Asia FX By Cornelius Luca - Wed 29 Aug 2012 17:04:34 CT (Source:CME/www.lucafxta.com)
The appetite for risk was limited on Wednesday despite hopes for signs of further easing by both the Fed and the ECB. The foreign currencies ended divergently after most of them advanced on Tuesday. Euro, yen and franc fell, the pound rose and the commodity currencies ended flat. Volume remains light near the end of the summer vacation. The US stock markets closed slightly higher, while gold, oil and silver ended down. The short-term outlook for most foreign currencies is sideways. The medium-term outlook for most of the foreign currencies is sideways. The LGR short-term model is long on most foreign currencies. Good luck!
Overnight
US: The gross domestic product was upwardly revised to +1.7% from +1.5% initially reported in the second quarter.
US: The NAR's pending home sales index rose by 2.4% to 101.7 in July from 99.3 in June.
Today's economic calendar
Japan: Retail sales for July
Australia: Building permits for July
Recap Stock Index Market Report (CME)
The September S&P 500 inched higher in a choppy trading session, slightly taking out yesterday's high in the process. Trading volumes and price ranges have been subdued this week, partially from end of August vacations, as well as uncertainty ahead of Fed Chairman Bernanke's address in Jackson Hole on Friday. The market rallied during the early US session, fueled by well received Q2 GDP data that came in above preliminary estimates. July US Pending Homes Sales data came in above expectations and rose toward its highest level in two years. There were a couple of positive stock specific moves offering support, including a nearly 8.0% gain in the shares of WellPoint and a better than 18% rally in Yelp. Afternoon gains in the S&P 500 also came in response to the Fed's Beige Book report.
Recap Interest Rate Market Report (CME)
The Treasury market was mostly off balance to lower today as the scheduled data was slightly better than expected and that dampened fears of slowing and might have leveled easing expectations temporarily. The 5 Year note auction didn't seem to have much of an impact on bond prices but it is possible that the auction provided a minor delayed reaction rally of roughly 11 ticks. The bid to cover ratio today was 2.92, with indirect bids at 39.7% and direct bids at 11.0%.
Asian Stocks Drop to Four-Week Low Before Bernanke Speech (Bloomberg)
Asian stocks dropped, with the regional benchmark index heading for a four-week low, after Japan’s retail sales fell more than economists forecast and as investors doubt Federal Reserve Chairman Ben S. Bernanke will announce a third round of quantitative easing. Samsung Electronics Co. (005930), the world’s biggest mobile-phone maker by sales, slipped 1.4 percent in Seoul. Nissin Electric Co. fell 3.1 percent after the Japanese maker of electricity distribution equipment lowered its full-year profit forecast. Fortescue Metals Group Ltd. sank 3.3 percent as JPMorgan Chase & Co. said Australia’s third-largest iron-ore producer would need additional funding if the metal’s price continues to fall. The MSCI Asia Pacific Index (MXAP) fell 0.5 percent to 118.74 as of 9:31 a.m. in Tokyo, heading for its lowest close since Aug. 3, before markets in Hong Kong and China open.
The Fed said the U.S. economy continued to expand “gradually” in July, damping speculation Bernanke will announce further measures to support growth in a speech tomorrow at a meeting of central bankers in Wyoming. “Investors who expect Bernanke to deliver a clear commitment to QE3 might be disappointed, which could trigger some sort of sell-off in so-called risky assets,” said Mikio Kumada, a Singapore-based global strategist for LGT Capital Management, which oversees more than $20 billion. “This is still not a time to bet against major central banks’ ability to intervene in markets.” Japan’s Nikkei 225 Stock Average lost 0.7 percent. South Korea’s Kospi Index dropped 1.1 percent and Australia’s S&P/ASX 200 Index fell 0.9 percent.
Japanese Stocks Fall as U.S. Growth Damps Stimulus Hopes (Bloomberg)
Japanese stocks declined, with the Nikkei 225 Stock Average (NKY) falling to a two-week low, after the U.S. economy grew more than expected, damping speculation Federal Reserve Chairman Ben S. Bernanke may announce another round of quantitative easing in his speech tomorrow. Nissan Motor Co. (7201), a carmaker that gets almost a third of its sales from North America, slid 0.9 percent even after its price target was raised by Credit Suisse Group AG. Yamada Denki Co., a seller of consumer electronics, lost 2.5 percent after Japan’s retail sales fell more than estimated. Softbank Corp., the nation’s third-biggest mobile phone company, gained 2.1 percent after saying it plans to open Japan’s biggest solar park with Mitsui & Co. and sell the output to Chuguku Electric Power Co.
The Nikkei 225 Stock Average slid 0.7 percent to 9,006.16 as of 9:42 a.m. in Tokyo, with volume 4.2 percent below the 30- day average ahead of the Fed chairman’s speech tomorrow at an economic symposium in Jackson Hole, Wyoming. The broader Topix (TPX) Index lost 0.6 percent to 745.38, with about three shares dropping for each that gained. “Investors who expect Bernanke to deliver a clear commitment to QE3 might be disappointed, which could trigger some sort of sell-off in so-called risky assets,” said Mikio Kumada, a Singapore-based global strategist for LGT Capital Management, which oversees more than $20 billion. “This is still not a time to bet against major central banks’ ability to intervene in markets.” Futures on the Standard & Poor’s 500 Index slid 0.2 percent today. The gauge gained 0.1 percent yesterday on a report gross domestic product expanded at an annualized 1.7 percent from April through June, beating an initial estimate of 1.5 percent.
U.S. Stocks Rise on GDP Data as Investors Await Bernanke (Bloomberg)
U.S. stocks advanced, following a two-day decline in the Standard & Poor’s 500 Index, as the economy grew more than first estimated and investors awaited Federal Reserve Chairman Ben S. Bernanke’s speech in two days. WellPoint Inc. (WLP) increased 7.7 percent after Angela Braly resigned as chairman and chief executive officer of the insurer. Yelp (YELP) Inc. surged 23 percent as investor confidence in its growth prospects prevailed after a ban lifted on stock sales by some of the largest investors in the online review website. The S&P 500 added 0.1 percent to 1,410.49 at 4 p.m. New York time. The Dow Jones Industrial Average rose 4.49 points, or less than 0.1 percent, to 13,107.48. Volume for exchange-listed stocks in the U.S. was 4.4 billion shares, the lowest level since at least 2008 excluding days surrounding holidays.
“You are right in that narrow little lane where nothing needs to move at this point,” said Madelynn Matlock, who helps oversee about $14.7 billion at Huntington Asset Advisors in Cincinnati. “People are actually waiting if anything comes out of Bernanke’s speech that is totally not expected. I don’t see any big initiative out of the Fed at this point. The economy is good enough that it’s not a disaster, yet it is slow enough that there’s no reason to crank up the anti-inflation machine.” Gross domestic product climbed at a 1.7 percent annual rate from April through June, up from an initial estimate of 1.5 percent. Separate data showed Americans signed more contracts to purchase previously owned homes in July.
European Stocks Fall for Second Day; L’Oreal Leads Slide (Bloomberg)
European stocks fell for a second day as companies from L’Oreal SA to Bouygues (EN) SA retreated after reporting earnings and German Chancellor Angela Merkel clashed with Italian Prime Minister Mario Monti over whether to give the euro area’s permanent bailout fund a bank license. L’Oreal dropped the most in 2 1/2 years after the world’s largest cosmetics maker reported profit margins that missed estimates. Bouygues, the French building, television and telecommunications company, tumbled 9 percent after trimming the earnings forecast for its phone business. Banca Monte dei Paschi di Siena SpA plunged 8 percent after posting a loss. The Stoxx Europe 600 Index (SXXP) slipped 0.1 percent to 267.01 at the close of trading, having swung between gains and losses at least 12 times.
The measure has still risen 14 percent from this year’s low on June 4 as European Central Bank President Mario Draghi pledged to do whatever it takes to preserve the euro and the region’s political leaders agreed to ease repayment terms on loans to Spain’s banks. “Investors want Draghi to put the money where his mouth is,” said Witold Bahrke, a senior strategist at PFA Pension A/S in Copenhagen, where he helps oversee $55 billion. “The European Central Bank seems to have developed a strategy of issuing a policy statement and letting it linger for a long time before backing it up by action. People in the market are getting annoyed with that.”
Emerging Stocks Retreat for Fourth Day on Commodities, Earnings (Bloomberg)
Emerging-market stocks dropped for a fourth day, sending the benchmark index to a 3 1/2 week low, as falling commodities dragged down producers and Chinese companies from Air China Ltd. to Evergrande Real Estate Group Ltd. posted lower earnings. The MSCI Emerging Markets Index lost 0.1 percent to 955.71 at 12:55 p.m. in London. An MSCI Inc. gauge of raw-material shares fell for a sixth day, set for the longest losing streak since May, as Jiangxi Copper Co. dropped 5.1 percent. Air China and Evergrande sank at least 2.9 percent. Eurocash SA (EUR), Poland’s biggest seller of non-durable consumer goods, tumbled the most on record as its chief executive officer sought to sell a stake. Metals retreated before a report on American economic growth and a hurricane in the U.S. curbed demand for oil at refineries.
The MSCI emerging-market index’s valuation slid to 1.6 times net assets today, a 10 percent discount versus the MSCI World Index of developed-nation shares, the widest gap since January 2009, according to data compiled by Bloomberg. “Investors are taking a cautious stance as the threat of a global slowdown hasn’t really disappeared,” said Jonathan Ravelas, the chief market strategist at Manila-based BDO Unibank Inc. “The sentiment for some investors is that it might be better to stay on the sidelines and wait if the U.S. and Europe will announce additional stimulus plans.”
Dollar Stays Higher Versus Yen Before U.S. Spending Data (Bloomberg)
The dollar remained higher versus the yen following a gain yesterday before U.S. data forecast to show consumer spending climbed the most in five months. The greenback held a gain against the euro as investors weigh whether Federal Reserve Chairman Ben S. Bernanke will signal a new round of bond buying when he speaks in Jackson Hole, Wyoming tomorrow. The euro was 0.5 percent from reaching an eight-week high versus the yen after European Central Bank President Mario Draghi said it’s in Germany’s interest to consent to extraordinary steps to preserve the single currency. “The market is scaling back its expectations a little bit for another clear signal of imminent policy easing as early as this week,” said Ray Attrill, global co-head of foreign- exchange strategy at National Australia Bank Ltd. (NAB) in Sydney. “That’s why the dollar is just a little bit firmer.”
The greenback traded at 78.68 yen as of 9:58 a.m. in Tokyo after gaining 0.3 percent to 78.71 yesterday. It was unchanged at $1.2530 per euro following a 0.3 percent advance in New York. Europe’s shared currency was little changed at 98.59 yen after climbing to 99.18 on Aug. 21, the strongest since July 5. U.S. consumer spending probably rose 0.5 percent in July from a month earlier, the most since February, according to the median estimate of economists in a Bloomberg News survey. The Commerce Department releases the figure today.
Aussie, Kiwi Drop to One-Month Low as Fed Stimulus Bets Decline (Bloomberg)
The Australian and New Zealand dollars fell to one-month lows as signs the U.S. economy is improving dimmed prospects that Federal Reserve Chairman Ben S. Bernanke will signal further stimulus tomorrow. Demand for the South Pacific currencies was limited ahead of U.S. data forecast to show initial jobless claims fell and personal spending rebounded. Bernanke will speak at a conference in Jackson Hole, Wyoming, following a Fed report yesterday that said the world’s largest economy continued to expand “gradually.” The so-called Aussie dollar remained lower before reports predicted to show a drop in Australian building approvals and a slowdown in capital spending growth.
“The Aussie is looking very tired,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. (WBC) in Sydney. “It’s too reliant on the Fed to start printing money again. I suspect what we will hear from Bernanke is a familiar line that they are prepared to take further action if needed, but that he is not going to declare action just yet.” The Australian dollar touched $1.0331, the weakest since July 26, as of 10:30 a.m. in Sydney. It dropped 0.2 percent yesterday to $1.0352. New Zealand’s dollar, also known as the kiwi, fetched 80.05 U.S. cents, unchanged from yesterday, after earlier falling as low as 80.01 cents, the weakest since July 27. Australian 10-year bond yields fell for a 10th straight day, poised for the longest stretch of declines since at least 1990, when Bloomberg began compiling daily data. The yield fell as much as four basis points, or 0.04 percentage point, to 3.15 percent, the lowest since Aug. 3.
FOREX-Euro hits session high vs dollar after Draghi comments
The euro hit a session high against the dollar after comments in a paper from European Central Bank President Mario Draghi cemented expectations the bank will soon announce measures to tackle the euro zone debt crisis.
Gross Says QE3 Likely Even if Bernanke Doesn’t Provide Hint (Bloomberg)
Pacific Investment Management Co.’s Bill Gross said the Federal Reserve will add to monetary stimulus even if Chairman Ben S. Bernanke fails to indicate additional measures during a speech in two days. Policy makers will announce more so-called quantitative easing “relatively soon,” Gross, who runs the world’s biggest bond fund, said in an interview on Bloomberg Television’s “Street Smart” with Trish Regan. The Fed signaled last week it’s ready to take further steps to spur the economic recovery. Many policy makers said additional stimulus probably will be needed soon unless the economy shows signs of a durable pickup, according to minutes released Aug. 22 of the central bank’s most recent meeting, on July 31-Aug. 1. Bernanke is scheduled to speak on Aug. 31 at the Kansas City Fed’s economic-policy conference in Jackson Hole, Wyoming.
“They have a dual mandate,” Gross said, referring to the Fed’s directive of price stability and maximum employment. “Unemployment is still above 8 percent and it’s obvious that the Fed isn’t comfortable, nor is the nation or the economy with 8 percent unemployment going forward.” Until the unemployment rate is in the low 7 percent range and inflation has risen above the Fed’s 2 percent target the fed is going to “ease quantitatively,” Gross said from Pimco’s headquarters in Newport Beach, California.
U.S. Grew Faster Than First Estimated in Second Quarter (Bloomberg)
The economy expanded more than previously estimated in the second quarter, reflecting gains in consumer spending and exports that are being threatened by costlier gasoline and a global slowdown. Gross domestic product climbed at a 1.7 percent annual rate from April through June, up from an initial estimate of 1.5 percent and following a 2 percent gain in the first three months of the year, revised Commerce Department figures showed today in Washington. The weakest gain in business investment in new equipment in almost three years restrained the pace of growth, which was the slowest since the third quarter. Consumers and companies may continue to curb spending in the second half of the year as rising fuel costs, unemployment and the prospect of tax changes and government budget cuts hurt confidence. Chairman Ben S. Bernanke this week may reaffirm the view of many Federal Reserve policy makers that more stimulus will be needed unless the expansion shows signs of strengthening.
“We are very much struck in a slow-growth mode,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who correctly forecast the revision. “We still don’t see the economy breaking free of this 1.5 percent to 2 percent growth rate. A 1.7 percent pace is the personification of the Fed’s frustration.” Another report showed Americans signed more contracts to purchase previously owned homes in July, a sign housing will keep strengthening in the second half.
Profits May Dwindle as U.S. Productivity Wanes With Demand (Bloomberg)
Businesses in the U.S. may struggle to maintain the profit gains of the past three years as cost- cutting opportunities become scarcer and cooling global growth reduces demand, according to economists such as Harm Bandholz. Commerce Department data released today showed before-tax earnings at U.S. corporations increased by 0.5 percent in the second quarter after a 2.7 percent drop in the prior three months. Earnings climbed 6.1 percent from a year earlier, slower than the pace of the previous two quarters. Economic growth in the U.S. has cooled, European countries are heading into a recession and China is slowing, limiting opportunities for sales growth. At the same time, waning productivity gains mean American companies will be less able to offset rising costs of raw materials and parts.
“We were maybe a little bit spoiled by the profits we saw in the last one-and-a-half years,” said Bandholz, chief economist at UniCredit Group in New York. “We may now see a normalization. Businesses already cut costs to a significant extent, so they are just looking for higher revenues, which in this environment may not go up so easily.” Today’s report showed gross domestic product in the U.S. climbed at a 1.7 percent annual rate from April through June, down from a 2 percent gain in the first quarter and 4.1 percent in the final three months of 2011.
New York Fed Says Household Debt Fell 0.5% in Second Quarter (Bloomberg)
Household debt in the U.S. declined 0.5 percent in the second quarter, led by a drop in debt tied to real estate, according to the Federal Reserve Bank of New York. Consumer indebtedness shrank by $53 billion from the first quarter to $11.38 trillion as of the end of June, according to the quarterly report on household debt and credit released today by the district bank. Delinquency rates for mortgages, credit cards and car loans declined, while rates for student loans and home equity lines of credit rose, the report said. “The continuing decrease in delinquency rates suggests that consumers are managing their debts better,” Wilbert van Der Klaauw, a vice president and economist at the New York Fed, said in a statement today. “As they continue to pay down debt and take advantage of low interest rates, Americans are moving forward with rebalancing their household finances.”
Americans have cut household debt by $1.3 trillion since the peak in the third quarter 2008 amid signs of a rebound in the housing market at the center of the 18-month recession that ended in June 2009, according to the report. The lowest mortgage rates on record helped boost the S&P/Case-Shiller gauge of home prices in 20 U.S. cities, which rose 0.5 percent in June from a year earlier for the first gain since September 2010. About 256,000 consumers showed new foreclosures on their credit reports in the second quarter, a decrease of 12 percent since the first quarter and the lowest level since 2007, the New York Fed’s survey showed. About 399,000 consumers had a bankruptcy notation added to their credit reports, down 16 percent from the same quarter a year earlier, the report said.
Pending Sales of Existing Homes in U.S. Rebounded in July (Bloomberg)
Americans signed more contracts to purchase previously owned homes in July, a sign housing will keep strengthening in the second half. The index of pending home resales climbed 2.4 percent, exceeding the 1 percent gain median forecast of 39 economists surveyed by Bloomberg, figures from the National Association of Realtors showed today in Washington. The gauge rose to 101.7, the highest since April 2010. Home buying is coming within reach for more Americans as less expensive properties and record-low borrowing costs combine to stabilize the industry that helped trigger the recession. Faster hiring and easier access to credit are needed to reduce foreclosures, a hurdle to a more sustained recovery. “All the elements are in place for continued growth in the housing industry,” said Omair Sharif, a U.S. economist at RBS Securities Inc. in Stamford, Connecticut. “Housing is one of the bright spots in the economy.”
Stocks were little changed after the report as investors awaited comments from Federal Reserve Chairman Ben S. Bernanke in two days on the state of the economy. The Standard & Poor’s 500 Index rose 0.1 percent to 1,411 at 10:18 a.m. in New York. Estimates in the Bloomberg survey ranged from a drop of 1.5 percent to a rise of 6.6 percent. Signings rebounded from a 1.4 percent fall in June that was the same as previously estimated.
Republicans Embrace Gold to Hedge Non-Existent Inflation (Bloomberg)
The Republican Party is so concerned about inflation that it’s considering a return to the gold standard. While there’s little evidence those fears are justified, they could shape a Romney administration’s approach to the Federal Reserve. The platform the party adopted yesterday at its national convention in Tampa, Florida, calls for a commission to investigate a possible “metallic basis for U.S. currency.” The move is driven by supporters of Representative Ron Paul of Texas, the libertarian presidential candidate who has long criticized the Fed’s control of the money supply and wants to revive the gold-dollar link to preserve the currency’s value. “We have a fiat currency that’s backed by nothing,” said Eric Brakey, 24, who ran Paul’s campaign in Maine’s Republican primary. “It’s really only backed by the say-so of our government, and I think the government is losing credibility more and more. Inflation is going higher and higher.”
Yet inflation has been tame, with the personal consumption expenditures index, the Fed’s preferred inflation gauge, declining in three of the past four months. Since the June 2009 end of the recession, the average increase in the index has been 1.8 percent, below the central bank’s 2 percent target. Over the last 20 years, the index has risen 2.1 percent, according to data compiled by Bloomberg. “I’m not particularly worried,” said economist John Makin of the American Enterprise Institute in Washington. “It’s not as if we’re about to rocket higher.”
Republicans Vow to Transform Obama’s U.S. by Less Government (Bloomberg)
The Republican Party platform promises to replace what it criticizes as President Barack Obama’s debt-swollen entitlement society with “a roaring job market to match a roaring economy.” The platform reflects the influence of presidential candidate Mitt Romney, offering as the remedy for the nation’s economic ills a familiar recipe of low taxes, light regulation, expanded oil drilling and free enterprise. It vows to reduce personal and corporate taxes, repeal Obama’s health-care law, promote small businesses and avoid taxpayer bailouts of troubled financial institutions. The 62-page roadmap, approved by a voice vote of the delegates yesterday at the party’s national convention in Tampa, Florida, promotes expanded trade and accuses the Obama administration of “a virtual surrender” to commercial rival China. The Asian country is stealing American trade secrets, manipulating its currency to make its exports cheaper, and hampering U.S. firms trying to sell to Chinese customers, the Republicans say.
Republicans call for banks to be “well-capitalized” and pledge to repeal the 2010 Dodd-Frank financial-regulation law. Along with major economic policy shifts, the Republicans vow to transform the size and scope of government. Trillion- dollar annual budget deficits and mounting debt are harming job growth, they say. “The massive federal government is structurally and financially broken,” the platform says.
Japan Retail Sales Slide With End of Car Subsidies Looming (Bloomberg)
Japan’s retail sales fell more than economists forecast in July as a winding down of government subsidies for car purchases threatens to further damp consumer spending in coming months. The 0.8 percent decline from a year earlier was the first drop in eight months and compared with the median estimate of a 0.1 percent fall in a Bloomberg News survey of 13 economists. From a month earlier, sales slid 1.5 percent, according to data released by the trade ministry in Tokyo today. Weakness in consumer demand and declining exports may make it harder for the government to prevent the economic contraction forecast for this quarter by Bank of America Merrill Lynch and Credit Suisse Group AG. Most of 274.7 billion yen ($3.5 billion) of subsidies for purchases of fuel-efficient cars is spent, with RBS Securities Japan Ltd. saying the program may run out of money next month.
“We can expect a plunge in spending in the fourth quarter because of the end of eco-car subsidies,” Masamichi Adachi, a senior economist at JPMorgan Securities in Tokyo and a former central bank official, said before today’s report. The yen traded at 78.72 per dollar as of 9:07 a.m. in Tokyo, little changed from before the release. Smaller summer bonuses for workers this year may have contributed to the sales decline. Payouts by large companies, often equivalent to several months’ pay, fell 2.5 percent after rising in the previous two years, according to the Japan Business Federation, also known as Nippon Keidanren.
South Korean Manufacturer Confidence Stays Near Post-Crisis Low (Bloomberg)
South Korean manufacturers’ confidence stayed near the lowest level since the global financial crisis, maintaining pressure for an interest-rate cut to support growth. An index measuring expectations for September was at 75 from 70 the previous month, the Bank of Korea said in a statement in Seoul today. Those are the only readings below 80 since 2009, with any number below 100 indicating that pessimists outnumber optimists. China’s economic slowdown and Europe’s debt crisis are dragging down South Korea’s exports, weighing on prospects for Asia’s fourth-largest economy. The central bank’s next interest- rate decision is on Sept. 13, with bond yields indicating that investors are waiting for further reductions after a surprise cut last month. “Big uncertainties from Europe and China continue to cloud business conditions for Korean companies,” Lee Sung Kwon, an economist at Shinhan Investment Corp. in Seoul, said before the report. “Policy makers will need to make another rate cut.”
A measure of expectations at non-manufacturing companies was unchanged from August at 69, today’s report showed. The survey was conducted between Aug. 16 and Aug. 23 with responses from 1,424 manufacturers and 1,010 non-manufacturers. Lee Yong Sup, an opposition Democratic United Party lawmaker, said yesterday that his party will drop a push for an extra budget to spur growth, because it’s now too late in the year.
Brazil Cuts Rate to Record Low 7.5% on Slow Economic Rebound (Bloomberg)
Brazil lowered its benchmark interest rate for the ninth straight time to boost sluggish growth in the world’s second-biggest emerging market. Policy makers led by central bank President Alexandre Tombini reduced the Selic rate by a half-point from its previous record low to 7.5 percent, as forecast by all 60 economists surveyed by Bloomberg. The vote was unanimous. “Considering the cumulative and delayed effects of policy actions implemented so far, which are partially reflected in the ongoing economic recovery, the Copom considers that if the prospective scenario were to allow for an additional adjustment in the monetary conditions, this move should be carried out with maximum parsimony,” policy makers said in their statement.
Over the past year, Brazil has reduced borrowing costs by 500 basis points, pressured banks to boost lending and cut taxes on cars and consumer goods to revive the economy, which expanded at less than half the annualized pace of the U.S. in the first quarter. While inflation quickened to 5.37 percent this month, industrial output is down from a year ago, and economists are forecasting continued weakness when second-quarter gross domestic product figures are published this week. “The bank has made the assessment that inflation is not getting out of hand,” Fabio Akira, an economist at JP Morgan Chase & Co, said in a phone interview from Sao Paulo before the decision. “The economic recovery is still gradual.” While Brazil has lowered its benchmark rate more than any other Group of 20 nation over the past year, the stimulus is being offset by a slowdown in the global economy that has hurt exports and battered manufacturers.
ECB’s Draghi Takes on Bundesbank Orthodoxy in Crisis-Plan Plea (Bloomberg)
Countering arguments made by the German economics establishment since before the introduction of the euro, European Central Bank President Mario Draghi said it’s in Germany’s interest to consent to extraordinary steps to preserve the currency shared by 17 nations. Draghi used the pages of German weekly Die Zeit to plead for a more expansive role for the central bank and to say that the crisis-struck currency can be stabilized without sacrificing each country’s independence to a unified European political system. In tactical terms, Draghi sought to neutralize protests made by Germany’s top central banker, Jens Weidmann, against ECB proposals to buy Spanish or Italian bonds on the market in order to bring down their borrowing costs and prevent the debt crisis from spreading. Draghi made his appeal in the run-up to the ECB’s Sept. 6 discussion of bond-market interventions for Spain or Italy and a Sept. 12 ruling by Germany’s supreme court on the viability of the planned euro rescue fund.
“A new architecture for the euro area is desirable to create sustained prosperity for all euro-area countries, and especially for Germany,” Draghi wrote. “Yet this new architecture does not require a political union first. Economic integration and political integration can develop in parallel.” Draghi didn’t mention Weidmann, who last week broke more than a month of silence by telling Spiegel magazine that the bond-buying proposal is a “touchy” matter and the thought of interest-rate targets gives him “stomach pains.” Weidmann, head of the Bundesbank, summed up the idea as “addictive like a drug.”
Draghi Hits Back at German Criticism of ECB Bond Plan (Bloomberg)
European Central Bank President Mario Draghi hit back at German criticism of his plan to intervene in bond markets and reminded Europe’s largest economy of its responsibility to anchor the euro. The ECB “will always act within the limits of its mandate,” Draghi wrote in a commentary for German newspaper Die Zeit provided by the Frankfurt-based ECB today. “Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools.” Bundesbank President Jens Weidmann and some German politicians have lashed out at Draghi’s plan to resume government bond purchases to lower borrowing costs in countries such as Italy and Spain. Draghi’s riposte comes as Chancellor Angela Merkel, who has signaled broad support for ECB bond buying, hosts Italian Prime Minister Mario Monti in Berlin today.
“The ECB is not a political institution,” Draghi wrote. “But it is committed to its responsibilities as an institution of the European Union. As such, we never lose sight of our mission to guarantee a strong and stable currency. The banknotes that we issue bear the European flag and are a powerful symbol of European identity.” Weidmann has said he’s against ECB bond purchases because they risk increasing governments’ reliance on the central bank and won’t solve Europe’s debt crisis. “Such policy is too close to state financing via the money press for me,” he told German magazine Der Spiegel in an interview published on Aug. 26.
French Business Confidence Stays Close to Two-Year Low: Economy (Bloomberg)
French industrial confidence remained near its lowest in two years in August, increasing pressure on President Francois Hollande’s government to revive growth in the face of Europe’s debt crisis. Sentiment among factory executives rose to 90 after July’s reading was revised down to 89, national statistics office Insee in Paris said in a statement today. That’s in line with the median of 20 forecasts in a Bloomberg News survey. A gauge that includes retailers, builders and service industries was unchanged at 87, the lowest in almost three years. Weak confidence at businesses underlines Hollande’s challenge as he attempts to keep a commitment to reduce the budget deficit at a time when the economy has failed to grow for three straight quarters. Prime Minister Jean-Marc Ayrault will address business leaders on the economy later today near Paris.
“France, unlike Germany, might suffer from the sharp tightening in fiscal policy following measures implemented over the summer,” said Francois Cabau, an economist at Barclays Capital in London. “Ayrault already said that growth assumptions might have to be revised down from the current 1.2 percent for 2013.”
ECB may need exceptional measures, says Draghi (Reuters)
The European Central Bank needs to employ "exceptional measures" at times to ensure its monetary policy can be effective but will act within its mandate to deliver price stability, ECB President Mario Draghi said in a newspaper opinion piece on Wednesday.
