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June 27, 2008

Just the Facts
by Doug Noland

For the week, the Dow was pounded for 4.2% (down 14.5% y-t-d), and the S&P500 sank 3.0% (down 12.9%). Economically-sensitive issues were under pressure, with the Transports hammered for 5.5% (up 7.4%) and the Morgan Stanley Cyclicals 5.4% (down 14.2%). The Utilities declined 2.7% (down 7.3%), and the Morgan Stanley Consumer index fell 2.9% (down 12.1%). The small cap Russell 2000 sank 3.8% (down 8.9%) and the S&P400 Mid-Caps 3.6% (down 4.1%). The NASDAQ100 fell 3.6% (down 11.0%), and the Morgan Stanley High Tech index dropped 4.0% (down 10.1%). The Semiconductors declined 3.7% (down 9.5%), the Street.com Internet Index 4.1% (down 9.3%), and the NASDAQ Telecommunications index 7.3% (down 7.6%). The Biotechs lost 1.7% (down 6.5%). The Broker/Dealers were hit for 5.6% (down 28.2%) and the Banks 5.5% (down 33%). With Bullion surging $26, the HUI gold index rallied 8.6% (up 10.2%).

One-month Treasury bill rates fell 12 bps this week to 1.37%, and 3-month yields dropped 17 bps to 1.66%. Two-year government yields sank 27 bps to 2.63%. Five-year T-note yields dropped 25 bps to 3.35% and 10-year yields fell 20 bps to 3.97%. Long-bond yields declined 21 bps to 4.52%. The 2yr/10yr spread widened six to 133 bps. The implied yield on 3-month December '09 Eurodollars sank 21 bps to 4.07%. Benchmark Fannie MBS yields fell 14 bps to 5.81%. The spread between benchmark MBS and 10-year Treasuries widened 6 bps to 185, the high since March 14th. The spread on Fannie's 5% 2017 note widened 7 bps to 76 bps, and the spread on Freddie's 5% 2017 note widened 6 bps to 75 bps - both wides since March 14th. The 10-year dollar swap spread widened 2 to 70.25. Corporate bond spreads were generally wider. An index of investment grade bond spreads widened 5 to 125 bps, while an index of junk bond spreads was little changed at 545 bps.

Investment grade issuance included Rockies Express $1.3bn, National Rural Utility Co-op $1.3bn, and Cameron International $750 million.

Junk issuers included Macy's $650 million, BE Aerospace $600 million, Quicksilver $475 million, CW Media $360 million, Linn Energy $255 million, and Atlas Pipeline $250 million.

Convert issuance this week included Evergreen Solar $325 million.

International dollar bond issuance included Rio Tinto $5.0bn, Intelsat $3.5bn, Telesat Canada $900 million, Vedanta Resources $1.25bn, and GS Caltex $300 million.

June 24 - Bloomberg (Hugh Collins): "Mexican peso bonds declined, pushing yields to a two-year high, after a government report showed inflation increased almost twice as much as forecast by economists in the first half of June. Yields on benchmark 10% bonds due December 2024 rose 8 bps... to 9.10%..."

German 10-year bund yields declined 11 bps to 4.52%. The German DAX equities index fell 2.4% (down 20.4% y-t-d). Japanese 10-year "JGB" yields sank 14.5 bps to 1.61%. The Nikkei 225 dropped 2.9% (down 11.5% y-t-d and 24.1% y-o-y). Emerging markets were again under pressure. Brazil's benchmark dollar bond yields jumped 16 bps to 5.77%. Brazil's Bovespa equities index slipped 0.5% (up 0.7% y-t-d and 18.8% y-o-y). The Mexican Bolsa declined 0.8% (down 0.8% y-t-d). Mexico's 10-year $ yields jumped 20 bps to 5.46%. Russia's RTS equities index fell 2.8% (up 1.2% y-t-d). India's Sensex equities index sank 5.3%, boosting y-t-d losses to 32%. China's Shanghai Exchange index fell 2.9%, pushing 2008 losses to 48%.

Freddie Mac 30-year fixed mortgage rates rose 3 bps to a 9-month high 6.45% (down 22bps y-o-y). Fifteen-year fixed rates increased 2 bps to 6.04% (down 30 bps y-o-y). One-year adjustable rates jumped 8 bps to 5.27% (down 38bps y-o-y).

Bank Credit dropped $24.8bn to $9.339 TN (week of 6/18). Bank Credit has now expanded only $126bn y-t-d, or 2.9% annualized. Bank Credit posted a 52-week rise of $754bn, or 8.8%. For the week, Securities Credit rose $8.5bn. Loans & Leases sank $33.3bn to $6.865 TN (y-o-y gain of $585bn, or 9.3%). C&I loans added $0.4bn, with one-year growth of 18.7%. Real Estate loans sank $20.2bn (up 2.4% y-t-d). Consumer loans rose $5.0bn, while Securities loans declined $1.8bn. Other loans sank $16.8bn. On the Liabilities side, Deposits dropped $19.6bn.

M2 (narrow) "money" supply added $2.4bn to $7.690 TN (week of 6/16). Narrow "money" has expanded $227bn y-t-d, or 6.6% annualized, with a y-o-y rise of $436bn, or 6.0%. For the week, Currency added $0.5bn, while Demand & Checkable Deposits slipped 0.4$bn. Savings Deposits gained $7.9bn, while Small Denominated Deposits declined $0.9bn. Retail Money Funds fell $4.7bn.

Total Money Market Fund assets (from Invest Co Inst) rose $14bn last week to $3.455 TN, increasing the y-t-d rise to $342bn, or 22.9% annualized. Money Fund assets have posted a one-year increase of $919bn (36.2%).

Asset-Backed Securities (ABS) issuance this week slowed to $2.6bn. Year-to-date total US ABS issuance of $106bn (tallied by JPMorgan's Christopher Flanagan) is running at 27% of the comparable level from 2007. Home Equity ABS issuance of $303 million compares with 2007's $198bn. Year-to-date CDO issuance of $14bn compares to the year ago $225bn.

Total Commercial Paper increased $1.1bn to $1.753 TN. CP has declined $471bn over the past 46 weeks. Asset-backed CP fell another $5.0bn last week (46-wk drop of $447bn) to $748bn. Over the past year, total CP has contracted $390bn, or 18.2%, with ABCP down $412bn, or 35.5%.

Fed Foreign Holdings of Treasury, Agency Debt last week (ended 6/25) increased $5.329bn to a record $2.322 TN. "Custody holdings" were up $266bn y-t-d, or 26% annualized, and $316bn year-over-year (17.6%). Federal Reserve Credit declined $2.8bn to $875bn. Fed Credit has increased $1.1bn y-t-d and $27bn y-o-y (3.2%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $1.389 TN y-o-y, or 25%, to $6.825 TN.

Global Credit Market Dislocation Watch:

June 25 - Bloomberg (Sree Vidya Bhaktavatsalam): "Mohamed El-Erian, co-chief executive officer of Pacific Investment Management Co., said established markets led by the U.S. and U.K. have lost credibility in the credit crisis sparked by the default of subprime mortgages. 'We are living through the unthinkable,' El-Erian said... 'The list of casualties is very different. What has suffered most is the credibility of the most sophisticated financial systems in the world.'"

June 23 - Bloomberg (Shannon D. Harrington): "More than 2,000 collateralized debt obligations made bets on the creditworthiness of bond insurers and some now may face a fresh wave of downgrades. Ratings warnings may be on the horizon for so-called synthetic CDOs linked to corporate bonds after Moody's... last week stripped MBIA Inc. and Ambac Financial Group Inc. of their top insurer ratings and slashed units of FGIC Corp. and Security Capital Assurance Ltd. to below investment grade... The insurers were common components of synthetic CDOs, which pay noteholders from the fees generated by credit-default swaps linked to a basket of companies."

June 27 - Bloomberg (Neil Unmack): "Deerfield Capital Management LLC and Declaration Management & Research LLC pushed the amount of collateralized debt obligations in default to $220 billion, according to Wachovia... Downgrades to mortgage bonds and their underlying securities triggered so-called events of default on 200 CDOs since October... Wachovia analysts wrote... The failures are equivalent to 36% of CDOs that include U.S. asset-backed debt sold since 2003, and 19.3% of all CDOs..."

June 23 - Bloomberg (John Glover): "Downgrades on securities guaranteed by MBIA Inc. and Ambac Financial Corp. may only 'scratch the surface' of rating cuts after the bond insurers lost their top grades, CreditSights analysts said. As much as $1.28 trillion of debt is covered by the so- called monolines, CreditSights said, citing data compiled by International Swaps and Derivatives Association. S&P cut the ratings of 0.42% of securities included in Merrill Lynch & Co. indexes of asset-backed debt, the analysts said."

June 27 - Bloomberg (Christine Richard): "MBIA Inc. faces a 'tenuous situation' as the bond insurer seeks to cover payments and collateral calls on $7.4 billion of securities triggered by a credit-rating downgrade, Fitch Ratings analyst Thomas Abruzzo said. MBIA may need to tap assets pledged to back other commitments as it comes up with the money, potentially opening the company up for further downgrades..."

June 23 - Bloomberg (William Selway and Martin Z. Braun): "The municipal bond market may be hit by a new round of turmoil from Wall Street's credit crisis. Yields on floating-rate, tax-exempt debt insured by MBIA Inc. and Ambac Financial Corp. soared as high as 9% last week as investors dumped the securities after the companies' credit ratings were cut by Moody's... The spiraling debt costs are reminiscent of those that followed the collapse of the auction-rate securities market in February."

June 26 - Bloomberg (Sarah Mulholland): "Sales of bonds backed by commercial real estate loans may fall to the lowest level since at least 1996 as investor demand for the debt slumps. Commercial-mortgage backed securities offerings dropped to $12.2 billion in the first half... from about $137 billion in the same period of 2007... JPMorgan predicts sales will fall to $20 billion this year from the record $237 billion in 2007 and the lowest since 1996."

June 27 - Bloomberg (Patricia Kuo): "Corporate bond sales in dollars, euros and yen by Asian companies have plunged 60% this year, as rising inflation and slowing economic growth douse credit demand and push up borrowing cost."

June 27 - Bloomberg (Shelley Smith): "Company bond sales dropped to the lowest in almost six months in Europe this week... Sales slumped to 5.4 billion euros ($8.5bn)..."

June 27 - Financial Times (Julie MacIntosh): "The value of mergers and acquisitions in the first half sank by nearly a third from the same period last year to $1,860bn as the collapse of the buy-out boom prompted a steep drop in the number of high value deals."

June 23 - Bloomberg (Jonathan Keehner and Bradley Keoun): "Workers building the $3.5 billion Cosmopolitan Resort & Casino on the Las Vegas strip are getting used to their financiers from Deutsche Bank AG. Lately, the weekly visitors from 60 Wall Street have been critiquing plans that called for a black-and-white decor. 'They are considering changing the color palettes and finishes,' said Travis Burton, a vice president for lead contractor Perini Corp... Since January, when New York developer Ian Bruce Eichner defaulted on a $760 million loan, ...Deutsche Bank has been cutting Perini a monthly check for $70 million to continue construction, now in full swing with 2,800 workers on site and a dozen cranes towering overhead."

June 23 - Bloomberg (Jeremy R. Cooke): "New York's Empire State Development Corp. joined borrowers replacing auction-rate securities last week, as the amount of that kind of municipal debt shrinks to less than half what it was before the February collapse. States, localities and other municipal borrowers such as hospitals and colleges have converted, refinanced or said they will redeem at least $83.8 billion of their $166 billion in securities whose rates are set at dealer-run bidding, typically each week or month..."

June 26 - Bloomberg (Darrell Preston and Michael McDonald): "Yanping Cui... says she invested in auction-rate bonds last December at the urging of a broker at UBS... The same month, UBS told one of the issuers of those securities, a New Hampshire student-loan agency, that the $330 billion market was in danger of failing. That's exactly what happened in February... Cui was told she wouldn't get her money back until the market recovered. 'He said it's very safe and as liquid as possible,' Cui said of the advice she received... 'I'm so angry. That's my bloody money.'"

Global Inflation Turmoil Watch:

June 25 - Financial Times (Francesco Guerrera, Krishna Guha and Javier Blas): "The spectre of inflation returned to haunt the global economy on Tuesday as companies ranging from Dow Chemical of the US to South Korea's Posco unveiled sharp price rises to combat the soaring cost of energy and raw materials. The moves by Dow, the biggest chemical group in the US, and Posco, the world's fourth largest steelmaker, came as Charles Holliday, chief executive of... DuPont, warned of rising inflationary pressures... 'Inflation is here big time,' Mr Holliday told the Financial Times, adding that companies such as DuPont faced 'tremendous cost pressures' and had the 'obligation' to raise their prices to offset higher costs.'"

June 27 - Financial Times (Jonathan Birchall): "Soaring energy prices are forcing Procter & Gamble, the US consumer goods company that is the world's biggest, to rethink how it distributes products and to consider shifting manufacturing sites closer to consumers to cut its transport bill. Keith Harrison, head of global supply at P&G... said the era of high oil prices was forcing P&G to change. 'A lot of our supply chain design work was really developed and implemented in the 1980s and 1990s, when our capital spending was fairly high as a cost of capacity and oil was 10 bucks a barrel... I could say that the supply chain design is now upside down. The environment has changed... Transportation cost is going to create an even more distributed sourcing network than we would have had otherwise.'"

June 26 - Financial Times (Raphael Minder): "South Korean authorities yesterday sold as much as $1bn to shore up the won... underlining concerns in several Asian countries about weakening currencies in the face of oil-fuelled inflation... The government 'hopes the foreign currency trend will not interfere with stable prices', Choi Jong-ku, head of the finance ministry's international finance bureau... said... South Korea's predicament is shared by other Asian nations that have seen an abrupt currency reversal compound inflationary pressures..."

June 26 - Bloomberg (Beth Thomas and Shamim Adam): "Vietnam's consumer prices accelerated for a 16th month in June... Consumer prices gained 26.8% from a year earlier, the biggest jump since at least 1992..."

Currency Watch:

The dollar index dropped 0.9% to 72.36. For the week on the upside, the Swiss franc increased 2.6%, the South African rand 1.8%, the Danish krone 1.8%, the Euro 1.8%, the Norwegian krone 1.7%, and the Japanese yen 1.6%. On the downside, the South Korean won declined 0.3%, the Chilean peso 3.8%, the Colombian peso 9.1%, and the Zimbabwean dollar 22.1%.

Commodities Watch:

June 24 - Bloomberg (Stewart Bailey and Dale Crofts): "ArcelorMittal Chief Executive Officer Lakshmi Mittal said the world may be facing its first steel shortage in decades because of accelerating demand and a lack of investment... 'There is short supply; all steel companies are running at full capacity,' he said... 'We're facing for the first time in decades a potential shortage of steel.' Steel prices have surged as emerging markets including India and China build more bridges and houses and their increasingly affluent populations buy more cars and appliances... Hot-rolled steel sheet... climbed to an average $1,020 a ton in the U.S. in May from $850 in April... Prices have gained 76% since January and are about 86% higher than a year ago."

June 24 - Financial Times (Javier Blas and Rebecca Bream): "Global inflation fears deepened as Chinese steelmakers agreed to a record increase in annual iron ore prices in a move likely to boost the cost of cars, machinery and other products. Chinese millers agreed to pay Anglo-Australian miner Rio Tinto up to 96.5% more for their ore supplies this year, the largest ever annual increase... The rise - an average 85% - surpasses the record increase of 71.5% agreed in 2005..."

June 27 - Bloomberg (Feiwen Rong and Aya Takada): "Natural rubber futures in Tokyo climbed to the highest in 28 years as crude oil surged to a record for a second day, boosting production costs for the alternative synthetic product used to make car tires."

June 23 - Bloomberg (Yuriy Humber): "The uranium industry's worst year is about to collide with a nuclear construction program in India and China that rivals the ones undertaken during the oil crisis of the 1970s. The result is likely to be a 58% rebound in uranium to $90 a pound from $57 now, according to Goldman Sachs JBWere Pty and Rio Tinto Group... Uranium plunged 57% in the past year..."

Gold rose 2.9% to a one-month high $928, and Silver 1.2% to $17.71. July Crude jumped $4.85 to a record $140.21. July Gasoline gained 1.8% (up 41% y-t-d), and July Natural Gas added 0.6% (up 76% y-t-d). July Copper gained 1.2%. July Wheat rose 3.3% and Corn 4.4%. The CRB index increased 2.0% to a new record high (up 29.5% y-t-d). The Goldman Sachs Commodities Index (GSCI) jumped 2.8% to a new record (up 42% y-t-d and 77% y-o-y).

China Watch:

June 27 - Bloomberg (Li Yanping): "Chinese industrial companies' profits grew at half the pace of a year earlier on record oil and coal prices, increasing the likelihood that economic growth will continue to slow. Combined net income rose 20.9% to 1.09 trillion yuan ($160bn) through May... That was less than the 42.1% gain in the first five months of last year."

June 23 - China Knowledge: "China's domestic automobile sales may increase 15% to 10 million vehicles this year, mainly on the back of strong demand for passenger cars, said a senior official of the China Association of Automobile Manufacturers."

June 25 - Bloomberg (Chia-Peck Wong): "Hong Kong's new mortgages rose 21% in May as lower interest rates fueled demand for loans."

Japan Watch:

June 27 - Bloomberg (Mayumi Otsuma): "Japan's consumer prices rose at the fastest pace in a decade in May, hurting household budgets and complicating policy for the central bank as economic growth slows. Core prices, which exclude fruit, fish and vegetables, climbed 1.5% from a year earlier..."

India Watch:

June 26 - Bloomberg (Sumit Sharma): "India's five-year property boom is coming to an end as the supply of housing increases, borrowing costs rise and a stock market rout erodes buying power, according to executives at two mortgage lenders. Prices across India may drop as much as 15% in the coming months, said Keki Mistry, vice chairman of Housing Development Finance Corp., India's largest provider of home loans. Gagan Banga, chief executive of Indiabulls Financial Services Ltd., said prices may fall as much as 20%."

June 24 - Bloomberg (Anil Varma and Cherian Thomas): "India's central bank raised interest rates for the second time this month... The Reserve Bank of India increased the repurchase rate to 8.5 percent from 8%..."

Asia Bubble Watch:

June 25 - Bloomberg (William Sim): "South Korea's consumer confidence slumped to the lowest level in more than seven years as spiraling food and energy costs sapped people's spending power."

Latin America Watch:

June 24 - Bloomberg (Katia Cortes): "Brazilian bank lending expanded 2.6% in May from the previous month on higher demand from consumers to buy cars and home appliances on credit... Lending climbed 32.4% from the same month last year."

June 23 - Bloomberg (Katia Cortes and Heloiza Canassa): "Brazil's central bank now forecasts a higher current account deficit for this year as faster economic growth spurs companies' remittances of profits... The bank changed its 2008 forecast for the current account... to a deficit of $21 billion, from a previous forecast of $12 billion deficit. It also changed its 2008 foreign direct investment forecast to $35 billion, from $32 billion previously. 'The higher forecast is not worrying because it will be fully financed by the rising foreign direct investment,' [said] Altamir Lopes, head of the central bank's economic research department..."

Unbalanced Global Economy Watch:

June 25 - MarketNews International (Vicki Schmelzer): "Merrill Lynch's annual World Wealth Report... noted that global High Net Worth Individual wealth totalled $40.7 trillion in 2007, up 9.4% from 2006. To be considered a HNWI individual, you must have at least $1 million in financial assets. There were 10.1 million such individuals in 2007, an increase of 6.0% over the prior year... 'HNWI population gains were higher in the Middle East, Eastern Europe, and Latin America, expanding by 15.6%, 14.3% and 12.2% respectively,' Merrill said. The largest regional gains were seen in Latin America and the Middle East, where HNWI wealth grew by 20.4% and 17.5% respectively."

June 26 - MarketNews International): "Contrary to most forecasts, eurozone M3 money supply growth did not slow in May after a pick-up to 10.5% in April, remaining at a rapid double-digit annual pace for the 18th month in a row... Growth of loans to the private sector slowed for the fifth-straight month to 10.4% while remaining over 10% for the last two years... Lending to corporations slowed for the second month in a row to an annual rate of 14.2% from 14.9%... growth in loans to households slowed as well, posting an annual rise of 4.9% in May after 5.2% in April."

June 27 - Bloomberg (Fergal O'Brien): "European confidence dropped more than economists forecast this month and retail sales plunged, signaling that economic growth is continuing to cool... An index measuring sentiment in the euro area fell to 94.9, the lowest since May 2005..."

June 24 - Bloomberg (Fergal O'Brien): "Ireland's economy will fall into a recession this year for the first time in more than two decades, the Economic and Social Research Institute said, slashing its forecasts for construction, exports and consumer spending."

June 26 - Bloomberg (Jurjen van de Pol and Meera Louis): "Inflation in Belgium accelerated to the fastest in more than 23 years in June on surging energy prices. he inflation rate rose to 5.8%..."

June 25 - Bloomberg (Tasneem Brogger): "Denmark's consumer confidence index slumped more than economists expected to the lowest since 1999 this month as inflation accelerated and borrowing costs rose."

June 27 - Bloomberg (Ben Sills): "Spanish inflation accelerated to the fastest pace on record in June as oil and food prices surged. Consumer prices rose 5.1% from a year ago after increasing 4.7% in May..."

June 26 - Bloomberg (Tasneem Brogger): "Iceland's inflation rate rose to 12.7% in June, more than five times the central bank's target, after a slump in the krona sent import prices surging, maintaining pressure on the central bank to raise interest rates. Inflation accelerated from 12.3% the month before..."

June 23 - Bloomberg (Alex Nicholson): "Russian retail sales growth unexpectedly accelerated to 14.6% in May from the slowest pace in almost a year and a half the month before."

June 26 - AFP: "Nigeria's inflation rate rose in May to 9.7% from 8.2% in April, driven by increases in the cost of food and household items..."

June 24 - Bloomberg (Jason McLure): "Ethiopia's annual inflation rate surged to 39.1% in May as food and fuel costs increased, the Central Statistical Agency said. Inflation accelerated from 29.6% in April..."

June 25 - Bloomberg (Nasreen Seria and Mike Cohen): "South African inflation accelerated to an annual 10.9% in May..."

Bursting Bubble Economy Watch:

June 24 - Bloomberg (Kevin Orland): "Dow Chemical Co., the largest U.S. chemical maker, said surging costs for energy and raw materials to make Styrofoam, pesticides and plastics are forcing the company to raise prices by as much as 25% in July. In addition to the price increases, freight surcharges of $300 per truck shipment and $600 per rail shipment will become effective Aug. 1... Chief Executive Officer Andrew Liveris last month raised prices for June by 20%, the biggest boost in the company's 111-year history... The additional increases were needed because of a 'relentless' rise in the cost of energy and hydrocarbon materials, Dow said. 'The staggering increase in our costs over the past few months have forced us to take these further measures in order to restore our margins,' Liveris said..."

June 25 - Bloomberg (Erik Holm): "American Express Co., the biggest U.S. credit-card company by purchases and cash advances, said customers are falling behind on their debt at a faster-than- anticipated pace, signaling the economy is worsening. 'Business conditions continue to weaken in the U.S. and so far this month we have seen credit indicators deteriorate beyond our expectations,' Chief Executive Officer Kenneth Chenault said..."

June 25 - Bloomberg (Josh P. Hamilton and Erik Holm): "Billionaire investor Warren Buffett says he's concerned about 'stagflation,' or slowing in the U.S. economy while inflation accelerates. 'We're right in the middle of it right now,' said Buffett... 'I think the 'flation' part will heat up and I think the 'stag' part will get worse.'"

June 24 - Bloomberg (Josh Fineman and Deirdre Bolton): "The world's biggest financial firms may lose as many as 175,000 jobs by this time next year as Citigroup Inc. and other banks shed workers... executive recruiters say. Financial companies have announced plans to trim more than 83,000 jobs since last July... As more employees are fired, workforce reductions may exceed those from the market slump of 2000 to 2003 when technology-related shares collapsed, recruiters said. 'The worst is yet to come,' Russ Gerson, head of... Gerson Group, said... 'We are going to have a major contraction. This is affecting all areas of the investment banking universe and it's affecting all areas globally.'"

June 24 - Bloomberg (Ian Katz): "Wall Street securities firms and brokerages paid chief executive officers an average of $16.9 million in 2007, down a third from a year earlier on reduced stock awards, according to a Citigroup Inc. study."

June 26 - Bloomberg (Angela Greiling Keane): "The number of travelers over the U.S. Fourth of July holiday will decline for the first time this decade after gasoline rose to a record, AAA said."

Central Banker Watch:

June 25 - Bloomberg (Christian Vits): "European Central Bank council member Axel Weber said the bank must fight inflation risks 'proactively.' 'There is the concrete risk that longer-term inflation expectations will start creeping up more strongly,' Weber said... 'A stability-oriented central bank is well advised to fight the risk of broad-based second-round effects decisively and proactively.'"

June 27 - Financial Times (Krishna Guha): "Overheating emerging markets are fuelling inflation around the world by pushing up commodity prices, Don Kohn, vice-chairman of the Federal Reserve, suggested... Mr Kohn appeared to call on these nations to loosen their exchange rate pegs to the dollar and adopt more independent monetary policies - so they no longer import Fed monetary policy that is not suited to their own economic outlook. The Fed number two said: 'In those countries where strong commodity demands are associated with rapid growth in aggregate demand that outstrips potential supply, actions to contain inflation by restraining aggregate demand would contribute to global price stability.' ...Mr Kohn's comments came in a speech in which he said there was still relatively little evidence that high headline inflation - pushed up by energy and food prices - was contaminating underlying inflation and inflation expectations. He said: 'For the moment, higher headline rates of inflation have shown only a few tentative signs of embedding themselves in core inflation or in longer-term inflation expectations.'"

June 23 - Bloomberg (Rich Miller): "What's good news for U.S. businesses may turn out to be bad news for Federal Reserve Chairman Ben S. Bernanke's fight against inflation. The surging oil prices that are raising exporters' costs to ship everything from steel to sofas to America are encouraging customers to buy more domestically made goods -- and giving the producers of those goods more room to raise their prices. The result: As Bernanke and fellow policy makers meet in Washington this week, they may find themselves starting to lose the benefit of the flow of inexpensive imports the chairman cited in a June 3 speech as a key force holding down living costs. 'It's changing global costs,' says Jeffrey Rubin, chief economist at CIBC World Markets... 'It's a huge inflationary threat.'"

June 25 - Bloomberg (Tasneem Brogger): "Norway's central bank raised its benchmark interest rate to 5.75%, the second increase this year, as it seeks to prevent accelerating wage and price growth."

Mortgage Finance Bubble Watch:

June 27 - Bloomberg (Jody Shenn): "The U.S. home-price declines most associated with lower-priced properties may accelerate among more expensive houses, according to analysts at JPMorgan... The increasing odds that the U.S. will enter a recession and a wave of payment spikes on option adjustable-rate mortgages make the larger percentage drops more likely... mortgage-bond analysts... wrote..."

GSE Watch:

Fannie and Freddie combined for May "book of business" (portfolio and guarantees) growth of $56.9bn, or 13.3% annualized, to $5.200 TN. This likely exceeds total net household mortgage debt growth for the month. Freddie's retained portfolio surged $32.8bn, or 53% annualized, to $770.4bn (surpassing Fannie!). Combined with Fannie, GSE retained portfolios expanded $41.4bn, or 34% annualized, the strongest month of portfolio growth since 2003. Year-to-date, Freddie's "book of business" has expanded almost $89bn, or 7.9% annualized. Fannie's "book" has increased $120bn, or 10.3%, annualized.

June 24 - Bloomberg (Dawn Kopecki): "Three months after Fannie Mae and Freddie Mac won the freedom to step up home-loan purchases, the government-chartered mortgage-finance companies are doing what critics... had predicted. Instead of using powers granted by Congress to buy jumbo loans for the first time, Freddie Mac and Fannie Mae are purchasing their own mortgage-backed securities, helping reduce losses... The large loans, above $417,000, made up almost a third of the U.S. market last year... Since the rule change took effect in March, Fannie Mae has packaged $24 million of jumbo loans into securities, while Freddie Mac added $220 million, according to Inside Mortgage Finance..."

California Watch:

June 25 - Bloomberg (Alan Mirabella): "The median price of an existing home in California fell 35% in May from the same period a year ago, the California Association of Realtors said. Home sales increased 18% and exceeded 400,000 last month for the first time since early 2007..."

Crude Liquidity Watch:

June 26 - Bloomberg (Maria Levitov): "Russia's foreign currency and gold reserves, the world's third largest, rose to a record $558.7 billion last week... The value of reserves increased by $7.2 billion in the week..."

June 26 - Bloomberg (Matthew Brown): "Saudi Arabian M1 money supply growth, an indicator of future inflation, accelerated to 27% in May from 23% in April."

June 23 - Bloomberg (Matthew Brown): "Qatar's M2 money supply growth... accelerated to an annual 53% in March from 33% in December, the Qatar Central Bank reported. Commercial banks' domestic lending grew an annual 60% in March, up from 52% in December..."

Doug Noland
The Credit Bubble Bulletin
PrudentBear.com

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