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.

Daily Sources 10/13

1. Vali Nasr has a surprising op ed in the Wall Street Journal arguing that Obama is right to say the US ought to diplomatically engage with Iran, because they can help contain Russia. Vasr is right, of course, to point out Iran's long history of facing Russian aggression. And Tehran has not forgotten it, believe you me. Direct talks with Iran makes lots of sense. However, it will be difficult to make nice with Tehran and at the same time tell Moscow that the placement of missile batteries in Georgia and Poland is to defend them from Iran. If the US must have either Tehran or Moscow as an enemy and the other a friend, surely the obvious and best choice would be to have Moscow as the friend.

In any case, I think it is a false dichotomy. Clearly, already Moscow is an ally. I suspect they want to be tied even closer to Washington, DC. They certainly want to be more tightly bonded to Europe. Even so it makes sense to talk to Iran, because it always makes sense to talk. As Churchill put it, "To jaw-jaw is always better than to war-war." Since when has Churchill become synonymous with appeasement?

2. Glenn Kessler at the Washington Post reports that the US took North Korea off the state sponsors of terrorism list on Sunday. The AP reports that today North Korea lifted its ban on inspectors to its Yongbyon nuclear facility. Victor Cha, the deputy head of the US delegation for the six-party talks and director of Asian affairs on the National Security Council from 2004 to 2007, has an important editorial in the Washington Post on why this move by the US was a reasonable decision. He says:

if North Korea keeps its word, John McCain or Barack Obama should inherit a situation in which U.S. and international nuclear experts are on the ground in North Korea learning more about Kim Jong Il's nuclear secrets while slowly disabling and degrading his nuclear capabilities. In this regard, Bush's decision was not a Hail Mary -- it was another yard gained in a slow ground game.

3. RIA Novosti reports that Russian contractors was chosen by Ukraine to build a nuclear power plant to be operated by Energoatom there. "85% of the proposed $4 billion project would be financed through a Russian loan with 15% funding coming from Ukraine."

4. Winnie Zhu and Wang Ying at Bloomberg report that China increased crude imports in September by 46% over August. China imported 20 million tonnes of crude in September (4.87 mb/d) as opposed to 15.65 million tonnes in August (3.81 mb/d). The numbers represent an 8.8% increase in demand growth year over year in China for September.

This is interesting news given the recent downward tweaking of worldwide demand by both the IEA and the EIA last week as well as the announcement of an emergency extraordinary meeting by OPEC in November. OPEC members seem very concerned. On Saturday, Iranian Oil Minister Gholamhossein Nozari told reporters "Oil demand has decreased due to the current economic situation in the world. A way out needs to be found; the balance of the market is essential for oil consumers and oil producers." as per Ladane Nasseri of Bloomberg. Reuters reports that Mohammad Alipour-Jeddi, the head of OPEC's petroleum studies department, made a formal statement to the IMF on Saturday that "The overall bearish sentiment in the market is expected to persist, particularly since there seems to be no quick end to the current financial market crisis or the worsening economic outlook." Also on Saturday, in a statement to Iranian television, Iran's OPEC Governor Mohammad Ali Khatibi said "OPEC will probably seek a cut in its production at the November meeting in order to balance supply and demand," as per the AFP. On Monday in London, Iraqi oil minister Hussein al-Shahristani told Platts that "current OPEC production level is more than the market can consume" and "if the current price trend continues, OPEC has no choice but to cut production." Also on Monday, Reuters reports that the Algerian President Abdelaziz Bouteflika said in a statement to an Algerian paper that the country needs to brace for a possible collapse in the price of oil and gas. Oil and gas account for 95% of the country's exports.

This is the case even though OPEC members appear to be adhering to the decision to not produce beyond quota as per their last meeting. Platts also reported that OPEC oil production was down 340 kb/d in September to 32.47 mb/d. John Kingston, Platts' Global Director fo Oil, wrote

"At Platts, we are seeing increasing signs of crude and products going unsold on the market. This means that from an OPEC perspective, the cuts we estimate for September may not be coming fast enough to keep the market in balance. OPEC's upcoming meeting is in November, and the conditions we face today could be radically different by then."

The largest fall in production came from Saudi Arabia at 170 kb/d. Iraqi volumes fell 110 kb/d; Angolan volumes fell by 100 kb/d. Libya and Kuwait increased production. The key is always the Saudis, but in such a tight market, smaller players can have an effect by reducing volumes. It is interesting, therefore, that we saw a cut in production from Iraq.

Despite these bits and pieces, influential analysts are turning around quite strongly on oil price. Jonathan Leff at Reuters reports that Goldman Sachs, which has been famously bullish on oil, on Monday released a report cutting their forecast for end of December price of oil to $70/b, down from $115.

"However, should the financial and evolving economic crisis cut deeper into demand, the market could fall as low as $50, which we believe to be the industry's cash cost and shut in level."

OPEC is officially blaming the role of speculation in the market for the volatility--no mention is made of the market's opacity. The AFP reports that Alipour-Jeddi also called for "the tightening of regulation on speculative trading practices and an extension of US market monitoring." I guess its possible that the extension of the CFTC's mandate to the over-the-counter markets would have a sobering effect on futures, but the fact that the reserve, production, and export numbers for over 70% of the market are all guesswork means that speculation is absolutely necessary to even give a picture of the fundamentals affecting the market.

Either way, the news on China and OPEC deliberation should put a floor on oil price. Despite reports to the contrary, it still remains to be seen whether emerging market oil demand will soften significantly enough to mean for a medium-term $70 or lower price of oil.

It is in that context that Iraq today placed over 40 billion barrels of oil concessions on the market in London, as reported by Terry Macalister and Nicholas Watt at the UK Guardian. The largest concession ever put on the market in the past is the 8 billion barrel Kashagan field in the Caspian. The most important data point here is that it was an open bid, which means that if the US went to war for oil in Iraq, we did not secure it. (Which is further proof that the war for oil theory makes no sense at all.)

5. Ben Hall at the Financial Times reported on Sunday that

"At a hastily arranged summit in Paris, leaders of the 15 governments agreed a set of measures modelled on those unveiled by the British government last week, involving bank recapitalisation, loan guarantees to unfreeze interbank lending and measures to provide extra liquidity.

However, the governments decided not to spell out there and then how much money each was prepared to allocate to the rescue plan.
...
In addition, the European Central Bank has agreed to look at widening its collateral rules by taking commercial paper in return for lending to companies

Jean-Claude Trichet, ECB president, who was present at the summit, said that the ECB did not have the legal power to buy commercial paper, as the US Federal Reserve can, in return for providing credit to companies.
...
The rest of the EU’s 27 member states are expected to back the eurozone plan at a meeting of the full bloc in Brussels on Wednesday."

Sean O'Grady at the Indepedent UK reports that the governments of the world's largest economies have moved to coordinate regulations which would increase the capital requirements of banks. In the meantime, Real Time Economics reports that Thomas Hoenig, President of the Kansas Federal Reserve Bank, said in a speech to international regulators that there is a limit to what the Fed and the Treasury can do to safeguard the financial system and that private actors should cooperate with each other to help shore up the system. Aaron Lucchetti, Damian Paletta and Jessica Holzer at the Wall Street Journal report that Secretary Paulson met with Ken Lewis, CEO of Bank of America, Jamie Dimon, CEO of J.P. Morgan Chase, Lloyd Blankfein, CEO of Goldman Sachs Group; John Mack, CEO of Morgan Stanley; Vikram Pandit, CEO of Citigroup; and Robert P. Kelly, CEO of Bank of New York Mellon, to discuss the details of the financial stabilization measures.

6. The Inter-American Development Bank approved a loan of up to $400 million for the expansion of the Panama Canal. The expansion is scheduled to be complete in 2014 and has four main components, quote:

* the construction of a third set of locks, including two lock complexes and water-saving basins at each end of the canal,
* the dredging of the canal entrances on the Atlantic and the Pacific,
* the deepening and widening of the existing navigation channels,
* the raising to the maximum operational level of the Gatun Lake, which provides fresh water for the waterway.

According to the IDB's press release, the current capacity of the canal's lock chambers is 4,500 TEU (20-foot equivalent units) and their capacity will be expanded to 12,600 TEU. In oil lingo I believe this means that the capacity of the canal is being expanded so ships a little larger than Suezmax's of 200,000 dead weight tons (1.6 million barrel cargoes) can pass through it. The loan is not being underwritten by the government of the Republic of Panama and Moody's has given the project a prospective investment grade of A2 (whatever that means given the recent crisis and their recent ratings track record.)