Contagion Fears Hit Euro; Spanish Bond Spreads Widen
Mark Brown and Eva Szalay/Wall Street Journal/Nov 30
Spanish and Italian bond spreads over German bunds rose sharply to new highs, as did the cost of European sovereign debt insurance, while the euro continued to tumble, as euro-zone contagion fears continue to roil currency and debt markets.
The premium demanded by investors to hold Spanish 10-year bonds over the benchmark German bund rose over 30 basis points to more than 300 basis points, while Italy’s 10-year bund spreads rose over 20 basis points to 215 basis points, according to Tradeweb, record highs in both cases.
Asia stocks fall on Europe debt, China hike fears
Associated Press/Nov 30
Asian markets crumpled Tuesday as Chinese shares slid on fears of an interest rate hike and the European Union’s bailout of Ireland failed to convince investors the continent’s debt crisis has been contained…
Soaring prices in China, the world’s No. 2 economy, are so far limited mostly to food, but analysts say price pressure could spread to other areas unless Beijing hikes interest rates and further tightens credit. Investors worry that might slow economic growth or reduce the amount of money flowing through the economy that is helping to finance stock trading.
“There is a little nervousness about how hard the policymakers will have to slam on the brakes to contain inflation,” said David Cohen, an economist with Action Economics in Singapore.

Will the Irish crisis spread to Italy?
Paolo Manasse and Giulio Trigilia/VOX/Nov 26
Is Italy the next European country to go? This column argues that the jury is still out, although the grace period will not extend beyond three years.
German Unemployment Falls to Lowest in 18 Years
Rainer Buergin/Bloomberg/Nov 30
German unemployment fell for a 17th month in November as business optimism improved, underscoring the gulf between Europe’s biggest economy and peripheral nations struggling to cut debt.
Germany watches with concern as euro falls despite Ireland bailout
Kate Connolly/LATimes/Nov 30
“Our economy is currently booming, so the experts tell us, but there’s no room for celebration,” said Christine Fromm, a dressmaker from Potsdam near Berlin. “Unemployment is lower than it’s been for two decades, exports are up, growth is healthy, but our wages have been more or less frozen for years with the promise of increases always ’round the corner.
“Politicians praise workers for helping to keep Germany competitive,” she added. “Yet if we keep bailing out the rest of Europe, we’ll end up going down with the sinking ship.”
How Chinese Inflation Policy Will Shape The Yuan-Dollar Exchange Rate
Ed Dolan/Ed Dolan’s Econ Blog/Nov 28
By freezing its exchange rate and pulling out all the stops on fiscal and monetary stimulus, China got through the global recession with only a mild slowdown in GDP growth. Now it is facing the inflationary consequences. Consumer price inflation, after rising steadily all year, hit a 4.4% annual rate in October, approaching the government’s red line. How will China choose to deal with the inflation threat? The answer is important both for China and its trading partners, because anti-inflation policy will determine what happens to the exchange rate of the yuan over the coming months…
We can see, then, that rising inflation makes it harder than ever for Chinese policy makers to restrain the ongoing real appreciation of the yuan. If inflation continues, the real exchange rate would continue to rise even if the nominal exchange rate were frozen once again…
As long Chinese inflation remains above the U.S. rate, the real exchange of the yuan will continue its steady appreciation relative to the dollar. Contrary to the political bluster heard from some quarters, appreciation of the yuan will not solve all the world’s problems. Over time, however, we can expect it to make a helpful contribution to easing some of the most acute global imbalances.
Confidence and the Business Cycle
Sylvain Leduc/San Francisco Fed/Nov 22
The idea that business cycle fluctuations may stem partly from changes in consumer and business confidence is controversial. One way to test the idea is to use professional economic forecasts to measure confidence at specific points in time and correlate the results with future economic activity. Such an analysis suggests that changes in expectations regarding future economic performance are important drivers of economic fluctuations. Moreover, periods of heightened optimism are followed by a tightening of monetary policy…
In recent decades, cycles of boom and bust in Japan, East Asia, and the United States have focused renewed attention on the question of confidence. These experiences suggest that optimism about the future helped fuel economic booms and that subsequent buildups of pessimism contributed to the busts. Moreover, these episodes fostered intense debate about the role of monetary policy in boom-and-bust cycles. Central banks have been sharply criticized for stoking the booms and inflating confidence by setting excessively accommodative monetary policy.