Daily Sources 3/5

1. Jana Randow at Bloomberg reports that the European Central Bank cut its benchmark interest rate by 0.5% to 1.5% today. In a separate Bloomberg story, ECB chief Trichet was quoted as saying:

"Inflation rates have decreased significantly and are expected to remain well below 2 percent in 2009 and 2010. That’s due to the fall in commodity prices and diminishing cost pressures reflecting the severe downturn in economic activity. Both global and euro-area demand are likely to be weak in 2009.'

2. Jennifer Ryan and Brian Swint at Bloomberg report that the Bank of England cut its benchmark rate by 0.5% to 0.5%. "The bank said it will pump cash into the economy by purchasing as much as £150 billion ($~ 211 billion) in government and corporate bonds ...." Real Time Economics carried the text of the Bank of England's announcement:

"World activity continued to weaken, reflecting both depressed confidence and the persistent problems in international credit markets. In the United Kingdom, output dropped sharply in the fourth quarter of 2008. That reflected lower consumer spending, a further fall in business investment and a rapid run-down in stocks, in part offset by stronger net exports as the past depreciation of sterling began to take effect. Business surveys continue to point to a similar rate of contraction in the early part of this year. Unemployment has risen markedly. Credit conditions faced by companies and households remain tight.

CPI inflation declined to 3.0% in January. The depreciation of sterling is adding to imported cost pressures, but pay pressures continue to wane. Inflation is likely to fall below the 2% target by the second half of the year, reflecting diminishing contributions from retail energy and food prices and the impact of the temporary reduction in Value Added Tax.

At its March meeting, the Committee noted that the February Inflation Report had implied a substantial risk of undershooting the 2% CPI inflation target in the medium term and that a further easing in monetary policy was likely to be needed. Data released since the finalization of the Report had not materially altered that prospect. Accordingly, the Committee concluded that a further easing in the stance of monetary policy was warranted. But the Committee also noted that a very low level of Bank Rate could have counter-productive effects on the operation of some financial markets and on the lending capacity of the banking system. On balance, the Committee decided to reduce Bank Rate by 0.5 percentage points, to 0.5%."

Worth reading in full. Brian Knowlton at the New York Times reports that at his address of US lawmakers UK Prime Minister Gordon Brown said, "Let me say that you now have the most pro-American European leadership in living memory." It was also reported elsewhere that he couldn't think of anything at all that would break the special relationship between the US and the UK, ever.

3. Eurointelligence reports that German industrial orders were down 42% year over year in January.

"Domestic orders were 31% per cent lower, foreign orders were down 47%. Month on month, January’s orders were 4.5 per cent lower than in December, on a seasonally-adjusted basis."

4. Gleb Bryanski and Yelena Fabrichnaya at Reuters report that Russia has banned investments by its $83.7 billion National Wealth Fund and $136.3 billion Reserve Fund in foreign government agency bonds.

5. Wendell Minnick at Defense News reports that China has increased its defense budget by 14% from 2008 to $70.2 billion. The budget will account for 6.3% of the total budget, which is a slightly smaller share than what Beijing had budgeted for defense in the past, but that comes on a large total budget increase as a part of the stimulus program.

"'US arms sales to Taiwan remain the main stumbling block, but the Chinese also continue to call for a change in the 2000 NDAA [National Defense Authorization Act] legislation that places limits on U.S.-China mil-mil exchanges,' Bonnie Glaser, Washington-based Strategic and International Studies. 'It is unlikely that US policy in either area will be altered in the near future. This is likely to have an influence on the mil-mil relationship, but exchanges are not likely to remain frozen.'"

(h/t Galrahn at Information Dissemination.) Li Yanping at Bloomberg reports that the People's Bank of China said in a statement prior to a press briefing in Beijing that it will keep the exchange rate "basically stable at a reasonable and balanced level." Premier Wen Jiabao did not announce a specific new stimulus at his address of the NPC as the markets had expected. However, as Ariana Eunjung Cha at the Washington Post reports,

"Wen vowed to 'dramatically increase' government investment, beyond what it had already injected, to counter the sharp slowdown in its economy. Wen predicted that as a result, China's GDP would grow 8% in 2009."

6. Merrill A. McPeak, Air Force chief of staff from 1990 to 1994 and co-chair of Barack Obama's presidential campaign, and Kurt Bassuener, senior associate of the Democratization Policy Council, have an opinion piece in the Washington Post which calls for creating a no-fly zone in Sudan.

"Air power plays a central role in Bashir's military strategy, so establishing a no-fly zone remains the most promising initiative to halt the atrocities in Darfur. During her Senate confirmation hearing, Hillary Clinton acknowledged that such a proposal was under consideration. As a practical matter, imposing control over Sudanese airspace must involve NATO and European Union allies, in particular France, which has a suitable airfield at Abeche, in eastern Chad. Allied air forces could and should provide much of the force structure, principally fighter aircraft, but a US contribution--especially of aerial refuelers and command-and-control aircraft--would be essential. About a squadron of each type of aircraft would be more than enough to end the impunity Sudanese military aviation now enjoys."

I believe the General is right when he says that it would be a relatively simple matter to deny the skies to Khartoum, but what he is calling for is an act of war. Perhaps it should be done, nonetheless. But getting China to agree in the Security Council to such action seems a daunting task.

7. Mark Landler at the New York Times reports that Secretary Clinton has proposed a "big tent" meeting on Afghanistan which would include Iran.

"Mrs. Clinton said this week that Iran could play a useful role in stabilizing Afghanistan, noting that its officials consulted regularly with the United States in the early days of the war to oust the Taliban in 2001."

8. Eric Watkins at the Oil & Gas Journal reports that Venezuela has approved Panama's application to join Petrocaribe."Launched by Chávez in 2005, Petrocaribe now includes 18 countries in and around the Carribbean Sea. Under the initiative, member countries pay 60% of the cost of Venezuelan oil at the time of purchase and can defer the remaining 40% as financing for development projects, repayable over 25 years at a 1% interest rate."

9. Chanyaporn Chanjaroen and John Rega at Bloomberg report that a panel charged with investigating the commodities boom by the International Organization of Securities Commissions concluded in a report that prices were not driven by speculation, but rather by fundamentals.

10. Barry Ritholtz reports that 12% of US homeowners with mortgages are behind in their payments or in foreclosure.