Wednesday, June 11, 2008

Global Confidence Declines as Central Banks Signal Higher Rates

Global Confidence Declines as Central Banks Signal Higher Rates

By Joshua Gallu

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Confidence in the global economy fell in June as central banks signaled interest rates may be heading higher, a survey of Bloomberg users on five continents showed.

The Bloomberg Professional Global Confidence Index fell to 21 from May's 22.7, with respondents becoming more pessimistic in every region. A level below 50 indicates negative sentiment. The measure had rebounded in the previous two months after hitting a low of 13.1 in March.

‘‘There's been a shift in focus to the inflation beast,'' said Martin Van Vliet, an economist at ING Bank in Amsterdam who took part in the survey. ‘‘You can clearly see a coordinated verbal response from central banks highlighting the rise in long- term inflation expectations.''

Investors increased bets on higher borrowing costs after policy makers from the U.S., Latin America, Europe and Canada focused on the threat of rising prices rather than weakening growth. European Central Bank President Jean-Claude Trichet said on June 5 the bank may raise rates as soon as next month after a report showed inflation hit a 16-year high.

The Bloomberg Professional Confidence Survey collated the responses of 4,533 Bloomberg users from Vatican City to New York on economic conditions in their region and the world. Participants in the poll, conducted from June 2 to June 6, were also asked about the outlook for their currencies, bonds, stocks and interest rates in the next six months.

Fed Increase Seen

U.S. investors, analysts and traders increasingly expect the Fed to lift rates, with the index rising to 60.4 from 51.3. After lowering the key rate by 325 basis points to 2 percent since September, Fed Chairman Ben Bernanke signaled June 9 that borrowing won't get any cheaper.

Policy makers will ‘‘strongly resist'' any surge in inflation expectations, he said, adding that the risk of a ‘‘substantial downturn'' in the world's largest economy receded last month.

Higher rates in the U.S. may herald an end to the dollar's decline. Survey respondents in Germany, Italy and Spain predict the euro will retreat in the next six months. The U.S. currency has fallen 14 percent against the euro in the past year.

Bloomberg users also forecast higher European borrowing costs. Those surveyed in France, Germany and Spain predict the ECB will raise rates in the next 6 months. France's index jumped the most, to 59.2 from 33.2 the previous month.

‘Gradual' Shift

‘‘We're entering a phase of higher interest rates,'' said Jose Carlos Diez, chief economist at Intermoney SA in Madrid, who took part in the survey. ‘‘It won't be abrupt, it'll be gradual.''

Record costs for commodities such as oil, natural gas, wheat, corn and rice are driving inflation above central banks' comfort zones and are replacing the global credit squeeze as the primary concern of policy makers. The International Monetary Fund is forecasting the fastest global inflation in 13 years for 2008

While the ECB left its key interest rate at 4 percent last week, Trichet said a rate increase next month is ‘‘not excluded.'' The Swiss National Bank is likely to follow suit, according to the survey. The Swiss index on rate expectations rose to 61.2 this month from a neutral 50 in May.

Banks and securities firms have posted about $392 billion in asset writedowns and credit losses following the collapse of the market for mortgages aimed at U.S. borrowers with poor credit histories.

‘Still Jittery'

‘‘It may be that the worst is behind us, but nobody's seeing a pick-up any time soon in financial markets,'' said Aurelio Maccario, co-head of European Economics at UniCredit Markets & Investment Banking in Milan. ‘‘Markets are still jittery.''

Stock markets, which rebounded in April, have renewed their slide as the U.S. economy falters. The Dow Jones 600 Index has fallen 5 percent since the beginning of the month and unemployment in the world's largest economy jumped the most in more than two decades in May.

Bloomberg users were gloomier in June about stock market performance in the coming six months. In the U.K., the gauge fell to 25.9 from 31.4 last month.

German-led export growth in the euro region may falter should Asian economies stumble. The Asian gauge for confidence in the global economy fell to 19.4 from 21.0, while the index for the region declined to 31.8 from 37.3.

Gloom in Spain

Bloomberg users in Spain, where the collapse of a decade-long housing boom is undermining economic growth, were the most pessimistic about their national outlook among all the survey participants. The gauge fell to 2.6 in June after 4.9 in the previous month.

Participants in Brazil remained the most optimistic about their economy, even as the gauge dipped to 76.2 from 86.6. Brazil, the world's largest emerging-market debtor for decades, was raised to investment grade on April 30 by Standard & Poor's as growth in Latin America's biggest economy accelerates and the nation reduces debt.

The next survey will be conducted July 7 to July 11.

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