Daily Sources 6/5

1. BUNDESBANK FORECASTS GERMAN GDP TO CONTRACT BY 6.2% IN 2009

Der Spiegel reports that the Bundesbank expects the German economy to contract by 6.2% in 2009. The bank expects downward pressure on the economy to end by the close of 2009, but only forecasts GDP growth of 0.0% for 2010.

"The low point of the recession could be reached this summer, the forecast noted. Still, Bundesbank President Axel Weber said it was too early to breathe a sigh relief. The report added that unemployment will continue to rise in the coming quarters, and by mid-2010, the number of jobless is expected to be 1 million people greater than it was this spring--reaching a total of around 4.4 million unemployed persons, or 10.5%."

2. DUTCH EUROPEAN PARLIAMENT ELECTIONS BIG WINNER FOR ANTI-ISLAMIST 'PARTY FOR FREEDOM'

Der Spiegel reports that preliminary data on the Dutch European Parliament elections show Geert Wilders' "Party for Freedom" would get four of 25 Dutch seats in the legislature, making it the second largest Dutch party represented in Brussels.

"Wilders, who has become popular in the Netherlands running on an anti-Islam and anti-political establishment platform, promised voters he would be tough on immigration and criticized Turkey's bid to join the EU. 'Should Turkey as an Islamic country be able to join the European Union? We are the only party in Holland that says, it is an Islamic country, so no, not in 10 years, not in a million years,' Wilders said."

3. RUSSIA TO CONSIDER SETTLING CHINESE TRADE IN LOCAL CURRENCIES, GAZPROM AND E.ON FINALIZE ASSET SWAP DEAL

Lyubov Pronina at Bloomberg reports that Russian President Medvedev has joined Brazil and Malaysia in the number of countries considering settling international trade with China in their respective domestic currencies. Meanwhile, Nadia Rodova and Anna Shiryaevskaya at Platts report that Gazprom and Germany's E.ON Ruhrgas have signed an asset swap agreement with E.ON receiving 25% of Severneftegazprom, a Gazprom subsidiary developing the Yuzhno-Russkoye oil and
gas field.

"Following the deal Gazprom will own 50% plus six ordinary registered shares of Severneftegazprom; Germany's BASF will own 25% minus three ordinary registered shares and three preferred shares without voting rights; and E.ON will own 25% minus three ordinary registered shares and three preferred shares without voting rights, Gazprom said.

In turn, the agreement gives Gazprom will take E.ON Ruhrgas' 49% stake in Gerosgaz, which owns 2.93% of Gazprom.

'By implementing this asset exchange transaction, Gazprom and E.ON have once again demonstrated a successful development of long-term Russian-German cooperation in the energy sphere,' [Gazprom CEO] Alexei Miller said in a statement."

The Yuzhno-Russkoye oil and gas field is thought to have 856.2 billion cubic meters of gas and 20.35 million metric tons (~148.6 million barrels) of oil and gas condensate reserves.

4. RIO TINTO BOARD REJECTS CHINALCO BID

David Barboza and Michael Wines at the New York Times report that in a meeting in London Thursday, the board of Rio Tinto rejected an offer of $19.5 billion by the Aluminum Corp. of China, or Chinalco, to take a 15% stake in the company. Chinalco's currently has a 9.3% share of the company. Political opposition to the deal in Australia began early on. In the middle of May, Chinalco revised its offer down from a 18.5% stake to 15--see Daily Sources 5/21 #2.

"Chinalco said it regretted the decision and had worked hard to try to revise the deal to reflect changed market conditions, as well as the response from shareholders and regulators.

'As a result, we are very disappointed with this outcome,' Chinalco’s president, Xiong Weiping, said in a statement."

Rio Tinto will combine its iron ore assets in Australia with those of BHP Billiton.

5. CHINESE MALE-FEMALE RATIO DRIVING UP 'BRIDE PRICES', INCREASINGLY A TARGET OF CONS

Mei Fong at the Wall Street Journal reports that the male-female ratio (120-100) in China has pushed up the dowries--or "bride price"--of potential brides so much that they have become the target of con artists.

"While there are no nationwide statistics, wedding scams have occurred before, but usually isolated cases. Mr. Tang, Xin'an's Communist Party secretary [Xin'an is a village of 14,000 in Shaanxi province], says he has never before seen such clusters of cases. Most of the 11 families involved lost an average of 40,000 yuan (~ $5,862 or roughly GDP per capita in purchasing power parity terms). Officials consider these to be fraud cases. So if caught, the women could serve jail time, according to police."

The story provides more anecdotal evidence for the case made by Shang-Jin Wei of Columbia University and Xiaobo Zhang of IFPRI that the one child policy in China has made the society even more one of saving than in the past--see Daily Sources 5/28 #2.

6. GLOBOVISIÓN PRES TO BE CHARGED WITH 'USURY'

Fabiola Sanchez at the Associated Press reports that Venezuelan prosecutors have charged the president of Globovisión, the sole opposition television station remaining in the country, Guillermo Zuloaga, of "usury."

"Trade Minister Eduardo Saman accused Zuloaga of keeping the cars off the market while waiting for their price to rise--involving a possible violation of foreign exchange rules that give importers access to dollars only if they aren't used to gain a 'disproportionate advantage' over rivals.

It was not clear if Zuloaga received dollars that way from the government, but importers who violate those terms can be prosecuted under Venezuelan usury law."

Last week Hugo Chávez said that the Supreme Court, attorney general, and telecommunications chief should take action against "poisonous media" or resign. Meanwhile, Platts reports that PdVSA said in a statement that it had taken over 45% of all private oil services companies operations in the country since nationalizations began again two weeks ago. "So far, around 76 companies have been nationalized, including the local units of Williams International."

7. CHILE TO COMMISSION LNG GASIFICATION PLANT BY END OF MONTH, EXXON SIGNS CONTRACTS TO BUILD LNG EXPORT FACILITY IN PAPUA NEW GUINEA

SAI reports that Chile will commission its 2.5 million tonne/year LNG-10 million cubic meter natural gas liquefaction plant in Quintero at the end of the month.

"The first vessel carrying LNG to Chile from Atlantic LNG’s facilities in Trinidad & Tobago is due to arrive at the plant owned by Chilean energy company ENAP, Endesa Chile, Metrogas and BG Group before the end of June."

Meanwhile, Russell Gold at Environmental Capital reports that Exxon Mobil has signed two construction contracts in the last 24 hours which lay the groundwork for building an LNG export facility in Papua New Guinea.

"Exxon didn’t cut its capital expenditures program during the oil-price drop, but it’s still noteworthy when they push a couple big high-cost projects ahead. And while Exxon didn’t really slow its spending, others did. But projects are looking more financially robust now because costs are falling. The big energy consultant IHS/CERA updated its upstream operating cost index today: it’s down 8% from six months ago. Meanwhile, capital costs are down 9%.

The question haunting oil circles is whether enough new investment will be undertaken to head off a major supply crunch in coming years as demand for black gold grows in Asia and elsewhere. The McKinsey Quarterly, a publication from the consulting group, recently warned that the 'tight demand–supply balance seen at the end of 2007 could return sooner than many observers might have anticipated' as oil companies--state owned and publicly traded--ease up on capital spending."

All of which may be true, but even if there is a supply shortfall does duly develop in 2010, that shouldn't have the effect of pushing up price on oil for delivery next month.

8. NEW U.S. EMISSIONS REGULATIONS PUSHING CANADIAN OIL SANDS PRODUCERS TOWARD ASIAN MARKET

Gary Park at Platts reported (on May 13) that Canadian oil sands operators are looking for Asian participation as the US Congress considers legislation which could limit the purchase of fuels produced by large carbon emitting processes. There are three key competing pipeline plans for taking oil sands products to the Pacific--Enbridge's 525 kb/d Northern Gateway pipeline, Kinder Morgan's 400 kb/d expansion to its 300 kb/d Trans Mountain pipeline and Kinder Morgan's 400 kb/d Northern Leg Expansion to Kitimat.



As Park reports:

"There has been no more public display of those problems than the roller-coaster efforts since 2005 by Canadian pipeline giant Enbridge to open the door to Asia through its 525 kb/d Northern Gateway pipeline, with 80% of volumes targeted for Asia and the rest for California, although the California option may disappear if the state bans fuels derived from 'dirty oil,' such as oil sands.

The initial plan involved a memorandum of understanding with PetroChina to aggregate 200 kb/d of oil sands production in return for a possible 49% equity stake in the C$5.2 billion venture.

It came to an acrimonious end in mid-2007, with PetroChina refusing to extend its MOU with Enbridge and accusing the Canadian government and producers of not doing enough to support Northern Gateway and allow energy trade between Canada and China.

Enbridge CEO Pat Daniel refused to abandon an idea that had already cost about C$100 million to develop a regulatory application.

'We decided enough of this fun ... we need to have customer support,' he said.

So he embarked on frequent selling trips to Asia, pointedly excluding China, shifting his focus to potential customers in South Korea, Japan, Taiwan and Singapore.

In the process, Enbridge secured financial commitments from unidentified producers and refiners to carry the proposal through Canada's National Energy Board and pay for the initial development costs.

Daniel said Northern Gateway is now a 'broad-based, industry-wide initiative ... we offered 50% of the equity to those companies supporting the project and we've had very good uptake on that.'"

Well worth reading in full. Perhaps the story can be said to put the recent report by the Council on Foreign Relations explaining that the "well-to-wheel" carbon footprint of developing bitumen deposits is "only" 17% more than conventional oil in context--see Daily Sources 5/22 #8.

9. ICAP SHIPPING SAYS 7 SUPERTANKERS USED AS STORAGE TO UNLOAD

Alaric Nightingale at Bloomberg reports that Simon Chattrabhuti, a London-based analyst at ICAP Shipping, in an email note today said that a notice of redelivery had been issued for seven supertankers currently being used for oil storage. In late May, Frontline Ltd. estimated that as many as 60 supertankers had been chartered for oil storage.

10. SOVEREIGN DEBT ISSUES TO CLIMB PRECIPITOUSLY, MAY EXPOSE COUNTRIES FAVORING SHORT-TERM DEBT TO "ROLL-OVER" RISK

Gillian Tett at the Financial Times notes that the projected amount of debt to be issued by OECD countries this year is at $12 trillion, up from $9 trillion in 2008.

"So deep in the bowels of western [Debt Management Offices, or DMOs], some officials are now scanning the calendar and wondering how they can organize all those looming debt sales. Most governments hold auctions on particular days of the week and there are only 52 weeks in the year.

Thus, even if the DMOs cancel their summer holidays--which some will--it may be tough to schedule all these looming sales. No wonder some western government officials are starting to mumble about the risk of 'auction fatigue', or the chance that investors get so overwhelmed with these sales that they go on strike. Nor is it little surprise that some western government officials are quietly debating whether they can can dramatically expand the size of individual auctions, to get these bonds sold, without creating a market glut, or panic.

Thus far, thankfully, there is little sign of any such panic."

"[T]he average US maturity in late 2007, was just 4.7 years and will almost certainly decline further. This year, the OECD projects that no less than 70% of US issuance will be short term. That leaves the treasury market now exposed to a mild version of the same problem that plagued conduits or structured investment vehicles that relied on short-term funding in the commercial paper market: namely 'rollover risk'."

Tett also notes that a number of European countries have average debt maturities of less than five years, including Norway and Hungary. A must read.

11. U.S. UNEMPLOYMENT CLIMBS TO 9.4%, FALL IN TEMP EMPLOYMENT SLOWS, BUT 12 MO MOVING TREND STILL DOWNWARD

Peter S Goodman and Jack Healy at the New York Times report that the US lost another 345,000 jobs in May, pushing the headline unemployment rate to 9.4%.

"[W]age growth has been stagnating even as gasoline and medical costs rise, putting pressure on household finances. Wages were 3.1% higher in May than a year ago, but that growth slowed drastically this year. In April and May, average hourly wages grew just 0.1%, to a seasonally adjusted $18.54, from $18.52, according to the Labor Department. Wages for manufacturing workers fell 0.1%."

The broader U-6 unemployment rate, which includes "marginally attached" workers, rose to 16.4%. Barry Ritholtz at the Big Picture notes that the fall in temporary help has flattened out, though the year over year loss for May is of 26.9%.



Jesse's Café Américain plots a chart of the 12 month moving averages of job growth from the middle of '04:



Jesse comments: "We will get a little more optimistic when the longer term trend turns higher."

12. REGIONAL FED PREZES GETTING NERVOUS ABOUT POTENTIAL INFLATION, TRADERS SEE 67% CHANCE FOMC WILL RAISE FED FUNDS RATE IN NOV MEETING

Sudeep Reddy at Real Time Economics reports that there are signs that some Federal Reserve policy makers are becoming nervous about the potential for inflation. Atlanta Fed President Dennis Lockhart recently told Market News that the central bank must be "anticipatory" and shouldn't wait too long to tighten monetary policy. Earlier this week, Kansas City Fed President Thomas Hoenig warned of "significant" inflationary pressures.

"Mr. Lockhart has suggested that the Fed eventually could start raising rates--he says it’s not time yet--while maintaining an expansionary policy through other programs. The Federal Open Market Committee’s most recent policy statement said the federal funds rate is likely to remain at 'exceptionally low levels ... for an extended period.' The FOMC may soon be discussing what constitutes an extended period."

Susanne Walker and Dakin Campbell at Bloomberg report that US treasuries fell, driving two year yields to an eight month high, on speculation that the FOMC will raise rates later this year.

"Traders see a 67% chance the Fed will raise its target rate for overnight loans between banks at its November policy meeting. The bets increased from 25% a week ago, according to futures traded on the Chicago Board of Trade. 88% of traders see no change in the rate at the central bank’s meeting this month."