Monthly Archives: February 2011

Ralph Atkins

Waiting for a German consumer boom is like… contributions welcome for the most appropriate metaphor. Whatever the comparison, it is not happening yet. Disappointingly for those hoping for a re-balancing, details just released of last week’s fourth quarter gross domestic product data show German growth continued to be driven mainly by exports.

The balance between exports and imports contributed 0.7 percentage points to growth in the fourth quarter. This was offset by a sharp, weather-related fall in construction and a run-down in stocks.

Despite steadily falling unemployment, low interest rates and soaring economic confidence in Europe’s largest economy, consumer spending rose by a measly 0.2 per cent compared with the previous three months, down from 0.5 per cent in the third quarter.  Read more

Guy Quaden, Belgium’s central bank governor, announced last night that he will step down on March 31. “It is time the government can provide stable leadership to the Bank in preparation for the transfer of the prudential supervision of banks,” he said. A likely successor is the vice governor, Luc Coene.

Whether the government is able to secure stability at the Bank is unclear. Mr Quaden should have retired last Autumn but problems forming a government in Belgium required him to stay in his post. There hasn’t been much improvement since then. Attempts to form a coalition after the June election failed in September. Chief political mediator Johan Vande Lanotte stepped down in January. Some agreement has been made on austerity measures after markets started to fret about Belgian debt, pushing up the cost of debt for the tiny nation by almost a third. Politically, the country is still in crisis, recently passing 249 days – a record – without a government.

James Politi

Goldman Sachs has waded into the raging political war over US fiscal policy, with a note explaining the economic ramifications of the battles on government spending, a possible shutdown of federal operations, and even the furore over collective bargaining rights in Wisconsin and some other midwestern states.

On the budget itself, Goldman economist Alec Phillips says the Republican plan approved by the House of Representatives last Saturday – with $61bn in spending cuts between now and September, would lead to a drag on US GDP growth of 1.5 to 2 percentage points in Q2 and Q3, before it tails off.

Mr Phillips also points out that the more likely scenario – a compromise with $25bn in spending cuts – would lead to a 1 percentage point hit to GDP growth in Q2, fading thereafter, with “negligible” impact on growth by the end of the year.  Read more

Ralph Atkins

In its early days, the European Central Bank would talk of the eurozone only as a single bloc. But after the crises of the past year, the euro’s monetary guardian now sees a clear need to monitor individual countries closely.

Speaking this evening in Liège, Jean-Claude Trichet, president, has positioned the ECB firmly behind plans being drawn up in Brussels to step-up economic surveillance based on national indicators. He cited seven variables that ECB staff had identified as providing “early warning signals when macroeconomic imbalances emerge and when countries are experiencing significant losses in competitiveness, or when there are risks thereof”. Read more

“The ECB should not issue public ratings to be used for regulatory purposes,” runs the response to an idea from the Commission. And the jury is also out on a publicly-funded agency other than the ECB issuing ratings.

Questions of independence are behind the ECB’s ratings reluctance. While the central bank does undertake in-house credit assessments, “the conduct of rating activity as in-house credit rating assessments always raised questions regarding reputation risks and potential conflicts of interest, beside other risks,” says the report.

As for an alternative, publicly-funded, body running the ratings, questions remain over independence and competition. “The degree of independence of such an agency funded wholly or partially by public money remains to be assessed,” says the report.  Aside from manpower and data requirements, it is also unclear whether “the creation of a semi-public agency would result in increasing competition, or rather create artificial barriers to entry for new private entities and therefore ultimately reduce competition”.

The spirit of the proposal was accepted, however, and the idea itself was not entirely scotched. Read more

Hot on the heels of a strong devaluation and a raise in the refinancing rate to 11 per cent, Vietnam has increased its reverse repo rate 1 percentage point to 12 per cent. No word yet on the base and discount rates, both last raised in November; they stand at 9 and 7 per cent, respectively.

Raising borrowing rates in Vietnam is an attempt to curb inflation, which will have been encouraged by the devaluation. Prices rose by 12.3 per cent in the year to February, following a 12.2 per cent rise to January, against a target of 7 per cent. Weakening the dong will make imports more expensive, which in the case of goods such as energy will work to push up dong-denominated prices generally.

Spencer Dale joined the hawk camp this month, latest minutes show. Now three of the nine Bank of England members are in favour of a rate rise, compared to two last month and one the month before.

Andrew Sentance, the original hawk, upped his rate rise request from 25bp to 50bp, or half a percentage point. Martin Weale and Spencer Dale preferred a quarter-point rise. Read more

James Politi

The biggest open question for US fiscal policy in the long run is whether the political system can forge a consensus to rein in the long-term debt through some combination of spending cuts and tax increases.

But in the short-term, at least for the next ten days, it is whether the US government is facing its first shutdown since the mid 1990s.

On March 4, the “continuing resolution” funding the government for the current fiscal year, which runs through September, will expire.

Unless a deal is approved by the Republican House, the Democratic Senate, and the White House, all non-essential federal operations will have to close, which could, if the standoff is lengthy, have significant consequences for the US economy. Read more

Robin Harding

Yes it does, according to a new working paper from a group of Chinese and Swiss academics, published as a preprint.

Using both monthly and weekly data, we found very similar lead-lag dependence between the S&P500 stock market index and the yields of bonds inside two groups: bond yields of short-term maturities (Federal funds rate (FFR), 3M, 6M, 1Y, 2Y, and 3Y) and bond yields of long-term maturities (5Y, 7Y, 10Y, and 20Y)….First, the stock market and yields move in the same direction. Second, the stock market leads the yields, including and especially the FFR.

 Read more

Eurozone price rises sound alarms at ECB – FT

Libya turmoil crushes risk appetite – FT Read more

After three weeks of relative calm, the ECB was forced to re-enter the fray and buy government bonds a couple of weeks ago, as rumoured by traders. Last week, €711m bonds bought under the eurozone central bank’s securities markets programme, settled.

Rumour has it the majority of bonds were Portuguese. Yields for the 10-year bonds remain on an upward trend despite this additional demand, however. The 10-year has typically closed above 7 per cent during February, touching 7.5 per cent several times in intra-day trading in the past few days. Read more

The Bank of Israel has raised its March interest rate by a quarter of one per cent, prompted by higher than expected inflation, strong economic activity and continued fears about an overheating housing market.

Israel’s central bank also said “the expected timing of an increase in the Fed interest rate has been brought forward”. Read more

Robin Harding

I’m not sure quite why Bernd Hayo and Matthias Neuenkirch of Philipps-University in Marburg, Germany, care about the behaviour of regional Fed presidents, but their latest working paper will interest Fed-watchers.

They took 612 speeches by members of the FOMC up to September 2009 and then coded them as ‘tightening’ or ‘easing’. Then they tested against economic variables to see what was motivating the speech.

Our results are, first, that Fed Governors and presidents follow a Taylor rule when expressing their opinions: a rise in expected inflation (unemployment) makes a hawkish speech more (less) likely. Second, the content of speeches by Fed presidents is affected by both regional and national macroeconomic variables. Third, speeches by nonvoting presidents are more focused on regional economic development than are those by voting presidents. Finally, voting presidents and Governors are less backward-looking in their wording than are nonvoting presidents.

 Read more

**updated 18.49**
Hungary’s base rate remains at 6 per cent after three quarter-point rate rises in as many months. The decision to hold was widely expected. Prices in the year to December rose by 4.7 per cent, against a target of 3 per cent. But rates were raised on December 20 and January 24, both of which should work to bring inflation down in the coming months.

It is the final meeting of the monetary policy council in its current form. A legislative change has been approved by the Hungarian parliament, which will allow the Hungarian government to appoint four new central bankers, which some fear will lead to policy focused on growth rather than inflation.

Apart from the continuing political instability in the Middle East, the most important macro events of the week were focused on inflation. We have known for a while that headline inflation is now rising, especially in the emerging world, because of the increases in food and energy prices. Now it appears that core inflation is also rising, despite the very large output gaps in most developed economies. Central bankers are now seriously split on whether to tighten policy, but the majority view still seems to be dovish.

This week, I learned that:

1. Core inflation is rising in most economies. This is in some ways surprising, since the output gap in the developed economies remains in the region of 3-4 per cent of GDP on most estimates. Until recently, this large degree of spare capacity was having the expected effect on core inflation, which was dropping at a rate of about 0.5 per cent per annum in the developed world. This gradual downward drift was predicted to continue during 2011 (for example, see this earlier blog on the impact on persistently large output gaps), but in recent months this pattern has been interrupted. The first graph shows the behaviour of core inflation in the 4 largest economies in the last two years.

 Read more

Everyone knows that the two prime candidates to replace Mervyn King as Bank of England governor are Adair Turner, chairman of the soon-to-be-defunct Financial Services Authority, and Paul Tucker, deputy governor of the Bank. So this evening’s lecture by Mr Turner at Clare College Cambridge, with a response from Mr Tucker, was a mouth-watering prospect. It required a trip to the University.

Bank wags dubbed it a Sumo showdown.

The title: Creating a stable financial system: is the reform programme sufficiently radical?
The venue: Clare College, Cambridge (packed)
The outcome: a fascinating draw if that is possible in Sumo. Victory seemed to be going Turner’s way because Tucker didn’t show up until Turner had nearly finished, but this was a traffic related delay rather than the deputy governor shrinking from the fight.

Actually, there were very few outright blows landed Read more

A dramatic reversal of direction occurred in the currency markets today after a central banker spoke of “pre-emptive action” on interest rates.

The euro reversed its fall at lunchtime on Friday, just as Bloomberg news wire published details of an interview with ECB executive board member Lorenzo Bini Smaghi. Read more

Robin Harding

The arguments in the speech and research paper that Ben Bernanke presented in Paris today will be fairly familiar if you’ve come across the influential 2009 AER paper by Ricardo Caballero and Arvind Krishnamurthy (indeed Mr Bernanke cites it specifically).

The basic point is that large capital inflows into the US in 2003-2007 were mainly in search of safe assets: and the US financial system responded by manufacturing them in the form of AAA-rated CDOs and similar moneytraps. Read more