2009 08 21: Bernanke Says Global Economy Emerging From Recession

Source: Bloomberg

Aug. 21 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke said the global economy is “beginning to emerge” from a recession after “aggressive” action by central banks and governments.

“After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good,” Bernanke said today in a speech at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming.

Economists forecast the U.S. will emerge from the worst recession since the 1930s, with the economy in the third quarter expanding at a 2.2 percent annual rate, according to the median estimate in an August survey by Bloomberg News. The International Monetary Fund last month predicted the world economy will expand 2.5 percent in 2010 after contracting 1.4 percent this year.

Signs are emerging that growth is resuming in other countries, with Japan, Germany and France all expanding in the second quarter. The Paris-based Organization for Economic Cooperation and Development said Aug. 19 that the economy of its 30 members was flat in the second quarter after contracting 2.1 percent in the previous three months.

Feldstein Sees Danger

The U.S. economy “is still weak and it’s not at all clear that the upturn that we’ve seen recently is the beginning of a sustainable rise,” Harvard University economist Martin Feldstein said in a Bloomberg Television interview in Jackson Hole. “There’s a serious danger that come the end of this year and the beginning of next year we will see it slipping back down again.”

Bernanke said the world economy still confronts “critical” challenges.

“Strains persist in many financial markets across the globe, financial institutions face additional significant losses and many businesses and households continue to experience considerable difficulty gaining access to credit,” Bernanke said. Recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels.”

U.S. stocks gained for a fourth day, and Treasury securities fell in reaction to Bernanke’s speech and a rise in existing home sales. The Standard and Poor’s 500 Index was up 1.5 percent at 10:51 a.m. in New York. Benchmark 10-year notes yielded 3.54 percent, up 11 basis points from yesterday.

Home Sales Climb

Sales of existing U.S. homes climbed 7.2 percent to a 5.24 million annual rate, the most since August 2007, the National Association of Realtors said.

European Central Bank President Jean-Claude Trichet and Bank of Japan Governor Masaaki Shirakawa are scheduled tomorrow to address the conference. Brian Madigan, Bernanke’s top official for monetary policy, is scheduled to speak today as part of a panel discussion. The topic of the central bank’s mountainside conference this year is financial stability and macroeconomic policy.

The IMF may raise its forecast for the global economic rebound, John Lipsky, the fund’s first deputy managing director, said in an interview yesterday in Jackson Hole.

A “strong and unprecedented international policy response” averted “the imminent collapse of the global financial system,” Bernanke said. The Fed has “consistently maintained” that the failure of a large, interconnected financial institution would have dire consequences for markets and the economy.

‘Spared No Effort’

“We have therefore spared no effort, within our legal authorities and in appropriate cooperation with other agencies, to avert such a failure,” he said. “The case of the investment bank Lehman Brothers proved exceptionally difficult, however.”

The Fed chairman reiterated that Lehman had inadequate collateral to merit a Fed loan “of sufficient size to meet its funding needs.” The government also lacked the authority to inject capital and sustain the firm, he said. Lehman Brothers Holdings Inc. filed for bankruptcy in September.

“Although concerted policy actions avoided much worse outcomes, the financial shocks of September and October nevertheless severely damaged the global economy — starkly illustrating the potential effects of financial stress on real economic activity,” Bernanke said.

Last week, Fed policy makers extended by a month, through October, a $300 billion program to buy long-term U.S. Treasuries, aiming to ensure a “smooth transition in markets.” They also affirmed a pledge to keep interest rates near a record low for an “extended period” even as they determined the economy is “leveling out.”

Fed’s Debt Purchases

Since the collapse of Lehman, the Fed has bought as much as $350 billion of short-term debt issued by companies including General Electric Co. and expanded currency swaps with other central banks to aid financial firms outside the U.S.

Bernanke has also led policy makers in a reduction of the benchmark interest rate almost to zero and in the purchase of as much as $1.75 trillion of Treasuries and housing debt.

“As severe as the economic impact has been, however, the outcome could have been decidedly worse,” Bernanke said. “Unlike in the 1930s, when policy was largely passive and political divisions made international economic and financial cooperation difficult, during the past year monetary, fiscal and financial policies around the world have been aggressive and complementary.”

Policy makers must now rewrite regulations to reflect lessons from the crisis, and that will prevent “a recurrence of the events of the past two years,” he said.

Term Expiring

President Barack Obama has yet to indicate whether he will nominate Bernanke for a second term as Fed chief after his current term ends Jan. 31.

Feldstein endorsed Bernanke for a second term. “He certainly deserves it. He has done a remarkably creative job of dealing with these problems,” Feldstein said.

Investors and traders see reappointment as increasingly likely. Yesterday, futures contracts on the Web site Intrade showed a 79 percent chance Bernanke will be tapped for a second term.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net.

2008 08 20: Mexico Experiences Fastest Contraction in 25 years

The good news story can be found here (speculation).  The not-so-good can be found below.

Source: Bloomberg

Mexico’s economy contracted at the fastest pace in more than 25 years last quarter as the global recession and swine flu caused a plunge in industrial output and services.

Latin America’s second-largest economy shrank 10.3 percent in the second quarter from a year earlier, the national statistics agency said today. Manufacturing shrank 16.4 in the second quarter and the service industry contracted 10.4 percent.

Mexico’s slump has deepened and job losses have accelerated as the recession in the U.S., which buys about 80 percent of the nation’s exports, saps demand for manufactured goods. Still, seasonally adjusted quarterly data shows the economy performed better in the second quarter than in the first.

“The economy had a heart attack and you’re starting to see a recovery,” said Rafael de la Fuente, chief Latin American economist at BNP Paribas SA in New York. “The bottom of the recession is behind us.”

The economy shrank 1.1 percent in the second quarter from the first quarter, compared with a 5.9 percent contraction in the first quarter from the previous three months, according to seasonally adjusted figures from the statistics agency.

“We’ll have a better GDP in the third quarter compared with the second, and in the fourth compared with the third,” Central Bank Governor Guillermo Ortiz said yesterday in an interview with UNAM TV. “But on average for the year, it will be very ugly.”

Worst in Region

Mexico’s GDP, the broadest measure of a country’s output of goods and services, will contract the most this year among the region’s largest economies, said Claudio Loser, former Western Hemisphere director for the International Monetary Fund.

“Exports have declined very sharply and we don’t yet see a reaction to the slow improvement in economic activity in the U.S.,” Loser said in a conference call.

Analysts had estimated gross domestic product would shrink 10.6 percent, according to the median estimate of 23 economists surveyed by Bloomberg.

The decline in second-quarter GDP was the biggest quarterly fall since at least 1980, according to data compiled by Bloomberg. The outbreak of swine flu in April and May will probably reduce GDP by 0.5 percent this year, Ortiz has said.

Auto Industry

Volkswagen AG, Europe’s largest automaker, said in June it would reduce production of four models in Mexico for about six weeks as demand stalled amid the global recession. Mexican production of cars and light trucks fell 48 percent in June from the same month a year earlier, the nation’s Automobile Industry Association said.

Mexico’s peso will depreciate because of the contraction in the economy, Rogelio Ramirez de la O, the Mexico City-based economist who predicted the 1994 peso devaluation, said in a conference call today.

The currency was little changed at 12.8875 per U.S. dollar at 5:05 p.m. New York time.

The central bank forecasts Mexico’s economy will shrink as much as 7.5 percent this year, which would be the most since 1932. Brazil’s economy will only contract 0.34 percent this year, according to a survey by that country’s central bank.

The shrinking economy has cut tax collection. That, along with falling oil revenue, will widen the budget deficit this year to the equivalent of 3 percent of GDP from 2.1 percent in 2008 and in 2007, the government predicts.

President Felipe Calderon said this month that officials may propose a combination of debt, higher taxes and lower spending in a bid to keep a lid on next year’s budget gap. Standard & Poor’s cut the outlook on Mexico’s debt to “negative” from “stable” in May because of the country’s dependence on oil revenue.

To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9@bloomberg.net

2009 08 03: Mexico Losing Trader Confidence as Peso Proves Worst

Source: Bloomberg

Aug. 3 (Bloomberg) — Foreign-exchange traders are losing faith that Mexican President Felipe Calderon will push through the tax increases needed to rein in the budget deficit and stem a rout that has made the peso the worst-performing major currency in the past year.

Options traders are more bearish on the peso over the next six months than 12 of the other 16 most-traded currencies against the U.S. dollar tracked by Bloomberg, according to derivatives known as risk-reversals. Morgan Stanley strategists say Mexico’s economy is headed for “unsustainable” deficits as oil output declines while RBC Capital Markets advises investors to sell the currency.

“Investors are showing an indifference towards Mexico that says, ‘Who knows when its problems are going to get fixed?’” said Rogelio Ramirez de la O, the Mexico City-based economist who predicted the 1994 peso devaluation.

Traders are betting that the peso will falter after Calderon lost congressional seats in July’s elections, a defeat that UBS AG and Putnam Investments say will make it tougher for him to garner support for higher taxes. Standard & Poor’s put Mexican debt on “negative” watch in May as the fastest drop in oil production since World War II erodes government revenue.

“The election result is very bad: we’re going to see a stalemate in all fundamental economic decisions,” said Ramirez de la O, who forecasts the peso will slide 12 percent to 15 per dollar by year-end, from 13.1895 at 6:41 a.m. in New York today.

Latin America’s second-biggest economy after Brazil shrank as much as 11 percent in the second quarter, hurt by the swine flu outbreak and the shuttering of factories along the U.S. border, the central bank said last week.

Worst Since 1932

The economy, which sends 80 percent of its exports to the U.S., will contract as much as 7.5 percent this year, the most since 1932, Banco de Mexico said. In Brazil, gross domestic product will expand 0.8 percent, according to that country’s central bank.

Mexico’s peso plunged 25 percent against the dollar over the past 12 months. The peso, which is also the worst-performing major currency over the past decade, touched a record low of 15.5892 to the dollar in March, down from 9.8572 last August.

RBC says it will weaken to 13.9 and recommended selling the peso on July 2 when it was trading at 13.1625.

The premium investors are willing to pay for six-month peso “put” options, which protect against currency depreciation, is 4.25 percentage points. That compares with 0.37 a year ago. A put option gives its holder the right, without the obligation, to sell an underlying asset, while a call option gives the holder the right to buy it. The risk-reversal has favored Mexican peso puts over calls for at least five years.

End of Rally

The July 5 defeat for Calderon’s National Action Party, or PAN, sparked the biggest weekly decline for the peso since November and marked the end of a four-month rally.

The Institutional Revolutionary Party, or PRI, which supplanted the PAN as the biggest group in the lower house, opposes raising taxes amid a recession, Cesar Duarte, a PRI congressman, said July 16.

“There does not appear to be any political appetite to pass these badly needed reforms,” said Paresh Upadhyaya, who helps manage $17 billion in currencies as senior vice president at Putnam Investments in Boston. “I remain bearish on the Mexican peso.”

Sergio Luna, chief economist at Citigroup Inc.’s Banamex unit in Mexico City, said he expects the government to drum up enough votes to get tax legislation approved. He predicts the peso will close the year at 13.5.

Party Rift

Calderon, a lawyer who earned a master’s degree in public administration at Harvard University in Cambridge, Massachusetts, also faces a rift within his own party that may further undermine efforts to narrow the deficit, said George Grayson, professor of government at the College of William and Mary in Williamsburg, Virginia.

A faction within the PAN opposes the nomination of Cesar Nava, Calderon’s former personal secretary, for an Aug. 8 vote to choose a new party leader, saying that the president is interfering with party affairs because Nava is his close ally. The opponents of Nava’s nomination protested by declining to put up their own candidate.

“It’s a deep and vicious split,” Grayson said. “You’ll just see deadlock and drift. The momentum is with the PRI now.”

A reduction in Mexico’s credit rating is now “more likely to occur than not” as Calderon struggles to build support, Putnam’s Upadhyaya said.

Debt Outlook

S&P cut the outlook on Mexico’s debt to “negative” from “stable” in May, following a similar move by Fitch Ratings in November. A downgrade would be the first since the aftermath of the 1994 devaluation. S&P rates Mexico’s foreign debt BBB+, the third-lowest investment-grade rating.

Mexico’s budget deficit, which includes the servicing of debt from a 1990s bank bailout, will reach the equivalent of 3 percent of GDP this year from 2.1 percent in 2008 and in 2007, the government predicts.

The gap may swell to as much as 6 percent of GDP by 2015 as state oil company Petroleos Mexicanos fails to bring enough new wells on-line to offset a decline in output at its main Cantarell field, Morgan Stanley said.

Annual output dropped 9 percent on average over the first six months of the year. Production slid 9.2 percent in 2008, the fastest annual decline since 1942. Oil funded 37 percent of Mexico’s budget last year.

Revenue Gap

Government revenue this year will fall short of the budgeted amount by 480 billion pesos, the largest gap in the country’s history, Finance Minister Agustin Carstens said on July 23. To make up the difference, Mexico will draw on oil hedges contracted last year and rainy-day funds as well as reducing spending by 85 billion pesos.

Gabriel Casillas, an economist at UBS in Mexico City, said in a report last week that the government may not have access to similar funding mechanisms next year. He predicts the peso will weaken to 14.5 by December.

“We see the risks tilted to the downside,” Lisa Schineller, an analyst at S&P, said in a telephone interview from New York. “The issues have proved, over several presidencies, to be challenging.”

To contact the reporters on this story: Valerie Rota in Mexico City at vrota1@bloomberg.net; Jens Erik Gould in Mexico City at jgould9@bloomberg.net

2009 07 30: Mexico’s GDP Probably Shrank Most in Three Decades Last Quarter

By Jens Erik Gould

July 31 (Bloomberg) — Mexico’s economy probably shrank the most in three decades last quarter as the global recession and the outbreak of swine flu curbed industrial output and fueled job losses, the finance ministry said.

Gross domestic product may have contracted 10.4 percent in the second quarter from a year earlier after declining 8.2 percent in the previous three months, the ministry said in an e- mailed report yesterday. The government is due to release last quarter’s GDP figures on Aug. 20.

“In the second quarter of 2009, the external environment continued to be adverse,” the ministry said. “The flu outbreak temporarily affected activity in several sectors and regions, particularly in those related to tourism and leisure.”

Mexican job losses have accelerated this year as the recession in the U.S., which buys about 80 percent of the nation’s exports, saps demand for products. The central bank said this week the economy will shrink in 2009 at almost double the pace it previously forecast, predicting a contraction of 6.5 percent to 7.5 percent.

A contraction of 10.4 percent in the three months to June 30 would be the biggest decline in GDP since at least 1980, according to Bloomberg quarterly data that starts from the first three months of 1981.

Industrial production plunged 12.1 percent in April and May from a year earlier, while formal jobs declined 4.1 percent in June compared with the same month in 2008, according to the ministry’s report. Mexico had a budget deficit of 94.6 billion pesos ($7.1 billion) in the first half of the year, it said.

Public revenue fell 7.8 percent in the first half of the year compared with the same period last year as oil and tax revenue dropped, the ministry’s report said.

To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9@bloomberg.net.