Top Economic Policy Stories Worldwide Monday June 10 – MNI News

Europe

* Very low inflation and high unemployment mean interest rates must be kept
low in the current climate, but rates will rise again when confidence in an
economic recovery is assured, European Central Bank President Mario Draghi said
in a television interview broadcast Monday. “Why are they so low? Because we
have been having a crisis. Inflation is very low and unemployed are in the
millions. In this situation, interest rates cannot be high,” Draghi told German
television station ZDF. Draghi emphasized interest rates “will go up. They will
go up when trust in the recovery will gain ground again.” Draghi also emphasized
limits to the ECB’s OMT bond-buying program, warning that the ECB is
“absolutely” prepared to let a country go bankrupt, and stressing it will only
intervene if sovereign yields do not reflect fundamentals in a Eurozone member.

United States

* Standard & Poor’s has come to acknowledge the recent fiscal progress
accomplished by the U.S. government and that is expected to stabilize the
general government debt as a percent of GDP for the next few years, enough to
remove the near-term threat of a downgrade, especially as politics are unlikely
to worsen. “We now see net general government debt as a share of GDP staying
broadly stable for the next few years at around 84%, which, if it occurs, would
allow policymakers some additional time to take steps to address pent-up
age-related spending pressures,” Standard Poor’s said Monday in its statement,
with the analysts clarifying the timeframe as three to five years. The statement
also cited stronger private-sector growth than had previously been assumed.
After having downgraded the U.S. long-term sovereign rating to AA+ from AAA in
August 2011, S&P resolved its negative outlook Monday by raising it to stable,
effectively allowing more time for the government to put its fiscal house in
order, while toning down the political concerns.

* In the first reaction of the Obama administration to Monday’s surprise
announcement by Standard and Poor’s, upgrading the U.S. outlook to stable from
negative and reducing the chance of another ratings downgrade, Treasury Under
Secretary Mary Miller said she’s “pleased” the ratings firm is recognizing the
progress being made. “You know that just occurred this morning and I’ve been
really tied up with our conference today so I haven’t read their statement
carefully line by line,” Miller said. “So I guess I’d say that we’re pleased
their recognizing the progress of the U.S. economy and fiscal results,” she told
reporters during a break in an all-day conference on small-business access to
credit. The upgrade affirmed the ‘AA+’ rating that had been assigned to U.S.
sovereign long-term debt in August 2011, a notch below triple-A. Asked if the
day’s upgrade lessened pressure on Congress for a debt-limit deal, Miller
replied, “I haven’t given that any thought, but obviously we would like to see
progress on things like the U.S. debt ceiling.”

* The Federal Reserve began its open-ended bond purchases in an effort to
spark the economy and spur faster job creation, but price stability concerns
mean the central bank could continue its aggressive asset purchases even though
job market conditions have gotten better, St. Louis Federal Reserve Bank
President James Bullard said Monday. With modest growth, improving labor
markets, limited financial stability risks, and inflation that has surprised to
the downside, “This configuration of data suggests that the FOMC can continue to
pursue its aggressive asset purchase program,” Bullard said.

* The recent uptick in U.S. mortgage rates has some concerned for a housing
market recovery that has only just regained its footing, but economists at major
U.S. banks, while predicting a slowdown in refinancing activity, don’t see any
cause for alarm just yet. “I’m not that concerned about it,” Ethan Harris,
co-head of Global Economics at Bank of America-Merrill Lynch told MNI in an
interview. “I trust the Fed that they are not going to sustain this bond market
selloff unless the data gets sustainably better.

* MNI’s U.S. retail trade indicator jumped 2.7 points in the June 8 period
to 58.5 which is well above 50 to indicate strong growth in year-on-year
business activity, according to the results of MNI’s weekly survey released
Monday. Data in MNI’s sample were at recovery lows in April and early May but
have since been moving higher with total sales now tracking at a year-on-year
+5.3%, up from a recent low of +3.3%, with same-store sales at +1.6%, up from a
low of +0.8%.

* MNI’s U.S. capital goods indicator fell 1.3 points in the June 7 period
to 37.7 for a new recovery low and far below 50 to indicate significant
contraction in year-on-year business activity, according to the results of MNI’s
weekly survey released Monday. Sales are near a recovery low, tracking at a
year-on-year +0.2% with foreign exchange having no meaningful effect.

* The Conference Board Employment Trends Index increased slightly in May.
The index now stands at 111.76, up from 111.11 (a downward revision) in April.
The ETI figure for May is 3% higher than a year ago. “Taken together with other
recent indicators of economic activity, the ETI is suggesting that a significant
improvement in employment growth is unlikely this summer,” said Gad Levanon,
Director of Macroeconomic Research at The Conference Board.

Markets

* U.S. Treasuries prices ended Monday lower, pressured by a combination of
factors, with the 10-year note yield closing at the highest yield, 2.213%, since
the 2.24% close of April 4, 2012. Technically, the Treasury 10-year note rose to
and briefly flirted with the key 2.23% recent high yield but did not remain
there, closing at 2.213%. That 2.23% level is a key level as there is no support
between there and the 2.38% level, said Tom di Galoma, head of rate sales at
ED&F Man.

* The dollar tone was decidedly mixed Monday, despite a sizable run-up in
U.S. Treasury yields. At the start of a new week, FX market players reverted
back to the recent trend of buying dollars versus the yen, Aussie and emerging
market currencies and selling dollars versus the euro, sterling and select other
currencies. Dollar-yen, closing around Y98.64, topped out at Y99.28 earlier, and
the euro, closing near $1.3255, topped out at $1.3269. Heading into Tuesday’s
BOJ decision, the market debated whether or not dollar-yen could regain a
toehold over the psychological Y100 mark.

* In U.S. stocks the Dow industrials ended down 9.53 Monday at 15,238.59.
The S&P 500 slipped 0.57 to 1,642.81. The Nasdaq composite ended up 4.55 at
3,474.77.

Canada

* Housing starts in Canada rose in May to 200,178 units from 175,922 in
April, led by a 22.2% rise in multiple urban starts to 177,234 units, but the
national housing agency Monday said the six-month trend in starts was unchanged.
Canada Mortgage and Housing Corporation said housing starts were trending at
182,756 units in May compared with 182,971 in April, on a six-month moving
average of the monthly seasonally adjusted annual rates (SAAR) of starts.

Latin America

* Brazil’s central bank has finally taken a hawkish tone against inflation,
and the government has begun easing capital controls, but the markets want more.
Sao Paulo futures markets are now pricing in at least 100 basis points of hikes
in the Selic overnight rate, currently 8.0%. And the 6% IOF tax on foreign
investment in fixed-income is history, but demand for government debt remained
low last week. Investors remain wary of Brazil, and the S&P’s downward revision
of the country’s outlook to negative – warning of the possibility of a ratings
downgrade in two years – only confirmed this sentiment.

* In Mexico, after falling 4.9% year-over-year in industrial output in
March, investors may be tempted to move on what is likely to be a strong rebound
in April. However, calendar effects continue to play a dominant role in the data
with the shift of the Easter holiday to March from April. State statistics
agency INEGI releases the data Tuesday. Even so, analysts are hopeful that
manufacturing, and autos in particular, will post at least modest growth,
following a strong report from the Mexican Auto Industry Association (AMIA)
showing production up 15.6% in the month.

* Argentina’s government this week will continue promoting a tax amnesty
designed to rebuild sagging foreign reserves, contain currency depreciation and
expand energy investments as the economy stagnates for a second year. President
Cristina Fernandez de Kirchner enacted legislation last week giving people the
chance to voluntarily repatriate undeclared funds – held overseas or locally –
without penalties as long as they are up to date in filing their taxes. The
amnesty will run July 1 to Sept. 30, before which the government and central
bank will fine-tune the process and market it to the public.

–MNI Washington Bureau; tel: +1 202-371-2121; email: dgulino@mni-news.com

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