NEW$ & VIEW$ (5 JULY 2013)


I have been warning about a developing growth problem in the U.S. on the basis of weakening exports, slow income growth and a fragile housing market.

ISI now says “This looks like another growth problem”, offering as evidence weaker Composite PMI, trade deficit, construction spending and bank loans, as well as an apparent breakdown in the diffusion index of their company surveys. ISI has cut its Q2 GDP estimate from +2.0% to +1.0%.

ECB, BOE Signal Low Rates to Remain Europe’s major central banks sent their clearest signals to date that interest rates will remain at record lows far into the future.

Europe’s central bank broke with longstanding tradition by pledging that interest rates will remain at record lows far into the future—distancing itself from speculation it would follow any U.S. move toward less growth-friendly policies as the euro zone’s financial crisis flares up again.

The strategy shift by the European Central Bank, which has long prided itself for keeping all its options open, came amid a political crisis in Portugal that threatened to bring down the government of a country largely seen as a model for Europe’s troubled periphery. As of late Thursday, Portugal’s coalition government appeared to have found a way to stay together. But doubts linger about the country’s financial health and political stability. (…)

The ECB will keep rates where they are, or even lower, for “an extended period,” ECB President Mario Draghi said after the bank’s monthly meeting. The ECB held its main policy rate at 0.5%. There was, however, an “extensive discussion” within the ECB’s rate board on whether to reduce rates Thursday, Mr. Draghi said, and there is a “downward bias” on rates “for the foreseeable future.”

Why such a long wait?

Gavyn Davies in the FT:

Overall, today’s developments tell the markets three things:

  • First, any exit from extraordinary accommodation by the Fed is not likely to be followed by other central banks, which are more likely actually to ease in response to any global effects from the Fed. Markets have already responded to this, and the message for the dollar seems clear.
  • Second, at the BoE, Mark Carney is probably looking for a significant regime change, not just a “steady as she goes” opening to his term of office, and he must be getting some encouragement from other MPC members in making this change.
  • Third, the bias towards easier policy at the ECB is greater than many expected, but the weapons available to them are not all that convincing.

Sometime in the future, this confusing combination of expectations, near-promises and not-quite-commitments are likely to come a nasty cropper, but that is a problem for another day, and another set of central bankers.

IMF Fears Risks From ‘Slippage’ in Italy

Italy’s economy faces “risks tilted to the downside” due to potential backsliding on the policy front both at home and at the European level, the International Monetary Fund said

Any “policy slippage” in Rome could further tighten credit conditions and renew doubts about Italy’s €2 trillion ($2.6 trillion) sovereign-debt load, the IMF said in its annual Article IV report, which strongly advocated keeping an unpopular new tax on primary residences in place despite the coalition government’s pledge to abolish it. (…)

“We broadly agree with all the IMF’s findings,” said Mr. Saccomanni.

But he acknowledged that Rome’s “need for revenue” could make progress slow. That is one reason he can’t take swift action to allow Italy’s banks, which are sitting on a burgeoning load of nonperforming loans, to deduct losses more quickly so that they can get back to more robust levels of lending to Italy’s small-business-dominated economy. (…)

PBOC to Extend Cash Crunch as Zhou Discovers Flaws

Zhou, in his first public comments since the cash crunch, said in a June 28 speech in Shanghai that “financial markets have always been very sensitive. They react very quickly to any signals. This helps discover and correct problems.”

The cash crunch was a reminder to lenders to adjust their “asset businesses,” Zhou, the G-20’s longest-serving central bank chief, said in an interview reported July 1 by China Business News. While the PBOC will step in if individual financial institutions are in extremely difficult situations, it doesn’t want banks to ignore the need for adjustments, he was cited as saying.

Oil-Price Gaps Jolt OPEC The price of oil from some OPEC members has fallen, highlighting the prospect of a deepening rift between countries that are most affected and those that are largely unscathed.

The unexpected energy boom in the U.S. is causing a revolution in global oil trade as America’s appetite for high-quality crude grades similar in quality to the oil extracted from the country’s shale-rock formations dwindles.

African OPEC members such as Nigeria and Algeria are the worst affected, with their exports to the U.S. shrinking substantially in recent years. (…)


From Richard Yamarone’s Orange Book (Bloomberg Briefs)

The second quarter has ended and there are only a few more first quarter commentaries remaining. “Cautiously optimistic” and “challenging” were the most frequent citations for the outlook from this week’s Bloomberg Orange Book entries. The story is still one of weakness; Europe is in recession, China is decelerating, pulling commodity prices along with it. The U.S. performance is mixed.

The Bloomberg Orange Book Sentiment Index for the week ended July 5 was 48.75, essentially unchanged from the 48.66 registered during June 28. This was the 21st consecutive weekly reading below 50.


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