Wednesday, June 10, 2009

Daily Sources 6/10

1. GERMAN EXPORTS FALL BY 29% YOY IN APRIL; THE ECB FORECASTS THAT WEAKNESS IN THE FINANCIAL SECTOR IS LIKELY TO PREVENT ECONOMIC RECOVERY IN THE EUROZONE UNTIL 2010; THE IMF CALLS FOR A REAL ACCOUNTING OF THE EUROPEAN BANKING SECTORS BOOKS

BBC reports that German exports fell by 29% in April from the year previous, per the Federal Statistics Office. (Exports fell by 4.8% in April from March, when they had risen unexpectedly from February.) The economics ministry reported that industrial production fell by 21.6% in April compared with April 2008. On Monday, Walter M√ľnchau noted that it was unlikely, given the current situation, for export-led economies to be able to export their way out of the recession. He further remarked that perhaps the Merkel Administration's apparent decision to push for allowing the euro to appreciate versus the dollar (and other currencies) could exacerbate the situation for Germany--see Daily Sources 6/8 #2. Joellen Perry at the Wall Street Journal reports that officials at the European Central Bank are concerned that financial sector weakness could prevent the eurozone from expanding before the middle of 2010, as per the remarks of Yves Mersch, the head of Luxembourg's central bank and a member of the ECB's Governing Council.
"The ECB expects the euro zone's first quarter--when output contracted by an annualized rate of nearly 10%--to mark the recession's trough, Mr. Mersch said. But he cautioned against overplaying recent signs of stabilization: 'We are reaching the valley, but we have to walk through the valley.'"
Well worth reading in full. A graph plotting the IMF's forecast of eurozone economic growth going forward from the IMF Survey published on Monday:



Meanwhile, Ambrose Evans-Pritchard at the UK Telegraph reports that the IMF's managing director, Dominique Strauss-Kahn, has called on the eurozone countries to take urgent steps to clean up their financial sector.
"To restore confidence, you need total disclosure of possible losses. Not only losses which are linked to the original sub-prime crisis, but also the losses linked to the slowdown in the economy, and impaired assets. There are lots of things that still have to be disclosed."
Strauss-Kahn went on to say that,
"Stresses persist, conditions for access to bank lending are tight, funding costs remain high. Sizeable losses lie ahead as the recession unfolds. The financial sector is hamstrung in fulfilling its vital intermediation role."
The IMF suggested that eurozone banks will need to raise an additional $375 billion as compared to $250 billion for US banks and called for stress tests along the lines of what was imposed by the US Treasury.

2. JAPAN ANNOUNCES GOAL OF REDUCING GREENHOUSE GAS EMISSIONS BY 8% FROM 1990 LEVELS BY 2020; EXPECTED TO ANNOUNCE $2 BILLION IN CLIMATE PROTECTION LOANS TO BANGLADESH, PHILIPPINES, THAILAND, AND VIETNAM

Shingo Ito at the AFP reports that Japanese Prime Minister Taro Aso said today that the government has set as a goal the reduction of greenhouse emissions by 8% from its 1990 levels by 2020.
"Aso said 'Japan must take the initiative in spearheading a global trend,' arguing that the target surpasses US and European goals because, unlike theirs, it does not factor in carbon trading or sequestration through forestry.

Japan's figure is far below the target announced by the European Union, which has said it would slash emissions by 20% from 1990 levels, or by 30% if others set a similarly ambitious goal."
On the other hand, Japanese power consumption has been steadily declining for some time now--in large part because of demographic changes. Mr. Aso also gave Japan's goals for 2050 for a 50% emissions cut, which matches the European Union's goal. In the meantime, Earth Times reports that Japan was expected to announce $2 billion in yen loans to Bangladesh, the Philippines, Thailand and Vietnam over two years for climate protection efforts. On April 29, China, India and South Africa called for at least $200 billion in aid from the developing nations to combat global warming--see Daily Sources 4/29 #1. In late May, African environmental ministers called upon the developed world for aid in combating climate change--analysts have argued that the countries would require at least $1 billion a year in order to effect change--see Daily Sources 5/29 #8.

3. CHINA'S CONSUMER PRICES FALL 1.4% YOY IN MAY, BUT HOUSE SALES VOLUMES INCREASE BY 27% IN JAN-MAY FROM 2008 PERIOD; CHINESE COMMODITIES PURCHASES ARE WELL IN EXCESS OF THE TREND HAD GROWTH CONTINUED AS USUAL FROM 2007

Terence Poon at the Wall Street Journal reports that China's consumer price index fell 1.4% in May from a year previous for the fourth straight month, according to data released by the National Bureau of Statistics today.
"Food prices, a key component of the CPI, fell 0.6% in May from a year earlier, but the decline was smaller than the 1.3% drop in April. The price of grains, a raw material of many food products, has risen sequentially for the past five months, the bureau said, adding 'it remains to be seen if the rise in grain prices will affect future CPI trends.'

China's domestic property market is also showing signs of a sustained recovery. The year-on-year drop in property prices in 70 of China's large and medium-sized cities shrank to 0.6% in May from 1.1% in April, the National Development and Reform Commission said Wednesday."
Further, the volume of housing sales grew by 27% in the period from January to May over the same period in 2008. Meanwhile, MacroMan has a fascinating post on the volume of imports of various raw materials, and notes that they are well-above the trend had China's economy continued to grow at the rates it had previous. His chart for coal:



His chart for copper:



He further notes that Chinese oil imports have returned to trend, and thus suspects that the additional demand is not likely responsible for the boost in price. (I think this reading is wrong, because it has to be taken in the context of OPEC taking a lot of supply off the market and the fact that implied oil consumption is well down, far below what Chinese GDP statistics would imply.) MacroMan summarizes:
"even if China manages to maintain its recent growth path over the next few quarters, its recent commodity buying spree might mean that it buys much less from the rest of the world than one might normally expect, perhaps with the exception of crude oil (the only commodity where Macro Man retains a long exposure.)

For now, the China syndrome giveth....but if Macro Man were long high-beta plays on Chinese growth, he'd be concerned that at some point, the China syndrome may taketh away."
Indeed, and this is the must read post of the day. Again, I think his relative bullishness on oil is misplaced, however, given the director of China's National Energy Administration telling reporters that all available crude storage was full, the State Council Information Office taking reporters on tours of previously secret strategic petroleum reserves apparently so they could confirm this with their own eyes, and the study of satellite images by Sanford Bernstein which suggest that as much as 400 kb/d of additional Chinese oil demand was going straight to those SPRs--see Daily Sources 6/9 #4.

4. US, RUSSIA, AND CHINA AGREE ON DRAFT SANCTIONS ON NORTH KOREA

Colum Lynch at the Washington Post reports that the US, China, and Russia have agreed upon a draft UN resolution which would condemn North Korea's April 5 nuclear test and impose additional military, financial and trade sanctions on Pyongyang. The draft has been presented to the full Security Council and its adoption is expected as early as Friday. In an interesting comment in the Wall Street Journal, Edward N. Luttwak, senior adviser at the Center for Strategic and International Studies, writes that the best diplomatic method of dealing with Pyongyang for the US just now is radio silence. His conclusion:
"The North Korean regime never yielded anything of significance in past negotiations, which have served nobody but them. This time, provocation must not be rewarded. Evidently, the North Korean aim is to evoke more attention, more offers of concessions, more gifts. They must receive nothing at all. Talking has failed utterly. Silence might yet persuade the North Koreans to improve their behavior."
Insofar as North Korea's goal is to have official direct talks with the US, in a way this policy is already in place, though perhaps no response will have the desired effect of moderating Pyongyang's provocative behavior. However, I wonder whether it would be seen as deliberately complicating a "soft solution" desired by Beijing, as evidenced by Tsinghua University professor Sun Zhe's recent interview, where he indicated that China's primary concern regarding North Korean intransigence is that Tokyo will decide to build its own nuclear deterrent--see Daily Sources 6/1 #4. Also, to do so would seem to simply abandon the initiative the US might have in orchestrating "Great Power" coordination on the issue, as per Kissinger's advice--see Daily Sources 6/8 #3.

5. RUSSIA COMMITS TO CONTINUING CURRENT LEVELS OF OIL PRODUCTION, APPARENTLY HAS NO INTENTION OF COORDINATING WITH OPEC; KUWAITI OIL MINISTER SAYS THAT $60-75/B OIL OK FOR WORLD, BUT THAT OPEC WOULD NOT CUT UNLESS PRICES HIT $100/B

The Associated Press reports that Russian Deputy Prime Minister Igor Sechin told Interfax that:
"We are not planning to cut the production in the next three years, but it may happen afterward if there is no investment in exploration and production."
Sechin also indicated that Russia was not interested in capping exports, saying "Exports have become more economically reasonable. So why cut it?"--apparently putting the nail in the coffin of the notion of Russia joining OPEC, worrisome at the time as it would have signified a tectonic shift in Russian foreign policy strategy--see Daily Sources 12/10 #8. Meantime, Fiona MacDonald at Bloomberg reports that Kuwait's Oil Minister Sheikh Ahmed al-Abdullah al-Sabah told reporters that OPEC would only consider increasing production if the price of oil hit $100/b.
"Oil prices have increased because investors have bought crude as a hedge against a weakening US dollar, not because demand is rising, Sheikh Ahmed said.

'The numbers, in terms of economic recovery, are not with the rise of oil,' he said. OPEC is seeing signs of an increase in demand for oil in Asia, Sheikh Ahmed said, 'but overall we don’t see any rise in demand. That’s why we should be cautious not to be driven by the market.'"
This statement is on top of the report by Miriam Amie at Platts yesterday where Sheikh Ahmed indicated that the market was not being driven by fundamentals, but that prices between $60-75/b were acceptable.
"But Sheikh Ahmed warned that a return to $100/b oil would harm the global economy and fuel inflation.

'Hopefully it will not jump to the hundreds, because this will fuel recession,' he said, adding that it would be like 'going back to square one.'"
6. BRAZIL AND RUSSIA ANNOUNCE PLANS TO PURCHASE $20 BILLION IN SPECIAL DRAWING RIGHTS-DENOMINATED BONDS FROM THE IMF, SAY CHINA PLANS A $50 BILLION PURCHASE, INDIA MAY FOLLOW SUIT

Alex Nicholson and Andre Soliani at Bloomberg report that Brazil and Russia announced plans to purchase $20 billion in bonds from the IMF denominated in special drawing rights.
"Alexei Ulyukayev, first deputy chairman of Bank Rossii, said today Russia will cut the share of US Treasuries 'because a window of opportunity for working with other instruments is opening,' according to Interfax news wire. Russia may also place more of the reserves in deposits with foreign banks, he said. The remarks were confirmed by a Bank Rossii official who declined to be named, citing bank policy."
Brazil’s Finance Minister Guido Mantega said of the move:
"For us, there is no interest in weakening the dollar, because when the dollar weakens the real gets stronger and when the real get stronger the exchange rate trips our exports up a bit. What we really want is that other currencies are also behind international transactions."
Mantega also indicated that China will purchase $50 billion of the IMF bonds and that India may well announce something along the same lines.

7. CNPC REPLACES TOTAL IN PHASE 11 OF IRAN'S SOUTH PARS

Reports of Total's ouster from Phase 11 of South Pars were not premature after all, or so I take it given Sanchez Wang at Bloomberg's report that NIOC released a statement saying that it had signed a $5 billion contract with CNPC for that stage of the natural gas development.

8. RAFSANJANI PUBLISHES OPEN LETTER TO LEADER OF REVOLUTION CALLING ON HIM TO CURB PRESIDENT AHMADINEJAD AS TENS OF THOUSAND SUPPORTERS OF PRESIDENTIAL CANDIDATES HIT THE STREETS IN TEHRAN, BRINGING CITY TO A HALT

Thomas Erdbrink at the Washington Post reports that Ayatollah Rafsanjani, former President of Iran and head of the Council of Experts (which determines who is qualified to be the Leader of the Revolution [LOTR]) as well as the Expediency Council (which settles legislative disputes between the Iranian Parliament and the Guardian Council), published an open letter to LOTR Ayatollah Khamenei complaining the he had not acted in the face of President Ahmadinejad's "insults, lies and false allegations" in a televised debate between the President and presidential candidate, former prime minister Mir Hossein Mousavi. Rafsanjani, and by implication other members of the revolutionary old guard in Iran such as Mousavi himself, were called "corrupt" by the President in the televised debate. Rafsanjani wrote:
"If the system cannot or does not want to confront such ugly and sin-infected phenomena as insults, lies and false allegations made in that debate, how can we consider ourselves followers of the sacred Islamic system?"
The letter was published as tens of thousands of supporters for both candidates filled the streets in Tehran, reportedly bringing the city to a halt. Juan Cole at Informed Comment links to reports that Mousavi appears to have detached key support from the Iranian Revolutionary Guards Corps from Ahmadinejad, the main basis of Ahmadinejad's power--a struggle over which may have led to Ahmadinejad's louder than usual complaints of corruption. Michael Collins Dunn at the Middle East Institute Editor's Blog notes that every incumbent president who has run again in Iran has won, so a Mousavi victory would indeed be an upset. He remarks:
"if Ahmadinejad is voted out in Iran, we should not try to claim a great victory: nothing would taint a President Mousavi more, and Khatami never recovered from being portrayed as too soft toward the West."
The links and commentary by both Cole and Dunn are well worth going through, should you have time.

9. RICHMOND FED CHIEF SAYS GROWTH IS WHAT WILL TRIGGER FED FUND RATE HIKES; TIPS YIELDS AND GOOGLE TRENDS SUGGEST INFLATION IS OVERTAKING DEFLATION AS GEN PUBLIC'S CONCERN RE: ECONOMY

Judith Burns at Real Time Economics reports that Richmond Federal Reserve Bank President Jeffrey Lacker told reporters today that
"I think growth is likely to warrant rates as low as they are now for some time. We’ll just have to wait to see how the growth process unfolds for some time."
Lacker added:
"I think the growth process needs to govern our rate decisions and I think the growth process is more important in governing our rate decisions than the unemployment rate per se."
On Friday, Atlanta Fed President Dennis Lockhart suggested that the FOMC should be "anticipatory," and not wait too long to raise the federal funds rate following even more hawkish remarks by Kansas City Fed President Thomas Hoenig, who warned of "significant" inflationary pressures. On that news, the yields on two-year treasuries shot up to an eight-month high on speculation that the FOMC would raise rates in its November meeting--see Daily Sources 6/5 #12. In the meantime, Kelly Evans, also at Real Time Economics, reports that:
"This morning, the 'breakeven' or expected inflation rate for securities [TIPS or Treasury Inflation Protected Secutires] maturing next April moved into positive territory for the first time since the financial crisis intensified in mid-September. That essentially means investors in these securities of any maturity no longer expect deflation to set in by next spring--or indeed at any other point in the future. The 'breakeven' rate on ten-year securities is now over 2%; earlier this year, it was 0%. For 30-year investments, expected inflation is even higher, at about 4.7%."
Evans remarks on another, "unscientific"--though I'm not sure what's so scientific about implied inflation expectations via TIPS, indicator recently was that the number of google searches for "hyperinflation" look set to pass the number of google searches for "deflation":



Both measures seem, to me at least, to be barometers of speculation regarding future conditions--though perhaps, and just perhaps--for there is no precise way to measure this, the expectations inferred from the treasury markets are better informed expectations.

10. HOMEOWNER EQUITY IN HOUSEHOLD REAL ESTATE HAS FALLEN BY NEARLY 50% OF GDP; US IMPORTS AND EXPORTS CONTINUE TO FALL IN APRIL; GASOLINE PRICES RISING ENOUGH TO BEGIN TO SIGNIFICANTLY EAT AWAY AT STIMULUS

Felix Salmon at Reuters notes that homeowner equity in household real estate has declined nationally by nearly 50% of GDP.



Yves Smith, at Naked Capitalism, through whom this piece came to my attention, points out that the bubble begins in 1997. Salmon notes:
"It’s easy to see why this recession is so severe, if you think about the unsustainable consumption boom fueled by mortgage equity withdrawals between 1997 and 2006. The loss in wealth during the dot-com bust might have been similar, but the effect on consumption wasn’t nearly as big: people weren’t borrowing against their tech stocks in order to buy new kitchens."
Put that in the context of Rebecca Wilder's observation that consumer credit is retrenching for pretty much the first time ever in the US both on the back of savings, but also credit card companies slashing credit lines--see Daily Sources 6/8 #15 for an excellent graph of hers--and the average number of work week hours declining to levels not seen since 1964 combined with expectations of more layoffs--see Daily Sources 6/9 #7--it is hard to see the economy recovering on the back of consumption any time soon. (Household consumption is said to account for about 70% of US GDP.) And, in what could be interpreted as evidence backing this concern, Rebecca Wilder at News N Economics reports that the Census Bureau today reported that April imports were down $2.2 billion from March and April exports were down $2.8 billion from March. She plots a graph of US trade since January 2008 showing that trade is down 20-30% from then:



Her blog is always worth a look. The EIA reports that for the week ended June 8, the national average price of gasoline was up $0.10/gallon to $2.624/gallon--at the bottom of the range at which I deduce Americans start driving less, or at which you see further declines in oil demand.

Peter Boockvar at the Big Picture comments on the price of gasoline:

"To quantify, the US uses about 9mm barrels of gasoline per day with 42 gallons in each barrel, thus 378mm gallons per day and almost 140b per year. Therefore, for every $1 move in the price of gasoline, it’s an extra $140b more in consumer spending at the pump. If gasoline prices stay elevated, it will dramatically dilute the tax cut portion of the Obama stimulus plan. On Feb 17th, Pres Obama signed the $787b stimulus plan that included $237b of ‘tax relief’ for individuals, $116b of which was a temporary payroll tax credit for income earners under a certain level."
Chief US economist at IHS Global Insight Nariman Behravesh's rule of thumb is that a $0.10 drop in gas prices equates to about a $12 billion tax cut--see Daily Sources 11/18 #2.

11. US COMMERCIAL CRUDE STOCKS FALL

The EIA reported that for the week ended June 5, commercial stocks of crude oil fell by a whopping 4.4 million barrels. They are still well above the historical range for this time of year, but the move was in contrast to analyst expectations of a 100k stock build, per a Bloomberg survey. Gasoline stocks also fell by 1.6 million barrels,are below the historical average for this time of year, and in contrast to analyst expectations of a 750k barrel build. The surprise however, was that distillate stocks also fell by 300k barrels. Stocks are well above the historical range for this time of year, but the draw was counter-cyclical--and surprising given recent rail and truck freight data--see Daily Sources 6/8 #14.

12. REPORT ARGUES THAT OIL SHALE WATER USE WILL COMPETE WITH WATER DEMAND FOR URBAN GROWTH AND AG USE, MAY RESULT IN "CALL" PROTECTING DOWNSTREAM CONSUMPTION RIGHTS; WATER SHORTAGE IN SAN JOAQUIM VALLEY

Jeremy Miller at Green Inc. writes that a report by the non-profit Western Resource Advocates released in March argues that increased water use for oil shale in the Colorado’s Piceance Basin:
"could hamper urban growth in the Rocky Mountain Front Range, threaten agriculture and critical habitat for endangered fish and increase the likelihood that Lower Basin states like Nevada, Arizona and California would issue a 'call'--a legal decree that forces junior upstream water rights holders to reduce, or eliminate altogether, water use until senior downstream rights are met."
The Western Resource Advocates report can be found here. Meanwhile, the Western Farm Press reports that legislation to protect Delta smelt has reduced water deliveries to San Joaquin Valley farmers by 90% and may cost the area as much as 45,000 jobs. (h/t Aquafornia.)

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