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

The Reserve Bank of New Zealand today raised the official cash rate 25 basis points to 3 per cent but said future increases were likely to moderate.

Governor Alan Bollard said: “The pace and extent of further OCR [official cash rate] increases is likely to be more moderate than was projected in the June Statement” Read more

Robin Harding

The Fed’s beige book is one of the less useful economic reports: it looks backward at what has been going on around the country and the qualitative information can be hard to compare to other times.

It’s quite fun to pick out some snippets of the detail, though. The sense this time is that economic conditions are, well, a bit beige.


The specific sales reports range from “extraordinary demand” at a semiconductor firm to less-than-anticipated demand at two firms making life science equipment and medical devices. In particular, the semiconductor firm reports sales in the second quarter were 17 percent above their pre-recession peak.

A New Hampshire contact says that some types of homes are still selling well, notably those in convenient locations near major highways. Meanwhile, prices in rural New Hampshire are “plummeting.”

 Read more

Many at the Treasury Select Committee were left baffled by Mervyn King’s use of a motoring metaphor, which the governor extended well beyond its natural life.

Associating the position of a driver’s feet with setting monetary policy, Mr King said “at present it is right to keep our foot firmly on the accelerator”, but “there is a debate about quite how hard we should be pressing on the accelerator” and “it may be” that the situation “warrants pushing down even harder or that we should ease back somewhat” without “applying the brakes”, but “there will come a point when we will certainly need to ease off the accelerator” because “it will probably be a signal that there is a smoother drive ahead”.

Any physicists present (or indeed people who did applied maths) were left musing exactly which derivative of position with respect to time Mr King was talking about. On my reckoning, he was talking about the rate of change of acceleration. It is pretty impressive to have policy makers confident enough to talk about the third derivative at the same time as they bleat on about how uncertain everything is. Entertainingly, the technical term for the third derivative of position with respect to time is a jerk.

UPDATE 16:30 Read more

Ralph Atkins

Eurozone housing markets are springing back to life. The European Central Bank reported on Tuesday that mortgage lending grew in June at the fastest annual rate for almost two years. Its latest bank lending survey, based on responses from 120 banks, showed second quarter demand for mortgages was the strongest since early 2006.

All of which tells a positive story about the eurozone—at least for eurozone optimists. While attention has focused on the problems of Greece, Spain and Portugal, households elsewhere have spotted that mortgage interest rates are at exceptionally low levels, and have been sufficiently confident about their economic prospects to buy a house.

A less positive interpretation is that consumers are worried about the stability of the euro and see bricks and mortar as a better investment. Gilles Moec, European economist at Deutsche Bank, warns that the ECB might also be less than pleased. He points out the sharp contrast between the revival in mortgage lending and the lifelessness of lending to companies. Read more

What’s in a word? Quite a lot if it comes from the People’s Bank of China. Shares in Shanghai are up over 2 per cent today after the central bank said the state of the Chinese economy was “good”.

The People’s Bank of China said on its website yesterday that the nation’s economic fundamentals remained “good”. China’s decreasing dependence on exports meant the European debt crisis was unlikely to have a large impact, the central bank said in its report for the second quarter. It said it was cautiously optimistic about the Chinese economy. Read more

Australian consumer price inflation rose above target in the second quarter, to 3.1 per cent year-on-year from 2.9 per cent in March.

The Reserve Bank of Australia is unlikely to be too concerned. First, because the target of 2-3 per cent is explicitly intended to hold in the medium-term, rather than for every quarter. Second, because the duration of this above-target period is likely to be short: quarter-on-quarter inflation actually fell, from 0.9 to 0.6 per cent. So changes in the 2009 comparison quarter used (“base effects”) are affecting the yearly numbers. Third, the weighted median index, based on seasonally-adjusted prices, has just fallen below 3 per cent for the first time since its peak at 4.7 per cent in September 2008.

Robin Harding

The Senate Banking Committee will vote on the three new nominees to the Fed’s board of governors tomorrow:

Executive Session to Vote on Nominations Read more

Robin Harding

I have a piece about the effects of the US fiscal stimulus in the paper today. My personal conclusion is that it very likely did have large effects (because of interest rates being at zero), but because one can’t test the counterfactual of no stimulus, the only evidence comes from models and historic surveys.

What’s depressing is that nothing has changed since before the stimulus began. The models of the people who said it would work say that it has worked. The models of the people who said that it wouldn’t work say that it hasn’t worked. There is no real evidence – and I suspect that will be the decisive point when economists argue for and against further stimulus.

Here are some links if you want to explore the issue in greater detail: Read more

If a sovereign default had been factored into the recent stress tests, which banks would have failed and how severe would the contagion have been?

Not too many and not too bad, says the Peterson Institute. They used the sovereign holdings provided by 84 of the 91 banks to model an additional shock: namely, a Greek default. Researchers find bank collapses to be relatively limited – Greek banks collapse, predictably, as do those in Cyprus, but: Read more