Posts Tagged ‘GDP’
Wednesday, January 4th, 2012
Yet another European nation – and one not in the Eurozone – is facing a financial crisis now that Standard & Poor’s (S&P) has downgraded its credit rating to junk status. The nation is Hungary, whose status was changed as a result of concerns about proposed policy changes regarding the country’s central bank. S&P cut its rating on Hungary’s debt to the non-investment grade of BB+ and warned that there could be additional adjustments. Its negative outlook on the Hungarian front means there is at least a 33 percent likelihood of another downgrade over the next year if Hungary’s fiscal performance worsens.
The lower rating could mean that Hungary has more difficulty borrowing, and may have to pay higher rates on its debt. Moody’s Investor Service, a rival credit-ratings agency, had already reduced Hungary’s rating to junk status in late November. According to S&P, policy changes related to Hungary’s central bank will curtail its independence; these changes by necessity complicate the scene for investors. They’re likely to negatively impact investment and fiscal planning, which will weigh on Hungary’s medium-term growth prospects. “The downgrade reflects our opinion that the predictability and credibility of Hungary’s policy framework continues to weaken,” S&P said.
Not surprisingly, the European Central Bank (ECB) is concerned about Hungary’s draft law that it says would undermine the independence of the country’s central bank. The government recently introduced proposals to merge Magyar Nemzeti Bank (MNB) with the Financial Supervisory Authority, name a new president who will outrank the current central bank governor and increase the number of members of the governing council. All of this would be “to the detriment of central bank independence,” the ECB said. “In particular, by appointing a new president with authority over the Governor of the MNB, who would become the vice-president of the new institution, the personal independence of the MNB’s Governor would be impaired and Article 14.2 of the Statute of the European System of Central Banks concerning the possible reasons for dismissing the Governor of a national central bank would be breached,” the ECB said. “The Governing Council of the ECB has requested the Hungarian authorities to bring their consultation practice into line with the requirements of European Union law and to respect the obligation to consult the ECB. Three major revisions of the central bank law in 18 months are incompatible with the principle of legal certainty.”
The independence of the central banks in European nations is enshrined in European Union treaties. However, Hungarian Prime Minister Viktor Orban wants to use his two-thirds majority in parliament to push through changes in the make-up of the decision-making entities of the MNB, with whom he has frequently disagreed over policy.
According to Business Week, “Hungary will probably overshoot its budget-deficit target next year, the central bank said. The shortfall may be 3.7 percent of gross domestic product, compared with the government’s 2.5 percent goal, the Magyar Nemzeti Bank said. The gap may be reduced to 2.6 percent with the ‘complete cancellation’ of budget reserves and assuming no unexpected spending and no shortfall in revenue in 2012. A decline in risk premium may allow keeping the benchmark interest rate unchanged at seven percent, the highest in the European Union, or its ‘cautious reduction’, the central bank said, citing the rate-setting Monetary Council. The rate may have to be ‘permanently’ higher if the pace of disinflation is slower than the bank’s forecast.”
Tags: European Central Bank, European Union, Eurozone, Financial Supervisory Authority, Forint, GDP, Hungary, inflation, Junk status, Magyar Nemzeti Bank, Moody's Investor Service, Standard & Poor’s, Viktor Orban
Posted in Economics, Financing, General | No Comments »
Wednesday, December 7th, 2011
In a stunning revelation, Bloomberg has obtained 29,000 pages of Federal Reserve documents detailing the largest bailout in American history. According to an article that will appear in the January issue of Bloomberg Markets magazine, the “Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on December 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates.”
The $7.77 trillion that the central bank made available stunned even Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009. According to Stern, he “wasn’t aware of the magnitude.” It overshadows the Treasury Department’s better-known $700 billion Troubled Asset Relief Program (TARP) program. When you add up guarantees and lending limits, it becomes clear that the Fed had committed $7.77 trillion as of March, 2009 to rescuing the financial system. That is more than half the value of the U.S. GDP that year. “TARP at least had some strings attached,” said Representative Brad Miller (D-NC), a member of the House Financial Services Committee. “With the Fed programs, there was nothing.”
According to Bloomberg’s editors, “Even as they were tapping the Fed for emergency loans at rates as low as 0.01 percent, the banks that were the biggest beneficiaries of the program were assuring investors that their firms were healthy. Moreover, these banks used money they had received in the bailout to lobby Congress against reforms aimed at preventing the next collapse. By keeping the details of its activities under wraps, the Fed deprived lawmakers of the essential information they needed to draft those rules. The Dodd-Frank Wall Street Reform and Consumer Protection Act, for example, was debated and passed by Congress in 2010 without a full understanding of how deeply the banks had depended on the Fed for survival. Similarly, lawmakers approved the Treasury Department’s $700 billion Troubled Asset Relief Program to rescue the banks without knowing the details of the far larger bailout being run by the Fed.
“The central bank justified its approach by saying that disclosing the information would have signaled to the markets that the financial institutions that received help were in trouble. That, in turn, would make needy institutions reluctant to use the Fed as a lender of last resort in the next crisis. Fed officials argue, with some justification, that the program helped avert a much bigger economic cataclysm and that all the loans have now been repaid.”
Derek Thompson, a senior editor at The Atlantic, argues that the Fed’s secret bailout is a sign that it was doing its job. According to Thompson, “First, you can be furious that the Federal Reserve ‘committed’ $7.7 trillion — a sum of money equal to half of the U.S. economy — to save the financial system. I understand the shock, but we were at the precipice of catastrophe and that money wasn’t ‘spent’ so much as it was put at risk and subsequently recouped. The economy has struggled in the three years since, but we avoided meltdown. The trillions worked.
“Second, you can be furious that the banks made a profit off of their own mistakes — but $13 billion is a small price to pay for staving off Armageddon. Third, you can be furious that the Federal Reserve went to court to keep this information out of the hands of journalists. There, I’d agree. It’s Congress’s job (not the Federal Reserve’s job) to pass laws that govern the banking sector, but Congress needs information to make good decisions about regulating banks and it’s disappointing that the Federal Reserve withheld details about its bailouts while the commission and the Dodd-Frank debate were ongoing. Fourth, you can be furious that our central bank basically did the right thing when it had to, and its counterpart in Europe won’t — at the risk of a continental meltdown.”
Times’ Massimo Calabresi agrees. According to Calabresi, “But the Fed saved the world economy through all this lending without losing a penny in the process. And after its initial heavy breathing, the article does give the Fed an opportunity to explain itself. ‘Supporting financial-market stability in times of extreme stress is a core function of central banks,’ said William B. English, director of the Fed’s Division of Monetary Affairs. “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.’ In other words, lending money to banks in a crisis is the whole point of the Fed: saving the world economy by flooding the system with money when it is about to freeze up is exactly what the central bank was created to do.”
The Fed has been lending money to banks since just after it was established in 1913. By the end of 2008, the Fed had created or expanded 11 lending facilities catering to financial firms that were unable to obtain short-term loans from their usual sources. “Supporting financial-market stability in times of extreme market stress is a core function of central banks,” said William English, director of the Fed’s Division of Monetary Affairs. “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.”
Tags: bailout, Ben Bernanke, Bloomberg, Committee, congress, Division of Monetary Affairs, Dodd-Frank Wall Street Reform and Consumer Protection Act, Federal Reserve, Freedom of Information Act, GDP, House Financial Services, Occupy Wall Street movement, Treasury Department, Troubled Asset Relief Program, Wall Street
Posted in Economics, Financing, General | No Comments »
Wednesday, November 30th, 2011
American companies ordered more heavy machinery, computers and other long-lasting manufactured goods in September, an encouraging sign for the shaky economy. The increase in demand for these durable goods suggests businesses are staying with investment plans, despite slow growth and a lack of consumer confidence.
Durable goods are products expected to last a minimum of three years. Core capital goods are products that have nothing to do with defense or aircraft. The gains are driven by tax breaks given to businesses for investments made this year, an incentive Congress approved last December to boost the lethargic economy.
“Demand for big ticket items seems to be alive and well,” said John Ryding, an analyst at RDQ Economics. “Outside of the volatile transportation sector, the gains in durable orders were broad based in September, and point to a manufacturing sector that continues to expand at a solid rate.”
“Despite the understandable concern about economic growth, businesses are still investing,” said Jennifer Lee, senior economist at BMO Capital Markets.
Robust demand for core capital goods is a strategic reason why economists expect an annual growth rate of 2.4 percent in the 3rd quarter. That would be a major improvement from the first six months of the year, when the economy expanded at just 0.9 percent, the worst growth since the recession ended more than two years ago. A 2.4 percent growth rate could ease fears that the economy is on the verge of sliding back into a recession. Even so, the growth rate needs to nearly double to make a substantial dent in the unemployment rate, which remained stuck at 9.1 percent in September for the third consecutive month.
“Manufacturing is in pretty decent shape, and this ends the quarter on a high note,” said Brian Jones, a senior U.S. economist at Societe Generale, who accurately forecast demand for non-transportation equipment. “We’ve got decent momentum going into the 4th quarter.” Orders for computers and related products jumped as much as six percent. A Commerce Department report is projected to show the world’s largest economy grew at a 2.5 percent annual pace in the 3rd quarter, an increase of the 1.3 percent rate in the previous three months. Societe Generale’s Jones said the gain in durable goods demand has the potential to bring GDP growth for last quarter closer to three percent.
Boeing, the largest American aircraft maker, received 59 airplane orders in September, compared with 127 the preceding month. September’s decline came on the heels of a 25 percent gain in August. Orders for non-defense capital goods excluding aircraft jumped 17 percent at an annualized rate compared with an 11 percent increase in the previous three months, an indication that business investment is picking up.
Additional indicators show that manufacturing, which accounts for approximately 12 percent of the economy, continues to grow. The Institute for Supply Management’s factory index rose a full point to 51.6 in September, compared with 50.6 in August. A level greater than 50 indicates that expansion is taking place. Industrial production advanced in September on demand for items such as cars and computers, according to the Federal Reserve.
According to Mike Shea, Managing Partner and Trader at Direct Access Partners LLC, “The number wasn’t bad, and having a decent number in durables is far better than having a bad number, since with the overhang of Europe, if we were getting lousy data here, then we wouldn’t have anything to hang our hats on. If not for what was going on in Europe, this market would be running on all cylinders. The summit in Europe is the tradable event. We could have one hundred percent earnings positive surprises today, we could have great economic data come out, all of that could come in rosy domestically, but if the news out of Europe is judged to be bad, none of what happens in the U.S. will matter. This market will not shrug off a lousy plan coming out of Europe. It will not shrug off any plan that is not fundamentally based in reality.”
Tags: Auto parts, Autos, BMO Capital Markets, Boeing, Commercial aircraft, computers, congress, Core capital goods, Department of Commerce, Durable goods, Durable goods orders, Europe, Federal Reserve, GDP, Heavy machinery, Institute for Supply Management, RDQ Economics, recession, Societe Generale, unemployment rate
Posted in Development, Economics, General | No Comments »
Tuesday, November 29th, 2011
Italy’s Prime Minister Silvio Berlusconi has asked for international oversight of his efforts to slash the eurozone’s second-largest debt, even as his unraveling coalition threatens efforts to build a wall against Europe’s debt crisis. Berlusconi’s government asked the International Monetary Fund (IMF) to assess its debt-reduction progress, and turned down an offer of financial assistance.
“It hasn’t been imposed, it was requested,” Berlusconi said. The IMF will carry out quarterly “certifications” of the euro region’s third-largest economy, he said, noting that the current sell-off of Italian debt is “a temporary trend” even as the nation’s borrowing costs soared to record highs. Berlusconi is under mounting pressure as Italy tries to avoid yielding to the sovereign-debt crisis.
Italy’s 10-year borrowing costs are getting dangerously close to the seven percent level that forced Greece, Ireland and Portugal to ask for bailouts. The yield on the nation’s benchmark 10-year bond surged to a euro-era record of 6.404 percent, the highest since the creation of the single currency. “If the current Greek tragedy is not to turn into an Italian tragedy, with far more serious and far-reaching consequences for the eurozone, Berlusconi must resign immediately,” Marc Ostwald, a fixed-income strategist at Monument Securities Ltd., said. Berlusconi may be “remembered as the architect of Italy’s descent into an economic inferno.”
IMF managing director Christine Lagarde hopes that quarterly monitoring will start by the end of November to verify that the reforms Berlusconi promised are implemented. “It’s verification and certification if you will, of implementation of a program that Italy has committed to,” she said. “It’s one of the best ways to have an independent view…to verify that promised measures are actually implemented.” She agreed that Italy doesn’t need IMF funding. “The problem that is at stake — and that was clearly identified both by the Italian authorities and its partners — is a lack of credibility of the measures that are announced,” according to Lagarde. “The typical instrument that we would use is a precautionary credit line. Italy does not need the funding that is associated with such instruments so the next best instrument is fiscal monitoring, which is what we have identified.”
Lagarde isn’t certain that the proposed reforms are credible. “The problem that is at stake and that was clearly identified both by the Italian authorities and by its partners is a lack of credibility of the measures that were announced,” Lagarde said. Additionally, the IMF will provide funds to stimulate Italy’s economy, although under strict conditions.
Will Berlusconi’s regime survive this crisis? “Historically, technocrat governments in Italy have been able to pass pro-growth structural reforms, including politically difficult labor market reforms,” said Barclays Capital analyst Fabio Fois. Governments such as those led by Carlo Azeglio Ciampi and Lamberto Dini – who had served as central bankers — in the early 1990s saved Italy from financial crises even worse than the present one. “I think the political parties would have a big incentive to go through the painful policy adjustment now, before the next election due in 2013, so that whoever wins won’t have to do it later,” Fois said.
Berlusconi seemed almost nostalgic for the days when the lira was Italy’s currency. “You don’t get much in your supermarket trolley for €80 today, whereas you used to get a lot for 80,000 lire,” he said.
He insisted that Italy’s economy is generally prospering. “The restaurants and vacation spots are always full, nobody thinks there is a crisis,” he said, noting that, considering its low household debt levels, Italy has Europe’s second-strongest economy, after Germany and was stronger than France or the U.K. The country’s €1.9 trillion in public debt, the equivalent of nearly 120 percent of GDP, was a legacy problem, had not grown in the past 20 years, and had been consistently serviced, Berlusconi said.
Berlusconi admitted that his government “might have made a mistake” in assuming the public debt was sustainable without more aggressive fiscal and reform action. When asked what he thought about frequent warnings from European Union partners that Italy demonstrate credibility with the promised reforms, Berlusconi said the criticism reflected prejudice about past Italian behavior. “If we don’t enact the reforms Italy will be in trouble,” he said. “But we will enact them.”
Tags: bailouts, Cannes, Christine Lagarde, euro, European Union, Eurozone, France, G20, GDP, Germany, Greece, International Monetary Fund, Ireland, Italy, Lira, Portugal, Silvio Berlusconi, Sovereign-debt crisis, U.K.
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Tuesday, November 15th, 2011
Standard & Poor’s slashed Spain’s credit rating to AA-, three steps beneath the highly desirable AAA, underscoring the challenges facing Europe’s major powers as they meet G20 counterparts over the eurozone debt crisis. S&P, whose move mirrored that by fellow ratings agency Fitch, cited high unemployment, tightening credit and high private-sector debt. Spanish 10-year government bond yields climbed slightly in response, although they are still nearly 60 basis points lower than those of Italy.
“Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain’s growth prospects due to high unemployment, tighter financial conditions, the still high level of private sector debt, and the likely economic slowdown in Spain’s main trading partners,” according to S&P. Spain’s Economy Minister Elena Salgado noted that there would be some margin for maneuver this year thanks to about two billion euros raised by an auction of wireless frequencies and lower interest payments. “Interest payments by the central government will be at least two billion euros below budget. So the combined effect of the spectrum auction and lower interest payments will mean we have a margin of 0.4 percent (of GDP)” Salgado said.
S&P took note of Spain’s “signs of resilience in economic performance during 2011” but saw “heightened risks” to the country’s prospects for growth. Elevated unemployment, tighter financial conditions, and an external debt-to-GDP ratio of approximately 50 percent and the likely economic slowdown of Spain’s main trading partners are the downgrade’s primary causes. S&P noted that the “economy” variable in its credit-rating equation was responsible for the downgrade. Spain’s GDP, according to S&P, will likely grow about 0.8 percent in 2011 and nearly one percent in 2012, weaker than S&P’s 1.5 percent estimate made in February. S&P said that Spain is still in danger of another downgrade if the situation deteriorates. According to their downside scenario, “We have also adopted a downside scenario, consistent with another possible downgrade. The downside scenario assumes a return to recession next year, partly as a result of weaker external and domestic demand, with real GDP declining by 0.5 percent in real terms, followed by a weak recovery thereafter. Under this downside scenario, the current account deficit would decline, but the general government deficit would remain above 5.5 percent of GDP, at odds with the government’s fiscal consolidation targets.”
Investors currently are focusing on“whether European governments can forge a political solution to the sovereign crisis,” said Guy Stear, Hong Kong-based credit strategist at Societe Generale SA. The longer-term question is “whether austerity plans will work,” he said.
S&P pointed out ongoing challenges facing Spain. “The financial profile of the Spanish banking system will, in our opinion, weaken further, with the stock of problematic assets rising further,” according to S&P analysts. Spain is being held back by “uncertain growth prospects in light of the private sector’s need to access fresh external financing to roll over high levels of external debt amid rising costs and a challenging external environment.”
Simon Denham, the head of Capital Spreads, noted that “S&P and Moody are working overtime at the moment downgrading bank after bank and European country after European country which reminds us of the dangerous situation that the eurozone is in. However, as mentioned, the overriding theme that something will be done to sort the mess out is keeping equity markets afloat and the FTSE remains just above the 5,400 level at the time of writing.”
Steven Barrow, currency strategist at Standard Bank, offers this perspective. “The move follows a similar downgrade from Fitch last week and hence does not have a huge shock factor for the market. Nonetheless, it clearly questions the markets ability to continue with the more optimistic tone towards the debt crisis that seems to have been reflected in the euro recently – although not necessarily in the bond markets.”
Catalina Parada, Marketing Consultant, is Alter NOW’s Madrid correspondent.
Tags: Credit rating agency, Downgrade, Elena Salgado, euro, Eurozone debt crisis, Fitch Ratings, FTSE, G20, GDP, Private-sector debt, recession, Sovereign debt, Spain, Standard & Poor’s, unemployment
Posted in Economics, General | No Comments »
Monday, November 7th, 2011
Are Americans shopping until they drop again? It could be, judging by the latest government report showing that consumer spending rose by a surprisingly vigorous 0.6 percent in September, even as personal incomes barely grew. Adjusting for inflation, after-tax income declined slightly by 0.1 percent, according to the Department of Commerce. The bottom line is a sharp drop in the saving rate in September, to just 3.6 percent. That’s the lowest level since 2007 and a drop from a healthy five to six percent during most of the last two years.
Scott Hoyt, who studies consumer spending for Moody’s Analytics, says it’s possible that the September numbers may have been inflated by spending for repairs and other things after Hurricane Irene. At the same time, other data suggest that people are spending more because lenders are suddenly more willing to give credit and as households — which had deferred buying new cars and other goods — feel more optimistic about the direction of the economy. Consumer spending is perceived as a critical economic component, and is often cited as representing 70 percent of the nation’s GDP.
The improvement in consumer spending helped boost the economy through the 3rd quarter while policymakers ranging from President Barack Obama to the Federal Reserve took additional action to stimulate growth and hiring. Unless paychecks grow, Americans may not be able to continue their spending sprees. “Given the state of consumer sentiment and the savings rate, we should see moderate spending, at best, going forward,” said Sean Incremona, a senior economist at 4Cast Inc., who accurately predicted the consumer spending boom. “The savings rate is just one of those warning signs that says we’re not pulling ourselves out vigorously, so the economy still has a lot of vulnerability.”
Fed policymakers are considering options for additional monetary easing even as the economy improves. Vice Chairman Janet Yellen said that a 3rd round of significant asset purchases “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.”
“Consumers today are still facing inflationary pressures on food, high unemployment, minimal job and income growth and waning consumer confidence,” BJ’s Restaurants, Inc., Chief Financial Officer Gregory Levin said after the chain reported a 6.5 percent increase in sales for the 3rd quarter. “It is difficult to ascertain if the current trends represent the trend we will end up seeing throughout the remainder of this year, or how strong the holiday retail selling season will be.”
“Income growth will have to be watched closely in coming months as the recent trend of spending at the expense of savings is not sustainable,” economists at Nomura Securities wrote. Inflation rose 0.2 percent in September, based on the latest analysis of the personal consumption expenditure price index. The PCE (Personal Consumption Expenditures) grew by 2.9 percent over the past year.
“Sluggish growth in U.S. consumer income in September led households to cut back on saving to increase their spending, casting doubts over the durability of the economy’s third-quarter growth spurt,” Reuters wrote.
According to The Hill, “Purchases of new and used cars drove spending. Clothing sales rose 1.1 percent. Purchases such as utility payments were up 0.2 percent, as consumers paid to cool their homes during a brutally hot summer.
Tags: 4Cast Inc., After-tax income, BJ’s Restaurants, consumer spending, Department of Commerce, Federal Reserve, GDP, Holiday retail selling season, Hurricane Irene, Inc., inflation, Janet Yellen, Moody’s Analytics, PCE Index, President Barack Obama, Saving rate
Posted in Economics, Financing, General | No Comments »
Wednesday, November 2nd, 2011
American companies ordered more heavy machinery, computers and other long-lasting manufactured goods in September, an encouraging sign for the shaky economy. The increase in demand for these durable goods suggests businesses are staying with investment plans, despite slow growth and a lack of consumer confidence.
Durable goods are products expected to last a minimum of three years. Core capital goods are products that have nothing to do with defense or aircraft. The gains are driven by tax breaks given to businesses for investments made this year, an incentive Congress approved last December to boost the lethargic economy.
“Demand for big ticket items seems to be alive and well,” said John Ryding, an analyst at RDQ Economics. “Outside of the volatile transportation sector, the gains in durable orders were broad based in September, and point to a manufacturing sector that continues to expand at a solid rate.”
“Despite the understandable concern about economic growth, businesses are still investing,” said Jennifer Lee, senior economist at BMO Capital Markets.
Robust demand for core capital goods is a strategic reason why economists expect an annual growth rate of 2.4 percent in the 3rd quarter. That would be a major improvement from the first six months of the year, when the economy expanded at just 0.9 percent, the worst growth since the recession ended more than two years ago. A 2.4 percent growth rate could ease fears that the economy is on the verge of sliding back into a recession. Even so, the growth rate needs to nearly double to make a substantial dent in the unemployment rate, which remained stuck at 9.1 percent in September for the third consecutive month.
“Manufacturing is in pretty decent shape, and this ends the quarter on a high note,” said Brian Jones, a senior U.S. economist at Societe Generale, who accurately forecast demand for non-transportation equipment. “We’ve got decent momentum going into the 4th quarter.” Orders for computers and related products jumped as much as six percent. A Commerce Department report is projected to show the world’s largest economy grew at a 2.5 percent annual pace in the 3rd quarter, an increase of the 1.3 percent rate in the previous three months. Societe Generale’s Jones said the gain in durable goods demand has the potential to bring GDP growth for last quarter closer to three percent.
Boeing, the largest American aircraft maker, received 59 airplane orders in September, compared with 127 the preceding month. September’s decline came on the heels of a 25 percent gain in August. Orders for non-defense capital goods excluding aircraft jumped 17 percent at an annualized rate compared with an 11 percent increase in the previous three months, an indication that business investment is picking up.
Additional indicators show that manufacturing, which accounts for approximately 12 percent of the economy, continues to grow. The Institute for Supply Management’s factory index rose a full point to 51.6 in September, compared with 50.6 in August. A level greater than 50 indicates that expansion is taking place. Industrial production advanced in September on demand for items such as cars and computers, according to the Federal Reserve.
According to Mike Shea, Managing Partner and Trader at Direct Access Partners LLC, “The number wasn’t bad, and having a decent number in durables is far better than having a bad number, since with the overhang of Europe, if we were getting lousy data here, then we wouldn’t have anything to hang our hats on. If not for what was going on in Europe, this market would be running on all cylinders. The summit in Europe is the tradable event. We could have one hundred percent earnings positive surprises today, we could have great economic data come out, all of that could come in rosy domestically, but if the news out of Europe is judged to be bad, none of what happens in the U.S. will matter. This market will not shrug off a lousy plan coming out of Europe. It will not shrug off any plan that is not fundamentally based in reality.”
Tags: Auto parts, Autos, BMO Capital Markets, Boeing, Commercial aircraft, computers, congress, Core capital goods, Department of Commerce, Durable goods, Durable goods orders, Europe, Federal Reserve, GDP, Heavy machinery, Institute for Supply Management, RDQ Economics, recession, Societe Generale, unemployment rate
Posted in Development, Economics, General | No Comments »
Tuesday, November 1st, 2011
The midnight oil burned in Brussels as European finance ministers, heads of state, bankers and the International Monetary Fund (IMF) try to reach an agreement to restructure Greek debt. In the deal, private banks and insurers would accept 50 percent losses on their Greek debt holdings in the latest bid to reduce Athens’ immense debt load to sustainable levels. Although it required more than eight hours of negotiations that did not end until 4 a.m., the deal also anticipates a recapitalization of hard-hit European banks and a leveraging of the bloc’s rescue fund, the European Financial Stability Facility (EFSF), to give it €1 trillion ($1.4 trillion).
Significant work remains to be done to assure that the rescue works as envisioned. Several aspects of the deal, including the technicalities of boosting the EFSF and providing Greek debt relief, could take weeks to firm up; the plan to rebuild confidence after two years of crisis could unravel over the details. “I see the main risk is that we are left waiting too long again for the implementation of these agreements,” European Central Bank (ECB) policymaker Ewald Nowotny said. “Speed is very important here.” According to Greek Prime Minister George Papandreou, “The debt is absolutely sustainable now. Greece can settle its accounts from the past now, once and for all.”
European Union (EU) President Herman Van Rompuy said that the deal will slash Greece’s debt to 120 percent of its GDP by 2020. Under current conditions, it would have soared to 180 percent. Achieving this will require that banks assume 50 percent losses on their Greek bond holdings — a hard-to-swallow pact that negotiators now must sell to individual bondholders. According to Van Rompuy, the eurozone and IMF — which have both propped up Greece with loans since May of 2010 — will give the country another €100 billion ($140 billion). That’s slightly less than amount agreed in July, primarily because the banks now must pick up more of the slack. “These are exceptional measures for exceptional times. Europe must never find itself in this situation again,” European Commission President Jose Manuel Barros said.
While some question whether Greece will be able to meet its debt obligations by the drop-dead date, the fact that leaders were able to finally put concrete numbers to what had previously been little more than vague promises represents an important step forward. “It’s great news that we’ve got an agreement,” said Deutsche Bank economist Gilles Moec. “When Europe puts its heads together, they do actually begin to cooperate.”
Greece, whose crippling debt load has in principle been cut in half in the deal that Papandreou says marks “a new day for Europe and for Greece,” emerges as the biggest winner. Although the necessary austerity measures will be tough for the Greek people to live with, the new plan has set the country on a sustainable debt trajectory, according to Moec. “At least the deal gives Greece a fighting chance. It’s not great, it would be much better if we could get the debt below 100 percent…but it’s doable.”
Germany, which had been the driving force behind compelling the banks to take a bigger “haircut” or write down on Greek debt, is another winner. “If you look at the vote in German parliament outlining what Germany was going to ask for at the summit, and then you see the results of the summit, it’s basically identical,” Moec said. German Chancellor Angela Merkel believes that the deal is a victory for Europe in general. “Everybody was aware that the whole world was looking at this meeting,” she said. “I think that tonight we Europeans have taken the right measures.”
Writing for Reuters, Global Economics Correspondent Alan Wheatley sees some reason for skepticism. “Greece, however, has become something of a sideshow. Investors long ago judged that it was not just illiquid, but insolvent. Much more critical is what the eurozone could do to prevent the debt rot from spreading to bigger, systemically important but stagnant economies, notably Italy. Markets will have to wait for details as to how the EFSF will be scaled up; whether the likes of China will top up the bailout fund; and how operationally it will enhance the credit of member states’ new bonds. But some analysts are skeptical. Economists at Royal Bank of Scotland said they expected markets to re-price sovereign debt across the euro area given the size of the losses imposed on Greece. Expressed as the ‘net present value’ of the bonds, the proposed loss will be close to 70 percent, much more than the 40 percent hit that banks had volunteered to take, RBS said. What’s more, the EFSF will be too small to offer help to any country that might need it for any length of time. And a promise by governments to help banks regain access to long-term bond market funding implies they will have to assume extra contingent liabilities, thus adding to their debt burdens.”
Time’s Bruce Crumley is more hopeful. According to Crumley, “Let’s hope that upbeat attitude persists, but let’s not be stunned if it doesn’t. Because let’s be honest about another reality of Thursday’s development: it was only the most recent play by governments in a global confidence game that’s certain to shift and surge again before it’s all over. That’s not ‘confidence game’ in the usual, illicit ‘con’ sense. Instead it more literally describes attempts by EU leaders to inspire confidence and calm in financial markets so they’ll cease the doubt-inspired dumping of bonds, and bets against iffy sovereign debt that severely complicates efforts by eurozone officials to overcome current crisis. To that end, the relatively timid action taken earlier by European leaders was subsumed by the far more dramatic measures adopted – an emphatic upward ratcheting designed to prove their determination to tackle the evolving catastrophe once and for all.”
Tags: Angela Merkel, Austerity measures, Brussels, China, Deutsche Bank, euro, European Central Bank, European Commission, European Financial Stability Facility, European Union, Eurozone, GDP, Greece, Greek debt, Herman Van Rompuy, International Monetary Fund, Italy, Jose Manuel Barros, Royal Bank of Scotland, Sovereign debt
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Wednesday, October 5th, 2011
Federal Reserve Chairman Ben Bernanke, in a long-awaited speech in Jackson Hole, WY, announced no new steps the Fed will take to prop up the shaky U.S. economy. Rather, he expressed optimism that the economy will continue to recover, based on its inherent strength and from assistance provided by the central bank. Bernanke restated the Fed’s determination to keep the federal funds rate “exceptionally low” for a minimum of two years. He did not say what many had been hoping to hear: that the Fed would begin another round of quantitative easing – usually referred to as QE3.
Bernanke said that he expected inflation to remain at or below two percent. Additionally, he acknowledged that the recent downgrade of the nation’s AAA credit rating had undermined both “household and business confidence.” He implied that there was only so much more the Fed can do to stimulate the economy, and that the time has come for Congress and the Obama administration to create “policies that support robust economic growth in the long term,” to reform the nation’s tax structure and to control spending.
“In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September,” Bernanke said. He went on to clarify the Fed’s guidance about how long interest rates will remain exceptionally low. “In what the committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years.”
As Bernanke delivered his remarks, the government cut its estimated 2nd quarter GDP growth to a paltry rate of one percent, a revision from the 1.3 percent previously reported. The revision was expected and primarily due to weaker exports. In more positive news, private spending and investment in April through June were slightly higher than initially estimated. The GDP grew by an annual rate of just 0.4 percent in the 1st quarter. The 2nd half of 2011 is expected to be somewhat stronger, but a major driver of the economy — consumer spending — remains weak amid slow hiring and sluggish income gains.
“This economic healing will take a while, and there may be setbacks along the way,” Bernanke said. “Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery. Although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years,” Bernanke said. “It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals.”
“Economic performance is clearly subpar, and from that standpoint the case for some sort of further economic-policy assistance is just being made by the poor performance,” said Keith Hembre, chief economist and investment strategist in Minneapolis at Nuveen Asset Management. Although Bernanke said the Fed has stimulus tools left, “the threshold to utilizing them is going to require fairly different conditions than what we have today,” such as lower inflation or a return of financial instability, Hembre said.
Bernanke also used the occasion to scold Congress for its tardiness in resolving the deficit debate. “The country would be well served by a better process for making fiscal decisions,” Bernanke said at the Federal Reserve Bank of Kansas City’s annual economic symposium. “The negotiations that took place over the summer disrupted financial markets and probably the economy, as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.” Bernanke implied that a return to economic prosperity is at stake. “I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if — and I stress if — our country takes the necessary steps to secure that outcome,” he said. The budget process, according to Bernanke, would be more effective if negotiators set “clear and transparent budget goals” and established “the credibility of those goals.”
Bernanke reassured investors that United States prospects for growth are sound over the long term and that the Fed has tools to aid the recovery if needed, even though he is not planning another stimulus at this time. “What no action will do is give confidence to investors that things are not as bad as many people perceive, otherwise he would’ve acted,” Keith Springer, president of Springer Financial Advisors in Sacramento, CA, said. “Investors will eventually see the positives.”
Tags: Ben Bernanke, congress, consumer spending, Debt-ceiling battle, economic stimulus, exports, Federal Reserve, Federal Reserve Bank of Kansas City, GDP, interest rates, Jackson Hole, Nuveen Asset Management, Obama administration, QE3, Springer Financial Advisors, WY
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Monday, October 3rd, 2011
ADP, a leading payroll services company, is reporting that private companies added 114,000 jobs in July.
Many analysts had projected an increase in hiring from June, but it is not likely that the unemployment rate will decline even if job growth rose sharply. ADP’s forecasts are frequently used to measure how the labor economy is performing, but the firm has had its share of missteps, with some estimates on target and others varying sharply from actual government-issued data. In June, ADP projected that more than 140,000 jobs were added. The official government report showed that the labor economy had experienced anemic growth during the month, with a net total of only 18,000 jobs created. Many economists and industry believe that private employers likely added more jobs than previously projected during July.
Not all the news was good, however. Employers announced 66,414 planned layoffs in July, an increase of 60.3 percent over the 41,432 announced in June, according to a report from consultants Challenger, Gray & Christmas, Inc.
Any gain or loss in jobs above 100,000 is considered statistically noteworthy by economists. Expectations were rather low, however, given the recent bad news about GDP, consumer spending and manufacturing recently. “We still expect that actual payrolls may have risen by around 50,000 in July,” according to Capital Economics. “That would be better than the previous two months, but hardly reason for cheer.” “This pace of job creation usually implies a steady unemployment rate,” according to ADP’s employment report. Capital Economics said that the latest job gains would not reduce the unemployment rate. “We are in a process of discovery over whether the slowdown we have seen since March in the U.S. is over and we are entering a new phase of faster growth or that we are in a slump,” said Francisco Torralba, economist at Morningstar Investment Management.
Recently released Institute of Supply Management (ISM) numbers indicate an economy that continues to move barely at a snail’s pace. The non-manufacturing ISM report showed expanding business activity, new orders and employment, but at a slowing pace. Planned layoffs reached a 16-month high while the private sector added 114,000 jobs in June, most of them in the small business and the services sector. “Today’s report shows modest job creation for the month of July at a rate of half what is needed for meaningful employment and economic recovery,” said Gary C. Butler, Chief Executive Officer of ADP. Approximately half of June’s private sector job additions came from small business, which added 58,000 employees, and medium businesses (+47,000). These statistics mesh with the Challenger, Gray & Christmas job-cuts report, which showed planned layoffs hitting a 16-month high on a “sudden and unexpected burst” in downsizing by large companies. Merck, Borders, Cisco, Lockheed Martin, and Boston Scientific announced plans to cut 38,000 jobs in July, 58 percent of the 66,414 announced. According to Dave Rosenberg, who is viewed by many as a perma-bear, it will be really hard for a self-sustaining recovery to pick up. “The overhang of excessive debt burdens is still with us today and the problem with the government stimulus programs that were put into place is that they were not designed properly; the multiplier impacts never did kick in,” said Rosenberg. “So we can’t ‘grow’ our way out. Now government sectors in nearly every jurisdiction are tightening their fiscal belts. Companies and banks retain their extreme stash of cash, if we dare suggest, because they see the economic environment that we do and want to survive the next downturn.”
In the meantime, 400,000 Americans filed for first time unemployment claims in the last week of July, according to the Department of Labor. Coupled with a revision of initial claims in the previous week to 401,000, the latest update means claims have yet to dip below the 400,000 mark for 17 weeks.
Writing for The Hill, Vicki Needham says that “Economists say these figures are in line with the economy’s slowing expansion and are expecting growth to accelerate through the second half of the year as temporary factors such as high gas prices fade. While companies aren’t hiring, consumers are being cautious with their money, spending less for the first time in 20 months. Consumer spending rose only 0.1 percent in the 2nd quarter and households tucked away more savings.”
Tags: ADP, Borders, Boston Scientific, Capital Economics, Challenger, Cisco, consumer spending, Department of Labor, GDP, Gray & Christmas, Inc., Institute of Supply Management, jobs, July Jobs Numbers Disappoint, layoffs, Lockheed Martin, manufacturing, Merck, Morningstar Investment Management, unemployment
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