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FTAA-Mercosur negotiations postponed; Strong inflation in Uruguay; Eurozone leaves rates unchanged at 2%; Opec expands output but markets remain edgy.

FTAA-Mercosur negotiations postponed

The Office of the United States Trade representative Robert Zoellick officially confirmed the postponement of negotiations with Mercosur for the creation of a Free Trade Association of the Americas, FTAA, scheduled to begin this Thursday in Argentina. "The FTAA talks between Mercosur and the United States scheduled for today in Buenos Aires have been postponed", said the short release with no further details. Negotiations for the creation of the US sponsored free trade area from Alaska to Tierra del Fuego encompassing the 34 countries of the three Americas with the exception of Cuba, should be over by January 2005 according to the agreed timetable. However, talks to liberalize trade are stalled because of differences between Mercosur (Argentina, Brazil, Paraguay and Uruguay), and the US because they can't agree on the areas and the speed with which to advance. The Buenos Aires meeting was to be at Under Secretary level. Last week during the Ibero-American summit held in Mexico, Mercosur advanced considerably in talks with the European Union for the creation of a trade and cooperation association. Talks are expected to be concluded next October and ready to sign early 2005.

Strong inflation in Uruguay

Retail prices in Uruguay during May increased 1,04%, bringing inflation in the last twelve months to 9,41%, well above government target. May's reading, according to Uruguay's National Statistics Office not only was considerably higher than May 2003, (0,37%), but also above market expectations which had anticipated a 0,75% expansion. In the first five months of 2004, accumulated inflation has reached 5,17%. Items with the greatest incidence in May's consumer price index were food and clothing, with 2,58% and 1,36%. Uruguay is vigorously recovering from a long damaging five years recession boosted by strong demand for commodities which have had a direct impact in domestic food, textile and skin prices. Uruguay's economy is forecasted to expand 10% in 2004, mainly through exports.

Eurozone leaves rates unchanged at 2%

The European Central Bank, ECB left interest rates in the twelve nations Eurozone unchanged at 2% as anticipated by local markets and in spite of soaring energy prices. ECB decision means the 12 nation Eurozone base rate has not changed for the last twelve months. ECB President Jean-Claude Trichet said the European Union recovery was underway adding that the ECB was closely monitoring the impact of oil prices in inflation. Oil prices this week reached an all time record of 42 US dollars per barrel. Some European economists fear that the rocketing cost of energy could affect the continent's recovery by slowing demand for exports. Another concern is inflation that could begin to rise since several country members are under strong price rises pressure. With oil prices jumping 30% since the beginning of the year, Eurozone inflation reached 2,5% in May compared to 2% last April. Since its creation the ECB has focused mainly on inflation, while the US Federal Reserve is more committed on boosting employment and economic growth. The United Kingdom basic rate stands at 4,25%.

Opec expands output but markets remain edgy

The Organization of Oil Exporting Countries, Opec, agreed this Thursday in Beirut to increase oil production by two million barrels per day, equivalent to 8%; in an attempt to cool soaring crude prices, the highest ever. According to Qatar Oil Minister Abdullah al-Attiyah this will be followed in August by an additional production of half a million barrels. "It's a good accord; we can test the impact of our policy in oil markets before we meet again in July", indicated Mr. al-Attiyah. The next OPEC meeting in scheduled for July 21 in the middle of the northern hemisphere summer season. Apparently the middle ground increase contemplates Saudi Arabia who wanted an immediate production expansion of 2 million barrels per day, and Venezuela an Iran who fear a strong drop in prices. However markets reacted with higher prices since a greater production increase was expected from the Opec meeting. Markets remain fearful of the Middle East situation and potential political instability in Saudi Arabia rocked by terrorist attacks during the last weekend. Market analysts also point out that even when the official output of Opec is 23,5 million barrels per day, production already stands 2,3 million barrels above that level. Saudi Arabia and the more conservative Opec members feel that soaring oil prices could derail the global recovery and eventually force a crash in oil markets.