April 25, 2011 Patrick Oliver-Kelley

The number of workers filing for jobless benefits declined last week but remained elevated, while a broad gauge of the economy’s strength rose, delivering mixed signals. First-quarter US growth, amid higher oil prices and a moribund housing market, weigh on business and consumer confidence. But a slowly reviving job market, suggest growth will reaccelerate as the year goes on. Mid-Atlantic manufacturers continued to expand in April, but at a much slower pace than in March. Housing prices remain on a down slope. U.S. home prices dropped for the fourth straight month in February.

 

When higher real interest rates come, they will not be a timely signal of problems ahead unless we change course–they will be the problem.  The structure of US debt is short, averaging around five years. If rates climb significantly, our interest expense will start putting a lot of pressure on an already weak fiscal position.

The Headline stealer though was Standard & Poor’s downgrading its outlook on US Government debt. It expressed unprecedented doubts of Washington’s ability to bring the federal deficit under control. The agency said the outlook is ‘Negative’ from ‘Stable’. It said that the US has less than one chance in three to avoid losing its investment grade, if it doesn’t come up with a credible plan for reducing the estimated 1.5 trillion dollar deficit.

Americans should look at the budget battle as bigger than just a power play. It is a tussle over spending as a way to define government’s role. It also dictates the future of US leadership, and its values in the world economy. The closer Democrats and Republicans come to a deal to really cut the deficit, the more likely the dollar will keep its dominant place in trade and as a reserve currency. Without a credible plan for reduction of the deficit, the wolves will be at the door and China, France, Brazil are the ones knocking. All bets are off until the US shows the guts to make the fiscal changes.

Increasingly alarmed by an overheating economy, the People’s Bank of China raised interest rates for the fourth time in five months. The rise of a quarter of a percentage point, to 6.31% for the one-year lending rate and 3.25 for the deposit rate, came as a surprise, leading analysts to suppose that inflation in March had been higher than expected.

German manufacturing orders climbed 2.4% in February, demand improved at home and within the euro zone. Moody cut Portugal’s long-term government-bond rating even closer to junk grade. Authorities are unable to meet their deficit reduction. Industrial producer prices rose Eurozone wide. The data cement expectations that the ECB could raise interest rates several times this year. What is surprising is the erosion of the firewall that the Eurozone had managed to erect around Ireland, Portugal and Greece, but in no way does not diminish the serious need to restructure their debt. Their bond yields are unsustainable. U.K. manufacturing suffered a sharp slowdown in February after several months as a star performer, stoking doubts about the sector’s ability to lead Britain’s fragile economy back to health, as it has in Germany. Inflation is accelerating during March tough-out the Eurozone. The ECB increased rates for the first time in three years.

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