Economy Live

Wall Street retreated after Federal Reserve Chairman, Ben Bernanke’s comment that the deteriorating economy pace, rising inflation and looming housing sector will remain a risk to consumer spending and overall economic growth.

Amid the inflation and increasing consumer spending apprehension in the future, investors sold off their shares, which adversely affect the Dow and fell 53.33, or 0.38 percent, to 13,918.22. The blue chip index was down by as much as 134 points during the session; a late-afternoon rebound wasn’t unexpected given the market’s recent volatility.

While speaking before the House Financial Services panel as part of the central bank’s midyear forecast, Bernanke urges to emphasize more on strengthening economy and clears that inflation risk will remain the Fed’s “predominant” concern.

However, experts arraigned Bernanke for creating fear in the mind of investors as they are already reeling from Bear Stearns, hedge funds sparking more subprime fears, and new worries about earnings.

Todd Salamone, director of trading at Schaffer’s Investment Research said:

Bernanke didn’t really say a whole lot of things that were new, but he added to a combination of seemingly negative events

The Fed lowered its 2008 GDP growth forecast to between 2.5 per cent and 2.75 per cent from its February forecast of between 2.75 per cent and 3 per cent. It also lowered its 2007 GDP forecast, as Mr Bernanke warned that the housing market has not yet eased down as he worried that it will continue to fall.

Nonetheless, the Fed kept its estimates of core inflation intact, where many Wall Street economists believed they could be lowered, and Mr Bernanke warned that productivity improvements may be slowing - a fact that would put upward pressure on inflation.
Core inflation, which excludes often volatile energy and food costs, also rose a moderate 0.2 percent last month.

Most big companies have failed to earn profit in the previous quarter ended in June. The yield on the benchmark 10-year Treasury note fell to 5.03 percent from 5.07 percent late Tuesday. The dollar was mixed against other major currencies, while gold shows some sign of improvement.

In the middle of lurking market expectations, JPMorgan Chase’s earning rose 20 percent, but firm also remains on guard for possible fallout from the mortgage industry.

Inflation remains the most excruciating factor for the economy and fed expect that the domestic interpretation on consumer prices could help ease some concerns about inflation. Investors are hoping rising prices won’t prompt the Federal Reserve to put off an eventual interest rate reduction or even to raise rates. Even if the Fed doesn’t act, higher costs could prompt some consumers to curtail their spending. Such a retrenchment could dent corporate profits.

Mr Bernanke’s asserts that moderate inflation may only be temporary, but warned that Fed is watching inflation expectations closely and vociferously rules out an early interest rate cut.

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Via: Washington Post

China’s General Administration of Quality Supervision, Inspection and Quarantine has suspended imports of chicken and pork from Tyson Foods Inc with six other U.S. companies.

China’s quality watchdog agency arraigned that frozen chicken meat from Tyson was found to contain salmonella. Ractopamine, a feed additive, was found in Van Luin Foods’ frozen pig ears, an anti-parasite drug was found in frozen chicken feet from Sanderson Farms. Quality watchdog agency also found ractopamine in Thumph Foods.

Cargill, Thumph Foods and Van Luin’s Imports were suspended for 45 days, while the remaining companies face unspecified suspension periods.

On the suspension, Tyson Foods responded quickly and said that it had received no notification and clarification from the Chinese government about the ban. To act timely over the matter, Tyson spokeswoman Libby Lawson said:

We will work with the U.S. and Chinese governments to get this matter resolved

However, the suspension seems an act of retaliation from the Chinese authorities and added fuel in the skirmish that began in March after FDA suspended its exported seafood, toothpaste and toys citing concerns about carcinogens or residues of antibiotics in the United States.

Regulations against American exported foods earn criticism from the Bush administration and the American Chamber of Commerce in China is seeking a proper and fair investigation over the ban.

US officials are aghast with the China’s action and are seeking clarification on the matter from Chinese authorities. The administration is also consulting the US exporters involved to try to see if there is substance in the Chinese claims.

US have advised China to avoid any act of retaliation, whereas Chamber suggested country to look forward to build up firm bilateral trade. Joining the league, China macro-strategist for CLSA Asia-Pacific Markets Andy Rothman, said:

China needs to avoid taking steps that appear to be simple retaliation and both sides need to make a big effort not to politicize the problem

The US is likely to make a fuller response any time today, but the thing that hurts me the most are the regulations - whether imposed by America or China - most of the business firms are hurt gravely. To win back American faith, China closed more than 100 food-processing plants and executed its former head of food and drug regulator thus making thousands of workers jobless. Well now, it is US’s turn!

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New Zealand’s inflation increased more than 1 per cent in the second quarter amid the rising petrol prices.

Statistics New Zealand’s published data shows that petrol prices increased by 8 per cent, which lifted country’s transport prices by 2.4 per cent in the quarter. Petrol prices remained unchanged since the March quarter.

Apart from the petrol prices, electricity prices were also, well ahead of the overall increase, up by 3 per cent in the quarter. Whereas food prices shot up by 0.5 per cent, health recorded 1.9 percent upsurge, household contents and services 1.2 per cent, and clothing and footwear experiences 0.9 percent acceleration.

In the middle of soaring inflation, consumer price index (CPI) surged by 1 percent from the previous quarter and was up by 2 percent from the same period a year earlier. The result beats the market expectations of a 0.8 percent on-quarter rise in CPI and a rise of 1.8 percent on year. The central bank had forecast a 0.7 percent quarterly increase and a 1.7 percent rise on year.

Domestic inflation - which excludes import prices - mounts by 1.1 percent from the previous quarter and 4.1 percent from the year earlier.

Data reveals that quarterly inflation mounted at a faster-than-expected pace pushing the currency to a 22-year high. Market reaction was swift with the New Zealand dollar rising to a record high of US$0.7894 (euro0.5728) from US$0.7861 (euro0.5705) just prior to the inflation data. It had fallen back to US $0.7863 (euro 0.5707).

Galloping inflation spark the anticipation of interest rate hike. The bank raised its key rate in March, April and June by 75 basis points, to a record high of 8.00 percent.

To curb the inflation, policymakers are eager to increase bank rates as economy is not showing any sign of cooling down.

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Via: New Zealand Herald

Rising foreign investment is ensuring China’s development as it mounted 22 percent to $6.6 billion in June compared to last year.

The Ministry of Commerce asserts that China’s foreign direct investment (FDI) grew 12 percent to $31.9 billion in the first half of the year. A total of 18,683 foreign-funded ventures were approved by the ministry from January to June, down 5.4 percent year-on-year.

China’s market potential and its cheap labor are attracting massive foreign currency. China, which has ensured constant growth from a decade, is converting into a hub for futuristic market.

Manufacturing, real estate and commercial service sectors are constantly attracting FDI. Analysts predict that with this pace, the FDI would exceed 60 billion U.S. dollars in 2007.

No doubt, foreign investment is a must for constant economic growth, but China should keep vigil on unnecessary boom as it could lead to inflation.

To ensure the development pace with possible check, the Chinese government has been trying to curb investment in real estate and other industries where it believes supply can exceed demand.

Despite being involved in all possible official efforts to cool the boom, Chinese economy growth is racing ahead. Inflation has increased to 3.3 percent, which automatically raises fears amongst policymakers that runaway spending could lead to debt crisis.

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China’s economy is booming despite its humiliating foray into tainted food and other hazardous stuff. In the last three months, country’s foreign reserve has added an overwhelming $266.3 billion, which pushed the total reserve to a record $1.33 trillion.

Country’s healthy trade flow has increased to a record high that contributed to acceleration in money supply growth in June. China’s trade is also rolling swiftly as its trade surplus has surged by 85.5 percent or $26.91 billion in June.

Analysts assert that the foreign reserve acceleration can intensify the pressure on the Yuan, as it’s already getting pressure from the American lawmakers to lift the unnecessary import duties.

Chinese policymakers are satisfied with the growth and hopeful for the prosper future as Cheng Manjiang, an economist with Bank of China International in Beijing said:

The figures are totally in line with expectations because the trade surplus surged very rapidly and we also expected FDI (foreign direct investment) to have been good

The country’s reserves have ballooned in recent years as the central bank, in order to hold down the Yuan, has bought most of the dollars generated by a growing trade surplus, inflows of foreign direct investment and speculative capital.

China’s economy is on threshold, where it is receiving maximum inflow of capital, apparently lured by its future growth, market potential and cheap labor. To check the vicious part of foreign reserve Chinese government has taken a premature step by raising interest rates twice.

Annual loan growth is galloping as it rose to 16.25 percent in June from 16.0 in May, while new Yuan loans reached 2.54 trillion in the first six months versus 3.2 trillion. Keeping all these aspects in mind, economists are expecting another interest hike in the coming months.

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Via: IHT

China’s trade surplus surged 85.5 percent in June, to a monthly record of $26.91 billion, potentially heightening tensions with the United States and Europe on Yuan’s market value.

Exports for June jumped to $103.27 billion, whereas imports were $76.36 billion. For the first six month of the year, the country’s trade surplus was soar to record $112.53 billion.

Experts allege that China’s trade surplus soared due to country’s new curbs on exports, which inevitably came under more global pressure as the surplus ballooned throughout the rest of the year. China’s top economic planners predicts that the trade surplus could cross $250-300 billion in 2007, up from a record $177.5 billion last year.

The trade surplus has been a constant source of friction with its major trading partners, mainly the United States and the European Union.

China is regularly accused of keeping Yuan artificially low, which helped to make domestic goods cheaper and imported articles expensive, providing an unfair competitive edge to exporters.

Goldman Sachs economist Hong Liang said:

This level of trade surplus is unprecedented for China or any other major economy in the world, this again highlights the ineffectiveness of the policy tinkering that has so far failed to tackle the root cause of China’s bloating trade surplus: the significantly undervalued currency.

America is continuously alleging China for unnecessary manipulating its currency and pressing Chinese lawmakers to let the Yuan free in the market. Some U.S. lawmakers suggest that if country fails to do so than legislation should impose punitive tariffs or other controls on Chinese imports.
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The fire-brand rightwing president of France, Nicholas Sarkozy has struck a note of discord with The European Union quite early in his term. Monday saw him clash with EU finance ministers over the economic direction that France is seeking to take vis-a-vis the European bloc’s overall vision.

His stance at the meeting yesterday is an indication of the fact that Sarko is looking to put domestic priorities ahead of EU’s broader agenda. Even the fact that he attended yesterday’s meting in Brussels was a bit of an aberration since heads of sate rarely attend such meets.

France’s ‘zero deficit goal’ may miss EU deadline

Major differences have cropped up between the bloc and one of its major members France over the highly debatable economic reforms that Nicholas Sarkozy is avowed to implement. He indicated as much yesterday. In a rare grab of initiative by a eurozone leader, Sarkozy said that he cannot make any promises that France will abide by the pledge to balance the budget by 2010.

He asserted:

If we don’t get to 2010, I’ll be the first to regret that. If we don’t have the expected growth, we’ll have to say 2012. It’s just a question of being honest.

He told EU Commission president, Jose Manuel Barroso that it was not possible for France to enact reforms in taxes and employment and at the same time meet EU’s deadline of reducing the country’s budget deficit to 1.8 per cent by 2008. Currently it hovers around the 2.4 per cent mark.

Sarkozy is attempting to cut French taxes by more than 10 billion euros in an attempt to revive the economy and boost employment. It is obvious that any move in such direction will lead to the abandonment of the pledge that the previous administration signed barely three months ago.

EU’s exasperation

Sarko’s moves are a signal that France is ready to rise to the forefront in EU again. Its clout in the bloc was substantially reduced after French voters rejected the EU constitution almost two years back. Yes, the European leaders are wary of Nicholas Sarkozy’s eagerness to assert him on the big stage but, at the same time, they cannot ignore that he is trying hard to put his economy on track again.

Nevertheless, some officials questioned his decision to invite himself to the meet yesterday and wondered whether he was going to run the entire show alone. Were his ministers mere ‘puppets’ they asked?

Also EU cannot resort to sanctions against France because French deficit still runs at 2.5 per cent. Incidentally the benchmark rate at which the EU can resort to sanctions is set at 3 per cent. Further EU’s rule book provides that if a country resorts to structural adjustments in the economy, it is allowed to have deficits.

IMF?

Then there’s a small matter of tussle over the appointment of IMF head. Sarkozy has made his intentions clear that he wants a former French finance minister, Dominique Strauss-Kahn, as the next head of the International Monetary Fund. Sarko announced on Sunday that he wanted Kahn to take over Rodrigo Rato’s post, which will fall vacant in October.

While no one questions Kahn’s credentials for the job, some are still viewing this as an attempt by the French to reassert themselves. Already French have the top posts in three premier world bodies and consequently several countries are in queue to block French’s attempts to control IMF as well

It is still quite early days to comment upon the policies that France will adopt under its new prez. However, what is clear is Sarko’s disliking for established norms. If anything, yesterday’s events confirm that he’s determined to have his say in shaping up the affairs of the European countries.

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To satiate the growing energy needs, UK has approved four reactor developers to build new nuclear power stations.

Areva, the world largest reactor maker, along with Japan’s Westinghouse, US giant General Electric and Canada’s AECL, has won the approval from the Nuclear Installations Inspectorate to modernize aging UK’s power facilities.

After short-listing the companies, it seems interested that which giant will elope with the multi-billion worth contract. Areva, Westinghouse and GE look frontline contenders. UK is supposed to build seven new reactors.

The former PM Tony Blair had shown his interest to built new reactors. Joining the league, newly appointed PM Gordon Brown confirmed his support for atomic energy as he said that for continuous growth, the country can’t rely on one source.

But the uncertainty over the proposed plan looms high as it supposes to take time and high cost to provide an initial ground for plant set ups. On the other side, Greenpeace also raises its apprehension over Government’s nuclear policy, which has already forced a formal consultation on the value of nuclear power.

Investors companies can be in agony as they have to put huge bucks, irrespectively have to wait for years for profit with no certainty it will happen. Experts assert that the cost of the reactor design pre-licensing process could be as much as £10m.

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Via: Telegraph

To curb the galloping inflation, Venezuelan government has decided to curtail public spending by issuing $2.8 billion in bonds and treasury notes by the end of this year.

Country’s inflation has risen to 17 percent last year, which raises the apprehension of policymakers.

Country’s finance minister Rodrigo Cabezas said that the idea is to moderate spending gradually while monitoring the economy’s response.

Policymakers have a plan to moderate the inflation by 12 percent this year, but it seems a very difficult task to attain.

Embodied with the petroleum resources, Venezuelan government will try to keep the yearly economic growth near 8 percent this year. Policymakers didn’t show any sign to increase its benchmark interest rate and assert that country will likely end the year with a fiscal deficit of 2 percent of gross domestic product without increasing bank rate.

Recently, Venezuela has nationalized its oil resources and forced foreign drillers to sign a deal with the government to minimize their share in country’s oil reserve. Those who would oppose the agreement, Chavez led government would throw them out of the country.

Chavez has also pulled Venezuela out from the international institutions viz. IMF and WB - arraigned them as ally of America dictating minor countries.

After taking such bold step, Venezuela returned all financial institutions’ debt, weakening country’s fiscal reserve. Also, its policy to remain aloof from the rest of the world has caused trade deficit and foreign currency shortage, which directly mar the domestic market and spurred the inflation.

To meet the inflation in the early phases, administration plans to sell $2.8 billion in government debt, including $837.2 million in short-term treasury notes and will buy $100 million in Bolivian treasury notes in the coming months.

Devaluation of Bolivar isn’t on Government’s card, but possibility can’t be rule out. Venezuela has fixed its exchange rate in 2003, and since then, the Central Bank has devalued currency twice.

Venezuela currency traded at 2,150 bolivars to one U.S. dollar.

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Limited oil reserve has fueled the necessity of other energy alternatives and biofuel has certainly sparked a new light in the depleting resources kindling new hope globally.

Recently Brazil, along with EU has joined the league to urge the creation of an international market in sustainable biofuels that would force producers to meet strict environmental, labor and social standards.

Biofuel will accelerate the development pace in the world and will ensure the participation of all nations, whether they are developed nations or developing one. Brazil asserts that Biofuels will help reduce the global gap between rich and poor nations by making many developing countries energy exporters.

At present, world has only 20 oil producers, which satiate the thirst of world’s 200 states, whereas more than 100 nations will produce biofuels and will export it to more than 200 nations.

Apart from the energy, the more use of biofuels will increase employment - as Brazil discloses that it has lessen the dependency on fossil fuels by 40 percent and created 6million jobs while cutting deforestation by half.

European Union has also shown interest in the program and is ready to slash its tariffs - now 70 percent on Brazilian exports of bio-ethanol. The EU has set itself a binding target of 10 percent of all vehicle fuel to come from biofuels by 2020.

World is battling with the global warming threat. To explore more oil, western oil drillers are digging Antarctica and North Pole, which has caused to the rising temperature. Green lobbies are worried about the growing concern and repeatedly issued warning, but nothing firm is coming out.

It is expected that by adopting Biofuel, dangerous gas emissions will curtail, but environmentalists has warned that headlong rush to develop biofuels will generate more global warming than the carbon they erase.

To ensure the continuous development, experts press to use sophisticated technology and suggest to avoid rush to develop unnecessary power stations.

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