Daily Sources 1/8

1. Ralph Atkins at the Financial Times reports that the European Central Bank does not look set to cut the benchmark interest rate any further.

2. The Bank of England cut its benchmark lending rate by 0.5% to 1.5%. Real Time Economics carries the full text of the bank's statement. Excerpts:

"The world economy appears to be undergoing an unusually sharp and synchronised downturn. Measures of business and consumer confidence have fallen markedly. World trade growth this year is likely to be the weakest for some considerable time.
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CPI inflation fell to 4.1% in November. Inflation is expected to fall further, reflecting waning contributions from retail energy and food prices and the direct impact of the temporary reduction in Value Added Tax.
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[T]he Committee judged that, looking through the volatility in inflation associated with the movements in Value Added Tax, there remained a significant risk of undershooting the 2% CPI inflation target in the medium term at the existing level of Bank Rate."

3. Kevin Rudd, the Prime Minister of Australia, has an opinion piece in the Financial Times which argues that the need to coordinate monetary policy and fiscal stimulus internationally is unprecedented.

"The development of a global response to this crisis is a complex task. The good news is that the Group of 20 summits in Washington last November and in London this April will have created a mechanism for effective, co-ordinated action – bringing together for the first time the main developed and developing economies, which represent between them 85 per cent of gross domestic product, 80 per cent of world trade and two-thirds of the world’s population.

In the immediate period ahead, G20 governments will need to work out the quantum of stimulus necessary for 2009 to offset the anticipated contraction in the private economy and the consequential impact on unemployment; to agree on the optimal content of stimulus policies to balance short and long-term economic needs; to co-ordinate the implementation of these measures; and to develop a medium-term exit strategy to ensure that surviving this crisis does not shackle us with long-term inflation."

Well worth reading in full.

4. Jann Bettinga and Oliver Suess at Bloomberg report that Commerzbank will receive a second bailout from Berlin, less than three months after the first. The bank, Germany's second-largest, will receive €10 billion (~$13.7 billion) from the government in return for 25% of its shares, plus one. It received €8.2 billion last November (~$10.4 billion at that time.)

"The capital injection will boost the combined Commerzbank- Dresdner Bank’s core capital ratio, a key measure of solvency, to about 10 percent, Commerzbank said. Germany’s bank-rescue fund, called Soffin, will buy 1.8 billion euros of Commerzbank shares and provide the rest of the money as a loan."

5. Edward Hugh at Fistful of Euros reports that German exports in November fell "12% year on year, while imports fell 5.6% on the month and 0.9% from a year earlier."

"And problems with indutrial output, emplyment and exports are not the only difficulty facing Germany, since a sale of 10-year bunds yesterday lured the least demand in six months as investors began to show increasing nervousness in the face of the coming flood of government securities, raising the prospect of increased borrowing costs across the European economies.

Investors bid a total of 5.2 billion euros for the bonds on offer, illustrating a reluctance to purchase which prompted the Bundesbank to retain some 32 percent of the securities."

The problem of selling sovereign debt will not be unique to Germany, and likely more critical for emerging markets selling US dollar denominated debt. (see Daily Sources 12/31 #9) Hugh's analysis is helpful, as usual.

6. David Yong at Bloomberg reports that Pacific Investment Management Co. (PIMCO) managing director and co-head of emerging-market investment, Curtis Mewbourne, wrote in a note on the company's website that "Default probabilities for countries like Brazil, Korea, Mexico and Singapore remain very low." Yong summarizes the analysis thus:

"Debt sold by countries with large enough financial reserves to stimulate economic growth and access to support from the Federal Reserve’s $120 billion of currency swap lines will outperform ....
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Pimco is most bullish on countries that have the resources or can borrow to stimulate their economies as exports slump, according to Mewbourne. He highlighted China’s $585 billion stimulus package and Russia’s $186 billion program."

Meanwhile, Lilian Karunungan and Kim Kyoungwha at Bloomberg report that Asian currencies are falling in the face of dropping US demand.

"'The export numbers were shockingly weak,' said Mitul Kotecha, Hong Kong-based head of global currency strategy at Calyon, the investment-banking unit of French bank Credit Agricole SA. 'In an environment where exports are under significant pressure, the authorities will be content to see some depreciation, as long as it’s not a rapid fall.'"

7. Brad Setser at Follow the Money believes that Chinese appetite for US debt has not disappeared but has shifted from a basket of Agencies and US Treasuries to just US Treasuries.

"Looking ahead, China’s official purchases of Treasuries will be function of three things:

1) The pace of China’s reserve growth. That will be determined by the evolution of China’s trade surplus, FDI flows and hot money flows. The World Bank expects China’s current account surplus to rise in dollar terms in 2009; I tend to agree. Oil will not average close to $100 a barrel in 09. The fall in commodity import prices will help to offset a (probably large) fall in exports. The fall in exports implies fewer imported components, and China’s domestic slowdown implies fewer imports too. But FDI inflows will slow and hot money flows clearly have reversed, so overall reserve growth (counting the increase in China’s hidden reserves) should slow.

2) The share of China’s reserves that are held in dollars. That is currently close to 70% best I can tell. I have no idea if China will want to continue to maintain that dollar share even as the US runs huge fiscal deficits. But now that China is pegging tightly to the dollar, I would guess that Europe would put a lot of pressure on China not to sell dollars for euros in a way that drives up the euro. That would be tantamount to driving the RMB down v the euro to support China’s exports to Europe. I consequently don’t expect a big change in the dollar share, but that is a huge assumption.

3) The share of China’s dollar reserves that are invested in Treasuries. That share is currently rising, big time. At some point though China will have brought its Agency portfolio down to an acceptable level and start to worry about the size of its Treasury holdings. So I wouldn’t expect it to rise forever.

Sum it all up and the pace of China’s Treasury purchases should fall from their recent monthly highs in 2009. But that is only because they currently are at such a high level. Even SAFE cannot sustain a close to $70b a month pace of Treasury purchases for all that long. Not unless it really plans to run its Agency portfolio down to zero."

Well worth reading in full. Meanwhile, Tao Wang of UBS argues that the unemployment situation facing China is unlikely to cause civil unrest, suggesting that it is hardly unprecedented.



Wang argues that these job losses are cyclical and not structural as they were in 1998 and that actual unemployment in the early 2000s was in excess of 10% in addition to an estimated 20 million migrant workers returning to the agricultural sector between 1998 and 2002, for lack of jobs elsewhere. He also thinks Beijing is more prepared to face the problem head on now.

Shanghai Stakes reports that vacancy levels for A-level commercial buildings in Shanghai have risen from 5% at the beginning of 2008 to 15.4% now.

"In Pudong, the percentage is as high as 25.6%, up to even 50% in some high-end commercial buildings. The vacancy ratio of commercial office space in Shanghai has been higher than 50% only once before, during the ‘97-‘98 Asian financial crisis.
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Morgan Stanley has also sought to sell property in Shanghai over the last several months, but has yet to find a buyer."

Meanwhile, Nisha Gopalan at the Deal Journal reports that Hong Kong billionaire Li Ka-shing's charitable foundation sold 2/5s of its entire stake in the Bank of China Wednesday. This is just a few days after UBS sold its stake in the company and as the Royal Bank of Scotland looks set to sell its 4.3% holding. (h/t Sky Canaves at China Journal for these last three items.)

Meanwhile, Li Yanping at Bloomberg reports that Chinese exports probably fell by the most in a decade in December, dropping by 5.3% from a year earlier using the median prediction of a survey of economists carried out by the wire service.

8. Winnie Lee at Platts reports that China's Ministry and Land and Resources said that the country's dependence on oil imports is likely to rise to 60% by 2020. Currently imports account for about 50% of China's oil requirement. The ministry expects the country to consume about 500 million metric tonnes of oil annually by 2020, or 10 mb/d. Of that 300 million metric tonnes will need to be imported, or 6 mb/d.

"To enhance supply security, the country has set a goal of discovering about six oil fields with reserves of 100 million mt and between six and eight gas fields with reserves of 100 Bcm.
During the 2011-2015 period, China is targeting a discovery of another 10 oil fields with reserves of 100 million mt and eight to 10 gas fields with reserves of 100 Bcm, the ministry said in the forecast document."

The story also reports that the Ministry suggests the establishment of strategic oil reserves, by which it is likely meant that the Ministry suggests the establishment of more strategic oil reserves.

9. Shiva Lingam at Platts reports that the strike by India's Oil Sector Officers Association, a union of mid-level oil industry employees, is in its second day and having a significant effect upon petroleum product supply in the country, creating fuel shortages in southern India and for the airlines. Indian Oil Corp. has been forced to shut four out of its seven refineries and military personnel have been sent to "man major oil installations." Production is down 30% at IOC and 50% at Bharat Petroleum Corp. Ltd.--state-owned refiners. This is extremely interesting because India's energy supply security strategy is now fundamentally based on importing more crude than required to produce the domestic petroleum product requirement and then exporting the surplus product. India consumes about 2.5 mb/d of oil, and this strike, if it continues, could have a considerable effect upon global oil prices.

10. Tim Johnston at the Washington Post reports that Kaing Khek Iev, aka Duch--the head of the Khmer Rouge's Tuol Sleng torture center in Phnom Penh, will likely go on trial starting March. Other Khmer Rouge leaders are unlikely to be tried until 2010.

11. Graham Bowley at the New York Times reports that the UN has suspended food shipments to the Gaza strip after a delivery driver was killed in an Israeli attack. Also rockets were fired into northern Israel from Lebanon in response to the Gaza offensive. The UN Security Council is reportedly close to a resolution calling for a cease fire in the strip.

"The break-through was reached after a delegation of high-ranking Arab ministers overcame the reluctance of the United States, Britain and France in calling for the cease-fire, the diplomats said."

Israel welcomed international efforts to secure a "durable" cease fire.

12. The BBC reports that the president of the Vatican Council for Justice and Peace, Cardinal Renato Martino, "accused both sides [in the Gaza conflict] of only thinking of their own interests while innocent people paid the price." In remarks made online, the Cardinal said:

"Defenseless populations are always the ones who pay. ... Look at the conditions in Gaza: more and more, it resembles a big concentration camp."

Relations between the Vatican and Israel have reportedly been strained recently as the Pope has made clear that he wants to beatify Pope Pius XXII. Pius XXII was Pope during WWII and is widely accused of having turned a blind eye to the holocaust. Meanwhile, Sameer N. Yacoub at the Associated Press reports that Muqtada al-Sadr has called for reprisals on US forces in Iraq in response to the Israeli offensive in Gaza. Al-Sadr is a Shi'a Islamist populist which some link to Iran, though the cleric has explicitly rejected the Khomeini vision of "the guardianship of the Islamic jurist." I regard him as a real threat to the legitimacy of the Iranian government, as I have explained in Law and Revolution in Iran. (h/t Informed Comment for both of these stories)

Former US President Jimmy Carter has an opinion piece in the Washington Post entitled, "An Unnecessary War."An important excerpt:

"[In April 2008, w]e knew that the 1.5 million inhabitants of Gaza were being starved, as the U.N. special rapporteur on the right to food had found that acute malnutrition in Gaza was on the same scale as in the poorest nations in the southern Sahara, with more than half of all Palestinian families eating only one meal a day.
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Palestinian leaders from Gaza were noncommittal on all issues, claiming that rockets were the only way to respond to their imprisonment and to dramatize their humanitarian plight.
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We were unable to confirm [that a truce had been agreed upon in June] in Jerusalem because of Israel's unwillingness to admit to any negotiations with Hamas, but rocket firing was soon stopped and there was an increase in supplies of food, water, medicine and fuel. Yet the increase was to an average of about 20 percent of normal levels."

Well-worth reading in full.

13. Pamela Constable and Candace Rondeaux at the Washington Post report that Mahmud Ali Durrani, the Pakistani National Security Adviser, was fired by Islamabad after admitting in a CNN interview that the evidence provided seemed to show that all 10 gunmen in the Mumbai attacks had roots in Pakistan. Meanwhile, in an interview with Der Speigel,

"[Foreign Minister Shah Mahmood] Qureshi and Pakistan's intelligence chief, Lt. Gen. Ahmed Shuja Pasha, said Wednesday that the country's security forces are subservient to civilian authority and committed to supporting democratic rule. 'It is completely clear to the army chief and I that this government must succeed,' Pasha said of Zardari's administration. 'I report regularly to the president and take orders from him.'"

The intelligence chief had also said that Pakistan has no desire to fight a war with India, wants cooperation with New Delhi, and views terrorism as the real enemy of both. In Afghanistan, Pakistan's foreign minister unequivocally denied that Pakistani government agencies had been involved in the attacks on Mumbai. Well worth reading in full.

14. David Osler at Lloyd's List reports that the US Navy plans to dedicate a task force--to be known as Combined Task Force 151--to anti-piracy duty in the Gulf of Aden. Initially this should mean that some of the ships in Combined Task Force 150, which is part of "Operation Enduring Freedom" or the invasion of Afghanistan and later anti-terror efforts, will be redeployed to CTF 151. Osler quotes a CTF 150 spokesman as saying,

"The primary role of CTF 150 was not to chase pirates, in a nutshell... There are nations who would prefer to stick with CTF 150 and not step outside those paramaters, and there are other nations who would be happy to step outside those parameters, but cannot."

Keith Wallis, also at Lloyd's List, reports that the Aso Administration is working on legislation to change the Japanese Constitution so as to allow it's armed forces to join the anti-piracy effort off the Somalian littoral. The government plans to submit the language to Parliament by March. (Sadly, you need a subscription to read the entire article, but the big news is linked, or so I imagine, given that I have not subscribed.)

15. David Jolly at the New York Times reports that a tentative solution may have been found to the Russo-Ukrainian gas dispute. Alexei Miller, CEO of Gazprom, has agreed to a proposal whereby the company would begin supplying natural gas via the Ukrainian pipeline infrastructure once EU monitors were in place to independently verify the volumes so as to ensure that Ukraine would not siphon off supply. Naftogaz CEO Oleh Dubyna told Reuters, "Naftogaz guarantees it will pump in full the volumes received, on the condition that Gazprom will guarantee and supply technological gas for Ukraine’s gas transit system to function." A certain amount of gas is required to keep the pipeline compressors functioning. Jolly reports that EU monitors could be in place by Friday. José Manuel Barroso, the president of the European Commission, has said that both Prime Ministers Putin and Tymoshenko have agreed "in principle" to the deal and

"If both Russia and Ukraine behave as they say they are behaving, there should be no problem. So we hope that the Russians put the gas into the Ukrainian network and that the Ukrainians do not interrupt the gas from Russia to the EU."

16. Marianne Stigset at Bloomberg reports that Norway's Petroleum Directorate expects crude output to fall to 110.8 million cubic meters, or 1.9 mb/d, in 2009 from 122.7 million cubic meters, or 2.11 mb/d in 2008. Production is expected to fall to 94.4 million cubic meters in 2013, or roughly 1.63 mb/d.

"Norwegian fields 'have a robust economy at $50 to $70 a barrel of oil,” [Bente] Nyland, [head of the Directorate,] said in an interview. 'Should prices fall below $50, without production costs going down, projects may be postponed.'"

17. Ian James at the Associated Press reports that Citgo announced it would continue its program of donating heating oil to the poor in American urban centers Wednesday, after it was announced that the program would be suspended. (see Daily Sources 1/5 #8) I am certainly pleased to hear that Chavez has decided to use Venezuela's oil wealth to continue his aid program to the American poor, but have to wonder how the Venezuelan poor are taking the news.

18. Alexander Kwiatkowski and Alaric Nightingale at Bloomberg report that Citigroup's Phibro LLC has hired a one million barrel capacity tanker to sit off Scotland as storage in order to capture profits from the current giant contango in the oil futures markets.

19. Paula Dittrick at the Oil & Gas Journal reports that ExxonMobil's recent annual Outlook for Energy: A View to 2030 forecast global energy demand to increase at an annual rate of 1.2% through 2030. Two key findings include:

a) "Transportation, currently responsible for more than half of total oil demand, is expected to expand substantially globally. From 2005-30, demand in developed countries is expected to be relatively stable because efficiency improvements will offset demand from an increasing number of vehicles. In contrast, demand for transportation fuels in developing countries will likely more than double." and
b) Oil, natural gas, and coal will continue to provide about 80% of the world's energy needs through 2030 because of their abundance, affordability, and availability."

I must get myself a copy.

20. In other foreboding news about the global economy, Janet Porter at Lloyd's List reports that the shipping industry is still being bogged down by inability to secure letters of credit.

"A great deal of cargo is stuck on the quayside unable to move, according to Inchcape Shipping Services chief executive Claus Hyldager."

Worth reading in full, though the article isn't entirely convincing as to why banks would be so leery of something as fundamental as a letter of credit.

21. Jon Kamp and Jessica Hodgson at Real Time Economics have another gloomy indicator for the prospects of the global economy, Intel's second warning this quarter that it will have received $8.2 billion in the fourth quarter, a 20% drop from the third.

"'If you’re an individual or a corporation, chances are you’re an Intel customer,' BMO Capital Markets analyst Brian Piccioni said. 'The fact that they’re not doing well is a good indicator of broader economic weakness.' ... The fact that a company with the size and reach of Intel has been unable to predict the scale of its problems or to swerve the worst of the downturn, has prompted broader concern about the rest of the economy."

22. Stephanie Rosenbloom at the New York Times reports that December sales in stores that have been open for at least a year--known in the retail industry as "same-store sales"--were down at an annual rate of 0.9% according to Ken Perkins, president of Retail Metrics. (The story does not make explicit whether this is year over year or from the month previous percentage changes.) Retail chains experienced a 2.7% year over year decline in sales in November.

"Sales in November and December are closely watched because they account for 25 to 40 percent of many retailers’ annual sales, according to the National Retail Federation, an industry group."

23. The AP reported that the Labor Department announced that initial jobless claims fell by 24,000 to the seasonally-adjusted number of 467,000 for the week ended January 3. This was less than most economists had expected. However, the number of people who continued to claim jobless benefits grew 101,000, to 4.61 million--the highest number seen since 1982.

24. Nancy Trejos at the Washington Post writes that the American Bankers Association reported yesterday that delinquencies on auto loans and home equity lines of credit rose to 3.25% and 1.15%, respectively, in the third quarter.

"James Chessen, ABA chief economist, said. 'With one million jobs lost in the first three quarters and 2 1/2 million expected for the year, delinquencies of all types of consumer loans will likely increase in the coming quarters.'"

The Association also found that delinquencies on credit card debt dropped 0.34% to 4.2%, which might be because the credit card companies increased the amount of debt they have simply written off. (see Daily Sources 1/7 #17)

25. Andrew Taylor at the Associated Press reports that the Congressional Budget Office estimates the deficit for the 2009 budget will reach $1.2 trillion.

"The $1.19 trillion 2009 figure shatters the previous record of $455 billion, set only last year. It also represents more than 8 percent of the size of the economy, which is higher than the deficits of the 1980s. The 2009 budget year began last Oct. 1."

The CBO estimate does not price in Obama's stimulus proposals.