Sunday, September 30, 2007

Unemployment May Rise, Factories Slow: U.S. Economy Preview

By Joe Richter

Sept. 30 (Bloomberg) -- Unemployment in the U.S. probably rose to a one-year high in September and manufacturing slowed for a third month as the housing recession reverberated through the economy, economists said before reports this week.

The jobless rate rose to 4.7 percent even as hiring rebounded, according to the median forecast in a Bloomberg News survey of economists before an Oct. 5 government report. Industry data tomorrow is forecast to show factories expanded at the weakest pace in six months.

Fallout from rising borrowing costs and declining home prices will hit the economy in full force in the fourth quarter as consumer spending fades, economists said. Waning demand may in turn prompt companies to scale back hiring and investment.

``As home prices continue to fall, consumers will spend less,'' said Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York. ``Adding to consumer gloom, the labor market is starting to show signs of weakness.''

The unemployment rate is projected to increase from 4.6 percent in August. The rate reached a five-year low of 4.4 percent in March and October.

Employers probably added 97,500 workers to payrolls this month following a 4,000 drop in August that marked the first decline in four years, the Labor Department's report is also projected to show.

The seeming improvement in hiring will reflect a rebound in government payrolls after three consecutive decreases, economists said. Changes in the timing of summer holidays probably made it difficult for the Labor Department to count the number of teachers hired for the new school year.

`Timing Issue'

``This was only a timing issue and there will be either a big upward revision to August and/or a smart rebound in teaching jobs in September,'' said Steven Wood, president of Insight Economics LLC in Danville, California.

The Institute for Supply Management's factory index fell to 52.5, a six-month low, from 52.9 in August, the Tempe, Arizona- based group may report tomorrow. A reading greater than 50 signals expansion in manufacturing, which accounts for about 12 percent of gross domestic product.

Applied Micro Circuits Corp., which produces components for communications-equipment makers such as Cisco Systems Inc., plans to cut 4 percent of jobs through fiscal 2008, the Sunnyvale, California-based company said last week.

A report on Oct. 4 from the Commerce Department may show factory orders fell 2.6 percent in August after a 3.7 percent gain in July, the Bloomberg survey showed.

Auto Sales

The auto industry will probably be a source of weakness in orders and production in the second half of the year as sales cool following an August surge, economists said.

Purchases of cars and light trucks probably fell to a seasonally adjusted annual rate of 15.8 million in September, from a 16.3 million pace last month, based on the median estimate of economists surveyed by Bloomberg. Auto sales figures will be released Oct. 2.

Service industries may also start to feel the pinch from a more hesitant consumer. A second report from the Institute for Supply Management may show banks, builders, retailers and other service industries expanded last month at the slowest pace in six months. The group's report is scheduled for Oct. 3.

Economists say headwinds for the consumer are likely to grow stronger. A cooling job market and a jump in defaults among subprime borrowers have led banks to raise borrowing rates and made it more difficult to get loans. Home-price declines also mean fewer owners can tap into home equity loans.

Fewer Contracts

The number of Americans signing contracts to buy previously owned homes probably fell to a record low in August, a report Oct. 2 is forecast to show. The National Association of Realtors' index of signed purchase agreements, or pending home resales, fell 2.1 percent to 88, the lowest since record keeping began in 2001.

So far, income gains have helped keep consumer spending from collapsing. The Labor Department is forecast to report hourly wages grew 0.3 percent on average for a third straight month, based on the median estimate.

Consumer spending in the U.S. rose more than forecast in August, a report last week from the Commerce Department showed.

``The consumer hasn't yet pulled back, but the risk is that they will do so by the fourth quarter as the bad news coming out of the housing market takes hold of consumer psychology,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. ``Consumer confidence is pretty low right now.''

Bloomberg Survey

Date Time Period Indicator BN Survey Prior
10/01 10:00 Sept. ISM Manufacturing 52.5 52.9
10/01 10:00 Sept. ISM Prices 62.3 63.0
10/02 10:00 Aug. Home Resales Pending -2.1% -12.2%
10/03 10:00 Sept. ISM Non-Manufacturing 54.8 55.8
10/04 8:30 9/22 Continuing Claims 2550K 2551K
10/04 8:30 9/29 Initial Jobless Claims 310K 298K
10/04 10:00 Aug. Factory Orders -2.6% 3.7%
10/05 8:30 Sept. Avg. Hourly Earnings 0.3% 0.3%
10/05 8:30 Sept. Change Nonfarm Jobs 97.5K -4K
10/05 8:30 Sept. Unemployment Rate 4.7% 4.6%
10/05 15:00 Aug. Consumer Credit $9.5B $7.5B

Last Updated: September 30, 2007 11:10 EDT

N.Z. Dollar Rises to 7-Week High as High Rates Lure Investors

By Emma O'Brien

Oct. 1 (Bloomberg) -- The New Zealand dollar rose to the highest in more than seven weeks on speculation the central bank will keep its benchmark rate at a record 8.25 percent this year.

The currency rose as high as 76.08 U.S. cents, after surging 6.2 percent in September, its biggest monthly gain since May 2002. Figures last week showed the economy grew faster than forecast in the second quarter, stoking expectations interest rates will stay high. The official cash rate is 3.5 percentage points more than the Federal Reserve's target.

``The yield differential is still in favor of the kiwi,'' said Tony Allen, currency trader at ANZ National Bank Ltd. in Wellington, referring to the currency by its nickname. ``How can you sell it when growth is still as strong as it is and the U.S. dollar down where it is?''

New Zealand's dollar bought 76.02 U.S. cents at 9:22 a.m. in Wellington, from 75.79 cents in late New York trading Sept. 28. The currency last rose above 76 cents on Aug. 11, when it strengthened to 77.03 cents.

It bought 87.02 yen versus 87.01 on Sept. 28 in New York.

Reserve Bank Governor Alan Bollard has raised rates four times this year in a bid to contain consumer spending and housing demand, which he says are buoying inflation. At his last monetary policy review Sept. 13 Bollard left the rate unchanged and said inflation remains at the top of the bank's 1 percent to 3 percent target band.

New Zealand's benchmark interest rates is the highest after Iceland's among Aaa rated countries.

Economic Growth

The economy grew 0.7 percent in the second quarter, beating a 0.5 percent median estimate of 11 economists in a Bloomberg survey.

The New Zealand dollar gained 4 percent Sept. 19, the day after the Federal Reserve cut U.S. rates by a half-percentage point. Speculation the Fed may reduce rates again when it meets Oct. 31 sparked the dollar's fall to a record low against the euro last week.

Futures contracts show 84 percent odds that the Fed will cut its target rate to 4.5 percent this month, compared with a 14 percent likelihood a month ago.

New Zealand's currency may strengthen against the yen today with Japanese investors attracted to so-called carry trades on the currency, Allen said. Carry trades, where cheaply borrowed yen is invested in countries such as New Zealand that offer higher yields, have boosted the New Zealand dollar 13 percent versus the yen in the past 12 months.

Bonds Unchanged

``The Japanese are still trying to get their money offshore and the high yielders like New Zealand are looking good,'' Allen said. ``The U.S. dollar is under some real pressure, why would you buy it?''

New Zealand government bonds were little unchanged. The yield on the country's two-year note held steady at 6.93 percent. The yield on the benchmark 10-year bond added 1 basis point to 6.26 percent. A basis point is 0.01 percentage points and bond yields move inversely to their prices.

Last Updated: September 30, 2007 16:24 EDT

Buying Euros Will Prove Hazardous as Charts Flash Sell Signal

By Bo Nielsen

Oct. 1 (Bloomberg) -- The euro's record-setting rally may not extend through the end of October, according to analysts who rely on market patterns for their predictions.

No fewer than half a dozen indicators that measure the speed and slope of a currency's rise and foreshadowed the euro's three biggest slumps of the past year show the best may be over after it strengthened 4.7 percent last month to its all-time high of $1.4278. Citigroup Inc., the largest U.S. bank, says the euro may drop to below $1.37 unless the currency maintains its momentum.

``We are a little more cautious,'' said Tom Fitzpatrick, Citigroup's global head of currency strategy in New York. ``Whenever you see acceleration'' of this magnitude, ``it's a sign we may have a correction,'' he said.

The euro's appreciation is putting pressure on the European Central Bank to find a way to curb the gains. French President Nicolas Sarkozy and Fiat SpA Chairman Luca Cordero di Montezemolo complain that the rise in the currency shared by 13 European nations is hurting their economies.

Shipments from Germany, the region's largest exporter, fell 0.1 percent in July as the a stronger currency damped demand from Asia and the U.S., the Federal Statistics Office in Wiesbaden said last month. Reports last week that showed declining business confidence in Germany, France and Italy failed to dent the euro.

The currency may drop as low as $1.367 by the end of October, according to Citigroup and Zurich-based UBS AG, the biggest currency traders after Frankfurt-based Deutsche Bank AG. A Bloomberg survey of 45 banks and brokerages set the euro at $1.40 by January and $1.34 at the end of 2008.

Price Clues

Technical analysis, popularized by Charles Dow, creator of the Dow Jones Industrial Average in 1896, is based on the theory that a chart of the price of any asset or index contains clues about future movements.

Those indicators watched by traders say the euro is becoming too expensive. The currency's 14-day relative strength indicator reached 80.65, almost double a month ago. The gauge measures the momentum of price changes. Readings above 70 and below 30 indicate a reversal may occur.

The euro dropped 3.2 percent in the five weeks following the last time the index passed 80 in December 2006. It fell 3 percent in the seven weeks after the index exceeded 70 in the last half of April, and the currency tumbled 3.5 percent in the three weeks after it topped 75 in late July.

``Most technical indicators -- stochastic, momentum or relative strength -- are telling us the euro is extremely overbought,'' said George Davis, chief technical analyst at RBC Capital Markets in Toronto. ``The prospect for a short-term correction is getting bigger every day the rally is sustained.''

Trading Envelope

The difference in the number of wagers on an advance in the euro compared with those on a drop, known as net longs, was 83,448 on Sep. 25, down 2,601 from the prior week and twice the average in the last three years, data from the Washington-based Commodity Futures Trading Commission show. The last three times bets have peaked, the euro lost more than 1.5 percent the following month.

Trading envelopes, which measure how far from the mean a price has strayed, and commodity channel indicators showing when a currency is overbought also suggest that the euro has reached extreme highs.

Goldman Sachs Group Inc. advised investors last week to sell euros bought since Aug. 16 because indicators show ``the probability of consolidation is quite high,'' said Jens Nordvig, a New York-based strategist at the firm.

`Super Euro'

The euro's strength is becoming a drag on European growth. Europe's manufacturing and service industries expanded at the slowest pace in two years last month, according to Royal Bank of Scotland Plc. Paris-based Total SA, Europe's third-largest oil company, calculates that every 10-cent decline in the U.S. currency reduces its net operating income by 1.1 billion euros ($1.57 billion).

``The super euro worries us, we ask for the government and the ECB to do something,'' di Montezemolo said last month in Rome. ``This could become a problem for exports.''

Sarkozy said on Sept. 20 that Europe's competitiveness may suffer if the ECB doesn't cut rates. Credit-market turmoil pushed Europe's short-term borrowing costs to the highest in 6 years.

``There are signs that the problems in the U.S. are starting to affect the euro-zone,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``It's not a one-way traffic favoring the euro anymore.''

Too Early

Unless growth in Europe stalls, it may be too early to call an end to the five-year euro bull market that has seen the currency gain 66 percent versus the dollar and 46 percent versus the yen, according to Trevor Dinmore, a London-based currency strategist with Deutsche Bank.

The firm forecasts the 13-nation economy will grow 2.8 percent this year, compared with 1.9 percent in the U.S., and drive the euro to $1.45 by year-end.

The rise in the euro led central banks to increase their share of assets in the currency by 1 percent in a year to a record 25.6 percent. The share of assets in dollars has fallen to 64.8 percent from 71 percent in 1999, the International Monetary Fund in Washington said last week.

ECB President Jean-Claude Trichet will discuss the strength of the euro with his U.S. counterpart Ben S. Bernanke and finance ministers from the Group of Seven industrialized nations in a series of meetings starting on Oct. 19 in Washington.

In 2000, the group coordinated efforts to boost the euro after it had plummeted about 25 percent since its introduction in January 1999.

``G7 policy makers are getting concerned and may decide to do something about the euro,'' said the London-based Mansoor Mohi-uddin, global head of foreign exchange strategy at UBS. ``I wouldn't like to buy the currency at the current price.''

Last Updated: September 30, 2007 18:31 EDT

Saturday, September 29, 2007

Dollar Falls to All-Time Low Versus Euro on Fed Rate Outlook

By Min Zeng

Sept. 29 (Bloomberg) -- The dollar fell to the lowest against the euro since the 13-nation currency's debut in 1999 as slowing growth and inflation increased speculation that the Federal Reserve will cut interest rates a second time this year.

The U.S. currency depreciated to an all-time low versus a basket of six of its major peers and posted the biggest monthly drop against the euro in almost four years. The dollar may decline further next week before a government report economists expect to show the U.S. unemployment rate rose in September to 4.7 percent, the highest in more than a year.

``Continued dollar weakness probably is still in the cards,'' said Ihab Salib, who helps oversee $3 billion in international bonds in Pittsburgh at Federated Investments Inc. ``I don't expect a meltdown in the dollar. It will be a moderate depreciation.''

The dollar fell 4.5 percent to $1.4267 per euro in September, reaching the record low of $1.4278 yesterday. It was the biggest monthly decline since December 2003. The U.S. currency reached all-time lows in each of the past seven trading days. The dollar posted a 5.1 percent drop in the third quarter, the biggest since the second quarter of 2006.

The New York Board of Trade's dollar index reached 77.66 yesterday, the weakest since the gauge began in 1973. The Fed's trade-weighted index comparing the dollar with major currencies dropped on Sept. 25 to the lowest since its inception in 1971.

Norway's krone was the biggest gainer this quarter, rising 9.4 percent against the dollar, while New Zealand's dollar lost the most, falling 1.9 percent. The dollar declined 6.8 percent to 114.81 yen over the same period.

U.S. Dollar Weakness

The U.S. dollar weakened against all of the 16 most actively traded currencies this month, falling 1.5 percent against the pound and 0.8 percent versus the yen. For the year, the dollar has lost 7.5 percent against the euro, 4.3 percent against the pound and 3.6 percent versus the yen.

The yen fell against all the major currencies except the dollar this month as the Fed's half-percentage-point rate cut on Sept. 18 encouraged carry-trade investors to resume borrowing in Japan to buy higher-yielding assets elsewhere. The yen lost 3.7 percent to 163.79 per euro, declining 7.1 percent against the Australian dollar and 6.6 percent versus the New Zealand dollar.

Japan's currency rallied on Aug. 17 to the highest against the dollar since June 2006 as higher borrowing costs related to subprime-mortgage losses led investors to avoid higher-yielding assets. The yen rose this quarter against all of the 16 most actively traded currencies except Norway's krone.

Consumer Confidence Plunges

Reports this week showed consumer confidence fell to almost a two-year low while new-home sales sank to the lowest in seven years. The price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure, rose 1.8 percent from August 2006, the smallest annual gain since February 2004.

Former Fed Chairman Alan Greenspan said yesterday in an interview with BBC Radio 4 that the chance of a U.S. recession is higher now than a few months ago.

The Labor Department will report on Oct. 5 that the unemployment rate rose to 4.7 percent this month from 4.6 percent a month earlier, according to the median forecast of 64 economists surveyed by Bloomberg News.

Futures contracts showed 86 percent odds yesterday that the central bank will cut its target to 4.5 percent at its next meeting Oct. 31, compared with a 14 percent likelihood a month ago.

Signs of Inflation

The euro also benefited this week as signs of rising inflation in Europe may increase speculation that the European Central Bank will boost interest rates before year-end.

Germany's inflation rate, measured using a harmonized European Union method, accelerated to 2.7 percent from 2 percent in August, the Federal Statistics Office said Sept. 27. That's the most since June 2001.

M3 money supply, which the ECB uses to measure future inflation, grew 11.6 percent from a year earlier after increasing 11.7 percent in July, the central bank said Sept. 27.

``This will get ECB concerned, and the expectation of an ECB ease was squashed,'' said Robert Sinche, head of global currency strategy in New York at Bank of America Corp. ``The euro-dollar move is a combination of dollar weakness and euro strength.''

The ECB is expected to keep its target rate at 4 percent when its board meets on Oct. 4, according to a Bloomberg survey. The Bank of England is expected to hold its rate at 5.75 percent the same day.

ECB President Jean-Claude Trichet yesterday told Dutch television it's ``too early'' to decide whether financial-market turmoil will hurt economic growth in the euro region.

The Euribor futures for delivery in December rose to 4.61 percent yesterday from 4.49 percent a week ago. The futures dropped to as low as 4.24 percent on Aug. 21 during the global credit crisis.

Last Updated: September 29, 2007 08:40 EDT

U.S. Stocks Have Biggest September Gain Since 1998 on Rate Cut

By Nick Baker

Sept. 29 (Bloomberg) -- U.S. stocks rose this week to complete the steepest September advance since 1998 as the Federal Reserve's interest-rate cut helped energy and raw-material companies lead the market's recovery from a summer rout.

Exxon Mobil Corp., Freeport-McMoRan Copper & Gold Inc. and Monsanto Co. climbed after the falling dollar sent commodities to the biggest monthly gain in 32 years, led by crude oil, gold and wheat. Goldman Sachs Group Inc. rose the most during September in the Standard & Poor's 500 Index, which gained for the fifth straight quarter, after the securities firm reported the third- highest profit in its 138-year history.

The Fed's Sept. 18 reduction to 4.75 percent of its rate for overnight loans sustained the stock market's recovery from losses spurred by subprime-mortgage defaults. In July and August, the S&P 500 had the largest slump in four years.

``The Fed easing was the catalyst for everything,'' said Ed Peters, chief investment officer at PanAgora Asset Management in Boston, which manages $22 billion. ``Commodities will continue rising in price,'' lifting shares of their producers, because the rate cut may boost inflation.

The S&P 500 rose 0.1 percent to 1,526.75 this week, giving the benchmark a 3.6 percent September advance and a 1.6 percent third-quarter gain. The Dow Jones Industrial Average rose 0.6 percent to 13,895.63 this week, 4 percent in September and 3.6 percent during the past three months.

4.57 Percent

U.S. Treasuries completed the biggest quarterly rally in five years on expectations the Fed will cut interest rates even more in 2007. The yield on the benchmark 10-year note fell 0.05 percentage point to 4.57 percent this week, bringing its decline since June 29 to 0.45 point. Bond yields and prices move inversely.

Exxon, the world's largest oil company, surged 8 percent to $92.56 in September, for its steepest monthly gain since July 2006. Freeport, the world's second-largest copper producer, jumped 20 percent to $104.89. Monsanto, the world's largest seed producer, advanced 23 percent to $85.74 for the S&P 500's second- biggest September rally.

Energy shares in the S&P 500 rose 8 percent as a group, the most among 10 industries, followed by the 7.6 percent advance by raw-material stocks.

The 19-commodity Reuters/Jefferies CRB Index increased 8.1 percent in September, the most since July 1975. Wheat climbed to a record amid a global grain shortfall, boosting corn and soybeans. Oil also hit a record, and gold reached a 27-year high. The dollar's decline, which sent it to a new low against the euro this week, spurred the commodities rally.

$2.85 Billion Profit

Goldman surged the most in the S&P 500 in September, climbing 23 percent to $216.74. Goldman's third-quarter profit increased 79 percent to $2.85 billion after the company bet against the mortgage bonds that roiled credit markets. Earnings beat the highest analyst estimate by more than 20 percent.

General Motors Corp. had the biggest advance in the Dow average, rising 19 percent to $36.70. GM reached a contract agreement that takes $50 billion of future health-care obligations off GM's books and may transform the competitive landscape of the U.S. auto industry. The accord, ending a two-day strike, is designed to allow the Detroit automaker to operate with a cost structure closer to that of its Japanese rivals.

McDonald's Corp. gained 11 percent to $54.47. The world's largest restaurant company boosted its annual dividend by 50 percent as part of a plan to return as much as $17 billion to investors.

P&G Rises

Procter & Gamble Co. shares gained in 17 out of 19 trading sessions in September, rising 7.7 percent to $70.34.

Stocks may keep rising in the October-to-December period, if history is any guide. The S&P 500 has climbed in 11 of the past 12 fourth quarters.

``We'll continue to plod along,'' said Jack Ablin, who helps manage $52 billion as chief investment officer at Chicago-based Harris Private Bank. ``Earnings are still holding together.''

Unemployment in the U.S. rose to a one-year high in September and manufacturing slowed for a third month as the effects of the housing recession reverberated through the economy, economists expect reports next week to show.

Last Updated: September 29, 2007 08:56 EDT

Thursday, September 27, 2007

Japan Consumer Prices Fall 0.1%, Seventh Monthly Drop (Update1)

By Mayumi Otsuma

Sept. 28 (Bloomberg) -- Japan's consumer prices fell for a seventh month in August, as retailers absorbed higher costs to attract customers.

Core consumer prices, which exclude fresh food, dropped 0.1 percent from a year earlier, the same pace as the preceding four months, the statistics bureau said in Tokyo today, matching the median estimate of 45 economists surveyed by Bloomberg News.

Daiei Inc. and Aeon Co., among Japan's largest retailers, announced discounts to boost sales even as manufacturers raised prices of products ranging from mayonnaise to toilet paper. Core prices may resume gains as early as next month, mainly driven by higher fuel costs, said economist Hiroaki Muto.

``Unless large retailers start raising prices, Japan's core inflation won't take hold,'' said Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. ``The closer companies are to consumers, the harder it is for them to increase prices.''

Daiei said this month that it would cut prices of 100 house-brand food items. Aeon said in August it will freeze prices of a similar number of goods such as coffee and tissue paper until the end of the year.

Tokyo's core prices, an indicator of the nationwide index, fell 0.1 percent in September, the statistics bureau report showed. Economists expected prices in the capital to be unchanged for a second month.

Separate reports showed household spending climbed 1.6 percent in August and the unemployment rate increased to 3.8 percent from 3.6 percent.

The yen traded at 115.53 per dollar at 8:42 a.m. in Tokyo from 115.49 before the reports were published.

BOJ's Fukui

Bank of Japan Governor Toshihiko Fukui said on Sept. 19 that prices will gradually resume rising even after the economy contracted in the second quarter and a U.S. mortgage rout heightened concern that global growth will slow. The bank should increase Japan's ``very low'' interest rates, he said.

Miyako Suda, a central bank board member, said yesterday that the economy may overheat should the bank fail to increase borrowing costs fast enough. Policy makers last week kept the benchmark overnight lending rate at 0.5 percent, the lowest among major economies.

Japan has struggled to beat deflation that emerged after an asset-price bubble burst in the early 1990s and compelled the central bank to cut interest rates to near zero percent. The bank raised the key rate for the first time in almost six years in July 2006 and doubled it to 0.5 percent in February.

Investors yesterday saw a 9 percent chance policy makers will raise the benchmark rate at their next meeting on Oct. 10- 11, according to Credit Suisse Group calculations based on interest payments.

Inflation Signs

Signs are emerging that consumer prices will soon rise for the first time since December.

House Foods Corp. said this month that it will raise prices of 116 items such as curry and instant noodles for the first time in 17 years to help pay for higher costs of edible oil, wheat and spices.

Sanyo Foods Co., Japan's third-largest instant-noodle maker, also said it will raise prices from January. Nippon Meat Packers Inc. and Itoham Foods Inc. will increase prices of meat products this month and in October.

Prices of services are also gaining. Transportation authorities this week allowed taxi fares to climb in Wakayama, western Japan, the Nikkei newspaper reported.

Higher charges have already been approved in Nagoya, Akita, Nagasaki and Okinawa and Tokyo-based taxi operators are also asking passengers to pay more.

``As a housewife myself, I've noticed many news reports about price increases in Japan, such as mayonnaise, taxi fares, wine, instant noodles and photocopy paper,'' Suda said yesterday. ``There's a risk of inflation soaring unexpectedly in the near future.''

Last Updated: September 27, 2007 19:43 EDT

New Zealand Economic Growth Slows Less Than Expected (Update1)

By Tracy Withers

Sept. 28 (Bloomberg) -- New Zealand's economic growth slowed less than expected in the second quarter, signaling the central bank is unlikely to cut interest rates from a record.

Gross domestic product increased 0.7 percent in the three months ended June 30 from the first quarter when the economy expanded a revised 1.2 percent, Statistics New Zealand said in Wellington today. The median estimate of 11 economists surveyed by Bloomberg News was for 0.5 percent growth.

Reserve Bank of New Zealand Governor Alan Bollard raised the benchmark interest rate four times between March and July to a record 8.25 percent to slow domestic demand and inflation. Stronger-than-expected growth in the first half of the year suggests he has little scope to cut borrowing costs, buoying the New Zealand dollar.

``The strain on resources will bring no comfort to the Reserve Bank,'' Doug Steel, an economist at Westpac Banking Corp. in Wellington, said before the report was released. Rising growth ``would certainly add to inflation worries and see a reduction in the probability of interest-rate cuts.''

New Zealand's dollar rose to 75.38 at 10:50 a.m. in Wellington from 75.09 cents immediately before the report.

Bollard will keep the official cash rate unchanged for the remainder of this year, according to all 13 economists in a second Bloomberg survey. Just four predict a cut before June 30.

Annual Growth

Steel says Bollard won't cut the rate cut until 2009, noting the Reserve Bank expects inflation will accelerate to 3 percent this year. Bollard is required to keep inflation between 1 percent and 3 percent. Consumer prices rose 2 percent in the year ended June 30.

From a year earlier, the economy expanded 3.2 percent. Annual- average growth was 2.2 percent from 1.7 percent in March. Economists forecast 2.1 percent.

Economic expansion will probably accelerate this year. Bollard expects 2.9 percent annual average growth in the year ending March 31, according to his latest forecasts. He predicted 0.5 percent in the second quarter.

Economists aren't as optimistic. Growth will probably be 2.4 percent in the year ending March 31, 2008, before slowing to 2 percent a year later, according to the average estimate of 10 economists surveyed by the New Zealand Institute of Economic Research Inc.

Growth could be as little as 2 percent over the next year, ANZ National Bank Ltd. said yesterday, basing its forecast on its monthly measure of business confidence. More companies expect profits will fall and fewer plan to hire workers, according to the survey of 423 firms.

Consumer Spending

The expenditure-based measure of GDP rose 0.8 percent as a 1.5 percent increase in domestic demand was offset by net exports, which subtracted from growth, the statistics agency said today.

Buoying growth, investment in new housing surged 3.8 percent. Government spending also increased. Inventories rose, adding to growth.

Household spending, which makes up 60 percent of the economy, gained 0.6 percent from the first quarter when it rose 2.1 percent.

Hallenstein Glasson Ltd., the third-biggest publicly traded retailer, said on Sept. 14 that full-year profit fell. The performance in New Zealand ``was challenging, with rising interest costs finally beginning to dampen consumer spending,'' Chairman Warren Bell said in a statement.

Skills Shortage

Spending on alcohol, food and other so-called non-durable goods rose 1.4 percent in the quarter. Purchases of cars, appliances and durable items gained 0.4 percent.

On Sept. 13, Bollard said there were signs that higher borrowing costs are damping domestic spending. Still, rising wages, government spending and record payouts to dairy farmers will prevent spending stalling, analysts said.

New Zealand's jobless rate fell to a record 3.6 percent in the second quarter as companies added more than twice the number of workers forecast by economists.

A skills shortage sparked a record 3.2 percent wage increase for non government workers in the second quarter from a year earlier.

Fonterra Cooperative Group Ltd., the world's biggest dairy exporter, has raised its milk payment to 10,900 farmers by 43 percent, citing record prices. That will add NZ$2.6 billion ($1.9 billion) to farm incomes this year.

Crimping growth, imports rose and business investment fell 2.9 percent from the first quarter, the agency said. Purchases of plant and machinery declined. The purchase of a navy ship buoyed investment in transport equipment.

Service Industries

Imports rose 2.5 percent, buoyed by the navy ship and spending also increased on overseas travel, which is treated as an import of services. Consumption goods imports fell 3.4 percent.

Exports of goods and services increased 0.5 percent in the quarter, with meat and dairy volumes declining. Tourist spending helped exports of services increase.

Service industries including finance and business services, transport and communications contributed most of the growth in the quarter, the agency said. Production from those industries increased 0.9 percent. The output from farmers and other primary industries rose 0.2 percent, while production from manufacturers and other goods producers dropped 0.1 percent.

Real estate sales and lending by financial institutions contributed most to output from the services industries.

Production from primary industries rose, buoyed by output from the nation's oil and gas fields. Farm production fell. Among goods- producing industries, manufacturing increased while construction declined.

The implicit price deflator gained 3.1 percent for the year ended June 30, the agency said.

Last Updated: September 27, 2007 19:02 EDT

U.S. Economy: New-Home Sales Decline 8.3 Percent (Update4)

By Joe Richter

Sept. 27 (Bloomberg) -- Sales of new homes in the U.S. dropped more than forecast in August and prices plunged by the most since 1970, underscoring the Federal Reserve's concern about the broader economy.

Purchases declined 8.3 percent to an annual pace of 795,000, the lowest level in more than seven years, the Commerce Department said today in Washington. The median price dropped 7.5 percent from a year ago.

The figures suggest home construction will extend its deepest slump since 1991, and consumers will have less home equity to tap for spending. Fannie Mae Chief Executive Officer Daniel Mudd said in an interview today that the industry won't hit a bottom until the end of next year, echoing comments by KB Home, the builder that hours earlier reported a third-quarter loss.

``The housing market is not looking good for the months ahead,'' said Richard DeKaser, chief economist at National City Corp. in Cleveland. ``We're likely to see an intensification of the impact housing has on growth.''

Economists forecast sales would fall to an 825,000 pace from a previously reported 870,000 in July, based on the median estimate of forecasts in a Bloomberg News survey. Compared with a year earlier, purchases were down 21 percent.

Summers on Recession

The severity of the slump poses a risk that housing woes will spill over into the broader economy. Former Treasury Secretary Lawrence Summers said there is nearly an even chance the U.S. will fall into recession after almost six years of growth.

The chance of a contraction ``is not quite 50 percent, but somewhere in that neighborhood,'' Summers, now a professor at Harvard University in Cambridge, Massachusetts, said in an interview today.

The economy grew in the second quarter at a revised 3.8 percent annual pace, the most in more than a year, a separate Commerce Department report today showed. The gain compares with a previous estimate of 4 percent and a 0.6 percent increase in the first three months of the year. The figures didn't reflect last month's credit-market turmoil, which heightened concern the expansion might be cut short.

In another report, the number of workers filing first-time jobless claims unexpectedly fell last week to a four-month low of 298,000. The Labor Department figures may help allay concerns about a weakening labor market.

`Weaker From Here'

``The jobs environment has up until now been better than people think, but I think it's going to get weaker from here,'' David Malpass, chief economist at Bear Stearns & Co. in New York, said in an interview.

Treasury notes rose after the housing report, and later extended gains. The yield on the benchmark 10-year note dropped to 4.56 percent as of 5:15 p.m. in New York, from 4.62 percent late yesterday. Stocks rose, with the Dow Jones Industrial Average at 13,912.94, up almost 35 points.

The number of homes for sale at the end of the month fell 1.5 percent to 529,000. The inventory of unsold homes jumped to 8.2 months at the current sales pace.

The number of properties completed and waiting to be sold rose by 2,000 to 180,000.

``We don't think we hit a bottom until the end of '08 and then we have some period of time to work our way back up again,'' Mudd said in the interview in Washington. Fannie Mae is the largest provider of financing for American mortgages.

Regional Breakdown

Sales fell in two of four regions. The decline was led by a 21 percent slump in the West and a 15 percent drop in the South. Purchases increased 42 percent in the Northeast and 21 percent in the Midwest.

Other housing reports already showed the market had weakened. Sales of previously owned homes fell in August to a five-year low, the National Association of Realtors said earlier this week.

Existing homes account for about 85 percent of the market and new homes make up the rest. New-home purchases are calculated based on contract signings rather than closings and are considered a more timely indicator.

A jump in defaults among subprime borrowers, or those with little or poor credit histories, led to stricter lending requirements and made it tougher for Americans to borrow.

Losing Confidence

Waning demand and a rise in cancellations caused builders to lose confidence and scale back projects. An index of builder sentiment this month matched a record low.

Companies including Red Bank, New Jersey-based Hovnanian Enterprises Inc. have increased incentives to work down inventories that swelled as sales slowed.

``We see no signs that the housing market is stabilizing and believe it will be some time before a recovery begins, Jeffrey Mezger, chief executive officer of Los Angeles-based KB Home, said today in a statement. ``The oversupply of unsold new and resale homes and downward pressure on new-home values has worsened in many of our markets.''

KB Home today reported a third-quarter loss on lower sales and $690 million in expenses to write down real estate.

Price declines have raised concerns that consumer spending will slow as fewer Americans apply for home-equity loans.

Masco Corp., the Taylor, Michigan-based maker of Behr paint and Delta faucets, last week cut its full-year earnings forecast because of the housing recession.

The Fed on Sept. 18 lowered its benchmark interest rate for the first time in four years. ``The tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally,'' policy makers said in announcing their decision.

The economy will grow 2 percent this year, the least since 2002, according to the median estimate of economists surveyed by Bloomberg News earlier this month.

Consumer spending will probably grow at a 2.25 percent average annual pace in the second half of 2007, compared with a 2.55 percent rate from January through June, the survey also showed. Quarterly gains averaged 3.7 percent in the last decade.

Last Updated: September 27, 2007 17:28 EDT

Wednesday, September 26, 2007

Japanese Stocks Rise on Weaker Yen; Toyota, Mizuho Advance

By Kiyori Ueno

Sept. 27 (Bloomberg) -- Japanese stocks advanced, led by exporters such as Toyota Motor Corp., after the yen weakened against the dollar, increasing the value of their overseas sales.

``The weaker yen is a positive support to the market,'' said Juichi Wako, a strategist at Nomura Securities Co. in Tokyo.

Financial stocks such as Mizuho Trust & Banking Co. also gained after a New York Times report that billionaire Warren Buffett will buy a stake in Bear Stearns Cos., raising speculation that lenders will recover from the subprime crisis.

The Nikkei 225 Stock Average added 189.92, or 1.2 percent, to 16,625.66 as of 9:19 a.m. in Tokyo. The broader Topix index gained 22.31, or 1.4 percent, to 1,598.33. All 33 industry groups in the Topix gained.

Nikkei futures expiring in September climbed 1.1 percent to 16,680 in Osaka and rose 1 percent to 16,655 in Singapore.

In other Asian markets, Australia's Standard & Poor's ASX/200 Index gained 0.5 percent and South Korea's Kospi Index added 1.6 percent.

The yen recently traded at 115.46 against the dollar, down from 114.76 at yesterday's equity market close.

Last Updated: September 26, 2007 20:21 EDT

Dollar Trades Near Record Low Versus Euro Before New-Homes Data

By Kosuke Goto and Min Zeng

Sept. 27 (Bloomberg) -- The dollar traded within a cent of its all-time low against the euro before a U.S. report forecast by economists to show new-home sales fell last month.

Traders increased bets that the Federal Reserve will cut borrowing costs for a second time this year to prevent the biggest housing slump in 16 years from weakening the economy. Policy makers on Sept. 18 reduced the target rate for overnight lending between banks a half-percentage point, making dollar- denominated assets less attractive to foreign investors.

``The slowing housing market is an albatross around the U.S. economy's neck,'' said Yuji Saito, head of foreign-exchange sales at Societe Generale SA in Tokyo. ``The dollar remains weak amid concern over the slowdown in the U.S.''

The dollar traded at $1.4129 per euro at 9:00 a.m. in Tokyo from $1.4128 in New York yesterday, when it fell to $1.4162, the lowest since the European currency's debut in January 1999. It was the fifth straight trading day the dollar fell to a record. The U.S. currency traded at 115.45 yen from 115.55.

The dollar may decline to a record low of $1.42 per euro today, according to Saito.

The U.S. dollar has weakened against 13 of the 16 most- actively traded currencies this quarter, depreciating 4.1 percent against the euro and 7 percent versus the yen. The Commerce Department will report today that new-home sales decreased 5.2 percent last month to the lowest in seven years, according to a Bloomberg News survey of economists.

Future Contracts

Futures contracts yesterday suggested about 86 percent odds of a quarter-percentage point cut in the 4.75 percent target rate at the Fed's next meeting Oct. 31, compared with a 72 percent chance a week ago. The European Central Bank's target lending rate is 4 percent, and the Bank of Japan's is 0.5 percent, the lowest among industrialized countries.

The dollar was weaker against the yen before Bank of Japan policy board member Miyako Suda speaks at a financial conference in Tsu, Mie Prefecture in western Japan today.

Suda and fellow policy makers Atsushi Mizuno and Tadao Noda unsuccessfully proposed doubling the key rate to 0.5 percent in January, a month before the board proceeded with a rate increase.

``Suda may speak in a hawkish manner,'' said Toru Umemoto, chief currency strategist at Barclays Capital in Tokyo. ``If Suda hints at possibility of a rate hike in October, it is likely to be positive for the yen,'' which may rise to 109 per dollar by year-end, Umemoto said.

Investors see a 9 percent chance of a rate increase at a BOJ meeting on October 10-11, unchanged from yesterday, according to Credit Suisse Group calculations using overnight index swap rates.

Quarterly Loss

The Japanese currency touched a seven-week low against the euro yesterday as investors resumed carry trades in which they take loans in a country with low borrowing costs and invest where interest rates are higher.

Japan's currency traded at 163.14 per euro after a 0.6 percent decrease yesterday, when it touched 163.44, the weakest since Aug. 9.

The yen rallied on Aug. 17 to the highest against the dollar since June 2006 as higher borrowing costs related to subprime mortgage losses led investors to avoid higher-yielding assets. The yen is up this quarter against all of the 16 most- actively traded currencies except Norway's krone.

One-month dollar-yen implied volatility fell to 9.5 percent, the lowest since Aug. 8. Lower volatility tends to encourage carry trades because it implies smaller swings in exchange rates.

The Chicago Board Options Exchange Volatility Index touched 17.68 yesterday, the lowest since July. Lower readings in the so-called VIX, derived from prices paid for Standard & Poor's 500 options, indicate traders expect smaller share-price swings in the next 30 days.

Last Updated: September 26, 2007 20:12 EDT

Tuesday, September 25, 2007

Economy Sends Off Warning Flares

Tuesday September 25, 6:10 pm ET
By Philana Patterson, AP Business Writer

Consumer Confidence Falls, Home Sales Slump, Auguring Trouble for Holiday Shopping Season

NEW YORK (AP) -- Crumbling consumer confidence and slumping home sales could prove to be a bad combination for retailers, and for the broader economy going into the holiday shopping season, if the labor market contracts further and chokes off spending, economic data showed Tuesday.

But markets took some heart from the warning signs, hoping that they would goad the Federal Reserve to lower interest rates more.

Worries about jobs and the economy flared in September, driving a key barometer of consumer sentiment to its lowest level in nearly two years, a private research group said.

The bad news was compounded by a report from the National Association of Realtors that sales of existing homes declined for a sixth straight month in August, pushing activity to the lowest point in five years. The Realtors showed a rise in median home prices, but a separate report done by S&P/Case-Shiller said home prices fell 3.9 percent in July in its 20-city index. Economists said that decline was probably a better reflection of where the market stands now.

The New York-based Conference Board said its Consumer Confidence Index fell to 99.8, an almost 6-point drop from the revised 105.6 in August. The reading was below the 104.5 that analysts had expected.

It marked its lowest level since a 98.3 reading in November 2005, when gas and oil prices soared after hurricanes Katrina and Rita devastated the Gulf Coast.

"Weaker business conditions combined with a less favorable job market continue to cast a cloud over consumers and heighten their sense of uncertainty and concern," said Lynn Franco, director of The Conference Board Consumer Research Center, in a statement. "Looking ahead, little economic improvement is expected, and with the holiday season around the corner, this is not welcome news."

The Present Situation Index, which measures how shoppers feel now about the economy, declined to 121.7 from 130.1 in August. The Expectations Index, which measures shoppers' outlook over the next six months, declined to 85.2 from 89.2.

Economists closely monitor confidence since consumer spending accounts for two-thirds of U.S. economic activity.

The National Association of Realtors reported Tuesday that sales of existing single-family homes dropped 4.3 percent in August, compared to July. Sales at a seasonally adjusted annual rate dropped to 5.5 million units, the slowest pace since August 2002.

The S&P/Case-Shiller report, also released Tuesday, showed that the decline in U.S. home prices accelerated nationwide in July, posting the steepest drop in 16 years. The index of 10 U.S. cities fell 4.5 percent in July from a year ago. That was the biggest drop since July 1991.

Tuesday's reports showing eroding consumer confidence and a further weakening of housing do not bode well for retailers, who are already bracing for a challenging holiday season. Merchants have seen spending slow all year amid falling home prices and higher gas and food bills. Financial turmoil in August and escalating problems in the credit market have made economists and retailers more nervous about the prospects for a decent holiday shopping season.

Such anxiety is further heightened by a weakened outlook for September sales.

Based on a weak weekly sales report, The International Council of Shopping Centers on Tuesday trimmed its September same-store sales growth estimates to between 2.0 percent to 2.5 percent, from the previous 2.5 percent. Same-store sales are sales at stores open at least a year and are considered a key indicator of a retailer's health.

And two of the nation's leading retailers -- discounter Target Corp. and home improvement merchant Lowe's Cos. -- both tempered their sales forecasts on Monday.

The Washington-based National Retail Federation last week predicted total holiday sales will be up 4.0 percent for the combined November and December period, the slowest growth since a 1.3 percent rise in 2002.

Holiday sales rose 4.6 percent in 2006 and growth has averaged 4.8 percent over the last decade.

"Our forecast has built in weak consumer confidence and the tough housing market," said NRF spokesman Scott Krugman, "If anything, this tells us that our forecast is in the right direction in terms of being so cautious."

While the Fed's decision last week to cut its interest rate by half a point was meant to soften the impact of the housing woes on the overall economy, economists say it won't do much to help spending this holiday.

Wall Street chose to interpret Tuesday's data as possible evidence the Fed could use to support a case for more rate cuts.

The Dow Jones industrial average rose 19.59, or 0.14 percent, to close at 13,778.65, clawing back from a more than 60 point decline after the opening.

Broader stock indicators were mixed. The Standard & Poor's 500 slipped 0.52, or 0.03 percent, to 1,517.21, while the Nasdaq composite rose 15.50, or 0.58 percent, to 2,683.45.

There might be some relief for homeowners with adjustable rate mortgages tied to the prime rate that are poised to reset soon, but it could take six to 12 months for consumers to feel the cumulative effect of the rate cut, said Diane Swonk, chief economist at Mesirow Financial in Chicago.

How well spending holds up hinges on the job market, economists said.

"The question is, do we add jobs?" said Scott Hoyt, director of consumer economics at Moody's "If we do we should see modest growth in consumer spending."

Economists say they'll monitor the labor market, which saw its first drop in job creation in four years in August, for signs of weakness. Economists expect the job market to add 100,000 jobs in September when the Labor department reports its data on Oct. 5. Meanwhile, the unemployment rate is expected to inch up to 4.7 percent from 4.6 percent in July.

Japan Exporter Stocks May Fall on Signs of U.S. Retail Weakness

By Patrick Rial

Sept. 26 (Bloomberg) -- Japanese exporter stocks may drop after the U.S. retail market showed signs of weakening, increasing concern profit at companies including Sony Corp. will be curbed.

U.S. retailer Target Corp. slashed its sales forecast for this month and Lowes Cos. issued a profit warning. Meanwhile, consumer confidence fell more than expected and sales of previously owned homes dropped to the slowest pace in five years.

``We'll see the subprime problem gradually making its way into the real economy of the U.S.,'' said Masayoshi Okamoto, a strategist at Jujiya Securities Co. in Tokyo.

Yamada Denki Co. may lead gains by domestic retailers after the company said it will acquire smaller rival Kimuraya Select Co. and boosted its stake in Best Denki Co., increasing speculation that consolidation in the industry will continue.

Nikkei 225 Stock Average futures expiring in December last traded in Chicago at 16,410, up from the close of 16,350 in Osaka and 16,315 in Singapore yesterday. The Bank of New York Japan ADR Index, which tracks the nation's American depositary receipts, jumped 1.1 percent.

Yesterday, the Nikkei climbed 0.6 percent to 16,401.73 and the Topix index advanced 1 percent to 1,566.83.

Investors will also be focusing on the cabinet appointments by newly elected Prime Minister Yasuo Fukuda. Jujiya's Okamoto said that since most of the ministers are the same as under the previous prime minister, there shouldn't be any market impact.

U.S. Retailers

U.S.-traded receipts of Sony, which generates about 70 percent of its sales outside Japan, slid 1.3 percent from the closing share price in Tokyo yesterday. Those of Toyota Motor Corp., which gets as much as 70 percent of its operating profit, or sales minus the cost of goods sold and administrative expenses, from North America, fell 0.6 percent. Receipts of Kyocera Corp., the world's biggest maker of ceramic packaging for chips, lost 0.5 percent.

Target, the second-largest U.S. discount chain, said yesterday same-store sales will increase 1.5 percent to 2.5 percent for the five weeks through Oct. 6, versus a previous forecast for an increase of up to 6 percent.

Lowe's, the second-biggest home improvement chain, said its profit this year will be at the low end of a previous forecast, sending its shares tumbling 6.1 percent.

Elsewhere, an index of consumer confidence fell more than forecast in September, to 99.8 from 105.6 and sales of previously owned homes dropped 4.3 percent in August to the slowest annual pace since 2002 and a separate index of home values fell the most in at least six years in July.

Domestic Consolidation?

Yamada Denki, the country's largest electronics retail chain, said yesterday it will make Kimuraya Select, a discount electronics chain with stores in the Tokyo region. The acquisition will cost the company as much as 6 billion yen ($52.3 million), the Nikkei newspaper reported.

Yamada also boosted its stake in Best Denki to 7.71 percent from 6.47 percent according to a regulatory filing. Yamada hopes to increase its stake in the company to about 20 percent, the Nikkei reported on Sept. 22. Best Denki plans to resist any takeover attempt, according to the Nikkei.

The move came after Bic Camera Inc. said on Sept. 20 it would pay 5.7 billion yen for new shares in Best Denki, giving it a 9.33 percent stake in the retailer. Yamada Denki has said in the past it is determined to retain the top spot among electronics retailers.

Hino Motors Ltd. may climb. Japan's biggest maker of heavy- duty trucks raised its net income forecast for the six months through September by 16 percent, to 11 billion yen, on higher overseas sales.

Fukuda, who was elected as Japan's prime minister yesterday, re-appointed Fukushiro Nukaga to the finance minister position. New appointments include Shigeru Ishiba, who was named defense minister, while Masahiko Komura was appointed foreign minister.

Dollar Falls to Record Low Against Euro Before Durable Goods

By Stanley White and Min Zeng

Sept. 26 (Bloomberg) -- The dollar declined to a record low against the euro before data that may show a drop in U.S. durable goods orders, adding to evidence the economy is slowing.

The dollar fell against 11 of the 16 most-active currencies after economic data yesterday showed declines in consumer confidence and home resales. Traders increased bets the Federal Reserve will cut borrowing costs for a second time this year.

``The dollar is mired in weakness,'' said Nobuaki Kubo, vice president of foreign exchange at BBH Investment Services Inc., a unit of Brown Brothers Harriman. ``Investors are trading off concerns the economy will weaken and interest rates will fall.''

The dollar traded at $1.4159 against the euro at 8:23 a.m. in Tokyo and reached $1.4162, the lowest since the European currency's debut in January 1999. It bought 114.69 yen. The dollar may fall to $1.42 against the euro and 114 yen today, Tokyo-based Kubo forecast.

Fed policy makers on Sept. 18 cut the target rate for overnight lending between banks by a half-percentage point to 4.75 percent to alleviate a housing slowdown that's weakening the U.S. economy. The European Central Bank's target lending rate is 4 percent, and the Bank of Japan's is 0.5 percent, the lowest among industrialized countries.

Futures contracts yesterday showed 94 percent odds of a quarter-percentage point cut to 4.5 percent at the Fed's next meeting on Oct. 31, up from a 72 percent Sept. 24.

Durable Goods

The Commerce Department will say orders for U.S. products meant to last several years fell 4 percent in August, the most in seven months, according to a Bloomberg survey. The data are due 8:30 a.m. in Washington.

The dollar has fallen against 13 of the 16 most-active currencies this quarter, depreciating 4.3 percent against the euro and 6.9 percent versus the yen. For the year, the dollar is down 6.7 percent against the euro and 3.7 percent versus the yen.

``The market is clearly bearish on the dollar,'' said Paresh Upadhyaya, who helps manage $29 billion in currency assets in Boston at Putnam Investments. Fed policy makers ``focused more on growth than inflation, and clearly they have an easing bias.''

The dollar will fall to $1.45 per euro and 110 yen by year- end, he said.

Consumer Confidence

The New York Board of Trade's index that compares the dollar with six other major currencies touched 78.213 yesterday, the lowest since September 1992.

The New York-based Conference Board reported yesterday that its index of consumer confidence fell to 99.8 in September, the lowest in almost two years, from a revised 105.6 in the previous month. U.S. home resales fell 4.3 percent to an annual rate of 5.50 million in August, the National Association of Realtors said yesterday.

Foreign-exchange trading rose 65 percent to a record $3.2 trillion a day on average, led by growth in hedge funds and foreign investors, the Bank for International Settlements said yesterday in its triennial survey.

The increase in the value of transactions from 2004 was the biggest in the survey's 18-year history, the Basel, Switzerland- based BIS said.

Last Updated: September 25, 2007 19:26 EDT

U.S. Economy: Consumer Confidence Slumps, Home Sales Decline

By Shobhana Chandra and Bob Willis

Sept. 25 (Bloomberg) -- Consumer confidence slumped to the lowest level in almost two years and home sales weakened, threatening U.S. household spending and bolstering the case for the Federal Reserve to keep cutting interest rates.

The Conference Board's index of consumer confidence fell more than forecast in September, to 99.8 from 105.6. The National Association of Realtors said August sales of previously owned houses dropped 4.3 percent and a separate index of home values fell the most in at least six years in July.

``These numbers will encourage the Fed to cut rates again,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``The recession in housing is continuing, home prices are still falling and that's going to eat into housing wealth and home-equity extraction. The net result is we'll see sluggish consumer spending into 2008.''

Traders increased expectations that the Fed will lower borrowing costs twice more this year, interest-rate futures showed. Policy makers reduced their benchmark by half a point last week, aiming to forestall a broader economic slump.

Futures prices on the Chicago Board of Trade indicated a 70 percent likelihood the Fed will reduce its main rate to 4.25 percent, from 4.75 percent, by year-end. The odds rose from 52 percent yesterday.

The consumer confidence index was the lowest since November 2005. The reading was forecast to fall to 104.3, from an originally reported August reading of 105, according to the median estimate in a Bloomberg News survey of 71 economists. Projections ranged from 100 to 107.

Home Sales

Purchases of existing homes fell to an annual rate of 5.5 million, the fewest since August 2002, the agents' group said in Washington. Sales dropped 13 percent compared with a year earlier and median home prices rose 0.2 percent to $224,500.

Home prices in 20 U.S. metropolitan areas fell 3.9 percent in the 12 months through July, according to the S&P/Case-Shiller home-price index, which was also released today. The drop was the biggest since record keeping began in 2001, indicating the threat to consumer spending was rising even before credit markets seized up in August.

Sales are likely to keep falling after borrowing costs rose and mortgages became more difficult to get last month. The number of properties on the market rose to a record in August.

``Housing is weak, it's taking a bit of a toll on consumer spending, and consumer psychology is obviously following that down,'' said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh. ``While the holiday shopping season is still months away, it is probably going to be weaker than we've seen in many years.''

Properties for Sale

As lenders make it tougher to get loans following a surge in subprime mortgage defaults, the number of unsold properties on the market has risen, pulling prices lower.

The supply of homes for sale at the end of the month rose to 4.58 million, the most ever. At the current sales pace, that represented 10 months' worth, the highest since record keeping began in 1999 and up from 9.5 months' at the end of August.

Existing homes account for about 85 percent of the market and sales of new homes make up the rest. The report on new-home purchases, which are calculated based on signings and are considered a more timely indicator, is due from the Commerce Department on Sept. 26.

Sweeter Incentives

With inventories rising, homebuilders are sweetening incentives to close sales. Hovnanian Enterprises Inc., the biggest homebuilder in New Jersey, Sept. 14 began offering discounts worth as much as $150,000. The company held a three-day sale in 18 states including California, New Jersey, New York, Arizona, Ohio and Illinois, that led to 2,100 contract signings.

Buyers are ``hesitant to purchase,'' Chief Executive Officer Ara Hovnanian said last week at a conference in New York. ``The trend is slowly trying to get back to recovery.''

Lennar Corp., the largest U.S. homebuilder, today reported the biggest quarterly loss in its 53-year history after $848 million of costs to write down the value of real estate.

The Conference Board's measure of present conditions fell to 121.7 from 130.1 in August.

``Usually this component tracks labor market conditions, so this is a potentially significant move,'' wrote Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York, in a report to clients.

The share of consumers who said jobs are plentiful decreased to 25.7 percent from 27.5 percent in August. The proportion of people who said jobs are hard to get increased to 22.1 percent from 19.7 percent.

While job losses at construction and mortgage-related firms have risen recently, reports suggest businesses in other industries are retaining their staff until there's more evidence the economic slowdown will deepen, economists said.

The number of Americans filing claims for jobless benefits fell in the week ended Sept. 15 to the lowest level in almost two months, the Labor Department reported last week. The number of people continuing to collect state unemployment benefits plunged by the most since May.

Last Updated: September 25, 2007 11:46 EDT

European Stocks Decline, Paced by Total, Anglo American, BP

By Adria Cimino

Sept. 25 (Bloomberg) -- European stocks fell for a second day as a retreat in crude prices pushed energy shares lower and mining companies snapped a five-day rally.

Total SA and Anglo American Plc led declines by oil and mining companies, Europe's best-performing stocks this month. BP Plc slid after a report that the company plans to announce staff cuts amid the worst financial showing since 1993. Deutsche Bank AG retreated after Merrill Lynch & Co. cut its estimate for the German bank's third-quarter earnings.

The Dow Jones Stoxx 600 Index lost 1.3 percent to 371.57 at 2:15 p.m., as all 18 industry groups fell except utilities. The index has retreated 5.2 percent so far this quarter, heading for its first decline since the period ended in June 2006, on concern turmoil in the credit markets will hurt economic growth.

``There's no doubt that investors are expecting further bad news,'' said Alan Borrows, who helps oversee $2.8 billion at Midas Capital Partners in Liverpool, England. ``The credit crunch issues are eventually going to feed through into the economy.''

The yen gained versus the pound and the euro on speculation credit market losses will damp business and consumer confidence in Europe. The risk of owning European corporate bonds rose, according to traders of credit-default swaps. U.S. Treasuries gained.

Business confidence in Germany, Europe's biggest economy, fell more than economists forecast this month, reaching a 19- month low, a report showed today.

Sales of previously owned U.S. homes fell in August to a five-year low and consumer confidence ebbed, economists said before reports later today.

Total, BP

Total, Europe's third-biggest oil company, retreated 1.3 percent to 57.36 euros. Statoil ASA, Norway's largest oil producer, declined 2.2 percent to 186 kroner.

Crude fell in New York as U.S. producers in the Gulf of Mexico increased output after a storm threat passed. Crude for November delivery sank as much as 1.3 percent to $79.89 on the New York Mercantile Exchange.

BP, Europe's second-largest oil company, lost 2.5 percent to 574.5 pence. Chief Executive Officer Tony Hayward plans to announce a company shake-up next month, the Financial Times reported, citing notes from a staff meeting that were distributed by an unidentified manager. BP spokesman Neil Chapman, when reached on his cell phone, declined to comment on the FT report.

Anglo American, Rio Tinto

Anglo American, the world's second-biggest mining company, sank 3.5 percent to 3,162 pence. Rio Tinto Group, the third- largest, slid 2.4 percent to 4,103 pence.

Copper, gold and silver declined in London.

A measure for basic resources companies in the Stoxx 600 fell 2.9 percent after five days of gains.

``People are locking in profits on oil and basic-resources shares,'' said Arnaud Scarpaci, who helps manage the equivalent of about $210 million at Agilis Gestion in Paris.

National benchmarks decreased in all of the 18 western European markets except Greece. France's CAC 40 lost 1 percent as did the U.K.'s FTSE 100. Germany's DAX dropped 0.6 percent. The Stoxx 50 declined 1.1 percent, while the Euro Stoxx 50, a measure for the euro region, retreated 0.8 percent.

Deutsche Bank lost 1.1 percent to 89.19 euros. Merrill Lynch cut its third-quarter adjusted earnings-per-share estimate for the German bank by 15 percent.

`Under Pressure'

``Banks are under pressure,'' said Franck Hennin, a fund manager at Richelieu Finance in Paris, which oversees $5 billion. ``The industry is having a difficult time estimating its exposure to subprime and its losses. The hour of selection has come.''

Concern that turmoil in the credit market will weigh on earnings has pushed Stoxx 600 banking stocks index down 11 percent so far this quarter.

Credit Agricole SA, France's second-biggest bank, slipped 2.1 percent to 26.79 euros after Merrill added the shares to the firm's ``least preferred'' list.

``We have now changed from `will we have a serious bank crisis?' to `who is the winner, who is the loser?''' said Bernhard Maeder, vice president of portfolio management at Credit Suisse Asset Management in Zurich.

Arcelor Mittal, the world's largest steelmaker, dropped 0.9 percent to 54.48 euros. The company will spend $35 billion on new plants to expand capacity, the Financial Times reported, citing Chief Executive Officer Lakshmi Mittal.

OMV, Air France

OMV AG sank 5.5 percent to 48.76 euros. Central Europe's biggest oil company said it's ready to bid 2.8 trillion forint ($15.7 billion) for the shares in Hungarian oil refiner Mol Nyrt. it doesn't own to create a large-scale regional energy supplier.

Air France-KLM Group, Europe's largest airline, gained 3.2 percent to 25.14 euros. The company's targets will be ``very easily hit,'' Chief Executive Officer Jean-Cyril Spinetta told La Tribune in an interview. Four-month reservations are excellent, he said in the newspaper.

Signet Group Plc, the world's largest specialty jewelry retailer, rose 1.8 percent to 83.5 pence. The shares were upgraded to ``buy'' from ``neutral'' at Merrill Lynch.

The shares have dropped 30 percent this year, but ``the key long-term fundamentals of Signet's business model have not changed materially, if at all,'' analysts including London-based Mal Patel wrote in a research note dated today. ``The downside risks from these levels are limited.''

Last Updated: September 25, 2007 09:19 EDT

German Business Confidence Drops to a 19-Month Low (Update3)

By Simone Meier

Sept. 25 (Bloomberg) -- German business confidence fell more than economists forecast in September, reaching a 19-month low, on concern the strength of the euro and increasing cost of credit will sap economic growth.

The Ifo sentiment index, based on responses from 7,000 executives, dropped to 104.2 from 105.8 in August, the research institute said in Munich today. Economists expected a decline to 105, the median of 38 forecasts in a Bloomberg News survey showed.

The euro's climb to a record $1.4130 threatens to curb exports after the U.S. housing slump roiled financial markets. The Cologne-based IW institute yesterday cut its growth forecast for Europe's largest economy next year. Business expectations dropped to the lowest level in almost two years, today's report showed.

The decline ``carries a bleak message of slower growth ahead for the German economy,'' said David Brown, chief European economist at Bear Stearns Cos. in London. The prospect of a German slowdown makes European Central Bank interest-rate cuts look ``more likely early next year.''

European government bonds rose for a third day today, with the yield on the benchmark 10-year German bund falling 4 basis points to 4.32 percent at 12:18 p.m. in London. Germany's DAX index fell as much as 0.8 percent.

ECB Waits

The ECB on Sept. 6 shelved a planned interest-rate increase, keeping the benchmark at 4 percent. The Federal Reserve pared its benchmark interest rate by half a point on Sept. 18 after losses on U.S. mortgages aimed at people with a poor credit history pushed up credit costs and raised concern that the U.S. economy may slip into recession.

In contrast, ECB council member Nicholas Garganas said in an interview in Athens late yesterday that ``any impact on economic activity of the financial market turmoil will be small.''

``With money and credit growth still running at very high rates, the upside risks to inflation dominate any effects stemming from the appreciation of the euro,'' he said.

Companies are benefiting from booming Asian demand. The European Commission said Sept. 11 the global economy may expand faster than previously predicted as growth in economies including China ``more than offsets'' a U.S. slowdown.

Volkswagen AG, Europe's largest carmaker, said Sept. 20 sales of its namesake brand will rise to a record this year. ThyssenKrupp AG, Germany's largest steelmaker, last month reported a 63 percent gain in third-quarter revenue.

Italian, French Consumers

In Italy, consumer confidence unexpectedly rose in September, Rome-based Isae Institute said today. French consumer spending on manufactured goods rose for a third month in August, led by purchases of automobiles, suggesting economic growth may be picking up from a second-quarter slowdown.

``We see a weakening, but not the end of the recovery,'' Gernot Nerb, an economist at Ifo, said in an interview today. ``It's still too early to tell.''

Economists expect the ECB to keep rates on hold for the rest of the year.

``I can't imagine another ECB rate increase after today's Ifo figures,'' said Ulrich Kater, chief economist at Dekabank in Frankfurt. ``Credit problems are affecting the economy.''

German investor confidence fell to a nine-month low this month, the ZEW institute said last week. Europe's manufacturing and service industries expanded at the slowest pace in two years, Royal Bank of Scotland Group Plc's purchasing managers' index showed Sept. 21.

Euro, Oil Record

The European currency has increased 5 percent against the dollar in a little more than a month. At the same time, oil prices have risen to records, pushing up energy bills. A barrel of crude cost $80.20 today, 60 percent more than on Jan. 18.

The IW institute predicted German growth will slow to 1.9 percent next year from 2.5 percent in 2007. It previously forecast a 2008 expansion of 2.2 percent. The Brussels-based European Commission on Sept. 11 trimmed its 2007 forecast for the 13-nation euro region to 2.5 percent from 2.6 percent.

A gauge measuring companies' confidence in the economic outlook six months from now fell to 98.7, the lowest since November 2005, from 100.4 in August, today's report showed. An indicator of executives' assessment of the current economic situation declined to 109.9 from 111.5 in the previous month.

Audi AG, Volkswagen's luxury unit in Ingolstadt, Germany, said Sept. 12 that U.S. sales will decline in the fourth quarter partly because of the dollar's weakness.

``We need to batten down the hatches, so to speak,'' Johan de Nysschen, Audi's U.S. chief, said in an interview that day. ``We think it's going to be stormy for a while.''

Last Updated: September 25, 2007 07:23 EDT

Sunday, September 23, 2007

Fed Will Lower Rates Again Before January Trading History Shows

By Elizabeth Stanton

Sept. 24 (Bloomberg) -- Government bond traders, who predicted six of the last seven recessions, say the Federal Reserve will lower interest rates again before the end of the year as the economy comes to a standstill.

Since the Fed last week lopped half a percentage point off the central bank's target for overnight lending between banks -- the first orchestrated decline in so-called federal funds since 2003 -- traders have pushed the yield on Treasury two-year notes to almost three quarters of a point below the designated 4.75 percent funds rate. In the three previous occasions during the past 20 years when that has happened, policy makers have cut borrowing costs.

``The U.S. economy needs to grow at 2.5 to 3 percent or else it stalls,'' said Bill Gross, manager of the $104.4 billion Total Return Fund, the world's biggest bond fund. ``Historically every time we get close to stall speed the Fed lowers short rates.''

The latest government data shows unexpected job losses in August, sagging core retail sales and no relief in sight for the moribund housing market. Now that U.S. gross domestic product probably is growing at an annualized rate of less than 2 percent, speculation is rampant that another Fed rate cut is assured before January.

Even former Fed Chairman Alan Greenspan provided encouragement to traders when he said in an interview two days after the central bank's Sept. 18 rate decision that the odds of a recession remained ``somewhat more'' than one in three.

Gross, who is chief investment officer of Newport Beach, California-based Pacific Investment Management Co., has predicted lower borrowing costs for a year. He said the federal funds rate will drop to at least 3.75 percent as housing causes the economy's growth rate to slow to between 1 percent and 2 percent from 4 percent in the second quarter.

Note Rally

The benchmark 4 percent note due in August 2009 ended last week little changed at 99 29/32 to yield 4.05 percent, according to New York-based bond broker Cantor Fitzgerald LP.

Two-year notes, more sensitive to changes in monetary policy than longer-maturity debt securities, returned 2.4 percent from mid-year through Sept. 20, according to Merrill Lynch & Co. They haven't done better in a calendar quarter since gaining 3.2 percent in the three months ended Sept. 30, 2002.

``The market is anticipating there could be some further rate cuts down the line,'' said James Sarni, senior managing partner at Payden & Rygel in Los Angeles, which manages $54 billion. ``There has been a shift in the balance of what's driving the Fed from concern about inflation to more concern about growth.''

Changing Focus

At each of their 11 regular meetings from May 2006 until Aug. 7, policy makers said inflation was the main risk facing the economy. Last week they said only that ``some inflation risks remain.'' The yield on the benchmark 10-year note, a 4 3/4 percent security due in August 2017, rose 17 basis points last week to 4.63 percent on concern the Fed is willing to tolerate faster inflation to make sure the economy doesn't slip into recession. A basis point is 0.01 percentage point.

What changed for the Fed was the first drop in U.S. employment in four years in August, an unexpected decline in retail sales excluding automobiles, and the inability of borrowers to roll over short-term debt. The Washington, D.C.- based National Association of Realtors said last week the worst housing slump in at least 16 years will extend into 2008 as tighter loan standards cut into home sales.

Two-year yields were more than half a percentage point lower than the fed funds target from May to December 1989, from August to November 1998 and from October 2000 to April 2001. The Fed lowered rates during and after each period.

Past is Prologue

In 1989 a series of 23 rate cuts began in June and continued until September 1992, taking the fed funds rate to 3 percent from almost 9.75 percent. In 1998 the Fed slashed rates in September, October and November, to 4.75 percent from 5.5 percent. The last series of cuts began Jan. 3, 2001 and ended in June 2003. The rate dropped to 1 percent from 6.5 percent.

Two-year yields declined more than benchmark 10-year yields during each period. Ten-year notes produced larger total returns because the longer a bond's maturity the more its price rises for the same drop in yield.

The economy has gone into recession seven times since 1960, and six were foreshadowed by yields on three-month Treasury bills exceeding yields on 10-year notes. Three-month yields, now 3.73 percent, exceeded 10-year yields from July 2006 through May 2007.

Some areas of the financial markets show that the Fed's cut may be working. U.S. stocks posted their biggest weekly advance since March, and the three-month London interbank offered rate has fallen to 5.20 percent from 5.725 percent on Sept. 7, indicating a resumption of lending by banks.

`Ahead of Itself'

``This has been much more of a capital markets dislocation than a fundamental problem with the U.S. economy,'' said Michael Materasso, co-chair of fixed-income policy committee at Franklin Templeton Investments. ``Unless you think we're going into a prolonged slowdown with an extended period of Fed rate cuts, the short end looks a little bit ahead of itself and priced for a dire economic outcome.''

Materasso said he has been ``selectively adding risk to portfolios'' by buying corporate and mortgage-backed bonds and selling Treasuries. San Mateo, California-based Franklin Templeton oversees $130 billion of bonds.

The Fed's last series of rate reductions began on Jan. 3, 2001, and also triggered advances in stocks and declines in long- maturity Treasuries that continued for three weeks after the move. The reductions aimed to contain the economic fallout of the previous year's stock market crash.

Futures Forecast

Futures on the fed funds rate traded on the Chicago Board of Trade imply a 72 percent chance of a cut to 4.50 percent at the Fed's next meeting on Oct. 31, and 55 percent odds of a reduction to 4.25 percent at the Dec. 11 gathering. The chances of a 4 percent rate by the end of January are about 22 percent.

Interest-rate futures have an accuracy rate of less than 30 percent since 1994 in forecasting the fed funds target, an August 2006 study by the Federal Reserve Bank of St. Louis found. As recently as July 25, futures put the odds of a target lower than 5.25 percent by November at less than 20 percent.

This time, they may prove prescient, according to Lacy Hunt, chief economist at Austin, Texas-based Hoisington Investment Management Co., which oversees about $5 billion of Treasuries. The firm's Wasatch-Hoisington U.S. Treasury fund has returned an average of 4.5 percent a year over the past five years, more than any other actively managed long-maturity U.S. government bond fund, according to Morningstar.

The economy's mortgage-related problems are ``not behind us today and they're not going to be behind us for a long time to come,'' Hunt said. ``This rate reduction was first of what we think will be quite a few over the next couple of years.''

Last Updated: September 23, 2007 11:21 EDT

U.S. Stocks Surge the Most Since March After Fed Cuts Rates

By Michael Patterson

Sept. 22 (Bloomberg) -- U.S. stocks posted the biggest weekly gain since March, pushing the Dow Jones Industrial Average to within 181 points of a record, after the Federal Reserve cut its benchmark interest rate by half a percent.

Exxon Mobil Corp. and Freeport-McMoRan Copper & Gold Inc. helped lead energy and raw-material stocks higher on expectations lower borrowing costs will buoy the U.S. economy and boost demand for commodities. Goldman Sachs Group Inc. climbed the most since April 2001 after reporting a 79 percent profit gain, easing concerns that turmoil in credit markets will curb earnings at banks and brokerages.

The Standard & Poor's 500 Index advanced 2.8 percent to 1,525.75, putting the measure 1.8 percent away from its July all- time high. The Dow average added 2.8 percent to 13,820.19. The Nasdaq Composite Index rose 2.7 percent to 2,671.22.

The S&P 500 had its steepest one-day rally in four years on Sept. 18 after Fed policy makers led by Chairman Ben S. Bernanke cut the federal funds rate to 4.75 percent, lower than most economists surveyed by Bloomberg predicted. The central bank pledged to ``act as needed'' to prevent credit-market losses and the housing slump from dragging down the economy.

``The market was hoping for a cut, and they got a big one,'' said Stephen Wood, who helps manage $221 billion as senior portfolio strategist at Russell Investment Group in New York. ``That should be buoyant for equity prices.''

First Since 2003

The Fed's cut was the first since 2003. The fed funds rate, which banks charge each other for loans, had stood at 5.25 percent since June 2006. That's when the central bank ended a two-year run of increases that lifted the rate from a four-decade low of 1 percent.

``Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets,'' the rate-setting Federal Open Market Committee said in a statement.

Energy companies and raw-material producers, whose earnings are sensitive to economic growth, rallied.

Exxon, the world's biggest oil company, added 4.1 percent to $92.31 after crude rose for a fourth straight week and reached a record high of $83.90 a barrel in New York on Sept. 20. Freeport, the fifth-largest gold producer, climbed 11 percent to $108.67 as bullion surged to a 27-year high.

Bank Shares Gain

Financial shares in the S&P 500 climbed 2.7 percent as a group after Goldman and Lehman Brothers Holdings Inc. reported third-quarter profit that topped analysts' estimates.

Goldman increased 10 percent to $209.98. The world's largest securities firm had the third-best profit in its 138-year history after betting against the mortgage bonds that roiled credit markets. Earnings beat the highest analyst estimate by more than 20 percent, the seventh consecutive that the company has surpassed expectations.

Lehman advanced 5.4 percent to $62.70. The largest U.S. underwriter of mortgage-backed bonds reported a smaller profit decline than analysts estimated after it limited losses on home loans and leveraged-buyout financing.

Technology shares climbed after Oracle Corp. reported earnings that topped analysts' estimates and Texas Instruments Inc. said it plans to buy back more of its stock.

Oracle, the world's third-biggest software maker, advanced 9.5 percent to $21.98 for the largest weekly gain since September 2004. First-quarter profit climbed 25 percent to $840 million, while sales of new software licenses, an indicator of future growth, rose the most in a decade. The company also forecast sales for this quarter that topped projections.

`High Note'

Investors ``can go into the weekend on a high note with a large number of companies reporting above estimates on earnings for the quarter,'' said Wayne Wicker, who helps oversee $31.5 billion as chief investment officer at Vantagepoint Funds in Washington.

Texas Instruments rallied 5.6 percent to $36.62. The world's biggest maker of mobile-phone chips added $5 billion to its share buyback plan and increased its dividend by 25 percent.

Reports next week on gross domestic product, home sales and consumer spending may help investors gauge the impact of losses stemming from the subprime mortgage market's swoon.

``The real-estate crisis is worse than the market has realized,'' said Bruce McCain, who helps oversee about $30 billion as head of strategy for the investment management unit at Key Private Bank in Cleveland. ``The worst is yet to come in terms of foreclosures.''

In other markets, Treasury 10-year note yields posted their biggest weekly gain since March 2006 on speculation that Fed rate cuts will cause inflation to quicken and erode the value of fixed-income securities. The dollar fell for a third straight week versus the euro. The common European currency rose above $1.40 for the first time since it was introduced in 1999.

Last Updated: September 22, 2007 09:35 EDT

Saturday, September 22, 2007

Dow, S&P turn in best week since March

Friday September 21, 10:55 pm ET
By Caroline Valetkevitch

NEW YORK (Reuters) - U.S. stocks rose on Friday after robust results from software maker Oracle Corp (NasdaqGS:ORCL - News) brightened the outlook for technology, helping the Dow and S&P turn in their best weekly performance since March.

Building on the euphoria that followed the Federal Reserve's aggressive interest-rate cut on Tuesday, investors snapped up bank and other rate-sensitive stocks, betting that lower borrowing costs will keep the economy on track.

Shares of Oracle, which is heavily dependent on business spending, jumped 4.4 percent to $21.97, a day after after the world's third-largest software maker's results topped Wall Street's expectations.

"We had earnings numbers out of Oracle, which were very positive, and that's kind of leading the rally in technology. The market's sensitive to earnings numbers, given that the economy has been slowing," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank Private Wealth Management in New York.

The Dow Jones industrial average (DJI:^DJI - News) rose 53.49 points, or 0.39 percent, to end at 13,820.19. The Standard & Poor's 500 Index (^SPX - News) gained 7.00 points, or 0.46 percent, to finish at 1,525.75. The Nasdaq Composite Index (Nasdaq:^IXIC - News) added 16.93 points, or 0.64 percent, to close at 2,671.22.

For the week, the Dow advanced 2.8 percent, while the S&P 500 also gained 2.8 percent and the Nasdaq rose 2.7 percent.

The stock market's rally followed the Fed's decision on Tuesday, when it slashed its benchmark federal funds rate and the discount rate by half a percentage point to cushion the economy from ailing credit markets. The fed funds rate is the rate charged on overnight bank loans, while the discount rate is the rate the Fed charges for direct loans to banks.


Strong results from Nike Inc. (NYSE:NKE - News), also late Thursday, pushed shares of the the world's largest athletic shoe and apparel maker up on Friday to a lifetime high of $60.99, but the stock ended down 1.8 percent at $57.26.

Late in the session, audio equipment maker Harman International Industries (NYSE:HAR - News) said private equity firms that planned to buy the company told Harman they no longer intended to complete the $8 billion deal. Its shares sank 24.3 percent to end at $85, topping the NYSE's list of biggest percentage losers. It extended losses to $83 in after-hours trading.

A number of big investment banks reported results that were mixed this week, including Goldman Sachs Group Inc (NYSE:GS - News), which posted third-quarter earnings on Thursday that beat Wall Street's estimates. The stock gained 3.2 percent to $209.98 on Friday.

The third-quarter profit reporting period will begin in earnest in early October.


Friday also marked the expiration of equity derivative contracts in the quarterly event known as "quadruple witching," which analysts said could have added to some of the positive momentum.

Trading was heavy on the New York Stock Exchange, with about 2.08 billion shares changing hands, above last year's estimated daily average of 1.84 billion. On Nasdaq, about 2.37 billion shares traded, above last year's daily average of 2.02 billion. Advancing stocks outnumbered declining ones by a ratio of about 5 to 3 on the NYSE and by nearly 8 to 7 on Nasdaq.

Without Friday's witching expiration, volume might have been lighter than average as many players took the day off or left the office early in observation of the Jewish holiday, Yom Kippur.

Shares of Texas Instruments Inc (NYSE:TXN - News) advanced 2.4 percent to $36.62 after it said its board had approved an additional $5 billion stock buyback, and the company plans to raise its cash dividend by 25 percent.

Gains in energy shares also helped the S&P 500 index after oil's surge above $84 a barrel late on Thursday. Exxon Mobil Corp (NYSE:XOM - News) was up 0.2 percent at $92.31.

November crude oil prices fell 16 cents to settle at $81.62 a barrel. The October U.S. crude oil contract expired on Thursday after it hit a record for the seventh straight session at $84.10.

Friday, September 21, 2007

European Manufacturing, Services Growth Slows (Update3)

By Fergal O'Brien

Sept. 21 (Bloomberg) -- Europe's manufacturing and service industries grew at the slowest pace in two years this month after a sudden increase in credit costs hurt banks, adding to evidence that economic growth is waning.

Royal Bank of Scotland Group Plc said today a preliminary estimate of its composite index fell to 54.5 in September from 57.4 in August. That's the lowest since September 2005 and below the 56.9 median of 15 forecasts in a Bloomberg News survey. A reading above 50 indicates growth.

The drop in the index may spell the end of almost two years of interest-rate increases by the European Central Bank. Gains in oil prices and the euro's increase to a record $1.412 already threaten to damp growth. The index of services, which account for about a third of the economy, had its biggest decline since the gauge was compiled in 1998, after the U.S. mortgage market collapse curtailed bank lending.

It is the ``plunge in the services equivalent that raises a big question mark on the eurozone,'' said Aurelio Maccario, an economist at Unicredit MIB in Milan. There's ``no room for the ECB to keep on tightening.''

The manufacturing index declined to 53.2 from 54.3, while a gauge of services dropped to 54 from 58. Both numbers were lower than economists forecast. A reading of manufacturing orders dropped to 52.4 from 54.8 and the services' measure of new business also declined.

Impact on Banks

Commerzbank AG, Germany's second-biggest bank, said yesterday that second-half earnings will be weaker than in the first six months ``due to market conditions,'' retreating from a forecast that it would beat its target. Deutsche Bank AG said it will write down the value of leveraged loans and scale back hiring plans after making ``mistakes'' during the credit boom that ground to a halt in the past two months.

``While the crisis persists, monetary conditions are unlikely to ease of their own accord and the euro-zone economy will suffer accordingly,'' said Dermot O'Brien, chief economist at NCB Stocbrokers in Dublin. ``Our expectation is that the ECB will be cutting rates early in 2008 if not sooner.''

Royal Bank of Scotland economists today said they now expect the ECB to cut interest rates next year, having previously anticipated the Frankfurt-based central bank would keep its benchmark on hold.

Fed Cut

The U.S. Federal Reserve cut its benchmark rate by half a percentage point this week, saying tightening credit has the potential to ``intensify the housing correction, and to restrain economic growth more generally.''

The ripple effects of the housing slump add to risks to Europe's economy. Crude oil futures rose to $82.51 on Sept. 19, the highest since trading began in 1983. Prices are up 35 percent from a year ago. The euro has risen 6.6 percent this year, hurting European competitiveness.

Confidence among consumers and business dropped to a six- month low last month, according to an Aug. 31 report.

The ECB cut its growth estimate for the euro area to 2.5 percent from 2.6 percent, joining the European Commission and the International Monetary Fund in becoming more pessimistic. The economy grew 2.8 percent last year, the fastest since 2000.

European Aeronautic, Defence & Space Co.'s Airbus SAS unit faces extra costs of 1 billion euros ($1.41 billion) for every 10-cent increase in the euro against the dollar, Chief Operating Officer Fabrice Bregier said told BFM Radio today.

Renault SA, France's second-largest carmaker, last month said its 2007 sales target was a ``difficult objective'' because of a sluggish auto market in Europe.

Futures trading shows investors have pared bets that the ECB will raise the 4 percent benchmark rate further. The implied yield on the three-month Euribor futures contract for March was at 4.27 percent today, down from 4.38 percent on Aug. 31.

The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB's benchmark rate since 1999.

Last Updated: September 21, 2007 08:03 EDT

Yen Falls Versus Euro, Dollar as Investors Seek Riskier Assets

By Min Zeng

Sept. 21 (Bloomberg) -- The yen dropped the most in a week against the dollar and touched a six-week low versus the euro as gains in U.S. stocks and falling corporate borrowing costs encouraged investors to resume risky bets.

Japan's yen declined against all 16 major currencies as investors jumped back into the so-called carry trade. The cost of overnight loans in dollars dropped a third day, after the Federal Reserve's unexpected move to cut its benchmark interest rate by a half-percentage point to 4.75 percent on Sept. 18.

``Risk aversion is coming down, which gives investors an incentive to push down the yen,'' said Christian Dupont, a senior currency trader at Societe Generale SA in Montreal.

The yen fell 0.7 percent to 115.56 per dollar at 9:38 a.m. in New York, dropping the most since Sept. 13. The Japanese currency declined 0.8 percent to 162.65 per euro, touching the weakest since Aug. 9. The yen has lost 0.2 percent versus the dollar and 1.6 percent against the euro this week.

The dollar was little changed at $1.4078 per euro after earlier reaching $1.4120, the weakest since the euro's debut in 1999. For the week, the dollar has dropped 1.5 percent versus the euro as the Fed's rate cut dimmed the allure of U.S. deposits.

Brazil's real and the New Zealand dollar led gains against the yen, rising 1.5 percent today.

`Cheap Money'

Japan's 0.5 percent benchmark borrowing rate, the lowest among industrialized nations, has fueled a 6.7 percent drop in the yen against the euro over the past year. Japan's target compares with 4 percent in the euro region, 6.5 percent in Australia and 8.25 percent in New Zealand.

In the carry trade, investors borrow in a country with low interest rates and invest where rates are higher, earning the difference. The risk is that currency moves may erase profits.

The London interbank offered rate that banks charge each other for overnight loans in dollars dropped 4 basis points to 4.90 percent, according to the British Bankers' Association. A basis point is 0.01 percentage point. The Standard & Poor's 500 Index gained 0.6 percent at the start of trading.

``Cheap money definitely helps out the carry trade,'' said Joseph Francomano, vice president of foreign exchange at Erste Bank in New York. ``Nobody is diving in 100 percent but they are definitely getting their feet wet again. That is weakening the yen.''

Last Updated: September 21, 2007 09:52 EDT