Credit Rating Downgrades

June 15, 2010

Moody’s announced a four-step downgrade of Greek debt from Ba1 to junk status, A3.  The 10-year Greek-minus-German yield premium widened 35 basis points to more than 600 basis points.  Irish and Spanish premiums also increased.

Fitch reduced British Petroleum’s credit rating from AA to BBB.  President Obama will address the nation on the oil spill later today.

Investor sentiment toward Germany and Euroland fell sharply this month according to new ZEW indices.  In Germany’s case, the expectations index dropped to a 14-month low of 28.7 from 45.8 in May, 53.6 in April and 44.5 in March.  The expectations index for the whole euro area was 18.8, half as much as in May and down from 46.0 in April.  Current conditions, however, rose from minus 21.6 to minus 7.9 in Germany and from minus 48.5 to minus 40.8 in Euroland.

The euro overcame the above poor news, rising 0.4% against the dollar, 0.2% versus the Swiss franc, 0.1% against the yen, and 0.3% against sterling.  The greenback is unchanged against the Canadian and New Zealand dollars and 0.1% softer relative to the Aussie dollar.

Equities in Europe got a boost from News Corp’s offer to purchase Sky news.  Stocks are up 0.8% in France, 0.7% in Spain, and 0.5% in Germany and Britain.  Equities closed generally unchanged in Australia, New Zealand, Thailand, Indonesia, Malaysia, Hong Kong, Japan and Pakistan.  They rose 0.9% in Taiwan, 0.4% in India, and 0.3% in China.

Ten-year German bund yields firmed three basis points, while those in Japan and Britain are steady.

Oil prices advanced 0.9% to $75.82 per barrel, while gold shows a steadier 0.1% downtick to $1223.90 per troy ounce.

The Bank of Japan completed a two-day Policy Board meeting, voting unanimously to leave settings such as the 0.1% overnight target rate unchanged but also unveiling a Y 3 trillion program to facilitate bank lending to businesses.  The gesture was seen as a mellowing of tensions between the central bank and the government.  The BOJ’s remarks about Japan’s economy were upbeat, projecting continuing moderate recovery, diminishing deflation, and less severe situations surrounding employment, income growth, and financial conditions.

Minutes from the Reserve Bank of Australia, which met earlier this month and left rates unchanged, underscored a significantly worse situation in Europe whose outlook remains uncertain but also noted coming support from elevated export commodity prices.  Having lifted the official cash rate earlier to 4.5% from 3.0%, officials noted they have the flexibility to wait for clarifying information.  Second-quarter CPI data due late next month are cited explicitly, and the appropriateness of interest rates covers the “near term,” suggesting that more tightening may occur in 2H10.

Singapore retail sales slid 2.2% in April and were 2.6% lower than a year earlier.  The non-auto retail sales component posted a 7.4% on-year increase, however.

Turkish unemployment of 13.7% in February-April was lower than the 14.4% printed in 1Q10 but higher than analyst expectations.

Euroland employment was unchanged between 4Q09 and the first quarter of this year, which resulted in a reduced on-year drop of 1.2% after declines of 2.0% in the year to 4Q09 and 2.3% in the year to 3Q09.  The Greek labor market trails the others, with decreases of 0.3% in the latest quarter and 2.0% from 1Q09.

Euroland recorded a seasonally adjusted EUR 1.4 billion trade surplus in April.  After monthly surges of 9.8% and 12.2% in March, exports and imports retreated 2.4% and 3.5% in the latest month.  The unadjusted trade balance showed a minuscule deficit of EUR 0.3 billion in January-April compared to a EUR 9.4 billion shortfall in the first four months of 2009.  The energy deficit in the first quarter of 2010 was 17.6% bigger than a year earlier at EUR 56.8 billion.

British consumer prices rose a bit less than expected in May, climbing 0.2%.  The 12-month CPI inflation rate was 3.4%, down from 3.7% in April.  RPI inflation slowed to 5.1% from 5.3%.  Core CPI slowed to 2.9% from 3.1%.

Two measures of U.K. house price inflation were reported.  The Department of Community and Local Government index accelerated to 10.1% in April from 9.7% in March.  The Royal Institute of Chartered Surveyors house price diffusion index showed a balance of 22.5% in May, up from 17.0% in April.

Czech producer prices rose 0.7% on month and 1.5% on year in May. Spain’s house price index fell by 2.9% in the year to 1Q10, down from a decline of 4.3% in the year between 4Q08 and 4Q09.  Germany’s Chamber of Commerce reaffirmed a forecast GDP growth rate of 2.3% for the current year. Danish wholesale prices rose 0.4% on month and 5.2% on year in May. Italy recorded a EUR 213 million trade surplus in April.

European new car registrations were 9.3% lower in May than a year earlier.

Scheduled U.S. data today include import prices, the N.Y. Fed’s Empire State factory index, the National Association of Home Builders index, the Treasury Department international capital flow data, and weekly chain store sales.  Canada releases labor productivity, manufacturing sales, and existing home sales.  Chile holds a monetary policy meeting, and a rate increase announcement is widely expected.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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