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Prospects daily: Continuing fallout form the Euro Zone crisis... U.S. GDP marked down slightly to 3% for Q1-2010

Global Macroeconomics Team's picture

Important developments today:

1.  European banks squeezed out of commercial paper market

2.  U.S. initial unemployment claims fall in latest week

3.  U.S. GDP growth in first quarter in modest downward revision


European banks squeezed out of commercial paper market. Raising funds from the commercial paper market, a key source of short-term loans for banks and other companies, has become increasingly difficult for banks, especially European ones, as lingering concerns over sovereign debt in Europe has caused banks and other lenders to pare-back risk. Indeed, U.S. money-market funds are reducing their holdings of commercial paper issued by European banks, driving up borrowing costs and forcing banks to borrow for shorter maturity. This helps U.S. fund managers comply with new restrictions limiting the length of time they can tie up cash in commercial paper.

The funding squeeze has already contributed to a recent hike in lending rates. Yields on top-tier commercial paper sold by financial companies have doubled in the past two months to 0.52%, near the highest in a year and up from 0.16% in February, according to Federal Reserve Data. However, current levels are not close to the 4.5% or-more that investors demanded from financial institutions at the peak of the credit crisis in 2008.

Banco Bilbao Vizcaya Argentina (or BBVA), Spain’s second largest bank, has been unable to renew €1 billion (roughly $1.2 billion) in short-term funding from the U.S. commercial-paper market this month, a latest signs of the funding squeeze facing European banks amid concerns that the European debt crisis will burden banks with losses. Some analysts have also suggested that this reflects Spanish banking woes that are beginning to spread from the country’s regional banks (the central bank’s takeover of regional saving banks, Cajas) to national ones, as the full extent of the systematic risks have yet to be revealed. Spanish banks increased borrowing from the European Central Bank for three months or more to €89.4 billion in April, the most in at least 1½ years, as other banks have refused to lend to them or demanded higher rates to do so.


U.S. initial unemployment claims fall in latest week. New claims for unemployment insurance declined by 14,000 in the week ending May 21 to a seasonally adjusted 460,000 persons, according to the latest report from the Labor Department. The number of people continuing to collect unemployment benefits declined by 49,000 to 4.6 million persons, while the number collecting extended federal benefits remained stable at 5.34 million. Reports on initial claims in recent months have indicated that layoffs continue to persist at elevated levels, despite acceleration in payroll growth in March and April, pointing to an uneven recovery in labor markets. While several private sector companies are adding to payrolls, some continue to cut back on workers in line with previously announced downsizing plans, leading to April’s unemployment rate of 9.9%. The May employment report, released next week, will provide a clearer picture of U.S. labor markets.


U.S. GDP growth in first quarter in modest downward revision. New figures from the Commerce Department today showed that the U.S. economy grew at a 3% annualized pace in the first quarter (saar), slightly less than the previously announced 3.2% expansion. Consumer spending grew slightly less than in the initial estimate, and was revised down from 3.6% to 3.5%, while business capital spending was also slightly weaker, at 12.7% annualized growth rather than 13.4% in the first GDP estimate. Exports’ contribution was stronger than previously estimated, but so was growth in imports, with the contribution from net exports remaining largely unchanged.

In Europe…French consumer confidence fell to -38 in May compared to a reading of -37 in April, according to the latest report on household sentiment by INSEE. The confidence index has been falling steadily since the beginning of the year, and has shed a total of 8 points since January, as unemployment, and more recently, concerns regarding the southern Euro Zone debt crisis, are factoring into households’ view of the general economy. Conversely, business confidence in Italy improved for a seventh month running according to ISAE research institute, moving up from 95.9 in April to 96.2 in May. Italian firms may be weighing the impact of the weaker euro for export competitiveness more favorably and the implications of the debt crisis less so.


Japanese exports continue to improve. Japanese exports grew 40.4% (y/y) in April extending the nation’s export led recovery and providing signs that the economy will likely expand in the second quarter. Imports grew with less force, increasing 24% from a year ago, leading to a trade surplus of ¥742 billion. There are concerns that the recent strength of the yen has made Japanese products more expensive in external markets, and that exports to the Euro Area are likely to fall sharply as several countries embark on austerity measures to rein in deficits. However shipments to China and other regional emerging markets, have remained robust, and in particular, demand for Japanese automobiles has grown to the fastest pace since the 1980s. And while lower demand from Europe will dampen the growth in exports, about 12% of Japanese export demand originates from Europe, with China and the U.S. holding larger shares of the Japanese export market at 19% and 16% respectively.


Among emerging markets:

In Latin America and the Caribbean, Venezuela’s economy shrank 5.8% in the first quarter from a year earlier, according to the central bank, on electricity shortages and a sharp fall in investment due to government takeovers. Mexico’s current account deficit narrowed to $765 million in the first three months of the year from a $1.3 billion deficit in the same period last year, as the recovery in the U.S. is bolstering exports. Meanwhile unemployment climbed to 5.4% in April from 4.8% in March as the labor force increased by 888,000.

In Sub-Saharan Africa, South Africa’s producer price inflation accelerated to an annual 5.5% in April from 3.7% in March, on higher gasoline and food prices.