Monday, May 11, 2009

Daily Sources 5/11

1. GLOBAL BUSINESS SERVICES INDICATORS SHOW SIGNS OF STABILIZATION

In a long and comprehensive post, Edward Hugh at Fistful of Euros reports that the rate of contraction in business services is stabilizing globally in parallel with production manufacturing index indicators.


"The JPMorgan Global Serices Report is based on the results of surveys covering around 3,500 executives in countries which taken together account for an estimated 60% of global service sector output."
Hugh notes that stabilization is not the same as recovery. His post gives some detail on the Eurozone, Spain, Italy, Germany, France, Russia, and the US, where the story is in outline fairly similar, though the devil is always in the details. For example, he touches on price indicators for Europe:
"All eurozone countries reported significant downward price pressures, and these are reflected in producer prices (which fell over 5% year on year in March, lead mainly by energy and commodities) and consumer price disinflation, where year on year price increases were only 0.6% in April, for the second month running."
Worth a look.

2. ICELAND LIKELY TO BEGIN PROCESS OF JOINING THE EU, SEEMINGLY CONFIRMING PREDICTIONS THAT THE CRISIS WILL BROADEN THE UNION

Eurointelligence reports that Iceland's new government has "formally decided to start a process leading to full EU accession, a decision to be backed up a parliamentary vote next Friday."
"The government wants to make a formal request for EU accession by July. The latest polls suggest that over 60% of the population is in favor of accession negotiations, with 27% against."
Given recent analysis which argues that the euro will end up benefiting most from the current debate over whether a new reserve currency is required as an alternative, at this stage it appears that Martin Feldstein's argument that the financial crisis will be a centrifugal force causing member nations to leave the European monetary union--see Daily Sources 1/5 #1--is proving less prescient than Wolfgang M√ľnchau's that it is more likely to enlarge both the eurozone and the EU--see Daily Sources 11/13 #1.

3. POLLING SHOWS THAT MERKEL LIKELY TO HEAD WHICHEVER COALITION ENDS UP WINNING FUTURE GERMAN ELECTION; IN THE MEANTIME FRIDAY CONFERENCE HIGHLIGHTS HOW ABANDONING NUCLEAR WILL INCREASE GERMAN ENERGY DEPENDENCE

Eurointelligence also reports that the likely outcome of the elections in Germany this year will either be a coalition of the Christian Democratic Union and the Free Democratic Party--with a tiny majority--or a "grand coalition" of the CDU and the Social Democratic Party. Eurointelligence notes that Angela Merkel would remain Chancellor in either case. Meanwhile, on May 8 Mark Hibbs at Platts reported that
"Germany's planned phase-out of nuclear power generation will raise the country's natural gas demand between 12.6% and 23% by about 2023, according to a statement on energy security policy submitted to the EU summit in Prague on Friday by the co-ruling Christian Democrats."
The Russo-Ukrainian contract dispute which shut off natural gas supplies to much of Europe at the beginning of the year is expected by many to convince a majority of Germans that the decision to abandon nuclear power was a mistake. Lars Jossefson, CEO of Vattenfall--an electric utility which serves a number of states within Germany, told Reuters in January that he expected the discussion over nuclear to re-open shortly--see Daily Sources 1/15 #1. A global survey by Accenture published in March suggested that the general view of nuclear power was becoming more positive, with the exception of France, where it provides 80% of the country's nuclear power or thereabouts--see Daily Sources 3/17 #8.

4. NORWEGIAN OIL PRODUCTION DOWN 7% IN APRIL FROM MARCH; BRENT EXPORTS TO FALL 12% IN JUNE ON REPAIRS AND MAINTENANCE

Spencer Swartz at Environmental Capital reports that Norwegian oil production was down 7% in April to 1.99 mb/d from 2.15 mb/d in March. Meanwhile, Alexander Kwiatkowski at Bloomberg reports that Dated Brent crude exports will drop by 12% in June to 1.257 mb/d from 1.427 mb/d in May as field operators carry out maintenance and repairs.

5. IRANIAN, ALGERIAN AND KUWAITI OIL OFFICIALS INDICATE THAT THEY DO NOT THINK NEW OPEC CUTS LIKELY, SAUDI ARAMCO MAINTAINS SUPPLY CUTS TO ASIAN REFINERS, IRAN INDICATES IT WILL NEED WESTERN FINANCING IN ORDER TO MAINTAIN OIL EXPORT LEVELS GOING FORWARD, THE UAE EXPECTS GDP GROWTH ON OIL BTW $50-53/B, WHILE WESTERN ANALYSTS BECOME WORRIED ABOUT EFFECT OF COMMODITIES PRICE INCREASES ON RECOVERY

Tamsin Carlisle at the UAE's National reports that Iranian, Algerian, and Kuwaiti oil officials all have indicated in recent days that they expect OPEC not to opt for further supply cuts in the upcoming meeting. Christian Schmollinger at Bloomberg reports that refiners in Japan, Taiwan and South Korea told the journalist on condition of anonymity that Saudi Aramco was maintaining supply reductions to Asian refiners in June.
"Saudi Arabia produced 7.925 mb/d of crude in April, down 25 kb/d from March, according to a Bloomberg News survey of analysts, oil companies and producers. That’s 126 kb/d under its OPEC production target of 8.051 million barrels a day."
Upstream online reports that Seiffolah Jashnsaz, managing director of the National Iranian Oil Company, told a conference that Iran needed to increase its investment in oil and gas sector development if it is to maintain its status in OPEC through 2025. He indicated that investment requirements would run at about $25-30 billion per annum in order to do so and that Tehran would need to access financing from the West to carry out the required efforts, indicating that the country's earnings were not sufficient to cover the costs. Geoff King at Platts reports that department acting director Ahmad Abu Ghaida at the Abu Dhabi Department of Economic Planning told a conference that they expect economic growth to return to the UAE in the second half of 2009 on the back of oil prices of $50-53/b.
"Despite the ongoing global financial crisis causing 'economic turmoil and uncertainty worldwide,' Abu Ghaida said there are a number of factors providing a positive outlook for the UAE, including a 'relatively positive outlook for oil prices of 'around $50-$53/b in 2009 and around $60/b in 2010.' The UAE currently produces around 2.2 mb/d."
James Hamilton has a post at Econbrowser where he argues that the US Fed--and I'd expect other monetary authorities to be as well--is likely concerned about the rebound in commodities prices over the last couple months. He plots a graph of their prices from March 17:



And comments:
"Some increase in relative commodity prices is certainly to be expected if we are indeed about to see a recovery in real economic activity. But this is a trend the Fed needs to watch closely from here, and could prove to be a significant limiting factor on how much the Fed can hope to achieve from monetary stimulus.

Because I for one do not think it's a good idea to call for a replay of the 2008:H1 commodity market show."
Worth reading in full.

6. CHINESE OIL IMPORTS UP 13.6% IN APRIL YOY AND CONSUMER PRICES DOWN, MOSTLY ON FOOD, AND PORK, IN PARTICULAR

Eadie Chen and Tom Miles at Reuters report that China imported 16.17 million tonnes (3.93 mb/day) of crude oil in April, a 13.6% increase from the year prior.
"If confirmed, the daily rate would surpass last month's 3.85 mb/d and comes next only to a record import level of 4.07 mb/d in March 2008 when Beijing drummed up for the Beijing Olympics and would also be the first positive yearly growth this year."
Reuters provided a graph of oil imports from 2006:



Liu Li and Terrence Poon at the Wall Street Journal report that China's consumer price index fell at an annual rate of 1.5% in April, marking the third straight month in consumer price declines. "The producer price index was down 6.6% following March's 6.0% fall, the fifth straight month of deepening declines." Further, new loans extended in April fell to 591.8 billion yuan, down from 1.89 trillion yuan in March, but up 409 billion yuan from April 2008. In a related story, Shen Hong at China Journal reports that pork prices in major Chinese cities fell by 10% in April from a year previous.
"If prices continue to fall, farmers will start killing pigs because it makes no sense for them to buy the feed for hogs that are worth little when sold.

The TV report warned the government is already considering boosting the country’s pork reserves and offering subsidies to pig farmers, in a bid to ensure future supply.
...
Food constitutes nearly 33% of China’s CPI, and pork’s weight in the food category is estimated to be at least 10%."
With so many workers migrating back to the country, it makes intuitive sense that food in the major cities would be facing a decline in demand. The subsidies targeting the rural areas so far do not include food, as far as I understand.

7. CHINA AND KUWAIT TO BUILD 300 KB/D REFINING COMPLEX IN GUANGDONG

Joanna Hartley at Arabian Business.com reports that the Kuwaiti and Chinese governments signed yesterday five deals incorporating oil, gas and environmental sectors. John Duce and Eugene Tang at Bloomberg, on the other hand, report that the deal includes an agreement between Sinopec and the Kuwait national oil company to build a $9 billion refining complex in Guangdong province.
"[T]he Kuwaiti venture in Guangdong will have a refining capacity of 300 kb/d, Kuwait News Agency reported April 28, citing the country’s oil minister. No other details were available.

The project’s location may be moved to Zhanjiang from an earlier plan of Guangzhou, Zhang [Guobao, the head of China’s National Energy Administration] told reporters yesterday, adding talks between the companies are still continuing. The plant will include an oil refinery and an ethylene plant and the complex should be built away from 'big cities,' he said."
Mr. Zhang indicated that there will be a third investor in the project, and mentioned either BP or Shell. (There is some confusion about the deal, with some reporting that the complex is to be built in Kuwait, but I suspect that it would be built in China, as my guess is that Beijing wants to minimize products imports given an anti-colonialist ideology.)

8. ROXANA SABERI TO BE RELEASED TODAY

BBC reports that Roxana Saberi has had her sentence commuted and will be freed, and able to leave Iran, today. She has been banned from reporting in the country for five years.

9. CANADIAN NEW HOME PRICES FALLING, BUT NOT AT THE PRECIPITOUS RATE OF THE US

Rebecca Wilder at News N Economics reports that the Canadian new homes market is weakening slightly, but that this is a result of weakening economic fundamentals, not overly-indebted households. She plots a graph of Canadian vs US home prices from 1997:



10. HAS THE NEW SOMALI TRANSITIONAL FEDERAL GOVERNMENT GIVEN PIRATES WARNING THAT THEIR DAYS OF FREELY OPERATING ARE OVER?

Eagle1 at the Eagle Speak blog reports that:
"two leaders of Somali pirate groups (at least 30 hijacks between them, I am told) are under pressure from the Islamic courts to stop all hijacking by the end of this month, when the monsoon normally slows pirate activities anyway."
Further, mosque leaders in Puntland have reportedly been told to preach to their female parishioners that pirates bring shame to Somalia and are not good Muslims. It is an odd story, does "Islamic courts" refer to the ICU--Islamist Courts Union--defunct as an organization, as I understand it, but a former head of which is now putative President? They should have some more control in Puntland than al-Shabaab, which is the group which has international Islamist backing, though al-Shabaab, if memory serves, did threaten pirates operating out of Harardere, well north of Mogadishu, but they are not in charge there.

If "Islamic courts" refers to the "governing" coalition, that may well make sense ... and they could put an end to it, though they are much more moderate in their Islamist views (even though the US decided they were too Islamist once upon a time leading to the Ethiopian invasion) than al-Shabaab. (h/t Galrahn at Information Dissemination.) From a May 8 story at the New York Times by Jeffrey Gettleman also linked to in Galrahn's post:
"The new president [of Puntland, not the Transitional Federal Government], Mr. [Mohamed Mohamud] Abdirahman, is a technocrat who had been living in Australia and came back with many Western-educated advisers--and an ambition to be Somalia’s first leader to do something substantive about piracy. He formed an antipiracy commission and even issued a 'First 100 Days' report.

Yet, Puntland officials are doing precious little about the pirate kings under their noses00reluctant, perhaps, to provoke a war with crime lords backed by hundreds of gunmen. When asked why they weren’t arresting the big fish, Mr. Abdirahman said, 'Rumors are one thing, but we need evidence.'"
11. PIMCO LOWERS EXPOSURE TO US GOVERNMENT-RELATED DEBT

In what may be a leading indicator, Dakin Campbell at Bloomberg reports that Bill Gross, manager of Pacific Investment Management Co.’s [PIMCO] $150 billion Total Return Fund, has reduced the funds holdings of US government-related debt since March. In his May investment outlook, Gross wrote:
"The Obama cannon shot will have financial consequences. Investors should recognize that this grassroots trend signals--most importantly--an increasing uncertainty of cash flows from financial assets.
...
Do not be deceived by the euphoric sightings of ‘green shoots’ and the claims for the new bull markets in a multitude of asset classes."
Campbell reports that Gross concluded: "Investors should partner with the government but do so at the 'senior level of the balance sheet.'"

12. THE NEW FANGLED DERIVATIVES WERE MOSTLY USED BY FINANCIAL INSTITUTIONS, NOT BY THE BUSINESSES THEY WERE PRESUMABLY DESIGNED FOR

Adam S. Posen and Marc Hinterschweiger at Realtime Economic Issues Watch argue that the recent financial innovations in derivatives provided little, if any benefits, to any sector of the economy outside finance.
"Between 2003 and 2008, US gross fixed capital increased by about 25%, a reasonable number during an economic expansion, but hardly a boom. During the same five-year period, the global amount of over-the-counter (OTC) derivatives increased by 300%, while derivatives held by the 25 largest US commercial banks rose by 170%. Clearly, growth in new financial products has outpaced fixed capital formation both globally and in the United States by a large margin. This has been especially true since 2006, when investment stagnated, but derivatives continued to grow at a rapid rate. There only seems to be a weak link, if any, between the growth of the newest complex--and now proven dangerous if not toxic--financial products and real corporate investment."


Posen and Hinterschweiger further note that only 11% of the counterparties in OTC derivatives transactions were not financial institutions--meaning that the non-financial institutions for which the derivatives were presumably designed didn't, on the whole, use them. Worth reading in full.

13. HOTEL SECTOR BEING HIT HARD

Ed Harrison at Credit Writedowns reports that the hotel industry is being hit hard in conjunction with the commercial real estate market. Harrison remarks:
"[W]e should expect the cost cutting to continue unabated in terms of non-residential property investment--and this includes the travel & leisure sector as well as commercial real estate. Obviously, this will be a drag on GDP. Investment levels at least thirty percent below today’s investments are not an unreasonable expectation as I argued in a recent post (see the section on fixed investment)."
He notes that owners across the entire spectrum of the real estate market are cutting back on maintenance in order to meet cash flow requirements--which has economic cascading effects.

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