Daily Sources 7/31

1. MESSERLIN AND MAREL ARGUE THE US & EC COULD REAP GAINS BY OPENING SERVICES SECTOR

Patrick A Messerlin and Erik van der Marel at VoxEU argue that the US and the European Commission should launch transatlantic negotiations in opening the services sector as a prelude to multilateral negotiations. Key excerpts:

"Services providers are busy redesigning their strategies for coping with the ongoing economic crisis. To take the appropriate decisions, they need predictable future market access in services. Meanwhile, as many services are still highly protected, opening services markets would deliver large benefits to consumers impoverished by the crisis."

"Is there any appetite for services negotiations now? Yes. The July 2008 Signalling Conference held under the aegis of the Doha Round showed a substantial number of participants expressing strong interests in most services, offers and requests in mode 3 in many services (foreign direct investment), and even a willingness to include mode 4 (movement of natural persons, by far the most contentious part of any service negotiations) in some services.

Such a willingness to negotiate appears particularly strong in three services: business, communication, and distribution services. Together, these three services in the EC, US, and top eight countries represent almost one-third of the world GDP, a size so huge that negotiators could work on deals within as well as between these services sectors. The three services face high levels of regulatory constraints, ensuring huge economic gains in case of market opening. Finally, negotiations are made easier by the fact that business and communication services are resilient to the current crisis, while the inflationist pressures to come should make governments eager to have distribution services as competitive as possible.

Last but not least, the foreign policy dimension of the whole endeavour is crucial for Europe. Many US decision-makers are looking to Asia for good reasons (Bergsten, 2009) while Europeans have not yet fully grasped the growing importance of Asia nor captured its attention, as illustrated by the disappointing June 2009 Asia Europe Ministerial meeting on energy."

2. EUROZONE UNEMPLOYMENT UP TO 9.4% IN JUNE, CONSUMER PRICES FELL AT ANNUAL RATE OF 0.6%

Reuters reports that eurozone unemployment rose to 9.4% in June, up from a revised figure of 9.3% in May.

"The European Union’s statistics office also said on Friday that inflation in the euro area had moved much further into negative territory than forecast in July, with consumer prices falling at an annualized rate of 0.6%.

The drop raised worries about deflation and heightened expectations that the European Central Bank will maintain its loose monetary policy."

3. US OPEN TO BRINGING RUSSIA INTO NATO

Yevgeny Bendersky at the Compass reports that

"Assistant Secretary of State Philip Gordon told US lawmakers Tuesday during the House International Relations Committee hearing that the United States would consider Russian membership in NATO."

Gordon said:

"[I]f Russia meets the criteria and can contribute to common security, and there is a consensus in the alliance, it shouldn't be excluded."

Bendersky points out that some in Eastern Europe might be cold to the idea. Given that membership would freeze, so to speak, the current borders by militarily integrating the members, it may arguably provide superior protection than the current relationship. It certainly would make adventurism a much more complicated affair.

4. NIPPON OIL IN TALKS WITH SK ENERGY TO BUILD NEW REFINERY IN VIETNAM

Megumi Yamanaka and Yuji Okada at Bloomberg report that Nippon Oil Company has announced it might build a refinery in Vietnam with SK Energy Co.

"'We’ve been in talks with SK and have agreed on the need for participating in a refining project' in Asia, Nippon Oil Chairman Fumiaki Watari said in an interview in Tokyo yesterday. Vietnam is a potential location for the first venture between Japan and South Korea’s biggest refiners, and the plant may process 200-300 kb/d of crude oil, he said.

Seo Young Joon, a spokesman at SK Energy in Seoul, said he couldn’t immediately comment. Idemitsu Kosan Co., Japan’s second-largest refiner, and Mitsui Chemicals Inc. plan to spend $5.8 billion to build a 200 kb/d plant in Vietnam."

"'We know that about 25% of Japan’s refining capacity will be unnecessary in the next five years.' Watari said."

Vietnam inaugurated its first refinery this year with capacity of 148 kb/d and which is poised to supply about 30% of Vietnam's product requirement--see Daily Sources 7/28 #8. The EIA projects its total petroleum demand was about 288 kb/d in 2008. Hanoi projects GDP will grow by 5.5% in 2009, adding perhaps as much as 10 kb/d in demand this year.

5. INDIAN FIELD BEGINNING PRODUCTION TO UP INDIAN CRUDE PRODUCTION BY 25%

The Economic Times reports that Indian crude production is expected to rise by about 25% when Cairn begins pumping from the Mangla field of its Rajasthan acreage next month.

"'We are operationally ready to commence oil production in August,' Cairn India CEO Rahul Dhir said. In its various filings to the government, Cairn has indicated that production will quickly touch 30 kb/d by the end of third quarter this year and reach a plateau of 175 kb/d (8.75 million tonnes a year) in 2011. Goldman Sachs, however, has pegged the peak output at 190 kb/d (9.5 million tonnes a year)."

Using EIA projections, Indian crude production in 2008 was 693.7 kb/d. Its imports came in at 2.056 mb/d, so the Mangla field at 175 kb/d would represent about 8.5% of its import requirement. However, some of those imports are reexported as products, for example to the US--Reliance is set to restart its old Jamnagar refinery shortly, bringing another 660,000 kb/d of nameplate capacity on line. It is expected to double Reliance gasoline exports to about 170 kb/d.

6. PAKISTANI SUPREME COURT REJECTS PETITION TO TRY MUSHARRAF ON TREASON CHARGES

BBC News reports that the Pakistani Supreme Court has rejected a petition to try former President Musharraf on charges of treason.

"The court had asked him to explain his decision in 2007 to invoke emergency rule and suspend the constitution.

It has now ruled that parliament is the place to debate Mr Musharraf's actions.

Chief Justice Iftikhar Mohammed Chaudhry rejected a petition to launch a treason case against the former president.

Mr Chaudhry was himself removed from his position as a result of President Musharraf's imposition of emergency rule, but was reinstated after he resigned in August."

For more on the lawyers revolution in Pakistan, I wrote a long piece on it early last year--see The Law in Pakistan.

7. 40 DAY CYCLE OF PROTESTS IN IRAN MIRROR 1979 REVOLUTION, PRESS REPORTS OF CHINESE-IRAN MOU ON SOUTH AZADEGAN FIELD DENIED BY CNPC, US SENATE TO BAR THOSE SELLING PETROLEUM PRODUCTS TO IRAN FROM PARTICIPATION IN SPR

Michael Collins Dunn at the MEI Editor's Blog observes that the 40-day cycle in protests seen in the 1979 Iranian Revolution is being repeated in the current conflict over the elections. Juan Cole at Informed Comment has a good roundup of the recent political events in Iran. Meanwhile, Upstream Online notes that there have been stories that CNPC has signed an MOU with NIOC to develop the South Azadegan oilfield, taking a 70% stake in the field in return for covering 90% of development costs.

"However, a CNPC manager based in Beijing told Reuters today that the MoU was actually signed earlier this year and there has been no real breakthrough in talks with the oil ministry since then.

'The MoU is not a binding contract, and we are still negotiating with NIOC about specific details,' the CNPC source, who declined to be named because he was not authorized to speak to the media, told the news agency."

In the meantime, Jean Chemnick and Katharine Fraser at Platts report that the US Senate has inserted language into the Senate Energy and Water Appropriations bill [H.R. 3183] which would prohibit companies that sell gasoline and diesel to Iran from entering into contracts to fill the Strategic Petroleum Reserve.

"At least three companies fit that bill, Glencore, Shell Trading and Vitol, according to the Foundation for Defense of Democracies. In January, the three were named by DOE as suppliers to the SPR for deliveries this year. While it could not be immediately confirmed whether any of the three currently sell refined products to Iran, all of them are known active traders in oil markets throughout the world."

In June, Reliance--a private oil company in India--halted gasoline exports to Iran, apparently because they expected difficulties for their exports to the US--see Daily Sources 6/4 #8. The UAE provides about 80% of Iranian product requirements, IIRC.

8. BAHRAIN CENTRAL BANK SEIZES TWO BANKS HELD BY SAUDI CONGLOMERATES

Frederik Richter at Reuters reports that the central bank of Bahrain has seized two banks owned by major Saudi conglomerates.

"The central bank said in a statement on Thursday it had assumed control of Awal Bank, owned by Saad Group and The International Banking Corporation, a unit of the Ahmad Hamad Algosaibi and Brothers conglomerate.

The central bank said an investigation at both banks had shown a substantial shortfall in assets compared with their liabilities and that it would appoint an external administrator to identify creditors' claims and manage the distribution of the remaining assets."

9. NIGERIAN PRESIDENT ENTERS TALKS WITH 6 NIGER DELTA GOVERNORS TO PREVENT THREATENED BOYCOTT OF MILITANT AMNESTY PLAN

Platts reports that Nigerian President Umaru Yar'Adua has begun talks with six governors from the Niger Delta in an effort to avert a threatened boycott of the amnesty program for militants in the region.

"The governors of southern Akwa Ibom, Bayelsa, Edo, Delta, Cross River and Rivers states last week said they would pull back their involvement in the amnesty deal for Delta militants in protest of the federal government's plan to relocate the petroleum training college in Delta state to northern city of Kaduna.

'There is a serious misunderstanding about some of the issues raised, but the president is very concerned and has been talking with the Niger Delta governors individually,' Presidential spokesman Olusegun Adeniyi in a statement. 'The president has respect for the Niger Delta region. He did not approach the crisis in the area as a Northerner.'

The governors also had grouse against a provision in the oil sector reform bill, which they said takes away royalties due Delta communities."

Earlier this week, the Nigerian Joint Revolutionary Council--an umbrella group of militants in the Niger Delta which includes MEND--warned a company linked to a current oil minister to stop operations to express their displeasure with the plan to locate the petroleum university in the north--see Daily Sources 7/28 #9.

10. US ENVOY FOR SUDAN RECOMMENDS TAKING KHARTOUM OF TERRORIST LIST

Reuters reports that General Scott Gration, the US special envoy for Sudan, recommended to Congress that Sudan be taken off the state sponsors of terrorism list.

"'There is no evidence in our intelligence community that supports [Sudan] being on the state sponsors of terrorism list,' Gration said. 'It's a political decision.'"

"'We are actually hurting the very development things we need to do help the south become ... if they chose to secede, a viable economic state,' Gration said, noting that Washington could not bring in heavy equipment to build roads and railways.

'At some point we are going to have to unwind some of these sanctions so that we can do the very things that we need to do to ensure a peaceful transition and a state that's viable in the (south) should they choose to do that,' he added.

In its latest report, the State Department described Sudan as 'a cooperative partner in global counterterrorism efforts.'"

11. CHÁVEZ PROPOSES LAW GIVING GOVT ARBITRARY POWER TO CONTROL MEDIA

Fausta Wertz at the Compass has the best summary of the news that Hugo Chávez's administration has now proposed a set of laws which would limit broadcasting rights and would make the rather arbitrarily defined violations are punishable with prison terms.

"The proposed law ... includes all media and applies to not only owners and publishers but also reporters, freelancers and anyone making a statement that could be interpreted as (my translation) 'any person who manipulates or distorts the news, creating a false perception of facts... as long as there is damage to social peace, national security, public order, or the mental health or public morals.'

The charge carries a compulsory 2-4 year prison sentence."

Wertz includes a link to the text of the law. She notes that the UN has registered its worries regarding the proposed legislation, but projects the protest will have little affect upon the administration's decision-making process ... correctly in my view.

12. RESEARCHERS FIND THAT EFFORTS TO HALT OVERFISHING ARE SUCCESSFUL

BBC News reports that a team of researchers have released the findings of a two-year study which concludes that efforts to halt overfishing in 5 of 10 marine ecosytems have helped fishing stocks to recover.

"The authors observed: 'Some of the most spectacular rebuilding efforts have involved bold experimentation with closed areas, [fishing] gear restrictions and new approaches to catch allocations and enforcement.'

But they warned that the signs of recovery should not be interpreted by policymakers as a sign that all was well beneath the waves.

The majority of fisheries were still in trouble, and were not being managed or regulated properly.

But Dr Worm said that the team's 'watershed paper' offered a blueprint for sustainable fishing.

'It clearly shows what needs to be done to not only avoid fisheries collapse, but to actually rebuild fish stocks and ecosystems.'"

(h/t Yves Smith at naked capitalism.)

13. US GDP DOWN AT ANNUALIZED RATE OF 1% IN Q2, CHICAGO PMI INDICATES BOTTOM

The Bureau of Economic Analysis released its estimation today that Q2 GDP fell at an annualized rate of 1%. Ed Harrison of Credit Writedowns observes:

"Down 1.5% was the consensus expectation. But Q1 was revised down to minus 6.4% from 5.5%. The GDP Deflator for Q2 came in at 0.2%, which shows that disinflation risks tipping into deflation still. The dollar is weaker and the short end of the treasury curve is up massively on these data and revisions.

Also ... the 2008 numbers were revised down. Q1 2008 was revised from positive 0.9% to negative –0.7%. Q2 2008 was revised way down as well from 2.8% to 1.5%. Q3 2008 was also very negative, now –2.7%. This confirms the December 2007 recession call.

There was a $140 billion reduction in inventories in Q2. I have been saying for some time that this would set us up for lots of upside come Q3 and Q4 as the inventory purge dissipates. So, we will get a technical recovery in my opinion. The question is whether there is any underlying demand uptick behind the inventory changes. In the data ... from the BEA website, you can clearly see ... that consumers are not even spending on basic items. Spending on non-durable goods was down 2.5% annualized. That is not good."

Peter Boockvar at the Big Picture reports that the Chicago PMI was 43.4 in July, up from 39.9 in June. (PMI readings of above 50 indicate expansion; below 50 indicates contraction.) He observes:

"Inventories remained extremely lean, falling to 25.4 from 34.2, the lowest since 1949 and is the perfect set up for a sharp contribution to GDP from this area in the 2nd half of the year, led by auto’s and related sectors. The employment index rose 6.4 points to 35.3, well below 50 but at the highest level since Dec ‘08. Prices paid fell a touch. Bottom line, the data confirms the backdrop for an improvement in GDP. The degree and sustainability of the recovery will however remain in the hands of end demand, aka, predominantly the US consumer."

Rebecca Wilder at News N Economics observes that

"Households have been 'delevering' for a longer time period than previously thought--as recent as 2008 Q1, the saving rate that was reported to be essentially zero, 0.2%, is now 1.2%."

Her chart of the US savings rate (with revisions as of today):

"The BEA has 'found' that households have been in fact saving roughly 1% of their disposable income per quarter since 1995, 0.9% per quarter in 2008."

Well worth a look, as always.

Daily Sources 7/22

1. DO COAL STOCKS INDICATE GLOBAL RECOVERY?; WTO SAYS GLOBAL TRADE TO CONTRACT 10% IN 2009

Thomas MacLeod yesterday at Seeking Alpha deduced from the performance of global coal ETF KOL, the US DOW Coal Index, and the global steel ETF SLX that energy consumption globally is up and thus is the global economy beginning a rebound.

"The commodity that we believe is more representative of pure changes in economic fundamentals is coal. It is difficult to manipulate, its supply is not so affected by political or natural events and it is comparatively difficult and expensive to store, which effectively weeds out speculators.

Moreover, coal is a genuine industrial commodity with over half of the world’s electricity generation being powered by coal fired power stations. It is integral in the production of steel and can be converted to produce crude and other industrial chemicals.

In order to analyze the behavior of coal we look at the movement of coal stocks relative to major market stock indices. This eliminates the impact of stock market movements so we can ascertain the movement due to changing expectations of coal demand and supply. In essence, outperformance of coal stocks suggests global economic expansion."

Of course, the performance of coal stocks does not represent a one-to-one ratio to consumption. The latest data on coal volumes shipped by train, for example, still shows 8% down year over year, which suggests that in North America, anyway, it is difficult to deduce a rebound on the basis of coal volumes. Meanwhile, Jonathan Lynn and Kazunori Takada at Reuters reports that the WTO has forecast that world trade will shrink by 10% in 2009.

"The WTO said however the contraction appeared to be slowing.

'Our figures showed that Asian countries may be leading a recovery in global trade,' [Director General Pascal] Lamy told a news conference in Singapore, where he was attending a two-day Asia Pacific Economic Cooperation (APEC) trade meeting."

2. IMF SAYS CHINA COULD STAND MORE STIMULUS IN CONTRAST TO WORLD BANK ASSESSMENT, CHINA INDICATING THAT IT WILL USE ITS FOREIGN CURRENCY RESERVES TO FUND CHINESE FIRM EXPANSION OVERSEAS, IN PARTICULAR RESOURCE PLAYS, CHINESE OIL IMPORTS IN JUNE WAY UP IN CONTRAST TO OFFICIAL COMMENT THAT STOCKPILING OVER

Timothy R Homan at the Bloomberg reports that the IMF has indicated in its first executive-level review of China in three years that there is scope for more fiscal stimulus in that country.

"The IMF’s assessment is a clash with the World Bank, the international development-aid agency also based in Washington, which last month advised China to delay until 2010 any additional stimulus. It also comes as China is already recording an acceleration in its expansion, and as its central bank takes steps to avert bubbles in stock and property markets."

In the April G-20 meeting in London, the Obama administration secured from the IMF a pledge to open up the selection process for the executive directorship of the organization in return for opening up the process for the head of the World Bank, traditionally an American. Some expect China to win the top spot when the next head of the World Bank is selected, but in order for Beijing to have had a real shot, it needed to open up the country to official review from the international financial institutions again. Meanwhile, Brad Setser has some remarks on the recent report that China intends to use its reserves to support the overseas acquisitions of Chinese firms.

"That of course is China’s right. China clearly has more reserves than it really needs, and thus can take some risks with its reserves.

But it also has consequences. If Chinese firms are explicitly backed by China;s reserves, it gets harder to argue that their expansion reflects a purely commercial calculus. China’s government presumably will deploy its assets to pursue China’s strategic as well as its commercial goals.

In some sense it is surprising that China has decided to be so explicit about its new desire to use its reserves to support Chinese state firms. China’s government could have achieved the same result by quietly putting more foreign currency on deposit in the state banks, and having the state banks lend those funds out to firms looking to expand abroad."

Kate MacKenzie at FT Energy Source notes,

"In an interview published in state-controlled media, the chairman of China Development Bank said Chinese outbound investment would accelerate but should focus on resource-rich developing economies.

'Everyone is saying we should go to the western markets to scoop up [underpriced assets],' said Chen Yuan. 'I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.'"

Meanwhile, Platts notes that Chinese apparent oil demand is up in June. I have reconfigured their data into a barrels per day format:



3. GERMAN ROLE AT ECB MAY BE ESPECIALLY PROBLEMATIC FOR COORDINATING GLOBAL RECOVERY, ECB ARGUES THAT ITALY'S ADOPTION OF THE EURO HAS CUSHIONED THE COUNTRY'S ECONOMY FROM ITS POLITICAL INSTABILITY

Jörg Bibow at the New America Foundation has an interesting piece on the German role in determining monetary policy for Europe and why it is presenting a serious obstacle to an effective global response to the financial crisis. Key excerpts:

"Within German 'stability culture' the Bundesbank's part was to enforce discipline, both budgetary discipline and wage discipline. The result was not only low inflation, but inflation lower than inflation of Germany's trading partners. And that is an important factor within any system of pegged nominal exchange rates: over time a country with relatively low inflation gains in competitiveness which is boosting its export performance. Stability policy worked well under the Bretton Woods regime, establishing both Germany's export-oriented growth strategy and the Bundesbank's claim to fame as inflation fighter."

"Exporting the German model to Europe through the Maastricht regime meant inflation would be low across Europe, while all countries would try to balance their budgets at the same time. When German stability policy was jointly applied across Europe in the early 1990s, the predictable result was domestic demand stagnation and rising unemployment. Even by 1996 it looked as though EMU was not going to fly because stagnation kept budget deficits above the 3% ceiling across the continent. Luckily, the US 'new economy' boom and strong US dollar came to the rescue, and eleven countries qualified in the spring of 1998 to launch the euro in January 1999. In other words, laboring under the Maastricht constraints, Europe failed to generate sufficient homemade demand growth, but benevolent external forces allowed the euro to get off the ground just on time."

"What does all this mean for the collective action problem which, as I said at the start, the world is facing today? Recovery from the ongoing global crisis requires everyone to pay their dues and pull their weight. Built into the German model is a strategy to rely on the recoveries of others to sponsor one's own. The German model has become the European model (pace the U.K). ECB president Jean-Claude Trichet said as much in 2004 when Euroland was last hoping for external sponsors of recovery: 'Growth starts with exports, then passes on to investment and then to consumption. That is the normal sequence for Europe in this phase of the cycle.' (FT 22 April 2004). The trouble is that Europe's economy is as large as America's or even larger, and the German model wholly unsuitable for a large economy. In addition, Europe has its hands full with its own homemade crises, crises which are largely the consequence of the German model as well. Recent statements made by key German policymakers clearly indicate that enlightenment is not a realistic prospect."

Bibow makes the especially uncharitable comment that perhaps Berlin needs to relearn the lessons of the Great Depression, but there he clearly misses the point. Perhaps Belin needs to unlearn the lesson, which clearly has as its main pivot the notion that hyperinflation led to the political instability which eventually ushered in the NAZIs to political ascendancy. That (nastiness) aside, the piece is worth reading. Meanwhile, the European Central Bank has published a working paper by Marcel Fratzscher and Livio Stracca which argues that the adoption of the euro has insulated Italy from its political instability.

"The paper focuses on political events in Italy over the past 35 years and asks whether the adoption of the euro in 1999 has helped insulate Italy’s financial markets from the adverse consequences of its traditionally unstable political system. We find that important political events have exerted a statistically and economically significant effect on Italy’s financial markets throughout the 1970s, 1980s and 1990s. The introduction of the euro appears to have indeed played a major role in insulating financial markets from such adverse shocks."

(I am obliged for both of these pieces to Eurointelligence.)

4. NETHERLANDS THREATENING TO BLOCK ICELAND ACCESSION TO THE EU IF IT DOES NOT COMPENSATE DUTCH SAVERS ON LOSSES

NRC Handelsblad reports that Dutch Foreign Minister Maxime Verhagen is threatening to block Iceland's bid to join the European Union, unless Reykjavik meets its obligations to compensate Dutch savers.

"According to the agreement Iceland has to repay €1.3 billion to the Netherlands and €2.3 billion to the UK. The British and Dutch governments spent that money to compensate savers for the €20,000 the Icelandic government had guaranteed for those saving with Icelandic banks. The Icelandic government agreed to repay those damages in the form of a loan, but parliament could block that deal, as some members of the Althing have threatened to do.

'A solution to the problems surrounding Icesave could speed up the handling of the Icelandic application for EU membership," Verhagen said. He added it is "absolutely necessary' that Iceland approves the agreement to 'show that Iceland takes EU guidelines seriously.'"

5. GEORGIA SEEKING AMERICAN ARMS

Philip P Pan at the Washington Post reports that Georgian President Mikheil Saakashvili yesterday indicated in an interview that Tblisi is seeking a weapons deal with the United States.

"In a wide-ranging interview, Saakashvili said that discussions about a weapons deal remained at 'very early stages' but that he planned to press Biden to speed up delivery of antiaircraft and antitank systems, saying such weaponry was 'purely defensive' and 'would make any hotheads think twice about further military adventures.'

'I think the decision to help us is there,' he added, noting recent meetings between Georgian and US defense officials. 'It's a matter of speeding up the process. . . . We want the country to still be around when those things start to arrive here. That's ultimately what's right now at stake.'

The United States has been working to train and modernize the Georgian military for more than a decade, but Russia has warned strongly against new arms shipments to the former Soviet republic, which it routed in a brief war last year."

6. PAKISTANI SUPREME COURT ASKS FOR MUSHARRAF REPRESENTATION ON CASE CONSIDERING WHETHER EMERGENCY MEASURES IN 2007 WERE CONSTITUTIONAL, ISLAMABAD OBJECTS TO CAMPAIGN IN AFGHANISTAN, GERMAN INVOLVEMENT HEATS UP, PAKISTAN ASKS FOR ADDITIONAL INTEL SUPPORT FROM US AND WARNS THAT DEAL WITH INDIA COULD START ARMS RACE

BBC News reports that Pakistan's Supreme Court has decided that former President Musharraf should be represented in a case before it over whether or not the emergency rule imposed in November 2007 was constitutional.

"'This is the first time in Pakistani history that the court has taken cognizance of such action. In the past, the courts have tended to condone military takeovers,' a former chief justice of Pakistan, Saeeduzzaman Siddiqui, told Dawn News TV.

The BBC's Ilyas Khan in Islamabad says that the court apparently issued the notice to Mr Musharraf following the refusal on Tuesday by the attorney-general, who represents the government, to defend the former president's position in the case."

Meanwhile, Eric Schmitt and Jane Perlez at the New York Times report that Pakistan is objecting to expanded combat plans in Afghanistan.

"Pakistani officials have told the Obama administration that the Marines fighting the Taliban in southern Afghanistan will force militants across the border into Pakistan, with the potential to further inflame the troubled province of Baluchistan, according to Pakistani intelligence officials.

Pakistan does not have enough troops to deploy to Baluchistan to take on the Taliban without denuding its border with its archenemy, India, the officials said. Dialogue with the Taliban, not more fighting, is in Pakistan’s national interest, they said."

Matthias Gebauer and Shoib Najafizada at Der Spiegel report on German forces increasing involvement in the fighting in Afghanistan:

"The Bundeswehr is supporting the Afghans with around 300 members of the Quick Reaction Force (QRF). Their primary role is to help secure the area around the fighting and provide reconnaissance.
...
[T]he Bundeswehr has also become considerably more assertive. For the first time, Marder tanks--which have heavy firepower and were only recently relocated from Mazar-e-Sharif to Kunduz--have been deployed.
...
According to SPIEGEL ONLINE sources, missiles are also being fired by German fighter jets in northern Afghanistan for the first time. Following a first deployment of fighter jets on June 15 in northern Afghanistan by the ISAF international security force, most supplied by the United States, Afghan forces requested so-called 'air support' for a second time on Sunday.

Such air support had long been considered taboo in northern Afghanistan."

Meanwhile, Joshua Partlow at the Washington Post reports that Pakistani Prime Minister Yusuf Raza Gilani today has called on the US to provide real-time intelligence and other military support for the Pakistani effort against the Taliban, without relying on attacks from US drones. Both American national papers mention that Islamabad is concerned about the recent end use monitoring deal made with India, suggesting that it could spark an arms race.

7. KURDISTAN COMMISSIONS NEW REFINERY

Eric Watkins at the Oil & Gas Journal reports that Kurdistan has commissioned a new refinery near Arbil which will originally process 20 kb/d, ramping up to 40 kb/d by the end of the year. The refinery is one of several planned for the area, with plans to have total throughput capacity of about 200 kb/d. "Refinery director Baz Karim said the new facility is operated by private Kurdish investors Kar Group, and will process crude from the Khurmala Dome oil field ... ."

8. IRANIAN CONSERVATIVES RESPOND TO RAFSANJANI LETTER, LOTR TELLS AHMADINEJAD THAT HE NEEDS TO WITHDRAW SON IN LAW AS VP PICK

The best round up on recent maneuvering between elites in the aftermath of the Iranian elections is at Juan Cole's Informed Comment. The Leader of the Revolution has warned against further civil disobedience on Monday and includes an excerpt of his speech as translated by the Open Source Center. A representative of the LOTR at the Revolutionary Guards has indicated that support for the LOTR has foiled the plots of outsiders--Cole includes an excerpt from his speech as translated by the OSC. He also includes an excerpt of conservative cleric Ayatollah Mohammad Yazdi's recent charges that Rafsanjani has undermined the revolution as translated by the OSC. Press TV--an English-language state media organ of Iran--on Tuesday reported that the LOTR has told Ahmadinejad that he must undo the selection of his son-in-law as Vice President.

9. HAGUE RULES ON NORTH-SOUTH SUDAN BORDER

Stephanie McCrummen at the Washington Post reports that the Hague has issued a ruling on the disputed south-north border in the Sudan, striking a compromise.

"The ruling by the Permanent Court of Arbitration awards control of a lucrative Chinese-run oil field in the region of Abyei to the Sudanese government but defines the region's boundaries in a way that is politically beneficial to the south.

Officials from the south and President Omar Hassan al-Bashir's ruling party quickly promised to respect the ruling, which analysts called a major test of the fragile 2005 peace deal that ended the bloody north-south civil war, one of Africa's longest-running conflicts.

'Both parties have agreed to accept the boundaries,' said Majok Guandong, Sudan's ambassador in Nairobi. 'We think there will be no maneuvering by either side.'"

The ruling leaves a smaller working oil field in the territory of the south and defines the territory as being mostly populated with the Ngok Dinka, a nomadic tribe which identifies itself with the south and will likely vote to join it in the referendum on independence from Khartoum in 2011.

10. NIGERIA SAYS NIGER DELTA UNREST CUTTING OFF 1 MB/D IN SUPPLY

Platts reports that Nigeria's Oil Minister Rilwanu Lukman yesterday told the media that the country is losing approximately 1 mb/d in production due to continuing strife in the Niger Delta.

"Lukman told leaders of the ruling People's Democratic Party in Abuja that Nigeria's oil production had dropped to between 1.4 million and 1.5 mb/d, well below its assigned OPEC quota and far off from the 2009 budget benchmark of 2.29 mb/d, according to a Thisday newspaper report Wednesday.

'We have production capacity of 2.3 mb/d but because of problems in the Niger Delta, we cannot meet our target. This year's budget is based on having 2.2 mb/d. So, we are short of a million barrels,' the minister was quoted as saying.

'Our target is 4 million barrels in 2010, presently we have 37 billion barrels in our reserve. The target for next year's production is 4 mb/d,' Lukman said."

11. BRAZIL TO SELL DOLLAR DENOMINATED BONDS, SIGNS NUCLEAR ENERGY MOU WITH MOSCOW

After all the hoopla about the replacement of the dollar as the reserve currency, Andre Soliani and Carla Simoes at Bloomberg report that Brazilian Treasury Secretary Arno Augustin has said that Brasilia plans to sell dollar denominated bonds on the overseas credit markets shortly.

"The country will tap the market more than once before yearend and look to sell securities maturing in more than 10 years, Augustin ... said in an interview with Bloomberg Television in Brasilia today.

'We will certainly issue foreign bonds more than once in the second half, seeking to lengthen the debt’s profile and create conditions' for companies to sell bonds, Augustin said. There is investor demand for bonds maturing in 30 years, he said.

Brazil plans to tap international credit markets as speculation the global recession is easing fuels demand for higher-yielding assets."

As a counterpoint, today the Latin American Herald Tribune notes that Russian media yesterday reported that Russia and Brazil have signed a MOU on nuclear energy cooperation.

"The pact calls for the development of uranium prospecting technology and the design of new reactors, as well as the design and construction of nuclear research reactors.

The agreement opens the way for the production of radioisotopes for use in agriculture and the pharmaceutical industry, as well as the training of nuclear energy experts.

Russia and Brazil agreed to create a working group for atomic research and development projects."

12. US PLANS TO INCREASE PRESENCE IN COLOMBIAN MILITARY BASES ROILING NEIGHBORS

Simon Romero at the New York Times reports that a plan to increase the American presence at three military bases in Colombia is drawing the ire Bogota's neighbors.

"Venezuela, Ecuador and Nicaragua, which are members of a leftist political alliance that is led by President Hugo Chávez of Venezuela and backed by his nation’s oil revenues, have all criticized the plan, saying it would broaden the military reach of the United States in the Andes and the Caribbean at a time when they are still wary of American influence in the region.

Despite a slight improvement in Venezuela’s relations with the United States in recent months, Mr. Chávez has been especially vocal in lashing out at the plan. Speaking on state television here Monday night, he put Venezuela’s diplomatic ties with Colombia under review, calling the plan a platform for 'new aggression against us.'

Colombia’s foreign minister, Jaime Bermúdez, on Tuesday defended the negotiations, which are expected to produce an agreement in August, asking neighboring countries not to interfere in Colombia’s affairs. 'We never expressed our opinion in what our neighbors do,' he said, pointing to Mr. Chávez’s attempts to strengthen ties with non-Western nations. 'Not even when the Russian presence became known in Venezuelan waters, or with relations with China,' he added."

13. EIA SAYS COMMERCIAL CRUDE STOCKS DOWN, GASOLINE AND DISTILLATE UP--REGULAR GASOLINE PRICES DOWN, REFINERY UTILIZATION DOWN

The EIA reports that commercial crude oil stocks were drawn down by 1.8 million barrels in the week ended July 17 to 342.7 million barrels. Inventories are still above the five year historical range for this time of year. The draw down was smaller than the 2.1 million barrel fall expected as per the median expectation of analysts in a Bloomberg survey. Bloomberg also notes:

"In contrast to the Energy Department supply report, the American Petroleum Institute said late yesterday that stockpiles rose 3.1 million barrels last week, the first gain since April."

Gasoline stocks grew by 800,000 barrels and are now at the top of the five year historical range for this time of year. Distillate stocks grew by 1.2 million barrels and there are 32.4 million barrels more distillate in storage than there was this time last year, about 25.3% more. Refining utilization fell to 85.84% from 87.87% in the week previous. The national average price of regular gasoline fell to $2.463/gallon in the week ended July 20, just below the range where driving demand begins to fall in response to the price.

Daily Sources 6/22

1. GORDON BROWN ASKS MINISTERS TO FORMULATE PROPOSALS FOR HANDLING OIL PRICE, INCLUDING PLAN TO HAVE IMF ACT AS PRICE REGULATOR; CGES SAYS OPEC SHOULD INCREASE PRODUCTION TO HELP GLOBAL ECONOMIC RECOVERY, BUT WON'T; HAMILTON SHOWS CONSUMER SENTIMENT STRONGLY CORRELATED TO GAS PRICE; AIRLINES COMPLAIN TO OBAMA OF OIL SPECULATION; ANDY XIE ARGUES STIMULUS BACKED LENDING SURGE IN CHINA BEING INVESTED IN COMMODITY SPECULATION

Kate Mackenzie at FT Energy Source reports that UK Prime Minister Gordon Brown asked top ministers at the Treasury and the Department of Business to draw up plans for responding to high oil prices. Apparently the administration is also considering proposals by which the IMF would take a role in monitoring oil prices--and influencing price. (The IEA mostly acts as a data collector and canary.)

"Brown believes that the G20 meeting in London in the spring missed an opportunity to put in place measures to stabilize the oil price, after it fell from a peak of $147 a barrel to less than $35 early this year."

The idea currently being mulled could reportedly form a key element of the UK proposal at the G20 meeting to be held in Pittsburgh in October. In the meantime, Platts reports that the Centre for Global Energy Studies, based in London and led by former Saudi Arabian oil minister Ahmed Zaki Yamani,

"is forecasting that oil prices will rise steadily through the rest of this year, reaching $80/b in the fourth quarter, as OPEC continues to maintain its current levels of quota compliance."

The CGES argues that OPEC should raise production in order to moderate price and gird a potential economic recovery, but is choosing not to do so. James Hamilton at Econobrowser plots the correlation between gasoline price and US consumer sentiment (with the dashed line [RH] being the miles per dollar spent on gasoline and the solid line [LH] representing the Reuters/Michigan index of consumer sentiment):



He comments:

"So how should we assess the likely consequences of the fact that gas prices have now come back up significantly from their lows of December? The Edelstein-Kilian regressions employed in my paper from a recent conference at the Brookings Institution imply that a 20% increase in energy prices would historically be followed within 2 months by a 15-point drop in consumer sentiment and a 1.4% decline (relative to trend) in real consumption spending. From that perspective, the 46% (logarithmic) increase in (seasonally unadjusted) gasoline prices since December is quite worrisome.

On the other hand, since those December prices were 88% (logarithmically) below the July 2008 peak, consumers should have been giddy in December and still be significantly more sanguine now than they had been last summer, if the only thing on their mind was the price of gasoline.

Only problem is, consumers were anything but giddy in December. Credit and employment challenges have weighed far more heavily than gas prices over the last 9 months, and are presumably far more important than gas prices for determining what happens over the next few months as well."

A bit wonky, but nonetheless the must read of the day. And Kyle Peterson at Reuters reports that the Airline Transport Association sent a letter dated June 11 to President Obama, complaining of the role of speculators in the oil market:

"A repeat of last summer's astronomical crude-oil prices will bring the nation's economic recovery to a painful halt. ... Businesses that spend billions of dollars on fuel each year, already dealing with the impacts of decreased consumer spending, are especially vulnerable."

(h/t Kate Mackenzie at FT Energy Source.) In the meantime, Andy Xie on Friday had an opinion piece at Caijin Magazine where he argued that the lending inside mandated by the stimulus program has not been spent on "tangible projects" but in asset markets.

"There's little doubt that China's bank lending since last December has driven speculative inventory demand for commodities. Chinese banks lend for commodity purchases, allowing the underlying commodities to be used as collateral. These loans are structured like mortgages.

Banks usually have to be extremely cautious about such lending, as commodity prices fluctuate far more than property prices. But Chinese banks are relatively lenient. As an industrializing economy, China's support for industrial activities such as raw material purchases for production is understandable. However, when commodities are bought on speculation, lenders face high risks without benefiting the economy.
...
The international media has been following reports of record commodity imports by China. The surge is being portrayed as reflecting China's recovering economy. Indeed, the international financial market is portraying China's perceived recovery as a harbinger for global recovery. It is a major factor pushing up stock prices around the world.

But China's imports are mostly for speculative inventories. Bank loans were so cheap and easy to get that many commodity distributors used financing for speculation. The first wave of purchases was to arbitrage the difference between spot and futures prices. That was smart. But now that price curves have flattened for most commodities, these imports are based on speculation that prices will increase. Demand from China's army of speculators is driving up prices, making their expectations self-fulfilling in the short term."

The other must read of the day.

2. GLOBAL RETAIL SALES NUMBERS DOWN

Rebecca Wilder at News N Economics notes that retail sales are taking a serious hit globally. Here is her graph of retail numbers for Asia:



She observes:

"Out of the 27 countries listed below, 18 posted a positive average annual growth rate in 2008, while just 5 saw the same in 2009 ytd."

Worth reading in full.

3. WORLD BANK SAYS GLOBAL ECONOMY TO CONTRACT BY 2.9% IN 2009, TRADE TO FALL BY 9.7%

Timothy R Homan at Bloomberg reports that the World Bank released a report today forecasting that the global economy will contract by 2.9% in 2009, a rougher contraction than the bank previously forecast of 1.7%. Global trade is expected to fall by 9.7% versus the fall of 6.1% forecast in March.

"'Unemployment is on the rise, and poverty is set to increase in developing economies, bringing with it a substantial deterioration in conditions for the world’s poor,' the World Bank said. While the world is set to return to growth in the second half of 2009, a recovery will be subdued, the report said.

Reduced capital inflows from exports, remittances and foreign direct investment means 'increasingly grave economic prospects' for developing nations, the lender said. After peaking at $1.2 trillion in 2007, inflows this year may fall to $363 billion, it said."

4. SARKOZY TO GIVE "STATE OF THE UNION ADDRESS" IN VERSAILLES, OVERTURN CENTURY OF PRECEDENT

Emmanuel Georges-Picot at the Associated Press reports that French President Nicolas Sarkozy has decided to overturn 136 years of precedent and directly address both houses of the French parliament today at the Chateau of Versailles. Sarkozy means to use the event to establish a platform by which to address the country on big issues along the lines of the American "State of the Nation" address.

"The last presidential speech to France's parliament was in 1873, before lawmakers banned the practice to protect the separation of powers and keep the president in check."

5. MALAYSIA'S CENTRAL BANK TAKES KEY STEP IN DIRECTION OF PURCHASING YUAN-DENOMINATED DEBT AS RESERVE

Denis McMahon at the Wall Street Journal reports that the China Securities Regulatory Commission said on June 12 that it had approved the Malaysian central bank--Bank Negara Malaysia--as a qualified foreign institutional investor [QFII].

"That status allows the Malaysian central bank to invest in China's exchange-traded equities and debt, including Ministry of Finance bonds."

Potentially, therefore, Bank Negara Malaysia could act as the first central bank to buy Chinese debt as a reserve. However, Bank Negara Malaysia has yet to be approved by China's currency regulator to purchase renminbi. In February, China and Malaysia signed a currency swap agreement.

6. RUSSIA INVOLVED IN TAIWANESE JET FIGHTER UPGRADE, BELARUS & RUSSIA ANNOUNCE JOINT MILITARY EXERCISES

Yevgeny Bendersky at the Compass notes the recent report that Russia was involved in the development of the third generation fighter planes for the Republic of Taiwan.

"According to The China Times, Taiwan has begun work on a new military aircraft after appeals to the US with a request for the sale of 66 fighter aircraft F-16C/D. Washington, as previously reported, denied this request, not wanting to spoil relations with Beijing. Chinese journalists also point out that the plane, developed by a public company Taiwan Aerospace Industrial Development Corporation (AIDC), has two engines and has a short take-off capability. Its development, according to The China Times, was completed only after Russia sent its experts to Taiwan--the source did not specify what Russian organization or company they represented.

This is certainly a new turn for the Russian defense industry and presents a dilemma for the United States. Washington and Taipei have a very close defense relationship, even if certain military hardware is not sold to the ROC from time to time. Taiwan is one of the high-tech sources for a great deal of technology that powers high-tech American industry, as well as American military developments. Russians were always keen on seeing first hand how far Western--and US in particular--military development has advanced, since at this time, Moscow can only watch on the sidelines as America and her allies implement next-generation high-tech military gear. Did the Russians get a chance to see first hand the advanced technology that Washington sold to Taipei, and did they take good notes to take back with them? An even larger question is what this news may do to the Moscow-Beijing military cooperation. Russia has sold a wide variety of advanced high-tech aircraft to mainland China recently, including Su-27 multi-role fighter bomber. China, making sure it was able to level the playing field, quickly reverse-engineered the Russian plane and began its indigenous production under J-11 designation.

Russians recently expressed concern that China is making plans to produce its own version of an even more advanced plane that Russia sold to Beijing about 8 years ago--Su-30 Flanker multirole fighter, a more advanced version of Su-27. Since all of Taiwan's military aircraft are designed and fielded against mainland China, Russian know-how now is part of ROC's high-tech air force pointed at the mainland. One has to wonder what Beijing thinks about all this, and whether Moscow's action was a pay back of sorts for China deciding to copy Russian technology."

Bendersky also notes that Belarus and Russia announced their joint military exercises for 2009, on the back of the recent refusal of Minsk to join the Moscow-led Collective Security Treaty--see Daily Sources 6/15 #3.

7. TALIBAN OPERATIONS IN AFGHANISTAN AND PAKISTAN RE-CENTRALIZING

Matthew Rosenberg, Yochi J. Dreazen and Siobhan Gorman at the Wall Street Journal report that Mullah Omar, the head of the Taliban, has been reasserting direct control over the militants in their struggle with NATO in Afghanistan.

"'This is Quetta's answer to Obama's surge,' said a senior member of a militant network led by Gulbuddin Hekmatyar, an independent Afghan warlord who fights alongside the Taliban. He was referring to plans by the administration of President Barack Obama to send an additional 21,000 troops to Afghanistan over the next few months. The Quetta 'are not ready to lay down their weapons,' he said in an interview in the Pakistani city of Peshawar."

Omar is thought to lead the Taliban leadership council from the city of Quetta in south Pakistan. There are some indications that the effort to re-centralize decision-making for the Taliban is upsetting some lieutenants which may make them more amenable to US outreach efforts. Insofar as Omar is directing attacks at Islamic institutions in Pakistan, I suspect he is setting fire to his own bed.

8. ZADARI SAYS US TOO COZY WITH DICTATORS, ASKS FOR MORE MONEY

Pakistan's President, Asif Ali Zardari, has an op ed in today's Washington Post, which sounds more than a little like a rebuke. To wit:

"The West, most notably the United States, has been all too willing to dance with dictators in pursuit of perceived short-term goals. The litany of these policies and their consequences clutter the earth, from the Marcos regime in the Philippines, to the Shah in Iran, to Mohammed Zia ul-Haq and Pervez Musharraf in Pakistan. Invariably, each case has proved that myopic strategies that sacrifice principle lead to unanticipated long-term consequences."

His ask sounds more like a threat than a plea:

"We need immediate assistance. The Obama administration recognizes that only an economically viable Pakistan can contain the terrorist menace. The United States has committed $1.5 billion a year for five years to help stabilize our economy, and the House of Representatives and the Senate Foreign Relations Committee have acted decisively to reorient the Pakistani-American relationship toward not just a military alliance but a sustained economic partnership.

Now, the rest of the world must step up and match the US effort. Pakistan needs a robust assistance package so that we can deliver for the people and defeat the militants. And the rest of the world should again follow the American lead in helping us deal with the millions of internally displaced people who are the most recent victims of terrorism in our nation.

But aid is not enough. In the long term, Pakistan needs trade to allow us to become economically independent. Only such an economically robust Pakistan will be able to contain the fanatics and demonstrate to the 1.5 billion Muslims worldwide that democracy and economic development go hand in hand. Notably, the United States is moving forward with regional opportunity zones in Afghanistan and the Federally Administered Tribal Areas region of Pakistan that will remove trade barriers and provide economic incentives to build factories, start industries, employ workers -- and give hope to the people. This opportunity zone concept should be a model to Europe, as well. Europe must realize that it is in its own self-interest, as the United States has realized, to do everything possible to grow the Pakistani economy and to provide incentives for Pakistani exports to the continent."

I suspect that someone's PR advisers weren't thinking when they composed this. It is not exactly a secret that Zadari is known to his countrymen as Mr. 5% nor that he recently moved to try and bar his main opponent for the office of President from running for office and his brother from running the province he had been elected to govern. Insofar as he backed down in the face of the lawyers' movement, I feel that he is "committed" to rule of law and democracy, but the rhetoric of the piece is rather closer to that of Evita Peron than to Nelson Mandela. Should be read in full, of course.

9. CONTINUED US JOBLESS CLAIMS FALLING MOST LIKELY DUE TO INSURANCE EXPIRING

Barry Ritholtz at the Big Picture observes that the decline reported in continuing claims is not due to the unemployed finding work, but rather to their unemployment insurance expiring. He plots the "exhaustion rate" for jobless benefits:



and notes, "They are now unemployed AND broke. That is hardly a green shoot ..."

Daily Source 5/8

1. CHINESE CONSUMERS SAVE, UNLESS THEY'RE PAID TO SPEND ... WHAT ARE THEY BEING PAID TO SPEND ON? CARS.

Barry Ritholtz at the Big Picture posts a fascinating graph which plots the trend of consumer spending as a share of GDP in China over time parallel to the trend of savings as a share of GDP:



The chart makes me think that culturally in China the consumer will only consume with abandon if the government pays him to. And the government is paying him to. Fang Yan and Michael Wei at Reuters report that passenger cars sales in China grew to 831,000 units in April, up from 604,900 units from a year earlier and 772,400 in March. Earnings did not particularly grow, however, as the Chinese stimulus targeted small vehicles, which do not yield the same margins as their larger cousins.

"'Beijing's stimulus policies are having a longer-lasting effect than expected,' said Qin Xuwen, an analyst with Orient Securities. 'As long as volume continues to grow, which is quite likely given the records in March and April, and there is no sudden spike in commodity prices, bottom lines of automakers will improve this year.'"

Which is an issue, oil prices are perking up, to say the least.

2. AND MORE CARS = MORE OIL DEMAND, SO THE NDRC PUBLISHES MORE DETAILS ON ITS NEW FUEL PRICING POLICIES, WHICH ARE MORE RESPONSIVE TO GLOBAL PRICES

The state is trying to make transportation fuel costs in China more responsive to global prices and thus make oil demand more responsive to them. The National Reform and Development Commission introduced new rules for pricing domestic petroleum products at the beginning of the year, and Xinhua reports the agency detailed it method on its website today:

"China would adjust domestic fuel prices when global crude prices reported a daily fluctuation band of more than 4% for 22 working days in a row.

The commission said refiners would enjoy 'normal' profit when global crude prices are below US$80/b, but would face narrower profit margins when the crude prices rise above US$80/b.

However, fuel prices would not go further up, or only be raised by a small margin, when crude prices rise above US$130/b, and fiscal and tax tools would be used to ensure supplies, the NDRC said."

On January 1 the NDRC introduced a new fuel consumption tax on importers and refiners of 0.8 yuan/liter (~$0.11745/liter or $0.445/gallon or ~$13.78/barrel) and suggested that it would reduce benchmark prices by 30-50%, though this more recent announcement appears to reflect a decision to let the price float to a certain extent--see Daily Sources 12/19 #1. In any case, close to a million new passenger vehicles a month, compact or not, translates into a considerable amount of oil demand. Dinakar Sethuraman at Bloomberg reports that the director of investor relations for China Petroleum & Chemical Corp., Zheng Baomin, indicated in a speech that Asia's largest refiner expects Chinese oil products demand to grow at 0.6 to 0.7 times that of GDP growth.

"The government has forecast GDP to expand 8% in 2009, Zheng said at a conference today in Singapore. This equates to China’s oil-product demand growing between 4.8% and 5.6% this year, according to Bloomberg calculations based on Zheng’s speech."

And China's National Bureau of Statistics data does suggest that apparent products demand was up slightly year on year in March. And Eadie Chen and Tom Miles at Reuters report that the petroleum products stocks held by Sinopec and CNPC fell by 15%--I infer from the month earlier. Sales rose by 5%.

3. WHILE COMMODITIES PRICES APPEAR TO BE SPIKING (ON CHINESE STIMULUS) CAUSING CORPORATIONS TO HEDGE, CAUSING MORE PRICE RISES LIKELY TO UNDERMINE STIMULUS GIVEN WEAK OVERALL DEMAND

And the entire commodities complex appears to be spiking, with the the spot S&P GSCI commodity index, a basket of raw materials, recently moving above 400, 32% higher than in late December, per Javier Blas at the Financial Times. Blas says that the price spikes, combined with rumors of "green shoots," have unnerved corporate consumers who are rushing to hedge their raw material requirements:

"The head of metals trading at a bank in London said: 'Consumers are being dragged to hedge, even if their demand is not strong, because they are afraid of the rapid price increase in some markets.'

Bankers pointed to hedge examples such as Delta, the world's largest airline, which has boosted its fuel hedge to 75% of this year's needs, from less than a third late last year.

Cargill and Louis Dreyfus, two of the world's largest agricultural trading houses, last week secured a hefty position in the sugar market, pushing prices higher, to supply India, the world's largest consumer."

And Grant Smith at Bloomberg reports on the latest prediction, by PVM Oil Associates Ltd., that oil is set to move to $62.65/b shortly, and from there to $78/b within six months.The problem remains that oil at those levels seems to precipitate demand destruction. I updated my VMT vs front month WTI prices (nominal) chart last night and $70-$80/b appears to the point at which people drive less in the US ... I would imagine that the effect would be more pronounced in China:



The bright spot, from the perspective of oil bulls, seems to be localized in China, as even the stimulus program there does not appear to have especially heartened representatives of the steel sector there. Reuters reports that Mr Shan Shanghua, secretary general of the China Iron and Steel Association said,

"'We are still aiming at a yearly production of 460 million tonnes. Whether we can make it or not depends on exports and domestic demand. But I am sure that if we remain at that high production rate and do not cut output, it will be a disaster.'

Mr. Shan said the Chinese, led in the negotiations by Baosteel, should be able to get a price below the spot market, which would mean a cut of more than 30%. He said that 'There is a common sense that wholesale prices should always be lower than those for retail.'"

(h/t Yves Smith at naked capitalism.) The Baltic Dry Index, though off its lows, isn't recovering at a rate that would make me all that optimistic:



4. GERMAN EXPORTS DOWN 16 Y-O-Y IN MARCH, OWEN HUMPAGE SAYS EURO MORE LIKELY ALTERNATIVE TO DOLLAR THAN SDRS

Der Spiegel reports that the value of German exports in March fell by 16% from a year earlier according to the Statistics Office. (They rose slightly from February--by 0.7%--but February is 10% shorter than March.)

"German industrial production remained flat in March, following a year long decline, data released by the Economics Ministry also showed on Friday.

'Recent positive impulses came from the car industry that has benefited from economic stimulus measures at home and abroad,' the ministry said in a statement, referring in part to the German 'scrapping bonus' scheme which pays a bonus to drivers junking an old car and buying a new one.

Meanwhile, German manufacturing orders released on Thursday, unexpectedly jumped just over 3% between February and March. The rise, its first in seven months, also fueled hopes that the worst of the recession may have passed."

Owen F. Humpage at Vox EU writes that the notion of trading the dollar for SDRs is faced with the same problem as deciding, say, to stop your business communications in English and talk in Klingon instead. Though some central banks may be diversifying their reserves into metals, the dollar is by far the largest held foreign reserve internationally.



Humpage comments:

"These currencies’ official reserve rankings parallel their status in international commerce more generally. This correlation should be of no surprise. Why hold a currency that no one uses? According to a 2007 BIS survey, roughly 88% of daily foreign exchange trades involve dollars. Again, the euro is a distant second, with the British pound and Japanese yen trailing."

He concludes that at its core the SDR notion is based on inflation concerns, which would be more easily met by switching to the euro than SDRs. Worth reading in full.

5. PAKISTANI PM TELLS COUNTRY ALL BETS ARE OFF IN SWAT, CHINESE AMBASSADOR TO ISLAMABAD COMPLAINS OF US PRESENCE IN REGION

Pamela Constable at the Washington Post reports that Pakistan's Prime Minister, Yousuf Raza Gillani, made a late night televised address last night which told the country that the armed forces are being "called in to eliminate the militants and terrorists," effectively ending negotiations with the Taliban for now. The announcement:

"signaled the final collapse of a fragile peace accord between the government and Taliban forces in the Swat region. It also represented the civilian government's formal green light for a full-fledged offensive by the military, which until now has been fighting sporadically."

Gillani has been regarded within the country as a hopeful figure having negotiated the end of the conflict with the lawyers' movement which ended in Chief Justice Chaudhry being restored to his seat and the governance of Punjab restored to the PML-N. Meanwhile, Kalbe Ali at the Karachi Dawn reports that the Chinese Ambassador to Islamabad, Lou Zhaohui, told reporters today that Beijing is "concerned over the increasing US influence' in the region.

"‘These are issues of serious concern for China,’ he said, adding that China was concerned over the US policies and the presence of a large number of foreign troops in the region.

He said that US strategies needed some ‘corrective measures’ to contain terrorism. However, he added, terrorism was a serious issue and required cooperation between countries in the region to counter it."

6. FMR ASST SECY OF DEFENSE ARGUES AFGHAN MILITARY SHOULD BE GIVEN LARGER GOVERNANCE ROLE

Former Assistant Secretary of Defense Bing West argues in the Wall Street Journal that the most important step to take in order to establish relatively amicable security in Afghanistan is to give the Afghan Army a larger role in governing the country.

"But as long as Pakistan is a sanctuary, US forces here will be on the strategic defensive, no matter how skillful their military tactics. We can't stay forever. The basic question is: How to consolidate the battlefield gains? That depends upon how the mission is defined. President Barack Obama has avoided promising to build a vibrant democratic nation. 'The achievable goal,' he said recently, 'is to make sure it [Afghanistan] is not a safe haven for terrorists.' Such a minimalist policy can be achieved in one of two ways.

The first is to apply the classic counterinsurgency model: After the military push the enemy from a populated area, the police take over, while government appointees provide honest governance and basic services. This approach pursues the expensive nation-building that Mr. Obama has not endorsed. It requires thousands of additional police trainers and hundreds of civilian advisers in the districts. These advisers also serve as watchdogs against corruption, acting as a shadow government to restrain officials prone to skimming and payoffs. It's a sound approach that is slow and expensive.

The second option is to expand the role of the Afghan army to act as the facilitators and watchdogs of governance. Today, American commanders like Capt. Howell routinely participate in shuras or councils. They can gradually hand off such governance-related tasks to Afghan officers."

Worth reading in full.

7. KRG LETTER SUGGESTS THAT A DEAL HAS BEEN STRUCK WITH BAGHDAD ON STATUS OF KURDISH CONTRACTS WITH OIL COMPANIES

William MacNamara at FT Energy Source reports that the Minister of Natural Resources of the Kurdistan Regional Government, Dr. Ashti Hawrami, released a statement today which stated that crude exports from the Tawke field of 60 kb/d and the Taq-Taq field of 40 kb/d will officially begin being exported through the Iraq-Turkey pipeline come June.



Key excerpt from the letter which Energy Source reproduces in full:

"The exported crude oil from both fields will be marketed by SOMO [Iraq's State Oil Marketing Organization] and the revenue will be deposited to the federal Iraq account for the benefit of all Iraqi people. The average API gravity of the crude oil mix at a combined rate of 100,000 barrels per day will be around 35 degrees. Once the Taq-Taq pipeline is laid and further upgrades are made to the Tawke pipeline, the combined exports from these two fields will reach 250,000 barrels per day, with the average API gravity of around 39 degrees. These higher API gravity oil mixes will improve on the overall quality of the present Kirkuk oil mix which is only around 31 degrees API."

Though the letter clearly implies that a deal has been struck with the central government regarding the validity of the licenses the Kurdish Regional Government has granted various E&P firms in the region, the Iraqi Oil Ministry denied to reporters at Reuters that any such deal had been struck. The companies involved also indicated surprise when approached by reporters. McNamara adds:

"While no expected the power struggle between Iraq’s central and regional governments to end any time soon, many many players involved in the Kurdistan oil industry said in recent weeks that the two sides were closer than ever to an agreement over Kurdish oil exports and were hammering out the final details of revenue-sharing."

8. POPE VISITS HOLY LAND, BRZEZINSKI URGES LARGER, MORE PROACTIVE--AND MORE BALANCED--APPROACH BY OBAMA ADMINISTRATION IN PALESTINE PEACE PROCESS

Rachel Donadio at the New York Times reports that Benedict XVI arrived in Jordan today as part of a visit to the Middle East that will take him to Israel and the Palestinian territories.

"On Monday, Benedict lands in Tel Aviv for four intense days in Israel that will include visits to the Western Wall, holy to Jews; and, sacred to Catholics, the Church of the Holy Sepulcher and the hall where Jesus is believed to have had the Last Supper. In Jerusalem he will visit the religious compound in the Old City known to Muslims as the Noble Sanctuary and to Jews as the Temple Mount.

The Vatican’s Jewish interlocutors say they hope the trip will mend fences, while Israeli officials hope it will boost Christian tourism to the region.

The trip is an important opportunity for the pope 'to demonstrate visually,' that the relationship between Jews and Catholics 'has continued to flourish since the visit of John Paul II,' said Rabbi David Rosen, chairman of International Jewish Committee on Interreligious Consultations."

In Jordan the Pope will meet with Muslim clerics and scholars as part of his outreach. In a review of Richard Haas's most recent book in Foreign Affairs, former Secretary of State Zbigniew Brzezinski makes the argument that the Obama Administration will need to abandon the passive approach to the Israeli-Palestine issue going forward as things are coming to a head:

"If the new president is to avoid in the Middle East not only the gross errors of his immediate predecessor but also the much too long-lasting passivity of the Clinton years, he truly has to lead. Admittedly, making matters more difficult for him is the legacy of the last 16 years, when a subtle shift took place in the US approach to the Israeli-Palestinian conflict: the United States moved from being a genuine mediator seeking to nudge both sides toward peace to holding a posture of thinly veiled partiality in favor of one of the parties to the conflict. The result has been detrimental to the prospects for peace--for without engaged and genuinely forthright US mediation, the two parties to the conflict have shown themselves to be unable to reach a genuine compromise.

To make matters worse, Islamist extremism is gaining ground among a growing number of Palestinians, and Israeli politics are currently moving in an increasingly intransigent direction. In the months to come, the next Israeli prime minister may try to prod the United States to go to war with Iran, while arguing disingenuously that the Palestinians must first become economically more developed before an Israeli-Palestinian peace can be seriously considered. The argument regarding the Palestinian issue, in effect, will be for leaving things as they are, notwithstanding the danger that the prolonged stalemate (with its periodic violence and the relentless expansion of the settlements that it allows) is already poisoning the prospects for a two-state solution."

9. SUDAN TO ALLOW NEW HUMANITARIAN GROUPS INTO DARFUR

The BBC reports that Sudan's Minister of Humanitarian Assistance, Haroun Lual Ruun, told reporters that the country would allow new humanitarian organizations into Darfur. He also indicated that Khartoum would allow those UN and NGO organizations remaining in the region to expand their operations.

"'I think what we're hearing... is that new NGOs with new names, new logos, if necessary, can come in,' [UN humanitarian chief John Holmes] was quoted as saying by Reuters news agency.

'That means there's an opportunity to exploit some of that expertise and experience that is there and I think that is a welcome degree of flexibility about how it might happen in the future.'"

Sudan's President Omar al-Bashir expelled most aid agencies from Sudan and the Darfur region following his indictment in the International Criminal Court in March--see Daily Sources 3/6 #5. Bashir also responded to the decision by releasing from prison a prominent critic of his regime, Hassan al-Turabi, the foremost Islamist in Sudan who had ties to Osama bin Laden--see Daily Sources 3/10 #15. Turabi was originally imprisoned by Bashir in part because Turabi had come out in favor of the ICC's indictment of the President, which makes more sense, I suppose, in light of recent conjecture that it might indict former US officials for their actions in prosecuting the second Gulf War. Foreign Affairs hosted a Q&A session on Sudan with Andrew Natsios, Professor of Diplomacy at Georgetown University, where he was asked what "are the United States' key national interests with regard to the Sudan crisis?" His response:

"The central US national interest in Sudan is humanitarian. The cooperation between the Sudanese and US government on counterterrorism has been exaggerated and overemphasized as a motivating force in US policy--it is useful but not central to the relationship."

This is code. It is in the interests of US elected officials and other American political associations to address Sudan primarily in terms of Darfur, because the US is primarily a Christian country and to openly address it in a hard-headed fashion would be bad for the political future of either. If I were to take a stab at what the US national interest is in Sudan, it would be:

A) The establishment of a stable government, capable of policing its constituents, and thus with which meaningful negotiation can take place;
B) So that a policy within Sudan which actively discourages militant Islamists from setting up base there;
C) Which probably could only take place when the civil war is brought to an end, which leaks instability into neighboring countries, most significantly via panicked migration flows, all of which are unable to provide basic services to their own citizens or subjects, much less to foreign migrants, one of which, at least, is a key US ally;

D) Meaning that the consolidation of rebel movements into a single coalition with which the central government can come to an agreement with; and
E) Additional supply of oil and gas to the global market, not only from Sudan, but also from Chad, which has been drawn into the conflict, as the additional crude theoretically mitigates price on the global market, and thus the share gasoline and diesel takes from the average American's pocket book.

10. VENEZUELAN TROOPS SEIZE FOREIGN OIL SERVICES COMPANIES' ASSETS

Manuel Hernandez at Reuters reports that Venezuela sent troops to seize control of boatyards and other assets belonging to oil services companies late yesterday after the National Assembly gave final approval to a law which would empower the government to nationalize their operations first and consider the legality and terms of compensation later. Yesterday Chávez told the media:

"'Tomorrow, we will start to recuperate assets and goods that will now belong to the state, as social property, as they should always have been,' Chavez said, adding that thousands of workers would be taken on by state oil company PdVSA.

But members of a Zulia business group that represents local oil firms told Reuters soldiers seized the installations of 20 companies on the eastern side of [Lake Maracaibo] late on Thursday."

Companies potentially affected by the deal include Baker & Hughes, Halliburton, and Williams, among others. Carlos Camacho at Platts reports that Venezuelan Energy and Oil Minister Rafael Ramirez indicated on Wednesday that:

"companies re-injecting natural gas and or water to sustain oil production--a means that sustains one-sixth of all Venezuelan production--are the main intended targets of the new law, as well as companies providing E&P barge services."

Reports began surfacing in March that Caracas was having a tough time meeting its obligations to foreign contractors in the country--see Daily Sources 3/19 #5.

11. SWINE FLU CASES RISE, BUT REMEMBER THAT TB KILLS TENS OF THOUSANDS MORE DAILY

Donald G. McNeil Jr. at the New York Times reports that the World Health Organization announced today that 2,384 people in 24 countries have confirmed cases of swine flu. The disease does not, at this stage, appear to be more lethal than regular flu, though it is clearly highly contagious and the historical fear with respect to diseases that jump between species is that the new species has no resistance to the disease which could, under the, um, wrong circumstances create a true global disaster. So, while being in favor of the reporting and the actions taken by the authorities, here is the curative for the media hysteria over the matter, by Hans Rosling, h/t Parke Wilde at US Food Policy:



12. US HEADLINE UNEMPLOYMENT NOW 8.9%, U-6 IS 15.8%, FAR WORSE DECLINE THAN LAST 5 RECESSIONS, BUT STILL RATE OF UNEMPLOYMENT RANKS GROWING SLOWER

The Bureau of Labor Statistics released the unemployment data today, showing that U-3, or headline unemployment, grew by 0.4% in April from March to 8.9% nationally (without adjusting for seasonality). U-6, or "total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons" crept up 0.2% to 15.8%. The number of unemployed persons, or U-3, rose by 563,000 to 13.7 million in April, well below analyst expectations which were of at least 600,000. Justin Fox at the Curious Capitalist put together a graph which plots the current decline in employment against five prior recessions, noting that the employment situation is clearly much worse than what was seen in 1982 and 1974:



Fox comments:

"Basically, the report offers a little bit of backing for the 'job market is turning' story that some other more timely but less reliable indicators have been hinting at, but not much. These numbers will be revised over the next couple of months as more data come in, and by then they may tell a somewhat different story. One thing that the revisions won't change: This employment downturn is now clearly much, much worse than those of 1981-1982 and 1973-1974."