Monthly Archives: April 2010

Simone Baribeau

Baby steps.

The Federal Reserve today moved one – itty bitty – step closer to getting reverse repos ready to drain the system of excess reserves. Not that they’re in much of a hurry – monetary tightening still seems to be a long way off in the distance, but nice to be prepared. Read more

Simone Baribeau

The Federal Reserve today released the transcripts from its 2004 FOMC meetings. Here’s a prescient comment, if ever there was one, from Cathy Minehan, president of the Boston Fed:

I remain concerned that the current very accommodative stance of monetary policy and the assureances that markets seem to have that we are on hold has increased leverage across all markets. When rates return to a more neutral place, as they ultimately will, this could create a burst of financial instability.

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So this is what ‘no change’ looks like: 123,000 more people unemployed in just one month. Most European unemployment rates rose last month, but the headline figure remained at 10 per cent because of falling unemployment rates and large populations in a handful of countries. Latvia is still suffering terribly, with unemployment rising to 22.3 per cent from 21.6 per cent in a single month.

Inflation is a better picture, with levels mostly close to target and almost all trends looking healthier. Slovakia and Estonia have pulled themselves out of deflation for the first time in months; Irish deflation is steady; and even Latvia’s deflation has tempered a little, from 4.3 to 4 per cent. Greece, and perhaps surprisingly, Norway, are experiencing steady-ish rises to 3.9 and 3.6 per cent, respectively. Only in Iceland is the trend a real cause for concern: inflation is still rising quickly, from 10.7 per cent last month, to 11.6 per cent this month. The spread of inflation among the countries – a very crude measure – has risen from 15 percentage points last month to 15.6pp this month.

Robin Harding

We’ve learned a little more about the Bank of Japan’s “new efforts to contribute to strengthening the foundations for economic growth”. The message is that they will not be aimed at loosening overall monetary conditions – something that was far from obvious in the initial release.

Instead the goal is to find ways to stimulate bank lending, particularly to growth-creating entities such as venture companies, although how this is to be done without the BOJ taking any credit risk I’m not too sure. Read more

Figures just out suggest a trend reversal in the growth of the American economy. An advance estimate from the Bureau of Economic Analysis shows US GDP rising at a seasonally-adjusted annualised rate of 3.2 per cent in the first quarter of 2010. The previous rate, for the last quarter of 2009, was 5.6 per cent.

“Negligible” risks of a Greek default but “multi-notch downgrade” likely. This from Moody’s in a confusing note yesterday. The ratings agency retains a downgrade review on the country but — unlike S&P — will wait till “shortly after the details of the euro area/IMF programme are unveiled”.

* Moody’s has consistently maintained that Greece’s short-term liquidity and restructuring risks are negligible given the depth of international commitment to maintaining regional financial stability…

* Moody’s believes that the appropriate repositioning of Greece’s rating should therefore be based on the country’s medium-term credit fundamentals…

* Moody’s has previously indicated that a multi-notch downgrade is likely, and that

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Liberalisation, scaling back the state and reduced terms for public sector workers – that is the package required to secure a multi-billion euro loan from the eurozone and IMF:


Robin Harding

The Bank of Japan often complains that it is misunderstood. Today’s train wreck of a monetary policy statement explains why:

1. At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided, by a unanimous vote, to set the following guideline for money market operations for the intermeeting period:

The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.1 percent.

2. At the Meeting, Policy Board members examined the Outlook for Economic Activity and Prices. Based on the recognition that Japan’s economy faces the critical challenge of overcoming deflation and returning to a sustainable growth path with price stability, it was confirmed at the Meeting that, in the conduct of monetary policy, the Bank would aim to maintain the extremely accommodative financial environment.

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If anyone had hopes that the final leaders’ debate would provide answers to the huge issue of cutting the budget deficit, they would have been sorely disappointed. All three leaders ducked the issue.

Although they were asked to spell out the coming spending cuts, all stuck to a familiar script of evasion and bickering.

Nick Clegg highlighted tiny spending cuts in defence from and biometric passports which are nothing like the sort of scale of cuts he recognises are needed. He even damaged his part’s reputation for slightly greater candour on spending cuts by getting close to pledging to protect hospitals and schools from cuts in his opening statement.

Gordon Brown did not mention spending cuts at all  in his first answer and repeatedly insisted that the £6bn of spending cuts the Conservatives propose for 2010-11 would  threaten a double-dip recession, while the more than £12bn of tax increases in 2010-11 had no effect on the economy.

David Cameron gave the impression that the Conservatives had spelt out difficult choices ahead and then mentioned a pay freeze in the public sector, an area which saves about £3.5bn and to which all parties have signed up to something very similar. Of the rest of the £46bn or so spending cuts a Conservative chancellor would need to introduce for the next three years, we heard nothing.

According to the on-screen worm judging the popularity of each leader in real time, Read more

After recent rises in US bond yields, recent auctions in the 5-year and 7-year bond markets show yields falling to to 2.54 and 3.21 per cent, respectively. We would expect this, to some extent, as demand increases for investments perceived as safe, while the eurozone is in turmoil. The question is: is this as much a reduction as we would have thought? If not, expect the US cost of debt to resume its previous upward trend when Europe has calmed down a bit.

James Politi

Peter Diamond, the Massachusetts Institute of Technology economist, is arguably the most interesting of the three nominations by President Barack Obama to the Federal Reserve Board of Governors.

Janet Yellen, president of the San Francisco Fed, is a consummate monetary economist close to Don Kohn in her views on interest rates, and has already been at the heart of many of the US central bank’s decisions during chairman Ben Bernanke’s tenure. Read more

This is probably wishful thinking, but I would like party leaders tonight to do the following:

Too much to ask? I will come back to this after the debate.

Deposits in Greek banks rose during the first quarter, but they were driven by large increases in holdings by central banks and other ‘monetary financial institutions’. This bucks the general European trend of decreasing holdings by MFIs.

The €8.1bn rise in euro area MFI deposits is 6.6 per cent of total holdings, easily the largest move across the Eurozone. It is, however, smaller than last month’s 10.4 per cent rise of €11.6bn. Cyprus and Slovakia are the only two other countries to record sizeable increases. Read more

James Politi

President Barack Obama has moved to fill three vacancies on the board of the Federal Reserve, in an attempt to put his stamp on the US central bank.

Mr Obama is nominating Janet Yellen, president of the San Francisco Fed, to serve as vice-chairman, replacing Don Kohn, who will be stepping down in June. Mr Obama is also seeking to appoint Sarah Raskin, a banking regulator in Maryland, and Peter Diamond, an economist at the Massachusetts Institute of Technology, as Fed governors, completing the full slate of the seven-member board. The appointments have yet to be confirmed by the US Senate. Read more

David Hale, the US economist, told Australian TV last night that Mervyn King believes the coming fiscal austerity will keep the next government out of power for a generation.

“I saw the governor of the Bank of England last week when I was in London and he told me whoever wins this election will be out of power for a whole generation because of how tough the fiscal austerity will have to be.

And now we have the problem that it may not even be a majority government, it may have to be some kind of coalition government or some kind of informal coalition where one party agrees to support the other party, at least in producing a budget, and none of that will be good for financial confidence. I’d be very bearish right now on both the British pound and on the British Government bond market.”

Since Mr Hale thinks it is OK to speak freely about a private conversation, for the interests of clarity, I will do the same.

Mr Hale did not meet the governor of the Bank of England last week as he has claimed. In fact he met him in early March, long before the election campaign and long before the Budget on March 24. At a private breakfast meeting on March 12, Mr Hale reported a similar, but not identical, account of his conversation with the governor. I was present. His remarks about Mr King struck me at the time as exaggerated. Read more

Reports this morning that IMF loans to Greece will be junior to existing bondholders. The details, apparently from Dominique Strauss-Kahn himself, are reported on eurointelligence blog, run by Wolfganag Munchau, a columnist of this parish. Further details:

In a conversion [sic] with German MPs, that was already being leaked while it was taking place in the Bundestag, Dominique Strauss Kahn outlined some of the details: Read more

Europe and contagion

Rest of World

If contagion is increasing, correlations between government yields should be rising. Indeed they are, among the PIIGS (plus Poland). But that is only part of the picture. A polarisation is taking place. Yields for the UK, US, Japan and Hungary are increasingly moving equal and opposite to Greek 2-year bonds.

First, a disclaimer. This is a work in progress. There are hundreds of ways to work out correlations. I have chosen a 7-business-day yield correlation. (A quick look at 20-day period supported the basic picture.) The other very important point is that correlations appear to be cyclical. They often rise to near 100 per cent. So some of what we are seeing might be part of this cycle. Read more

By Jonathan Wheatley in São Paulo

Brazil’s central bank raised its core interest rate by three-quarters of a percentage point on Wednesday evening, confirming market expectations that it would act aggressively to deal with rising inflation and the threat of an overheating economyRead more