EuroWatch: another bad day on markets for no apparent reason, other than fear and a lack of confidence in the German government. But everyone knows there’s a grim reality to the fear; combined, the 27 economies of the EU are the world’s largest economy; China’s largest source of export demand at the moment and Germany’s major export destination. That’s why the US, Asia (including Australia and Canada) are seeing markets heading south, along with the prices of industrial commodities (oil was down about $US20 until yesterday when it staged a small rise from $US68 a barrel to just over $US71).
EuroWatch 2: The euro yesterday hit a succession of four-year lows and into the evening, dragged the Aussie dollar lower. The euro then rebounded from about $US1.2144 to just under $US1.24 in later trading in Europe and the US, the Aussie dipped under 84 US cents, then recovered a bit to be close to 85 US cents in early Asian trading. A big night, but seeing the damage to confidence done by the Germans and their ban on naked short selling, it was understandable. The drop in the Aussie of about 2 US cents in a day had nothing to do with super profits, taxes mining, etc, more to do with the big profits traders had built up on euro cross rates, which just had to be taken, especially from the Aussie dollar because of the very strong rise in recent weeks.
GermanFlop: So the 2010 “Shoot Yourself in the Head” award has already been run and won by the German government and Chancellor Angela Merkel for not only the ban on naked shorting, but for the lead support role in turning a problem in Greece into a world-class event. France was upset at the shorting ban, perhaps they were were miffed that they didn’t think of the grandstanding move first. French finance minister Christine Lagarde said Germany should have talked to other governments first. Germany’s move could cut liquidity in debt markets, particularly for states with big fiscal problems, she chastised in a report in the Financial Times, and Mario Draghi, the head of the Bank of Italy who chairs the Financial Stability Board co-ordinating international regulatory reform, appealed for countries not to abandon a joint approach. “At this critical moment it is vital that we continue to work together on reforming the international financial system and maintain our faith in international co-operation,” he told the Financial Times. In other words, Germany went it alone and has stuffed up badly and help stuff confidence. And the Germans and their supporters of “tough financial love” have the hide to accuse others of being the problem. It’s in Berlin, for all the world to see.
GermanBanks: Germany’s banking regulator told a parliamentary committee overnight that all German banks, especially the listed ones were solvent (but are they liquid?). That’s helpful, didn’t know there was any doubt. But solvency isn’t the big question, it’s their level of liquidity when we hit times of rising stress, as we are in now, thanks to Greece, and especially the German government.
USWatch: The Federal Reserve raised its forecast for US economic growth for the rest of 2010, cut its estimate for unemployment and inflation and voiced the tiniest level of concern about the lower-than-expected price pressures in the economy. In the minutes of its meeting last month, the Fed said it now expects US gross domestic product to increase at an annual rate of between 3.2% and 3.7% in 2010. That’s up from the previous estimate of between 2.8% and 3.5% in January. According to the first estimate, GDP rose at a 3.2% annual rate in the first three months of this year.
US JobsWatch: The Fed reduced its forecast for the nation’s unemployment rate to a range between 9.1% and 9.5% this year, from 9.5% to 9.7% in January. The unemployment rate presently stands at 9.9%. Unemployment is forecast to fall to the range of 8.1% to 8.5% next year, slightly better than the January forecast.
US InflationWatch: The Fed also cut its inflation estimate the day the Consumer Price Index for April was released, which showed a fall in the month, static core price pressure. Core inflation (which excludes energy and food) rose 0.9% in the year to April, the smallest annual rise since 1966. After the surprise fall in wholesale prices in the same month, there’s a tinge of deflation lapping at the US economy. Not much, but the Fed has spotted it. “Most members projected that economic slack would continue to be quite elevated for some time, with inflation remaining below rates that would be consistent in the longer run with the Federal Reserve’s dual objectives,” the minutes said, (that’s the Fed’s mandate of maximum sustainable employment and price stability). The upshot is, no interest rates rises this year and well into 2011 in the US, even though growth is forecast to rise.
USReality: But the Fed didn’t forget the housing sector, saying construction remains depressed and the recent recovery in the housing sector “had stalled”. And it’s no wonder with more than 10% of all mortgage borrowers now behind on their payments. According to the US Mortgage Bankers Association, the delinquency rate hit a record of 10.06% in the first quarter. The seasonally adjusted rate accounts for all mortgages on properties that have up to four units and that are at least one payment late. It hit 9.47% in the December and a year ago, 9.12% were late. The non-seasonally adjusted figure showed a small fall in the March quarter. But the foreclosure inventory rate, which represents the percentage of mortgaged homes repossessed by lenders, was fairly flat quarter-over-quarter, inching up to 4.63% from 4.58%. But it jumped a lot from 12 months earlier, when the rate stood at 3.85%.
FedReality: And buried in the minutes was this sober comment for all those boosters who reckon US consumers are going to continue spending the economy out of the mire: “The recent increase in consumer spending appeared to be supported importantly by pent-up demands and possibly by other temporary factors, such as unusually large income tax refunds. With the personal saving rate having dropped back to a relatively low level, it seemed unlikely that consumer spending would be the major factor driving growth as the recovery progressed. Moreover, the recovery in the housing market appeared to have stalled in recent months despite various forms of government support.”
And Then There’s Europe: The Fed meeting was at the end of April; since then it has reactivated huge US dollar swap lines with central banks in Japan, Europe, Britain and Canada. And the minutes contained this recognition about what was happening in Europe: “Members of the Fed panel expressed concern that belt-tightening across the eurozone could put the economic recovery in jeopardy. If other European countries responded by intensifying their fiscal consolidation efforts, the result would likely be slower growth in Europe and potentially a weaker global economic recovery. Some participants expressed concern that a crisis in Greece or in some other peripheral European countries could have an adverse effect on US financial markets, which could also slow the recovery in this country.” Things have worsened since late April, with markets and commodities down sharply, the US dollar up, the euro down and market yields on American government securities at their lowest since last December.
Remember Greece? Well, it repaid the €8.5 billion loan that fell due yesterday, which in turn had triggered the current stage in the euro crisis. With other people’s money, of course, but a small win in any case.