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Thursday, December 13, 2007

Grand Alliance of Central Banks Fails to Impress

A grand alliance of Central Banks makes for great headlines. Unfortunately it doesn’t accomplish much beyond generating a fleeting warm fuzzy feeling… $24 billion? That’s not even enough for one troubled financial firm. Countrwide, Washingto Mutual, UBS, Citigroup could each blow through that by themselves in an attempt to stay solvent.

Euribor Stays at 7-Year High, Defying Central Banks (Update1): “Interest rates on loans in euros stayed at a seven-year high, a day after global central banks teamed up in an attempt to thaw a freeze in money markets.

The three-month borrowing cost was at 4.95 percent, its highest level since December 2000, according to prices from the European Banking Federation today. That's 95 basis points more than the European Central Bank's benchmark interest rate and up from 4.18 percent at the start of July, before losses related to subprime mortgages contaminated money markets.

Policy makers in the U.S., U.K., Canada, Switzerland and the euro region agreed to the first coordinated action since the Sept. 11, 2001, terrorist attacks. The Federal Reserve said it will make $24 billion available to increase the supply of dollars into Europe. Banks have reported more than $66 billion in losses linked to U.S. subprime mortgages this year.

“It's not going to help us find an exit to this crisis,” said Cyril Beuzit, head of interest-rate strategy at BNP Paribas SA in London. “These measures aren't going to address the root cause of the crisis. Banks are still reluctant to lend money to each other because there are serious concerns about potential further bad news.””

Banks SHOULD be reluctant to lend money to each other because a couple of them aren’t going to be able to pay it back.

“The U.S. central bank also plans four auctions that will add as much as $40 billion. The Bank of England said it would widen the range of collateral it will accept on three-month loans.”

‘Widening’ the range of collateral is a clever way of avoiding saying ‘we are going to lower the quality of collateral’. Brilliant. Loose credit standards created this mess in the first place. Time to loosen the credit standards exactly where they are supposed to be the tightest to ‘save’ the markets.

U.S. Treasuries Little Changed as Central Banks' Efforts Fail: “Treasury notes were little changed as interest rates charged by banks for loans in the euro region stayed near a seven-year high, suggesting a Federal Reserve-led plan to revive credit markets is failing.

The three-month borrowing cost for euros was at 4.95 percent, its highest level since December 2000, according to prices from the European Banking Federation today. Policy makers in the U.S., U.K., Canada, Switzerland and the euro region announced the first coordinated action since Sept. 11, 2001.

The so-called “TED” spread, the difference between three- month Treasury bill yields and the London interbank offered rate for the same maturity, was at 2.20 percentage points, near the widest since August. The increase indicates banks are charging more to lend to each other.”

Yen Climbs From One-Month Low Against Dollar on Credit Losses: “The yen rose from a one-month low against the dollar on speculation a Federal Reserve-led plan to provide banks with extra funds won't resolve credit-market turmoil, prompting investors to exit so-called carry trades.

The yen gained against all 16 most-active currencies after Bank of America Corp. and Wachovia Corp. said provisions for loan defaults will increase, spurring investors to repay funds borrowed in Japan to buy higher-yielding assets. The yen strengthened the most against the Brazilian real, South African rand, Australian dollar, beneficiaries of the carry trade.”

Time to unload risky assets… again.

U.S. November Producer Prices Rise 3.2%; Core Up 0.4% (Update1): “Prices paid to U.S. producers climbed at the fastest pace in 34 years in November, pushed up by surging costs for fuel. Excluding food and energy, prices rose the most since February.

The 3.2 percent gain, twice as much as economists had forecast, follows a 0.1 percent increase in October, the Labor Department said today in Washington. Core prices, which exclude food and energy, jumped 0.4 percent after no change the prior month.

The rising prices highlight the Federal Reserve's concern that energy and commodity costs may feed inflation at the consumer level. The Fed this week cut its benchmark rate for a third time in four months and said it would “continue to monitor inflation developments.”

Economists had forecast a 1.5 percent increase in producer prices, according to the median of 77 estimates in a Bloomberg survey. Forecasts ranged from 0.3 percent to 2.5 percent. Excluding food and energy, the median forecast was for an increase of 0.2 percent following no change the prior month.

November's gain in producer prices was the biggest since August 1973, according to Labor Department figures.”

Makes sense now why the Fed only cut 25 basis points. Greatest increase since 1973. Hmmmmmmm. I don’t see anything in the near term that would change that since the US dollar slide is not likely to reverse anytime soon. Stagflation here we come… (You did notice Chinas recent inflation numbers right? China Inflation Reaches 11-Year High, Trade Gap Grows)

U.S. November Retail Sales Rise More Than Forecast (Updated1): “Retail sales in the U.S. increased twice as much as forecast in November, easing concern near- record fuel prices and falling home values would trip up consumers.

The 1.2 percent increase, the biggest since May, followed a 0.2 percent gain the prior month, the Commerce Department said today in Washington. Purchases excluding automobiles jumped 1.8 percent, the most since January 2006.

More jobs and higher incomes may cushion the damage from $3-a-gallon gasoline and declining home prices, preventing a collapse in demand, economists said. The increase bears out the Federal Reserve's decision this week to reduce the benchmark interest rate by just a quarter point. Policy makers took additional steps yesterday to spur bank lending.”

Not bad actually. All things considered.