Entries Tagged 'Wall Street Journal' ↓

Even as ECB president Jean-Claude Trichet aimed to calm markets by indicating the central bank is not embarking on a series of interest-rate increases after Thursday’s quarter-percentage point hike to 4.25%, he may also have rattled some nerves by suggesting policy makers are reviewing the bank’s collateral policy and that euro-zone living standards may be headed down.

Amid market tensions, the ECB’s broad collateral policy - which has always included accepting mortgage-backed securities in exchange for central bank funds - has been a boon to markets and a model for central banks including the Fed and Bank of England, which have broadened their collateral policies in turn.

But amid suggestions some banks are exploiting the ECB’s generous policy, Mr. Trichet Thursday gave the most serious hint yet that policy makers are eyeing the bank’s collateral criteria. “Our collateral framework has served us very well,” he said in the press conference following Thursday’s interest-rate decision. “We are permanently examining and applying our rules with great care … If it is necessary to refine elements in our scheme … we shall see what we have to do.”

ECB executive board member Jose Manuel Gonzalez-Paramo said last month that the bank is studying whether the rules on collateral “may need to be refined.”

Separately, Mr. Trichet Thursday also warned euro-zone citizens that rising global prices might mean an unavoidable reduction in euro-zone living standards: “The shift in relative prices and the related transfer of income from commodity-importing countries to commodity-exporting countries have to be accepted,” Mr. Trichet said. Warning euro-zone consumers and firms to adjust their behavior accordingly, he also tossed a shot across the bow of oil suppliers.

“We also tell the suppliers that to the extent that part of the prices are coming from this cartel this is very, very abnormal,”he said, noting that, globally, “when we have a demand-driven increase in prices then it plays a role in the automatic stabilization of global growth. But if we have a supplier-driven artificial scarcity then it is very grave.” – Joellen Perry

New York Mayor Michael Bloomberg’s congestion-pricing plan crashed and burned after he failed to get support from the state legislature. But the New York Times notes today that high gas prices — along with increases in tolls by agencies that run the city’s bridges and tunnels — “seem to be doing for traffic in New York what … the ambitious congestion pricing was supposed to do: reducing the number of cars clogging the city’s streets and pushing more people to use mass transit.” The Times reports that in May, traffic at the Metropolitan Transportation Authority’s bridges and tunnels dropped 4.7% from the same month the previous year. The Times said the Port Authority of New York and New Jersey has recorded a similar decline in its bridges and tunnels since early March. The Times also highlights stats on weekday subway ridership (up 6.5% in April from a year earlier) and commuter lines (up 5.5% on the Long Island Rail Road, 4.3% on the Metro-North Railroad, and nearly 9% on the PATH trains that cross the Hudson from New Jersey).

So which had more of an impact, higher tolls or higher gas prices? Streetsblog examines the numbers, and leans in the direction of tolls. “Here’s why: a typical round-trip into the Manhattan CBD uses between 1.3 and 1.4 gallons of gas (based on an average 22.6-mile round-trip distance and a stop-and-start 17 miles per gallon). Nationally, gas cost $3.65 this April-May and $3.05 a year earlier, for a year-to-year increase of 60 cents a gallon or just 80 cents per trip. The toll increase was a good deal higher than this, even accounting for trips into town via the free bridges.”

In May, the Journal cited a study by International Business Machines researchers of 4,091 drivers in 10 U.S. cities, including Atlanta, Los Angeles and New York. With national gasoline prices averaging $3.67 per gallon at the time of the survey, 9% of drivers said they already were seriously considering other commuting options. At $4.50 a gallon, the figure jumps to 46%.

The European Central Bank, as expected, raised interest rates a quarter point to 4.25% in a bid to attack inflation despite signs of weakening growth. The U.S. Federal Reserve, meanwhile, appears to be on hold for the coming months — despite rising inflation concerns — to give the economy more time to recover from the turmoil in housing, credit, labor and energy markets. Their divergence might be explained by the central banks’ mandates: the ECB is charged with maintaining price stability first, while the Fed aims to achieve low inflation and optimal growth at the same time.

But the difference in mandates or even economic circumstances between the U.S. and Europe don’t quite account for the divide, Deutsche Bank economists say in a research note this week titled “ECB is from Mars and Fed is from Venus.” As chief economist Peter Hooper explains, “The two central banks are reacting to relatively similar economic and financial circumstances as if they are from different planets, with the ECB’s approach akin to a frontal attack on inflation that the Roman god Mars would have approved of, while the Fed is being more cautious and patient, in a manner the goddess Venus would have endorsed.”

The Deutsche Bank economists say the divergence comes from the two regions’ different historical experiences in dealing with the shock from deflating asset prices and rising inflation.

In the United States: “The traumatic experience of the deflation and extreme levels of unemployment that occurred during the Great Depression in the 1930s – and the Fed’s mistakes during this period — play a prominent role in the discussion of monetary policy by both practitioners and academics. Accordingly, Fed policy makers have been very sensitive to the risk of asset price collapses and debt deflation (note, for example, the Fed’s reaction to the 1987 stock market crash, the [Long-Term Capital Management] crisis, and the burst of the dot-com bubble).”

In Europe: “Probably the most prominent economic trauma in Europe were Germany’s hyperinflation after World War I and currency reform after World War II. Throughout its existence the Bundesbank was extremely sensitive to inflation pressures, and willing to take significant risks with growth to keep inflation in check (note, for example, the Bundesbank’s reaction to the two oil shocks of the 1970s and its reluctance to follow the Fed in 1987). German sensitivity to inflation risks of course had a strong influence on the institutional design of the ECB and more recently on the implementation of the euro zone’s monetary policy.”

Of course, Fed officials in recent weeks have ratcheted up their talk about “vigilance” of inflation and inflation expectations. But most policy makers appear inclined to wait as long as they can to give their rate cuts of the last year a chance to work. And the ECB won’t necessarily be following today’s rate increase with more tightening. The Deutsche Bank economists say the the transatlantic policy divergence will diminish when weaker growth in Europe lowers fears at the ECB and even leads to rate cuts in 2009, while the Fed remains on hold. “What now looks like the beginning of a new transatlantic divergence of monetary policy,” they write, “will in our view eventually look like a blip in the time-tested relationship of the Fed leading and European central banks following.” - Sudeep Reddy

U.S. nonfarm payrolls shrank for a sixth consecutive month, decreasing by 62,000 jobs in June while previous months were revised lower, as businesses retrenched in the face of rising costs and a weak economy. The month’s unemployment rate held at 5.5%, after rising sharply in May. Economists and others react to the data below.

[E]ven these dismal headline numbers do not tell the full story of the erosion in labor market conditions. Over the past year, the number of workers employed part-time for economic reasons has risen by 1.1 million and accounting for these workers and those who have given up looking for a job and left the labor force yields an unemployment rate of 9.9%, compared to 8.3% in June 2007. Also, job counts in many industries, most notably leisure & hospitality services, continue to be overstated thanks to the “birth-death” model employed by the BLS. It will not be until the annual benchmark revisions are released in January 2009 that the influence of the model … will be stripped out. – Richard F. Moody, Mission Residential

Today’s reports painted a consistent picture of weakness in the US labor market. … While tax rebates are currently plugging a hole in consumer finances, the continued deterioration in labor income growth and decline in household wealth suggests that healthy consumer spending figures are unlikely to be sustained. – Lehman U.S. Economics

This report, along with today’s jobless claims data [which rose by 16,000 to total 404,000, above the forecast of 385,000], suggest a significant pickup in the pace of deterioration in the labor market. The net job loss in June after factoring in revisions to April and May was 114,000, while the household survey showed a 155,000 job loss and no reversal of May’s sharp rise in unemployment — the unemployment rate in the 16- to 24-year old group fell back by only 1/5 of the amount it rose in May, suggesting that school-leavers are finding the summer jobs market challenging. – John Ryding, Conrad DeQuadros, RDQ Economics

Another report that underscores the increasing pressures on consumers from a weakening labor market on top of pre-existing woes of over-extended balance sheets, plunging housing prices, tight lending standards, and soaring energy prices. After the temporary and modest beneficial impact of tax rebate payments, consumers will have nothing left to fall back on, and the underlying trend of consumption growth will therefore weaken even further in the latter part of the year. – Joshua Shapiro, MFR Inc.

Here is the text of prepared remarks by ECB chief Jean-Claude Trichet at a press conference following the bank’s quarter-point rate increase Thursday morning.

Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Frankfurt am Main, 7 July 2008

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to today’s press conference. Let me report on the outcome of our meeting, which was also attended by the President of the Eurogroup, Prime Minister Juncker, and Commissioner Almunia.

On the basis of our regular economic and monetary analyses, we decided at today’s meeting to increase the key ECB interest rates by 25 basis points. This decision was taken to prevent broadly based second-round effects and to counteract the increasing upside risks to price stability over the medium term. HICP inflation rates have continued to rise significantly since the autumn of last year. They are expected to remain well above the level consistent with price stability for a more protracted period than previously thought. Moreover, continued very vigorous money and credit growth and the absence thus far of significant constraints on bank loan supply in a context of ongoing financial market tensions confirm our assessment of upside risks to price stability over the medium term. At the same time, while the latest data confirm the expected weakening of real GDP growth in mid-2008 after exceptionally strong growth in the first quarter, the economic fundamentals of the euro area are sound. Against this background and in full accordance with our mandate, we emphasise that maintaining price stability in the medium term is our primary objective and that it is our strong determination to keep medium and long-term inflation expectations firmly anchored in line with price stability. This will preserve purchasing power in the medium term and continue to support sustainable growth and employment in the euro area. On the basis of our current assessment, the monetary policy stance following today’s decision will contribute to achieving our objective. We will continue to monitor very closely all developments over the period ahead.

U.K. default rates and related losses on mortgage lending rose more than expected in the second quarter and are expected to increase further in the next three months, the Bank of England said Thursday.

In its quarterly credit conditions survey, the bank also said that demand for secured lending for house purchases had declined in the second quarter by more than lenders had anticipated in the first three months of the year.

Taken in concert with dismal services sector data, analysts said that the results of the survey further reduce the possibility of the Bank of England raising interest rates this year. The U.K. bank rate currently stands at 5%, following reductions in April, February and December.

Alan Clarke, U.K. economist at BNP Paribas, described the survey as a “particularly bleak assessment.” He said, “Just because the markets and central banks’ primary focus has moved more heavily towards inflation is not to say that households’ and firms’ experience of the credit crunch has passed its worst - rather the opposite.”

“Falling house prices are aggravating demand and supply of credit. The effects on growth are likely to persist for some time to come,” he warned.

U.K. residential property sales have slumped and prices have fallen in recent months as a tightening in credit availability spurred by concerns about losses in the U.S. subprime market led U.K. banks to hike their mortgage rates and reduce their loans for house purchases. Even though the BOE has cut its main interest rate by 75 basis points since December, mortgage rates haven’t fallen in tandem due to the greater difficulty associated with obtaining credit.

The poll found that a net balance of 47.3% of lenders questioned said that default rates on mortgage loans had increased in the second quarter, up sharply from 28.6% in the previous period. A net balance of 50.4% expected default rates to increase over the coming three months, higher than 40.1% in the BOE’s last poll. – Natasha Brereton and Nicholas Winning

A message for investors: If the CEO of a company starts gaining status, watch out.

Economists have long examined the phenomenon of superstars — how people at the very top of their field earn far more than anyone else. Unfair as it seems, often the superstars’ big paychecks are justified. The differences between the best and the next best may be small, but the rewards to coming in first place are so great that baseball teams will pay up for the best pitchers, and software firms will pay up for the best engineers.

But when it comes to CEOs, superstars aren’t all they’re cracked up to be, argue Berkeley economist Ulrike Malmendier and UCLA Anderson School of Management economist Geoffrey Tate in a paper posted to the National Bureau of Economic Research’s Web site this week.

The economists looked at CEOs who won awards from publications like “Business Week” and other organizations. Then they found CEOs from companies that had performed comparably to the winners’ firms, but who hadn’t won an award. After receiving awards, CEOs extracted more money from their companies — mostly in the form of stock and options — than their nonwinning counterparts. But in comparison, their companies’ returns and stock performance suffered.

One problem might be that the award-winning CEOs got distracted from the business of running their companies. The economists found that the award-winners wrote more books. They also had lower golf handicaps. –Justin Lahart

The big airline-traffic declines haven’t started yet, despite the flood of bad news in the industry. In fact, some airlines this week reported a rise in June passenger traffic from a year ago, especially on international routes, as travelers made good on their summer vacation plans.

Early reports from U.S. airlines indicate that June passenger traffic for domestic flights was about the same as a year ago, with airlines posting gains on most international routes. Southwest Airlines Co., the biggest carrier of domestic passengers, said traffic edged up 0.7% in June, on a 5.7% increase in seat capacity. At Continental Airlines Inc. traffic rose just 0.1%, with domestic passenger traffic down about 4% from last year. International flying was up 2.5%, led by a 6.5% gain in transatlantic passenger traffic.

Encouraging news? Not really. The deep cuts in carriers schedules won’t come until after Labor Day, when most carriers are planning sharp cuts in their schedules, as they cope with the high cost of fuel and an expected fall-off in passenger demand amid the weak U.S. economy.

The International Air Transport Association said Wednesday that, according to its most recent data, global air traffic was up 6% in May, more than expected. The pace slowed from the 7.4% growth recorded in May of 2007. (Air traffic generally tracks the economy, and has been growing globally at about 5% per year.) Strong growth this year, despite economic worries, came mainly because U.S. airlines have been adding seat capacity on international routes, where flying is more profitable. Still, said IATA Chief Executive Giovanni Bisignani, with jet fuel prices up 87% from a year ago, airlines are facing operating costs that have risen by 20% to 30%. “Efficiency everywhere is imperative,” he said.

So far, U.S. carriers have announced cuts in unprofitable flights that add up to a reduction of about 5% of industry flying by the fourth quarter of this year. When fall flight schedules are finalized, 10% or more of flying will be eliminated. Analysts have said the industry needs to shrink by 20% to remain profitable over time.

“It isn’t the summer we’re worried about,” Jamie Baker at J.P. Morgan wrote in a research note. “We continue to expect material [passenger demand] slippage this fall, accompanied by increasingly aggressive capital-raising efforts from virtually all airlines.” –Ann Keeton

While financial markets are showing some signs of progress, it will still “take a substantial amount of time” to get the financial system fully back on its feet, Federal Reserve governor Frederic Mishkin said. That means the recovery as well as economic growth is likely to be sluggish, Mishkin said at an economics forum in Israel. Here are excerpts of his remarks:

Mishkin

Speaking as a central banker soon to return to the relatively tranquil ivory tower of Columbia University, I don’t think it is far off the mark to characterize the turmoil of the past year as one of the worst financial shocks that the United States has confronted since the Great Depression. However, although the U.S. economy clearly has slowed, aggressive actions by the Federal Reserve and other central banks as well as fiscal stimulus have helped us weather the storm better than we would have otherwise.

Had the Federal Reserve and other central banks not stepped in and acted with appropriate vigor to provide liquidity, the consequences for the real economy very likely would have been quite severe. Public liquidity, however, is only an imperfect substitute for private liquidity. Although it is critical that the Federal Reserve acts as a lender of last resort when financial stability is threatened, the efficient allocation of capital is best promoted by competitive financial markets and institutions. However, the flow of credit has been impeded by the developments I outlined previously. Financial markets and institutions will be able to resume their proper roles in allocating capital and supporting economic growth only when confidence in them recovers. And it is clear that financial institutions have some way to go toward reforming business models and practices. Large financial institutions in the United States and Europe have reported credit losses and asset write-downs amounting to more than $375 billion and have been working to repair their balance sheets by raising new capital from a wide range of sources. This process will take time, but at least we can see some progress.

We expect to strengthen the financial system with an array of regulatory changes, which includes strengthening of capital and liquidity rules, more disclosure requirements, closer supervision of the measurement and management of firm-wide risks, and steps to increase the transparency and resilience of the financial infrastructure. Private investors and other market participants clearly also have crucial roles to play in strengthening the financial system.

While the current turmoil is not yet over, we have seen some signs of improvement. We have learned much from this episode. I am confident that it will be studied for some time to come, and that we will forge a better financial system as a result.

Back in early 2000, Daniel Johnson, a professor at Colorado College, found himself with extra funding leftover from a separate project and with the help of an undergrad decided to use the resources to see whether economic variables could predict the medal winnings of each country in the upcoming summer Olympics.

Source: Daniel Johnson

“We were shocked at how accurate our predictions were,” he said. His model used five basic pieces of data for each participating nation: GDP per capita, total population, political structure (democratic, authoritarian, military or communist), climate (the number of frost days) and home-nation bias. “It’s a pretty simple model,” Mr. Johnson said.

His results and subsequent predictions weren’t too well-publicized — it was, after all, an exploratory project. But once the Games concluded and countries’ medal count showed a 95-96% correlation to his predictions (“We were so accurate we thought we’d made a mistake,” he says), people started to pay attention. Calls poured in, including calls from two nations “who shall remain nameless” asking him for advice to gear up for the next Games.

“It would be harmful for me to offer advice,” the self-proclaimed un-athletic professor jokes. “I don’t know, get more income per capita?”

For each summer and winter Olympics since 2000, Mr. Johnson’s medal count predictions have been remarkably accurate. And now, ahead of the Aug. 8 start to this summer’s Olympics in Beijing, Mr. Johnson has released his latest estimates. (Read about his 2006 predictions.)

The U.S. is expected to match its 2004 Athens medal count with a total of 103, though slip slightly to 33 gold medals from 35. Russia is predicted to finish second overall with 95 medals (and 28 golds).

But the big story this year is China, the host nation, expected to take home 89 total medals and a whopping 44 golds. The country could even beat the U.S. to become the top medal-earner overall, Mr. Johnson says. “China we badly underestimated in Athens and we could still be underestimating,” he said, adding that China’s expected 44 golds would match the U.S. tally when it hosted the 1996 Olympics in Atlanta, Ga.

Typically, host nations’ medal count is boosted by about 25 from its baseline performance, and China took home 32 golds in Athens. Plus, its GDP per capita has soared since the last Games. Adding to the posturing is that China is expected to be pushing quite hard for success in the Games as a testament to its arrival as a global superpower.

Mr. Johnson says what matters most isn’t comparing the take-home medal count of one nation compared to another but instead measuring it against the nation’s own expected performance, based on his metrics. “This is more of a benchmarking analysis than anything else,” he said, to gauge which nations are over- or under-performing their expected totals. Plus, the overall tally is obviously influenced by the size of each nation and how many athletes they train and send to the games. “One reason Botswana doesn’t win a lot of medals is they don’t send a lot of participants each year,” he said. –Kelly Evans