Daily Sources 11/6

1. Ashley Seager, Julia Finch and Jill Treanor at the UK Guardian report that the Bank of England has cut its benchmark lending rate by 1.5%, or 150 basis points, to 3%. Real Time Economics has posted a copy of the entire text of European Central Bank President Jean-Claude Trichet's statement announcing a cut in its benchmark lending rate by 0.5%, or 50 basis points, to 3.25%.

"Looking forward, recent sharp falls in commodity prices, as well as the ongoing weakening in demand, suggest that the annual HICP inflation rate will continue to decline in the coming months and reach a level in line with price stability during the course of 2009. Depending, in particular, on the future path of oil and other commodity prices, some even stronger downside movements in HICP inflation cannot be excluded around the middle of next year, particularly due to base effects. These movements would be short-lived and therefore not relevant from a monetary policy perspective. Looking through such volatility, however, upside risks to price stability at the policy-relevant horizon are alleviating. The remaining upside risks relate to an unexpected increase in commodity prices, as well as in indirect taxes and administered prices, and the emergence of broad-based second-round effects in price and wage-setting behavior, particularly in economies where nominal wages are indexed to consumer prices. The Governing Council calls for these schemes to be abolished. It is imperative to ensure that medium to longer-term inflation expectations remain firmly anchored at levels in line with price stability."

Elena Logutenkova and Joshua Gallu at Bloomberg report that the Swiss central bank cut its benchmark lending rate by 0.5%, or 50 basis points, to 2% from 2.5%.

2. Shannon D. Harrington and Abigail Moses at Bloomberg report that the DTCC data on the net institutional exposure to credit default swaps--which showed that several governments were among the most exposed--is incomplete. The report doesn't include privately-negotiated and tailored bilateral credit default swaps designed to guarantee specific collateralized debt obligations. I'm guessing that private institutions will be more exposed to bespoke CDSs than national governments.

3. Phillip Lane, Professor of International Macroeconomics at Trinity College Dublin and CEPR Research Fellow, at VoxEU argues that Iceland should leap at the chance to join the EU. Also, as I suggested as a possibility in an earlier post, he urges that the prerequisite economic criteria for monetary union be loosened in order to allow for its speedy accession:

"The current crisis also raises questions about the appropriateness of the 'exchange rate stability" criterion in determining whether a country is ready to join the euro area. Under the existing rules, a country must spend two years inside the ERM II mechanism before it can enter the EMU. Recent weeks have shown that even countries with excellent macroeconomic fundamentals are vulnerable to major currency shocks. In this new environment, it seems expensive to impose a two-year currency stability test on countries that wish to join the euro."

4. Jesse’s Café Américain has come commentary on an interview with Marc Faber conducted by swissinfo where he predicts that the United States will default. Faber is a fairly renowned Swiss investor who tends to a contrarian take on the world economy and whose predictions are usually only of the pay-per-view sort, and so all public comment should be viewed with some skepticism. Either way, worth reading.

5. Tom Barkley at Real Time Economics reports that the IMF predicts a global recession for 2009. The IMF expects the global economy to slow to 3.7% this year and 2.2% in the next. The organization defines anything below 4% global growth as recessionary.

"Forecasts for emerging and developing economies were adjusted even more sharply, with the 2008 growth estimate falling to 6.6% from 6.9% and the 2009 forecast dropping to 5.1% from 6.1%.

'Among the most affected are commodity exporters, given that commodity price projections have been marked down sharply, and countries with acute external financing and liquidity problems,' the report said, while noting that China and other countries in East Asia are generally in better financial and economic shape.

China’s 2008 forecast was left unchanged at growth of 9.7%, while the 2009 estimate was cut to 8.5% from 9.3%."

6. Brad Setser at Follow the Money argues that China is heading into a serious downturn.

"Absent the close to 3% contribution from net exports in the boom years, China’s growth would have been a (respectable) 9% rather than above 11%. With a negative 3% contribution to growth during the boom (as is often the case), growth would have been close to 6%. And if net exports turn negative now China’s growth clearly would slow sharply.

But the real key to forecasting China’s future growth consequently is determining whether domestic consumption and above all investment will continue to grow strongly in the absence of strong export demand.
...
The (likely) fall in construction is particularly worrisome. China’s new capital intensive export sectors haven’t been huge job generators. Building buildings by contrast employs lots of people – including a lot of migrants from rural areas."

Well-worth reading in full.

7. Edward Wong at the New York Times reports that the President of Taiwan, Ma Ying-jeou, decided to meet with the People's Republic of China's senior Taiwan negotiator, Chen Yunli, today. The meeting is one of the highest ranking meetings to take place since the end of the Chinese Civil War in 1949. Mr. Chen is in Taiwan for five days of talks and signed a slew of agreements increasing infrastructural links between the two countries yesterday. The meeting between Mr. Chen and the President lasted five minutes. Gifts were exchanged.

8. Nizam Ahmed at Reuters reports that Myanmar has halted oil and gas exploration in the disputed offshore areas which has precipitated a naval confrontation with Bangladesh. Today the Chinese government called upon both governments to solve the problem amicably. However, Myanmar has not ordered its vessels out of the area, saying that the area is in their exclusive economic zone and that exploration will resume shortly.

9. Grant Smith at Bloomberg reports that the IEA released the executive summary of its World Energy Outlook--due to be released on November 12--said that it expects oil prices to average $100/b between 2008 and 2015. The IEA urged the removal of subsidies:

"The removal of energy subsidies, which last year totaled $310 billion in the 20 largest industrializing countries, 'could make a major contribution to curbing energy demand and emissions growth.'"

Unfortunately, this is very difficult to do politically in some of the fastest growing and largest consumers, members of OPEC like Saudi Arabia and Iran. It is also an extremely painful action to take for countries like China and India to take, where small increases in petroleum product prices put the products out of reach for significant portions of the population. The organization also forecasts that Saudi Arabia will be producing over 15 mb/d of oil to the world in 2030, which is rather difficult to see happening. (It is often hard to decide what to make of IEA--or EIA or OPEC for that matter--pronouncements, given that one's wishes for oneself are often the best indicator of one's beliefs.)

10. Vladimir Soldatkin at Reuters reports that the Russian tariff agency has cleared a nearly 20% increase in prices for domestic sales of natural gas. Moscow's goal is to remove all subsidies on natural gas by the end of 2011.

11. Anna Driver at Reuters reports that bidding for the construction of the Saudi Aramco ConocoPhilips 400 kb/d capacity export refinery to be based in Yanbu has been halted today. The two companies have rescheduled bidding for the second quarter of 2009, by which time they expect the turmoil in the financial markets to have worked themselves out. This refinery will be built into what many analysts expect will be a glut of refinery capacity in Asia specifically. The Oil & Gas Journal reports that PetroSA--the South African refiner--has secured from the government the go ahead for its $11 billion, 400 kb/d, export refinery in Coega, just outside Port Elizabeth. However, the final decision on whether to construct the refinery is also being delayed until 2010. If it is, it is expected to come on line in 2014.

12. David Osler at Lloyd's List reports that Svitzer, a shipping company which is a subsidiary of Danish conglomerate Maersk, has become the first company to publicly announce it is refusing to sail through the Suez Canal due to pirating issues, sailing the Cape of Good Hope instead.

13. Jihadica provides a sampling of jihadist responses to the election of Barack Obama. An example:

"Al Hakim: "Brother Abu Ahmad al-Salafi, like you I believe that al-Qaeda wants the election of the Republican candidate McCain. But the organization has been quiet until now, when Obama has been elected. There can be only one reason for this: the organization is taking the next step after the success of its previous plan against the wildly stupid Republican Party. The new plan requires a massive effort from al-Qaeda and we are behind it. The Democratic Party is diplomatic and smart.'"

Well-worth reading in its entirety.

14. The Associated Press reports that Iranian President Mahmoud Ahmadinejad congratulated Barack Obama on his victory today, the first time that an Iranian leader has expressed well wishes to a president-elect in the history of the Islamic Republic of Iran. Ahmadinejad encouraged "an approach based on justice and respect, as well as lack of intervention in the affairs of others."

15. Candace Rondeaux at the Washington Post reports that Afghani President Hamid Karzai has called upon President-elect Obama to put an end to air strikes in Afghanistan, a practice held responsible for increased civilian deaths in that country recently.

16. There are several pieces out there recycling rumors on who Obama might choose to lead the President-elect's energy team. Platts mentions Pennsylvania Governor Ed Rendell, Kansas Governor Kathleen Sebelius, Arizona Governor Janet Napolitano, California Governor Arnold Schwarzenegger, "MIT Professor Ernie Moniz, a former undersecretary of energy from 1997 to January 2001; General Electric CEO Jeffrey Immelt; and Dan Reicher, a former assistant secretary of energy for energy efficiency and renewable energy in the Clinton administration who recently joined Google." Schwarzenegger is getting more press than most on the issue, and I suppose he makes sense, given that a Democratic governor would probably follow for California. Given the challenges the United States faces in terms of its energy future, it probably does make sense to put candidates capable of organizing and motivating large numbers of people to accept--and even embrace--uncomfortable changes. Whether or not Schwarzenneger could perform that task, I cannot say, but someone charismatic and politically-tested seems advisable. In a related story, Susan Davis and Greg Hitt at the Wall Street Journal reports that California Rep. Henry Waxman is challenging Rep. John Dingell of Michigan for the chair of the Energy and Commerce Committee. Well-worth reading in full.