Monthly Archives: July 2009

Is the Latvia intervention team assembling?

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So we’re in the new era of the Swedish presidency of the European council.  Insh’allah this will be the last country presidency under the rotating system once all that Lisbon messiness is sorted out.  The Swedes have the advantage of taking over from the politically hobbled Czech presidency and they begin with a slick website and very much with the times there’s a Twitter feed.  So what do we learn is getting the Swedish presidency twitterers excited? —

02/07 14:39 MÃ¥rten Wierup: 1st meeting went well-the most exciting thing that happened was that Latvia’s excessive budget deficit was added to the Ecofin agenda (7/7)

One’s first reaction might be to be glad that there’s someone in the world who finds Ecofin agenda items exciting.  One’s second reaction might be to wonder: what’s the need for yet another rap on the knuckles for Latvia?  Our twitterer is indeed correct that Latvia did not appear on the original draft agenda, so what’s the urgency?  Well, Edward had the relevant background a few days ago.  The IMF and the European Commission appear to be not on the same wavelength regarding the Latvian rescue program, not least on the role of the exchange rate peg therein.  If there is a split (especially within the European institutions), it might well be the kind of thing that would get sent to the ministers to sort out.   One thing this suggests: since Ecofin doesn’t meet till next Tuesday, don’t hold your breath waiting for the next installment of the IMF loan to Latvia.

State of the Art Monetary Policy In Sweden

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Animated by yesterday’s export driven PMI result, Sweden takes poll position in quantitative easing and commits to keeping 0.25% rates on hold till the end of 2010. Mind you, they are lucky enough to have Princeton economist and avid deflation fighter Lars Svensson in there on the board to steer them through all this. Good for Swedish growth, Krona negative, great for exports. Let’s go, let’s go, let’s go.

Sweden’s central bank cut its key interest rate by 25 basis points to a new record low of 0.25 percent in a surprise move on Thursday, and said it would offer one-year loans to banks to foster lending. The Riksbank said it expected interest rates to remain at that level until late 2010. Deputy Governor Lars Svensson disagreed with the decision and advocated a cut to zero. Nearly all economists in a Reuters poll had expected the Riksbank to keep rates on hold at 0.5 percent, in line with a previous central bank forecast that suggested rates would stay around that level at least until early next year.

“The repo rate is expected to remain at this low level until autumn 2010,” the central bank said in a statement. “The Riksbank’s assessment is that after cutting the repo rate to 0.25 percent it will have reached its lower limit in practice, and that the situation on the financial markets is still not completely normal. “Supplementary measures are necessary to ensure that monetary policy has the intended effect.” Those measures entailed offering 100 billion crowns’ worth of loans to the banks at a fixed interest rate and a maturity of 12 months. “This should contribute to lower funding costs for the banks and lower interest rates for companies and households,” the Riksbank said.

The reaction on the Krona front was swift:

The Swedish krona fell against the euro after the country’s central bank unexpectedly cut its main interest rate. The krona weakened 0.6 percent to 10.7868 per euro as of 9:32 a.m. in Stockholm. The Swedish currency depreciated 0.9 percent to 7.6527 against the dollar. The Riksbank lowered its main rate by a quarter of a percentage point to 0.25 percent. All but one of 17 economists surveyed by Bloomberg forecast no change.

Some people have been saying in response to warnings that this recovery will be export lead, “exports what exports”? What a load of tripe! Without exports there will be no recovery. The next lesson in abc economics: in times of crisis relative currency values matter more. And to prove it, Swedens PMI just poked into the growth zone, 50.5, following 43.7 last month. The 17% odd devaluation with the euro would have nothing to do with this, would it? Welcome Sweden, the worlds fourth 50+ PMI.

The Global Manufacturing Contraction Eases Again In June

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Global manufacturing took another step towards growth in June – but the process was, as ever, uneven. The JPMorgan Global Manufacturing PMI posted 46.9, its highest reading since last August. The current output component even expanded slightly following a year-long period of contraction. The PMI has now remained below the neutral 50.0 mark for thirteen successive months.

The principal factors weighing down on the level of the PMI in June were declines in new orders, employment and inventories. However, rates of contraction in new work and employment eased to their weakest for thirteen and eight months respectively. Looking ahead, the new orders to inventories ratio – which tends to move in advance of the production cycle – rose for the sixth month running to its highest since April 2004. Only 4 PMIs – those for China, India, Turkey and Sweden posted growth readings in June (although Sweden is not included in the JP Morgan survey). There was a general easing in the rates of contraction recorded elsewhere. The next two to three months will now be critical in order to decide whether the sector is going to move over to expansion mode, and if it does, at what pace?

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