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Euro climbs to 2-week peak vs dollar on German survey Analysis: Bank of Japan running out of arguments against long bond buys GLOBAL MARKETS-Shares ease as U.S. data casts doubt on recovery HIGHLIGHTS-G20, IMF/World Bank meetings in Washington Global growth seen subdued, still heavily reliant on Asia

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By Richard Hubbard
LONDON | Fri Apr 20, 2012 6:02pm EDT

(Reuters) - Two key central bank meetings and a string of big data releases in the coming week should sharpen the debate over slowing growth and rising inflation risks, and may shake the markets out of the doldrums which followed a bumper first quarter for asset prices.
The U.S. Federal Reserve's monetary policy committee will update its economic forecasts for the first time since January at its mid-week meeting, when no policy change is expected but where recent indicators have disappointed investors. While the Bank of Japan is seen as likely to ease its policy further at a meeting on April 27 after coming under intense pressure to help support the still fragile economy. The meetings come after two other central banks, the Bank of England and Bank of Canada, last week surprised markets with more hawkish statements suggesting it was less likely they would need any more monetary policy stimulus. "We're at a point where the nexus of the risks between growth and inflation might get more interesting over the next couple of months," said Ned Rumpeltin, head of G10 FX strategy for Standard Chartered Bank. After a wave of policy easing measures earlier this year led by the Federal Reserve and including a huge 1 trillion euro injection of liquidity by the European Central Bank, there are some signs that growth has stabilized leaving room for monetary authorities to give more weight to inflation risks. Earlier this month Singapore said it will tighten monetary policy slightly because of persistent inflationary pressures, while Australia's central bank opened the door for a rate cut in May when it held rates steady. The Reserve Bank of New Zealand holds its rate setting meeting on April 26 where rates are expected to remain unchanged but inflation concerns could feature in the accompanying statement.

At the centre of the concerns are oil prices with Brent crude currently at an average price of about $118 barrel for the year to date, which if it is maintained for 2012 as a whole would be a record. FUND VIEWS SHIFT Many institutional investors have also been gradually raising their expectations for inflation, according to the latest Bank of America Merrill Lynch survey of fund managers. Global inflation expectations rose to nine month highs in the survey conducted in the week to April 12. "It's not at anything like alarming levels at this point, but what it does do is reinforce the message that there is very little love for bonds at current levels," said Gary Baker, European equity strategist at BofA Merrill Lynch. Overall global growth is still seen as subdued by most economists with weakness in euro zone and a relatively slow U.S. recovery leaving Asia as the main driver. A Reuters poll of more than 700 economists across the world, taken in the past week, predicted a modest 3.3 percent growth in the global economy this year, unchanged from a poll taken three months ago. GDP DATA In the coming week the United States and Britain will unveil their preliminary estimates of first quarter growth. The U.S. economy is expected to grow at an annual rate of around 2.5 percent in the first three months of the year down from 3.0 percent record in the final quarter of 2011. Britain's economy is much weaker with GDP falling by 0.3 percent in the final quarter of last year and a fairly anemic growth of 0.1 percent expected in the first three months of 2012. However, if economists' forecasts are missed and a negative number results, the country will technically be in recession. In the markets a general scaling back in growth forecasts and the return of concerns over euro area government finances have largely ended the rally in risk assets that marked the first quarter. World equities have seen about 5 percent wiped off the gains to the end of March, leaving global stocks .MIWD00000PUS up about 8.5 percent for the year, with emerging markets and the share markets of Spain and Italy underperforming. In the foreign exchange market, the shifts have seen one-month volatility of the euro's exchange rate to the dollar drop to levels not seen since before the Lehman crisis, reflecting a view that swings in the common currency in the near term are likely to be very low. Volatility as indicated by the VIX index (a popular measure of the implied volatility of S&P 500 index options) has rapidly declined since the end of 2011 to hit historic lows last month, though it has kicked up a bit lately as the U.S. economic data has surprised. It may be time for volatility to pick up further. (The story was refiled to clarify the poll in para 14 is a Reuters poll) (editing by Ron Askew)

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Comments (5)
jw_collins wrote: As always, those who control the purse strings spend wildly, having faith that the economy will grow its way out of trouble.and it always does grow its way out of trouble (we all know we arent going to pony up the current bill in hard cash). It will again. The cost of this growth is invariably inflation.thats the magic that makes a trillion in debt payable at some point in a trillion of a dollar with lesser value than those borrowed dollars..in this latest case considerably less Im guessing. The problem is that those who control the purse strings COUNT on this and simply engage in spending behavior that recycles and reignites the problem. In this light, its a good thing that we now take this break to have a bare knuckles, all-out political fight about which road to take. Austerity is a function of that fight, as is the legitimate need to upgrade our economic superstructure in a wise and long term way. No doubt, we will do both in time, once we stop pointing fingers of blame. We can only hope that this lesson is finally learned and that living within our means is far more advantageous a long term prospect than the hyper-spend/inflation model weve deployed during our relatively brief time as a united national economy. Hope we change.
Apr 20, 2012 2:50pm EDT -- Report as abuse

PseudoTurtle wrote: I suggest we already have a massive inflation problem, but everyone is quietly ignoring it it is the $15.6 trillion (and growing) debt sitting on our books. I say our books because it is the middle class taxpayers who will eventually be forced to pay for it. What few people seem to realize is that, if Bernanke had simply bailed out the banks (initially and with the continuing QE programs) the good old fashioned way by simply printing money, the US economy would probably look like the Wiemar Republic of Germany during its hyperinflation heyday. What Bernanke has done, thanks to more modern methods, is to simply provide the same effect without the apparent inflation by creating debt instead of money. This debt has been used by the banks to expand their investments in third-world countries at our expense, but without any apparent inflation here at home. Basically, we have exported inflation to the third-world countries, instead of absorbing it in the US economy, which would have been devastating. The problem is that at some point this exported inflation will have to come home and the US will experience a bout of severe inflation as we are forced to pay down the debt and repatriate dollars. This will happen because the US economy is not growing. The US economy is not growing primarily because the US is serving simply as a conduit for channeling investment money through the banks to third-world countries, all so the banks can enjoy higher profits they could not possibly achieve if they invested that money in the US economy. This is the sole reason why the US stock markets have risen from the dead like Lazarus after their 2008 bubble burst. For example, the DOW crashed at 14,100 in 2008, but now in 2012 is already back at 13,000 + and nearing its all-time high again. There is no other rational reason for this miracle comeback for the banks except for the scenario I proposed. The US stock markets are no longer a reflection of the health of the US economy, but that of the third-world economies. Given the state of the US economy, there is no other rational explanation to account for this comeback in profitability, except as I said they are simply taking the money and investing it anywhere but here as they should be doing. If they did that, the markets would not be nearly as high as they are

now. But the US economy might well be on the road to recovery already. As it is now, the US economy will never recover. This is the major reason why the 1% versus 99% split in wealth is occurring. The wealthy are prospering by investing in third-world economies instead of the US economy. This is why their wealth is growing and the US economy is stagnating. It is all at the direct expense of the 99% of the American people. The real irony is that the 99% are financing the growth in wealth of the 1% (i.e. they are using our money, free of charge and taxes to become wealthier) through the continuing bank bailouts with taxpayer money that is stacking up rapidly as debt for the 99%. This is the real problem with the present continuing bank bailout plan. Without any restrictions whatsoever on the use of the money, the banks have simply chosen to invest elsewhere, thus costing the US the jobs it desperately needs for recovery. In domino fashion, it is also why the housing sector will never recover as long as the present system continues, because the housing market is driven by jobs and without jobs there can be no housing market. And if you fall behind on your payments the wealthy bankers seize your property and transfer the debt to Fannie or Freddie (i.e. the US taxpayer) so they take no losses at all, but still sell the house for market value to increase their profits. This provides the banks with a powerful incentive to foreclose on homeowners. They not only get to write-off the debt and charge it to the government (taxpayers), but also to keep the house and sell it for profit. Now, that is a hell of a deal, and all at taxpayer expense. Everything you see in this economy is a very vicious circle that benefits only the wealthy at the expense of everyone else. Yes, the truth is as simple as that. That is the good news. The bad news is that the $15.6 trillion in debt (just like a credit card) must be paid off before too long because the bond market will begin the same process here as they have already in the eurozone (i.e. demanding a reduction in our lifestyle). When the debt begins to be paid off it must be released into the US economy, thus driving up prices due to its inflationary effect. It will flood the US economy with liquidity that has nowhere to go the same effect as if Bernanke had been printing money all along. We desperately need to stop what we are doing for monetary policy that is, giving the banks free money to spend as they choose with no strings attached because it will only result in the US suffering from massive inflation, or worse hyperinflation down the road. That will result in the US economy crashing into another Great Depression. It is the inevitable result of what we are doing now. Simply cutting back on spending as the wealthy want to do will not save this economy. It will only exacerbate our problems. What we need is revenue to survive. This must be from both internal (i.e. higher taxes) and external (i.e. bringing manufacturing jobs home again) sources. One without the other will not succeed. This would require the US Congress to reverse most of the favorable trade and tax legislation enacted over the past 30+ years that forms the basis for this declining economy, which is how the problem began in the first place. Also, much stricter bank regulations (e.g. similar to that enacted during the Great Depression that was specifically designed to curb the banking excesses of the 1920s that was responsible for the 1929 stock market crash). Only by completely halting the flow of debt-driven capital out of the country and by reestablishing our revenue flows to what they used to be will the US economy survive. Only then should we begin to cut back on our profligate spending, but not before. This is our only chance at a soft landing, and it is a slim one at best. No one in the wealthy-driven government is telling the American people the truth about what is happening, why it has happened, and what needs to be done to solve the problem. To do so, would gore their own own sacred cow of greed, and they are not likely to ever do that. We must begin to think for ourselves before it is too late (if it isnt already past the point of no return that is). The thing for the American people to understand is that this is not rocket science. You dont even have to remotely understand what I have explained above as to what is causing our problems. All you need to do is to realize this country is in serious financial trouble and simply follow the money to see who is benefiting from it. Then be willing to take appropriate action to stop it.
Apr 21, 2012 11:36am EDT -- Report as abuse

moxsee wrote:

Psueso Turtle, you get the gold star for that comment and its Saturday. Nice work.
Apr 21, 2012 12:52pm EDT -- Report as abuse

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TION griculture and industry

ics, Indian Statistical Institute, Calcutta

r the last several months now, a debate is afoot about the sustainability of the much-applauded ian growth rate in the face of a seemingly uncontrollable rate of inflation. The inflation, in turn, s been raging mostly in our agricultural sector and it is worth our while to investigate the nature of problem.

start with, an important question to ask is why it is agriculture rather than industry that is more sceptible to inflationary pressures in the context of a growth scenario. An obvious answer to the estion lies in excessive demand for food. Even the governments salutary Mahatma Gandhi ional rural employment guarantee programme is being held responsible for the rise in food ces. If so, this is no less than a farce, for it implies that inflation is caused by the poor mans food

side altogether. In this connection, Sergio Rebelos insights into the area of growth economics others, points out that the most important barrier to steady growth takes the form of a ely, the law of diminishing returns. Put simply, the law states that in any production process, extra ined with a fixed quantum of a given resource leads to a rise in output at ever decreasing rates. output must fall in the presence of a fixed resource even if all other resources were to increase at

vious in the context of agriculture, where land constitutes the fixed non-augmentable resource, on are the variable resources. As per LDR, equal extra doses of the variable resources will yield agricultural produce, say wheat. Alternatively put, to keep the output of wheat growing at a must be increased not in equal doses, but in ever increasing amounts. To put this in technical ultural output calls for a larger rate of input consumption in that sector. This, so long as land size ed by an unchanging technology. This is not to deny the fact that if productivity rises due to case with the Green Revolution), the constraints imposed by LDR could well be postponed, owth of outputs and inputs in agriculture.

e generic term capital, Rebelo argues therefore that in the absence of technology improvement, extracted from a fixed plot of land only if the growth rate of capital use is higher than the growth

ertilizers, pesticides and so on are captured under the blanket term capital, the word capital itself purchase of capital, or all inputs put together, amounts to expenditure of money. On the other gricultural activities as well, such as industry, of which manufacturing enjoys a lions share. For production of personal computers as an example. The inputs that go into such production qualitatively different of course from those required by agriculture. However, as opposed to ts do not lead to diminishing extra produce. Two PCs call for twice the quantum of inputs as one a sense therefore, LDR does not work for manufacture the same way as it does for agriculture. er. It assumes the form of an overall capacity constraint. Depending on the size of the factory, a n be produced per week say. Till that capacity is reached, the ratio of PC production to capital it, it drops as with the case of LDR, but the drop is drastic. It falls sharply to zero.

its of capital in manufacture produce a fixed extra units of PCs, while in agriculture, equal extra xtra quantities of wheat. If markets are free, owners of capital will seek maximal returns from the anufacture yields a constant rate of return (a fixed number of PCs) from each unit of capital, and the capital owner will agree to employ extra capital in agriculture only if the price of wheat as capital use increases in agriculture.

technical progress in agriculture is stagnant, there will be a natural tendency for agricultural acture, quite independent of demand forces. And, as Rebelo points out, this relative price ss agriculture is filliped by technical improvements. Moreover, for sustainable growth, capital ase at a higher rate than the rate of growth of agricultural produce.

d on demand forces at all. However, if demand is brought in and it grows at a rate higher than the he price of agricultural products will rise at an even higher rate than what is indicated by supply n policy planners have been harping on the demand problems alone, neglecting thereby Rebelos .

he required excess in capital growth is not maintained, the desired growth rate of agriculture too uation, particularly in West Bengal, land policy has reduced the size of individual plots to such an quantities of capital, say tractors this time, has turned literally impossible. The result is that ssuming almost the form it has in manufacture. The extra capital being non-employable in ed with it will be close to zero.

ssumption of free markets where capital is allowed to move in the direction of highest returns. In ly free. Secondly, endless fragmentation of land has made it technically infeasible for large capital herefore, it is only small capital that is attracted towards agriculture in states such as West too small a growth in agriculture compared to industry. Under these circumstances, even if the eturn to capital in alternative sectors were to be ignored, food prices should be expected to been the case.

aps by opting for large-scale agriculture, though this is no easy task. Any move in that direction is ns. On the other hand, the attempt to shackle the food inflation monster by repeated increases in g capital does not seem to be based on sound reasoning either. Since it is physically, rather than al in agriculture, industry continues to be its only feasible destination. However, with increasing w struggling to survive. Neither agriculture nor industry, it would appear, is poised to attract at growth rates are not showing signs of improvement. And it is this insufficient growth rate that is r than the other way around.

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term for Europes struggle to pay the debts it has built up in recent decades. Five of the regions countries have, to varying degrees, failed to generate enough economic growth to make their ability to pay back to be. Although these five were seen as being the countries in immediate danger of a possible default, the xtend beyond their borders to the world as a whole. In fact, the head of the Bank of England referred to it as

nce the 1930s, if not ever, in October 2011.

cing the world economy, but it is also one of the hardest to understand. Below is a Q&A to help familiarize

growth since the U.S. financial crisis of 2008-2009, which has exposed the unsustainable fiscal policies of Greece, which spent heartily for years and failed to undertake fiscal reforms, was one of the first to feel the ws, so do tax revenues making high budget deficits unsustainable. The result was that the new Prime was forced to announce that previous governments had failed to reveal the size of the nations deficits. In ey actually exceed the size of the nations entire economy, and the country could no longer hide the problem. yields on Greeces bonds, which raised the cost of the countrys debt burden and necessitated a series of ean Central Bank (ECB). The markets also began driving up bond yields in the other heavily indebted ms similar to what occurred in Greece. fecting bond market performance

nse to this type of crisis, and what are the implications?

e: if investors see higher risk associated with investing in a countrys bonds, they will require a higher return ins a vicious cycle: the demand for higher yields equates to higher borrowing costs for the country in crisis, ing investors to demand even higher yields, and so on. A general loss of investor confidence typically causes question, but also other countries with similarly weak finances an effect typically referred to as

about the crisis?

it has moved slowly since it requires the consent of all 17 nations in the union. The primary course of action uropes troubled economies. In spring, 2010, when the European Union and International Monetary Fund t of $163 billion) to Greece. Greece required a second bailout in mid-2011, this time worth about $157 creditors agreed to a debt restructuring that set the stage for another round of bailout funds. Ireland and ber 2010 and May 2011, respectively. The Eurozone member states also created the European Financial ency lending to countries in financial difficulty.

me involved. The ECB announced a plan, in August 2011, to purchase government bonds if necessary in vel that countries such as Italy and Spain could no longer afford. In December 2011, the ECB made 489 ions troubled banks at ultra-low rates, then followed with a second round in February 2012. The name for ing Operation, or LTRO. Numerous financial instituions had debt coming due in 2012, causing them to hold ns. Slower loan growth, in turn, could weigh on economic growth and make the crisis worse. As a result, the eets to help forestall this potential issue.

makers usually helped stabilize the financial markets in the short term, they were widely criticized as merely oning a true solution to a later date. In addition, a larger issue loomed: while smaller countries such as Greece opean Central Bank, Italy and Spain are too big to be saved. The perilous state of the countries fiscal health t various points in 2010, 2011, and 2012.

m? Couldnt a country just walk away from its debts and start fresh?

le for one critical reason: European banks remain one of the largest holders of regions government debt, ughout the second half of 2011. Banks are required to keep a certain amount of assets on their balance sheets a country defaults on its debt, the value of its bonds will plunge. For banks, this could mean a sharp balance sheet and possible insolvency. Due to the growing interconnectedness of the global financial vacuum. Instead, there is the possibility that a series of bank failures will spiral into a more destructive

ial crisis, when a series of collapses by smaller financial institutions ultimately led to the failure of Lehman orced takeovers of many others. Since European governments are already struggling with their finances, there

ng of this crisis compared to the one that hit the United States.

fected the financial markets?

e European debt crisis a key focal point for the world financial markets in the 2010-2012 period. With the recent memory, investors reaction to any bad news out of Europe was swift: sell anything risky, and buy the ancially sound countries. Typically, European bank stocks and the European markets as a whole ounterparts during the times when the crisis was on center stage. The bond markets of the affected nations ans that prices are falling. At the same time, yields on U.S. Treasuries fell to historically low levels in a

d?

enormous. In the affected nations, the push toward austerity or cutting expenses to reduce the gap between rotests in Greece and Spain and in the removal of the party in power in both Italy and Portugal. On the s between the fiscally sound countries, such as Germany, and the higher-debt countries such as Greece. ected countries to reform the budgets as a condition of providing aid, leading to elevated tensions within debate, Greece ultimately agreed to cut spending and raise taxes. However, an important obstacle has been ion-wide solution such as the issuance of bonds by all 17 countries in the Eurozone since it would have e bill.

t one or more European countries would eventually abandon the euro (the regions common currency). On country to pursue its own independent policy rather than being subject to the common policy for the 17 er, it would be an event of unprecedented magnitude for the global economy and financial markets. This in the euro relative to other major global currencies during the crisis period.

rity (higher taxes and lower spending) measures in the regions smaller nations is problematic in that slower growth, which means lower tax revenues for countries to pay their bills. In turn, this makes it more emselves out. The prospect of lower government spending has led to massive public protests and made it of the steps necessary to resolve the crisis. In addition, the entire region slipped toward a recession in late overall loss of confidence among businesses and investors.

ve little choice but to pressure the smaller nations to tighten their belts since they are facing pressure from such as Germany and France balk at using their money to fund what is seen as the overspending of Greece . This type of fundamental, high-level disagreement has made a solution more difficult to achieve.

is matter to the United States?

connected now meaning a problem for Greece, or another smaller European country, is a problem for all of cts our financial markets, but also the U.S. government budget. Forty percent of the International Monetary ed States, so if the IMF has to commit too much cash to bailout initiatives, U.S. taxpayers will eventually debt is growing steadily larger meaning that the events in Greece and the rest of Europe are a potential cularly with the "fiscal cliff" looming at the end of this year.

il. Greece's exit from the euro appears inevitable; according to Bloomberg, Citigroup economists see a 75% ter its elections later in the year, since the elections would likely lead to a rejection of the country's latest ent of investors surveyed by Bloomberg News predict an exit of a euro member at some point in 2012. urope as well: French President Nicolas Sarkozy lost power due in part to his support for austerity measures, Spain, for its part, faces 25% unemployment with no clear path to growth. European policymakers - who keep the currency union together, with all of the challenges that would entail, or allow Greece (and possibly ld likely lead to financial market chaos. As a result, the chance of a further economic shock to the region -

l a significant possibility, and will likely remain so for several years.

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