Daily Archives: June 8, 2010

US traders get more excited about the Fed’s decisions than their European counterparts do about those of the ECB, and no-one knows why.

This from a research paper by Magnus Andersson at the ECB. The research finds, perhaps unsurprisingly, “intraday US and euro-area stock and bond market volatility strongly increases at the time of the release of monetary policy decisions”. But more so in the US than in Europe. Why?

Tentative explanations from the author include the difference in information released, the differing mandates of the two central banks, and timing uncertainty in the Fed’s releases. However, overall, “the observed discrepancy between asset-price reactions in the United States and in the euro area following monetary policy decisions still remains a puzzle.”

What else does this gem of a paper contain? Three conclusions: Read more

That is the question the new British government will ask every day until the emergency Budget in two weeks’ time.

Warning if the British public refuses to buy the “we’re all in it together” line, the government will continue the drip-drip of minor announcements about the disaster of borrowing and the possibility of London turning into Athens on Thames. The next date in this process will be on Monday, when the Office for Budget Responsibility (now with a suitably sober logo) will present its new forecast for the economy and the public finances.

Of course, the public have every reason and right to stick two fingers up to the politicians. They had an opportunity to say the deficit was a shocker before the election. We even provided a handy deficit buster to help them. But this stuff was described as scaremongering. Now it has made governing more difficult. Whatever George Osborne might claim, he does not have a mandate for public sector austerity.

That does not mean he is wrong Read more

Ralph Atkins

It is one month since the announcement of the €750bn “shock and awe” international rescue package to save Europe’s government debt markets – and the results so far are not encouraging.

A key part of the plan was the European Central Bank’s decision to buy eurozone government bonds to stop the relentless rise in government bond yields of the weaker economies on the monetary union periphery. Yet the bond yields of Italy and Spain, which hit fresh peaks on Monday, are higher than they were before the emergency rescue plan was announced. Read more

Year-on-year producer price inflation in South Korea hit 4.6 per cent in May, up from 3.2 per cent the month before. The central bank runs an inflation targeting policy, focused on consumer rather than producer prices, of 3 per cent +/- 1 per cent tolerance.

Producer prices are often an early indication of consumer prices. In this case, however, the change was driven largely by base effects (i.e. this time last year, prices fell 0.8 per cent month-to-month). The month-to-month price rise in Korea during May was only 0.5 per cent, actually a reduction on the month before.

Both short- and medium- term rouble volatility will fall if the central bank gets its way. The Bank of Russia tweaked its currency interventions strategy yesterday, saying it would consider oil prices when working out how many roubles to sell.

A warning was also issued to forex speculators as the Bank said its currency interventions were “directed mainly at neutralising the firm expectations of forex market participants”. Oil price rises can heighten speculation of a rouble rise, as the Russian economy is heavily dependent on the stuff.

The rouble has greatly appreciated in recent months, and the Bank is still cutting interest rates and buying dollars and euros to counter the rise.

The Bank of Russia explained its intervention strategy thus:

The operations of the Bank of Russia on purchases/sales of foreign currency undertaken in excess of the set target volumes are directed at smoothing out the movements in the rouble’s exchange rate which are not determined by the influence of fundamental economic factors.

 Read more

By Jude Webber

Argentina’s government has unveiled stricter controls on dollar purchases in what it says is a crackdown on money laundering and tax evasion. Though people will still be able to buy $2m a month without justifying their purchases, the idea is to eliminate cash transactions and use tax data to scrutinise operations.

Here’s what economist Miguel Kiguel had to say before the measure – which was leaked in the press over the weekend – was formally announced:

In line with … higher demand and with the fear of losing reserves, it has emerged in the local media that the Central Bank is going to announce new regulatory measures for the currency market. We do not believe that these stricter controls will be effective to reduce capital flight but they could be taken as a sign that the government is willing to increase controls to avoid losing reserves. However, it is difficult for these stricter controls to prevent capital flight and it is more likely that they will end up an incentive for the informal market, increasing the spread between the informal and official dollar.

 Read more

By Jude Webber

Official data showing that the Chilean economy grew at its fastest monthly rate in a decade must be music to the ears of Sebastián Piñera, the new president. His election pledge to boost annual growth to 6 per cent always sounded ambitious, and looked especially so after the country’s devastating earthquake at the end of February.

But what the April data revealed was a speedier-than-expected business rebound. Bloomberg puts this in context:

The economy expanded 8.2 percent in April from March, the biggest increase since 1996, and 4.6 percent from a year earlier, the central bank said today on its website. It was the quickest annual growth since September 2008 and double the median forecast of 10 economists surveyed by Bloomberg.

April’s expansion comes after the economy shrank the most since 1996 in March following an 8.8-magnitude earthquake on Feb. 27 that caused almost $30 billion in damage. The faster- than-forecast expansion added to speculation that the central bank will raise its benchmark interest rate June 15 for the first time since September 2008.

The data raise two questions. Read more