Daily Sources 10/30

1. Daniel Gros and Stefano Micossi argue that until the European Union introduces bonds denominated in euros backed by all euro-member states, the

"US will continue to dictate the agenda in international monetary affairs .... To add insult to injury the US government is now paying 2-3 percentage points less on its short term debt than even the most virtuous EU member states."

2. Phil Izzo at Real Time Economics reports that the majority of economic analysts think that the economy will begin to recover in the second half of 2009, assuming further stimulus and citing Abiel Reinhart at JP Morgan Chase, Macroeconomic Advisors, Richard Moody at Mission Residential, and David Greenlaw at Morgan Stanley.

3. Shobhana Chandra of Bloomberg reports that GDP contracted by 0.3% year over year in the third quarter.

"GDP was forecast to drop at a 0.5 percent pace in the third quarter, according to the median forecast of 75 economists surveyed by Bloomberg News. Estimates ranged from a 1.2 percent rate of expansion to a contraction of 1.9 percent."

4. Yesterday the Federal Market Open Committee decided to reduce the federal funds rate by 50 basis points (0.5%) to 1%: "the Committee expects inflation to moderate in coming quarters to levels consistent with price stability." The Fed also opened dollar swap lines with the the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore. The decision was made in order to allow dollar purchases outside of the international currency markets, " to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies," and which had been part of the reason behind the huge rise in the dollar. The move affords for some emerging markets the same mitigation abilities it had extended to the developed markets and for which it had therefore been criticized. The swap lines were extended earlier to the Reserve Bank of Australia, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Reserve Bank of New Zealand, the Norges Bank, the Sveriges Riksbank, and the Swiss National Bank. In a coordinated move reported by Mark Landler at the New York Times, the IMF has anounced it will lend as much as $100 billion to emerging markets with healthy economies stressed by current credit crisis. Landler suggests that the countries that qualify include the countries which just received the new swap lines from the Fed.

5. Grant Smith at Bloomberg reports that consultants Petrologistics released preliminary data suggesting that OPEC supply increased in October by 0.5% to 31.85 mb/d from 31.7 mb/d. Evidently, Angola and Iraq, both of which until the October 24 meeting had no production quotas--now Angola does--increased production during the month. Angola's shipments crept up to 1.995 mb/d from 1.805 mb/d. Iraq's crude shipments were up to 2.315 mb/d in October from 2.145 mb/d.

6. Edward Cody at the Washington Post reports that Sarkozy has submitted a budget which increases the military budget of that country by an average of $1.8 billion per annum through 2014. The bill would provide the French military $230 billion for the period.

"Defense Minister Hervé Morin said the decision illustrated Sarkozy's determination, even amid financial turmoil, to conduct activist policies in Afghanistan, Africa and other trouble spots around the globe.
...
Morin said the expenditures also will permit France's defense industries to remain competitive. 'France is among the three or four biggest countries when it comes to the arms industry,' he said. 'I did everything so that we can maintain those industrial icons and the 350,000 jobs they generate in France.'"

7. Blaine Harden at the Washington Post reports that Japan has announced a new stimulus package for the economy of $275 billion. The stimulus package mostly comes in the form of tax breaks, though $20 billion will be send directly to families. A familiy of four will receive a check for $600.

8. David Osler at Lloyd's List reports that British shipping employers and employees have agreed to designate the Gulf of Aden a "warlike operations area," a move which will have the effect of doubling the pay of ships operated out of the UK near Somalia. This does not seem likely to help the British industry at a time when shpping rates are tanking.

9. Ambrose Evans-Pritchard at the UK Telegraph reports that trouble in the shipping industry is beginning to have an effect upon the finances of the country.

"It is also beginning to cause strains in Greece, where the yield spread between Greek 10-year bonds and German Bunds rocketed to a post-EMU record of 123 basis points yesterday.
...
[T]his is the first time its debt has broken its tight linkage with Italian bonds – which traded at spreads of 100 yesterday. The markets are now clearly singling out the country as the most vulnerable of the EMU members.
...
'Shipping has overtaken tourism to become the country's biggest industry. They get their finance from other countries, so I think there are going to be a lot of worried bankers in London,' [Chris Pryce, a director of Fitch Ratings,] said.
...
Greek shipping families control a third of the global freight market for bulk goods, with operations split between London and Pireaus.

Mr Pryce said Greek banks had expanded rapidly in the Balkan region and Turkey, with heavy exposure to Serbia and Macedonia. "They saw this as a growth region, but they may be thinking differently about it now," he said."

The article is well-worth reading in its entirety. (h/t Yves Smith at naked capitalism)

10. The EIA yesterday released This Week in Petroleum reporting the stocks of crude ending October 24 were up 0.5 million barrels and a little bit above the historical range. Gasoline stocks fell 1.5 million barrels putting them back at the very bottom of the historical range.

11. The AFP reports that UK Prime Minister Gordon Brown has embarked on a mini-tour of the Gulf States to encourage them to participate more fully in the IMF and its financial stabilization efforts.

12. Venezuelan Oil Minister Rafael Ramirez reportedly said that OPEC would need to cut its production quota again at the next meeting. Chavez said he would support a second cut in Ecuador on Tuesday.