Agricultural Commodities Pull Back; 80% of Banks Tightened Lending Standards for Prime Mortgages; The Dollar's Continued Rally; Fuel Subsidies Counter Productive for Emerging Economies

MWF (Monday) Briefing:

Last week, Bloomberg released their monthly survey of over 50 economists. The median estimate for US recession in the next 12 months was 51%, similar to the 50% readings in the prior two months. 

Commodities have been pulling back.  From Bespoke, gold now is in bear territory "with a decline of over 2% overnight, gold is the latest commodity to hit bear market territory.  The commodity is now down 21.5% from its highs during the collapse of Bear Stearns.  As highlighted below, gold is now at its lowest levels of the year and down over 6% YTD.  Looking back at the prior eleven bear markets in gold, the average decline has been just under 34% over a period of 18 months."  Commodity sales have surged by rising prices, particularly for grains, and by the decline in the value of the dollar, reducing the cost of American exports in other currencies. Both trends have recently reversed, suggesting that the rise in commodity sales will not be sustained.  The dollar rallied in a particularly strong way suggesting that it might hold it's own against other currencies.  That's very bad for exports and agricultural commodities.

China and India lifted much of their gas subsidies within the past few months.  Developing countries support of gas subsidies only hurt their economies more by encouraging waste.

• "In its latest quarterly survey of bank lending officers, the Fed found nearly 80% of banks had tightened their lending standards for prime mortgages since the previous survey in April, when 60% said they were imposing more stringent criteria. For so-called nontraditional loans, 85% said they tightened their standards, up from 75% in the previous survey. And in the subprime market, about six out of seven respondents said they tightened standards, up slightly from the previous survey." WSJ

• The commodities boom looks to be coming unwound, and dollar gains are looking more substantial, but the news isn't necessarily good.Cheaper commodities will ultimately reduce inflation pressure, but the cause of the decline, as well as dollar appreciation, seems to be rapid flagging of growth in Europe and Asia. Economist

• Surge of the Dollar raises global fears. Against sterling, the US currency notched up its 11th consecutive day of gains – its longest uninterrupted rise in more than 35 years – as markets became increasingly convinced that the US was best-placed to weather the global downturn. FT

• Fuel subsidies are a drag.  Many emerging economies employ subsidies that keep domestic fuel prices far below the world price.As a result, these countries consume far more fuel than they would otherwise, ending up being counter productive.  NYT