Friday, April 15, 2005
Warning- imbalances worsen
Warning: global economic imbalances are getting worse. The US trade deficit rose to a new record $61bn (£32bn) in February. This was not supposed to happen.
Global imbalances were expected to narrow as the economic cycle matured. Instead they are increasing. The International Monetary Fund is worried that this trend will continue, increasing the risk of a sudden adjustment at some point in the future.
The economic argument is familiar. The US current account deficit is not sustainable in the long run. If private investors lose faith that a gradual adjustment is feasible, or foreign central banks stop accumulating US assets, the dollar could fall sharply. This would probably prompt a similarly abrupt rise in US interest rates, which could kill off the US housing and consumption boom and explode over- leveraged financial institutions, with severe global consequences.
Two months ago Alan Greenspan suggested that market forces appeared "poised to stabilise and, over the long run, possibly to decrease" the US current account deficit. The IMF believes the current account deficit will indeed stabilise but at an unsustainable level: about 5.7 per cent of gross domestic product in 2005 and 2006, unless the dollar falls further.
The immediate culprit is the widening growth differential between the US (and China and the UK) on the one hand, and the eurozone and Japan on the other. The US has powered ahead. But growth faltered in the eurozone and Japan. The IMF now expects the eurozone to grow at only 1.6 per cent and Japan at 0.8 per cent this year. It wisely urges the European Central Bank and the Bank of Japan not to jeopardise this - though, bizarrely, it still thinks Japan should raise taxes.
Policymakers have shirked their responsibilities to tackle the underlying causes of the imbalances. The US is not doing nearly enough to reduce government borrowing; the eurozone is moving too slowly with growth-promoting labour market reforms; Japan still has its own structural problems to overcome; and Asia as a whole is resisting currency appreciation.
Global imbalances were expected to narrow as the economic cycle matured. Instead they are increasing. The International Monetary Fund is worried that this trend will continue, increasing the risk of a sudden adjustment at some point in the future.
The economic argument is familiar. The US current account deficit is not sustainable in the long run. If private investors lose faith that a gradual adjustment is feasible, or foreign central banks stop accumulating US assets, the dollar could fall sharply. This would probably prompt a similarly abrupt rise in US interest rates, which could kill off the US housing and consumption boom and explode over- leveraged financial institutions, with severe global consequences.
Two months ago Alan Greenspan suggested that market forces appeared "poised to stabilise and, over the long run, possibly to decrease" the US current account deficit. The IMF believes the current account deficit will indeed stabilise but at an unsustainable level: about 5.7 per cent of gross domestic product in 2005 and 2006, unless the dollar falls further.
The immediate culprit is the widening growth differential between the US (and China and the UK) on the one hand, and the eurozone and Japan on the other. The US has powered ahead. But growth faltered in the eurozone and Japan. The IMF now expects the eurozone to grow at only 1.6 per cent and Japan at 0.8 per cent this year. It wisely urges the European Central Bank and the Bank of Japan not to jeopardise this - though, bizarrely, it still thinks Japan should raise taxes.
Policymakers have shirked their responsibilities to tackle the underlying causes of the imbalances. The US is not doing nearly enough to reduce government borrowing; the eurozone is moving too slowly with growth-promoting labour market reforms; Japan still has its own structural problems to overcome; and Asia as a whole is resisting currency appreciation.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 9:08 AM 0 comments
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Thursday, April 14, 2005
Inflation linked 50-year UK bond in prospect
The UK government is poised to become the first in the world to issue an inflation-linked 50-year bond to satisfy rising demand for such assets from institutional investors.
The Debt Management Office which borrows on behalf of the government already plans to sell a 50-year conventional bond next month. But an ultra-long bond linked to inflation and therefore protecting investors from the risk of future price rises could come in the third quarter of the calendar year.
While a formal decision is unlikely to come until after the conventional bond is placed, officials at the DMO said on Monday that “there is no reason not go for a linker after that”.
Pension funds are under growing pressure to improve the way they match their assets with their long-dated liabilities, partly because of regulatory requirements, but also because people are living longer.
Issuing such long-dated bonds during a time of historically low interest rates is also a cheap way for the government to reduce the cost of funding the country's rising debt.
But while demand is expected to be high for the conventional 50-year paper, there are investors who are largely interested in index-linked gilts because they also have the added advantage of serving as hedges against inflation.
This is particularly important because the recent period of historically low inflation may not last and many investors have liabilities that rise with inflation.
However as the current Chancellor Gordon Brown will not give govt lending details more than 3 years in advance and Standard & Poors estimates that in 50 years time the creditworthiness of UK gilts will be on a par with junk bonds we wonder who will buy this issuance.
The Debt Management Office which borrows on behalf of the government already plans to sell a 50-year conventional bond next month. But an ultra-long bond linked to inflation and therefore protecting investors from the risk of future price rises could come in the third quarter of the calendar year.
While a formal decision is unlikely to come until after the conventional bond is placed, officials at the DMO said on Monday that “there is no reason not go for a linker after that”.
Pension funds are under growing pressure to improve the way they match their assets with their long-dated liabilities, partly because of regulatory requirements, but also because people are living longer.
Issuing such long-dated bonds during a time of historically low interest rates is also a cheap way for the government to reduce the cost of funding the country's rising debt.
But while demand is expected to be high for the conventional 50-year paper, there are investors who are largely interested in index-linked gilts because they also have the added advantage of serving as hedges against inflation.
This is particularly important because the recent period of historically low inflation may not last and many investors have liabilities that rise with inflation.
However as the current Chancellor Gordon Brown will not give govt lending details more than 3 years in advance and Standard & Poors estimates that in 50 years time the creditworthiness of UK gilts will be on a par with junk bonds we wonder who will buy this issuance.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 8:35 AM 0 comments
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Wednesday, April 13, 2005
Treasuries rally as Fed is less hawkish than feared
Prices of US's Treasury bonds rallied in late trade on Tuesday as investors breathed a sigh of relief over signs that the Federal Reserve was not yet ready to accelerate the speed of its interest rate rises.
Minutes released yesterday afternoon from the central bank’s last policy-setting meeting in March revealed growing concerns over inflation but suggested that the Fed was not inclined in the near term to start raising rates at more than its current pace.
“Although the required amount of cumulative tightening may have increased, members noted that an accelerated pace of policy tightening did not appear necessary at this time,” the minutes said.
Earlier in the day, Treasury prices had fallen as traders feared that policy makers might be ready to initiate more aggressive action on rising prices.
Bond investors largely ignored data showing that the US trade deficit had widened again in February to hit a new record of 61.04 billion dollars.
In late trade in New York, the yield on the 10-year bond fell 6.8 basis points to 4.368 per cent, its lowest since early March. The yield on the two-year note was down 3.4bp to 3.699 per cent.
UK gilt prices fell and yields rose following a disappointing auction of long-dated inflation-linked bonds that received bids worth only 1.52 times the £800m of the 2 per cent 2035 index-linked paper that was offered. But the auction came as the market absorbed news that the Debt Management Office was poised to sell a 50-year linker. By the end of the day, the yield on the two-year gilt had edged back down 0.6bp to 4.595 per cent while 10-year gilt was yielding 4.683 per cent, up 0.2bp.
In the eurozone, government bond prices traded in a tight range for most of the day. The two-year Schatz yield was flat at 2.4 per cent while the 10-year Bund edged down 1.7bp to 3.54 per cent.
Japanese government bond prices climbed higher following a well-received auction of short term paper and as the stock market continued to weaken. Dealers bought Y2,000bn of five-year government bonds with a coupon rate of 0.6 per cent while there was also strong demand in the secondary auction.
Amid heavy volume, the 10-year June JGB contract moved 0.16 higher to 139.55. The yield on the 10-year bond also moved higher, up 2bp to 1.340 per cent.
Minutes released yesterday afternoon from the central bank’s last policy-setting meeting in March revealed growing concerns over inflation but suggested that the Fed was not inclined in the near term to start raising rates at more than its current pace.
“Although the required amount of cumulative tightening may have increased, members noted that an accelerated pace of policy tightening did not appear necessary at this time,” the minutes said.
Earlier in the day, Treasury prices had fallen as traders feared that policy makers might be ready to initiate more aggressive action on rising prices.
Bond investors largely ignored data showing that the US trade deficit had widened again in February to hit a new record of 61.04 billion dollars.
In late trade in New York, the yield on the 10-year bond fell 6.8 basis points to 4.368 per cent, its lowest since early March. The yield on the two-year note was down 3.4bp to 3.699 per cent.
UK gilt prices fell and yields rose following a disappointing auction of long-dated inflation-linked bonds that received bids worth only 1.52 times the £800m of the 2 per cent 2035 index-linked paper that was offered. But the auction came as the market absorbed news that the Debt Management Office was poised to sell a 50-year linker. By the end of the day, the yield on the two-year gilt had edged back down 0.6bp to 4.595 per cent while 10-year gilt was yielding 4.683 per cent, up 0.2bp.
In the eurozone, government bond prices traded in a tight range for most of the day. The two-year Schatz yield was flat at 2.4 per cent while the 10-year Bund edged down 1.7bp to 3.54 per cent.
Japanese government bond prices climbed higher following a well-received auction of short term paper and as the stock market continued to weaken. Dealers bought Y2,000bn of five-year government bonds with a coupon rate of 0.6 per cent while there was also strong demand in the secondary auction.
Amid heavy volume, the 10-year June JGB contract moved 0.16 higher to 139.55. The yield on the 10-year bond also moved higher, up 2bp to 1.340 per cent.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 9:40 AM 0 comments
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Monday, April 11, 2005
ECB holds rates at 2% as euro gloom deepens
The European Central Bank held its main refinancing rate at 2 per cent for the 22nd straight month on Thursday.
The move was widely expected given the deterioration in eurozone economic data since the March meeting. All 30 economists polled by AFX News and Agence France-Presse had forecast the ECB would remain on hold, with only one predicting a hike before the second half of 2005.
The futures market has moved to pricing in an initial hike in October, rather than the September move it saw a month ago.
A number of members of the ECB’s governing council are believed to be keen to raise rates as soon as possible, particularly in the wake of the decision by European Union finance ministers on March 20 to loosen the EU’s stability and growth pact.
The move, which gave member countries greater leeway to run fiscal deficits greater than 3 per cent of GDP, is potentially inflationary, provoking the ECB to say it was “seriously concerned about the changes”.
Yves Mersch, a member of the ECB’s governing council, said: “If there is relaxation on the fiscal side, it will not remain without consequence on the monetary side.”
Buoyant money supply growth has also prompted some concern from hawks on the ECB. M3, a broad money supply measure watched closely by the bank, grew at an annual rate of 6.4 per cent in February, potentially hinting at greater inflationary pressures in the pipeline.
However the continuing poor economic health of the eurozone has so far not given the ECB the opportunity to raise rates.
Earlier this week the European Commission downgraded its forecast for economic growth in the eurozone to 1.6 per cent in 2005, from 2 per cent, pinning the blame on high oil prices and a strong euro.
The Commission also saw eurozone inflation tumbling from 2.1 per cent in 2004 to 1.9 per cent this year and 1.5 per cent in 2006, well below the ECB’s target rate of “close to, but below” 2 per cent.
Core inflation in the eurozone fell to 1.6 per cent in the year to March, from 1.8 per cent in February, even as higher energy prices caused the headline inflation reading to edge up to 2.1 per cent.
Rising unemployment will have heaped further political pressure on the ECB not to hike rates. France has seen its unemployment rate rise above 10 per cent, joining that of Belgium (12.8 per cent), Germany (12 per cent), Spain (10.5 per cent) and Greece (10.1 per cent).
Sentiment also remains weak. French business confidence has fallen to a 15-month low and that of Germany to an 18-month low, while Italian business confidence is at its weakest level for 20 months.
Sentiment has been damaged by rising oil prices, which are likely to act as a further drag on economic growth.
Admittedly the euro has fallen against the dollar from $1.314 at the time of the March meeting to $1.289 today, but any eurozone rate hike risks sending the euro back up towards the highs of $1.365 seen in December 2004, further damaging the zone’s fragile export-led recovery.
The move was widely expected given the deterioration in eurozone economic data since the March meeting. All 30 economists polled by AFX News and Agence France-Presse had forecast the ECB would remain on hold, with only one predicting a hike before the second half of 2005.
The futures market has moved to pricing in an initial hike in October, rather than the September move it saw a month ago.
A number of members of the ECB’s governing council are believed to be keen to raise rates as soon as possible, particularly in the wake of the decision by European Union finance ministers on March 20 to loosen the EU’s stability and growth pact.
The move, which gave member countries greater leeway to run fiscal deficits greater than 3 per cent of GDP, is potentially inflationary, provoking the ECB to say it was “seriously concerned about the changes”.
Yves Mersch, a member of the ECB’s governing council, said: “If there is relaxation on the fiscal side, it will not remain without consequence on the monetary side.”
Buoyant money supply growth has also prompted some concern from hawks on the ECB. M3, a broad money supply measure watched closely by the bank, grew at an annual rate of 6.4 per cent in February, potentially hinting at greater inflationary pressures in the pipeline.
However the continuing poor economic health of the eurozone has so far not given the ECB the opportunity to raise rates.
Earlier this week the European Commission downgraded its forecast for economic growth in the eurozone to 1.6 per cent in 2005, from 2 per cent, pinning the blame on high oil prices and a strong euro.
The Commission also saw eurozone inflation tumbling from 2.1 per cent in 2004 to 1.9 per cent this year and 1.5 per cent in 2006, well below the ECB’s target rate of “close to, but below” 2 per cent.
Core inflation in the eurozone fell to 1.6 per cent in the year to March, from 1.8 per cent in February, even as higher energy prices caused the headline inflation reading to edge up to 2.1 per cent.
Rising unemployment will have heaped further political pressure on the ECB not to hike rates. France has seen its unemployment rate rise above 10 per cent, joining that of Belgium (12.8 per cent), Germany (12 per cent), Spain (10.5 per cent) and Greece (10.1 per cent).
Sentiment also remains weak. French business confidence has fallen to a 15-month low and that of Germany to an 18-month low, while Italian business confidence is at its weakest level for 20 months.
Sentiment has been damaged by rising oil prices, which are likely to act as a further drag on economic growth.
Admittedly the euro has fallen against the dollar from $1.314 at the time of the March meeting to $1.289 today, but any eurozone rate hike risks sending the euro back up towards the highs of $1.365 seen in December 2004, further damaging the zone’s fragile export-led recovery.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 4:41 PM 0 comments
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