australia
China
Hong Kong
Indonesia
India
Japan
Korea
MGIY10Y Index
GNZGB10 Index
PDSF10YR Index
PKIB10YR Index
MASB10Y Index
GVTL10YR Index
TGBY10T0 Index
Malaysia
N. Zealand
Philippines
Pakistan
Singapore
Thailand
Turkey
4.4%
14.4%
26.8%
23.6%
4.1%
-9.8%
28.0%
51.2%
16.2%
12.8%
14.6%
17.2%
9.0%
38.5%
11.4%
1D Chg YTD
YoY
bps/% bps/% bps/%
COMMODITY
7.2
19.3
1.8
263.0
313.2
22.9
15.8
279.6
180.8
85.0
83.7
-0.3
0.3
2.0
0.4
0.5
-1.1
0.0
2.8
-1.5
0.0
0.0
18.2
123.6
6.9%
1.4%
Equity
LAST
PRICE
Agricultural
KC1 Comdty
SB1 Comdty
W 1 Comdty
Corn
Coffee
Sugar
Wheat
HG1 Comdty
GC1 Comdty
SI1 Comdty
Aluminum
Copper
Gold
Silver
CO1 Comdty
CL1 Comdty
XB1 Comdty
NG1 Comdty
Crude (Brent)
Crude (WTI)
Gasoline
Natural Gas
LA1 Comdty
YoY
BPS
6.5
-13.2
-31.5
-32.5
30D
Chart
5Y
CDS
GEBR10Y Index
0.2
1.5
40.2
592.3
101.7
62.1
100.8
98.5
12.47%
-3.4
30.2
-24.2
8.18%
7.17%
6.0
0.6
49.0
21.2
-7.0
-33.6
3.54%
4.18%
3.91%
3.33%
3.42%
3.46%
3.12%
15.62%
7.16%
10.37%
4.60%
3.39%
3.44%
6.06%
8.93%
-0.1
-0.9
2.0
0.8
0.7
0.5
0.8
0.3
5.0
-4.3
1.1
1.0
-2.5
-1.3
-4.2
2.8
20.5
0.2
31.1
25.6
10.1
16.1
314.4
-79.0
130.9
-21.8
24.0
-28.2
0.7
232.8
28.2
86.3
9.9
32.6
34.4
34.2
26.1
756.1
21.0
566.9
69.8
31.3
16.9
38.3
422.7
5.26%
3.06%
1.89%
3.41%
1.4
-1.2
0.8
2.3
-19.0
-21.9
17.7
1.0
127.6
32.9
22.8
-33.6
8.47%
-7.1
31.7
-28.4
118.7
5.39%
3.86%
2.45%
7.67%
8.26%
1.16%
4.34%
5.5
1.0
-1.1
3.8
-1.9
2.0
-1.0
-15.7
-7.8
-5.0
56.0
-42.2 -14.1
6.0 -122.5
34.5
75.4
3.2 -13.0
-18.0 -70.0
50.8
71.2
42.5
135.9
4.02%
5.19%
6.63%
14.11%
2.31%
3.78%
9.45%
0.0
-1.0
9.0
0.0
-2.0
1.7
15.0
-1.5
-5.2
-68.5 -50.9
53.1 -140.2
-14.0 157.0
-40.0 -16.0
4.9
20.8
102.0 -99.0
76.8
62.6
134.0
Europe
Middle East & Africa
Asia/Pacific
58.4
127.9
75.5
28.8
26.2
68.6
36.5
1241.7
248.2
598.3
146.2
28.0
15.7
139.7
592.5
132.7
227.5
21.3
54.2
82.0
97.8
120.4
157.3
CURRENCIES
SPREAD/RATE/INDEX
$$SWAP10 Curncy
$$SWAP2 Curncy
USGGBE01 Index
.2Y10Y Index
.10YV3MSP Index
.TED3M Index
.LIBORIOS Index
JPEIPLSP Index
.AAA10Y Index
.AAABAA Index
MUNSMT10 Index
C 1 Comdty
3.19%
3.16%
Latin America
9.4
13.0
11.8
14.6
12.5
10.7
11.3
8.1
10.0
23.2
10.1
9.8
10.4
11.3
12.1
n.a
9.7
13.2
12.2
11.0
Fixed Income
TICKER
Canada
US
COGR10Y Index
GMXN10YR Index
OTHER INDICATORS
TICKER
GCAN10YR Index
USGG10YR Index
Argentina
Brazil
Chile
Colombia
Mexico
Middle East & Africa
Asia/Pacific
YTD
BPS
North America
CRY Index
CRB index
BDIY Index
Baltic Dry Index
GI1 COMB Index
GS Cmdty Index
CMCITR Index
UBS-Bloomberg Cmdty
DBLCDBAT Index
DBIQ Diversified Ag Index
Source: Bloomberg. Updated at 7 a.m. ET
1D
%Chg
-1.3
-2.3
1.1
-7.0
-4.2
4.6
3.8
31.6
22.2
-25.0
-9.6
30D
CHART
1Y
Z-SCORE
2.9
-15.5
1.1
-5.9
-20.4
-8.0
-8.4
-16.8
30.5
-22.0
-5.2
-0.1
-0.4
0.6
0.6
0.5
0.0
-0.2
0.2
0.0
-6.9
-1.9
2.8% -40.9%
2.4% -3.8%
-0.6
0.3
YTD
%Chg
YoY
%Chg
30D
CHART
VOLATILITY
TICKER
Euro
Japanese Yen
British Pound
Swiss Franc
Canadian Dollar
Australian Dollar
N. Zealand Dollar
Danish Krone
Norwegian Krone
Swedish Krona
Czech Koruna
Hungarian Forint
Polish Zloty
Russian Ruble
S. African Rand
Turkish Lira
Argentine Peso
Brazilian Real
Chilean Peso
Mexican Peso
Chinese Renminbi
HK Dollar
Indian Rupee
Indonesian Rupiah
Singapore Dollar
S. Korean Won
Thai Baht
Taiwan Dollar
AUDJPY Curncy
Aussie Dollar-Yen
Euro-Pound
Euro-Yen
Euro-Swiss Franc
704.3
265.0
21.9
737.0
1.0% 12.0%
0.4% 10.2%
0.5% -31.9%
0.1% -7.2%
97.8%
97.0%
57.5%
57.1%
37.6
27.6
39.3
47.2
2532.8
403.0
1494.8
34.0
-0.8% 3.0%
1.2% -9.2%
0.3% 5.2%
-0.4% 10.0%
21.8%
37.9%
21.7%
80.5%
21.2
27.2
14.4
63.0
111.3
97.5
294.4
4.3
0.4% 17.5%
0.1% 6.7%
0.5% 20.0%
-0.1% -2.0%
48.2%
39.1%
44.1%
-1.9%
40.8 EURGBP Curncy
43.8 EURJPY Curncy
45.4 EURCHF Curncy
34.9
Metals
Energy
Indices
336.8
1291.0
676.0
1380.4
258.7
TWI USSP INDEX
-0.5% 1.2% 33.0%
-1.1% -27.2% -67.1%
-1.1% 6.6% 38.2%
0.3% 1.3% 33.5%
0.0% -1.0% 35.2%
CURRENCY
EUR Curncy
JPY Curncy
GBP Curncy
CHF Curncy
CAD Curncy
AUD Curncy
NZD Curncy
DKK Curncy
NOK Curncy
SEK Curncy
CZK Curncy
HUF Curncy
PLN Curncy
RUB Curncy
ZAR Curncy
TRY Curncy
ARS Curncy
BRL Curncy
CLP Curncy
MXN Curncy
CNY Curncy
HKD Curncy
INR Curncy
IDR Curncy
SGD Curncy
KRW Curncy
THB Curncy
TWD Curncy
22.9 DXY CURNCY
18.0 ADXY Index
31.6
22.0
14.0
1 2 3 4 5 6 7 8 9 10 11 DB USD Trade Weighted
Average USD Index
Bloomberg JP Asia Dollar
LAST
PRICE
1.42
81.63
1.63
0.89
0.97
1.06
0.78
5.25
5.58
6.33
17.23
188.47
2.77
28.13
6.98
1.59
4.08
1.63
471.44
11.74
6.51
7.77
45.16
8578.00
1.25
1088.50
30.29
28.85
1D
YTD
YoY
%CHG %CHG %CHG
0.3%
6.1% 14.6%
1.0% -0.6% 13.4%
0.4%
4.1% 12.3%
0.2%
5.5% 27.6%
-0.3%
2.6%
6.1%
0.4%
3.6% 20.8%
0.2%
0.1% 12.1%
-0.3%
6.1% 14.3%
0.1%
4.3% 11.4%
-0.4%
6.0% 21.8%
-0.1%
8.5% 19.5%
-0.4% 10.4% 18.8%
-0.4%
7.1% 17.2%
0.2%
8.6%
9.0%
-0.3% -5.0%
8.3%
-0.4% -2.6% -2.7%
0.0% -2.6% -4.5%
-0.1%
1.6% 10.1%
0.8% -0.7% 15.1%
-0.3%
5.2%
7.4%
0.0%
1.6%
4.9%
0.0%
0.0%
0.3%
0.7% -1.0%
1.0%
0.0%
4.9%
6.6%
-0.3%
2.9% 11.4%
-0.2%
3.4%
6.0%
0.0% -0.8%
6.9%
0.1%
1.6% 10.3%
Other Crosses
30D
CHART
1Y
Z-SCORE
1.2
-0.8
1.0
-1.4
-1.2
1.4
1.1
-1.1
-1.1
-1.0
-1.0
-1.2
-1.1
-1.7
-0.4
1.1
-1.1
-0.9
-1.5
-1.6
-0.1
-0.4
-2.2
-1.3
-1.3
-0.6
-1.3
86.5 1.5%
0.9 -0.1%
115.9 1.4%
1.3 0.5%
-4.0%
-1.9%
-6.4%
-0.7%
-6.1%
-2.0%
-1.0%
11.4%
1.5
1.1
1.0
-1.4
64.0 -0.1%
75.5 -0.1%
117.9 0.1%
-3.5% -10.6%
-4.4% -12.4%
1.3%
5.6%
-1.2
-1.2
1.3
FX Indices
05.17.11
Bloomberg Brief | ECONOMICS 11
Keene’s
Corner
Andrew Tilton, U.S. economics analyst at
Goldman Sachs, speaks with Tom Keene and
Ken Prewitt about what the U.S. structural budget deficit is.
Q: Give us an update on your GDP view
here. You have been cautious.
A: We are still looking at around 3.5 percent GDP growth in the second quarter,
maybe a touch slower in the second half of
the year. Overall, first quarter was certainly
a disappointment to us and a lot of people.
But a number of other non-GDP indicators like the business survey, like industrial
production, like the employment numbers,
suggested that we’re seeing a decent pace
of overall growth and activity in the first
quarter. So we think the second quarter
numbers will look fairly good.
Q: Is the slowdown of stimulus going to
drag the economy to a lower GDP over
the next 24 months?
A: There are three basic conclusions. Number one is we do need a very large fiscal
adjustment. There is some dispute among
different commentators about exactly how
big that is. We think at least six percent of
the budget deficit, at least six percent of
GDP is what is known as structural. You
need deliberate fiscal tightening to close
that much of the budget gap. That is really the low end of the reasonable range
of estimates as to the structural budget
deficit. So point number one is that there is
a very big gap that needs to be closed and
it won’t be closed just through growth. Point
number two is that the research in this
area has generally shown that what are
known as spending-based adjustments are
on average more successful. That means
that fiscal adjustments that rely more on
spending cuts and structural adjustment
tend to result in a better economic outcome
or more often tend to result in a bigger closure of the budget deficit than adjustments
which predominantly focus on taxes. That
doesn’t mean there can’t or won’t be a mix
of both, but it is simply a matter of how the
adjustment is skewed. The third conclusion
is simply that a big budget adjustment does
slow growth. This has been somewhat
disputed as well. Some people are arguing
that if you cut government dramatically, the
private sector will boom. While, over the
long term, there may be some offsets of
that sort, there is no doubt that in the first
few years you will see a growth hit from a
big budget adjustment. That is one element
of our forecast for the next couple of years.
We are assuming that the fiscal adjustment
takes about a point off GDP growth.
Q: The National Association for Business Economics trimmed its forecast
from 3.3 percent growth to 2.8 percent.
They say what is going to do that is
commodities prices. Are you expecting
commodities prices to stop rising?
A: We don’t think they are going to rise
a lot more in the near term. We certainly
would agree that they will have an impact
on the economy. We actually had a slightly
more optimistic forecast coming into the
year for a number of different reasons,
including the fact that financial conditions
were easy. We thought the private sector
had mostly finished its adjustment of saving rates. We saw at the end of last year
more fiscal and monetary stimulus. We
thought the labor market was improving. All
of those reasons for being more optimistic
about growth are actually still true, but what
has changed more than anything else in
2011 is the move up in commodity prices.
We did take down our numbers a bit a
couple of weeks ago primarily for that reason. The rise in oil prices so far this year is
probably worth something like half a point
on real GDP growth, maybe a touch more.
Our commodity strategists thought some
of the increase was due to aggressive
market positioning, and I think they have
been shown right, that there has been a
little bit of relief recently. But oil prices and
gas prices are a lot higher than we thought
they would be going into the year.
Q: One of the hallmarks of your research was mortgage equity withdraw.
There are a lot of houses priced at less
value than the mortgage right now. Give
us the dynamic.
A: Going into the crisis and the years of
the boom, there was a huge amount of
mortgage equity withdraw. People were
using their houses as ATMs. That has
clearly ended. Now, in part because of the
drop in home prices, in part because of
the substantial tightening in credit availability, you actually have a paying down of
1 2 3 4 5 6 7 8 9 10 11 mortgage debt on the margin. So the mortgage equity withdraw is negative or zero
to negative for all practical purposes. And
so that particular source of fuel for consumer spending during the boom days is
gone. Going forward, the fuel for consumer
spending growth is going to have to come
from the labor market.
(This interview was condensed and edited.)
Today’s guests:
David Ader of CRT Capital Group; Anne Mathias
of MF Global; Paul Sheard of Nomura; Robert
Wetenhall of RBC Capital Markets; Edward Lazear
of Stanford Business School
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