British politics
Home and dry, just
Gordon Brown wins a Pyrrhic victory
IN THE end, Britain’s government was better at getting MPs to vote for its counter-terrorism bill than at making the case for it in the first place. Wavering backbenchers were seduced by phone calls from Gordon Brown, the usually aloof prime minister. David Miliband, the foreign secretary, was recalled from a trip to the Middle East. Some suggest that generous boondoggles were thrown at (among others) Northern Ireland’s Democratic Unionist Party, whose nine MPs in effect decided the vote.
Whatever the means, though, the end was that on Wednesday June 11th the House of Commons voted by a margin of 315 to 306 to extend the maximum period a terrorist suspect may be detained without charge from 28 to 42 days. The House of Lords could yet reject the bill; if it did, the government would most likely invoke the Parliament Act to force through the legislation.
The most extraordinary fallout from the vote came on Thursday, when David Davis, the shadow home secretary, resigned as an MP. A former candidate for the Conservative Party leadership, Mr Davis says he will stand in a by-election in his constituency on a principled position of opposition to 42 days specifically and the "slow strangulation" of civil liberties generally. Whispers abound of a rift with David Cameron, the Tory leader, over whether a future Conservative government would repeal the 42-days legislation (Mr Davis was keen; Mr Cameron less so). Dominic Grieve, who had been the shadow attorney-general, will replace Mr Davis.
Whatever the Tories’ new-found troubles, and though Mr Brown has avoided the defeat suffered by Tony Blair, his predecessor, when he tried to extend the limit to 90 days in 2005, this is far from an unalloyed triumph for him. For one thing, the concessions to hesitant MPs are so hefty that it is unclear whether the bill is a meaningful increase in police powers at all. For example, Parliament would debate and vote on any extension beyond 28 days within a week of a request from the home secretary. Yet if enough information were provided to make parliamentary scrutiny significant it could also prejudice any trial that resulted. David Cameron, the Conservative leader, calls it “ineffective authoritarianism”.
Mr Brown has also alienated liberal opinion at a time when his stock is already low among sections of the left due to unpopular income-tax changes. Not that opponents of the legislation were all unworldly ideologues. The director of public prosecutions, a former attorney-general, a former lord chancellor and Parliament’s Joint Committee on Human Rights all regard the current 28-day limit as sufficient. On June 6th even John Major, the usually circumspect former Tory prime minister, registered his dismay at the proposal.
Moreover, if ministers hoped the Tories would pay an electoral price for opposing a measure that is popular in the country, they are likely to be disappointed. An ICM poll published on June 8th showed 65% of the public backing the government on 42 days. But it also showed the Tories narrowly leading on the issue of terrorism, suggesting that their reputation as the party of national security, as well as their support for alternatives to 42 days (such as post-charge questioning and the use of intercept evidence), shields them from taunts of weakness. It may be that, even when they agree with him, many voters have just stopped listening to Mr Brown.
Supporters of the bill, who include Lord Carlile, the independent statutory reviewer of anti-terrorism laws, and many police chiefs, insist that the bill is necessary. Terrorism investigations can be stupefyingly complex: thousands of gigabytes of encrypted data must be studied and plots tracked across different continents. The fact that so far no case has required more than 28 days is, they say, irrelevant: better to legislate this reserve power now than to wait for a crisis to justify it.
Many of those unmoved by these arguments will suspect that Mr Brown’s motives were political. If so, it was a short-sighted gambit. A victory on a matter of national security will be enough to mute, temporarily, speculation about a leadership putsch against him. But a longer-term reversal of his party’s grim fortunes—on Tuesday Populus became the second polling firm in recent weeks to show a Tory lead of 20 percentage points or more—will require rather more. The revelation on Wednesday that a senior intelligence official working in the Cabinet Office had left secret documents about Iraq and al-Qaeda on a train was an unpromising start.
Commentary by Andy Mukherjee
June 12 (Bloomberg) -- The 8.1 percent, one-day slump in China's key stock index this week shows investors are shifting their gaze away from food prices -- which are stabilizing -- to other sources of inflation simmering below the surface.
The biggest drop in the equity market in 16 months came just as information leaked that a government report to be released today will show a bigger slowdown in the pace of consumer-price gains than expected by all but three of the 19 economists surveyed by Bloomberg News.
An annual inflation rate of 7.7 percent in May, 100 basis points lower than the 12-year high recorded in February, is ``certainly good news,'' says Michael Pettis, a Peking University finance professor. Yet, ``it shouldn't give too much comfort to the pro-growth camp in China,'' Pettis says.
The good news on the inflation front was drowned by the hawkish monetary tightening that was announced over the weekend when the People's Bank of China ordered banks to set aside a further 1 percent of their deposits as reserves, seeking to limit a liquidity buildup, one of the biggest sources of future inflation in the world's fourth-largest economy.
``The liquidity threat remains copious,'' says Dwyfor Evans, a macro strategist at State Street Global Markets in Hong Kong.
According to media reports, the People's Bank of China added $75 billion to its foreign-exchange reserves in April, creating local money in the process. Some of those funds may get exported out of the economy by China Investment Corp., the sovereign wealth fund.
Bank Credit
The money that remains in the local banking system and is not mopped up by the sale of government bonds ``will make its way to domestic credit, which has risen consistently over recent years,'' Evans says. ``This opens up a potential monetary source of inflation.''
The biggest weapon that Chinese policy makers have against runaway bank credit is what they call ``window guidance.'' The monetary authority describes the process as one in which it tells banks to ``encourage growth in some sectors while discouraging growth in others.''
This kind of moral suasion does produce immediate results, and it may already be under way. However, past experience suggests the credit rationing is usually not carried on for too long because it tends to slow the economy sharply, something that doesn't go down well in China.
Money supply in China, growing at an annual pace of about 17 percent, remains a key concern.
It isn't, however, the only one.
PPI and Energy
China's producer-price index rose 8.2 percent from a year earlier in May, the quickest pace in more than three years. That announcement caused China's benchmark stock index to fall 2 percent yesterday, taking the total decline so far in 2008 to almost 38 percent, making China the third-worst-performing market in the world this year after Vietnam and Iceland.
Rising costs of coal, steel and labor are crimping corporate profitability. Pretax-profit growth for publicly traded companies slowed to 17 percent in the first quarter from 49 percent in 2007, says Jing Ulrich, chairwoman of China equities at JPMorgan Chase & Co. in Hong Kong.
The future may hold even more pain because at present Chinese companies don't have to bear the true cost of energy.
``Price controls on refined oil have kept a lid on the impact of higher global oil prices on producer prices,'' Ulrich says. ``The relaxation of price controls would open the door to further increases in the producer price index and the consumer price index.''
Demand Pull
The price controls and subsidies ``can't be open-ended commitments,'' according to a May 23 research report by Peter Redward, head of emerging Asia research at Barclays Capital Inc., and two of his colleagues. ``The government budget is, ultimately, constrained while price controls create hoarding/shortages and general resource misallocation.''
The economy, which expanded 10.6 percent from a year earlier in the first quarter, is overheating. ``Demand-pull pressures exist but are largely masked by price controls and subsidies,'' say Redward and his colleagues. That's also the impression one gets when looking at the number of consumption items in China whose prices are either falling or not rising as fast as they are elsewhere in the world -- such as urban transportation.
The prospects for equity investors aren't very encouraging. ``Higher structural core inflation may be an ongoing concern for policy makers, and investors in the Chinese economy,'' says JPMorgan's Ulrich.
Three-Stage Proposal
The Chinese currency will need to strengthen markedly to lower the cost of imported goods: Barclays analysts estimate that for every 1 percent strengthening of the yuan, consumer-price inflation in China is reduced by 0.1 percent to 0.15 percent.
So what could China do to walk out of its money glut and the attendant inflationary spiral?
Morris Goldstein and Nicholas Lardy, senior fellows at the Peterson Institute for International Economics in Washington, have a suggestion.
They say China should immediately revalue the yuan by 15 percent and then allow it to appreciate by 6 percent to 8 percent annually for the next several years. In the third stage, which will be reached in four to six years, China can allow its currency to float almost freely.
It may be the right strategy to adopt, especially with Chinese exports growing strongly in May. Yuan revaluation is the bullet that China must bite; and soon.
June 12 (Bloomberg) -- Lehman Brothers Holdings Inc. replaced Chief Financial Officer Erin Callan and President Joseph Gregory after the firm's efforts to shore up capital and shed unwanted assets failed to quell speculation about additional losses and stem a 60 percent plunge in the stock this year.
Callan, 42, who has been a prominent spokeswoman for the bank since she was promoted to CFO six months ago, will return to Lehman's investment banking unit and will be succeeded by co-chief accounting officer Ian Lowitt, the New York-based firm said today in a statement. Herbert ``Bart'' McDade, the 48-year-old head of the equities business worldwide, will replace Gregory.
Lehman's future as in independent firm has been in question this week as the shares continued to sink after the company posted the first quarterly loss since it went public in 1994 and raised $6 billion to help survive the collapse of the mortgage market. Analysts at Merrill Lynch & Co., Wachovia Corp and Oppenheimer & Co. cut their ratings on the stock this week.
``The new investors who bought in this week probably asked for some heads to roll,'' said Peter Sorrentino, a senior portfolio manager at Huntington Asset Advisors, which oversees $13 billion and invests in options to buy and sell Lehman shares. ``But when you don't bring a proven captain to turn things around, it's more like re-arranging the deck chairs on the Titanic. This might be too little at this point.''
Lehman, the fourth-biggest U.S. securities firm, fell 28 cents, or 1.2 percent, to $23.47 at 10:39 a.m. in New York Stock Exchange composite trading.
Cayne, Mack
Fuld's decision to push aside top executives amid the credit- market turmoil mirrors steps taken by his counterparts at rival Wall Street firms.
Bear Stearns Cos. CEO James ``Jimmy'' Cayne ousted co- president Warren Spector in August, and wound up losing his own post and then his firm to a takeover by JPMorgan Chase & Co. Morgan Stanley CEO John Mack has fared better since firing Co- President Zoe Cruz, whom he held responsible for the bank's mortgage-related losses.
Gregory ``has been my partner for over 30 years and has been a driving force behind who we are today and what we have achieved as a firm,'' Chief Executive Officer Richard Fuld, 62, said in the statement. ``This has been one of the most difficult decisions either of us has ever had to make.''
Callan got high marks from investors and analysts during her first earnings conference call after being appointed in December for being direct and open about the firm's finances. Her credibility was damaged when she had discussions with hedge fund manager David Einhorn, who then publicly accused her of changing her story about one of Lehman's private equity investments after he pressed on some details. Einhorn has bet that Lehman shares will fall.
`Sacrificial Lambs'
Gregory, six years younger than Fuld, ran the day-to-day operations of the firm and hasn't been involved with trading, which is Fuld's strength.
McDade, who ran the fixed-income division for three years before being appointed to head equities, is considered by current and former Lehman executives to be a leading candidate to succeed Fuld. The equities division grew during his tenure to account for one third of the firm's revenue, as Lehman became the largest trader of stocks on the London Stock Exchange and Euronext.
Fuld ``was forced by his board to offer up sacrificial lambs,'' George Ball, chairman of Houston-based brokerage Sanders Morris Harris Group, said in a Bloomberg TV interview. ``That is what they do on Wall Street.''
June 12 (Bloomberg) -- Crude oil fell for the third time this week as a strengthening U.S. dollar reduced the appeal of commodities as an inflation hedge.
Oil futures have more than doubled in 12 months as investors sought refuge from a declining dollar. The currency gained against the euro and yen today on signs a rebound in U.S. retail sales will support the Federal Reserve's case for raising interest rates to curb inflation.
``These moves that have been caused by the dollar underscore the enormous weight the financial community has in the oil market,'' said Rick Mueller, director of oil practice at Energy Security Analysis Inc. in Wakefield, Massachusetts. ``Our little oil patch is much smaller than the equity or bond markets.''
Crude oil for July delivery fell $3.28, or 2.4 percent, to $133.10 a barrel at 10:36 a.m. on the New York Mercantile Exchange. Futures reached a record $139.12 a barrel on June 6.
U.S. retail sales rose 1 percent in May, twice as much as forecast, as Americans used their tax rebates to shop at electronics and department stores, and record gasoline prices swelled service-station receipts, a Commerce Department report today showed.
The dollar increased 0.8 percent to $1.5425 per euro at 10:51 a.m. in New York, from $1.5552 late yesterday. The U.S. currency rose 1 percent to 107.92 yen, from 106.96.
``The dollar has played a very important role in the daily move of the oil market,'' said Eric Wittenauer, an analyst at Wachovia Securities in St. Louis. ``At this point I don't see the market moving much lower because commodities, in particular oil, still compare favorably to stocks.''
Stock Indexes
Rising returns have also spurred investment in commodities. Oil in New York has gained 39 percent this year, as the Standard & Poor's 500 Index dropped 8.2 percent and the Dow Jones Industrial Average declined 7.8 percent.
Saudi Aramco, the world's largest state oil company, will supply customers in Asia, Europe and the U.S. with full volumes of the crude oil they requested under their monthly loading programs for July, refinery officials said today. Earlier this year, refiners in Europe and the U.S. received less than the full contracted volumes.
Saudi Arabian Oil Minister Ali al-Naimi said last month, when President George W. Bush was visiting the kingdom, that Saudi Arabia would raise output by 300,000 barrels a day to 9.45 million barrels a day in June in response to rising demand from its customers.
Jeddah Meeting
The kingdom this week called for a meeting between producers, consumers and financial institutions to discuss the increase in oil prices, which it called ``unjustified.'' Talks will be held in Jeddah, Saudi Arabia, on June 22.
Brent crude oil for July settlement declined $3.01, or 2.2 percent, to $132.01 a barrel on London's ICE Futures Europe exchange. Prices climbed to a record $138.12 on June 6.
US Airways Group Inc. is considering cutting the number of available seats and adding fees as record fuel prices boost costs this year by about $2 billion, executives of the carrier said yesterday. Fuel has become the industry's largest cost, passing labor, and has erased profits for most carriers.
AMR Corp.'s American Airlines, UAL Corp.'s United Airlines, Continental Airlines Inc. and Delta Air Lines Inc. have announced reductions of at least 11 percent of capacity which will begin later this year.
``The oil market is also not a bad bet because there is little excess spare capacity as global demand grows,'' Wittenauer said. ``In the developed world we are starting to see some changes in consumption patterns but it's the developing world that's still the backbone of demand growth.''
Global Demand
Global oil consumption will probably increase 1 million barrels to 86.38 million barrels a day this year, the U.S. Energy Department said on June 10.
A proposed strike by Chevron Corp. employees in Nigeria is threatening to halt as much as 350,000 barrels a day of crude production and 14 million cubic feet a day of natural gas from the company's 32 fields in the West African country.
Nigeria's senior white-collar oil workers' union is making a final effort to avoid a strike during talks with Chevron's local unit, an official said.
``The talks are not going well,'' said Lumumba Okugbawa, deputy secretary general of Petroleum & Natural Gas Senior Staff Association of Nigeria, or Pengassan. The strike might come as early as tomorrow should talks break down, he said.
June 12 (Bloomberg) -- The dollar strengthened to a one- week high against the euro as U.S. retail sales advanced in May more than economists forecast, raising speculation the Federal Reserve will increase borrowing costs this year.
The U.S. currency rose against all of the other major currencies except the Mexican peso. It increased 2.4 percent versus the euro this week as Fed Chairman Ben S. Bernanke said the risk of a deeper economic slowdown is receding. An index gauging the dollar against the currencies of six U.S. trading partners rose to the highest level since February.
``The consumer refuses to die,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``That's helpful for the dollar.''
The dollar increased 0.9 percent to $1.5420 per euro at 10:41 a.m. in New York, from $1.5552 yesterday. It touched $1.5380, the highest level since June 5. The U.S. currency rose 0.9 percent to 107.91 yen, from 106.96. The euro traded at 166.43 yen, compared with 166.33.
The Australian dollar fell against all of the other major currencies after the Bureau of Statistics reported that employers unexpectedly eliminated jobs last month. The Aussie dropped 1.3 percent to 93.39 U.S. cents and decreased 0.5 percent to 100.75 yen.
South Africa's rand weakened 0.9 percent to 8.09 against the dollar as the central bank raised its target lending rate by a half-percentage point to 12 percent, less than the 1 percent increase forecast by 18 of 26 economists surveyed by Bloomberg. The rand has fallen 6.7 percent versus the dollar since May 30.
Mexican Peso
The Mexican peso was the only major currency to gain versus the dollar, getting a boost from the U.S. retail report. It increased 0.4 percent to 10.3969 per dollar. The U.S. buys about 80 percent of Mexico's exports.
U.S. retail sales increased 1 percent in May as Americans used their tax rebates to shop, the Commerce Department reported. That following a revised 0.4 percent advance the prior month. The median forecast of 82 economists surveyed by Bloomberg News was for a 0.5 percent increase.
``The key downside risk to the dollar was the consumer,'' said David Watt, senior currency strategist at RBC Capital Markets in Toronto. ``The tax rebates remove that risk for a little while. It's certainly bullish for the dollar in the short term. But it's a Band-Aid solution.''
Traders bet Fed policy makers are more likely to raise interest rates in August. Fed funds futures on the Chicago Board of Trade show a 60 percent probability the central bank will increase borrowing costs by at least a quarter-percentage point, compared with a 7 percent chance a week ago.
Bernanke on Economy
``The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,'' Bernanke said June 9. ``The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations.''
The Fed has lowered its benchmark rate to 2 percent from 5.25 percent since September to prevent widening subprime losses from stalling economic growth. The European Central Bank has kept its main refinancing rate at a six-year high of 4 percent since last June.
Speculation that Irish voters may not support a new European Union governing treaty in a referendum today weighed on the euro. A defeat would kill the Lisbon treaty, which requires unanimous approval of all 27 EU nations.
The U.S. currency was supported by speculation that finance ministers from the Group of Eight countries might make comments discouraging the currency's decline at two days of meetings in Osaka, Japan, this weekend.
Lagarde on G-8
G-8 officials will urge emerging nations to stop subsidizing oil consumption and press regulators, notably in the U.S., to look into the trading that has driven crude oil to a record, French Finance Minister Christine Lagarde said in an interview on RTL radio. The G-8 comprises the U.S., Japan, Germany, the U.K., France, Italy, Canada and Russia.
The euro's decline was limited as a report showed European industrial production unexpectedly rose in April. Gains in France and Italy countered weakness in Germany, the region's largest economy.
Industrial output in the 15 nations that share the euro increased 0.9 percent in April from the previous month, the European Union's statistics office said in Luxembourg today. The median forecast of 35 economists surveyed by Bloomberg News was for no change.
The euro rose last week the most against the dollar since late March after ECB President Jean-Claude Trichet said policy makers may increase the main refinancing rate by a quarter- percentage point in July to curb inflation, which is running at the fastest pace in 16 years.
ECB Executive Board member Lorenzo Bini Smaghi told reporters today in Milan that policy makers ``only sent indications for July, not beyond.'' His comment was similar to that of ECB executive board member Juergen Stark on June 10. Pricing of Euribor December futures indicates traders are betting the bank will raise rates at least two times by then.
June 12 (Bloomberg) -- Retail sales in the U.S. rose twice as much as forecast in May as tax-rebate checks spurred Americans to shop at electronics and department stores, helping them cope with record gasoline prices.
Purchases climbed 1 percent, the most since November, following a 0.4 percent gain the prior month that was previously reported as a drop, the Commerce Department said in Washington. Purchases excluding gasoline increased 0.8 percent last month.
The figures show the more than $56 billion of rebates distributed so far are benefiting retailers such as Wal-Mart Stores Inc., Toys ``R'' Us Inc. and Costco Wholesale Corp. and helping keep the economy from shrinking. Treasuries slumped as the report reinforced investors' expectations for the Federal Reserve will raise interest rates later this year.
``It's just amazing the American consumer's resilience in the face of everything negative,'' Stuart Hoffman, chief economist at PNC Financial in Pittsburgh, said in an interview with Bloomberg Television.
The decline in Treasuries sent benchmark 10-year note yields rising to 4.17 percent at 9:18 a.m. in New York, from 4.07 percent late yesterday. The dollar gained 0.9 percent to $1.5410 per euro. The Standard & Poor's 500 department-stores index gained 4 percent.
Import Prices
A separate report today showed that prices of goods imported to the U.S. rose 2.3 percent in May from the previous month, less than economists had forecast.
Initial claims for unemployment benefits rose to 384,000 last week from 359,000 the prior week, the Labor Department also reported today.
Today's sales report showed sales at every merchant category increased last month, except for miscellaneous retailers. Excluding autos, sales rose 1.2 percent, also exceeding the median forecast of a 0.7 percent rise.
Wal-Mart Stores Inc., the world's largest retailer, had a 3.9 percent jump in same-store sales last month, as consumers bought cut-rate staples and took advantage of promotions linked to the tax rebates.
``Many of our customers need to live from paycheck to paycheck,'' Wal-Mart Chief Financial Officer Thomas Schoewe told reporters last week. ``The amount they're spending on basics is a big portion of the total basket.''
Toys ``R'' Us, the largest U.S. toy-store chain, this week said it posted a narrower first-quarter loss as sales for the three months that ended May 3 climbed 5.3 percent to $2.72 billion. Costco, the largest U.S. warehouse-club chain, said last week May sales at stores open at least a year rose 9 percent, beating analysts' estimates.
Bernanke Assessment
Today's figures bear out Fed Chairman Ben S. Bernanke's assessment this week that risks of a ``substantial downturn'' have receded.
Morgan Stanley economists raised their estimate for second- quarter economic growth to 0.5 percent, from a 0.2 percent contraction, after the report.
Bernanke, Fed Vice Chairman Donald Kohn and at least three district-bank presidents this week warned that the central bank must keep inflation expectations in check. The remarks stoked investors' bets on a rate boost in the second half of 2008.
Traders see a 94 percent chance the Fed will raise its main rate from 2 percent by the end of the September meeting, futures contracts show.
Purchases of electronics increased 0.7 percent and sales at department stores jumped 1.2 percent, the most since March 2007. Building-material retailers sold 2.4 percent more than in the prior month.
Car Sales
Sales at automobile dealerships and parts stores increased 0.3 percent after dropping 2.1 percent in April. That contrasts with industry figures that showed cars and light trucks sold at an annual pace of 14.3 million annual pace in May, the fewest in almost a decade, as sales of pickup trucks and sport-utility vehicles plummeted.
The surge in fuel costs is ``a structural change, not just a cyclical change,'' General Motors Corp. Chief Executive Officer Rick Wagoner said June 3 as Detroit-based GM said it would close four North American pickup and large SUV factories and focus more on making small, fuel-efficient cars.
Filling station sales surged 2.6 percent in May. Regular gasoline reached as high as $3.98 a gallon in late May, about 53 cents more than the average for the prior month, according to AAA.
GDP Impact
Excluding autos, gasoline and building materials, the retail group the government uses to calculate gross domestic product, sales climbed 0.8 percent, after a 1 percent increase the prior month. The government uses data from other sources to calculate the contribution from the three categories excluded.
Most economists aren't convinced the jolt from the stimulus checks will last.
``This good report suggests the tax rebates are having an impact,'' Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, said in a Bloomberg Radio interview. ``As these tax-rebate effects fade, the weaker job market is going to take over.''
The Fed's Beige Book regional business survey yesterday indicated the economy was ``generally weak'' in late April and May as consumer spending slowed. Still, five of the 12 districts reported that growth was ``stable,'' an increase from three in the previous survey, issued April 16.
Spending may grow at an annual rate of 0.8 percent this quarter, down from a 1 percent pace in the prior quarter and the weakest since the first three months of 1995, according to the median estimate of economists surveyed by Bloomberg News this month.
The bulk of the tax rebates will probably be spent from July through September, giving third-quarter growth a lift, before the economy decelerates again in the last three months of the year, the Bloomberg poll also showed.
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