Daily Sources 4/1

1. Michael D. Shear at the Washington Post reports that Russia and the US released a joint statement today after a closed-door meeting in which the two countries pledged to begin work on a new treaty to reduce offensive nuclear weapons to replace START.

"The Presidents decided to begin bilateral intergovernmental negotiations to work out a new, comprehensive, legally binding agreement on reducing and limiting strategic offensive arms."

President Obama told reporters after the meeting that he plans to visit Moscow in July.

"The statement reflects a desire by both nations to put more pressure on Iran to end its pursuit of nuclear weapons. While giving a nod toward Iran's claim that it is developing a civilian nuclear program, the document puts the Russians on the record calling on Iran to implement UN Security Council resolutions regarding the confirmation of its nuclear capabilities and intentions.

'Iran needs to restore confidence in its exclusively peaceful nature' the document says."

Worth reading in full.

2. Edward Hugh at Russia Economy Watch reports that VTB Bank's Russian PMI rose slightly to 42 in March from 40.6 in February.

"'Stocks of unsold goods declined which, combined with a sluggish contraction of the new business sub-index, suggest that the headline index may keep rising into the second quarter,' Dmitri Fedotkin, a VTB economist, said in the statement. Still, 'no sharp recovery' in the index is to be expected."

3. Reuters reports that Eurostat released data today showing that unemployment in the eurozone rose to 8.5% in February from 8.3% in January.

4. President of France Nicolas Sarkozy has a piece in today's Washington Post in which he argues that a primary prerequisite to resurrecting global economic growth is to reform its financial regulatory structure.

"This week we must attach the same sense of urgency to the regulation of financial markets. World growth will be all the stronger for being sustained by a stable, efficient financial system and by the kind of renewed confidence in the markets that would enable resources to be better allocated, encourage lending to pick up again and foster the return of private investment capital to developing countries.

We agreed in November that not one financial player, institution or product could be beyond the control of a regulatory authority. This rule must be applied to credit rating agencies, speculative investment funds and tax havens. On the latter point, I want us to go far indeed, adopting a resolution that identifies tax havens and that details the changes we expect from them and the consequences should they fail to respond. The debate on tax havens initiated by the Washington summit has begun to bear fruit, particularly in Europe.

We must reform the required disclosure standards and levels of prudential oversight for financial firms. Sadly, in many countries, this issue has not been getting the attention it deserves."

Well worth reading in full. Tony Czuczka and Mark Deen at Bloomberg report that Sarkozy and German Chancellor Angela Merkel appeared together in a news conference to call for better financial regulation and general reform. Meanwhile, Mure Dickie at the Financial Times reports that Japan's Prime Minister Taro Aso dismissed Merkel's concerns about excessive public spending to address the crisis in an interview with the newspaper.

"Because of the experience of the past 15 years, we know what is necessary, whilst countries like the US and European countries may be facing this sort of situation for the first time. I think there are countries that understand the importance of fiscal mobilization and there are some other countries that do not–-which is why, I believe, Germany has come up with their views."

5. Ben Blanchard at Reuters reports that China's President Hu Jintao and French President Nicolas Sarkozy will meet on Thursday in order to repair ties which have been frayed by a series of disputes, including French rhetorical support for the Dalai Lama. A joint statement of the two countries hosted by the Chinese Foreign Ministry's website said:

"Both sides reaffirm the high importance of Sino-French relations and are willing to strengthen the all-round strategic partnership on the basis of mutual respect and paying attention to each sides basic interests.
...
On the basis of this spirit and the principle of not interfering in internal affairs, France refuses to support any kind of 'Tibet independence'."

6. Bettina Wassener at the New York Times reports that the Tankan survey in Japan--a quarterly poll conducted by the Bank of Japan which measures the sentiment of manufacturing--fell to -58 in March from -24 in December. Exports in South Korea fell by an annual rate of 21.2% in March; imports fell by an annual rate of 36%. In addition, the CLSA China PMI fell to 44.8 in March, down from 45.1 in February. (Readings below 50 implies contraction, above 50 implies expansion.)

7. Jonathan Nonis at Platts reports that March bunker fuel sales are expected to rise 10% from February, but fall 5% year over year. Since the Singapore bunker fuel numbers are reported in a monthly weight as opposed to daily volume measure, the monthly increase is mostly explained by the fact that March has about 10% more days than February. Bunker fuel is an indicator of shipping volumes as it is a primary marine fuel.

8. Fausta Wertz at The Compass reports that although Venezuela has been a signatory to the ICC since 1998, Hugo Chávez said in Doha today that the ICC "has no power to make a decision against a sitting president, but does so because it is an African country, the third world." Chavez invited Sudanese President al-Bashir to visit Venezuela, saying

"Today I talked to al-Bashir and I asked him what risks does he run when he travels around here. I invited him to Caracas but told him, 'I hope you don't have any problems over there'."

Carlos Camacho at Platts reports that following Doha, Chávez will visit China and then Japan, where he will sign a loan agreement with the Japan Bank for International Cooperation for $1.5 billion to expand Venezuela's El Palito and Puerto La Cruz refineries.

9. The Associated Press reports that the Kuwait Stock Exchange halted trading in 36 companies because they had failed to meet the deadline for providing financial results. Two of Kuwait's largest firms, Global Investment House and Investment Dar, are of the number.

"The state-owned Kuwait News Agency reported March 24 that the country’s 99 investment companies lost nearly $32 billion between August and January, a third of what those companies once owned.

Global and Investment Dar have faced some of the biggest challenges. Global has been in negotiations with creditors for several months after announcing in December that it had defaulted on about $3 billion in debt."

10. Charles Levinson at Real Time Economics reports that the Israeli central bank Gov. Stanley Fischer said in an interview yesterday that:

"Monetary policy will continue to be expansionary until there are signs of inflation. We’re doing very expansionary things now, and we’re going to have to be prepared to undo them when the economy starts recovering."

The bank expects Israeli GDP to contract by 1.5% in 2009.

11. Jens Erik Gould at Bloomberg reports that Mexico will seek for a $47 billion credit line from the IMF.

"Mexican Finance Minister Agustin Carstens, speaking at a news conference today in London, said the lending facility would 'bullet proof' the country’s financial position."

The government is seeking the credit line as a measure of insurance, and may choose not to use it.

12. The Associated Press reports that a Mexican gang was captured which was being paid by US refiners to steal oil from Pemex and smuggle it into the US for processing. (Believe it or not.) The refiners involved were not named. US authorities assisted in the year long investigation leading to the gang's capture.

13. Brad Setser at Follow the Money reports that global foreign exchange reserves are shrinking, mostly because surplus tax receipts are declining on shrinking economies. Setser produces a graph showing that foreign dollar holdings are growing much more slowly.

"A chart of central bank purchases of Treasuries against reserve growth shows that central bank purchases of Treasuries soared even as dollar reserve growth fell. That can only go on for so long."

Given that tax receipts continue to fall--meaning that the US will need to finance its sovereign debt domestically. Meanwhile, Yu Qiao, professor of economics at Beijing's Tsinghua University, has an opinion piece in yesterday's Financial Times which notes that if the "bond bubble" bursts, it is the Asian governments which will suffer most.

"The provision of stable, reliable and viable dollars may be subordinated to short-term US interests, posing a risk to global monetary stability. In the long term, America may seek to resolve its economic mess by devaluing the dollar at best and a default at worst. This is depicted in a Chinese proverb: 'Drinking poisonous liquid to quench thirst.' History points to examples such as the collapse of the Bretton Woods system in the early 1970s. It is the foreign holders of US obligations denominated in dollars that would end up paying."

Qiao suggests that a solution to this dilemma is to take Asian dollar savings and use them to invest in US businesses, and presumably, real estate. But, given a lack of familiarity with "cultural, legal and regulatory issues in US businesses" and market turbulence, Asian investors are reluctant to enter the market. Qiao suggests that Asian nations could pool a proportion of their treasury holdings to convert them into equity investments in the US. The US would be called upon the guarantee the investment and the Fed would arrange a special account to ensure the Asian pool has liquidity. Qiao concludes,

"Conventional Keynesian policies – fiscal and monetary expansion on a national basis–-cannot solve the problem but will make it worse."

Well worth reading in full.

14. Sudeep Reddy at Real Time Economics reports that the Institute for Supply Management's PMI rose slightly to 36.3--the third consecutive increase.

"The headline purchasing managers index only needs to top 41.2 to indicate expansion of the overall economy (beyond manufacturing). So the improvement in new orders, if it remains on track, would suggest that the economy stops contracting and returns to growth sometime in the third quarter. Could forecasters’ expectations for a mid-2009 turnaround actually be right?"

15. Jack Healy at the New York Times reports that a report from ADP and Macroeconomic Advisers estimates that the private sector lost 742,000 jobs in March. The Labor Department publishes the official report on Friday.

16. Nick Bunkley at the New York Times reports that automobile sales by Ford and Volkswagen continued to fall in March. Ford reported today that sales fell by 41% in March on an annual basis, though its share of the market is its highest since December 2006. Volkswagen announced its sales fell by 20%. Other carmakers are expected to announce their sales figures later today.

17. The EIA reported today that crude oil stocks grew by 2.8 million barrels in the week ended March 27 to 359.4 million barrels, still below the high seen 15 years ago of 362.2 million barrels on July 16, 1993. According to a Bloomberg survey, analysts had expected a 3 million barrel build. Gasoline stocks grew by 2.2 million barrels to climb above the historical range for this time of year and against Wall Street expectations of a 1.5 million barrel draw. Distillate stocks also rose by 300kb and are currently well above the historical range for this time of year, staying roughly level when typically stocks will have been drawn down by 20 million barrels by now. Taken in isolation, the news should be bearish on the price of crude.