Alexander Kramer
2011 Global Initiatives Council Chair
VSI Venture Strategies Innovations

 

China’s monetary tightening taking effect: Money supply (M2) growth slowed down to a 30 month low of 15.1 percent missing forecasts of 15.4 percent. Banks are extending fewer loans and are down 12.5 percent YTD.  The decrease isn’t due to lower demand but the central bank’s tightening policy. The central bank has raised interest rates twice this year and bank reserve requirements five times. Inflation is a top priority for Beijing which is at 5.5 percent. A decrease in M2 increases interest rates resulting in lower economic activity and deflation can result. Chinese firms will begin to demand less which will impact commodity prices.

U.S. trade deficit decreased 6.7 percent to $43.7 billion in April: The decrease was much lower than forecasts predicted. However, the reduction is temporary and not sustainable. Four factors helped lower the deficit:

• A weak dollar made U.S. goods cheaper and more competitive
• Japanese exports fell 25.5 percent but will return to previous levels in the latter half of 2011
• Petroleum exports, which make up a large portion of the trade deficit, fell 5.5 percent due to lower demand
• Exports increased 1.3 percent being led by computers, petroleum products and industrial supplies. 

U.S. import prices rise 0.2 percent in May: Economists predicted a 0.7 percent decrease. Import prices for May year-to-year are 12.5 percent higher. The price index increase resulted from the rise in oil prices. Since oil is priced in dollars a weaker dollar translates into higher oil prices. In addition, growing demand from Asia and rising commodity prices are pushing up the costs of business. 

South Korea warns United States on consequences of not passing the FTA by the end of summer: The Korean National Assembly will vote on the United States- Korea Free Trade Agreement (KORUS) after U.S. approval. Congress’ failure to pass KORUS by August could push the Korean vote into the 2012. Any vote after summer is too close to the 2012 Korean elections and domestic politics will push the authorization into May. Obama will present the three pending FTAs for a vote if Congress renews the Trade Adjustment Assistance. The program costs $1bn annually but Republicans are questioning its costs and effectiveness.

European Central Bank(ECB) and Germany are in standoff over Greek bailout: Berlin indicated it would not concede its position for private creditors to swap bonds for a longer maturity of seven years. The ECB argues any debt restructuring could scare financial markets and trigger financial turmoil pushing Ireland and Portugal bonds into junk territory.  However, investors and rating agencies believe some form of debt restructuring is inevitable. One of the parties will have to concede at the end of the month when an agreement is needed to keep Greece afloat. 

S&P downgrades Greece’s credit rating to CCC: A triple C rating pushes Greek bonds into junk territory meaning they are highly speculative. A restructuring of Greece’s debt is becoming increasingly likely which S&P would consider a default. Debt restructure would be either a bond swap or maturity extension. The cost of insuring against Greek debt default soared to a new high. European banks are starting to agree on a rollover where they would buy new debt to replace maturing bonds

Chinese monetary official warns of risks in holding heavy dollar denominated assets: Chinese Official Guan Ho spoke on his own personal views and not the state’s. His warning of excessive holdings in dollars reflects concern over Washington’s policy of weakening the dollar, and potential future easing. He urged capital control easing and widening of the Chinese yuan trading band.  Also, he noted that market conditions were ripe for two-way renminbi, China's official currency, price movement. 

Global manufacturing fell in May: The Purchasing Managers Index (PMI) for the United States fell from 60.4 in April to 53.5 in May missing economists’ expectations of 57.7. China’s PMI fell from 52.9 in April to 52 in May but was higher than the expected drop to 51.6. However, China’s PMI has seasonal patterns of decreasing in May but the markets will still overreact.  The Eurozone’s PMI went from 58 in April to 54.6 in May. The PMI is an indicator of economic health and usually sets the tone for the next month’s economic expectations.