Tag Archive | "Minister David"

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Osborne Calls For Bolder BoE

Finance minister George Osborne stated his case for more aggressive and innovative Bank of England initiatives to help the country climb out of the economic rut that has led to a credit downgrade and has the economy on the verge of another recession. His address to Parliament was marred by jeers from Labor and their leader, Ed Millibrand.

While the politics is sticky, the current economic trends point to disaster unless a commitment to growth is in place. Osborne looks to the BoE to carry the ball by giving the economy some breathing room with an already stifling inflation rate.

Osborne made it clear that this was not the time to cut back on austerity. Prime Minister David Cameron and Osborne remain committed to the austerity strategy that is designed to narrow the deficit through curtailing public debt. Many Brits believe their success will determine the outcome of the elections in two years. The deficit reduction package is a five year plan.

Another EU Nation Long On Austerity, Short on Growth

However, as other EU nations have found, austerity without growth is a dangerous formula. Recession looms and the UK manufacturing output is discouraging.

Latest growth projections are dismal. Osborne announced the economy will grow about 0.6 percent this year. The finance minister projects 1.8 percent GDP expansion in 2014. He was quick to point out that the 1.8 percent would exceed the output of Germany and France.

Cameron and Osborne had paid a price politically for the struggling recovery. British sterling took another hit on Wednesday but the prospect of a more aggressive BoE seemed to stabilize equity markets.

Osborne called for the central bank to maintain its 2 percent inflation rate, if possible, but not at the expense of growth. He asked for the bank to devise a strategy to reduce the inflation rate over time if it became necessary to increase the rate by more than 2 percent to supply enough easing to stimulate growth.

Housing and Construction Must Lead Way

Of particular interest is the stagnant construction and housing industry. Osborne’s charge to the BoE would transform the mission to resemble the mandate of the US Federal Reserve, whose controversial three rounds of QE have sparked a slow, tenuous but steady recovery.  US equity markets have flourished in the meantime.

Most troubling in Osborne’s presentation is his paring of the 2013 GDP growth. The 0.6 percent is half the original 2013 projection of 1.2 percent.

Osborne said, “As we’ve seen over the last five years, low and stable inflation is a necessary but not sufficient condition for prosperity. The new remit explicitly tasks the MPB with setting out clearly the tradeoffs it has made in deciding how long it will be before inflation return to target.”

It looks like uneasy times are ahead for the Sterling and the UK economy.

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US Bonds Attracting Investors

Despite a dysfunctional congress, the demand for US 10-year bonds has increased as investors shy away from euro zone bonds.  By Friday afternoon, the 10-year US bonds were yielding 2.01 percent in moderate trading.  Analysts predict the bonds could hit the 1.5 percent yield before the end of the year. 

Meanwhile, US investors are focused on the S&P 500, which is in jeopardy of falling below the 1200 mark. If the S&P does not find footing above 1200, triggers will kick in and a fall will be steep and fast.  The S&P could settle at 1100 but some analysts are projecting the floor could be in the 950 range. 

If the super committee fails to present a significant debt reduction package, the US dollar could take a hit.  Investors want the committee to create a meaningful reduction plan.

The European Central Bank (ECB) has aggressively invested in the sovereign debt in the euro zone.  The ECB’s investment has caused the Italian and Spanish bonds to lower interest rates but there is work to do.  By the end of day, the euro settled at $1.35.  

France and the Netherlands have been caught in the freefall throughout the euro zone.  Both countries are holding large quantities of euro zone sovereign debt. 

Germany’s Angela Merkel has held firm that there would be no more German money added to the European Financial Stability Facility.  The Chancellor has also opposed the idea that the ECB should play a larger role in the euro zone’s debt crisis. 

After meetings with Merkel, the UK Prime Minister, David Cameron, called for decisive action in the euro zone.  Germany has generally been regarded as the most stable bonds in the region but taxpayers are resisting investment in the euro zone. 

As the euro zone’s largest exporter, German bunds are off the year’s high of 3.5 percent and closed today at 1.97 percent.  However, analysts are not sold on Germany, who holds large amounts of Greek and Italian debt.  Worries that Germany may be sucked into the crisis have deepened since the country revised their GDP projections.

Asian appetite in bunds has also declined.  These countries are usually active in the euro zone, but the brakes are on.  Investors are looking at Germany through two perspectives:  that the euro zone will collapse or the possibility that Germany will create a new economic union.  Germany fears that their currency will cause their export market to suffer larger losses.

On Friday, a proposal that the ECB would invest in the IMF and the IMF would then invest in troubled economies.  Most investors would like the ECB to utilize quantitative easing.  Merkel rejects more action by the ECB saying that the central bank does not have the authority to print money.

Merkel now opposes leveraging the EFSF.  This is a strategy that she supported 30 days ago.  With her party holding the narrowest of margins in the parliament, Merkel is treading on thin ice.

In Rome, Mario Monti achieved a second confidence vote in his parliament. In Athens, the new government put forth a budget that called for no more austerity cuts in 2012.  Cameron’s call for decisive action is on the mark, but without Merkel, the euro zone is at a standstill and teetering on the edge of a deep precipice. 


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