Asia FX By Cornelius Luca - Mon 30 Jul 2012 17:04:40 CT (Source:CME/www.lucafxta.com)
The appetite for risk was limited on Monday after surging in the second half of last week on hopes that both ECB and the Fed will ease as early as this week in order to alleviate the Eurozone debt crisis and support the deteriorating US economy. Now, these central banks are faced to the task of having to meet these expectations. The European currencies edged lower on profit taking after surging since Wednesday, while the commodity currencies and the yen advanced. The US stock indexes edged lower. The gold/oil ratio edged up. The short-term outlook for the European and commodity currencies is sideways. The medium-term outlook for most of the foreign currencies is sideways. The LGR short-term model is short only the euro and franc. Good luck!
Today's economic calendar
UK: Gfk consumer confidence for July
Australia: Building permits for June
Japan: Overall household spending for June
Japan: Unemployment rate for June
Japan: Housing starts for June
Asian Stocks Swing From Gains to Losses Ahead of Fed, ECB(Source:Bloomberg)
Asian stocks swung between gains and losses as investors await policy announcements by the Federal Reserve and the European Central Bank amid signs of a global economic slowdown. Information technology and utility shares advanced. Hokuriku Electric Power Co. soared 14 percent, leading utilities higher in Tokyo after raising its sales forecast. Canon Inc. (7751), the world’s biggest camera maker, advanced 4 percent on a share buyback plan. Drugmaker Otsuka Holdings Co. fell 1.5 percent, pacing declines among Japanese health-care companies. The MSCI Asia Pacific Index rose 0.1 percent to 117.40 as of 10:17 a.m. in Tokyo before markets in Hong Kong and China opened. About three shares fell for each two that rose. The measure has added 0.2 percent this month, headed for a second monthly gain. It yesterday capped the biggest three-day rally since Dec. 5.
“At the moment, the markets are really focused on central bank actions rather than the economic environment,” said Matthew Sherwood, Perpetual Investments’ head of investment markets research in Sydney. Perpetual manages about $25 billion. “We may get a little bit of sell-down in Asian equities after pretty good rises.” The MSCI Asia Pacific Index fell 9 percent from this year’s high on Feb. 29 through yesterday amid concern Europe’s sovereign-debt crisis will worsen and China’s economy is slowing. The regional benchmark index traded at 11.9 times estimated earnings, compared with 13.5 for the Standard & Poor’s 500 Index (SPXL1) and 11.2 for the Stoxx Europe 600 Index, according to data compiled by Bloomberg.
Japan Stocks Fall First Time in Four Days on Factory Data(Source:Bloomberg)
Japanese stocks fell for the first time in four days, with the Nikkei 225 Stock Average heading for the worst monthly performance among developed equity markets, as manufacturing contracted this month. Shipping companies slipped before reporting earnings today. Fanuc Corp., the world’s largest maker of controls that run machine tools, slid 4.6 percent, the biggest decline on the Nikkei 225. (NKY) Nippon Yusen K.K. (9101), Japan’s largest shipping line, fell 1.7 percent. Canon Inc. (7751) soared 3.9 percent after saying it will spend 50 billion yen ($640 million) to buy back shares. The Nikkei 225 lost 0.4 percent to 8,605.51 as of 10:05 a.m in Tokyo, heading for a 4.5 percent loss this month. That’s the worst performance among 24 benchmark developed-market equity indexes tracked by Bloomberg News. The broader Topix Index (TPX) today retreated less than 0.1 percent to 731.48.
Shares fell even as Japan’s jobless rate unexpectedly declined in June to 4.3 percent, beating analyst expectations that unemployment would remain flat at 4.4 percent. The Topix lost 16 percent since March 27, leaving the gauge trading at 0.9 times book value, compared with 1.1 for the MSCI World Index, data compiled by Bloomberg show. A number less than one means a company can be bought for less than the value of its assets.
U.S. Stock-Index Futures Decline on Economic Concern(Source:Bloomberg)
U.S. stock futures fell, signaling the Standard & Poor’s 500 Index may drop for the first time in three days, before reports this week that may show the country’s jobless rate remained above 8 percent and consumer confidence fell in July. JPMorgan Chase & Co. (JPM) lost 0.8 percent in early New York trading after Deutsche Bank AG lowered its rating on the shares. Nexen Inc. (NXY) dropped in Germany on concern Cnooc Ltd.’s acquisition of the company may spark government concern about Chinese control of U.S. energy sources. Microsoft Corp. (MSFT) rose 1.1 percent in premarket trading. S&P 500 futures expiring in September lost 0.3 percent to 1,379.1 as of 7:15 a.m. in New York. The benchmark gauge completed its third weekly gain, the longest stretch since March. Dow Jones Industrial Average futures slipped 20 points, or 0.2 percent, to 13,013 today.
“We’re getting a big picture that’s consistent with the commentary seen out of the U.S. over the last six months, that recovery continues to pace, but there’s no boom in sight,” Michael McCarthy, chief market strategist at CMC Markets in Sydney said in an interview on Bloomberg Television. “What we’re expecting in the U.S. is ongoing modest growth.” The Dow topped 13,000 last week, capping its longest stretch of weekly advances since January, amid expectations the European Central Bank will buy bonds to help lower borrowing costs and preserve the euro. Meanwhile, the Chicago Board Options Exchange Volatility Index has fallen to the lowest daily average in five years.
Most U.S. Stocks Slip After Two-Day Rally; Corn at Record(Source:Bloomberg)
Most U.S. stocks fell following the biggest two-day rally of the year, while European equities rose for a third day and Spanish bonds rallied on speculation policy makers will take action to ease the region’s debt crisis. Corn jumped to a record as an American drought persisted. The Standard & Poor’s 500 Index (SPXL1) slipped 0.05 percent to 1,385.3 at 4 p.m. in New York after jumping 3.6 percent over the previous two sessions. Three stocks retreated for every two that rose on U.S. exchanges. The Stoxx Europe 600 Index surged 1.6 percent to extend a rally since July 25 to more than 5 percent. Ten-year Treasury notes halted a three-day retreat, sending rates down five basis points to 1.50 percent. The euro depreciated 0.5 percent to $1.2258, snapping a three-day gain. Corn, wheat and soybeans rallied at least 1.8 percent.
European Central Bank President Mario Draghi met with U.S. Treasury Secretary Timothy Geithner in Frankfurt today after leaders in Berlin, Paris and Rome backed him by saying they will do what’s needed to protect the 17-nation euro. Spain’s economy shrank 0.4 percent in the second quarter, the National Statistics Institute in Madrid said today. The Federal Reserve will start a two-day meeting tomorrow. “People looked at their portfolios over the weekend and, after a move like we saw, that usually brings more sellers and people rearranging their positions,” Rick Fier, director of equity trading at Conifer Securities LLC in New York, said in a telephone interview. His firm oversees $12 billion in assets. “It’s an extremely frustrating market. People that were shorting lost it all in two days, people that were more long came back but nobody is killing it.”
European Stocks Rise on Euro Support Pledge(Source:Bloomberg)
European stocks rose to their highest level since April amid optimism the European Central Bank will win support from policy makers for a plan to ease the euro area’s debt crisis. Air France-KLM Group (AF) surged 19 percent after it posted a narrower second-quarter loss. Evraz (EVR) Plc and Fiat SpA (F) climbed more than 4.5 percent, leading rallies by gauges of commodity producers and automakers. JCDecaux SA (DEC) plunged 6.9 percent as it reported a 13 percent drop in first-half profit. The benchmark Stoxx Europe 600 Index gained 1.6 percent to 263.94 at the close in London, completing a three-day rally of 5.4 percent, the largest since November. The gauge has risen 13 percent from this year’s low on June 4 as Greece elected a coalition government prepared to abide by the terms of its two European Union-led bailouts.
“We’ve been here before,” George Godber, who helps oversee $22 billion as a fund manager at Charles Stanley’s Matterley division in London, said in an interview on Bloomberg Television. “We’ve actually got to see if they’re going to act now and that’s really what matters. It doesn’t have to be massive steps forward, it just has to be an outlining of a road map.”
Emerging Stocks Rise to 3-Week High on Europe Speculation(Source:Bloomberg)
Emerging-market stocks rose, driving the benchmark index to a three-week high, on optimism European Union policy makers will act to ease the region’s debt crisis. The MSCI Emerging Markets Index (MXEF) climbed 0.8 percent to 948.97 by 5:10 p.m. in New York. Brazil’s Bovespa stock index rose 1.2 percent as steelmaker Usinas Siderurgicas de Minas Gerais SA surged after Goldman Sachs Group Inc. raised its rating. Samsung Electronics Co. (005930), the world’s largest maker of televisions and mobile phones, rose to an 11-week high in Seoul after Daewoo Securities Co. said the company’s profit will accelerate from the second quarter.
U.S. Treasury Secretary Timothy F. Geithner and German Finance Minister Wolfgang Schaeuble held talks in Germany today and backed a commitment by European leaders to do everything needed to defend the euro area while failing to mention its weakest link, Greece. Geithner was scheduled to meet European Central Bank President Mario Draghi later today. In the U.S., Federal Reserve policy makers convene this week before a jobs report to decide whether additional stimulus is needed.
Treasuries Remain Higher Amid Speculation Fed to Ease(Source:Bloomberg)
Treasuries remained higher following a gain yesterday as the Federal Reserve starts a two-day policy meeting today amid speculation it will add to monetary stimulus to boost the economy. Ten-year yields were about 12 basis points from a record low before reports that economists say will show consumer spending stagnated in June and confidence deteriorated for the longest period since 2008. Federal Reserve Chairman Ben S. Bernanke said on July 17 that policy makers are “looking for ways to address the weakness in the economy should more action be needed.” “We can’t expect a significant improvement in the U.S. economy, and that’s weighing on Treasury yields,” said Makoto Suzuki, a senior bond strategist in Tokyo at Okasan Securities Co. “The Fed may extend its pledge to keep interest rates low for longer.”
The benchmark 10-year yield was little changed at 1.5 percent as of 9:07 a.m. Tokyo time, according to Bloomberg Bond Trader prices. It reached the all-time low of 1.379 percent on July 25. The 1.75 percent security due May 2022 traded at 102 1/4. The Fed said in January that the benchmark interest rate will stay at “exceptionally low levels” at least through late 2014, extending its pledge from the middle of 2013. Consumer spending probably rose 0.1 percent in June following no change the prior month, according to the median estimate of economists in a Bloomberg News survey taken before the Commerce Department releases figures today.
FOREX-Euro slips on profit-taking as ECB action awaited
LONDON, July 30 (Reuters) - The euro slipped, with traders taking profit on the gains enjoyed late last week due to growing expectations the European Central Bank will launch fresh action to tackle the euro zone's debt crisis.
"Draghi has to put some action behind his words last week ... The bias is towards disappointment and that's what's creeping into markets now," said Niels Christensen, currency strategist at Nordea in Copenhagen.
Aussie Dollar Halts Gain Before Building Permits Data(Source:Bloomberg)
Australia’s dollar halted an advance that took it to a four-month high before data that may show building approvals in the nation declined last month. The so-called Aussie slid versus most of its major counterparts as economists forecast unemployment in the euro area climbed to a record in June, tempering demand for higher- yielding assets. The Australian and New Zealand currencies are set to close out a second monthly gain against the greenback as the Federal Reserve begins its two-day policy meeting today. “Chances are that the Aussie loses a little bit of steam today,” said Joseph Capurso, a strategist in Sydney at Commonwealth Bank of Australia (CBA), the nation’s biggest lender. “The building approvals report should be very, very weak.”
The Australian dollar was little changed at $1.0502 as of 9:19 a.m. in Sydney after touching $1.0508 yesterday, the strongest since March 27. The Aussie traded at 82.09 yen from 82.10. New Zealand’s currency bought 80.90 U.S. cents from 80.89 yesterday, when it rose to 81.13 cents, the highest since May 2. The so-called kiwi was unchanged 63.24 yen. Australia’s 10-year government bond yield dropped six basis points, or 0.06 percentage point, to 3.07 percent. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, was little changed at 2.77 percent.
Dollar Repatriation First Since Lehman Evokes Post-LTCM Gain(Source:Bloomberg)
Until about four months ago, JKMilne Asset Management invested at least half the money in its global fund outside the U.S. No more. With Europe’s debt crisis intensifying, the Fort Myers, Florida-based firm with $1.8 billion under management has all its money in dollars. “It’s been a winning strategy,” John Milne, chief executive officer, said July 26 in a telephone interview. “Given the magnitude of the problem, there was the realization that there was a contagion possibility.” Milne has plenty of company. U.S. investors repatriated $48.9 billion from December to May, the first time they brought assets home during a six-month stretch since the period following the failure of Lehman Brothers Holdings Inc. in 2008, according to Treasury Department data compiled by Bloomberg. The flows are among the biggest since 1999, after the collapse of hedge fund Long-Term Capital Management LP boosted the dollar as funds retreated from all but the world’s safest assets.
IntercontinentalExchange Inc.’s Dollar Index has risen 3.3 percent this year as investors moved cash into funds that focus on U.S. bonds. Inflows more than doubled to $157 billion in the first six months from $65 billion during the same period a year earlier, while international bond investments were unchanged, according to TrimTabs Investment Research.
Euro Set for Monthly Loss Before Jobs, Manufacturing Data(Source:Bloomberg)
The euro was set for a monthly loss against the dollar on signs the sovereign-debt crisis is hampering growth in the region’s economy. The 17-nation currency maintained losses against the yen from yesterday before reports this week forecast to show the jobless rate in the euro area rose to a record and manufacturing shrank, and before the European Central Bank’s Governing Council meets on Aug. 2. The dollar remained lower against its Japanese counterpart amid speculation Federal Reserve policy makers may signal additional stimulus when they conclude a two-day meeting that starts today. “Apart from Germany, the rest of Europe is struggling, and the crisis is far from solved,” said Thomas Averill, managing director in Sydney at Rochford Capital, a currency and interest- rate risk-management company. “The euro is going down to $1.18.”
The euro traded at $1.2261 as of 10 a.m. in Tokyo from $1.2260 yesterday, when it fell 0.5 percent. It was poised for a 3.2 percent decline this month. The shared currency was little changed at 95.84 yen from 95.85, set for a 5.1 percent slide in July. The U.S. dollar bought 78.17 yen from 78.18 yesterday, when it declined 0.4 percent. The greenback has dropped 2 percent since the end of June versus its Japanese counterpart.
Geithner, Schaeuble Hail Euro Plan as Greece Gets No Word(Source:Bloomberg)
U.S. Treasury Secretary Timothy F. Geithner and German Finance Minister Wolfgang Schaeuble backed a commitment by European leaders to do everything needed to defend the euro area while failing to mention its weakest link, Greece. In a joint statement issued after they held talks on the German North Sea island of Sylt today, Geithner and Schaeuble “took note” of comments made last week by European leaders to “take whatever steps are necessary to safeguard financial stability” in the 17-nation currency area. The two officials welcomed Ireland’s sale of bonds and Portugal’s “continued success in meeting program commitments” and discussed the “considerable efforts” made by Spain and Italy “to pursue far-reaching fiscal and structural reforms.” They didn’t refer to Greece, where international creditors are reviewing the government’s progress.
The talks signaled U.S. endorsement for European Central Bank President Mario Draghi as he seeks a game changer in the battle against Europe’s sovereign-debt crisis almost three years after it surfaced in Greece. Geithner is due to conclude his one-day trip to Germany later today by meeting with Draghi in Frankfurt. An ECB spokeswoman declined to comment when asked whether the ECB would release a statement after the Draghi meeting.
Fed Weighs Cutting Interest on Banks’ Reserves After ECB Move(Source:Bloomberg)
Federal Reserve Chairman Ben S. Bernanke may be taking another look at cutting the interest rate the Fed pays on bank reserves to bring down short-term borrowing costs and spur the slowing U.S. expansion. Bernanke testified to Congress on July 17 that reducing the rate from its current 0.25 percent is one of several easing steps the Fed might take to reduce unemployment stuck above 8 percent for more than three years. In February, by contrast, the Fed chairman told Congress that lowering the rate might drive away investors from short-term money markets. “They’re reconsidering it,” said Ward McCarthy, a former Richmond Fed economist. A July 5 decision by the European Central Bank to cut its deposit rate to zero is prompting renewed interest in the strategy, said McCarthy, chief financial economist at Jefferies & Co. McCarthy said it’s unlikely the Fed will reduce the rate at a two-day meeting that starts tomorrow.
Policy makers meeting this week are looking for new monetary tools after the Fed lowered its benchmark interest rate to near zero in December 2008 and purchased $2.3 trillion of securities to spur the economy. A government report on July 27 showed economic growth slowed to a 1.5 percent annual rate in the second quarter as consumers curbed spending.
Deflation Dismissed by Bond Measure Amid QE3 Anticipation(Source:Bloomberg)
For all the handwringing over the slowdown in the U.S. economy, the bond market shows there’s less risk of deflation now than before the Federal Reserve’s first two rounds of large-scale debt purchases. The expectation that consumer prices will rise, measured by the five-year, five-year forward breakeven rate, means that Fed Chairman Ben S. Bernanke has persuaded traders the U.S. will avoid the chronic deflation that has slowed Japan’s economy since 1995. It also complicates the central bank’s decision about starting more quantitative easing to boost an economy that grew at the slowest pace in a year during the second quarter. Commodity prices surged during QE1 and QE2 in 2008 and 2010.
“Higher inflation results in a tax on consumers and slows the economy down,” Michael Materasso, a senior portfolio manager and co-chairman of the fixed-income policy committee at Franklin Templeton Investments, which oversees $320 billion of bonds, said in a July 24 interview at Bloomberg headquarters in New York. “If you end up with a spike in commodity prices, have you done more harm than good?” The Fed’s favored bond-market gauge of inflation expectations ended last week at 2.39 percent, above the 2 percent levels in 2008 and 2010 that led the central bank to inject $2.3 trillion into the economy by purchasing Treasuries and mortgage-related bonds, the policy known as quantitative easing. The five-year, five-year measure shows how much traders anticipate consumer prices will rise during a period of five years starting in 2017.
China Increases Railway Spending Plan for Second Time(Source:Bloomberg)
China announced a jump in planned railway spending and the State Council called for private investment in utilities and health care as Premier Wen Jiabao tries to reverse an economic slowdown. The Ministry of Railways, the nation’s largest corporate debt issuer, plans to spend 470 billion yuan ($74 billion) on railroads and bridges this year, according to a bond prospectus issued yesterday. That’s the second increase in July, making a combined gain of about 14 percent from the previous figure. The new target exceeds last year’s 461 billion yuan in spending and follows Wen’s July 10 comments that promoting investment growth is the key now to stabilizing an expansion that decelerated to 7.6 percent last quarter, a three-year low. At the same time, Chinese officials are signaling the slowdown isn’t deep enough to warrant a return to the 700 billion-yuan level of railway-construction funds in 2010.
“China is selectively upscaling the stimulus,” said Lu Zhengwei, chief economist with Industrial Bank Co. in Shanghai. “Premier Wen Jiabao said China will do something to boost confidence, and this is fresh evidence.” Economic growth hit bottom in the second quarter and will probably rebound to 7.8 percent in the third quarter, Lu said.
Singapore’s GIC Adds Cash, Cuts Stocks and Bonds Amid Crisis(Source:Bloomberg)
Government of Singapore Investment Corp., managing more than $100 billion, said it almost quadrupled its cash allocation, pared bonds and stocks and reduced its holdings in Europe amid the region’s debt crisis. Cash made up 11 percent of its portfolio in the year ended March from 3 percent a year earlier, GIC, as the sovereign wealth fund is known, said in its annual report. Stocks fell to 45 percent from 49 percent as it pared equities in developed markets, while bonds dropped to 17 percent from 22 percent. GIC is reducing its investments as the MSCI World Index (MXWO) posted its biggest slump since the 2008 global financial crisis and market volatility reached the highest level in more than two years. Investment options become limited for government funds seeking to preserve capital as policy makers across the world prepare for a deeper impact from Europe’s debt woes.
“There are not many safe havens, so cash is king,” said Ronald Wan, a Hong Kong-based managing director at China Merchants Securities Co., which oversees about $1.5 billion. “It’s logical for everyone to cut investments and take a wait- and-see approach. The economic downturn will last for a while before we can see certainty and a swing-back in investment sentiment.”
Korea Output Unexpectedly Falls as Europe Caps Demand(Source:Bloomberg)
South Korea’s industrial production fell for the first time in three months in June as Europe’s debt crisis and China’s slowing economy curtailed export demand. Output fell 0.4 percent last month from May when it climbed a revised 1.3 percent, Statistics Korea said today. The median estimate of 12 economists in a Bloomberg News survey was for a 0.1 percent gain. Production rose 1.6 percent from a year earlier. South Korean manufacturers’ confidence dropped to a three- year low for August, the central bank said yesterday, after Asia’s fourth-largest economy grew at the slowest pace in almost three years last quarter. Bank of Korea Governor Kim Choong Soo warned last week the economy is losing steam, fueling speculation policy makers will follow a surprise rate cut on July 12 with further easing.
“The lower-than-expected output figure once again shows that the European crisis is hurting South Korean companies and consumer sentiment more than what economists had thought,” said Lee Sung Kwon, an economist at Shinhan Investment Corp. “Although the industrial output data may not be enough for the Bank of Korea to cut rates again this month, they may have to in September or October.” The won gained 0.1 percent to 1,137.60 per dollar at the close in Seoul yesterday, according to data compiled by Bloomberg. It touched 1,132.45 earlier, the strongest since May 4, on speculation Europe’s policy makers will act to resolve the region’s debt crisis. The benchmark Kospi Index rose 0.8 percent.
South Korea Manufacturer Confidence Drops to 3-Year Low(Source:Bloomberg)
South Korean manufacturers’ confidence dropped to the lowest level in more than three years as Europe’s worsening fiscal crisis damped sentiment in a country where exports make up about half the economy. An index measuring expectations for August was at 70, the lowest level since May 2009, after dropping from a revised 81 in July, the Bank of Korea said in a statement in Seoul today. A measure of expectations at non-manufacturing companies also dropped to 69 from a revised 76. “The South Korean economy is muddling through uncertainty caused by the European debt crisis,” Oh Suk Tae, an economist at SC First Bank Korea Ltd. in Seoul, said before the release. “The central bank indicated that it’s ready to act, but the market is expecting supplementary fiscal support only if the economy contracts significantly.”
Asia’s fourth-largest economy grew at the slowest pace in almost three years last quarter, with HSBC Holdings Plc and Citigroup Inc. saying the Bank of Korea may cut rates again this year. The BOK lowered its main rate a quarter percentage point to 3 percent on July 12, and Governor Kim Choong Soo warned last week the nation may miss a 3 percent growth estimate for 2012.
Japan Jobless Rate Falling May Fail to End Recovery Concerns(Source:Bloomberg)
Japan’s jobless rate unexpectedly declined in June, a positive sign for an economy struggling with gains in the yen and weakness in export demand because of Europe's debt crisis. The rate fell to 4.3 percent from 4.4 percent the previous month, the statistics bureau said today in Tokyo. The median estimate of 29 economists surveyed by Bloomberg News was for the rate to stay at 4.4 percent. The yen rose more than 6 percent against the dollar since mid-March, hurting profits of exporters such as Canon Inc. (7751) and Nintendo Co., and reached an 11-year high against the euro last week. The improvement in the unemployment rate may not be enough to dispel concerns that a recovery is losing steam after industrial output declined for a third month in June. “Activity could drop more sharply once the full impact of the crisis in Europe and the strong yen hit home,” Julian Jessop, an economist at Capital Economics Ltd. in London said before today’s release.
BOJ Shouldn’t Buy Foreign Bonds, Ex-MOF’s Utsumi Says(Source:Bloomberg)
The Bank of Japan (8301) should reject calls for it to buy foreign currency bonds to weaken the yen because such a move would hurt its independence, said Makoto Utsumi, a former top currency official. Such purchases would be “akin to currency intervention and wouldn’t be in the bank’s realm of authority,” said Utsumi, 78, the former vice finance minister for international affairs and now president of Japan Credit Rating Agency Ltd. “We’re not in a situation where we need to blur that distinction.” Signs of a global slowdown have boosted the yen’s haven appeal, sending it to an 11-year high versus the euro this month. It was at 78.12 per dollar as of 9:26 a.m. in Tokyo, less than 4 percent from the postwar record of 75.35 on Oct. 31. Former BOJ Deputy Governor Kazumasa Iwata and Takehiro Sato, who was appointed to the central bank’s policy board last week, have called for the bank to weigh buying foreign-currency bonds.
Current Deputy Governor Hirohide Yamaguchi on July 25 signaled the BOJ isn’t considering such purchases, saying that doing so to weaken the yen would be against the central bank law, which says that the government dictates currency policy.
RBI Says India Inflation Risks Significant Even as Growth Slows(Source:Bloomberg)
Indian inflation is a major challenge for monetary policy even as economic expansion remains weak, the Reserve Bank of India said. Threats to the economy “have been amplified by decelerating global trade and domestic supply constraints,” the central bank said yesterday ahead of its rate decision in Mumbai today. At the same time, “persistent inflation limits the space for monetary policy to revive growth.” Governor Duvvuri Subbarao faces inflation above 7 percent even with expansion at a nine-year low, curbing his scope to join a stimulus drive extending from China to Europe. Nearly all analysts in a Bloomberg News survey predict he will leave borrowing costs unchanged as a drop in the rupee, a scanty monsoon and infrastructure gaps, underscored yesterday by India’s worst power-grid failure in a decade, stoke price pressures.
“The Reserve Bank has rightly pointed out significant risks to inflation,” said Brinda Jagirdar, an economist at State Bank of India (SBIN) in Mumbai. “That leaves it with little headroom to cut rates to support growth. New Delhi has to act on fiscal tightening and accelerating reforms.”
Singh’s $400 Billion Power Plan Gains Urgency as Grid Collapses(Source:Bloomberg)
India’s worst power-grid failure in a decade exposed the urgency behind Prime Minister Manmohan Singh’s bid to attract $400 billion in investment and ease an electricity deficit that is holding back economic growth. Seven states that are home to more than 360 million people were plunged into darkness early yesterday as power networks collapsed, possibly after too many provinces simultaneously purchased electricity beyond their scheduled allowance, Power Grid Corp. (PWGR) of India Chairman R.N. Nayak told reporters. It took about 15 hours for 80 percent of services to be resumed. The blackout “was a fairly large breakdown that exposed major technical faults in India’s grid system,” Subhranshu Patnaik, a Gurgaon-based senior director at Deloitte Touche Tohmatsu India Pvt., said yesterday. “If this were a simple demand-supply problem, the grid operator would have intervened to strike a balance. Something went terribly wrong which caused the backup safety systems to fail.”
Businesses and households across much of Delhi, Haryana, Punjab, Himachal Pradesh, Uttar Pradesh, Jammu and Kashmir, and Rajasthan states had to turn to generators, while services on New Delhi’s metro and Indian railways were suspended for several hours. Traffic signals failed, jamming roads for morning commuters.
Euro-Area Economic Confidence Drops More Than Forecast(Source:Bloomberg)
Economic confidence in the euro area fell more than economists forecast to the lowest in almost three years in July, suggesting the economy’s slump extended into the third quarter as governments struggled to tame the debt crisis. An index of executive and consumer sentiment in 17-nation euro area dropped to 87.9 from 89.9 in June, the European Commission in Brussels said today. That’s the lowest since September 2009. Economists had forecast a drop to 88.9, the median of 26 estimates in a Bloomberg News survey showed. European governments are striving to contain the debt turmoil, which has undermined confidence and last month forced Spain and Cyprus to seek external aid. European Central Bank President Mario Draghi, who will meet with U.S. Treasury Secretary Timothy Geithner in Frankfurt today, said last week that policy makers will do whatever is needed to preserve the euro.
“It appears that the euro zone is headed for further clear gross-domestic-product contraction in the third quarter,” said Howard Archer, chief European economist at IHS Global Insight, who estimates the second-quarter contraction at 0.3 percent. The weakness “piles yet more pressure on the ECB to come up with concrete measures at its policy meeting” on Aug. 2.
Draghi on Offensive as Game Changer Sought in Crisis(Source:Bloomberg)
European Central Bank President Mario Draghi has gone on the offensive as he seeks a game changer in the battle against the sovereign debt crisis. Draghi, who sparked a global market rally last week by pledging to do whatever it takes to preserve the euro, is trying to build consensus among governments and central bankers for a plan to ease borrowing costs in Spain and Italy before ECB policy makers convene on Aug. 2. He meets with U.S. Treasury Secretary Timothy Geithner in Frankfurt today and is also attempting to win over Bundesbank President Jens Weidmann, a critic of ECB bond purchases. Berlin, Paris and Rome have already endorsed Draghi’s approach, echoing his language in saying they will do what’s needed to protect the 17-nation euro. Draghi must now deliver or face a renewed selloff on bond markets, where soaring Spanish and Italian yields have fueled speculation that the monetary union could fall apart.
Draghi “put his personal credibility on the line” and “would not have done so without being confident about his key constituency,” Erik Nielsen, global chief economist at UniCredit Bank AG in London, wrote in a note to clients yesterday. “The ECB under Draghi does not like to mess around in the market, but if it sees a need, it will come with overwhelming force.”
