Wednesday, July 30, 2008

Fed Extends Emergency Loan Programs Through January (Update4)

By Scott Lanman

July 30 (Bloomberg) -- The Federal Reserve extended its emergency lending programs to Wall Street firms through January after policy makers judged that markets are still ``fragile.''

The Fed also plans to give securities dealers options for tapping one of the loan programs to ensure financing through the ends of quarters, when funding needs can jump. Commercial lenders will be able to borrow from the central bank for a longer period, and the Fed boosted its swap line with the European Central Bank.

Today's action reflects continued financial turmoil, with premiums banks charge each other for three-month funds over the Fed's expected benchmark rate little changed since May. It's the latest step in officials' efforts to combat the yearlong credit crisis, after the Fed's March rescue of Bear Stearns Cos. and the Treasury's backstop for Fannie Mae and Freddie Mac this month.

``The U.S. is pulling out all the stops here to make sure we don't have a terrible downturn or a collapse in the financial system,'' said Allen Sinai, chief global economist at Decision Economics in Boston. ``There isn't anything else the Federal Reserve can do but to keep pumping liquidity into the system.''

The Primary Dealer Credit Facility for direct loans to securities firms and the Term Securities Lending Facility for loans of Treasuries, both begun in March, will now extend through Jan. 30. They would then be canceled if the Fed judges that markets ``are no longer unusual and exigent,'' the Fed said in a statement today in Washington.

Outlook for Rates

``These facilities do indicate strains that are part of the risks in the economic outlook,'' said Brian Sack, a former Fed research manager who is now senior economist at Macroeconomic Advisers LLC in Washington. Sack added that today's decision bolstered his expectation for the Fed to hold off on raising interest rates until next year.

The Fed made today's announcement ``in light of continued fragile circumstances in financial markets,'' the central bank said today. Officials made the decisions in a July 24 conference call and worked out details in the following days.

The gap between the three-month London Interbank Offered Rate and the overnight index swap rate, one measure of bank funding strains, is at 0.73 percentage point today, compared with an average of 0.66 percentage point so far this year. Former Fed Chairman Alan Greenspan says the crisis will be over once the spread narrows past 0.25 percentage point.

Policy makers are forecast to keep their benchmark rate at 2 percent when they next meet on Aug. 5. Traders still see a 71 percent chance of at least a quarter-point increase by year-end, futures prices show.

Bernanke, Geithner

Chairman Ben S. Bernanke and New York Fed President Timothy Geithner spearheaded the introduction of three lending programs since December as the credit crisis engulfed Wall Street.

Bernanke flagged the likelihood of the extension in a July 8 speech, saying the Fed is ``strongly committed'' to financial stability. The programs represent a provision of Fed credit to nonbanks unprecedented since the Great Depression.

The Fed will start auctions of options of as much as $50 billion in the TSLF on top of the $200 billion program, which loans Treasuries to securities firms in exchange for asset-backed securities and other collateral.

New York Fed officials plan to consult with the primary dealers of U.S. government bonds on the TSLF options program, the district bank said in a separate statement. The options plan is aimed at providing liquidity for two weeks or less surrounding key financing periods to be identified. Further details are planned on or before Aug. 8, the New York Fed said.

TAF Overhaul

The central bank also will start selling 84-day loans to commercial banks under the Term Auction Facility beginning next month, in addition to the sales of 28-day loans that have occurred since the program began in December. The biweekly sales will alternate between auctions of $75 billion in 28-day loans, and $25 billion in 84-day loans.

The Fed plans to keep the TAF program at $150 billion and released a schedule indicating it will remain at that size through November.

In related moves, the European Central Bank and Swiss National Bank are also extending their operations to include auctions of 84-day funds, the Fed said in a press release. The Federal Open Market Committee authorized an increase in the ECB's swap line with the Fed to $55 billion from $50 billion; the SNB's swap line is unchanged at $12 billion. The swaps are authorized through Jan. 30.

The Fed started the lending programs for investment banks under its authority to lend to nonbanks in ``unusual and exigent circumstances.'' Officials said at the time the Primary Dealer Credit Facility, which provides direct loans, would last for ``at least'' six months. The central bank had not previously given an end date for the TSLF.

Demand Falls

The PDCF has shown a zero balance for four straight weeks. The loans, once as high as $37 billion, fell to zero after the Fed took on a $30 billion portfolio of assets in June to facilitate Bear Stearns's acquisition by JPMorgan Chase & Co.

``I would be surprised if Jan. 30 marks the end of the measures,'' said Mark Vitner, senior economist at Wachovia Corp. in Charlotte, North Carolina. ``The credit crunch is very much with us and, if anything, spreading a bit to consumer borrowing.''

Regulators took over IndyMac Bancorp Inc., a California lender, on July 11 after a run on deposits. First National Bank of Nevada and California-based First Heritage Bank were shuttered July 25.

Housing Bill

Today, President George W. Bush signed into law a housing bill that provides Treasury Secretary Henry Paulson the power to make equity purchases in Fannie Mae and Freddie Mac. Paulson asked for the authority July 13 after the shares of the firms, which own or guarantee almost half of the $12 trillion of U.S. mortgages, slid to the lowest level in more than 17 years.

The Fed provides loans to commercial banks of as long as 90 days through the traditional discount window, which carries an interest rate of 2.25 percent, a quarter-point higher than the Fed's benchmark rate. Lending rose to a record daily average of $16.4 billion in the week ended July 23.

Economists compared the TSLF options program to a Fed initiative aimed at potential money shortages during the 2000 computer-system changeover. The Fed sold options on almost $500 billion of repurchase agreements for standby financing. None were exercised.

U.S. Stocks Rally, Led by Oil Companies; Financial Shares Gain

By Eric Martin

July 30 (Bloomberg) -- U.S. stocks rallied, led by the biggest gain in energy shares in six years, after oil jumped by more than $4 a barrel and a private report showed an unexpected increase in jobs.

All 39 energy producers in the Standard & Poor's 500 Index advanced as crude climbed on a decline in gasoline inventories. Wal-Mart Stores Inc. and Walt Disney Co. gained after ADP Employer Services said payrolls grew by 9,000 in July. Bank of America Corp. and Wachovia Corp. led financial shares higher after the Federal Reserve extended an emergency lending program and the Securities and Exchange Commission prolonged a ban on a type of short sale.

The S&P 500 added 21.06 points, or 1.7 percent, to 1,284.26, capping its biggest two-day rally since April. The Dow Jones Industrial Average jumped 186.13, or 1.6 percent, to 11,583.69. The Nasdaq Composite Index increased 10.1 to 2,329.72. Almost two stocks rose for each that dropped on the New York Stock Exchange.

``A strong up day from energy is going to move the whole index,'' said James Gaul, a money manager at Boston Advisors LLC in Boston, which oversees $2 billion. ``Investors are looking for any excuse possible to push this market up. They're tired of being in a down market.''

Jobs Surprise

The S&P 500 extended its rebound from an almost three-year low on July 15 to 5.7 percent as nine of 10 industry groups advanced. Stocks rallied at the open after the ADP report defied economists' forecasts for a decrease of 60,000 jobs.

Financial stocks briefly erased their advance around midday before rallying in the afternoon. Traders said the late-day gains resulted from investors covering bets that the shares would fall further because of oil's advance.

European and Asian shares climbed and the dollar rose to a one-month high against the euro.

The S&P 500 Energy Index advanced 5.6 percent, its biggest gain since July 24, 2002, as crude oil for September delivery rose $4.58, or 3.8 percent, to $126.77 a barrel in New York.

Exxon, the biggest U.S. crude producer, advanced 4.3 percent to $84.38, while Chevron, the No. 2, rallied 5.3 percent to $87.26.

`Overwhelming News'

``Rising oil prices usually hurt the market but today it went up,'' said Giri Cherukuri, a money manager at Oakbrook Investments LLC in Lisle, Illinois, which oversees $1.4 billion. ``Enough other overwhelming news canceled out the oil price.''

Hess Corp. rose the most since 1981 after the fifth-largest U.S. oil company said second-quarter profit rose 62 percent on higher production and prices. Hess soared $12.72, or 14 percent, to $106.97.

Cameron International Corp. rallied $3.24 to $49.82 after earnings topped estimates and the second-largest U.S. maker of oilfield equipment by market value forecast full-year earnings that would surpass a previous projection.

Profits have topped estimates at almost three-quarters of the S&P 500 companies that have reported second-quarter results so far even as profits slump 21 percent on average from a year earlier, according to data compiled by Bloomberg. As recently as July 3, analysts had forecast a drop of 11 percent in earnings.

Forecasts for the third quarter have improved this week. The 73 companies that gave outlooks say profit will rise an average of 1.8 percent, according to data compiled by Bloomberg. That's up from 0.9 percent at the end of last week though below the 7.3 percent growth projected by analysts.

Awaiting Labor's Report

Wal-Mart, the largest retailer in the world, rose $1.11 to $58.56. Disney, the biggest theme-park operator, climbed 75 cents to $31.67.

The ADP report isn't necessarily a guide to the Labor Department's numbers to be published Aug. 1. Four of the six previous ADP reports showed an increase in employment; all six of the government's estimates showed the workforce contracted. Private payrolls dropped by an average 94,000 a month from January through June, according to official figures, while ADP showed gains of almost 11,000 on average.

Freddie Mac gained 31 cents, or 3.7 percent, to $8.73 and Fannie Mae added 61 cents, or 5.3 percent, to $12.21 after the SEC extended until Aug. 12 an emergency limit on so-called naked short sales in shares of the mortgage-finance companies and 17 brokerages as it prepares broader rules to thwart stock manipulation.

The order aims to keep traders from driving down financial stocks to boost profits after Bear Stearns Cos. and IndyMac Bancorp Inc. collapsed amid rumors they were faltering.

`Fragile Circumstances'

The Fed extended two emergency lending programs until Jan. 30, 2009, ``in light of continued fragile circumstances in financial markets,'' the central bank said. The Primary Dealer Credit Facility for direct loans to securities firms and the Term Securities Lending Facility for loans of Treasuries, both begun in March, ``would be withdrawn should the board determine that conditions in financial markets are no longer unusual and exigent,'' the Fed said.

Financial stocks in the S&P 500 gained 2 percent as a group. Bank of America climbed 4.3 percent to $33.61. Wachovia added 8.8 percent to $17.08. American International Group Inc., the world's largest insurer, gained 91 cents to $26.76.

MetLife Inc., the nation's biggest life insurer, dropped $1.03 to $51.78. The company cut its full-year earnings forecast and said second-quarter net income fell to $946 million, or $1.26 a share, from $1.16 billion, or $1.48. Operating profit, which excludes investment losses, was $1.30 a share, missing the $1.51 average estimate of 19 analysts surveyed by Bloomberg.

Wyeth lost $5.37 to $39.74 after its experimental Alzheimer's drug was linked to a brain-swelling side effect in a test. The company's drug, bapineuzumab, developed with Elan Corp., showed no benefit for the majority of Alzheimer's patients.


The S&P 500 rallied 2.3 percent yesterday as financial shares rose for the first time in four days, led by Bank of America and JPMorgan Chase & Co., on Merrill Lynch & Co.'s plans to sell $8.5 billion of stock and liquidate $30.6 billion of bonds bolstered speculation that Wall Street is overcoming failed subprime bets.

Merrill gained 2.5 percent to $26.91. The third-largest U.S. securities firm said it will maintain its quarterly dividend at the rate it has paid for the past year and a half.

``I'm looking for good follow-through from financials,'' said Robert Stimpson, a money manager at Oak Associates Ltd. in Akron, Ohio, which oversees $1.2 billion. ``We've seen a lot of big one-day moves that faltered. I would like to see continued strength in the sector'' based on ``more indications we're closer to the end of the writedowns.''

Descent From Peak

The S&P 500 has declined 18 percent from an October record as the collapse of the U.S. subprime mortgage market forced financial institutions worldwide to report $476 billion in writedowns and credit losses since the beginning of 2007.

Financial industry profits, which analysts estimated would fall 60 percent, have plummeted 87 percent. Record oil prices drove earnings of ConocoPhillips and Occidental Petroleum Corp. to the highest in their histories. The energy group of the S&P 500 has posted a 15 percent gain in earnings so far.

Comcast Corp. increased 89 cents, or 4.6 percent, to $20.07 today. The largest U.S. cable-television operator said second- quarter profit rose 7.5 percent as the company attracted more customers to its telephone and high-speed Internet services.

RF Micro Devices Inc. gained 49 cents, or 17 percent, to $3.40. The maker of chips and radio systems for mobile phones reported second-quarter profit of 5 cents a share, meeting the average analyst estimate in a Bloomberg survey.

Cummins Inc. rose $4.48, or 6.8 percent, to $70.50. The maker of more than a third of North America's heavy-duty truck engines said that second-quarter profit rose 37 percent on increased engine demand at home and generator sales overseas.

Monday, July 28, 2008

IMF Says End of U.S. Housing Slump `Not Visible' (Update1)

By Christopher Swann

July 28 (Bloomberg) -- The International Monetary Fund said there's no end in sight to the U.S. housing recession and warned that deteriorating credit conditions for consumers and banks may prolong a period of slow economic growth.

``At the moment, a bottom for the housing market is not visible,'' the IMF said in its Global Financial Stability Report, released today in Washington. ``Stemming the decline in the U.S. housing market is necessary for market stabilization as this would help both households and financial institutions to recover.''

The IMF, which a year ago failed to foresee the depth of the subprime mortgage collapse, stood by its April forecast for about $1 trillion in losses stemming from the U.S. mortgage crisis. While U.S. policy makers have helped contain the financial losses, ``credit risks remain elevated'' and banks need to raise more capital.

Worldwide asset writedowns and losses have totaled $469 billion in the past year and $345 billion has been raised.

The Washington-based lender in the report said the Federal Reserve's decisions to expand lending to Wall Street firms ``have succeeded in containing systemic risks.'' Still, weakness in housing threatens to extend the slump.

``The growing concern is that, with delinquencies and foreclosures in the U.S. housing market rising sharply, and house prices continuing to fall, loan deterioration is becoming more widespread,'' the IMF said.

`Few Signs'

Jaime Caruana, head of the IMF's capital market division, speaking to the press in Washington today, said housing data in the U.S. showed few signs of improvement. ``Some indicators continue to go south,'' he said. Improving affordability, he said, should at some point help the market recover.

Falling share prices are making it harder for banks to raise capital, increasing the risk of a downward spiral in the global economy, the IMF said. The outlook for banks may make investors reluctant to provide fresh funds needed to restore the strength of financial institutions, the fund said.

``As economic growth slows, banks will face continued headwinds in maintaining earnings due to falling credit quality, declining fee income, high funding costs, and exposures to monoline and mortgage insurers,'' Jaime Caruana, director of the IMF's monetary and capital markets unit, said in a statement.

Fannie, Freddie

The fund warned that the frailty of the financial system would be increased by the failure of Fannie Mae and Freddie Mac, the two largest sources of U.S. mortgage financing. Shares of both companies are down more than 80 percent in the past year.

The U.S. Congress two days ago passed legislation to stem foreclosures for 400,000 homeowners and aid Fannie Mae and Freddie Mac, its most sweeping effort to halt the biggest housing slump since the Depression. President George W. Bush may sign the bill into law this week.

IMF economists said that the global holdings of Fannie Mae and Freddie Mac debt meant that ``there would have been systemic consequences had confidence in the debt come into question.''

The report said oversight of Fannie Mae and Freddie Mac was too weak. ``Part of the problem stems from the current regulatory framework, which has allowed their balance sheets to expand to their current systemic significance,'' the fund said.

For central bankers, the risks of inflation as well as weaker growth are rising, the IMF said.

Inflation Quickens

On July 17 the IMF said inflation in developing and emerging countries would average 9.1 percent in 2008, up from a forecast of 7.4 percent in April. Their prediction for inflation in advanced economies for this year was raised to 3.4 percent, compared with a forecast of 2.6 percent in April.

``Policy trade-offs between inflation, growth and financial stability are becoming increasingly difficult,'' the fund said. ``With inflation risks on the rise, the scope for monetary policy to be supportive of financial stability has become more constrained.''

IMF economists said the duration of the turmoil in credit markets was testing the resilience of emerging markets, leaving investors wary of putting money in countries with rising inflation and large trade deficits.

``There are now clear signs that investors are becoming more cautious about adding to positions,'' the fund said. ``Outflows from emerging market equity funds have been concentrated on Asian markets where inflation and downside growth risks are most elevated.''

Sunday, July 27, 2008

ANZ Bank Profit to Fall as Much as 25% on Bad Debts (Update1)

By Stuart Kelly

July 28 (Bloomberg) -- Australia & New Zealand Banking Group Ltd., the nation's fourth-biggest by market value, said full-year profit will fall as much as 25 percent as a weakening economy increases bad debts.

Cash earnings per share, which excludes income from derivatives trading, is expected to drop by between 20 percent and 25 percent in the 12 months to Sept. 30, compared with the year-earlier period, the Melbourne-based bank said in a statement today. Provisions for bad debts in the current half are likely to be about A$1.2 billion ($1.1 billion) compared with A$980 million in the first half, the bank said.

ANZ joins National Australia Bank Ltd., the nation's largest, in warning of weaker profit amid higher funding costs and increased provisions for non-performing loans. The U.S. subprime mortgage collapse has triggered more than $468 billion in losses and writedowns among banks and brokerages globally the past year.

ANZ in April posted a 7 percent drop in first-half profit, with Chief Executive Officer Mike Smith setting aside A$980 million for bad debts, four times more than a year ago.

ANZ today maintained its dividend forecast of A$1.36 for the full-year.

Australia Dollar Peak Pushes Traders to Yen on Slowing Economy

By Wes Goodman and Stanley White

July 28 (Bloomberg) -- Six months after correctly identifying the Australian dollar as one of the best bets in the foreign exchange market, the biggest investor in the nation's debt says the rally is coming to an end.

Daiwa Asset Management Co., which holds 4 percent of the government's bonds, expects the currency to close the year at $1, compared with 95.62 U.S. cents on July 25, after earlier forecasting a surge to $1.10. Daiwa cut its estimate as the country's benchmark S&P/ASX 200 Index of stocks dropped to a 2 1/2-year low this month and the Reuters/Jefferies CRB Index of commodities fell 13 percent from its record high on July 2.

``The rally is finished as the best days for the economy may be over,'' said Tsutomu Komiya, a money manager in Tokyo at Daiwa, a unit of Japan's second-largest brokerage. Daiwa, which manages the equivalent of $93 billion, isn't buying the currency because cash flowing into Australia funds ``has stopped in recent days,'' he said.

Mizuho Asset Management Co., State Street Global Advisors and Putnam Investments are also turning into bears as the U.S. economic slowdown spreads, curtailing the rally in coal, oil and metals that fueled Australia's expansion. Lehman Brothers Holdings Inc., which recommended the currency in February, now predicts it will depreciate 21 percent by 2009.

The Aussie gained 9.3 percent against the greenback this year, lagging behind only the Brazilian real and the Swiss franc among the 16 most-traded currencies, according to data compiled by Bloomberg. It touched 98.5 cents on July 16, the highest since 1983. The Australian dollar soared 44 percent over the past five years, on demand from China for the country's coal, iron ore and nickel.

Record Exports

Commodities exports were poised to set a record for the fourth-straight year in the 12 months to June 30, 2008, reaching A$145.6 billion, the government's Australian Bureau of Agricultural and Resource Economics said in March.

The $1 trillion economy is slowing after the central bank increased its target interest rate to a 12-year high of 7.25 percent in March to stem inflation. Home loan approvals fell by the most in eight years in May and consumer confidence slumped to a 16-year low this month. Growth may decelerate to 2.95 percent this year from 4.23 percent in 2007, according to the median estimate of 14 economists surveyed by Bloomberg News.

Australia's dollar slumped 1.4 percent last week, even after a government report showed consumer prices climbed 4.5 percent from a year earlier, the most since 2001.

Cooling Economy

The Reserve Bank of Australia increased its target rate 12 times from 4.25 percent in April 2002 to curb inflation. Governor Glenn Stevens will cut rates by 0.25 percentage point at least once in the coming 12 months, a Credit Suisse Group index shows.

The Aussie will slide 4.8 percent this year to 91 U.S. cents, according to the median of 30 currency strategist forecasts in a Bloomberg survey. Lehman predicts 85 U.S. cents as commodity prices fall and losses linked to subprime mortgage defaults slow global growth.

``Parity is out of the question,'' said Akira Takei, the general manager for international bonds at Mizuho in Tokyo, part of Japan's second-largest publicly traded bank. ``For the past several years, people were eager to take risks. Now things have changed as the U.S. subprime issue spills over into other regions. The Australian dollar will be sacrificed.''

Mizuho, which oversees the equivalent of $37 billion, sold last week. The currency may fall to 85 cents this year and 75 the next, Takei said.

Yen to `Soar'

The biggest beneficiary of a weaker Aussie may be the yen. Australian dollar securities rose to 12 percent of Japanese overseas investments between November and April, compared with an average of 6 percent since 2005, according to Japan's Ministry of Finance. Investors took advantage of the difference between Australia's interest rates and Japan's, where the benchmark borrowing cost is 0.5 percent.

As Japanese bring home proceeds of their sales, the yen will gain 1 percent this year after closing last week at 107.84 to the U.S. dollar, a separate Bloomberg survey showed.

``The yen should broadly soar if commodity prices were to fall,'' Taisuke Tanaka, Lehman's chief Japan currency strategist wrote in a July 17 report.

Japanese individuals already started to reduce bets, according to figures from the Tokyo Financial Exchange Inc. Net long positions that the Australian dollar will gain against the yen fell to 39,449 contracts on July 22, less than half the record of 79,920 contracts on July 1.

Trade Balance

Investors should be wary of betting too soon on the yen, according to UBS AG, the world's second-biggest foreign exchange trading firm. Japan's exports fell in June for the first time in more than four years as demand for cars and electronics dropped, the Finance Ministry reported last week. The yen and the trade balance have consistently moved together over the last couple of decades, UBS said.

``The downside risks to Japan's currency are growing sharply,'' said Mansoor Mohi-uddin, a Zurich-based strategist at UBS, in a research note on July 25.

The Aussie remains the favorite of Kokusai Asset Management Co. because of growth in China's economy, which is expanding at an annual rate of more than 10 percent, said Masataka Horii, one of four investors for the firm's $53 billion Global Sovereign Open fund in Tokyo.

``Australia will profit from China,'' said Horii. ``Its economy is relatively better than that of Japan or the U.S.''

Australia & New Zealand Banking Group Ltd., the country's third-biggest bank, predicts the currency will rise to $1.04, after reaching parity for the first time since 1982.

Commodity Impact

Australia relies on raw material exports for 9 percent of its economy, ranking behind Gulf Arab states, Chile and Russia, according to research by Morgan Stanley.

Investors started to question the outlook for Australia after oil prices tumbled 15 percent since reaching a record on July 3 on concern demand from the U.S., Japan and China will wane. Gold fell 5 percent from this month's high as the drop in fuel prices gave investors less need for the metal as a hedge against inflation.

Gold, Australia's biggest raw-material export after coal and iron ore, may drop to $825 in 2010 from $924 now, according to a Bloomberg survey of 11 analysts. Crude oil, the No. 4 raw- material export, may slump to $112 a barrel in 2010 from $124, a separate survey shows. China's economy grew 10.1 percent in the second quarter from a year earlier, compared with the 11.9 percent pace in 2007.

`Too Expensive'

``Oil and commodities are too expensive,'' said Kensuke Niihara, head of foreign-exchange management in Japan at State Street, which manages $100 billion in assets worldwide. ``Within this year, there is good potential the Australian dollar will come down.''

Putnam, which forecast the Aussie would reach 95 U.S. cents when it was trading at 88 cents on Jan. 10, is also turning negative.

``We've been bullish the Australian dollar all year long but we have reduced some in the last few weeks,'' said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president in Boston. ``If you believe we're in a period of weaker global growth then it would seem the Australian dollar has some risk of falling.''

Friday, July 25, 2008

U.S. Economy: Orders Up, Home Sales Beat Forecasts (Update1)

By Courtney Schlisserman and Timothy R. Homan

July 25 (Bloomberg) -- Orders for U.S. durable goods unexpectedly rose in June, and sales of new homes were higher than forecast, easing concern that the economic slowdown will worsen.

Bookings for goods made to last several years gained 0.8 percent and posted the first consecutive monthly rise since July 2007, the Commerce Department said today in Washington. New homes sold at an annualized pace of 530,000, exceeding the median forecast of 503,000 in a Bloomberg News survey. A private report showed consumer sentiment rose from a 28-year low.

Stocks rose and Treasuries fell after the reports indicated the economy accelerated in the second quarter from the weakest pace of growth in five years. Economists had forecast that the slowdown would worsen by year-end as the impact of tax rebates fades and as job losses and rising consumer prices force households to cut spending.

``At the end of the day, we are going to avoid a severe recession,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut.

The Reuters/University of Michigan final index of consumer sentiment increased to 61.2 in July from 56.4 in June. The measure averaged 85.6 in 2007 and is up from a preliminary reading of 56.6 in early July.

Stocks, Treasuries

The Standard & Poor's 500 Stock Index gained 0.4 percent to close at 1,257.76 at 11:24 a.m. in New York. Benchmark 10-year note yields rose to 4.10 percent at 4:45 p.m. in New York from 4 percent late yesterday.

The rise in durable-goods orders compared with the median forecast for a 0.3 percent drop in a Bloomberg News survey of 78 economists.

``It's consistent with modest economic growth,'' Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina, said in a Bloomberg Radio interview. ``It does support the notion that GDP growth in the second quarter was pretty solid,'' he said, referring to gross domestic product.

Record exports, fueled by a weakening dollar and economic expansions abroad, are helping U.S. factories withstand the housing slump and slowing demand at home.

Caterpillar Inc., the world's largest maker of earthmoving equipment, said July 22 that demand in China and the Middle East helped its second-quarter profit surge 34 percent.

GDP Impact

Bookings for non-defense capital goods excluding aircraft, a measure of future business investment, climbed 1.4 percent after a 0.1 percent decrease in May. Shipments of those items, which is a figure used in calculating gross domestic product, increased 0.7 percent following a 0.2 percent gain.

Morgan Stanley economists raised their forecast for second- quarter GDP growth to 2.4 percent from 2.2 percent after the durable-goods report.

The government is scheduled to release its advance second- quarter growth estimate on July 31. Economists surveyed by Bloomberg forecast the economy expanded at a 2 percent pace from April through June as exports grew and consumer spending rebounded on the tax rebates mailed.

Economists forecast new-home sales would decline to a 503,000 pace, from a previously reported 512,000 for May, according to the median of 75 projections.

The number of properties on the market dropped by the most in four decades, indicating builders are making some headway in clearing out inventories.

The median sales prices last month decreased 2 percent from June 2007 to $230,900. These figures can be influenced by changes in the mix of sales at the regional level. For that reason, economists prefer price measures that track the same home over time.

Drop in Supply

The supply of homes at the current sales rate fell to 10 months' worth from 10.4 months in May. There were 426,000 homes for sale at the end of June at an annual pace, the fewest since December 2004. The figure was down 5.3 percent from the prior month, the biggest decline since November 1963.

A report yesterday from the National Association of Realtors showed existing home sales fell 2.6 percent to a 4.86 million annual rate, the lowest level in a decade. The median home price dropped 6.1 percent from June of last year.

Concern over the ability of Fannie Mae and Freddie Mac, the largest U.S. purchasers of mortgages, to survive the meltdown in subprime lending has heightened the credit crisis and may push up mortgage rates and further curtail access to loans.

U.S. foreclosure filings more than doubled in the second quarter from a year earlier as falling home prices left borrowers owing more on mortgages than their properties were worth.

Loss at Pulte

Pulte Homes Inc., the third-largest U.S. homebuilder, this week reported a second-quarter loss of $158.4 million.

``We see no immediate signs of this housing downturn relenting,'' Pulte Chief Executive Officer Richard Dugas said yesterday on a conference call with analysts.

The gains in today's durable-goods report reflected increasing demand for machinery, metals, autos and defense gear.

The figures countered regional reports, which indicated manufacturing was weakening. The Federal Reserve said on July 23 that manufacturing declined in ``many'' of its 12 districts in June and July. The Fed also said the economy ``slowed somewhat'' and that all of its bank districts reported ``elevated or increasing'' price pressures.

``Manufacturers in several districts anticipated further factory weakness in the near future,'' the central bank said in its regional economic survey, known as the Beige Book for the color of its cover. ``While most districts expected stable capital spending heading forward, a few noted manufacturers' plans to reevaluate based on current economic conditions.''

Orders for automobiles increased 1.8 percent, the most since July 2007. The gain may have reflected the end of a strike at American Axle & Manufacturing Holdings Inc., the largest axle supplier for General Motors Corp. GM said June 16 it had returned to full production.

Wednesday, July 23, 2008

Oil Is Steady Near 7-Week Low on Supply Gain, Drop in Demand

By Mark Shenk and Samantha Zee

July 24 (Bloomberg) -- Crude oil futures were little changed near their lowest in seven weeks after falling yesterday as a report showed that U.S. fuel stockpiles increased and consumption tumbled to the lowest in more than a year.

Gasoline supplies rose 2.85 million barrels last week, the Energy Department said. Stockpiles of distillate fuel, a category that includes heating oil and diesel, climbed 2.42 million barrels. U.S. fuel demand averaged 19.9 million barrels a day, the lowest since January 2007.

``The inventory and demand numbers make it clear that demand is being affected by high prices and the weak economy,'' said Kyle Cooper, an analyst at IAF Advisors in Houston. ``The 19.9 million barrel demand number is incredibly low and has to have the bulls worried.''

Crude oil for September delivery rose 2 cents to $124.46 a barrel at 9:04 a.m. Sydney time on the New York Mercantile Exchange. Yesterday, oil dropped $3.98, or 3.1 percent, to settle at $124.44 a barrel, the lowest close since June 4. Futures have lost more than 5 percent this week.

Demand has declined for three straight weeks, the Energy Department report showed. U.S. fuel consumption averaged 20.3 million barrels a day in the past four weeks, down 2.1 percent from a year earlier, the department said.

Refineries operated at 87.1 percent of capacity last week, down 2.4 percentage points from the week before, according to the department. It was the lowest utilization rate since the week ended May 9.

Crude Stockpiles

Refineries were forecast to operate at 89.5 percent of capacity last week, unchanged from the week before, according to the median of analyst estimates in the Bloomberg survey.

Crude-oil inventories dropped 1.56 million barrels to 295.3 million. Stockpiles were forecast to decline 675,000 barrels, according to the survey results.

``Any bullish impact from the crude-oil drop has been offset by rising product inventories in the face of falling refinery utilization rates,'' said Bill O'Grady, director of fundamental futures research at Wachovia Securities in St. Louis. ``This is another sign that demand is being hammered. You've reached a price level where there's a demand response.''

Analysts were split over whether gasoline inventories rose or fell last week, the survey showed. Distillate supplies were forecast to climb 2.5 million barrels.

Pump Prices

Gasoline for August delivery fell 11.26 cents, or 3.6 percent, to settle at $3.0344 a gallon in New York yesterday, the lowest close since May 2. Futures reached a record $3.631 a gallon on July 11.

Pump prices are following changes in futures. Regular gasoline, averaged nationwide, fell 1.3 cents to $4.042 a gallon, AAA, the nation's largest motorist organization, said yesterday on its Web site. Pump prices reached a record $4.114 a gallon on July 17.

Crude oil has tumbled 16 percent from a record $147.27 a barrel on July 11, as a stronger U.S. dollar limited the appeal of commodities as a hedge against inflation and high prices cut fuel consumption. Prices also fell the past two days because a hurricane moved away from oil platforms in the Gulf of Mexico.

Oil and other commodities may drop further and the dollar increase if the Federal Reserve boosts interest rates to curb inflation. Philadelphia Fed President Charles Plosser yesterday said higher mortgage costs and continued declines in house prices pose no bar to raising interest rates.

`Unhinged' Expectations

Policy makers must increase borrowing costs before inflation expectations become ``unhinged,'' Plosser said in an interview with Bloomberg Television.

The dollar traded at 107.97 yen at 6:13 a.m. in Tokyo, after rising 0.5 percent yesterday, when it reached 107.97, the highest since June 26. The U.S. currency was at $1.5687 per euro, after rising 0.5 percent yesterday and touching $1.5670, the strongest since July 9. The yen traded at 169.27 per euro after touching 169.96 euro, the weakest since the 15-nation currency's 1999 debut.

The UBS Bloomberg Constant Maturity Commodity Index, which tracks 26 raw materials, gained 31 percent in the first half of the year as the U.S. currency retreated 8 percent. The index has fallen 8.8 percent this month as the dollar has stabilized.

Hurricane Dolly came ashore in southern Texas yesterday, where coastal residents sustained their first direct hit by a hurricane in almost a decade. Dolly packed winds of 100 miles (161 kilometers) per hour as its eye hit South Padre Island, about 35 miles northeast of Brownsville, at 1 p.m. local time, according to the U.S. National Hurricane Center.

Dolly is the season's first hurricane in the Gulf of Mexico, home to about a quarter of U.S. oil production. The storm has steered south of most rigs, which are off the East Texas and Louisiana shores.

Brent crude oil for September settlement dropped $4.26, or 3.3 percent, to close at $125.29 a barrel on London's ICE Futures Europe exchange yesterday, the lowest settlement since June 4.

N.Z. Cuts Key Rate a Quarter Point as Economy Slows (Update2)

By Tracy Withers

July 24 (Bloomberg) -- New Zealand's central bank cut its benchmark interest rate by a quarter point to 8 percent, the first reduction in five years, saying slowing economic growth will curb inflation. The nation's currency fell.

``Economic activity is likely to remain weak over the remainder of 2008,'' Reserve Bank Governor Alan Bollard said in a statement in Wellington today. ``Provided that the outlook for inflation continues to improve and there is no excessive exchange rate depreciation, we would expect to lower rates further.''

New Zealand's economy contracted in the first quarter, putting the nation on the brink of its first recession since 1998, as drought, a slumping housing market and rising credit costs stall spending. Bollard says inflation will return below the 3 percent limit of his target range within two years.

``This is a rate cut to compensate for the tightening of financial and credit markets,'' said Matthew Johnson, a senior economist at ICAP Australia Ltd. in Sydney. ``The economy is broken. The construction industry has turned turtle, the housing market is going backwards and their equity markets have fallen. It's all pretty ugly.

``Admittedly inflation is high, but rates at 8 percent are still very tight,'' Johnson said, adding that he forecasts another 50 basis points of cuts by the end of this year.

New Zealand's dollar fell to a six-month low of 74.30 U.S. cents from 75.02 cents immediately before the statement. The currency, which dropped 2.7 percent in the seven days before the decision, bought 74.44 cents at 9:55 a.m. in Wellington.

Unexpected Decision

The yield on a three-year benchmark bond fell 12 basis points to 6.11 percent. A basis point is 0.01 percentage points.

Just four of 15 economists surveyed by Bloomberg News last week predicted today's decision. Eleven expected no change until the next review on Sept. 11.

Bollard had kept the official cash rate at 8.25 percent, the highest of any nation with an Aaa credit rating, since July last year. Today's is the first rate cut since July 2003.

While official rates have been unchanged the past year, local banks have been raising borrowing costs as they have had to pay more for credit overseas.

Today's rate cut ``will help to mitigate the effect of these increases on the actual borrowing costs paid by firms and households,'' Bollard said.

Global Dilemma

Central bankers around the world are grappling with slowing economic growth while surging fuel and food prices fan inflation. Consumer prices in the U.S. surged 5 percent in the year through June, the biggest jump since 1991, and in Europe they climbed 4 percent, the fastest pace in more than 16 years.

Bollard was under pressure to cut interest rates to help New Zealand avoid a prolonged recession.

``More unpleasant international news has emerged since the June statement and there is a risk that the domestic economy will slow further,'' Bollard said today. ``The ongoing correction in the housing market together with very high oil prices will limit household spending and constrain the extent of recovery.''

Gross domestic product contracted 0.3 percent in the first quarter. Eight of 13 economists surveyed by Bloomberg expect it also shrank in the three months ended June 30.

Sales of houses slumped for a fourth straight month in June and prices fell, the Real Estate Institute said on July 11. Consumer confidence fell to a record low in the two weeks ended June 29 because of the threat of recession, according to a survey by research firm Roy Morgan.

Retail Sales

Slowing sales are eroding earnings at retailers such as Hallenstein Glasson Holdings Ltd., which said on July 10 that full-year profit will fall at least 28 percent. The clothing retailer became the third New Zealand store owner to cut earnings forecasts in two weeks.

``The current environment is the most challenging experienced for a number of years,'' Chief Executive Officer Shayne Quanchi said. ``There is fierce competition for consumers' wallets.''

New Zealand's biggest trade union said last week companies will face demands for higher wages as food and fuel prices soar.

``The weaker economy is expected to reduce pressure on resources, making it more difficult for firms to pass on costs and for higher wage claims to be agreed.''

The jobless rate was 3.6 percent in the first quarter, the sixth-lowest of 27 economies in the Organization for Economic Cooperation and Development that use standardized rates.

Consumer prices rose 4 percent in the year ended June 30, the fastest annual pace in two years.

Inflation will peak at 5 percent in the year ending Sept. 30, the highest rate since the fourth quarter of 1990, Bollard said today. Inflation will return to the central bank's 1 percent-to-3 percent target range in the medium term, he said.

Tuesday, July 22, 2008

Merrill Cuts 2009 U.S. GDP Forecast: Chart of the Day (Update1)

By Mark Gilbert

July 22 (Bloomberg) -- Merrill Lynch & Co. economists clipped their forecasts for U.S. growth, making revisions that they described as ``adjusting to the new reality.''

``Just like consumers, who are insulating their windows and making fewer trips to the malls, we are adjusting our economic forecasts to the new high-oil-price reality, not to mention the latest round of trauma in the mortgage markets,'' New York-based economists Sheryl King and Drew Matus wrote in a report.

The chart of the day shows the quarterly change in U.S. gross domestic product in green, with the annualized figure in red. Merrill now expects the economy to contract by 0.5 percent in 2009, after previously forecasting growth of 0.5 percent.

``We expect GDP to plummet 2.5 percent in the fourth quarter, and see a similar decline in the first quarter'' of 2009, wrote King and Matus. ``With the consumer likely to remain under duress into 2009 and inflation fears likely to abate, we continue to expect the Federal Reserve to cut interest rates early next year.''

Figures scheduled for release on July 31 are expected to show that the U.S. economy grew at an annualized 1.8 percent in the second quarter, according to the average forecast of 23 economists surveyed by Bloomberg News, up from 1 percent in the first three months of the year.

U.S. Stocks Rally as Oil Drops; Wachovia, Airline Shares Surge

By Lynn Thomasson

July 22 (Bloomberg) -- U.S. stocks rallied, pushing the Dow Jones Industrial Average up 127 points in the last hour, after Deutsche Bank AG said financial companies are overcoming credit losses and a drop in oil stoked a record gain in airlines.

Wachovia Corp., Bank of America Corp. and SunTrust Banks Inc. helped lenders extend their rebound from last week's nine- year low to 28 percent after Deutsche Bank analyst Mike Mayo said bank losses haven't spread as ``much as feared.'' UAL Corp., parent of United Airlines, surged the most since emerging from bankruptcy in 2006 as oil slid to a six-week low and the company said it will cut costs by eliminating 7,000 jobs.

The S&P 500 gained 17 points, or 1.4 percent, to 1,277 and has climbed 5.1 percent from an almost three-year low on July 15. The Dow Jones Industrial Average added 135.16 points, or 1.2 percent, to 11,602.5. The Nasdaq Composite Index increased 24.43 points, or 1.1 percent, to 2,303.96. Three stocks rose for each that fell on the New York Stock Exchange.

``After two months of nothing but bad news, we just got a couple rays of lasting sunshine to trigger some buying,'' said Frederic Dickson, who helps manage $23 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.

The report from Deutsche Bank and Wachovia's plan to cut costs helped the market add to last week's gains spurred by results at Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. The benchmark for U.S. equities is still 18 percent below its October record as profits slump for a fourth straight quarter, the longest stretch of declines since 2002.

U.S. Treasuries fell, sending the yield on the two-year note up 0.13 percentage point to 2.72 percent, and the dollar climbed the most against the euro in more than two weeks.

Wachovia Rallies

Wachovia climbed 27 percent to $16.79. Chief Executive Officer Robert Steel, the former Treasury Undersecretary hired two weeks ago, told investors on a conference call that a sale of stock is ``not on the plan.'' Steel plans to cut the $2 billion in expenses by the end of next year. Earlier, the shares tumbled as much as 12 percent after the bank posted a record loss and reduced its dividend for the second time in three months.

Financial shares extended gains after Deutsche Bank's Mayo said he's less ``negative'' on bank earnings and predicted Wachovia will increase earnings in the coming quarters.

The comments from Wachovia and Mayo helped financials reverse a decline of as much as 3.8 percent to an advance of 6.6 percent. The Chicago Board Options Exchange Volatility Index, which gauges the cost of using options as insurance against declines in the S&P 500, fell 8.1 percent to 21.18, the lowest since June 25. The so-called VIX rose as much as 4.5 percent as trading began.

`Strong Stomach'

``We really believe volatility is here to stay for the year,'' said Frank Ingarra, the assistant portfolio manager at Hennessy Advisors Inc., which oversees $1.1 billion in Novato, California. ``If you've got a long-term view, there are some great buying opportunities, but you've got to have a strong stomach.''

SunTrust climbed 16 percent to $39.66, the highest price since Jun. 17. The largest bank based in Georgia reported per- share earnings that exceeded the average analyst estimate by 19 percent and said it won't cut its dividend and doesn't need to raise capital.

Bank of America increased 13 percent to $32.35 and contributed the most to the S&P 500's advance. The S&P 500 Financials Index added 6.6 percent, extending its gain since July 15 to 28 percent.

Washington Mutual

Washington Mutual Inc. added 34 cents to $5.82. After the close, the biggest U.S. savings and loan reported a $3.3 billion quarterly loss and forecast $1 billion of annual costs savings mainly from closing wholesale and home loan centers. In after hours trading, the stock gained 61 cents, or 10 percent, to $6.43 as of 4:32 p.m. in New York.

Caterpillar added 2.4 percent to $74.98. The world's largest maker of earthmoving equipment reported second-quarter earnings of $1.74 a share, exceeding the average analyst estimate from a Bloomberg survey by 13 percent as demand from Asia and the Middle East drove sales.

Crude oil for August delivery fell $3.09 to $127.95 a barrel today and touched $125.63, the lowest since June 5, on forecasts that a tropical storm in the Gulf of Mexico will miss oil fields and refineries.

The Amex Airline Index rallied 22 percent, its biggest gain ever, and pared its 2008 retreat to 39 percent. The group also climbed after JetBlue Airways Corp. and US Airways Group Inc. beat analysts' second-quarter estimates and said they will cut capacity.

UAL rose 69 percent to $8.41. JetBlue added 16 percent to $4.50. US Airways jumped 59 percent to $4.27.

Insurers Climb

UnitedHealth Group Inc. rallied 10 percent to $26.21 for the steepest gain since January 2000 after adjusted earnings topped analysts' estimates. The largest U.S. medical insurer's results pushed managed-care companies in the S&P 500 to their biggest rally in a decade.

WellPoint Inc., the second-largest U.S. health insurer, gained 6.8 percent to $48.75 for the biggest climb since April. Coventry Health Care Inc. rose the most since April 2006, adding 8.5 percent to $31.91.

Apple lost 2.6 percent to $162.02. Fourth-quarter profit will be $1 a share as sales climb to $7.8 billion, the company said. That compares with the average analyst estimate of $1.24 a share in earnings and $8.3 billion in sales.

American Express Co. fell the most since Jan. 11, declining 7.1 percent to $37.99 after it said second-quarter profit fell 37 percent on worse-than-expected consumer defaults and Chief Executive Officer Kenneth Chenault withdrew his 2008 forecast.

American Express, Capital One Financial Corp. and Discover Financial Services shares have dropped by more than 40 percent in the past year amid concern the lenders underestimated the depth of the U.S. slowdown.

Bear Markets

Except for Canada, all of the 23 developed markets in the MSCI World Index experienced bear market plunges of at least 20 percent this year as global credit losses exceed $452 billion and oil trades near a record.

Financial shares led the bear-market retreat as credit losses and asset writedowns sparked by the subprime-mortgage market's collapse topped $460 billion worldwide. Technology, industrial and consumer companies also dropped after record oil prices and the deepening U.S. housing slump prompted businesses and consumers to pare spending

Sunday, July 20, 2008

Home Sales, Durables Orders Probably Fell: U.S. Economy Preview

By Bob Willis

July 20 (Bloomberg) -- Home sales in the U.S. probably declined in June as the housing slump headed for a third year, undermining the economy and prompting businesses and consumers to trim spending, economists said before reports this week.

Combined sales of new and existing homes dropped 1.3 percent last month, according to the median estimate of economists surveyed by Bloomberg News. Orders for durable goods, products meant to last several years, probably fell 0.3 percent.

The biggest housing recession in a generation, now being exacerbated by a tightening in credit as financial losses spread, threatens to stall economic growth. The surge in raw-material costs and slowing demand will likely prompt companies to keep reducing investment in a bid to protect profits.

``Stress in financial markets and curtailment in lending are going to make it more difficult to buy homes,'' said David Resler, chief economist at Nomura Securities International Inc. in New York. ``Manufacturers that produce for homebuilders or homeowners are being hurt by the slump in housing.''

The National Association of Realtors' report on sales of existing homes is due July 24. Purchases declined to a 4.93 million annual pace from 4.99 million in May, according to the survey median. Sales reached a 4.89 million pace in April, the fewest since comparable records began in 1999.

A day later, the Commerce Department is forecast to report that sales of new houses dropped to an annual pace of 503,000 from 512,000 in May, according to survey estimates. Sales of existing and new homes are down 35 percent from their July 2005 peak.

Construction Drops

Reacting to the weak sales, builders in June began work on the fewest single-family homes since 1991, the Commerce Department reported last week. That signals that home construction will continue to weigh on the economy after subtracting from growth since the first quarter of 2006.

More Americans are walking away from their homes as property values tumble and borrowing costs on adjustable-rate mortgages reset higher. Bank seizures increased a record 171 percent from a year ago and foreclosure filings rose 53 percent in June, RealtyTrac Inc., a seller of default data, said July 10.

Stricter lending regulations and the drop in home prices make it harder for Americans to tap home equity for extra cash. Consumer spending in the first quarter grew at the slowest pace since the 2001 recession and is likely to keep slowing later this year, according to economists surveyed this month by Bloomberg.

Bernanke's View

Federal Reserve Chairman Ben S. Bernanke last week abandoned his June assessment that the threat of an economic downturn had diminished, telling lawmakers in semiannual testimony in Washington that there were ``significant downside risks to the outlook for growth.''

The index of leading economic indicators may have fallen in June for the first time in four months, economists forecast a report tomorrow will show. The Conference Board's gauge dropped 0.1 percent after increasing by the same amount in May, signaling growth is likely to slow over the next three to six months.

The report on durable goods, due from the Commerce Department on July 25, is also projected to show that orders excluding transportation equipment fell 0.2 percent in June, according to the Bloomberg survey.

Carmakers in particular have been battered. Sales of cars and light trucks fell to an annual pace of 13.6 million units in June, the lowest since 1993, according to industry figures.

General Motors Corp., buffeted by three years of losses, will hasten reductions in truck production and planned closings of four truck plants, Chief Operating Officer Fritz Henderson said on July 15.

``Lack of demand warrants'' accelerating the cutbacks, he said in a press conference in Detroit. ``The market is even softer'' than GM projected in June, when the reductions were first announced. ``We need to act now.''

Also on July 25, the University of Michigan/Reuters final survey of consumer sentiment for July may show confidence dropped to a 28-year low.

Bloomberg Survey

Release Period Prior Median
Indicator Date Value Forecast
LEI MOM% 7/21 June 0.1% -0.1%
Initial Claims ,000's 7/24 20-Jul 366 380
Cont. Claims ,000's 7/24 13-Jul 3122 3190
Exist Homes Mlns 7/24 June 4.99 4.93
Exist Homes MOM% 7/24 May 2.0% -1.2%
Durables Orders MOM% 7/25 June 0.0% -0.3%
Durables Ex-Trans MOM% 7/25 June -0.8% -0.2%
U of Mich Conf. Index 7/25 July F 56.6 56.3
New Home Sales ,000's 7/25 June 512 503
New Home Sales MOM% 7/25 June -2.5% -1.8%

British M&A Will Fall for a Further 15 Months, Report Predicts

By Ambereen Choudhury

July 21 (Bloomberg) -- Mergers and acquisitions among U.K. companies will go on declining for the next 12 to 15 months as the credit crunch slows Britain's economy, advisory firm Grant Thornton LLP said.

``If present economic conditions continue, it could take some years to climb back to the M&A peaks we saw midway through last year,'' said London-based David Brooks, head of M&A at Grant Thornton, in an e-mailed statement today. Deal values and volumes will fall for another five quarters, the report predicted.

The British pound has dropped 12.5 percent in the past 12 months on a trade-weighted basis, as the run on Northern Rock Plc and a housing-market slump eroded confidence in Europe's second- largest economy. British M&A has almost halved to $372 billion this year after a record 2007, according to data compiled by Bloomberg.

Emerging market countries and foreign acquirers may continue to cushion the fall, as they snap up assets in the U.K., Brooks said. ``The developing world is cash-rich and looking to spend, and the U.K. is putting a `For sale' sign up in the window.''

Banco Santander SA, Spain's biggest bank, agreed to acquire Alliance & Leicester Plc for 1.26 billion pounds ($2.6 billion) on July 14, less than half the U.K. mortgage lender's market value at the end of last year.

Thursday, July 17, 2008

.S. Futures Fall on Google, Merrill, Microsoft Earnings Misses

By Lynn Thomasson and Elizabeth Stanton

July 18 (Bloomberg) -- U.S. stock-index futures retreated after Google Inc., Merrill Lynch & Co. and Microsoft Corp. missed analysts' profit estimates, indicating the market's two-day rally may be short-lived.

Google, Merrill and Microsoft slumped more than 6 percent in New York. Google trailed forecasts for only the third time since 2005 as growth in clicks on Internet advertisements slowed. Merrill fell short of projections for the fourth straight quarter. Microsoft cut its profit estimate. The Dow Jones Industrial Average completed its steepest two-day advance since October 2002 yesterday after JPMorgan Chase & Co.'s earnings beat forecasts and falling oil sparked an advance in consumer shares.

Standard & Poor's 500 Index futures expiring in September dropped 8.70 points, or 0.7 percent, to 1,244.70 as of 7:14 a.m. in Tokyo. Dow futures lost 63 points, or 0.6 percent, to 11,338. PowerShares QQQ, an exchange-traded fund tracking the Nasdaq-100 Index, fell 1.8 percent to $44.81 in New York.

``We're still in the middle innings of this financial crisis,'' said James Thorne, who helps oversee more than $13 billion as chief capital market strategist at MTB Investment Advisors in Baltimore. ``It's going to be a very long and slow workout for this market.''

About $14 trillion has been wiped off the value of global equities since October as almost $423 billion in credit-related losses prolong the global economy's slump and rising commodity prices stoke inflation. Among the 23 industrialized nations in the MSCI World Index, only Canada averted a bear-market decline of 20 percent.

Bear Market Retreat

The S&P 500 slid into a bear market last week as oil rose to a record and the U.S. Treasury moved to shore up Fannie Mae and Freddie Mac. Financial institutions led the index's retreat in 2008, losing 29 percent.

Google Inc. dropped 7.5 percent to $493.48. The owner of the most popular Internet search engine posted second-quarter profit of $3.92 a share, excluding costs such as stock compensation. Analysts estimated $4.73 on average in a Bloomberg survey.

Merrill Lynch fell 6.1 percent to $28.85. The third-biggest U.S. securities firm reported a $4.65 billion quarterly loss, its fourth straight, as it added to its credit-market writedowns.

Merrill Chief Executive Officer John Thain is selling assets and cut about 4,200 jobs in the first half of the year to stem record losses and a 43 percent drop in Merrill's share price during the past 12 months. The company announced $9.7 billion of writedowns yesterday; analysts at Citigroup Inc., Oppenheimer & Co. and Wachovia Corp. had predicted the company would book charges of at least $5 billion.

23% Stock Slump

Microsoft Corp. retreated 6.4 percent to $25.76. The world's biggest software maker reported 2.3 percent less fourth-quarter profit than analysts estimated. The company, whose shares have fallen 23 percent this year, predicted first-quarter earnings as low as 47 cents a share. Analysts polled by Bloomberg anticipated 49 cents a share, on average.

During regular trading, the S&P 500 jumped 14.96, or 1.2 percent, to 1,260.32. The measure gained 1.7 percent so far this week. The Dow added 207.38, or 1.9 percent, to 11,446.66, bringing its two-day rally to 4.4 percent.

JPMorgan, the largest U.S. bank by market value, led financial shares during the regular session to their biggest-ever two-day surge as profit beat estimates by 22 percent. Huntington Bancshares Inc., BlackRock Inc. and Comerica Inc. also climbed on earnings that exceeded projections. Home-improvement chains Home Depot Inc. and Lowe's Cos. led gains in all 29 companies in the S&P 500 Retailing Index as oil slid below $130 a barrel for the first time in a month.

`Long Energy, Short Financials'

``The trade that's been the big winner has been long energy and short financials; the last couple of days maybe we're seeing a reversal of that,'' Gavin Graham, chief investment officer at Guardian Group of Funds Ltd. in Toronto, told Bloomberg Television. Guardian Group manages $5.7 billion.

For the second straight day, energy producers were the biggest drag on the market among 10 industries. The S&P 500 rallied the most since April yesterday, rebounding from the lowest level since 2005, after better-than-forecast earnings at Wells Fargo & Co. sparked a 12 percent gain in the S&P 500 Financials Index and oil extended a two-day tumble to more than $10 a barrel.

Earnings surpassed analysts' estimates by an average of 6.7 percent for the 51 companies in the S&P 500 that released second- quarter results as of the close of U.S. trading yesterday, data compiled by Bloomberg show. The entire index trailed estimates by an average of 3.6 percent in the first quarter, a period in which the benchmark gauge of American equities slumped 9.9 percent.

Analysts as of July 11 had forecast an average 14 percent decline in second-quarter profits for S&P 500 companies, led by a 69 percent tumble in earnings at financial companies. So far, the group's earnings have slipped 4.9 percent, with financial profits declining 32 percent, Bloomberg data show.

Pound Falls on Report Treasury Working to Reform Fiscal Rules

By Stanley White

July 18 (Bloomberg) -- The pound fell after the Financial Times reported the U.K.'s Treasury is working on plans to reform fiscal rules in Britain that may boost borrowing.

The U.K. currency fell to $1.9974 as of 7:48 a.m. in Tokyo, from $2.0038 yesterday. It was at 79.35 pence per euro, from 79.16 pence.

Wednesday, July 16, 2008

U.S. Economy: Consumer Prices Up 5%, 17-Year High (Update2)

By Shobhana Chandra and Timothy R. Homan

July 16 (Bloomberg) -- U.S. consumer prices surged 5 percent in the past year, the biggest jump since 1991, just as households struggled with falling home values and the credit crunch.

Spiraling expenses for food and fuel spurred the increase in June, the Labor Department said today in Washington. The cost of living rose 1.1 percent from May, more than forecast and the second-largest rise since 1982. Separate figures showed industrial production rose more than estimated because of the end of a strike at American Axle & Manufacturing Holdings Inc. and increased electricity output.

Price gains accelerated last month even after stripping out energy and food, underscoring the challenge for Federal Reserve Chairman Ben S. Bernanke as he attempts to steer the economy through the slowdown and credit crisis. Treasuries fell.

``This is a problem for the economy; it's even worse for the Fed,'' said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania. ``Inflation numbers are high enough that under different circumstances the Fed would be hiking rates.''

Excluding food and energy, so-called core costs climbed 0.3 percent in June from the previous month and 2.4 percent from a year before.

Yields Jump

Benchmark 10-year note yields rose to 3.93 percent at 4:20 p.m. in New York, from 3.82 percent late yesterday. The Standard & Poor's 500 Stock Index advanced 2.5 percent to close at 1,245.36, after earnings from Wells Fargo & Co. topped analysts' estimates.

Consumer prices were forecast to rise 0.7 percent, according to the median estimate of 79 economists in a Bloomberg News survey. Projections ranged from gains of 0.2 percent to 1.1 percent. Costs excluding food and energy were forecast to rise 0.2 percent, the survey showed.

Bernanke told lawmakers in semiannual testimony on the economy yesterday and today that inflation risks have ``intensified.'' At the same time, he dropped his June assessment that risks to the economic expansion had diminished, indicating policy makers aren't ready to raise interest rates to contain expenses.

``We don't think they're going to raise rates now -- until June next year now is our forecast -- until basically the economy starts to get some footing,'' Beth Ann Bovino, senior economist at Standard & Poor's in New York, said in an interview with Bloomberg Radio. ``Right now the beast is what's going to happen with the economy.''

Exceeding Forecasts

Prices were forecast to climb 4.5 percent in June from a year earlier, according to the survey median.

A separate report today said confidence among U.S. homebuilders dropped to 16 this month, a record low. Readings for current sales, expected sales and buyer traffic in the National Association of Homebuilders/Wells Fargo sentiment index also were at all-time lows.

``The magnitude of the housing bubble was unprecedented, and the corrective process promises to be a long and painful one,'' Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, said in a note to clients.

The Fed said today that production at factories, mines and utilities increased 0.5 percent last month after dropping 0.2 percent in May. Capacity utilization, which measures the proportion of plants in use, rose to 79.9 percent from 79.6 percent.

Strike's Resolution

The resolution of a three-month strike by General Motors Corp.'s largest axle supplier, American Axle, probably helped lift auto output. Excluding autos, factory output fell 0.1 percent for a second month.

Wholesale costs rose 1.8 percent in June, the most in seven months, the Labor Department reported yesterday. From a year ago, prices climbed 9.2 percent, the biggest surge since 1981.

Companies, unable to fully recover ballooning raw-material costs by raising prices, have cut staff and reduced equipment purchases as profits shrink.

Kimberly-Clark Corp., the maker of Huggies diapers and Scott paper towels, said earnings for this year will trail its previous forecast as expenses rise more than twice as fast as predicted,

``Inflation has outpaced our ability to offset higher costs in the near term through price increases, cost reductions and other measures,'' Thomas Falk, the Dallas-based company's chief executive officer, said this week in a statement.

Price Increase

Procter & Gamble Co., the maker of Tide detergent and Head & Shoulders shampoo, last week said it'll raise prices as much as 16 percent due to higher costs for plastic, energy and paper. The increases start in September and are the Cincinnati-based company's steepest in at least 18 months.

Energy expenses jumped 6.6 percent, the biggest gain since November. Gasoline soared 10.1 percent and fuel oil jumped 10.4 percent.

The cost of fuel will continue stoking price pressures. Crude oil futures reached a record $147.27 a barrel on July 11 and have risen almost 90 percent in the past year. Regular gasoline, which topped $4 a gallon for the first time in June, kept rising this month, AAA figures show.

The consumer price index is Labor's broadest gauge of costs. Almost 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to airline fares and movie tickets.

Food Expenses

Food prices, which account for about a fifth of the CPI, increased 0.8 percent, driven by the biggest gain in the cost of vegetables in almost four years.

The report showed that food and fuel weren't the only items on the rise. Costs for airline fares jumped 4.5 percent, the most since 2001.

Rents which, make up almost 40 percent of the core CPI, also accelerated. A category designed to track rental prices rose 0.3 percent after a 0.1 percent gain in May.

Today's figures also showed wages decreased 0.9 percent in June after adjusting for inflation, the biggest drop since September 2005, and were down 2.4 percent over the last 12 months. The decline in buying power is one reason economists forecast consumer spending will slow.

Americans trimmed purchases of automobiles, furniture and restaurant meals last month as the cost of gasoline soared, a Commerce Department report showed yesterday. Retail sales rose 0.1 percent, less than forecast, a sign the boost from the tax rebate checks is already fading.

Some Fed Officials Backed Rate Rise Soon, Minutes Say (Update1)

By Craig Torres

July 16 (Bloomberg) -- Some Federal Reserve policy makers in June favored an increase in the benchmark U.S. lending rate ``very soon,'' according to minutes of that month's meeting.

The assessment came before last week's collapse in the stock price of Fannie Mae and Freddie Mac, the largest sources of American home financing, altered Chairman Ben S. Bernanke's views about growth risks. Bernanke abandoned the Federal Open Market Committee's June stance that the threat of an economic downturn had diminished in congressional testimony this week.

The economic outlook made the ``timing and magnitude of future policy actions'' unclear to the full committee, the records of the policy meeting said. Still, ``with increased upside risks to inflation and inflation expectations, members believed that the next change in the stance of policy could well be an increase in the funds rate.''

The FOMC on June 25 left the main interest rate at 2 percent, pausing after seven cuts that totaled 3.25 percentage points since September. Futures traders have priced in a 93 percent probability of no change at the Aug. 5 meeting.

There are ``significant downside risks to the outlook for growth,'' and ``upside risks to the inflation outlook have intensified,'' Bernanke said in semiannual testimony before the House Financial Services Committee yesterday and today.

`Fine Line'

Kansas City Fed President Thomas Hoenig said in a speech in Durango, Colorado, today that the level of interest rates ``almost certainly raises the risk of higher inflation.'' He said monetary policy must ``walk a fine line,'' supporting growth while ensuring prices remain anchored.

Risks to the economic outlook have risen after the Standard & Poor's Financials Index dropped 21 percent between June 25 and July 15. Shares of Fannie Mae and Freddie Mac, the largest sources of U.S. home financing, have slumped, prompting the Treasury and the Fed to announce a financial aid plan July 13.

``The big change has been this financial turmoil that goes along with Fannie and Freddie,'' said former Dallas Fed President Robert McTeer in an interview. ``Holding the financial system together has got to be their near-term priority. And they're not going to be raising anytime soon.''

Inflation Debate

The minutes show committee members wrestling with the inflation risks associated with record-setting oil prices, which have unseated consumers' outlook for near-term inflation, and whether demand could be hampered by tighter credit resulting from financial market turmoil.

Some members noted that the federal funds rate at 2 percent was negative after adjustments for inflation, a policy which ``could well lead to higher trend inflation.''

``With downside risks having diminished somewhat, some firming in policy would be appropriate very soon, if not at this meeting,'' some members argued. ``Other participants observed that the high level of risk spreads and the restricted availability of credit suggested that overall financial conditions were not especially accommodative.''

Prices paid by U.S. consumers jumped in June by the most since 2005 on soaring costs for fuel and food, the Labor Department said earlier today. The cost of living jumped 1.1 percent for the month, after a 0.6 percent gain the prior month. Prices increased 5 percent in the 12 months to June, the most since 1991.

Fisher Dissents

Forecasts in the minutes were identical to what Bernanke presented to Congress today and yesterday. Fed officials raised their projections for economic growth and inflation for this year, while reiterating their outlook for faster growth in 2009.

Dallas Fed Bank President Richard Fisher dissented in favor of a rate increase at the June meeting.

``Mr. Fisher was especially concerned about behavioral changes among business operators that appeared to be accommodating inflationary pressures'' by passing on higher input costs, the minutes said.

Fed bank presidents and the Board of Governors also discussed their discount window facility for investment banks, known as the Primary Dealer Credit Facility, and the Term Securities Lending Facility, which allows dealers to temporarily swap mortgage bonds and asset-backed securities for the Fed's holdings of Treasury notes.

``Participants also discussed the possibility of extending the PDCF and the TSLF past year-end,'' the minutes said. ``Participants exchanged views on longer-run issues regarding appropriate arrangements for supervision of investment banks.''

Friday, July 11, 2008

Fed Says No Talks With Fannie, Freddie About Loans (Update1)

By Scott Lanman

July 11 (Bloomberg) -- The Federal Reserve has not had any discussions with Fannie Mae and Freddie Mac about access to direct loans from the central bank, Fed spokeswoman Michelle Smith said.

``Federal Reserve officials are following the situation closely,'' Smith said in a telephone interview today. ``However, there have been no discussions'' with the companies ``about access to the discount window,'' she said.

Shares of the two largest U.S. mortgage-finance companies plummeted this week on concern they don't have enough capital to offset losses from the mortgage meltdown. The discount window offers direct loans to commercial banks at an interest rate that's now 2.25 percent, a quarter point above the Fed's benchmark rate.

Chairman Ben S. Bernanke and his colleagues opened the discount window to investment banks at the time of the collapse of Bear Stearns Cos. in March to alleviate the credit crisis.

Even if the Fed did provide emergency funding to Fannie Mae and Freddie Mac, it's ``not a solution'' for maintaining the companies' solvency, said Brian Sack, senior economist at Macroeconomic Advisers LLC in Washington. ``If it happens, it would only be a bridge to some other government solution,'' said Sack, a former Fed research manager.

`Various Options'

Fed and Treasury officials are discussing ``various options'' to help Fannie Mae and Freddie Mac, Senate Banking Committee Chairman Christopher Dodd said earlier today.

Reuters reported earlier that Bernanke told Freddie Mac's chief executive officer Richard Syron that the two government- chartered companies could take advantage of the discount window.

Smith said she was ``not prepared to discuss the range of options and alternatives being considered.''

Today, U.S. Treasury Secretary Henry Paulson signaled that a government takeover of Fannie Mae and Freddie Mac won't be necessary, saying they should continue as shareholder-owned companies with federal charters.

``Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,'' Paulson said in a statement in Washington. President George W. Bush told reporters separately that the two firms are ``very important institutions'' and that he discussed market ``concerns'' with Paulson earlier today.

Dodd, a Connecticut Democrat, said at a press conference today that the companies are sound, and the ``facts don't warrant'' the negative reaction by investors.

Thursday, July 10, 2008

U.S. Bank Buys Stall on Housing Slump, Loan Defaults (Update1)

By Linda Shen

July 10 (Bloomberg) -- U.S. banks are merging at the slowest pace in at least 15 years as the mortgage-market collapse depletes capital and makes lenders wary of buying firms saddled with bad loans.

Banks announced 67 takeovers this year through June 13, valued at a total of $6.8 billion, data from KBW Inc. analyst Melissa Roberts show. Bank dealmaking is headed for its slowest year since at least 1993. The annual average is more than 300 deals.

``Why would you want to buy somebody else's problems when you're still trying to figure out what your own are?'' Robert Patten, a New York-based analyst for Morgan Keegan, said in an interview.

U.S. lenders have raised $120 billion after losses tied to housing, and may have to raise another $65 billion, Goldman Sachs Group Inc. analysts wrote in a note to investors in June. Banks, still discovering bad loans during the worst housing slump since the Great Depression, have left the merger and acquisition market ``dormant,'' the report said.

National City Corp. said in April it was raising $7 billion in cash, ending speculation it might be sold. Problem assets were ``so severe'' that National City would have been ``prohibitive'' for an acquirer, KBW Inc. analyst David Konrad said in an interview. National City instead worked with Corsair Capital LLC for a capital infusion.

U.S. foreclosure filings increased 53 percent in June from a year earlier, according to data released today by Irvine, California-based RealtyTrac Inc. One in every 501 households was in some stage of foreclosure. Nevada, California and Arizona had the highest rates.

Housing Prices

The Office of Thrift Supervision said in May savings and loans set aside a record $7.6 billion to cover bad loans, and home prices fell 15.3 percent in April from a year earlier, according to S&P/Case-Shiller. That's the steepest price decline since the group started collecting data.

``Banks don't know when the next guy is going to walk in and hand them the keys for a place,'' Patten said.

The banking industry averaged 308 deals a year from 1993 through 2007, data from Roberts show. The average value of deals fell 70 percent to $101.5 million in the first six months of 2008 from $329.3 million in the same period a year ago, according to Roberts' data.

Lenders selling themselves at this point may not be the most attractive acquisition candidates anyway, analysts say. A bank putting itself on the market now invites ``thinking that bank must be about to crumble,'' Sandler O'Neill & Partners LP analyst Kevin Fitzsimmons said.

`Degree of Desperation'

``If you're selling today, you're probably the weakest and have the least franchise value of what might come along later,'' Zions Bancorporation Chief Financial Officer Doyle Arnold said at a conference last month. Such banks ``probably have some degree of desperation.''

Bank of America Corp.'s $4 billion acquisition of Countrywide Financial Corp. was made after considering likely declines in home prices and risks from lawsuits, Chief Executive Officer Kenneth Lewis said April 23 at the company's annual meeting, where some investors asked him to call off the deal.

The mortgage broker's ``loan portfolio has deteriorated so rapidly that Countrywide currently has negative equity and the acquisition will be a drag on Bank of America's earnings,'' Friedman, Billings, Ramsey & Co. analyst Paul Miller said in a May report.


Some deals taking place are products of regulator pressure. PFF Bancorp Inc. sold itself to FBOP Corp.'s California National Bank for about $30.5 million and a loan to stay ``adequately capitalized'' according to regulator standards.

PFF, which has lost about 96 percent of its value in the past 12 months, was ``an attractive transaction for us from an economic standpoint,'' said California National Bank Chief Executive Officer Greg Mitchell.

``There's a hope and belief there could even be some recoveries'' among PFF's problem assets, Mitchell said.

There will be lenders that emerge in a better position than others to ``roll this stuff up,'' FTN Midwest Securities analyst Jeff Davis said. Banks such as Winston-Salem, North Carolina- based BB&T Corp. and New York-based JPMorgan Chase & Co. may emerge as ``winners,'' Davis said.

Oil Is Little Changed After Rising 4% on Planned Brazil Strike

By Nesa Subrahmaniyan

July 11 (Bloomberg) -- Crude oil was little changed in New York after rising 4 percent yesterday as Brazilian oil workers threatened a strike and on rising concern that supplies from the Middle East and Nigeria may be disrupted.

Brazil's Oil Workers Confederation is planning a five-day strike from July 14 against Petroleo Brasileiro SA on platforms in the offshore Campos Basin, the source of 80 percent of the country's supply, a union official said. Oil also rose after Iran test-fired more missiles in the Persian Gulf and a Nigerian militant group said it will end a cease-fire this week.

``It's a supply focused market and trading has become very volatile,'' said Gerard Burg, energy and minerals economist at National Australia Bank Ltd. in Melbourne. ``Right now geopolitical events are critical supply-related drivers.''

Crude oil for August delivery fell 10 cents to $141.55 a barrel on the New York Mercantile Exchange at 9:14 a.m. in Singapore. Yesterday, it soared $5.60, or 4.1 percent, to settle at $141.65 a barrel, the biggest one-day increase since June 6. Prices had risen to an intra-day high of $142.10 a barrel. Nymex crude oil touched a record $145.85 on July 3. Futures are up 96 percent from a year ago.

In the last hour of floor trading in New York yesterday, prices jumped more than $5 a barrel as investors bought futures based on technical trends indicating a rally in futures. The increase accelerated after futures broke through the July 9 high of $138.28 at 2:09 p.m. after approaching it at least five times.

About 4,500 Petrobras employees in the Campos Basin will take part in the protest to get full pay for the day they return to the mainland after a 14-day shift at sea, Jose Maria Rangel, the confederation's coordinator for the basin, said in an interview yesterday.

Iranian Tests

Iran, holder of the second-biggest oil reserves, tested missiles capable of reaching Israel, increasing concern that a conflict may cut supply. The Movement for the Emancipation of the Niger Delta said attacks will resume attacks on oil facilities.

Iran's military yesterday fired the missiles during a third day of war games, Agence France-Presse reported, citing the Web site of Iranian state-run television. Missiles were also launched yesterday.

Iran has ignored United Nations efforts to halt its uranium- enrichment program and says further sanctions won't affect its plans to develop nuclear energy. The U.S. has led international efforts to force Iran to give up enrichment because of concern the technology may be used to develop nuclear weapons.

OPEC Secretary-General Abdalla El-Badri said at a press conference in Vienna yesterday that he hoped there would be no military conflict between Israel and Iran, adding that ``if something were to happen, it is impossible to replace the production of Iran.''


The Nigerian militant group known as MEND will call off its unilateral cease-fire beginning midnight on July 12, the group's spokesman, Jomo Gbomo, said yesterday. MEND has helped cut more than 20 percent of Nigeria's crude oil exports since 2006 by attacking pipelines and other installations.

MEND says it is fighting for a greater share of oil wealth for the impoverished inhabitants of the Niger Delta and accuses successive Nigerian governments of decades of oppression.

The group declared a unilateral cease-fire after a June 19 attack against Royal Dutch Shell Plc's Bonga deep-water oilfield, located 120 kilometers (75 miles) offshore, that cut 190,000 barrels a day of oil output.

``The missile tests and the end of the cease-fire are going to put a higher and higher floor under prices,'' said John Kilduff, vice president of risk management at MF Global Ltd. in New York.

Demand Forecast

The International Energy Agency increased its 2008 demand forecast for the first time in six months yesterday, because of rising consumption in developing countries.

The Paris-based agency increased its outlook by about 0.1 percent, or 80,000 barrels a day, to 86.85 million barrels a day in its monthly report, leaving demand growth at 1 percent for this year. The IEA forecasts the same pace of growth for 2009.

The Organization of Petroleum Exporting Countries, which supplies more than 40 percent of the world's oil, cut its forecast of demand for its own crude oil through 2030, as record prices and environmental considerations encourage consumers to conserve fuel and rely more on biofuels.

OPEC lowered demand forecasts by 4.4 percent to 32.3 million barrels a day in 2015, and by 12 percent to 43.6 million a day in 2030, the group's secretariat said yesterday in its World Oil Outlook report. This means OPEC may unnecessarily commit $300 billion to new fields over the next 12 years, it said.

``OPEC's report indicate that they may not invest in new production,'' National Australia's Burg said. ``The market's already concerned about supplies and that may aggravate it.''

Brent crude oil for August settlement fell 33 cents to $141.70 a barrel at 9:03 a.m. Singapore time on London's ICE Futures Europe exchange. Yesterday, the contract gained $5.45, or 4 percent, to $142.03 a barrel. Prices climbed to a record $146.69 on July 3.

Wednesday, July 9, 2008

Japan's Wholesale Prices Climb at the Fastest Pace in 27 Years

By Mayumi Otsuma

July 10 (Bloomberg) -- Japan's wholesale inflation rate rose to a 27-year high in June as companies raised prices to counter record oil and commodity costs.

Producer prices climbed 5.6 percent from a year earlier, after a revised 4.8 percent gain in May, the Bank of Japan said in Tokyo today. The median estimate of 36 economists surveyed by Bloomberg News was for 5.3 percent.

Oil, wheat and soybean costs have almost doubled in the past year, forcing companies to charge more and fanning the fastest consumer-price inflation in a decade. Costs are gaining faster than the pace firms can raise prices, prompting businesses to predict the first profit decline in seven years, a report last week showed.

``Price increases, which have been confined to energy and materials so far, may be spreading,'' said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute and a former central bank official. ``Authorities are watching these trends very closely, trying to catch any small signs'' that inflation is spreading throughout the economy.

Crude oil rose to a record $145.85 a barrel on July 3 and retail gasoline prices have risen more than 18 percent this year to 181.5 a liter ($6.40 a gallon). The Bank of Japan's overseas commodity index soared 70.9 percent in June from a year earlier.

`So Rapid'

``The pace of raw-material price increases is so rapid that companies' attempts to pass costs are failing to catch up with cost surges,'' Masahiro Samejima, who heads the central bank's Osaka branch, told reporters on July 7.

Nisshin Oillio Group Ltd., J-Oil Mills Inc. and Showa Sangyo Co., the country's three largest edible oil makers, raised their prices this month. Ajinomoto Co. increased mayonnaise prices and QP Corp. plans to follow suit in August. Kagome Co., a maker of ketchup and canned food, increased tomato juice prices by 10 percent.

Higher producer costs are feeding into consumer prices, and inflation excluding fresh food will probably exceed 2 percent as soon as next month, according to Azusa Kato, an economist at BNP Paribas in Tokyo. The Bank of Japan regards prices as stable when they are between zero and 2 percent.

Kato said the price increases won't prompt the central bank to raise its benchmark interest rate from 0.5 percent because higher prices are crimping growth in the world's second-largest economy.

`Relatively Calm'

``Japan's inflation rate is relatively calm compared with other countries', and there are no signs that costlier oil will trigger wage increases,'' Kato said. Rising prices ``won't lead to interest rate hike discussions at the central bank.''

Core consumer prices rose 1.5 percent in May from a year earlier, less than half the pace of gains in the euro zone and lower than the 2.3 percent inflation in the U.S. Wages rose 0.2 percent in the month, the slowest increase this year.

Price increases are spreading beyond energy and food to industries such as automakers, which have so far avoided charging more through cost cutting and improving productivity. Hino Motors Ltd., Japan's largest maker of heavy trucks, and Nissan Diesel Motor Co. this month raised prices of vehicles for the first time in almost 17 years to absorb costs.

Costlier steel, rubber and aluminum costs are ``practically impossible to absorb,'' Nissan Motor Co. Chief Executive Officer Carlos Ghosn told shareholders last month.

Tuesday, July 8, 2008

Australian Dollar Rises Against Yen as Stocks Spur Carry Trades

By Candice Zachariahs

July 9 (Bloomberg) -- The Australian dollar gained the most in five days against the yen as a rally in U.S. equities encouraged investors to buy higher-yielding assets funded in Japan.

The local dollar, a favorite of so-called carry trades, pared yesterday's losses against the yen as U.S. stocks rose the most in a month. The currency was little changed versus the U.S. dollar before the release of a government report that will probably show demand for housing in Australia declined in May.

``Today could bring further gains for carry trades if the strong U.S. equity finish spills over into Asia,'' said Matthew Strauss, a senior currency strategist at RBC Capital Markets in Toronto, a unit of Canada's largest bank, in a research note.

The Australian dollar rose 0.7 percent to 102.41 yen at 8:14 a.m. in Sydney, from 101.72 yen in late Asian trading yesterday. It bought 95.33 U.S. cents from 95.23 cents.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency market moves erase those profits.

Australia's dollar, known as the Aussie, is a target of the strategy because the nation's benchmark interest rate of 7.25 percent exceeds Japan's 0.5 percent and 2 percent in the U.S.

Stocks, Oil, Loans

The Aussie climbed against 10 of the 16 most-traded currencies as the Standard & Poor's 500 Index gained 1.7 percent, the most since June 5. Crude oil for August delivery fell 3.8 percent to settle at $136.04 a barrel on the New York Mercantile Exchange, the biggest drop since March 31.

Gains in the Australian dollar were limited before the report that will probably show the number of loans granted to build or buy homes or apartments fell 2 percent from May, the fourth monthly decline, according to the median estimate of 21 economists surveyed by Bloomberg News. The statistics bureau will release the report at 11:30 a.m. in Sydney.

Westpac Banking Corp. and the Melbourne Institute release a survey of consumer confidence today at 10:30 a.m. in Sydney. The gauge slumped to a 16-year low in June.

``Disappointing consumer confidence and home loans in Australia will, however, briefly frustrate the expected Aussie- yen rally,'' Strauss said in the note.

Australian government bonds gained for a fifth day. The yield on the 10-year bond fell 1 basis point, or 0.01 percentage point, to 6.34 percent. The price of the 5.25 percent bond maturing in March 2019 rose 0.086, or A$0.86 per A$1,000 face amount, to 91.667. Bond yields move inversely to prices.

Bernanke Says Fed May Continue Lending Into Next Year (Update3)

By Scott Lanman

July 8 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke, seeking to allay renewed concerns over the health of the nation's financial system, said the central bank may extend its emergency-loan program for investment banks into next year.

``The Federal Reserve is strongly committed'' to financial stability and is ``considering several options, including extending the duration of our facilities for primary dealers beyond year-end,'' Bernanke said in a speech to a conference in Arlington, Virginia.

The Fed chairman's comments come a day after Fannie Mae and Freddie Mac fell to their lowest level since 1992 and the Standard & Poor's 500 Banks Index dropped to a 12-year low. It's the first time Bernanke has indicated how long he'll extend the lending programs that were introduced in March in a provision of Fed credit to nonbanks unprecedented since the Great Depression.

Bernanke also endorsed proposals to set up a federal liquidation process for a failing investment bank. The Treasury should ``take a leading role in any such process'' in consultation with regulators, he said. Such a resolution mechanism may help reduce concern that investors and dealers begin counting on Fed aid in case their bets go wrong.

The Fed started the unprecedented lending programs for investment banks in March under its authority to lend to nonbanks in ``unusual and exigent circumstances.'' Officials said at the time the Primary Dealer Credit Facility, which provides direct loans, would last for ``at least'' six months.

Rate Outlook

Continued lending to investment banks may make it harder for the Fed to raise interest rates this year. Traders estimate 74 percent odds of at least quarter point increase in the 2 percent benchmark rate by year-end.

``There was some speculation that, come September,'' the lending programs ``might be allowed to expire,'' Dominic Konstam, head of interest-rate strategy at Credit Suisse Securities USA LLC in New York, said in a Bloomberg Radio interview. ``A lot of people would have thought that might be a prelude to the Fed beginning a tightening cycle. Now, that is obviously that much more uncertain.''

The S&P 500 Banks Index, a measure of 22 firms including Fannie Mae and Freddie Mac, the largest sources of U.S. home financing, fell to 155.48 yesterday, its lowest level since 1996.

Fannie Mae, based in Washington, and McLean, Virginia-based Freddie Mac have dropped more than 60 percent this year, with declines accelerating in the past two weeks, on concern that the capital the companies have raised since December may not be enough to overcome writedowns.

FDIC Conference

Bernanke didn't comment on the outlook for the economy or monetary policy in his remarks today to a Federal Deposit Insurance Corp. forum on mortgage lending.

The PDCF and the Fed's Term Securities Lending Facility, which auctions as much as $200 billion in Treasuries, are both aimed at the 20 primary dealers in U.S. government debt.

Fed officials are working with the Securities and Exchange Commission and securities dealers ``to increase the firms' capital and liquidity buffers,'' Bernanke said.

The remaining four major investment banks, after Bear Stearns Cos.'s takeover by JPMorgan, are Lehman Brothers Inc., Merrill Lynch & Co., Morgan Stanley and Goldman Sachs Group Inc.

Bernanke said ``it is worth the effort'' for lawmakers to design a resolution ``regime'' for securities firms. Treasury Secretary Henry Paulson and FDIC Chairman Sheila Bair have also advocated such a mechanism, which already exists for commercial banks.

`High Bar'

``By setting a high bar for such actions, the adverse effects on market discipline could be minimized,'' the Fed chief said today. His call for a leading role for the Treasury is in line with Paulson's July 2 remark that ``any commitment of government support should be an extraordinary event that requires the engagement of the executive branch.''

In the case of commercial banks, the use of taxpayer funds in an emergency requires the approval of two-thirds majorities of the FDIC and Fed boards, and of the Treasury secretary in consultation with the president.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told the same conference that he supported Fed and Treasury proposals for ``policies, because of what happened, to take proper action if a large investment bank goes bankrupt.''

Without any liquidation procedure in place, the Fed in March decided to make a bridge loan to keep Bear Stearns out of bankruptcy. The central bank then agreed to take on $30 billion of hard-to-trade Bear Stearns assets to help secure its takeover by JPMorgan.

JPMorgan's Dimon

``The Federal Reserve in essence bought $30 billion of mortgage product from Bear Stearns; I want to remind people we bought $350 billion,'' Dimon said today. ``We don't really think'' the deal will end up costing taxpayers money, he also said.

Securities firms have cut back on their use of the programs in recent weeks. The balance of loans outstanding from the PDCF dropped to zero as of July 2, the first time that's happened since the program began. On March 26, the end of the first full week of operation, the PDCF had a balance of $37 billion.

Bids in the TSLF's weekly auctions, in which dealers swap securities such as mortgage-backed debt for Treasuries from the New York Fed, have declined since the start of the program. In the July 3 operation, firms submitted bids for $26.1 billion out of $50 billion of Treasuries offered.

One gauge of financial stress watched by the Fed has remained elevated. The difference between the overnight indexed swap rate, a measure of what traders expect for the Fed's benchmark rate, and three-month interbank loans in dollars was 0.74 percentage point today, up from 0.64 percentage point a month ago.

`Remained Strained'

``Although short-term funding markets remain strained, they have improved somewhat since March,'' Bernanke said.

Congress should legislate ``consolidated supervision'' of investment banks and other big securities firms, with the unspecified regulator having authority over capital, liquidity holdings and risk management, Bernanke also said today.

The Fed should also get ``explicit oversight authority'' over payment and settlement systems, putting the it on a par with counterparts from around the world, Bernanke said.

U.S. central bankers will already play a part in setting capital cushions at securities firms under an agreement yesterday with the SEC. The two agencies will collaborate in determining ``guidelines or rules concerning the capital, liquidity and funding'' arrangements of investment banks, the accord said.