Sunday, August 31, 2008

Crude Oil, Gasoline Advance as Gustav Cuts Production, Refining

By Nesa Subrahmaniyan and Gavin Evans

Sept. 1 (Bloomberg) -- Crude oil and gasoline rose in New York as Hurricane Gustav approached the U.S. Gulf coast, forcing the closure of refineries and evacuation of offshore rigs.

Gustav will likely make landfall later today as a Category 3 hurricane, the National Hurricane Center in Miami said. The storm has shut three-quarters of oil output in a region that accounts for 26 percent of U.S. oil production and 14 percent of its natural-gas output.

``This is right on the bull's eye,'' said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo. ``Massive power supply cuts are likely and it's hard to prepare a refinery against any kind of flooding. If there's a very prolonged outage, a big rally is possible.''

Crude oil for October delivery rose as much as $2.54, or 2.2 percent, to $118 a barrel in electronic trading on the New York Mercantile Exchange. The contract traded at $116.48 at 11:51 a.m. in Singapore. Prices, which dropped 7 percent in August, are up 22 percent this year.

Gulf Coast refineries have cut at least 1.56 million barrels a day of production, about 9.8 percent of the U.S. total. Eight refineries have announced shutdowns, while a further five have reduced capacity.

Personnel from more than 70 percent of the platforms and rigs in the Gulf have been evacuated as the storm approaches, the U.S. Minerals Management Service said in a statement on its Web site yesterday. About 1.25 million barrels a day of oil and 6.09 billion cubic feet of gas have been shut, or more than 96 percent of offshore oil output and 82 percent of gas production.

`In the Way'

Nymex electronic trading opened early today to allow traders to respond to Gustav. Trades will be dated Sept. 2 because of the U.S. Labor Day holiday today.

``There are still some production rigs in the way,'' said Gerard Burg, energy and minerals economist at National Australia Bank Ltd. in Melbourne. ``We're just going to have to wait and see what kind of impact it's going to have.''

Gasoline for October delivery gained as much as 10.3 cents, or 3.6 percent, to $2.9572 a gallon on the exchange, and traded at $2.908 at 10:27 a.m. Singapore time.

Brent crude oil for October settlement rose as much as 1.3 percent to $115.56 a barrel on the ICE Futures Europe Exchange, and traded at $114.55 at 10:39 a.m. Singapore time.

The Gulf of Mexico normally produces about 1.3 million barrels of oil and an estimated 7.4 billion cubic feet of gas a day, according to the agency, part of the U.S. Interior Department.

Mandatory Evacuations

Natural gas for October delivery fell 19.7 cents, or 2.5 percent, to $7.746 per million British thermal units.

Chevron Corp.'s Sabine Pipe Line LLC began to shut its pipelines and the Henry Hub natural gas connection point as mandatory evacuations were declared. Henry Hub, in Erath, Louisiana, is the pricing point for Nymex natural-gas futures.

BHP Billiton Ltd., the world's largest mining company, shut the $1.1 billion Neptune oil project in the Gulf of Mexico and evacuated staff as Hurricane Gustav approaches.

Hurricane Katrina struck the U.S. Gulf coast on Aug. 29, 2005, with winds near 130 miles-an-hour, flooding 80 percent of New Orleans, killing 1,800 people in Louisiana and Mississippi and causing more than $80 billion in damage.

Katrina reached Category 5 status, the strongest type of hurricane, before hitting land. Oil rose as much as 5.4 percent on Aug. 30 to a then-record $70.85 a barrel after Katrina closed 95 percent of offshore output in the Gulf of Mexico.

Idled Refineries

Almost 19 percent of U.S. refining capacity was idled because of damage and blackouts caused by hurricanes Katrina and then Rita, which made landfall Sept. 24, 2005.

Gustav, earlier downgraded from Category 4, was packing winds of 115 miles an hour, the hurricane center said in its 10 p.m. local time advisory. ``Data suggest that the landfall intensity of Gustav will not be every different from its current category three strength,'' the center said.

Oil futures have fallen 20 percent from the record $147.27 a barrel reached on July 11 as the rising U.S. dollar reduced the appeal of commodity investments and on signs of slowing global economic growth.

``Fairly weak'' demand and the International Energy Agency's early commitment to free up reserves if needed has damped the reaction to Hurricane Gustav, Edward Meir, an analyst at MF Global Ltd. in Stamford, Connecticut, said in a Bloomberg television interview.

While major damage may push oil as high as $125 a barrel, prices are otherwise likely to quickly resume their slide after Gustav has passed, he said.

``If it's Category 3 without any major damage, $105 is possible'' by October, Meir said.

Australian Dollar Falls as Investors Pare Carry-Trade Holdings

By Ron Harui and Chris Young

Sept. 1 (Bloomberg) -- The Australian dollar dropped to its lowest level in four months against the yen as a slide in U.S. and Asian stocks prompted investors to pare holdings of higher- yielding investments funded in Japan.

Australia's currency, a favorite of so-called carry trades, declined for a second day after crude oil futures increased as Hurricane Gustav approached the Gulf of Mexico. The Australian dollar was close to its lowest in almost a year against the U.S. currency on speculation Reserve Bank of Australia policy makers will cut interest rates when they meet tomorrow.

``The risk aversion story has weakened the Australian dollar,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. ``Carry trade sentiment has been hurting it.''

The Australian dollar declined 0.8 percent to 92.66 yen as of 11:40 a.m. in Sydney from 93.36 yen late in New York on Aug. 29. It reached 92.44 yen, the weakest since April 2. The currency, known as the Aussie, fell 0.4 percent to 85.41 U.S. cents from 85.78 cents. It will trade between 85.25 and 87.50 cents this week, Kyriakopoulos said.

The Aussie is a favorite for carry trades because the nation's benchmark interest rate is at a 12-year high of 7.25 percent. That compares with 0.5 percent in Japan and 2 percent in the U.S. In the strategy, investors get funds in a country with low borrowing costs and invest in one with higher rates, earning the spread between the two. The risk is that currency market moves erase those profits.

Rate Cut Expected

Traders are certain Reserve Bank of Australia policy makers will lower their interest rate by a quarter-percentage point when they meet tomorrow, according to interest-rate futures trading on the Sydney Futures Exchange.

The MSCI Asia-Pacific Index of regional shares slipped 1.3 percent after the Standard & Poor's 500 index fell 1.4 percent on Aug. 29.

Australia's currency also declined as a report showed today that inflation held above the RBA's target range of 2 percent to 3 percent.

Consumer prices rose 4.2 percent from a year earlier, down from 4.6 percent in the 12 months through July, according to a monthly gauge released by TD Securities Ltd. and the Melbourne Institute in Sydney.

The Aussie was little changed after the Bureau of Statistics said the nation's current-account deficit narrowed to A$12.77 billion ($10.9 billion) in the second quarter from a revised A$19.84 billion in the first quarter. The median estimate of 24 economists surveyed by Bloomberg News was for a trade shortfall of A$11.65 billion.

Australian government bonds gained for a second day. The yield on the 10-year bond fell 1 basis point, or 0.01 percentage point, to 5.75 percent. The price of the 5.25 percent bond maturing in March 2019 rose 0.187, or A$1.87 per A$1,000 face amount, to 96.204. Yields move inversely to prices.

Thursday, August 28, 2008

U.S. Economy: GDP Exceeds Initial Estimate on Exports (Update2)

By Courtney Schlisserman and Timothy R. Homan

Aug. 28 (Bloomberg) -- The U.S. economy expanded faster than previously estimated in the second quarter, helped by a surge in exports that will probably wane as Europe and Japan head toward recessions.

Gross domestic product increased at a 3.3 percent annual pace, compared with the initial estimate of 1.9 percent, the Commerce Department said today in Washington. Trade contributed the most to U.S. growth in almost three decades.

The expansion is likely to weaken in the second half as consumers burdened with falling home values and dwindling job prospects rein in spending. Separate figures today showed the number of Americans collecting unemployment benefits reached a five-year high last week.

``Outside of trade, the economy is considerably weaker,'' said Carl Riccadonna, an economist at Deutsche Bank Securities Inc. in New York. ``When you look at the spending, it looks terrible for the second half of the year.''

The increase in GDP last quarter was bigger than the median estimate of a 2.7 percent gain in a Bloomberg News survey of 78 forecasters. The expansion was the fastest since the third quarter of 2007 and followed growth of 1.9 percent in the first three months of the year.

Treasuries dropped after today's reports, sending benchmark 10-year note yields up to 3.78 percent at 4:14 p.m. in New York, from 3.77 percent late yesterday. The Standard & Poor's 500 Stock Index rose 1.5 percent to close at 1,300.68.

Jobless Claims

The Labor Department said initial jobless claims dropped to 425,000 last week, matching economists' forecasts, from 435,000 the previous week. The level remains well above the 321,000 average of last year. The number of people staying on unemployment rolls rose to 3.423 million, the highest since November 2003.

``The labor market may continue to weaken,'' said Russell Price, a senior economist at H&R Block Financial Advisors Inc. in Detroit. ``It's become clear that second-half growth isn't going to be as strong as the first half, so businesses are going to finally start to trim payrolls a little more.''

The smallest trade deficit in eight years was the biggest contributor to growth last quarter. The trade gap narrowed to a $376.6 billion annual pace and added 3.1 percentage points to growth, the most since 1980. Excluding trade, the economy would have expanded at a 0.2 percent pace after growing 0.1 percent in the first three months of the year.

Tiffany's Sales Gains

Tiffany & Co., the world's second-largest luxury-jewelry retailer, today posted profit and sales gains that exceeded analysts' forecast, helped by strength in Europe. The company has accelerated its international expansion, planning to increase worldwide locations by 13 percent through early 2009. It had 196 stores and boutiques, including 72 in the U.S., 95 in Asia Pacific and 19 in Europe, as of July 31.

Total sales were ``strong'' in Europe and Asia-Pacific, Tiffany said in a statement.

Other companies are looking to Asia, Europe and the Middle East to offset slowing demand in North America. Caterpillar Inc.'s order books for large machines are full through the end of next year, and its factories in Asia are running at full capacity to meet demand in China, Chief Executive Officer Jim Owens said today at a press briefing in Beijing.

Caterpillar Investment

Caterpillar, the world's biggest maker of earthmoving equipment, will invest more than $100 million to triple capacity at its Shandong SEM Machinery Co. unit in northern China, Owens said. It will put another $20 million in the first of three building phases of a new research and development center in the eastern Chinese city of Wuxi to test engines, materials and electronics for manufacturing operations in the Asia-Pacific region.

The boost from trade may wane in the rest of the year as growth among some of the U.S.'s biggest trading partners slows. Europe and Japan both shrank last quarter.

Today's GDP report is ``kind of the last hurrah'' for the U.S. economy, Martin Regalia, chief economist for the U.S. Chamber of Commerce, said at a press conference today. ``We've begun the process of slipping into a good old-fashioned recession.''

Private economists aren't the only ones taking a dimmer view. Federal Reserve staff also ``marked down'' the central bank's forecast for growth in the second half of 2008, according to minutes of the Federal Open Market Committee's Aug. 5 meeting released this week.

Softer Export Demand

Fed policy makers also said recent reports pointed to ``softer export demand,'' according to the minutes.

Consumer spending, which accounts for more than two-thirds of the economy, grew at a revised 1.7 percent annual rate in the second quarter, compared with the 1.5 percent estimated last month and 0.9 percent for the first three months of the year.

The longest expansion in consumer spending on record will probably end this year, according to economists surveyed by Bloomberg earlier this month. Retail sales fell in July for the first time in five months, led by a slump in auto purchases, according to Commerce data.

``We are in a recession,'' Farooq Kathwari, chief executive officer at Ethan Allen Interiors Inc., said in an interview with Bloomberg Television this week. ``Our industry has been impacted. Conditions are still tough.''

The Danbury, Connecticut-based home-furnishings retailer said last month that sales fell 8.7 percent in the second quarter compared with the same period last year.

Jobs, Spending

A weakening labor market is one reason consumer spending is likely to slow after the government sent out about $92 billion in tax rebate checks. The U.S. has lost 463,000 jobs so far this year and wages haven't kept up with inflation, according to Labor Department data.

``We don't have a lot of demand out there on the part of consumers, so there is a worry,'' Joel Naroff, chief economist at Commerce Bancorp Inc. in Holland, New Jersey, said in a Bloomberg Radio interview. ``What we're looking at is an economy that's bouncing around, but when you really average it out we're just muddling along -- still some growth but nothing special.''

Smaller increases in paychecks are another reason Americans are likely to cut back. Wages and salaries increased by $52.5 billion in the first three months of the year, $20.2 billion less than previously estimated, according to today's revised estimates.

The reduction caused total personal income to grow at a 3 percent annual pace in the first quarter, compared with a previous estimate of 3.7 percent.

Housing Slump

Today's revisions showed housing continued to slump and companies invested less in new equipment. Residential construction decreased at a 15.7 percent pace, more than previously estimated.

The slide in residential construction has continued this quarter. Housing starts last month fell 11 percent and building permits also declined, the government said Aug. 19.

A smaller decline in stockpiles contributed to the larger- than-forecast gain in growth. Inventories fell at a $49.4 billion annual rate from April through June, down from a $62.2 billion first estimate. Still, the draw-down subtracted 1.44 percentage points from growth.

Today's report also included a first look at corporate profits for the second quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, decreased 2.4 percent to an annual rate of $1.56 trillion. Earnings were down 7 percent from the same time last year, the biggest decrease since the 2001 recession.

Wednesday, August 27, 2008

U.S. Stocks Gain on Durable Goods; Fannie Mae, Freddie Mac Rise

By Eric Martin

Aug. 27 (Bloomberg) -- U.S. stocks rose for a second day after orders for durable goods unexpectedly advanced in July and analysts said new investments by Fannie Mae and Freddie Mac will boost their earnings.

Bank of America Corp. and American Express Co. each climbed more than 2 percent after the Commerce Department report bolstered expectations that the economy is recovering. Fannie Mae and Freddie Mac rallied more than 15 percent each after the largest U.S. mortgage finance companies also sold $3 billion in debt at yields which suggest they won't need a government bailout. Oil's advance of more than $2 a barrel pushed up 38 of 39 energy producers in the Standard & Poor's 500 Index.

The S&P 500 added 10.15 points, or 0.8 percent, to 1,281.66, with 9 of its 10 main industry groups gaining. The Dow Jones Industrial Average climbed 89.64, or 0.8 percent, to 11,502.51. The Nasdaq Composite Index increased 20.49 to 2,382.46. Four stocks advanced for each that fell on the New York Stock Exchange.

``As long as businesses are optimistic, we have a good chance of pulling out of this weak period in the economy in fairly short order,'' said Peter Jankovskis, who helps manage $1.5 billion at OakBrook Investments in Lisle, Illinois. The durable goods data ``was a very strong report, and the market has acted appropriately.''

Durable Goods Growth

The 1.3 percent gain in durable goods orders defied economist forecasts for an unchanged reading in July. Stock futures fell before the Commerce Department report as a third day of gains in oil spurred concern that crude's rebound from a more than 20 percent tumble since July will threaten profits at consumer, transportation and technology companies.

Trading on the NYSE was the slowest for a full session since December 2006, with about 820 million shares changing hands. Volume since the start of last week has been more than one-third lower than the year-to-date average.

Fannie Mae added 86 cents to $6.48, while Freddie Mac gained 78 cents, or 20 percent, to $4.75. The mortgage-finance companies may get the biggest profits on new investments since at least 1998. The current-coupon mortgage bonds Fannie and Freddie buy yield about 40 basis points, or 0.40 percentage point, more than what they pay to borrow by selling benchmark bonds, Citigroup Inc. said in a report. The difference exceeded 20 basis points only twice in the 10 years through 2007 -- in 1998 and 2003.

The two companies today sold short-term debt at yields relative to benchmark rates that were higher than in sales earlier this month, yet below levels seen a year ago, data compiled by Bloomberg show. Investors have been watching the debt sales for any ``tell-tale'' signs that the companies can't fund themselves, UBS AG analysts in New York wrote in a report.

Fannie, which tumbled 37 percent last week on concern a government bailout will wipe out shareholders, has risen for five straight days for its longest streak of gains in a year.

`Great Confidence'

Merrill Lynch & Co. gained $1.17, or 4.9 percent, to $25.27. Temasek Holdings Pte, Singapore's $130 billion sovereign wealth fund, said it has ``great confidence'' in Merrill's Chief Executive Officer John Thain and plans to raise its stake.

Temasek, the U.S. bank's biggest shareholder, received U.S. antitrust approval yesterday to raise its stake to between 13 percent and 14 percent.

`Still Opportunities'

``Once we get through this credit crisis and rebuild confidence, things should get better,'' Kelli Hill, a portfolio manager at Ashfield Capital Partners in San Francisco, which manages $4 billion, said in an interview with Bloomberg Television. ``There are still opportunities within the market.''

Goldman Sachs Group Inc. dropped 43 cents to $155.48. Morgan Stanley analyst Patrick Pinschmidt cut his estimate for Goldman's third-quarter earnings to $1.65 a share from his earlier $3 estimate. The New York-based bank may mark down so-called principal investments by $525 million, he said in a note to clients.

Exxon Mobil Corp. rose 52 cents to $80.47, while Chevron Corp. climbed 83 cents to $86.62. Crude oil, natural gas and gasoline rose on speculation Tropical Storm Gustav will become the most damaging hurricane since Katrina as it moves toward production platforms in the Gulf of Mexico.

Valero Energy Corp., Tesoro Corp. and Sunoco Inc., the biggest U.S. petroleum refiners, rose more than 4 percent and made up the three top advances in the S&P 500 Energy Index. The gains came as profit margins on processing oil into gasoline and heating oil, the so-called crack spread, advanced 6.8 percent, sending the measure to its biggest two-day increase since March.

Refiners Rally

Valero increased $1.42 to $35.02. Tesoro climbed $1.84 to $18.41. Sunoco jumped $1.97 to $42.23.

Amylin Pharmaceuticals Inc. plunged $6.76, or 25 percent, to $20.48 after four more patients taking the diabetes drug Byetta died from pancreatitis. Byetta, available in the U.S. since June 2005, is Amylin's leading product, with global sales that rose 25 percent in the second quarter to $194.7 million from a year earlier.

No definite relationship between Byetta and the additional deaths has been proved, and the Food and Drug Administration was aware of them when it made its announcement last week, Amylin Chief Executive Officer Dan Bradbury said by telephone yesterday.

Health-care companies had the only decline among 10 S&P 500 industries, falling 0.1 percent. Pfizer and Bristol-Myers Squibb Co. dropped after saying their experimental blood thinner apixaban worked no better than an older pill in a study, causing them to delay seeking U.S. regulatory approval. Bristol-Myers dropped 46 cents, or 2.1 percent, to $21.52 and Pfizer declined 20 cents, or 1 percent, to $19.08.

`Significant Risks'

U.S. airlines retreated after Citigroup Inc. said demand may weaken and ``significant risks remain'' for the industry as crude oil rebounds.

``U.S. airlines have yet to see a severe consumer downturn despite gloomy economic data,'' analyst Andrew Light wrote in a note.

Investors should sell shares of AMR Corp., parent of American Airlines, the world's largest carrier, because they have more than doubled since falling to a five-year low last month, Light said. AMR declined 2.7 percent to $9.35. UAL Corp., the Chicago-based parent of United Airlines, dropped $1.27, or 11 percent, to $9.88.

The S&P 500 is up 1.1 percent in August after falling in June and July. The benchmark index for U.S. equities has posted only two monthly gains since reaching a record in October and is down almost 13 percent this year.

Tuesday, August 26, 2008

Dollar Falls on Speculation Reports to Show Flagging Spending

By Stanley White

Aug. 27 (Bloomberg) -- The dollar fell from a six-month high against the euro on speculation weakening business and consumer spending will discourage the Federal Reserve from raising interest rates.

The greenback retreated from a two-year high against the British pound as economists forecast U.S. data this week will show declines in durable goods orders and consumption. The Australian dollar rebounded from an 11-month low as rising Asian stocks gave investors confidence to buy higher-yielding assets in a nation profiting from commodity exports to China and India.

``The numbers coming up are a reason to push the dollar lower,'' said Toru Tokoyoda, head of foreign exchange sales in Tokyo at Lehman Brothers Holdings Inc. ``There are doubts about the U.S. economy.''

The dollar declined to $1.4698 per euro at 10:01 a.m. in Tokyo from $1.4653 yesterday, when it touched $1.4571, the strongest since Feb. 14. The dollar fell to 109.22 yen from 109.60. The euro was little changed at 160.59 yen after dropping yesterday to 159.95, the lowest level since May 12. The dollar may rise to $1.4750 versus the euro today, Tokoyoda forecast.

Bookings for goods made to last several years were unchanged in July, compared with a gain of 0.8 percent in June, according to a Bloomberg News survey of economists before a Commerce Department report at 8:30 a.m. today in Washington. A separate report on Aug. 29 may show personal spending rose 0.2 percent, less than half the 0.6 percent gain in June, according to a separate survey.

``The prospects for the U.S. economy are still poor and it will continue to slow,'' said Katie Dean, a senior economist at Australia & New Zealand Banking Group Ltd. in Melbourne. ``There's not a lot of reasons to own dollars.''

Monday, August 25, 2008

U.S. Stocks Drop, Led by Financial Shares, AIG, Banks Retreat

By Elizabeth Stanton

Aug. 25 (Bloomberg) -- U.S. stocks fell the most in a month as a Kansas bank's failure and speculation American International Group Inc. will post a loss heightened concern that credit writedowns will keep rattling the financial system.

AIG tumbled to a 13-year low after Credit Suisse Group said the insurer may lose $2.41 billion this quarter on mortgage- related writedowns. Washington Mutual Inc. and Huntington Bancshares Inc. each dropped more than 6 percent after Columbian Bank & Trust Co. became the ninth U.S. bank to collapse this year. Alcoa Inc. and Freeport-McMoRan Copper & Gold Inc. led the Standard & Poor's 500 Materials Index to a 2.3 percent retreat as gold and aluminum prices decreased.

``The market's going to struggle until we get a clear indication that we know what the bottom is in the financials, and that may be a while,'' Peter Sorrentino, senior portfolio manager at Cincinnati-based Huntington Asset Advisors, which manages about $17 billion, told Bloomberg Television.

The S&P 500 dropped 25.36, or 2 percent, to 1,266.84, ending a three-day advance. The Dow Jones Industrial Average slid 241.81, or 2.1 percent, to 11,386.25, with all 30 of its companies lower. The Nasdaq Composite Index decreased 49.12 to 2,365.59. About 865 million shares changed hands on the New York Stock Exchange, the slowest trading day of the year. Volume last week was 35 percent less than the year-to-date average.

Broad Retreat

Almost 10 stocks retreated for each that rose on the NYSE. All 10 industry groups in the S&P 500 dropped as the index extended its first weekly decline since July. The benchmark for American equities slipped 0.5 percent last week as energy prices climbed and concern grew that the government may need to bail out Fannie Mae and Freddie Mac.

Stocks fell even after a report showed sales of previously owned homes in the U.S. rose in July from a 10-year low as declining prices helped stabilize demand, and investor appetite increased for Freddie Mac's weekly sale of short-term debt securities.

Morgan Stanley cut its year-end forecast for the S&P 500 on concern banks will report more credit-related writedowns and the global economic slowdown will curb profits at technology and industrial companies.

``Our biggest concern for 2009 earnings estimates is that a combination of global growth slowdown, declining operating leverage, a stronger U.S. dollar, less share count reduction and a long tail to dysfunctional credit markets will create powerful headwinds for what appear to be very optimistic consensus expectations,'' Abhijit Chakrabortti wrote in a note to clients dated yesterday.

AIG, Banks Retreat

AIG fell 5.5 percent to $18.78 for the biggest drop in the Dow average. Credit Suisse analyst Thomas Gallagher predicted AIG will lose 86 cents a share in the third quarter. Previously he forecast a 13-cent profit. ``Recent deterioration'' in debt holdings may cause losses in the firm's credit-default swaps, Gallagher wrote today in a research note. He rates New York-based AIG ``neutral.''

The KBW Bank Index tumbled 3.4 percent as all 24 of its companies decreased. Washington Mutual lost 23 cents to $3.60. Huntington Bancshares retreated 51 cents to $7. SunTrust Banks Inc., the largest bank based in Georgia, fell 6 percent to $40.15 after Citigroup Inc. began covering it with a ``sell'' rating.

Columbian Bank, with $752 million in assets and $622 million in total deposits, was shuttered by the Kansas state bank commissioner's office and the Federal Deposit Insurance Corp. on Aug. 22.

`Last Shoe'

The pace of bank closings is accelerating as global financial firms rack up more than $500 billion in writedowns and credit losses since 2007. The FDIC's ``problem'' bank list grew by 18 percent in the first quarter to 90 banks with combined assets of $26.3 billion. Prior to yesterday, the FDIC had closed 36 banks since October 2000, according to a list at The U.S. shut 12 banks in 2002, the highest in the period, and 2005 and 2006 had no closures.

``Trying to guess when the last shoe has dropped is going to be a difficult way of making money,'' said Jeffrey Coons, co- director of research at Manning & Napier Advisors Inc., which manages $19 billion in Fairport, New York. Investors ``should focus on companies that aren't reliant on you picking a bottom in the financial crisis,'' he said.

Lehman Brothers Holdings Inc. slipped 6.6 percent to $13.45 on concern that a Korean bank will abandon a potential investment in the fourth-largest U.S. securities firm. The shares rose 5 percent in New York trading on Aug. 22 after Korea Development Bank said it's ``considering'' an investment in the company.

Lehman Talks

The Korean bank ended talks on a possible investment after Lehman demanded a price 50 percent higher than its book value, the Maeil Business newspaper said, citing an unnamed official in the banking industry. South Korea's financial regulator said today that state-controlled banks including Korea Development Bank should consider the risks of buying overseas rivals amid the global credit crisis.

New York-based Lehman has dropped 79 percent this year, the worst performance in the 11-company Amex Securities Broker/Dealer Index.

Fannie Mae rose 3.8 percent to $5.19, paring its drop over the past year to 92 percent. Freddie Mac climbed 17 percent to $3.29, still down 95 percent in the past year. Investors bid 3.95 times the amount of three-month securities on offer from Freddie today, compared with 2.19 times last week.

Financials Slump

Financial shares last week fell the most in six weeks for the biggest drop among 10 S&P 500 industries. The group has retreated 32 percent this year. One year into the financial crisis, central bankers and scholars at the Federal Reserve's annual retreat this weekend couldn't agree on how to prevent a repeat.

Fed Chairman Ben S. Bernanke, European Central Bank President Jean-Claude Trichet, former officials and economists meeting in Jackson Hole, Wyoming, split over whether policy makers should be made responsible for financial stability and how closely to heed the concerns of Wall Street.

The yearlong credit crisis has yet to run its course, with continued turmoil likely in housing and banking, Bank of Israel Governor Stanley Fischer said Aug. 23 at the Fed's symposium.

Alcoa, the world's third-largest aluminum producer, retreated 86 cents to $31.42. Freeport-McMoRan tumbled $2.79 to $87.81. Gold futures for December delivery fell $7.80, or 0.9 percent, to $825.70 an ounce in New York and November aluminum fell 1 percent in Shanghai. The London Metals Exchange was closed for a bank holiday.

Consumer Shares Decline

Shares of retailers, hotel operators and other S&P 500 companies that rely on consumers' disposable income dropped 2.4 percent as a group. Spreads on their bonds, the extra yield investors demand to own the industry's debt, rose to 2.5 percentage points over U.S. Treasuries last week. Every time spreads have widened that much this decade, the S&P 500 Consumer Discretionary Index slumped 16 percent on average.

Coach Inc., the largest U.S. maker of luxury handbags, fell $1.93 to $26.40. Darden Restaurants Inc., the owner of the Olive Garden and Red Lobster chains, retreated $1.31 to $32.26. Wyndham Worldwide Corp., the franchiser of Ramada and Super 8 hotels, lost 38 cents to $18.27.

The consumer index rose 7.6 percent in August through the end of last week, putting it on track for the biggest monthly rally in five years. The gain, helped by a 2.2 percent rally after earnings at Gap Inc. topped analyst forecast, was almost four times that of the S&P 500.

Ryder, AMR

Ryder System Inc. slid 6.4 percent to $64.72. Wachovia Corp. analyst Justin Yagerman lowered his rating on the trucking industry to ``market weight'' from ``overweight,'' citing ``lackluster'' freight volumes in August and the potential for continued weakness.

AMR Corp., parent of American Airlines, the world's largest carrier, lost 46 cents to $10.06. AMR may sell as much as $300 million worth of newly issued shares, diluting existing stockholders' stake, and use the proceeds to repay debt or help purchase aircraft, according to a regulatory filing.

Advanced Micro Devices Inc. climbed 2.1 percent to $5.93, the highest in two months. The world's second-largest maker of personal-computer processors agreed to sell a unit that produces semiconductors used in lower-priced digital TVs to Broadcom Corp. for $192.8 million. Broadcom declined 4.6 percent to $26.17.

Leggett & Platt Inc. gained 2 percent to $21.55. The maker of lumbar supports for car seats was raised to ``buy'' from ``hold'' by analysts at Stifel Nicolaus & Co., who said the company may get out of its less profitable businesses.

Dell Inc., Sears Holdings Corp. and Big Lots Inc. are among the companies scheduled to report earnings this week. Second- quarter profits for S&P 500 companies slumped 22 percent on average, based on Bloomberg data. Fewer than 50 companies in the U.S. stock benchmark have yet to release results.

U.S. Treasuries Climb on Concern Credit-Market Turmoil Widening

By Dakin Campbell

Aug. 25 (Bloomberg) -- Treasuries rose the most in almost two weeks on speculation credit-market turmoil may be widening.

The gains pushed yields on U.S. 10-year notes to the lowest since May 13 as financial stocks fell amid speculation American International Group Inc. will post a loss and Korea Development Bank may be reconsidering a possible bid for Lehman Brothers Holdings Inc. Interest-rate derivatives imply banks are becoming more hesitant to lend.

``This is the longest-running horror movie that any of us has ever had to deal with,'' said T.J. Marta, a fixed-income strategist at RBC Capital Markets in New York, the investment- banking arm of Canada's biggest lender.

The 10-year note yield declined 9 basis points, or 0.09 percentage point, the most since Aug. 12, to 3.78 percent at 4:39 p.m. in New York, according to BGCantor Market Data. The yield touched 3.76 percent. The 4 percent security due in August 2018 rose 3/4, or $7.50 per $1,000 face amount, to 101 26/32.

Two-year yields dropped 9 basis points, also the most since Aug. 12, to 2.33 percent.

The rally comes as the Treasury prepares to auction $32 billion of two-year notes on Aug. 27 and $22 billion of five- year securities Aug. 28. The size of the two-year note sale is a record, and the five-year note auction will be the biggest sale of that maturity since February 2003. Both amounts are $1 billion more than expected last week.

``Even with supply on the horizon, everyone is concerned with the uncertainties,'' said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. ``You have the thought of continued credit deterioration within the market. That is an ongoing thorn in everyone's side.''

Credit-Default Swaps

The cost of protecting U.S. corporate bonds from default rose as Credit Suisse Group said AIG may lose $2.41 billion this quarter and as the ninth U.S. bank failure of the year, the collapse of Columbian Bank and Trust Co. of Topeka, Kansas, added fuel to concern subprime losses will worsen.

Credit-default swaps on the Markit CDX North America Investment Grade Index, a benchmark gauge of credit risk linked to the bonds of 125 companies in the U.S. and Canada, rose 4 basis points to 144 basis points, according to prices from broker Phoenix Partners Group and CMA Datavision.

``You keep hearing about continued credit fears,'' said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley's individual-investor clients. `We're back into flight-to-quality mode.''

The Standard & Poor's 500 Index dropped 2 percent.

Losses, Writedowns

Banks are charging each other a premium of 78 basis points over what traders predict the Federal Reserve's daily effective federal funds rate will average in the next three months to lend cash. The spread has widened from about 24 basis points in January.

U.S. notes headed for a third straight monthly gain, according to Merrill Lynch & Co.'s U.S. Treasury Master Index, as forecasts called for slowing economic growth and credit- market losses mounted. Treasuries returned 0.9 percent so far in August, the Merrill index shows, after gaining 0.8 percent in June and 0.4 percent in July.

Losses and writedowns on securities related to subprime home loans now exceed $500 billion at financial institutions worldwide, according to data compiled by Bloomberg.

`Biggest Uncertainty'

JPMorgan Chase & Co. said the value of $1.2 billion in preferred shares of government-sponsored enterprises Fannie Mae and Freddie Mac has declined in the third quarter by half. Prices on the securities are volatile as speculation increases about whether a government rescue of the two companies will protect shareholders.

``All eyeballs will be on the GSEs and whatever statement the government makes'' about them, said John Spinello, chief technical strategist in New York at Jefferies Group Inc. ``That remains the biggest uncertainty in the market.''

Treasuries remained higher today even after a National Association of Realtors report showed sales of existing houses in the U.S. rose in July from a 10-year low. The resales increased at an annual pace of 5 million units, versus a revised 4.85 million in June. A Bloomberg News survey forecast a pace of 4.91 million.

Ried, Thunberg & Co.'s sentiment index for the end of December rose to 49 for the seven days ended Aug. 22 from 48 the week before. A reading below 50 means investors anticipate lower prices. The 31 fund managers surveyed by the company, a unit of ICAP Plc, the world's largest inter-dealer broker, manage a combined $1.40 trillion.

Rate Outlook

Futures contracts on the Chicago Board of Trade show the Fed will most likely refrain from raising its 2 percent target rate for overnight lending between banks this year. Traders see an 81 percent chance the Fed will remain on hold through December, up from 25 percent odds a month ago.

Fed Chairman Ben S. Bernanke signaled in a speech Aug. 22 the central bank is relying on slowing growth to contain inflation. The comments, during the Kansas City Fed's conference at Jackson Hole, Wyoming, fueled speculation the central bank will be reluctant to raise rates.

The world's largest economy probably grew at an annualized 2.7 percent in the second quarter, according to a Bloomberg survey of economists before the Commerce Department releases the figure on Aug. 28. Growth will slow to 0.45 percent in the fourth quarter, a separate survey showed.

Sunday, August 24, 2008

Home Sales Probably Held Near Decade Low: U.S. Economy Preview

By Shobhana Chandra

Aug. 24 (Bloomberg) -- Home sales in the U.S. probably teetered near a 10-year low, property values dropped and consumer spending cooled, signaling the economy has taken another turn for the worse, reports this week may show.

A total of 5.435 million new and existing homes were purchased in July at an annual pace, according to the median estimate of economists polled by Bloomberg News. June's 5.39 million rate was the weakest since at least 1999. Spending probably rose 0.3 percent in July, half the prior month's gain.

The real-estate recession will persist into next year as stricter lending rules and higher borrowing costs shackle demand. At the same time, equity is disappearing as home prices fall, and wages aren't keeping up with inflation, depriving Americans of the means to maintain spending, the biggest part of the economy.

``The economy is going down a shaky path,'' said Maxwell Clarke, chief U.S. economist at IDEAGlobal Inc. in New York. ``We're not going to see a rebound in housing anytime soon. Consumers are living hand to mouth, and the outlook for spending is very weak.''

Purchases of new houses dropped 0.9 percent to an annual rate of 525,000, according to the median estimate of economists polled ahead of a Commerce Department report on Aug. 26. March's 513,000 pace was the lowest since 1991.

Resales of existing homes, compiled from closings and reflecting contracts signed weeks or months earlier, will be reported by the National Association of Realtors tomorrow. Purchases gained 1 percent to a 4.91 million annual rate, staying near June's 10-year low, the survey median showed.

Timelier Gauge

While sales of previously owned homes account for about 85 percent of the U.S. market, new-home purchases are considered a timelier indicator because they are based on contract signings.

The slump in demand is keeping property values under pressure. The S&P/Case-Shiller index of home prices in 20 metropolitan areas probably fell in June, the survey showed. The figures, due on Aug. 26, would extend a string of declines that began in August 2006.

Consumers, after getting a temporary lift from the government's tax rebates earlier this year, are focusing on buying necessities and hunting for bargains to stretch their paychecks following the jump in food and fuel costs.

Home Depot Inc., the world's largest home-improvement retailer, said second-quarter profit fell 24 percent, its eighth straight quarterly drop. The Atlanta-based company forecast a decline in sales and earnings for the year.

Consumer 'Pressure'

``We continue to see pressure on our market and the consumer,'' Chief Executive Officer Frank Blake said in a statement on Aug. 19.

Commerce Department figures on Aug. 29 will underscore the dimming outlook for consumer spending, according to the Bloomberg survey.

The report is also projected to reinforce concern over inflation. The price gauge tied to spending patterns probably rose 4.5 percent in the year ended July, the biggest 12-month gain since 1991.

The measure that excludes food and energy costs, the one tracked by Federal Reserve policy makers, probably rose 2.4 percent from a year earlier, the biggest gain since February 2007, the survey showed.

Concerns about slower growth and the pickup in prices led Fed policy makers to hold the benchmark interest rate at 2 percent this month. Minutes of the Aug. 5 meeting, to be released Aug. 26, may shed more light on the debate within the central bank about the future direction of rates.


The one bright spot for the economy remains the narrowing of the trade deficit. A surge in exports caused the economy to grow even faster in the second quarter than previously projected. Revised figures from the Commerce Department, due Aug. 28, may show the economy expanded at a 2.7 percent annual rate from April through June, up from an advance estimate of 1.9 percent issued last month, according to the survey median.

``The data releases this week should illustrate the stark contrast between how well the economy performed in the second quarter and how bad the outlook for the second half of the year is,'' said Paul Ashworth, international economist at Capital Economics Ltd. in London.

Other reports this week may show orders for durables goods stalled in July and confidence among American consumers was little-changed this month from multiyear lows reached earlier this year, even as gasoline prices retreated.

Bloomberg Survey

Release Period Prior Median
Indicator Date Value Forecast
Exist Homes Mlns 8/25 July 4.86 4.91
Exist Homes MOM% 8/25 June -2.6% 1.0%
Case Shiller Monthly YO 8/26 June -15.8% -16.2%
Case Shiller Monthly In 8/26 June 168.5 167.2
Consumer Conf Index 8/26 Aug. 51.9 53.0
New Home Sales ,000's 8/26 July 530 525
New Home Sales MOM% 8/26 July -0.6% -0.9%
OFHEO HPI MOM% 8/26 June -0.3% -0.4%
OFHEO HPI QOQ% 8/26 #VALUE! -1.3% -1.6%
Durables Orders MOM% 8/27 July 0.8% 0.0%
Durables Ex-Trans MOM% 8/27 July 2.0% -0.6%
GDP Annual QOQ% 8/28 3Q P 1.9% 2.7%
Personal Consump. QOQ% 8/28 3Q P 1.5% 1.6%
GDP Prices QOQ% 8/28 3Q P 1.1% 1.1%
Core PCE Prices QOQ% 8/28 3Q P 2.1% 2.1%
Initial Claims ,000's 8/28 Aug. 23 432 425
Cont. Claims ,000's 8/28 Aug. 16 3362 3380
Pers Inc MOM% 8/29 July 0.1% -0.2%
Pers Spend MOM% 8/29 July 0.6% 0.3%
PCE Deflator YOY% 8/29 July 4.1% 4.5%
Core PCE Prices MOM% 8/29 July 0.3% 0.3%
Core PCE Prices YOY% 8/29 July 2.3% 2.4%
Chicago PM Index 8/29 Aug. 50.8 50.0
U of Mich Conf. Index 8/29 Aug. F 61.7 62.0

Oil Is Steady After Falling More Than $6 as Pipeline Restarts

By Angela Macdonald-Smith

Aug. 25 (Bloomberg) -- Crude oil was little changed in New York after dropping more than $6 a barrel on Aug. 22, the most in percentage terms for more than three years, as BP Plc resumed flows through a Caspian Sea pipeline.

The Baku-Tbilisi-Ceyhan pipeline, which moves oil from Azerbaijan through Georgia to Turkey's Mediterranean coast, may resume full operations within days after a fire halted exports, a BP Plc spokeswoman said Aug. 23. Oil also fell on Aug. 22 as the dollar strengthened.

``The pipeline restart was a contributing factor, putting more supply in the market,'' said Jonathan Barratt, managing director of Commodity Broking Services in Sydney. ``Oil is trading in a very volatile, wide range. The volatility is telling me that a base is trying to form'' and prices won't sink much further, he said.

Crude oil for October delivery was at $114.45 a barrel, down 14 cents, in after-hours electronic trading on the New York Mercantile Exchange at 6:26 a.m. in Singapore.

Oil fell $6.59 on Aug. 22, or 5.4 percent, to $114.59 a barrel, the biggest drop since Dec. 27, 2004. In dollar terms, it was the biggest decline since Jan. 17, 1991, when U.S.-led forces expelled Iraq from Kuwait. The October contract, which had jumped 4.9 percent the previous day, still rose 0.6 percent for the week.

The price swings indicate that fundamental factors aren't the only influence in the market, Barratt said.

`Huge Move'

``That's a huge move,'' he said. ``From that price action on Thursday and Friday it seems there are some big boys pushing it around.''

BP, Europe's second-largest oil company, StatoilHydro ASA and partners cut output at Caspian oil fields following the closure of the 1,768-kilometer (1,100-mile) Baku-Tbilisi-Ceyhan link on Aug. 5. The pipeline is used to carry oil from Azerbaijan through Georgia to Turkey, where it's loaded onto tankers for U.S. and European markets.

BP is ``carrying out integrity testing on the pipeline,'' Tamam Bayatly, a company spokeswoman, said by telephone from Baku on Aug. 23. She didn't specify a date for full production, due this week.

Oil may rise this week because of a weakening dollar, tension between the U.S. and Russia and falling gasoline stockpiles, a Bloomberg News survey found. The dollar fell 0.7 percent last week, to $1.4793 per euro on Aug. 22. It was at $1.4789 per euro at 6:38 a.m. in Singapore.

Sixteen of 29 analysts surveyed, or 55 percent, said prices will increase through Aug. 29. Seven of the respondents, or 24 percent, said oil will be little changed and six said there would be a drop in prices. Last week 63 percent expected prices to increase.

Brent crude oil for October settlement declined $6.24, or 5.2 percent, to $113.92 a barrel Aug. 22 on London's ICE Futures Europe exchange.

Wednesday, August 20, 2008

Fannie, Freddie Shares Slump, Bonds Rise on Bailout Speculation

By Dawn Kopecki

Aug. 20 (Bloomberg) -- Fannie Mae and Freddie Mac shares tumbled in New York trading to the lowest levels since at least 1990 and the bonds rose as speculation increased that the U.S. Treasury will bail out the mortgage-finance companies, wiping out shareholders.

Fannie, based in Washington, slumped 27 percent and McLean, Virginia-based Freddie dropped 22 percent, extending its losses to 90 percent for the year. The companies' debt yields fell the most in a month against benchmarks in anticipation that the government would fully support the bonds in any rescue.

``Using taxpayer money to bail them out looks like it's becoming reality now,'' said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages $5 billion in San Antonio. ``That's going to leave the shareholders holding worthless paper.''

Rising borrowing costs and evidence that demand for their debt was waning last month led Treasury Secretary Henry Paulson to seek the authority to pump unlimited amounts of capital in Fannie and Freddie in an emergency. Freddie paid its highest yields over U.S. Treasuries on record in a debt sale yesterday amid concern that credit losses are depleting the capital of the beleaguered mortgage-finance companies.

Fannie and Freddie have $223 billion of bonds due by the end of the quarter and their success in rolling over that debt may determine whether they can avoid a federal bailout. Fannie has about $120 billion of debt maturing through Sept. 30, while Freddie has $103 billion, according to figures provided by the government-chartered companies and data compiled by Bloomberg.

Rolling over the debt ``is the single most important factor to their ability to remain liquid,'' said Moshe Orenbuch, an analyst at Credit Suisse in New York. ``So far, they've been able to do that.''

Market Value Shrinks

Fannie declined $1.61 to $4.40, the lowest since 1989, in New York after falling as low as $3.95. Freddie dropped 92 cents to $3.25, the lowest level since 1990, and earlier fell to $2.95.

Fannie's market value has shrunk $34 billion, or 88 percent, to $4.73 billion this year and Freddie's declined $20 billion, or 90 percent, to $2.1 billion. That makes it increasingly difficult for the companies to raise equity through public markets, Miller said. The companies have reported a combined $14.9 billion of net losses the past four quarters.

The difference between yields on Fannie's 5-year debt and 5- year Treasuries fell 12.6 basis points to 87.6 basis points at 4:45 p.m., data complied by Bloomberg show. The drop was the largest since Paulson said July 11 that he supported keeping the companies ``in their current form.'' Freddie's 5-year debt spreads fell 12.9 basis points to 88.9 basis points.

Asian Investors

Investors in Asia, the biggest foreign owner of Fannie's $3 trillion of bonds, are reducing their share of purchases, potentially increasing the need for Paulson to make good on his pledge to backstop the companies.

``This whole backstop mechanism was set up so the actual need for it could be avoided,'' said Mahesh Swaminathan, a mortgage strategist for Credit Suisse in New York. ``The market is testing the Treasury's resolve.''

The companies, responsible for 42 percent of the U.S. home loan market, need as much as $15 billion each in fresh capital to reserve against losses on mortgages and related securities that they either own or guarantee, Paul Miller, an analyst with Friedman Billings Ramsey & Co. in Arlington, Virginia, said.

The Treasury will probably be forced to buy as much as $30 billion of preferred shares in both Fannie and Freddie by the end of next month, according to Bill Gross, who manages the world's biggest bond fund at Pacific Investment Management Co.

Fed Clash

Fannie hasn't asked the Treasury for help in funding the mortgage-finance company and the government hasn't offered, Chief Executive Officer Daniel Mudd told National Public Radio today. Freddie ``continues to have strong access to the debt markets at attractive spreads,'' spokeswoman Sharon McHale said.

``Treasury is monitoring market developments vigilantly. We are focused on encouraging market stability, mortgage availability, and protecting the taxpayers' interests,'' Treasury spokeswoman Jennifer Zuccarelli said.

Freddie executives met with Treasury today, according to a person with knowledge of the talks. The talks are part of a regular series of meetings between Treasury and finance officials from Freddie, said the person, who declined to be named because the discussions are confidential. Treasury won't confirm particular meetings and receives regular updates from the companies, Zuccarelli said.

Richmond Federal Reserve Bank President Jeffrey Lacker became the first Fed official to clash publicly with the Bush administration's strategy yesterday, saying the companies should be ``credibly and demonstrably privatized.''

Best Path

``I think a path like what Chairman Greenspan suggested is probably the best path,'' Lacker said in a Bloomberg Television interview in Washington. Former Fed chief Alan Greenspan has advocated nationalizing the two largest U.S. mortgage financers, splitting them up and selling them off.

Freddie yesterday sold $3 billion of five-year reference notes at its highest yields over benchmarks in at least 10 years as demand fell from Asian investors and central banks. The debt priced to yield 4.172 percent, or 113 basis points more than U.S. Treasuries of similar maturity. The company sold five-year notes in May at a spread of 69 basis points. A basis point is 0.01 percentage point.

In market trading, investors this week demanded an extra 104 basis points in yield to own Freddie's five-year debt rather than Treasuries of similar maturity, the most since reaching a 10-year high of 114 basis points in March. The gap narrowed to 74 basis points after Paulson's announcement.

Fannie spreads approached a 10-year high of 104 basis points on Aug. 18, from 74 basis points on July 28. In the decade before 2008, the spread averaged 43 basis points.

Losing Faith

``The fixed-income markets are starting to lose faith,'' Miller said.

Fannie paid a record high yield in a $3.5 billion sale of three-year benchmark notes last week that drew less demand from Asia. Investors in the region bought 22 percent of the offering, almost half the demand of three months ago and about two-thirds of Asia's usual purchases.

``The 22 percent of Asian participation is worrying,'' said Ajay Rajadhyaksha, the head of fixed-income strategy for Barclays Capital in New York.

Not Good Environment

JPMorgan Asset Management Japan is reducing its holdings of Fannie and Freddie debt, according to Shinji Kunibe, a senior money manager at the firm in Tokyo. And Yuuki Sakurai, the general manager of financial and investment planning in Tokyo at Fukoku Mutual Life Insurance Co., said his firm is also ``a little bit worried about the fate of'' Fannie and Freddie.

``The conditions don't seem to be turning into a good environment,'' Sakurai said.

After receiving authority last month to inject unlimited capital into Fannie and Freddie, a Treasury spokeswoman this week said Paulson had no plans to use his new power.

Initial optimism that Paulson's proposal would bolster confidence in the companies has vanished on concern that the deteriorating housing market may force a bailout, a move that would likely wipe out common shareholders and potentially some preferred stockholders, Miller said.

``It hasn't restored any faith, it just highlighted their problems,'' Miller said. ``The market has come to accept the fact that the government has got to do something.''

Freddie's 5.57 percent perpetual preferred shares slumped to $7.15 today to yield 20.2 percent, compared with $17.99 and a yield of 7.77 percent on June 30 before the crisis erupted. Fannie's 5.5 percent preferred shares yield 18.8 percent, up from 16.4 percent yesterday and 7.83 percent on June 30.

More Explicit

Fannie was created as part of Franklin D. Roosevelt's New Deal in the 1930s and became a publicly owned company in 1968. Freddie was started in 1970, when the economy was strained by the Vietnam War.

The companies, which own or guarantee about $5 trillion of the $12 trillion of outstanding U.S. home loans, help expand financing to homebuyers by purchasing home loans from lenders and packaging other loans into securities that they then guarantee.

Fannie and Freddie issue new debt to pay off outstanding obligations as they mature and have a combined $1.7 trillion in outstanding unsecured notes and bonds. The companies can also sell securities to raise cash.

Freddie had $70 billion of cash and non-mortgage investments on June 30 and $470 billion of agency mortgage securities that it could pledge for secured borrowing, the company said Aug. 6.

``While the plan was extraordinarily aggressive, it seems that the market is looking for something even more explicit and more guidance about what form that will take,'' said Margaret Kerins, the managing director of agency debt strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut.

Stern Says It's `Good Time to Be Patient' on Rates (Update1)

By Vivien Lou Chen and Kathleen Hays

Aug. 20 (Bloomberg) -- Federal Reserve Bank of Minneapolis President Gary Stern said an oil-price decline will probably push headline inflation lower, allowing the central bank to ``be patient'' in considering a change to the main interest rate.

``Now is a good time to be patient because I do think we will see better news on the inflation front,'' Stern said today in an interview from Minneapolis with Bloomberg Television.

Central bank policy makers signaled earlier this month that persistent financial market turmoil and falling employment would delay any increase in borrowing costs. The Federal Reserve kept its benchmark interest rate at 2 percent on Aug. 5, pausing for a second straight meeting.

A 22 percent drop in crude oil, from a record $147.27 a barrel on July 11, has ``certainly helped,'' said Stern, 63, the central bank's longest-serving policy maker and a voter on rates this year. ``The implication is not immediate, but over the next several months we should see a diminution in the rate of headline inflation,'' he said.

Traders are placing 77 percent odds of no change to the overnight lending rate between banks for the rest of the year.

A growing number of Fed bank presidents, while voicing concern about inflation, have said the central bank shouldn't wait for markets to settle before lifting rates.

`Completely Certain'

Dallas Fed President Richard Fisher said yesterday the central bank might ``have to move ahead of what everybody else perceives to be the turn.'' The Richmond Fed's Jeffrey Lacker said such an increase could come ``before we are certain all of the weakness is behind us and before we are completely certain that financial markets are as tranquil as we would like to see.''

Prices paid to U.S. producers rose twice as much as economists had forecast in July, according to figures released yesterday by the Labor Department. Consumer prices rose at the fastest pace in 17 years last month.

``We largely have addressed the potential downside risks from here,'' Stern said today. Still, the Fed will ``have to probably adopt a somewhat less accommodative monetary policy before it is altogether clear that robust growth has resumed. But that point is somewhere in the future.''

Referring to the ``dual mandate'' of the Fed to limit inflation while promoting maximum sustainable employment, Stern said, ``If you look at the performance of the economy vis-a-vis the dual mandate, we are achieving neither part of it at the moment.''

``Inflation is higher than certainly I would like it to be, and growth has been quite modest recently,'' he said.

Federal Support

Stern reiterated his view that federal support for Fannie Mae, Freddie Mac and Bear Stearns Cos. may prompt excessive risk-taking by bolstering investors' view that some firms are ``too big to fail.''

Still, ``you cannot deal with these problems in the middle of a lot of turmoil and turbulence and disturbance,'' he said. Actions to save Fannie Mae, Freddie Mac and Bear Stearns have been ``appropriate given the risks,'' he said.

The U.S. Treasury, in legislation aimed at restoring investor confidence, gained authority last month to inject capital into Fannie Mae and Freddie Mac. Stocks and bonds issued by the companies have since slumped.

Now ``would not be an appropriate time to close'' Fannie Mae or Freddie Mac, Stern said. The Fed will monitor banks' exposure to preferred shares of Fannie Mae and Freddie Mac, the largest sources of money for U.S. home loans, he added.

``But I don't think the problem with Fannie and Freddie is just confined to banks that happen to hold their preferred stock,'' Stern said. ``It is important Fannie and Freddie continue to function as effectively as possible under these circumstances.''

``Once we get through this period, as we certainly will, we want to sit down and take a look at what is the appropriate framework and the appropriate role for these institutions,'' he said.

Monday, August 18, 2008

Australian Dollar Declines Before Reserve Bank Board Minutes

By Chris Young

Aug. 19 (Bloomberg) -- The Australian dollar fell on speculation minutes of the central bank's last meeting released today will underpin bets policy makers plan to cut interest rates next month for the first time in more than six years.

The currency approached a more than six-month low set last week as some traders speculated the Reserve Bank of Australia will reduce the benchmark borrowing cost of 7.25 percent by more than a quarter-percentage point, according to a Credit Suisse Group index based on interest-rate swaps.

``The morning's RBA board minutes from the Aug. 5 meeting provides a downside risk for the Australian dollar,'' John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney, wrote in a research note. ``The minutes will detail why the RBA believes it needs to cut rates.''

The Australian dollar weakened to 86.71 U.S. cents as of 8:41 a.m. in Sydney, compared with 87.28 cents in late Asian trading yesterday. It touched 85.93 cents last week, the lowest since Jan. 23.

The Reserve Bank will release the minutes of its August meeting at 11:30 a.m. in Sydney. The central bank meets Sept. 2 to decide on interest rates.

Losses in the Australian dollar were limited as prices rose for commodities the nation exports. The Reuters-Jefferies CRB Index of 19 commodities gained for the first time in three days as the price of gold rebounded 1.7 percent.

Sunday, August 17, 2008

U.K. House Prices Fall Most Since at Least 2002, Rightmove Says

By Svenja O'Donnell

Aug. 18 (Bloomberg) -- U.K. house prices posted the biggest annual decline in August since at least 2002 as reduced mortgage lending deepened the property slump in London, Rightmove Plc said.

The average asking price for a home fell 4.8 percent from a year earlier to 229,816 pounds ($426,929), Britain's most-used property Web site said in a statement today. On the month, home values fell 2.3 percent, the most since December, led by London.

``The lack of mortgage finance is central to the problem,'' Miles Shipside, commercial director of Rightmove, said in the statement. ``London, in particular, appears to be having its own special summer sale, with over 21,000 pounds off in a month.''

Bank of England Governor Mervyn King said last week that the housing market faces ``a significant adjustment'' as banks ration loans for homebuyers. Falling prices may exacerbate the economic slowdown as the threat of a recession looms and unemployment rises the most in 16 years.

Prices in London fell 5.3 percent on the month and 3.8 percent from a year earlier. Each of the 32 districts in the capital showed a decline, and the biggest drop was in the southwest area of Wandsworth, where values fell 7.9 percent. Hackney, in east London, was the best performer, with a 0.6 percent decline.

The stock of unsold property per real estate agent rose for a seventh month to 78, from 77 in July. The number of transactions may reach the lowest since 1959, Rightmove said.

Market `Standstill'

Banks have starved the market of loans after more than $500 billion in losses and writedowns worldwide from the U.S. mortgage market collapse. U.K. mortgage approvals fell to the lowest since at least 1999 in June, the Bank of England said July 29. The Royal Institution of Chartered Surveyors said last week that the housing market is at a ``virtual standstill.''

King said on Aug. 13 that ``there is a feeling of chill in the economic air'' and that ``the British economy is going through a difficult and painful adjustment'' that ``cannot be avoided.''

Weakness in the housing market may ``amplify'' the impact of the lending squeeze on household spending, the central bank said last week. Retail sales probably fell for a second month in July, dropping 0.2 percent, according to the median forecast of 32 economists in a Bloomberg News survey. The government's statistics office will release that data on Aug. 21.

Britain's gross domestic product will either stagnate or contract in the next two or three quarters, meaning the economy may fall into a recession, the British Chambers of Commerce said in forecasts released today.

Company Confidence

Confidence on business prospects fell to the lowest level in at least 6 years, according to a survey of more than 200 companies released by Lloyds TSB Group Plc today. The index of sentiment on the next 12 months fell to 22 in July, the lowest since the survey began in 2002, from 32 in June.

The economy probably grew 0.1 percent in the second quarter, less than previously estimated and matching the slowest pace since the aftermath of the last recession in 1992, the median forecast of 34 economists surveyed by Bloomberg News shows. The statistics office will publish the figures on Aug. 22.

The central bank kept its benchmark interest rate at 5 percent on Aug. 7 for a fourth month, as policy makers weighed the risk of accelerating inflation against the threat of a recession. Minutes of their meeting, showing how the panel voted, will be released on Aug. 20.

Housing Starts Probably Slumped in July: U.S. Economy Preview

By Shobhana Chandra

Aug. 17 (Bloomberg) -- U.S. builders began work in July on the fewest houses in 17 years and the economic outlook dimmed, indicating the real-estate slump is at the epicenter of the growth slowdown, economists said before reports this week.

Housing starts plunged 9.9 percent to an annual rate of 960,000, according to the median estimate in a Bloomberg News survey ahead of a Commerce Department report on Aug. 19. The Conference Board's index of leading indicators probably fell 0.2 percent last month, a third consecutive drop.

Stricter lending rules, rising borrowing costs, falling property values and record foreclosures may further depress home sales and cause builders to keep retrenching. Housing, job losses and the credit crisis are likely to weaken the economy for the rest of the year and into 2009.

``There's no underlying support for the housing market,'' said Adam York, an economist at Wachovia Corp. in Charlotte, North Carolina. ``The economy as a whole is in fairly poor shape.''

The leading indicators index, a measure of the economy's likely path over the next three to six months, is due for release on Aug. 21.

Commerce's housing report may also show building permits, a sign of future construction and a component of the leading index, fell 15 percent last month, according to the Bloomberg survey.

A change in New York City's building code that took effect July 1 caused housing starts and permits to unexpectedly surge in June as builders broke ground ahead of the new regulations.

The magnitude of the projected July drop in starts and permits reflects, in part, ``a payback from the big jump'' the month before, York said.

Sales Fall

Underneath the gyrations, demand continues to weaken. Existing home sales fell to a 10-year low in the second quarter and the median price for a single-family house slid 7.6 percent, according to the National Association of Realtors. A third of all sales were foreclosures or ``short sales,'' in which lenders take a loss on a property.

To make matters worse, financing is also becoming scarce, a quarterly survey of banks by the Federal Reserve showed. Three- fourths of the loan officers polled reported they tightened standards on prime mortgage loans, up from the April survey. Lending rules on non-traditional loans were also toughened.

The five largest U.S. homebuilders reported a combined $1.08 billion in losses in their most recent quarters.

Record Pessimism

Builders are understandably downbeat as the losses mount. The National Association of Home Builders/Wells Fargo's sentiment index may show optimism held at a record low in August for a second month, economists forecast a report tomorrow will show.

Still, construction companies are making some headway in reducing the supply glut. The number of new homes for sale dropped in June by the most in four decades.

Some firms are seeing an improvement. Toll Brothers Inc., the largest U.S. luxury homebuilder, reported cancellations last quarter dropped to the lowest level in more than two years, and said buyers are starting to return to the market.

``There is growing pent-up demand from those who have postponed buying during the past almost three years,'' Chief Executive Officer Robert Toll said on an Aug. 13 conference call.

Finally this week, a Labor Department report Aug. 19 may show wholesale costs rose at a slower pace last month as fuel expenses peaked. The producer price index probably climbed 0.5 percent in July after jumping 1.8 percent the prior month, according to economists surveyed.

Bloomberg Survey

Release Period Prior Median
Indicator Date Value Forecast
NAHB Housing Index 8/18 Aug. 16 16
PPI MOM% 8/19 July 1.8% 0.5%
Core PPI MOM% 8/19 July 0.2% 0.2%
PPI YOY% 8/19 July 9.2% 9.2%
Core PPI YOY% 8/19 July 3.0% 3.2%
Housing Starts ,000's 8/19 July 1066 960
Building Permits ,000's 8/19 July 1138 970
Initial Claims ,000's 8/21 Aug. 16 450 440
Cont. Claims ,000's 8/21 Aug. 9 3417 3404
Philly Fed Index 8/21 Aug. -16.3 -14.0
LEI MOM% 8/21 July -0.1% -0.2%

Thursday, August 14, 2008

U.S. Economy: Consumer Prices Rise More Than Forecast (Update2)

By Shobhana Chandra

Aug. 14 (Bloomberg) -- U.S. consumer prices rose at the fastest pace in 17 years in July, limiting the ability of the Federal Reserve to lower interest rates as economic growth slows.

The cost of living climbed 5.6 percent in the year ended in July, the Labor Department said today in Washington. It was up 0.8 percent from the previous month, twice as much as anticipated. So-called core prices, which exclude food and energy, also advanced more than projected.

The surge last month reflected energy prices that have since declined, signaling July may represent the peak in inflation. Still, increases went beyond food and fuel, including gains in clothing, airline fares and education, likely intensifying discussions among Fed policy makers about how quickly to shift toward raising rates.

``What we are seeing is a lot of commodity-price spillover'' into other items, said Richard DeKaser, chief economist at National City Corp. in Cleveland, who correctly forecast the increase in core prices. ``Numbers like this increase the hand of hawks'' at the Fed who argue that rates need to rise to quell inflation, he said.

Commodity costs have retreated since mid-July. Crude oil futures dropped as low as $112 a barrel this week after topping $147 last month. Regular gasoline, which reached a record $4.11 a gallon on July 17, has fallen about 8 percent, according to AAA.

``We're probably looking in the rearview mirror with respect to the worst part of inflation,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. ``Energy prices have declined sharply in the last month.''

Treasuries, Stocks

Treasuries rose, with benchmark 10-year note yields falling to 3.89 percent at 4:35 p.m. in New York, from 3.94 percent late yesterday. The Standard & Poor's 500 Stock Index advanced 0.6 percent to close at 1,292.93.

Separate reports today reinforced evidence of a weakening job market and continued slump in housing.

The Labor Department reported that 450,000 Americans, more than anticipated, filed first-time claims for jobless benefits last week. Claims averaged 321,400 last year.

The median price for a single-family home in the U.S. dropped 7.6 percent in the second quarter as bank sales of foreclosed homes caused values to tumble in three-quarters of U.S. cities, the National Association of Realtors said.

Sales of single-family houses and condominiums fell 16 percent to 4.913 million at an annualized pace, a 10-year low, the realtors group also said.

Economists' Estimates

Consumer prices were forecast to rise 0.4 percent, according to the median estimate of 78 economists in a Bloomberg News survey. Projections ranged from gains of 0.1 percent to 0.7 percent.

Costs excluding food and energy increased 0.3 percent for a second month, exceeding the 0.2 percent median forecast of economists surveyed.

The core rate increased 2.5 percent from July 2007, the most since January, after a 2.4 percent year-over-year increase the prior month.

Energy expenses jumped 4 percent, after a 6.6 percent gain in the prior month, today's report said. Gasoline prices increased 4.1 percent.

Procter & Gamble Co. was among businesses that responded to the surge in oil earlier this year. The world's largest consumer- products company charged more for Cascade dishwashing detergent, Iams pet food and Gillette razors to offset some of the jump in packaging costs. McDonald's Corp., the world's largest restaurant company, raised prices as ingredient expenses surged.

McDonald's Costs

``Beef and cheese are up, but we've been able to mitigate that cost,'' Chief Executive Officer James Skinner said in an interview in Beijing last week.

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

Today's report ``raises the general trajectory'' of interest rates, reducing the chance of cuts and bringing forward the likelihood of increases, William Poole, the former St. Louis Fed president, said in an interview with Bloomberg Television. Poole is a Bloomberg contributor.

Food prices, which account for about a fifth of the CPI, gained 0.9 percent after a 0.8 percent increase in June.

The increases went beyond food and fuel. Clothing expenses jumped 1.2 percent, the most since 1998. The cost of an airline ticket rose 1.3 percent and education expenses climbed 0.5 percent for a second month.

Rent Costs

Rents, which make up almost 40 percent of the core CPI, cooled. A category designed to track rental prices rose 0.1 percent, compared with a 0.3 percent gain in June.

The rate-setting Federal Open Market Committee last week kept its benchmark rate at 2 percent for a second straight meeting. In their statement, policy makers said they expect ``inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.''

Dallas Fed President Richard Fisher dissented in favor of raising rates, and others have indicated concern about leaving borrowing costs unchanged for a prolonged period. Minneapolis Fed chief Gary Stern and Charles Plosser of the Philadelphia Fed said last month the central bank may need to raise rates even before the housing market stabilizes.

Thomas Hoenig of Kansas City said July 16 the current level of rates ``almost certainly raises the risk of higher inflation.''

Wages Drop

Today's figures also showed wages decreased 0.8 percent after adjusting for inflation following a 0.9 percent drop in June. They were down 3.1 percent over the last 12 months, the biggest year-over-year decline since 1990. The drop in buying power is one reason economists forecast consumer spending will slow.

Higher gasoline bills and tighter credit reduced automobile purchases in July, causing retail sales to drop for the first time in five months, government figures showed yesterday.

A jump in the cost of imported goods may also give American companies leeway to charge more, economists said. Prices of products made overseas soared 22 percent in the year ended in July, the most since at least 1982, the Labor Department reported yesterday.

Wednesday, August 13, 2008

Yen Rises on Speculation Carry Trades Pared as Stocks Slump

By Stanley White

Aug. 14 (Bloomberg) -- The yen rose against the dollar and the euro as Asian stocks followed U.S. equities lower, prompting investors to reduce bets on higher-yielding assets outside Japan.

Japan's currency climbed against the South African rand and the British pound, two favorites of so-called carry trades, after U.S. retail sales declined and Merrill Lynch & Co. said a crisis in credit is far from over. Australia's dollar pared gains against the U.S. currency after the Reserve Bank of Australia said it may lower interest rates.

``There's a great chance that the yen will appreciate,'' said Akira Takei, the general manager in Tokyo for international bonds at Mizuho Asset Management Co., which oversees the equivalent of $37.3 billion. ``Things are still quite turbulent due to worries over the credit crisis. There will be an unwinding in carry trades.''

The yen rose to 162.09 per euro as of 9:14 a.m. in Tokyo from 163.43 late yesterday in New York, when it reached a three- month high of 161.40. Against the dollar, the yen climbed to 109.36, from 109.53. The euro was little changed at $1.4909.

Against the South African rand, the yen rose to 13.8861 from 13.9086. It also gained to 204.34 per pound from 204.87.

The Nikkei 225 Stock Average fell 0.7 percent and the MSCI Asia Pacific Index of regional shares dropped 0.5 percent.

In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. The Bank of Japan's target lending rate is 0.5 percent, the lowest among major economies. Benchmark rates are 4.25 percent in Europe, 12 percent in South Africa and 5 percent in the U.K.

Tuesday, August 12, 2008

Japan Economy Shrinks 2.4%, Signaling Recession Looms (Update1)

By Jason Clenfield

Aug. 13 (Bloomberg) -- Japan's economy contracted last quarter, bringing the country to the brink of its first recession in six years, as exports fell and consumers spent less.

Gross domestic product shrank an annualized 2.4 percent in the three months ended June 30 after expanding a revised 3.2 percent in the first quarter, the Cabinet Office said today in Tokyo. The median estimate of 29 economists surveyed by Bloomberg News was for a 2.3 percent contraction.

The drop in exports was the biggest since the 2001 recession, and robs Japan of the engine that drove its longest postwar expansion just as surging food and fuel prices deter spending at home. Toyota Motor Corp. last week reported its worst earnings decline in five years as U.S. sales slumped, and Japan Airlines Corp. said it will cut wages to meet rising costs.

``The bottom line is that the economy is in a clear downturn,'' said Hiroshi Shiraishi, an economist at Lehman Brothers in Tokyo.

The yen traded at 109.14 per dollar as of 9:20 a.m. in Tokyo from 109.33 before the report was published. The Nikkei 225 Stock Average fell 1.3 percent.

The economy shrank 0.6 percent from the first quarter, when it grew 0.8 percent. The quarterly decline matched economists' predictions.

Exports Fall

Exports dropped 2.3 percent, the first decline in three years. Imports fell 2.8 percent.

Consumer spending, which accounts for more than half of the economy, decreased 0.5 percent from the previous quarter, compared with expectations of a 0.6 percent decline. The decline may have been exaggerated by comparison with the first quarter, when the leap year gave consumers an extra shopping day.

Domestic demand, which includes company and consumer spending, accounted for 0.4 percentage point of the economy's quarter-on-quarter contraction. Capital spending slipped 0.2 percent, compared with expectations of a 0.6 percent drop.

The world's second-largest economy has yet to contract for two consecutive quarters, one definition of a recession. Still, the prices companies pay for raw materials are rising at the fastest pace in 27 years and demand has weakened in the U.S., the country's biggest export market. That's eroded profits, forcing businesses to cut production, investment and hiring.

Toyota Fires Workers

Toyota, Japan's biggest company, last week lowered its vehicle sales forecast by 3.5 percent for the year ending March 2009. Since June, Toyota has fired 800 workers at a Kyushu-based subsidiary that's making fewer sport-utility vehicles and Lexus sedans bound for the U.S.

Prime Minister Yasuo Fukuda, whose popularity has plummeted since he took office last September, said this week that the economic situation is ``severe'' and he plans to announce relief measures later this month end to help companies and households cope with record energy costs.

Japan Air, the country's largest carrier by sales, said last week that it will reduce workers' pay by 5 percent to compensate for the increase in fuel prices.

Consumer sentiment fell in July to the lowest level since records began 26 years ago, after inflation outpaced wage growth. Summer bonuses at Japan's biggest companies dropped for the first time since 2002, according to the Keidanren business lobby.

The government last week described the economy as ``weakening,'' language it hadn't used since the most recent recession in 2001. Stalling growth and the fastest inflation in a decade have created a dilemma for the Bank of Japan, which will probably have to keep its benchmark interest rate at 0.5 percent for the rest of the year, according to economists surveyed last month.

Not as Severe

Still, the current slowdown is unlikely to be as severe as past recessions because companies have paid off debt and shed extra workers and idle equipment, said Huw McKay.

``We're not in the kind of situation we were in at the end of previous expansions,'' said McKay, senior international economist at Westpac Banking Corp. in Sydney. ``There's going to be a floor under this economy.''

Companies plan to increase capital investment by 4.1 percent in the year ending March 31, according to a survey released last week by the Development Bank of Japan. While that's slower than last fiscal year's 7.7 percent, it's better than the 10 percent decline recorded during the 2001 recession.

The Bank of Japan's most recent business survey showed that labor demand is close to a 16-year high. The jobs-to-applicants ratio was at 0.91 in June, meaning almost every person who wants a job can get one. Seven years ago, there were two applicants competing for every position.

``The economy is decelerating,'' said Westpac's McKay. ``But it doesn't look an economy that's collapsing and that's the key point.''

Monday, August 11, 2008

Fed Says Banks Toughen Lending Standards Amid Slump (Update3)

By Craig Torres

Aug. 11 (Bloomberg) -- The Federal Reserve said more banks made it harder to borrow money as defaults and delinquencies on home loans soared and the economy faltered.

Most ``domestic institutions reported having tightened their lending standards and terms on all major loan categories over the previous three months,'' the Fed said today in its quarterly Senior Loan Officer Survey.

Funds were scarcer for homebuyers and small businesses, credit card loans became tougher to get, and even banks' best customers were subject to greater scrutiny. Tighter credit may delay any recovery in economic growth, which economists forecast will slow well into next year.

``The credit crunch is intensifying,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``It reinforces the view that the economy will be weak in the next several months and there will be renewed pressure on the Fed to start easing again.''

The survey, conducted last month, covers 52 domestic banks with combined assets of $6.1 trillion, along with 21 foreign institutions. About 75 percent of U.S. banks indicated they tightened standards on prime mortgage loans, up from 60 percent in the previous survey, the central bank said.

Bank stocks pared gains after the report. The Standard & Poor's Financials Index gained 5.49 points to 299.57 in New York. The index climbed as high as 305.23 before the survey was published.

Defying Monetary Policy

The Fed has reduced its main rate 3.25 percentage points over the past 11 months to 2 percent. Still, rates on a 30-year mortgage stood at 6.52 percent Aug. 7, nearly unchanged from 6.59 percent a year ago, according to data from Freddie Mac.

``When the Fed started to cut rates, mortgage rates and other rates were actually lower than they are today,'' former San Francisco Fed Bank President Robert Parry said before the report. ``To say that things are easier in many areas of credit would be mistaken.''

Banks may be reluctant to lend against housing collateral that is falling in value. Home prices in 20 U.S. metropolitan areas dropped 15.8 percent in May, the biggest decline since record keeping began in 2001, according to the S&P Case-Shiller Home-Price Index.

`Bandwagon Effect'

``There is a bandwagon effect,'' said Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio. ``When times are tough, the herd starts running in the other direction, with tougher standards pretty much across the board.''

About 30 percent of U.S. banks said they had sold mortgages of as much as $729,750 to Fannie Mae or Freddie Mac during the prior three months, or had the two companies package the loans together as mortgage bonds, the Fed said.

The economy is also faltering. The unemployment rate has moved up 1 percentage point during the past 12 months to 5.7 percent, while delinquencies on home loans to borrowers with weak or limited credit histories rose to 18.8 percent in the first quarter from 13.8 percent a year earlier.

``Large majorities of domestic respondents reported having tightened their lending standards on prime, nontraditional, and subprime residential mortgages over the previous three months,'' the Fed said.

Of the 32 banks that originate non-traditional mortgage loans, about 85 percent reported tighter lending standards, up from 75 percent in the prior survey, the Fed said.

Prime Standards

For prime mortgage loans, about 45 percent of domestic banks said they would tighten standards in the second half of this year, and about 30 percent of domestic banks said they anticipated tightening standards in the first half of 2009.

About 65 percent of domestic banks indicated they had tightened their lending standards on credit card loans over the previous three months, up ``notably'' from about 30 percent in the April survey, the Fed said.

Most banks increased loan rates over their cost of funds for commercial and industrial borrowing, according to the central bank. The proportion of banks raising such rates rose to a net of 80 percent, compared with 70 percent in the April survey.

``Very large majorities of domestic and foreign respondents pointed to a less favorable or more uncertain economic outlook, their banks reduced tolerance for risk and the worsening of industry specific problems as reasons for tightening their lending standards'' on commercial loans the Fed survey said.

Business Credit

Some 55 percent of domestic banks surveyed told the Fed that they would continue tightening credit standards for business loans in the second half of this year, with 65 percent of the institutions making terms stricter for loans to small firms.

Policy makers left the benchmark lending rate unchanged Aug. 5 and said ``financial markets remain under considerable stress.''

Federal funds futures traders see a 69 percent chance that the benchmark lending rate will remain unchanged at the October 29 meeting.

``The case for tightening this year is fading,'' said Brian Sack, vice president at Macroeconomic Advisers LLC in Washington and a former Fed Board economist.

Sunday, August 10, 2008

Crude Oil Rises on Excessive Drop, Supply Threat in Caspian Sea

By Nesa Subrahmaniyan

Aug. 11 (Bloomberg) -- Crude oil rose from a 14-week low in New York as traders deemed last week's 7.9 percent drop as excessive and on concern Caspian Sea supplies may be disrupted.

Russian bombers targeted the Baku-Tbilisi-Ceyhan pipeline supplying Azeri crude across Georgia and Turkey to the Mediterranean Sea, Georgian Economy Minister Eka Sharashidze said by phone yesterday. Georgia is a key link in a U.S.-backed ``southern energy corridor'' that connects the Caspian Sea region with world markets, bypassing Russia.

``It's mainly a technical rebound after last week's big drop coupled with concern about supplies from the Caspian,'' said Tetsu Emori, a fund manager at Astmax Co. in Tokyo. ``Prices may test $117 before another wave of selling.''

Crude oil for September delivery gained as much as $1.30, or 1.1 percent, to $116.50 a barrel in electronic trading on the New York Mercantile Exchange, and traded at $116.28 at 9:48 a.m. in Singapore. Oil settled at $115.20 on Aug. 8, the lowest close since May 1.

``Whether we get an actual physical disruption in supply to Europe, that will be the critical thing,'' said Gerard Burg, energy and minerals economist at National Australia Bank Ltd. in Melbourne. ``If it impacts on Brent, it is going to affect a much wider market and has the potential to send prices higher.''

Brent crude for September settlement rose as much as $1.32, or 1.2 percent, to $114.65 on the ICE Futures Europe exchange, and traded at $114.45 at 9:35 a.m. Singapore time.

Nymex crude traded at a premium of $2.03 a barrel to Brent crude oil, compared with 59 cents a month earlier.

Baku Pipelines

The Baku-Tbilisi-Ceyhan pipeline ships Azeri Light crude, which is typically priced based on the Brent contract.

Russian troops entered the breakaway province of South Ossetia on Aug. 8 after fighting between local forces and the Georgian army. Georgia, which has withdrawn its forces, is now under attack from warplanes and artillery fire from neighboring Abkhazia province.

``Brent hasn't really narrowed to Nymex futures so it hasn't really affected supplies too much, but if there's a real prolonged disruption, then Brent may get a kick up,'' Astmax's Emori said. ``The European refinery maintenance season is also about to start so demand for crude may also drop.''

BP Plc, Europe's second-largest oil company by market value, said its operations and production continue as they were on Aug. 8, amid fighting between Russian and Georgian troops in the region of South Ossetia, spokeswoman Tamam Bayatly said.

Dollar Gains

BP and other companies are pumping crude through the Baku- Supsa pipeline to the Georgian Black Sea coast, after a fire on Aug. 5 in Turkey stopped flows on the Baku-Tbilisi-Ceyhan oil pipeline, which runs about 100 kilometers (60 miles) south of the South Ossetian capital, Tskhinvali.

The Baku-Tblisi-Ceyhan pipeline was shut Aug. 5 after a blast on part of the line in eastern Turkey. The pipeline had been delivering about 800,000 barrels of oil a day to the Turkish port of Ceyhan before the shutdown, BP said last week.

Unless supplies are stopped or the conflict escalates, oil prices may come under pressure from the rising U.S. dollar and a more ``bearish mood'' toward most commodities, National Australia's Burg said.

New York oil futures fell 4 percent to settle at $115.20 on Aug. 8, as gains in the dollar reduced the investment appeal of commodities. Gold, copper and grains also fell as weaker growth prospects in Europe reduced the likelihood of rate increases there and delivered the dollar its biggest gain against the euro since September, 2001.

The euro slumped to a five-month low against the dollar, at $1.4907. It was trading at $1.4965 at 9:27 a.m. in Tokyo, from $1.5005 late Aug. 8 in New York.

New York oil futures traded as low as $114.62 on Aug. 8, dropping below the $116.76 level that marks a 50 percent retracement of the climb in prices from February to July's record $147.27 a barrel. Some traders use the Fibonacci analysis to suggest prices that may encourage investors to buy or sell a commodity.

``It fell very heavily,'' Burg said. ``You can often see a little bit of a rebound in those situations.''

Australia Central Bank Says Room to Cut Interest Rate (Update1)

By Jacob Greber

Aug. 11 (Bloomberg) -- Australia's central bank says it will have more room to cut interest rates because of a ``significant moderation'' in domestic demand that will cut economic growth by half and drive up unemployment.

``Economic growth will be fairly slow in the period ahead,'' the Reserve Bank of Australia said in its quarterly policy statement released in Sydney today. Gross domestic product will probably expand 2 percent this year compared with 4.3 percent in 2007 and less than the 2.25 percent forecast by the bank in May.

Borrowing costs at a 12-year high, surging gasoline prices and a slump in consumer confidence are forcing households to cut spending, helping ease inflation pressures, the bank said. Governor Glenn Stevens left the benchmark lending rate at 7.25 percent last week and signaled he may cut it for the first time since 2001.

``On the assumption that the subdued demand conditions are likely to continue, scope to move to a less restrictive monetary policy stance in the period ahead is increasing,'' today's statement said. The bank expects a ``significant reduction in inflation over time.''

The Australian dollar dropped to 88.59 U.S. cents at 11:33 a.m. in Sydney from 88.72 cents before the statement was released. The two-year government bond yield fell 2 basis points, or 0.02 percentage point, to 5.92 percent.

The currency has declined more than 10 percent against its U.S. counterpart since reaching a 25-year high of 98.49 cents on July 16 on speculation the Reserve Bank will cut borrowing costs as soon as next month.

Inflation Forecasts

Inflation is forecast by the bank to peak at 5 percent in the fourth quarter, compared with the 4.5 percent predicted in the May statement, before slowing to 2.75 percent in 2010.

The bank aims to keep annual gains in consumer prices between 2 percent and 3 percent on average. They rose 4.5 percent in the second quarter.

``Demand pressures in the economy now appear to be easing and the forecasts project a significant period of slower growth, which will result in a moderation of capacity pressures,'' today's statement said.

Still, the bank said there are risks to its inflation forecasts ``in both directions.''

While the figures for the June quarter, released last month, suggested ``quite tentative'' evidence that inflation pressures may no longer be rising, income from Australia's trade boom could stimulate domestic spending and leave ``inflation expectations entrenched at unacceptably high levels,'' the statement said.

Resources Boom

Demand for coal and iron ore from China has boosted Australia's terms of trade, a measure of export income, by 20 percent this year, taking the increase in the past five years to 65 percent, the bank said. ``The income gains from this source continue to represent a significant stimulus to the economy.''

Policy makers raised the benchmark interest rate in March, February, November and last August amid concern the lowest unemployment in more than three decades would drive up wages and inflation.

Stevens and his board will cut the overnight cash rate target by at least 25 basis points to 7 percent when they meet on Sept. 2, according to 18 of 25 economists surveyed by Bloomberg News last week. Of those, five predict a 50 basis point reduction and seven expect no change.

Since the bank's last quarterly statement on May 9, there have been increasing signs the nation's $1 trillion economy is slowing.

Consumer confidence slumped in July to the weakest level in 16 years and home-loan approvals tumbled in June to a four-year low.

Slower Growth

The economy will probably grow 2.5 percent in 2009 and 2.75 percent in 2010, today's statement predicts. It expanded 0.6 percent in the first quarter, the slowest quarterly pace in almost two years. Second-quarter gross domestic product figures will be released on Sept. 3.

The bank also said ``any further deterioration in the outlook for global growth would present a significant downside risk'' to its Australian GDP forecasts, ``particularly if it led to a marked slowing in growth in China and India.''

``In addition, the ongoing turmoil in capital markets could exacerbate the slowing in domestic growth by further reducing the availability of credit to households and businesses,'' it said.

The Reserve Bank said investment in residential property is ``expected to contract over the next year'' because of the cost and availability of credit, as well as ``the subdued state of the housing market.''

House prices fell in the second quarter for the first time in almost three years.

Demand for labor will continue to ease, the bank said. Australia's jobless rate was 4.3 percent in July, up from 3.9 percent in February, which was the lowest since 1974.