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					                                                                                                                                                                                                                                       ARAB TIMES, SUNDAY, JULY 17, 2011
    BUSINESS                                                                                                                                                                                                                                                                    37


                    S&P warns it may downgrade Fannie, Freddie credit                                                                                                      Canadian bank buys stake in American Century

    Standard & Poor’s warned mortgage lenders Fannie Me              limit and avoid a default in the coming weeks. It said                     American Century Investments, a privately held invest-             “This investment will build on our strong franchise in
    and Freddie Mac on Friday that they may lose their top           there was at least a one-in-two likelihood that it will lower              ment manager, said Friday that the 41 percent economic          Canada and provide CIBC an additional platform for
    credit ratings if lawmakers don’t raise the US govern-           the rating within the next 90 days.                                        interest in the company held by JPMorgan Chase & Co.            growth in asset management internationally,” CIBC’s
    ment’s borrowing limit in time to avoid a default.                  On Wednesday, Moody’s Investors Services said it is                     will be acquired by Canadian Imperial Bank of                   CEO Gerry McCaughey said.
       S&P said government-controlled Fannie and Freddie,            also reviewing the government’s triple-A bond rating.                      Commerce for $848 million.                                         “It is aligned with our risk appetite and provides attrac-
    along with certain Federal Home Loan Banks and Farm                 The government reached its borrowing limit in May.                         The transaction is expected to close within the next 60      tive fee-based income, geographic diversification and
    Credit System Banks, could also default on their debts,          The Treasury Department has said that the govern-                          to 90 days, pending approval by US and Canadian regu-           revenue synergies within our asset management busi-
    given each institution’s “direct reliance on the US gov-         ment will default on its debt if the limit isn’t raised by                 latory authorities.                                             ness.”
    ernment.”                                                        Aug 2.                                                                        The transaction provides the Kansas City-based                  American Century Investments’ business partnership
       The rating agency this week threatened to lower the              Congressional and Obama administration officials met                    American Investments with a strategic partner in Canada         with CIBC brings together the US investment firm’s $112
    US government’s credit rating if the White House and             for a sixth day Friday in an effort to avert a default. But                to broaden non-US distribution of the firm’s products and       billion in assets and CIBC’s more than $400 billion in
    Congress can’t agree to raise the $14.3 trillion borrowing       Obama conceded that “we’re running out of time.” (AP)                      services, the company said in a statement.                      assets. (AP)




                                                                                                      global economic weekly
                                                                                                                                                    Bank of America Merrill Lynch

US soft patch ‘spongier’ than expected
  This is the first part of Global                                                                                                                                                       Europe, the focus will also be on infla-           Labor dynamics, past, present and
Economic Weekly by Bank of America                                                                                                                                                       tion reports. The highlight will be             future
Merrill Lynch. — Editor
                                                                                                       Global forecasts
                                                                                                                                                                                         Thursday’s Eurozone-wide inflation                 Historically, a key feature of the US
           ❑      ❑     ❑                                                                            Economic forecasts                                                                  report, which should show that Core             labor market was “labor hoarding”—a
                                              Global economic forecasts
                                                                                                                                                                                         CPI remained at 1.5% YoY in June. On            tendency by firms to use workers more

G       lobal manufacturing is recover-                                                     GDP growth, %               CPI inflation*, %         Short term interest rates**, %
        ing swiftly but confidence is                                                2009    2010 2011F 2012F         2009 2010 2011F         2012F Current 2010 2011F 2012F             the central bank front, we’ll be hearing        intensively during booms and less
        waning. There is still some           Global and Regional Aggregates                                                                                                             from the Bank of Japan, Bank of Korea           intensively during busts.2 This
                                              Global                                  -0.7     5.0      4.1      4.8     1.6   3.2     4.3      3.6     3.29   3.01    3.64 4.52         and the Chilean central bank, among             “implicit marriage contract” between
inventory trimming in the pipeline.           Global ex US                            -0.2     5.6      4.6      5.3     2.2   3.7     4.5      4.0     4.17   3.81    4.58 5.59
   United States: Just in time labor          Developed Markets                       -3.6     2.7      2.0      2.7     0.0   1.4     2.7      1.9      0.80  0.58    0.86 1.58
                                                                                                                                                                                         others.                                         workers and firms made sense both due
   Weak corporate confidence and              G5                                      -3.7     2.5      1.9      2.6    -0.1   1.4     2.7      1.8     0.69   0.46    0.74 1.46                      United States                      to the cost of hiring and firing workers
increased labor market flexibility mean       Emerging Markets                         2.6     7.5      6.4      6.5     3.6   5.2     5.9      4.9      6.36  5.71    6.58 7.01                                                         and because job security increases
                                              Europe, Middle East & Africa (EMEA) -4.2         2.6      2.6      2.4     3.1   3.3     4.2      3.3      2.99  2.61    3.28 4.07            Just in time labor                           worker loyalty and morale.
a much faster response of jobs to                European Union                       -4.1     1.8      2.0      1.9     0.9   2.0     3.0      2.1     1.64   1.20    1.88 2.77         ■ Review: Friday’s dismal jobs report              A key implication of labor hoarding
swings in the economy.                           Emerging EMEA                        -3.5     4.4      4.3      4.0     8.0   6.1     6.7      5.7     6.69   6.30    6.90 7.24         essentially cancelled out a string of bet-
   Canada: Rate bait                          PacRim                                   3.8     8.1      6.2      7.1     0.5   3.5     4.4      3.5     4.46   4.12    4.84 5.31
                                                                                                                                                                                                                                         is that worker productivity, rather than
                                                                                                                                                                                         ter data in June. We will remain in a           job cuts, tended to absorb most of the
   Mortgage insurance rule changes by            PacRim ex Japan                       6.1     8.9      7.5      7.8     0.9   4.4     5.2      4.1     5.55   4.98    5.80 6.29         cautious mood until we see a sensible
the Department of Finance over the               Emerging Asia                         6.6     9.2      7.8      8.0     0.9   4.5     5.3      4.2     5.77   5.15    6.01 6.50                                                         blow of recessions. As Chart 4 shows,
                                              Americas                                -2.5     3.8      3.0      3.4     1.4   2.9     4.1      3.3     2.55   2.29    2.75 3.44         solution around the debt ceiling.               before 1984 productivity dropped
past three years have barely offset the          Latin America                        -2.0     6.3      4.6      4.5     6.4   6.3     6.6      6.6      9.02  8.13    9.63 10.10        ■ Hot topic: Weak corporate confi-              sharply in recessions, but in the three
decline in rates, in our view.                G5                                                                                                                                         dence and increased labor market flex-
   Euro area: Is the next move a fis-                                                                                                                                                                                                    most recent recessions productivity has
                                              US                                      -2.6     2.9      2.4      3.0    -0.4   1.6     3.2      2.1    0.250 0.130 0.125 0.750           ibility mean a much faster response of          either continued to grow (1991 and
cal union?                                    Euro area                               -4.1     1.7      2.0      1.6     0.3   1.6     2.6      2.0     1.50   1.00    1.75 2.75         jobs to swings in the economy.
   EU institutions are putting the brakes     Japan                                   -6.3     4.0     -0.3      3.6    -1.3 -1.0      0.1      0.2     0.10   0.05    0.05 0.05                                                         2001) or has fallen very mildly relative
                                              UK                                      -4.9     1.4      1.3      2.3     2.2   3.3     4.5      2.2     0.50   0.50    0.75 1.50
                                                                                                                                                                                         ■ Preview: After being pushed off the           to the size of the recession (2009). The
on the crisis, and EU governments are                                                                                                                                                    stage by soft patch concerns, inflation
unwilling to change the institutional         Canada                                  -2.8     3.2      3.0      3.0     0.3   1.8     3.3      2.4     1.00   1.00    1.50 3.50                                                         flip side of the more stable productivi-
                                              Euro area                                                                                                                                  indicators should grab some of the              ty is that worker hours and jobs are
structure. A fiscal union is not the          Germany                                 -4.7     3.5      3.3      1.8     0.2   1.2     2.3      1.7     1.50   1.00    1.75 2.75         spotlight. We expect a flat headline CPI
short-term solution, in our view.             France                                  -2.6     1.4      2.1      1.6     0.1   1.7     2.1      1.7     1.50   1.00    1.75 2.75
                                                                                                                                                                                                                                         increasingly absorbing swings in the
                                                                                                                                                                                         reading, but a 0.3% increase in the             economy.
   UK: The negative real interest rate        Italy                                   -5.2     1.2      1.0      1.2     0.8   1.6     2.8      2.2     1.50   1.00    1.75 2.75         core.
debate                                        Spain                                   -3.7    -0.1      0.8      1.4    -0.2   2.0     3.2      2.0     1.50   1.00    1.75 2.75                                                            Digging deeper, Table 3 decomposes
                                              Netherlands                              1.6     2.1      1.8      1.0     0.9   2.2     2.0     1.50     1.00   1.75    2.75                 Sponge Bob, soft patch                       the drop in output into hours worked,
   Real interest rates in the UK are cur-     Belgium                                 -2.7     2.1      2.6      2.1     0.0   2.3     3.2      2.1     1.50   1.00    1.75 2.75            Recent data suggests both that the
rently well below zero. But households                                                                                                                                                                                                   employment (a sub-component of
                                              Greece                                  -2.3    -4.4     -3.3      1.1     1.3   4.7     3.4      3.1     1.50   1.00    1.75 2.75         “soft patch” has been even spongier             hours) and productivity. Note that for
may be taking little solace: real wage        Austria                                 -3.4     2.1      2.6      2.0     0.4   1.7     3.3      2.2     1.50   1.00    1.75 2.75         than expected. Our tracking model
growth is also negative.                      Portugal                                -2.5     1.3     -1.9     -1.1    -0.9   1.4     3.5      1.9     1.50   1.00    1.75 2.75                                                         the latest recession was from Q4 2007
                                                                                                                                                                                         points to a feeble 1.5% gain in Q2              to Q2 2009, but we have included an
   Japan: Signs of an end to defla-           Finland                                 -8.3     3.2      3.7      2.3     1.6   1.7     3.3      2.4     1.50   1.00    1.75 2.75
                                              Ireland                                 -7.0    -0.4      1.2      2.1    -1.7 -1.6      1.0      0.7     1.50   1.00    1.75 2.75         GDP, suggesting that this year’s soft           extra line that also looks at the full peri-
tion?                                                                                                                                                                                    patch is even worse than last summer.
                                              Other Developed Europe                                                                                                                                                                     od of hours cuts through Q4 2009. The
   The output prices diffusion index in       Sweden                                  -5.3     5.4      4.5      2.5    -0.5   1.2     3.2      2.7     2.00   1.25    2.25 3.00         Until the employment report was
Bank of Japan’s Tankan survey exhibits                                                                                                                                                                                                   table underscores the changing dynam-
                                              Switzerland                             -1.9     2.6      2.2      2.0    -0.5   0.7     0.9      1.4     0.25   0.25    0.75 1.75         released, the data for June had been            ics of the US economy:
a close correlation with the CPI is get-      Norway                                  -1.6     2.1      2.8      3.1     2.2   2.4     1.7      1.7     2.25   2.00    2.75 3.75         hinting at some easing of the soft patch.
ting less negative. Whether this trend        Asia Pacific                                                                                                                                                                               ■ While recessions were mild during
                                              China                                    9.2   10.3       9.3      9.0    -0.7   3.3     4.7      3.6     6.56   5.81    6.56 7.06
                                                                                                                                                                                         This tentative improvement was con-             the “Great Moderation” period after
will continue or not will depend upon                                                                                                                                                    sistent with the fading of both the oil
                                              India                                    8.0     8.5      7.6      8.0     3.6   9.4     8.2      6.0     6.50   5.75    6.75 7.25                                                         1984, the latest recession broke new
the yen’s FX rates.                           Korea                                    0.2     6.1      3.9      5.0     2.7   3.0     4.4      3.1     3.25   2.50    3.50 4.00         shock and the Japan supply chain dis-
   Emerging Asia: Indonesia: In a                                                                                                                                                                                                        ground in terms of lost output, jobs and
                                              Indonesia                                4.5     6.1      6.3      6.1     4.9   5.0     7.0      6.3     6.75   6.50    7.50 8.00         ruption.                                        hours.
sweet spot, for now                           Australia                                1.3     2.7      2.0      4.3     1.8   2.8     3.5      3.0     4.75   4.75    5.00 5.75            Unfortunately, the employment
   Indonesia appears to be in a sweet         Taiwan                                  -1.9   10.8       4.6      7.2    -0.9   1.0     1.8      2.9     1.88   1.63    2.13 2.88                                                         ■ Over-time workers are increasingly
                                              Thailand                                -2.5     7.8      3.8      4.5    -0.9   3.3     3.7      3.2     3.00   2.00    3.50 3.50
                                                                                                                                                                                         report essentially canceled out all of          bearing the brunt of recessions, with
spot, especially relative to its large                                                                                                                                                   the signs of improvement. This was an
Asian BRIC counterparts, China and            Malaysia                                -1.7     7.2      5.1      5.4     0.6   1.7     3.2      2.5     3.00   3.20    3.12 3.06                                                         both hours and employment suffering
                                              2009                                   2010 2011F 2012F         2009     2010 2011F 2012F Current         2010 2011F 2012F                 easy report to interpret: employment,           disproportionately.
India. Growth is accelerating, despite        Philippines                              0.9     7.3      5.8      5.9     3.2   3.9     4.5      5.0     4.50   4.00    4.75 5.00         unemployment, wages and hours
the global soft patch and disruptions         Hong Kong                               -2.7     7.0      6.4      5.8     0.5   2.4     4.0      4.5     0.50   0.25    0.25 0.25
                                                                                                                                                                                                                                         ■ The latest recession set new records
                                                                                                                                                                                         worked were all worse than expected.            in terms of labor pains. Hours fell the
from Japan’s earthquake.                      Singapore                               -1.3   14.5       5.3      4.6     0.6   2.7     3.9      2.5     0.18       -      -      -       Thus, we continue to believe it is too
   Emerging EMEA: Turkey: Mind                New Zealand                             -2.1     1.5      1.4      4.5     2.1   2.3     4.2      2.5     2.50   3.00    2.75 4.50                                                         most in any recession while productiv-
                                              Latin America                                                                                                                              early to look past the soft patch to            ity increased the most.
the FX pass-through                                                                                                                                                                      firmer ground ahead. We expect the
                                              Mexico                                  -6.1     5.4      4.0      4.5     5.3   4.2     3.6      4.0     4.50   4.50    4.50 5.50                                                            We think it is also worth noting that
   The side effect of the low rates-          Brazil                                  -0.6     7.5      4.1      4.6     4.9   5.0     6.5      5.1    12.25 10.75 12.50 12.00           economy to shake off the after-effects
weaker TRY policy choice of Ankara is         Argentina                                0.9     9.2      7.0      3.5     6.3 10.3      9.8     13.4    11.50 11.08 15.00 18.00
                                                                                                                                                                                                                                         the US stands out relative to other
                                                                                                                                                                                         of the oil shock and the Japanese sup-          countries in terms of labor market flex-
likely to be higher inflation. Our mod-       Colombia                                 0.8     4.3      5.0      5.0     4.2   2.3     3.2      3.2     4.25   3.00    4.75 5.75         ply chain disruptions by the end of the
els suggest that FX pass-through to           Venezuela                               -3.3    -1.7      3.6      3.7    28.6 29.1    24.9      25.9    18.03 16.68 18.00 18.00                                                           ibility: a 2004 study from the OECD
                                              Chile                                   -1.5     5.0      5.9      5.0     0.4   1.4     3.5      3.4     5.25   3.25    5.50 5.50         summer. However, the fiscal crises in           found that the US ranked last in terms
inflation has started to increase after                                                                                                                                                  the US and Europe remain very much
                                              Peru                                     0.9     8.8      6.5      6.0     2.9   1.5     3.1      2.7     4.25   3.00    5.00 5.50                                                         of “employment protection” among the
tanking during the downturn.                  Uruguay                                  2.9     8.5      7.0      5.0     5.9   6.9     7.3      6.0     8.00   6.50    9.00 9.00         alive. Europeans have fumbled the ball
   Latin America: Conflicting infla-                                                                                                                                                                                                     28 countries studied.
                                              EEMEA                                                                                                                                      again and seem to be delaying a sec-               Labor hoarding has declined
tion forces linger                            Russia                                  -7.9     4.0      4.8      4.1    11.7   6.9     9.1      6.1     8.25   7.75    8.25 8.00         ond package for Greece until
   Inflation in LatAm has been well           Turkey                                  -4.7     8.9      6.4      4.0     6.3   8.6     6.4      7.7     6.50   6.50    7.25 8.75                                                            Labor economists argue that labor
                                              Poland                                   1.7     3.8      3.5      3.8     4.5   2.7     4.3      3.0     4.50   3.50    4.75 4.75
                                                                                                                                                                                         September. A bigger concern is the              hoarding has declined both due to a fall
behaved at the margin. Yet this picture                                                                                                                                                  dysfunctional debt ceiling debate in
could bring a false sense of accom-           South Africa                            -1.7     2.8      3.5      4.2     7.1   4.4     4.9      6.0     5.50   5.50    6.50 8.00                                                         in labor adjustment costs and increased
                                              Egypt                                    4.7     5.1      0.0      3.0    16.2 11.7     11.0     10.0     8.25   8.25    8.25 8.25         Washington. The list of bad ideas               business uncertainty:
plishment given recent seasonality pat-       Ukraine                                -15.1     4.3      5.0      4.2    15.9 10.4    10.2       8.5      7.75  7.75    7.75 7.75         keeps growing (See Mike Hanson’s
terns.                                        Romania                                 -7.1    -1.3      1.5      2.5     5.6   6.1     6.6      3.5     6.25   6.25    6.25 6.75                                                         ■ Labor adjustment costs have
                                                                                                                                                                                         piece), but we remain hopeful that              declined due to the decline in unions,
           Global overview                    Czech Republic                          -4.1     2.3      1.8      3.0     1.1   1.5     2.2      1.9     0.75   0.75    1.00 1.75         common sense will prevail and a last
                                              Israel                                   0.8     4.5      3.9      4.5     3.3   2.7     3.3      2.8     3.25   2.00    4.00 4.75                                                         better job search tools (such as Internet
   Coming up for air                          Hungary                                 -6.7     1.2      2.5      3.0     4.2   4.9     4.1      3.0     6.00   5.75    6.00 6.75         minute deal will be struck.                     postings), and increased substitutabili-
■ Review: Both the PBoC and the               Kazakhstan                               1.2     5.5      5.0      5.0     7.3   7.1     6.7      6.0     7.50   7.00    6.50 6.00            He said, she said                            ty between workers and computers
ECB hiked interest rates as expected.         GCC                                                                                                                                        ■ The news flow around a potential              (particularly for middle-tier white col-
In the US, the June employment report         Saudi Arabia                             0.6     3.2      4.9      4.2     5.1   5.7     5.5      5.4                                      debt ceiling deal remains as confusing
                                              United Arab Emirates                    -1.4     2.0      2.8      3.1     1.6   1.0     2.8      3.2                                                                                      lar jobs).
was dismal.                                                                                                                                                                              as ever. At this stage the key to a deal is     ■ Business uncertainty may have
                                              Kuwait                                  -2.2     2.5      3.1      5.0     4.0   3.0     4.0      4.2
■ Hot topic: Global manufacturing is          Qatar                                    9.0   13.3     13.0       7.5    -4.9 -2.9      2.5      3.5                                      probably getting the Republicans to             increased because firms have less faith
recovering swiftly but confidence is          Oman                                     0.8     3.8      3.7      4.0     3.5   4.0     4.1      4.0                                      agree to more than token “revenue rais-         in rapid recoveries from recessions and
waning. There is still some inventory         Bahrain                                  3.1     2.4     -2.2      2.9     2.8   2.5     3.0      2.7                                      ers.” A recent front page piece from the        because while national sales have
trimming in the pipeline.                     Notes: Global and regional aggregates are based on the IMF PPP weights unless stated otherwise. Countries within each region are           New York Times underscored the con-             become more stable, firms have experi-
                                              ordered according to these weights.
■ Preview: We’ll be on the receiving          * Annual averages. The HICP measure of inflation is used for Euro area economies. ** Central bank target rate, year-end, where avail-
                                                                                                                                                                                         fusion. In this one article, Republican         enced greater volatility in recent
end of inflation reports in the US and        able, short-term rates elsewhere. † US short-term rate forecast for 2008, 2009 and 2010 year end is 0-0.25%.
                                                                                                                                                                                         leaders are: considering “as much as $1         decades.
Eurozone. Central banks meeting this          Midpoint used in table above for global and regional aggregation purposes. Source: BofA Merrill Lynch Global Research                      trillion in new revenues,” but are “not            The implicit contract between work-
week include the BoJ, BoK, and the                                                                                                                                                       interested in raising taxes”,                   ers and firms only works if both sides
Chilean central bank among others.                                                                                                                                                       ■ “finding areas were we can agree,”            believe that hard work during periods
   Review: Actions speak loader than          weighed in. S&P informed that the             writes, Italy’s budget cuts are back-           side. The auto sector is effectively in an   but “insist(ing) that any deal not raise
                                              Greek debt rollover plan on the table         loaded and the markets correctly ques-          auto pilot recovery. This week’s May                                                         of strong business will be rewarded
words                                                                                                                                                                                    taxes,”                                         with job security during periods of
   After a week of better data, the dis-      may be rated “selective default”, albeit      tion whether they will really deliver.          manufacturing orders out of the US,          ■ Mr. Boehner is “open to” “killing             weak business. Perhaps the “marriage
mal June US employment report ended           temporarily. Moody’s then downgrad-              A different shade of soul                    Germany and Japan support the expec-         tax breaks for the oil and gas industry,
                                              ed Portugal’s long-term debt by four             Not to be outdone by Europe, China           tation of further improvement in June.                                                       contract” in the finance industry is par-
the past week on a negative note.                                                                                                                                                        eliminating ethanol subsidies and end-          ticularly weak—where else do you get
While markets were up for the week, a         notches on the grounds that the Greek         is facing its own fiscal issues. In the         By contrast, last week’s round of man-       ing preferential treatment for corporate
                                              solution would eventually be applied to       past week, Moody’s claimed that                 ufacturing PMIs showed that business                                                         a “honeymoon” (garden leave) when
variety of negative headlines contin-                                                                                                                                                    jets.” But “aides to Mr. Boehner said           you divorce? But there seems to be a
ued to buffet sentiment, including            Portugal.                                     China’s National Audit Office (NAO)             managers are growing less upbeat. The        that no tax increases were on the
                                                 Politicians in Germany and the rest of     had understated the size of local gov-                                                                                                       broad-based decline in worker-firm
more negative news out of the periph-                                                                                                       PMIs are above 50, but still easing.         table.”                                         loyalty.
ery of Europe and concerns about non-         core Europe continue to look for ways         ernment debt, also suggesting that                 Taking the PMIs at face value in fact        In our view, the running commentary
                                              to increase private sector participation      banks’ non-performing loans would                                                                                                               Just in time today
performing loans in China. The nega-                                                                                                        suggests industrial production should        out of Washington is not very useful in            In our view, this increasingly flexible
tive news did not deter central bank          in funding Greek debt. They hope that         make a higher proportion of debt than           still be weak. Regressing global manu-       predicting the outcome of the debt ceil-
                                              this will make the bailouts more politi-      generally believed. Moody’s warning                                                                                                          labor market helps explain the rapid
hiking. In China the PBoC hiked inter-                                                                                                      facturing on the headline global PMI         ing debate. A better predictor is to go         stops and starts in the job market in the
est rates for the third time this year, a     cally palatable to taxpayers. However,        struck a chord with investors: if China         and other lagged terms delivers a sim-       back to first principles. The gap               last two years. Companies cut their
move anticipated by the markets.              the math is not encouraging. As our           significantly underestimated bad debt           ple gauge of the impact of confidence        between the two positions remains very          staffing to the bone during the reces-
Likewise the ECB followed through             European team points out, Greece              before, why not again?                          on output. PMI-base regression illus-        wide: the Democrats seem willing to             sion and the first two quarters of the
on its “strong vigilance” warning with        needs to roll over 110bn between now             Our China economist, Ting Lu nev-            trates actual and fitted values. The         strike a deal where only a quarter of the       recovery, so as their business expands
a 25bps interest rate hike.                   and mid-2014. Of this only 30bn is            ertheless believes the NAO data are             model suggests production should be          deficit reduction comes from taxes,             they need to hire. And yet, at the first
   But when it comes to peripheral debt,      debt that could be rolled over by             correct. If the NAO is indeed close to          down 0.1% in May and 0.5% in June            while Republicans seem willing to               sniff of economic uncertainty, job
the ECB’s talk is a lot tougher than its      European banks. Thus, even with a 50%         the mark, our Chinese banks analyst             (standard deviation of month-ahead           offer at most token cuts—the three              growth slows dramatically. Then, when
actions. ECB President Trichet insists        participation rate, a voluntary “Vienna-      thinks the amount of associated non-            forecast is 0.4).                            above add up to just $100 bn. The lead-         the uncertainty fades, job growth
that they will not accept government          type” rollover plan would fund a small        performing loans in banks’ balance                 We think the discrepancy with the         ers of each party need to fight hard            comes back. We expect this jerky
paper rated as “selective default”. And       fraction of Greek financing needs.            sheets is close to RMB2 trillion. Given         recent robust data reflects a manufac-       before they go back to their caucus and         recovery to continue this year. If the
yet, in practice the ECB continues to            Market-based schemes such as buy-          provision amounts of almost RMB1.5              turing recovery narrowly concentrated        try to sell a compromise. Indeed, an            uncertainty around European and US
loosen its requirements. The latest con-      backs and debt-equity swaps were              trillion, banks could absorb these loss-        in Japanese-related production. The          early compromise by the leadership              fiscal policy abates, a return to okay
cession: the suspension of credit rating      extensively employed in 1980s Latin           es within a year. The downside thus             broader picture remains soft. Forward-       might be voted down by majorities of            job growth is likely later this year. In
collateral requirements for Portuguese        America, but to less-than-effusive            seems manageable, but with a dis-               looking indicators such as the new           both parties. Hence, it is likely that the      the meantime, it’s hard labor.
debt. Thus, despite its rigid rhetoric, the   reviews. By benefitting mostly credi-         claimer that this is fully conditional on       orders components of the PMI surveys,        agreement will come only at the last
                                              tors these solutions failed to achieve        the accuracy of the NAO’s figures.                                                           minute and only after scaring the capi-                          Canada
central bank remains flexible in the face                                                                                                   the ECB euro-area wide and the OECD
of the crisis. With further periphery-        meaningful debt reduction, and were              A relief bounce?                             leading indicators all suggest there is      tal markets.                                       Rate bait
related stress episodes lying ahead, the      eventually supplanted by the Brady               The supply chain disruptions that            still some inventory trimming in the            Just in time labor market                    ■ Review: The jobs figures once again
ECB is underscoring a familiar mes-           plan. In this initiative, creditors forgave   followed the Great Eastern Japan earth-         pipeline. Activity is therefore on the          We continue to be struck by the fast         defied downbeat expectations in June
sage: it never pre-commits.                   some existing debt in exchange for            quake weighed heavily on global out-            mend, but all in all the current soft        response of the labor market to shifts in       and suggest there is underlying
   Zombie negotiations                        greater certainty of servicing residual       put, but global manufacturing is start-         patch is not ready to pack up just yet.      economic sentiment. Twice in this               strength in the economy.
   We had been hoping the European            claims. This was achieved through col-        ing to recover. After falling in both                                                        recovery, the job market started a real,        ■ Hot topic Mortgage insurance rule
debt crisis would settle down for a           lateralization of principal with US           March and April, global production                   Global economic calendar                200,000-plus monthly recovery, only to          changes by the Department of Finance
while, but it now looks like it could         zero-coupon bonds1.                           recovered robustly in May. Output rose             Inflating inflation                       drop back below 100,000. In our view,           over the past three years have barely
take until September to get a new                Meanwhile, amid gridlocked negoti-         in all the major economies: the US,                In the US, investors will be focusing     this reflects both a structural shift           offset the decline in rates, in our view.
Greek plan in place. After last week-         ations and rating agency protests, con-       Japan, Germany, China, Brazil and               in on the three inflation reports due out.   toward more flexible labor market               ■ Preview: Next week’s releases will
end’s Eurogroup gathering failed to           tagion blossomed. Italian leaders took        Korea. We estimate a 0.7% global rise           Our sense is that inflation continues to     adjustment and a corporate sector that          show us business sentiment, interna-
agree on the composition of the new           note and agreed on new multi-year             in May following a 0.5% drop in April.          crawl higher, but we are a long way off      is deeply skeptical about the staying           tional trade and manufacturing sales.
Greek program, the rating agencies            budgetary plans. But as Silvia Ardagna           June may also come in on the bright          from above 2% core inflation. In             power of the economic recovery.                          To Be Continued Tomorrow

				
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