NEW$ & VIEW$ (7 June 2012)


China is pragmatic:

The benchmark one-year lending rate will drop to 6.31 percent from 6.56 percent effective tomorrow, the People’s Bank of China said on its website today. The one-year deposit rate will fall to 3.25 percent from 3.5 percent. Banks can also offer a 20 percent discount to the benchmark lending rate, the PBOC said, widening from a previous 10 percent.

China will release a host of eco data next weekend. Beijing has likely seen them, including domestic car sales:

Average inventory carried at Chinese dealerships bloated to a level exceeding two months of sales by the end of May, compared with more than 45 days at the end of April, Luo Lei, deputy secretary general of the state-backed China Automobile Dealers Association, said in an interview yesterday. That’s forcing dealers to deepen discounts and sell cars at a loss to meet mandatory sales targets set by automakers, he said.

Luo’s warning is a contrast to the jump in sales reported by automakers including General Motors Co. and Honda Motor Co., which only disclose the number of vehicles sold to Chinese dealers — instead of consumers.

China clearly needs to reflate but it can only act on domestic demand. I doubt they will reverse the squeeze on housing since prices have just begun to decline YoY. What’s slow grind in Chinese?

The FT’s Gavyn Davies (The central banks are back in play) might have read my post yesterday Winking smile (BANKING (BETTING) ON BANKERS?). I found his chart revealing of the gradual but substantial deterioration in world economic trends since February. Keep that in mind when you read comments from the ECB and the Fed below.

This week, however, the markets’ hopes have been rising that the major central banks are once again preparing to ease monetary conditions, if not via a formally co-ordinated announcement, then in a series of separate steps which would amount to a powerful monetary boost to the global economy.  Although this policy change may take a couple of months to transpire, it does indeed seem to be on the way. The pause in monetary easing which became clear in February/March has once again proved to be only temporary.(…)

Where does this leave us? The recent slowdown in the global economy demonstrates that the world is still heavily dependent on the actions of the central banks to achieve even the mediocre, sub-trend GDP growth rate which has been seen in 2010-12. No matter how hard they try, the central banks have been unable to pass this responsibility on to governments. They will soon be forced to ease again.

Here’s what Draghi said yesterday:

  • “Europe ‘s crisis is not that bad”. Confused smile

ECB President Mario Draghi played down the severity of the euro bloc’s economic troubles and debt woes, saying that the economy should gradually recover later this year. Europe’s debt crisis is “far away” from the severity of the collapse of Lehman Brothers nearly four years ago, he said.

  • But we’re “ready to act” if needed…Sleepy smile

Still, Mr. Draghi opened the door to lower interest rates as soon as next month, saying the ECB stands “ready to act” if needed. “I don’t think it would be right for monetary policy to fill other institutions’ lack of action,” he said after the ECB’s monthly meeting, which occurred a day earlier than usual because of a public holiday Thursday in parts of Germany.

  • And it looks like there might a need shortly  Surprised smile

Mr. Draghi hinted that rate cuts could be on the way as early as July if the economy deteriorates further. Downside risks to the economy have “increased,” he said, and “a few” ECB board members wanted a rate cut at Wednesday’s meeting. A rate cut wasn’t even discussed in May.

  • Don’t drag me into problems abroad. Other countries should also take care of their debt. Punch

The ECB head brushed off criticism that Europe’s debt crisis is threatening the global economy, saying other countries have their own problems that they need to tackle, including “high and rising public debt.”

“Europe may have some responsibility, but these countries have their own policy problems which are still unaddressed,” Mr. Draghi said.

Still, “we have to be aware that the context is one where you have liquidity constraints and tensions in financial markets,” he said after keeping rates on hold. “Price signals in this situation have a relatively limited immediate effect.”

Draghi also cast doubt on the impact of further longer term refinancing operations, or LTROs, saying the full effects of previous loans have yet to be felt. Some of the problems in the euro area “have nothing to do with monetary policy,” he said.

The Fed is also ready to act. Or is it?


Thumbs up Thumbs down Officials Say Fed May Need to Act

A trio of Federal Reserve officials warned of risks to the health of the U.S. recovery and said the central bank might need to take new actions to support economic growth.

Most notable among them, Fed Vice Chairwoman Janet Yellen cited risks that the rate of inflation could drop below the Fed’s 2% goal or economic growth would slow. Fed action might be justified merely “to insure against adverse shocks” that might derail the recovery, she said, adding it could also be needed if the Fed concludes the recovery “is unlikely to proceed at a satisfactory pace.”

“I am giving more weight and higher probability to a negative influence on our economy coming from Europe,” Atlanta Fed President Dennis Lockhart said in a speech in Ft. Lauderdale, Fla. If modest economic growth no longer seems realistic, “further monetary actions to support the recovery will certainly need to be considered,” he said.(…)


A number of Fed officials are likely to resist action. Some have warned the Fed risks breeding inflation or a financial bubble with its unconventional programs, and also argue the programs are doing little to spur growth. One growing concern for some Fed officials is the risk that businesses will cut back on hiring and investing due to uncertainties about the U.S.’s political and fiscal outlook—as well as the fate of the euro zone.


Fed paints more upbeat picture of U.S. economy

Economic growth in the United States picked up over the last two months and hiring showed signs of a “modest increase,” the Federal Reserve said in a report that ran counter to a growing sense of economic gloom.

“Overall economic activity expanded at a moderate pace,” the central bank said on Wednesday in its latest Beige Book summary of business activity covering a period between early April and late May.

The Fed’s previous Beige Book assessment of the economy, released on April 11, had painted growth in a more timid light.

The central bank also described hiring as steady or modestly increasing, in contrast with a government report last week that showed hiring slowed last month for a fourth straight month.

Reading the Beige Book yesterday, it struck me how the Fed staff could be so removed from the reality:

Manufacturing continued to expand, and most Districts reported gains in production or new orders. The only exceptions were from the Philadelphia, Richmond and St. Louis Districts, where factory activity was mixed or had softened slightly. Demand appeared to be the strongest in auto and steel manufacturing. Reports from the Cleveland, Atlanta, Chicago, and St. Louis Districts noted vibrant activity for auto manufacturers, and an auto maker in the Atlanta District reported plans to add a third shift to keep up with increased global demand.

What increased global demand? Car sales in Europe are in the pits, Chinese car sales have come to a grinding halt and dealers are suffocating with unsold inventory while U.S. pent-up demand is from a very fragile and vulnerable consumer

But, this morning, the optimists gained some weight:

Smile  Jobless claims fall, labor market still on mend

Initial claims for state unemployment benefits dropped 12,000 to a seasonally adjusted 377,000. The government revised the prior week’s figure up to 389,000 from the previously reported 383,000.


So, while Chinese authorities are clear about their problems and pragmatic about the imagesolutions, European and American central bankers, denied any positive help from politicians, are debating whether they need to move and whether they can actually do something really useful.

Speculators are doing the hope trade, thereby helping Bernanke who, more than ever, needs a positive wealth effect. (Chart from The Boeckh Investment Letter.)


New Risk to Europe’s Growth: Banks Cut Lending to Cities

Facing tighter solvency rules, European banks have cut back lending to regional governments such as that of Chartres, France, for their infrastructure investments, posing an obstacle to employment and economic growth.

[LECRUNCH_p1]European local governments rely on bank borrowing for projects, unlike in America, where they often sell bonds. But European banks are drastically reducing their municipal lending as they try to meet the tightened solvency rules. Their retreat leaves many local governments struggling with how to pay for their projects.

The new rules, besides requiring banks to hold more capital against the loans on their books, also block European banks’ traditional practice of funding long-term lending by going to the money markets for capital every three months or so.

This is no small matter because local governments in Europe carry out the majority of public infrastructure investments, from roads to sewage to hospitals, including more than 70% of those in France. So at a time when governments across Europe are searching for sources of growth and employment, localities’ funding squeeze is making their job harder.


Hollande’s First Step Backward Lowering the retirement age puts France closer to another downgrade.

French President François Hollande made good Wednesday on his campaign pledge to lower France’s minimum retirement age to 60 from 62.

Mr. Hollande’s proposal would restore the retirement age to 60 for people who have contributed to the pension system for 41 years, meaning they entered the labor force at age 18 or 19. Mothers with three or more children would also be able to retire at 60 under the plan, as would the elderly unemployed.

Proposals to lower the pension age for other categories of workers are said to be in the works, though this first step alone is expected to cost €1.1 billion next year, rising to €3 billion a year by 2017. The government will cover the expense by—surprise, surprise—raising employees’ and employers’ payroll taxes.(…)

Higher taxes may help flatter the numbers for a while, albeit at the cost of raising the cost of employing workers and thereby damaging job creation and growth. But unless payroll taxes go to astronomical levels, it will prove impossible over time to balance a pay-as-you-go system in which retirees spend two decades or more living off other people’s money.

After that, Hollande will be asking Merkel to pool debts!


Saudi Arabia Achieving $100 Oil Signals Output Reversal

Saudi Arabia is poised to rein in oil sales after it achieved a $100-a-barrel target by cutting the price of its crude and pumping at the highest rate in at least three decades.

The world’s biggest crude exporter started to scale back shipments this month, Vienna-based researcher JBC Energy GmbH said, citing tanker fixtures. Three days ago the desert kingdom raised the July official selling price to Asia of its main crude grade, Arab Light, for the first time in three months, another sign that it is reducing production, according to the Centre for Global Energy Studies in London.

Saudi Arabia has been trying to lower the international price of oil to about $100 as slowing global economic growth counters concern of a supply shortage following a ban by western nations on imports from Iran. Brent crude, used to price more than half the world’s oil, fell to a low of $95.63 a barrel on June 4 amid Europe’s debt crisis, brimming supplies and weaker- than-expected Chinese manufacturing. Prices were as high as $128.40 in March.



High five  Beijing Dims the Lights on Data for Investors  Investors Finding It Difficult to Obtain Financial Reports and Other Information Gathered on Companies

A Chinese government agency that compiles extensive Chinese corporate records has begun to withhold information that includes financial reports, shareholder changes and assets transfers, according to lawyers, investors and research companies.

The new restrictions come at a time of skepticism from U.S. regulators and investors over financial data from some China-based companies. Last year, amid pressure from short sellers, auditors resigned from dozen’s of firms, citing problems with financial reporting, and in some cases auditors backed away from financial results they had previously blessed.

While that represents a small portion of the more than 200 China-based companies that trade publicly in the U.S., it led to increased skepticism of data from China.


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