UK watch: The new Conservative-Lib Dem government faces its first big economic test tonight: the announcement of cuts of £6 billion from the bloated Budget of £156 billion, a Greece-like 11.1% of GDP (But down from the earlier estimate of £163 billion for the year to March). According to UK media reports, 300,000 public service jobs could be cut in by the government, starting with tonight’s statement (and the full Budget on June 22 and announcements later in the year). That’s more than 10% of the current unemployed pool of 2.45 million. The Sunday Times estimated that 300,000 jobs could go, but up to 700,000 could be cut in coming years. The second estimate for UK growth will be issued this week and the talk is the first quarter first estimate of 0.2% will be sharply revised upwards. For how long is the big question. The eurozone is Britain’s biggest export market. The UK cuts will highlight the paradox for governments in high debt countries: cut jobs and cut the deficit, but you also cut tax revenues, consumer spending and growth.
All in the family: News Corp’s 39%-owned satellite broadcaster BSkyB is about to lift its stake in MasterChef producer Shine, as Japanese electronics giant Sony seeks to quit the business started by Elisabeth Murdoch. Sony’s 21% stake is expected to be priced at up to $US100 million, valuing Shine at about half a billion bucks, according to TV industry reports over the weekend. Sky will part-fund the deal with Murdoch (thanks, dad). Sky will lift its stake from 13% to just under 20%. Murdoch holds a 60%, with the remainder of the company’s shares held by the management of companies Shine has acquired.
US economy check 1: The US 10-year bond rate ended at 3.20% on Friday after hitting the low for the year so far of 3.10% in early trading. That was a fall of more than 0.20% in a week. There was an easing in demand for bonds as the euro rebounded and the US dollar fell on Friday (the Aussie dollar rose nearly 2%). The fall in bond yields told us about the intensity of the flight to quality last week. But it has also hidden what could be an emerging reassessment of the strength of the US economic rebound. A month ago, forecasts were for 10-year bond yields to touch 4% after touching 3.8% in late April. That was based on the growing recovery, perhaps the re-appearance of inflation and maybe a Fed rate rise. Now that’s no longer the belief of many in the markets, not because of Europe, but because of growing concerns about the underlying strength of this rebound.
US economy check 2: Goldman Sachs economist Jan Hatzius had to cut his forecast for annual US economic growth to 1.5% for the second half of 2010 from the 3.0% annual rate for the first half. Comments from major retail firms last week seemed to echo the Fed’s comments on weak consumer demand. Wal-Mart was especially gloomy about the financial strength of its customers. Even though the jobs market has improved, wages and hours remain weak, meaning consumers are not getting the lift in income to sustain a rise in spending over the rest of the year. Indeed, the boost in consumer spending seen up to last month, has come from government aid and from consumers running down savings. Very soon the US savings rate will dip towards 1% and set off more alarm bells.
US economy check 4: The Fed’s point last week (in the minutes of its last meeting in April about the housing sector remaining depressed) won’t be apparent from what are expected to be good figures for sales of new and existing house sales for April. But that will be due to the impact of the expiration of tax credits, not real demand. The actual level of housing demand can be seen in the fall in mortgage applications to a 13-year low the week before last. And there was the surprise fall in new home building permits, even though the backlog of unsold new homes is close to the lowest for 40 years.
US inflation watch: Last week’s very weak April inflation figures for the US supported the Fed’s contention that there won’t be a problem with inflation this year (therefore, no need to lift rates). If anything the figures and the Fed’s comments about inflation being lower than desirable, have set off speculation that America could be facing a bout of deflation this year, especially in the US dollar remains high and helps cut the cost of the country’s huge import bill. Oil and copper prices have weakened, driven by not only the surge in fears about risk, but also continuing worries that China will slow too quickly. That fear helped Asian markets to fall by 5%-7% last week, double the falls in Europe and the US. The Financial Times Lex column on Saturday wondered if the flow of positive news from the factories of Asia, the US and Europe (strong output, orders, falling inventories and rising exports and imports in many cases), might be a case of factories being “the lagging indicator” in not picking up on slowing demand.
US bank watch: Only one bank fell over in the US on Friday, a tiny one-branch bank in Minnesota. That’s 73 so far this year. And it underlines another notable development: for the first time in the 76-year history of the key regulator, the Federal Deposit Insurance Corporation, the number of banks insured by it had fallen under 8000. Two decades ago, the FDIC insured more than 16,000 institutions. At the end of March, that was down to 7932 institutions. At the end of last week it was approaching 7900 after the flood of failures in April and this month so far. Forty one FDIC-insured institutions failed during the March quarter, while 37 institutions were merged into other charters. Only three new banks were chartered in the quarter, and all new banks started to acquire failed banks. The number of insured commercial banks and savings institutions on the FDIC’s “problem list” increased 10% — 702 to 775 — during the quarter, and total assets of problem institutions increased from $US403 billion to $US431 billion.
Spanish bank watch: The fallout among Spain’s 45 regional banks went up a notch at the weekend when the central bank took control of CajaSur (owned by the Catholic Church) after management took too long to complete a merger ordered last July. Spain’s big banks, like Santander, are well capitalised, but the smaller domestic groups or Cajas are struggling with huge property relate debts, low capital and dwindling business. It is the second domestic bank to go bust or being forcibly taken over in the past year or so.
Spanish banks 2: Spain has set aside €99 billion to help recapitalise and slim down the sector, which accounts for roughly half the Spanish banking market. CajaSur had assets of about €19 billion and lost €596 million loss last year. The special bailout fund will inject €500 million into the bank to stabilise it. The Bank of Spain wants the 45 banks to become 15 by the middle of the year. About a third have already merged with another bank. According to the Bank of Spain, the 45 Cajas had assets last year of $US1.8 trillion, about half of which were in the property sector, which has collapsed. An estimated $US500 billion-plus are in non-performing or defaulted loans to property, or roughly more than half all property-related loans.
California dreaming: Local governments in the state have already started thinking of ways of taxing marijuana if possession becomes legal later this year. Now LA City Council has decided to start an even newer trend, getting police to book stationary objects, or foreclosed houses that fall into disrepair. Banks and other lenders who have taken possession of tens of thousands of houses across LA, will have 30 days to improve the look of the house before the fine of $US1,000 a day becomes due. The maximum fine of $US100,000 could be more than the value of the house in some parts of LA.