Monthly Archives: July 2010

Canada was the first G7 country to start raising rates, and has enjoyed consistent growth for nine months, bar a static April. Latest data show slight growth in May of 0.1 per cent.

However, data show non-farm payrolls fell in May by 0.2 per cent, or 25,000 people. To add to the mixed picture, the central bank reduced growth forecasts 10 days ago, even as it raised rates, and three days later, inflation fell to just 1 per cent. It seems Ben Bernanke’s oft-quoted description of unusual uncertainty, would apply equally well north of the border.

Ralph Atkins

With eurozone inflation rising to 1.7 per cent this month, the European Central Bank can justifiably claim the annual rate is back within its target range of “below but close” to 2 per cent for the first time since the global financial crisis erupted in August 2007.

Since then, the inflation rate has been either significantly higher (it peaked at 4 per cent in mid-2008) or wildly lower (hitting of low of minus 0.6 per cent in July last year). For the ECB, that is probably another sign of economic conditions returning to something nearer normal - even if it was more oil prices that threw inflation so badly off course, rather than the direct effects of the global economic turmoil.

So there is a good chance of a more bullish tone from Jean-Claude Trichet, ECB president, after next Thursday’s governing council meeting. He will have to be careful, however. Too much optimism would jar with the caution these days from the US Federal Reserve and Bank of England. The euro has already rebounded from the lows reached during the crisis over eurozone public finances.

The problem Mr Trichet faces is that Read more

The current debt trajectory of the US may imperil the country’s future Aaa rating, Moody’s has said.

Steven Hess, senior credit officer at the ratings agency, told Bloomberg the US needed a strategy to tackle its deficit: “Having a clear plan certainly increases confidence and the U.S. doesn’t have that yet… the debt trajectory as it is now is something that might potentially cause us to consider whether the US is Aaa at some point in the future.” Read more

Brazil’s central bank surprised many economists by raising interest rates by less than expected last week. Today, it published the minutes (in Portuguese only) of the monetary policy committee meeting at which the decision was taken. Anyone hoping they would make matters clearer may be disappointed.

As expected, the committee said weaker global and domestic demand had contributed to its decision. Less predictably, it suggested it would be happy to bring consumer price inflation in line with the government’s 4.5 per cent target only in early 2012, rather than during next year.

The minutes are clearly open to interpretation. In a note to clients, Itaú Unibanco said they confirmed its view that the committee, known as the Copom, would leave rates unchanged at its next meeting on August 31 and September 1. Barclays Capital, on the other hand, said they supported its call for a 50 basis point increase at the next meeting and a 25bp increase in October. Read more

Robin Harding

For an inflation hawk, James Bullard, the president of the St Louis Fed, has some radical views on what to do if the economy weakens and the Fed decides to ease policy further.

Today he argued forcefully in a research paper that the Fed should use asset purchases if it has to ease further because promising to keep rates lower for longer – one of the other options – increases the chance of Japan-style deflation. Let me try to explain why. This post is long, wonkish, and probably not 100% technically accurate.

This is the chart that Mr Bullard uses. Look at the two lines this way:
- The curved line is the central bank. If inflation is high, it raises interest rates by more than one-to-one, in order to bring inflation back to target.
- The dashed red line basically says that money and prices don’t change anything real. You may have higher inflation and higher nominal interest rates but the gap between the two – the real interest rate – stays the same. Read more

Freddie Mac 30-year mortgage rates just fell to a fresh all-time low of 4.54 per cent (see chart, right). But it’s not just homeowners who can borrow more cheaply than ever.

The US government’s cost of debt is at, or approaching, its lowest ever levels in the medium-term (<10 years). Yields on Treasury auctions have been falling gently and consistently as demand has risen.

Rising demand for US debt is usually taken as an indicator of risk aversion in the markets. But should US bonds be seen as a safe haven with so much strength in east Asia and Australasia, and such ‘unusual uncertainty’ facing the West?

Auction results of US government bonds are shown below from 2008, or as far back as the data go, for you to puzzle over: Read more

It was hardly a surprise when Ukraine passed the bar for a $15.5bn IMF bailout. Desperate to plug a budget gap and stay financially afloat, Kiev caved in to unpopular but economically necessary austerity measures in recent weeks.

While painful for average cash-strapped Ukrainians, a nod from the IMF should reopen the door to international debt and capital markets. But in which currency?

Ukraine was expected in coming months to try (again) to raise some $2bn on international debt markets through a eurobond issue. Earlier this month, it cancelled a similar sized issue after balking at the prospect of paying more than 8 per cent on 10 year debt. Ukraine now hopes that with the IMF deal in place, it can secure cheaper money. But there’s a growing question for bankers, bond investors and fund managers eyeing the country: could Ukraine opt for rouble bonds instead? Read more

Growing risk aversion among investors is slowing foreign capital flows to emerging markets such as India, potentially choking inflows needed to fund the nation’s widening current account deficit, India’s central bank said.

Duvvuri Subbarao, the governor of the RBI, told the FT that the expectations of the world’s senior economic policymakers about the volume of capital inflows in emerging markets had dramatically changed over the past three months. “Even three months ago, we were talking about a possible flood of capital flows,” he said. Read more