Daily Sources 2/4

1. Keiko Ujikane and Kyoko Shimodoi at Bloomberg report that Makoto Utsumi, a former vice finance minister for Japan, hinted in an interview last week in Tokyo that the G-7 was likely to reinstate calls for the renminbi to trade more freely in their meeting in Rome next week.

"Finance ministers and central bankers from the G-7 nations gather on Feb. 14 in Rome. In April, the group said they 'encourage' further appreciation of the yuan, language that was omitted an from October statement."

2. Eurointelligence reports that the EU has warned the US that it will pursue legal remedies should the buy American provisions of the stimulus bill become law.

3. Eurointelligence reports that Paris has decided to offer unlimited guarantees for exports to China, India and Brazil. The guarantees act as partial or full insurance against payment default on the import contract. Though Eurointelligence has a snarky take on the move, it occurs to me that if letters of credit have become difficult to obtain in the shipping industry (see Daily Sources 1/8 # 20 for a recent indication that this is the case), then these guarantees might represent a reasonable way to resurrect trade being put on hold due soley to tight credit requirements being driven mostly by the liquidity concerns of financial institutions. (Export guarantees were removed for exports to Russia, Nigeria and Morocco.)

4. Edward Hugh has a long post on spiking unemployment and falling consumption in Spain at Fistful of Euros. Courtesy of Hugh:



Hugh provides a slew of data demonstrating that the downturn in Spain will be long and deep, but that Spanish consumers still expect inflation. He concludes that it is likely to enter a deflationary period more intense than was seen in Japan.

"When [Spain’s Economy Secretary David] Vergara was asked about whether falling inflation would make it more likely that the European Central Bank would cut rates at its meeting next week, he replied: 'We are convinced the ECB will take all available data into consideration and act accordingly.' But the point is, if we are entering deflation here, and looking at the rate of contraction in the economy, which I am forecasting will be in the region of 5% of GDP this year, we certainly are. And Spanish deflation is likely to be much deeper than anything Japan has experienced, due to the severity of the contraction, which means that what we should be talking about is not simply a half point, or three quarter point, trimming in the ECB repo rate, what we should be asking for is the immediate introduction of Quantitative Easing, but Spains leaders are a long, long way from accepting this reality, and when they do finally accept it it will, unfortunately be too late to find any kind of rapid exit strategy. The issue is expectations. Spanish people still have inflationary expectations, but this will turn, and expectations will change to the anticipation of price decreases, postponement of consumption, and when we do reach this point it will be the devils own work to get them out of that pit."

Worth reading in full, though quite long.

5. The AP reports that Bulgarian foreign minister Ivailo Kalfin said in a TV interview today that Sofia wants to renegotiate its natural gas contracts with Gazprom to reduce the number of intermediaries which deliver gas to the country to one from three. The interview was given just prior to leaving on a state visit to Moscow led by Bulgarian president Georgi Parvanov.

6. Candace Rondeaux at the Washington Post reports that the Taliban has destroyed an iron bridge near Peshawar, effectively shutting off the main supply line to NATO forces being employed by US quartermasters. Marla Dial at Stratfor has a podcast reporting that US General Craddock said Monday that NATO member states were free to discuss opening supply routes for forces in Afghanistan with Iran. (Registration required.) Prior the primary alternative supply route under discussion was via Russia, through Kazakhstan, to Uzbekistan, and onwards Afghanistan. (see Daily Sources 1/21 #1) Meanwhile, George Friedman, the CEO of Stratfor, has an op ed in the New York Times which frames the geostrategic question of supply in terms of Moscow's probable unwillingness to permit supply through its borders without some sort of assurance that NATO will not expand further in Eastern Europe. What he leaves unanswered is a) why it is in US--or NATO--interests to expand NATO and b) why any such interests trump the clear US and NATO interest in integrating Moscow into its defensive framework. That said, it is interesting that some advocates of rapprochement with Tehran have picked up this meme of Iran being a potentially critical partner in resisting Russian encroachment in Central Asia. I personally think that concern is overblown, given that Russian demographics will undermine, on their own, any truly expansionist policy--though certainly Moscow will try and strengthen its influence in the region. It seems to me that the regional balance of power is being slowly upset from other directions, even if with less bluster, and as a result of historical trends as opposed to policy.

7. Nariman Gizitdinov at Bloomberg reports that Kazakhstan has devalued the tenge by 18%, abandoning attempts to shore up the currency. On February 2, the government agreed to bail out its largest bank--BTA--exchanging 251 billion tenge for 78% of the company's shares. Astana has reportedly offered OAO Sberban, Russia's largest bank, half of its new stake.

8. Eric Watkins at the Oil & Gas Journal reports that in a state visit to Japan, Indonesian Vice-President Jusuf Kalla has reiterated Jakarta's determination to prioritize natural gas for domestic consumption against exports.

"I have spoken to the Japan Bank for International Cooperation (JBIC) that we will help Japan (meet their gas demand) as long as (the transactions) are under a win-win solution," Kalla said.

"We need gas for domestic consumption, but we also need to export gas for foreign exchange reserves," said Kalla who did not detail Indonesia's plans to export gas to Japan this year."

Jakarta wants to utilize gas for domestic power consumption in part due to environmental concerns, but largely due to a desire to export crude oil as opposed to natural gas. Oil is currently a considerable part of its power generation consumption mix, and gas can additionally be used to boost the production of oil fields via reinjection. The shift in priorities had raised alarm bells in Tokyo because they have long depended on natural gas imports from Indonesia for power generation--and because their long term contracts were originally made at what were, for the time, generous contract terms. However, the dilemma may, in part, be resolved over the course of the year by new LNG plants being commissioned, which has caused some to argue that the US will face a natural gas glut. (see Daily Sources 2/2 #11)

9. Peg Mackey and Alex Lawler at Reuters report that an OPEC source told them in an interview that OPEC may well cut another 1 mb/d in the upcoming meeting scheduled for March 15.

10. Grant Smith at Bloomberg reports that Saudi Arabia has raised the price of all crude grades for export in March.

"Saudi Arabia bolstered the cost of its Arab Light crude for US customers by $3/b to a premium of $1/b to the West Texas Intermediate benchmark. For buyers in Asia, it was increased 70 cents to a 25 cent premium to Oman and Dubai crude. In northwest Europe Arab Light was raised $1.70 to a discount of $3.75 against Brent crude."

Prices for Arabian Heavy to US customers were raised the most, by as much as $4.70/b.

11. Juan Cole at Informed Comment posts that according to statements made to the Iraqi Media Center, Prime Minister Nuri al-Maliki said, "The new US Administration has sent messages on its plans to withdraw the US forces ahead of the agreed upon schedule which is something we consider to be good." Meanwhile, Ernesto Londoño at the Washington Post reports that there have been serious allegations of election fraud committed by the Iraqi Islamic Party in Anbar province.



Voter turnout in Anbar was 42%, among the lowest in the country. The Iraqi Islamic Party currently holds 26 of 29 seats in the provincial council.

12. Elzio Barreto at the Reuters reports that Santander, JPMorgan, and HSBC have been hired to manage the sale of 10 year bonds by Petrobras to the international capital markets. On January 28, the CEO of Petrobras asserted that the cost of credit was too steep for the company to, at this stage, issue new bonds, saying "We don't need more funds." (see Daily Sources 1/28 #11)

13. Craig Whitlock at the Washington Post reports that Chancellor Merkel has strongly criticized the Pope's decision to rescind the excommunication of four bishops, given that one is a holocaust denier and doing so gives the impression that denial of the holocaust is tolerable. Merkel told reporters that, "The pope and the Vatican should clarify unambiguously that there can be no denial and that there must be positive relations with the Jewish community overall." Benedict XVI is of German descent.

14. Nick Bunkley at the New York Times reports that new vehicle sales fell by 37% in January. Hyundai and Subaru reported sales increases. Chrysler sales fell by 55%. GM sales fell by 49%; Ford: 40%; Toyota: 32%; Nissan: 30%; and Honda's sales fell by 28%.

"In general, carmakers and analysts expect sales this year of 10 million to 11 million vehicles, down from 13.2 million in 2008. Until last year, automakers had been selling about 17 million vehicles annually for nearly a decade."

For the first time last month, more cars were sold in China than in the US.

15. Phil Izzo at Real Time Economics reports that ADP released data today suggesting that the private sector lost 522,000 jobs in January. The Bureau of Labor Statistics is set to announce its unemployment data on Friday. ADP does not include public sector employment in its numbers, which is some cause of different unemployment projections from the more complete BLS reports.

16. The EIA reported today that crude stocks grew by another whopping 7.2 million barrels to 346.1 million barrels for the week ended January 30, above the historical range, but just a bit below the most recent high in 2006 of 352.6 million barrels. A Bloomberg survey of Wall Street analysts had expectations of a 3 million barrel build. Gasoline stocks built by 300 kb, are near the top of the historical range, and versus analyst expectations of a 800 kb build. Distillate stocks fell by 1.4 million barrels, but are still above the historical range. Linda Rafield at Platts reports that crude stocks at Cushing, Oklahoma, the nominal delivery point for CL contracts, grew by 832 kb to 34.335 mb. Stocks were at 17.88 million barrels above last year's levels. Taken in isolation, the news is very bearish for price.

17. Jim Tankersley at the Los Angeles Times reports that Steven Chu, Secretary of Energy, said in an interview that global warming could have dire consequences for California if it is not arrested. In the worst case scenario, 90% of the Sierra snowcap could disappear, severely cutting the supply of water to Californian cities and farms. Water shortages brought on by global warming would be seen throughout the American West and Upper West according to Dr. Chu. Worth reading in full.