Thursday, December 24, 2009

Central Banks Avoiding Dollar to Kill 2010 Rally, Barclays Says

By Candice Zachariahs

Dec. 24 (Bloomberg) -- The U.S. dollar’s gains may end in the middle of 2010 as central banks shy away from adding greenbacks to their reserves and the Federal Reserve raises rates at a slower pace than investors expect, Barclays Plc said.

Long-term demand for dollars is set to weaken after the currency’s share of global reserves added in the third quarter slid to less than 30 percent, a decline “unprecedented in a period of U.S. dollar weakness,” Barclays said in a note to clients. The dollar stemmed 11 months of declines versus the 16 most-traded currencies in December, gaining against all but two, after investors increased bets the Fed will remove monetary stimulus next year as the economy recovers.

“We see the dollar strengthening in the first six to nine months of 2010 when the focus is on liquidity withdrawal and tightening of rates,” said Steven Englander, chief U.S. currency strategist at Barclays in New York, in a telephone interview. “Once the market gets past this initial fear of tightening, the reality will be that the Fed isn’t going to be tightening very fast and we’ll see dollar selling again.”

The Dollar Index -- which measures the currency against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona -- has dropped 4.2 percent this year. It has climbed 4.1 percent in December and traded at 77.928 as of 9:28 a.m. in Tokyo. The U.S. dollar has registered its biggest declines against the Brazilian real, Australian dollar and South African rand dropping by more than 25 percent this year against each.

Global Reserves

Global reserves probably gained by about $180 billion in the third quarter with U.S. dollar-denominated reserves accounting for about $50 billion or less than 30 percent, Barclays estimated, using data from the International Monetary Fund and U.S. official reports.

The bank adjusted for changes in the value of currencies over that period to capture “actual buying and selling, rather than passive gains and losses” Englander wrote in the note.

The dollar declined against all but the yen among the 16 most-active currencies this year. That prompted China and Russia, holders of the world’s biggest and third-biggest currency reserves, to express concern about their U.S.- denominated investments.

“Emerging market central banks are selling their local currencies and buying U.S. dollars to prevent appreciation of their currencies,” Englander said. “They’re avoiding having a bigger concentration of U.S. dollars in their portfolio by turning around and selling dollars against the euro and other currencies.”

Canadian Dollars

Canada’s Finance Minister Jim Flaherty said this week that China, may be poised to buy Canadian dollars as it seeks to shield its $2.3 trillion worth of reserves against the U.S. dollar’s decline. Russia’s central bank said last month it will add Canadian dollars to its reserves and may include more currencies to reduce its dependence on the U.S. dollar.

Declines in the greenback mostly stalled this month as traders bet on a 48 percent chance that Fed Chairman Ben S. Bernanke will increase the target rate for overnight lending between banks by June. Policy makers will end most emergency lending programs and debt purchases by March because of “improvements in the functioning of financial markets” and stabilizing labor markets, the Federal Open Market Committee said on Dec. 16.

Unemployment, Retail

Reports this month showed the U.S.’s jobless rate unexpectedly fell, retail sales beat forecasts and purchases of existing homes rose to the highest level in almost three years in November. Benchmark rates are as low as zero percent in the U.S. compared with 8.75 percent in Brazil and 3.75 percent in Australia. They are 0.1 percent in Japan and 1 percent in the Euro region.

Barclays forecasts that the Federal Reserve will begin raising rates at the end of the third quarter of next year, while the European Central Bank’s tightening cycle will begin at the start of 2011. The Fed’s target rate will reach 2 percent by the end of 2011, Englander said.

Barclays on Dec. 10 forecast the euro will fall to $1.40 in six months before rallying to $1.45 by the end of 2010. The euro traded at $1.4333 today.

Monday, December 14, 2009

Traders Bet on Euro Drop Versus Dollar, First Time Since April

By Candice Zachariahs

Dec. 14 (Bloomberg) -- Futures traders are betting that the euro will fall against the dollar for the first time in seven months, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 511 on Dec. 8, compared with net longs of 22,151 a week earlier. That’s the first time since April 28 that short bets outnumbered longs.

The dollar has gained for the past two weeks after a Dec. 4 report showed that U.S. employers cut the fewest jobs in November since the recession began and unemployment unexpectedly fell, prompting traders to bet that the Federal Reserve will bring forward interest-rate increases. Retail sales and consumer confidence in the U.S. increased more than forecast, separate reports showed Dec. 11.

“Investor sentiment is turning away from the euro and tending to become less opposed to the dollar,” said Gareth Berry, a Singapore-based currency analyst at UBS AG. “It’s difficult to know for sure if it’s made a decisive switch, but certainly the correlation with risk appetite and the dollar has been loosening.”

The euro traded at $1.4634 as of 12:01 p.m. in Tokyo from $1.4615 on Dec. 11 when it declined to $1.4586, the weakest level since Oct. 5.

The euro will fall to $1.45 in one month and $1.40 in three months, UBS forecasts.

Futures are agreements to buy or sell assets at a set price and date. The figures reflect holdings in currency-futures contracts at the Chicago Mercantile Exchange as of Tuesday.

Yen Favored for Carry Trades as Japan Faces Deflation (Update1)

By Oliver Biggadike and Theresa Barraclough

Dec. 14 (Bloomberg) -- The yen is poised to replace the dollar as the top funding currency for investments in cities from Sydney to Sao Paulo after borrowing from Japan became almost as cheap as U.S. loans for the first time in four months.

Rates on 90-day yen loans between banks have fallen the most in 13 years amid record deflation that prompted the Bank of Japan to start a $113 billion lending program last week. By easing demand for private-sector loans, the move helped shrink the gap between U.S. and Japanese London interbank offered rates by two-thirds over the past three months to 0.024 percentage point, the least since Aug. 26, data compiled by Bloomberg show.

Investors are betting Libor rates in the U.S. will be higher by June as it recovers from the recession quicker than Japan, according to Bloomberg data. The U.S. will expand 2.6 percent in 2010, twice as fast as Japan, median forecasts in Bloomberg surveys of as many as 82 economists show. That may entice traders to shift to yen from dollars to buy assets in higher-interest countries like Australia and Brazil, weakening Japan’s currency and shoring up the dollar, as advocated in public statements by both governments.

“The dollar’s role as a funding currency is fleeting at best,” said Samarjit Shankar, a foreign-exchange group managing director in Boston at BNY Mellon, the world’s largest custodial bank at more than $20 trillion in assets. “When central banks start raising rates, the yen will be left behind as the primary funding currency.”

The yen fell 7.7 percent in the five months after the last time Japanese loans became cheaper, in August 1993. That plunge followed a 45 percent gain in the previous three years, when American rates were mostly lower.

Libor Spread

Japan’s currency also tended to slide as the Libor spread between the two countries widened during the 13 years that U.S. loans cost more, from 1993 until Aug. 24. The yen depreciated 24 percent in five months in 1995 as that spread expanded by 41 basis points, or 0.41 percentage point. It weakened 13 percent in 2005 as Japan’s borrowing costs became almost 2 percentage points cheaper than in the U.S.

This year’s falling U.S. loan costs encouraged investors to sell dollars in carry trades, which seek to profit by using money from low-interest economies to buy assets in higher- yielding countries. Since American rates began dropping in March, the dollar has lost 9.4 percent against the yen, almost twice as much as the U.S. currency had weakened in the prior 10 months.

The three-month yen Libor rate fell to 0.28 percent on Dec. 11, from 1.09 percent on Oct. 8 last year, following its biggest 14-month plunge since 1996. The U.S. rate last week was 0.25 after its largest drop since 2002.

Cash and Carry

Since U.S. borrowing costs fell below Japan’s in August, buying Australian dollars with U.S. funds has produced a 9.9 percent profit, Bloomberg data show. With Brazilian real, the trade gained 6.9 percent. Using yen as a funding currency would have gained less than half as much against the Aussie and barely broken even versus the real.

“The difference between U.S. dollar and Japanese interest rates in general, including Libor rates, is one of the main drivers of the dollar-yen,” said Masafumi Yamamoto, Tokyo-based chief foreign-exchange strategist at Barclays Capital. Based on British Bankers’ Association surveys, Libor rates are what banks charge each other for loans and serve as benchmarks for $360 trillion worth of financial products globally from home mortgages to corporate bonds.

Weaker Yen

“A higher dollar Libor rate than yen Libor rate means stronger dollar versus yen,” said Yamamoto, who predicts Japan’s currency will fall to 96 by June and to 100 by the end of 2010, an 11 percent drop from its Dec. 11 close, at 89.10. Median estimates from as many as 41 strategists surveyed by Bloomberg see the yen weakening to 93 by mid-year and to 97 six months later.

The dollar traded at 88.86 yen today, after falling 1.6 percent against the yen last week, down 2.5 percent for the year. The greenback bought $1.4624 per euro, after gaining 1.7 percent for the week and down 4.7 percent for the year. The U.S. Dollar Index measuring its performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona added 0.9 percent last week and is down 5.8 percent for the year.

Investors are betting that the Bank of Japan will keep its 0.1 target rate through next year and that the Federal Reserve will abandon its near-zero benchmark.

Future Chances

There’s at least an 88 percent chance the U.S. will raise rates in 2010, up from 78 percent on Nov. 24, futures on the CME Group show. Prices indicate a 46 percent likelihood of an increase by June, up from 30 percent on Nov. 30. By contrast, overnight interest-rate swaps traders see no chance that the BOJ will increase its benchmark next year, Bloomberg data show.

Trading in forward contracts on three-month swaps, used to hedge against Libor fluctuations by agreeing to pay or receive a specified rate starting on a future date, show U.S. borrowing costs rising above Japan’s within six months.

The yen hit a 14-year high of 84.83 per dollar on Nov. 27, less than three weeks after U.S. Treasury Secretary Timothy Geithner said a “strong dollar” is “very important.” Prime Minister Yukio Hatoyama said on Dec. 2 the yen’s rise can’t continue, Nikkei newspaper reported.

There is “no doubt” that accelerating yen gains would hit exporter profits, said Chief Cabinet Secretary Hirofumi Hirano on Nov. 26 in Tokyo. That would be a “huge risk” for auto makers, Nissan Motor Co. Chief Operating Officer Toshiyuki Shiga said on Nov. 19 in Yokohama.


Chances are increasing that Japanese policy makers will sell the currency to prevent damage to the economy from further gains, said Sophia Drossos, co-head of global foreign-exchange strategy for Morgan Stanley in New York.

Options traders are the least optimistic on the yen since before the bankruptcy of Lehman Brothers Holdings Inc. pushed up volatility in currency markets and forced investors to buy protection against yen gains. The cost on Dec. 4 of hedging for a month against a gain was the cheapest relative to guarding against a decline since February 2007, so-called risk reversal rates show.

Japan’s struggling economy and signs of a U.S. recovery are shifting the carry-trade funding advantage back toward the yen, where it had been since 1993, when the BOJ cut rates in an unsuccessful attempt to avert a recession that sparked a decade of deflation.


Employers in the U.S. eliminated 11,000 jobs in November, the fewest since the recession began, and unemployment fell to 10 percent from 10.2 percent a month earlier, the Labor Department reported on Dec. 4. The dollar rose that week against the yen by the most since 1999, advancing 4.7 percent.

“The U.S. economy will perform strongly; the Fed will tighten,” said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG, the world’s biggest currency trader. “It makes the yen again a much more attractive vehicle for funding carry trades.”

In Japan, the economy has shrunk 7.7 percent since 2008’s first quarter, the steepest decline in at least 29 years. Prime Minister Hatoyama is boosting borrowing to a record 53.5 trillion yen ($607 billion) in the year ending March 2010 to support the economy and slow deflation.

Consumer prices have fallen 2.5 percent in the past year, the sharpest 12-month decline since at least 1970, sparking demand for the nation’s debt and pushing down bond yields as investors bet the securities’ fixed payments will gain purchasing power.

Real Yields

Mitsubishi UFJ Financial Group Inc. and Yasuda Asset Management Co. say they are buying the bonds even though Japan’s 1.23 percent 10-year yield is lower than in the U.S., U.K. and Germany. That’s because deflation has driven so-called real yields up to 3.78 percent, compared to the U.S.’s 3.7 percent.

From 2004 to 2007, carry trade investors who sold borrowed yen to invest in Mexican pesos, South African rand, Brazilian real and New Zealand and Australian dollars earned as much as 84 percent, Bloomberg data show.

The trades benefited from interest rates as low as zero in Japan and three-month bill yields as high as 8.4 percent in New Zealand. The popularity weakened the yen more as it fell as much as 13 percent in that period, further increasing carry profits.

Last year’s financial crisis magnified price swings and caused the trades to lose money. Dollar-yen volatility surged on Oct. 24, 2008 to 42 percent as Japan’s currency rallied 27 percent from 110.66 on Aug. 15, 2008 to 87.13 on Jan. 21, erasing carry trade profits from the previous four years.

‘World’s Weakest’

Now, narrowing interest-rate differences are making the yen the funding currency of choice again. Six-month borrowing costs in yen fell below dollar rates for one day last week after the Bank of Japan announced its 10 trillion yen ($112.7 billion) program on Dec. 1 to offer three-month loans to commercial banks at 0.1 percent interest. The central bank said on Dec. 10 that it had initiated the program with an 800 billion yen injection into the banking system.

Japan’s currency “may become the world’s weakest,” said Keiji Matsumoto, currency strategist at Nikko Cordial Securities Inc. in Tokyo.

Wednesday, December 9, 2009

Bollard Says He Will Raise N.Z. Rates Sooner; Currency Rises

By Tracy Withers

Dec. 10 (Bloomberg) -- New Zealand’s central bank says it will raise the benchmark interest rate sooner than it previously indicated as a stronger housing market leads the economy out of recession. The nation’s currency gained.

“If the economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010,” Reserve Bank Governor Alan Bollard said in a statement in Wellington today, after leaving the official cash rate at a record low of 2.5 percent. In October, he said rates would be on hold until the second half of next year.

Bollard said the economy has moved out of recession, buoyed by demand for housing and rising commodity prices. Higher house prices and a pickup in consumer and business confidence have fanned expectations he may raise borrowing costs as early as March to counter emerging price pressures.

“Clearly the record low cash rate is approaching its use-by date,” said Annette Beacher, senior strategist at TD Securities in Singapore. “Those of us looking for a modest ramp up in the tightening bias were not disappointed.”

New Zealand’s dollar rose to 71.97 U.S. cents at 9:55 a.m. from 71.23 cents immediately before the statement. The yield on a three-month bank-bill futures contract maturing in June increased to 3.81 percent from 3.56 percent.

All 12 economists surveyed by Bloomberg News expected today’s decision. Four, including Beacher, forecast a rate increase in the first quarter of next year and six predict the first move in the second quarter.

Inflation Target

Bollard is required to keep annual inflation between 1 percent and 3 percent. The consumer price index will rise 1.4 percent next year and accelerate to 2.6 percent in 2011, the central bank said today.

“A key uncertainty is the extent to which higher house prices are eventually reflected in increased consumer spending,” Bollard said. “At this point, credit growth remains subdued, suggesting households are being relatively cautious.”

Banks aren’t lending as freely to consumers and home-loan rates have risen to reflect their increased funding costs, he said.

Export earnings will be subdued because “the high level of the New Zealand dollar has limited the scope for exports to contribute to the recovery,” said Bollard.

Tighter Conditions

“Recent tightening in financial conditions, driven by a higher exchange rate, increased long-term interest rates and a wider gap between the cash rate and bank funding costs, reduces the need for more immediate action” on the official cash rate, Bollard said.

The economy grew 0.1 percent in the three months to June 30, the first expansion in six quarters, buoyed by low interest rates, tax cuts and extra government spending.

The economy will expand 1.9 percent in the first quarter of 2010 from a year earlier, the Reserve Bank said in new forecasts published today. That’s better than the 1.3 pace predicted in September. Annual growth will accelerate to 4.2 percent by the first quarter of 2011, the bank said.

“The economy continues to recover, reflecting world growth, higher export commodity prices, increased government spending and housing strength,” said Bollard.

House Prices

House prices have increased 9.4 percent since a low in January and property sales in October surged 36 percent from a year earlier, according to the Real Estate Institute.

A stronger housing market helped drive consumer confidence to a 22-month high in October, according to an index compiled by Roy Morgan Research and ANZ National Bank Ltd.

Prices of New Zealand’s commodity exports jumped the most in 23 years in November, led by dairy prices, according to an ANZ National index published last week.

Signs of a global recovery and rising commodity prices boosted business confidence to a 10-year high last month, according to a separate ANZ National survey.

“While business confidence has improved, actual business spending remains weak,” Bollard said.

Finance Minister Bill English said yesterday the economy is improving and may grow faster than forecast in his May budget. “The picture is patchy” and the government is yet to see business confidence convert into investment and jobs, he told parliament’s finance and expenditure select committee.

Jobless Rate

A challenge for the economy is the rising jobless rate, English said. Unemployment was at a nine-year high of 6.5 percent in the third quarter. The Reserve Bank expects the rate will increase to 6.6 percent by the first quarter of next year and decline to 6.3 percent a year later.

Central bankers around the world are now assessing when to remove stimulus as the global economy recovers. Australia and Norway have started raising interest rates and the Federal Reserve has committed to scale down buying of mortgage-backed debt.

Reserve Bank of Australia Governor Glenn Stevens raised his benchmark rate for an unprecedented third straight month last week to 3.75 percent. He will increase borrowing costs to 4 percent at his next review on Feb. 2, according to all 16 economists in a Bloomberg News survey.

Buoying New Zealand’s economy, auction prices for milk powder sold by Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, have jumped to a 16-month high, prompting the Auckland-based company to increase its payment to its local suppliers.

To be sure, the currency’s gains may slow the recovery by curbing exports, which make up 30 percent of the economy.

Banks have boosted estimates for the New Zealand dollar, assuming Bollard may raise rates as soon as March, according to a Bloomberg News survey. The currency will likely rise 6 percent to 75 U.S. cents by March 31, according to the median estimate in the poll of 32 strategists.

Commodity export prices in November were 17 percent higher than a year earlier, according to an ANZ National Bank index. After converting to local dollars, prices were 8.5 percent lower.

Monday, December 7, 2009

Bernanke Sees ‘Formidable Headwinds’ for U.S. Economy (Update3)

By Craig Torres and Shobhana Chandra

Dec. 7 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the U.S. economy faces “formidable headwinds,” including a weak labor market and tight credit that are likely to produce a “moderate” pace of expansion.

“The economy confronts some formidable headwinds that seem likely to keep the pace of expansion moderate,” Bernanke, 55, said today in a speech to the Economic Club of Washington. He said inflation remains “subdued” and might even move lower.

Treasuries advanced as traders pared bets the central bank will increase interest rates before August. Bernanke, in response to a question after his speech, repeated the Fed’s statement that rates are likely to remain low for an “extended period.”

The yield on the benchmark two-year Treasury note fell seven basis points to 0.76 percent at 3:35 p.m. in New York. The Standard & Poor’s 500 Index was down 0.2 percent to 1,103.92 after rising as much as 0.4 percent.

“Bernanke suspects we will grow below normal recovery standards, and that pace could be around awhile,” said Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta. “Fed policy may stay where it is, essentially zero, for some time. There are serious risks out there.”

Job Losses

Payrolls have declined by more than 7.2 million jobs since the start of the recession in December 2007. Employers cut the fewest jobs in November in 23 months, and the unemployment rate unexpectedly fell, a Labor Department report showed last week. Payrolls declined by 11,000, and the jobless rate fell to 10 percent in November from 10.2 percent the previous month.

In response to a question from the audience about the direction of interest rates, Bernanke said: “Right now we are still looking at the extended period given that conditions remain low rates of utilization, subdued inflation trends, and stable long-term inflation expectations.”

“Obviously there has been some signs of strength recently, we will want to factor that in as we talk about this next week.”

U.S. central bankers meet for their final two-day meeting of the year on Dec. 15-16. At their last meeting in November, policy makers repeated their pledge to keep interest rates low for an “extended period.”

The consumer price index, minus food and energy, rose at a 1.7 percent annual pace in October, up from 1.5 percent the previous month. The core inflation rate rose at a 1.4 percent pace in August, the lowest rate since February 2004.

“Tight’ Credit

“Despite the general improvement in financial conditions, credit remains tight for many borrowers,” and the job market “remains weak,” Bernanke said in his prepared remarks.

The Fed chairman said the U.S. central bank has the tools and commitment to keep price increases in check, and that inflation could subside further.

“Elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here,” Bernanke said. “The Federal Reserve is committed to keeping inflation low and will be able to do so.”

The Fed chairman credited the U.S. central bank with pulling the economy “back from the brink,” and suggested that growth is unlikely to be strong enough to lower unemployment at a rapid pace. The speech was his first since his appearance at a Senate Banking Committee hearing last week on his nomination to a second term.

‘Modest’ Growth

“We still have some way to go before we can be assured that the recovery will be self-sustaining,” the Fed Chairman said. “My best guess at this point is that we will continue to see modest economic growth next year -- sufficient to bring down the unemployment rate, but at a pace slower than we would like.”

The Fed has channeled liquidity to banks and markets for asset-backed securities and the commercial paper market, helping to unfreeze bank funding markets. The London interbank offered rate, or Libor, for three-month loans in dollars between banks was 0.25 percent today, down from 1.42 percent at the start of the year.

The central bank is also purchasing $1.25 trillion in mortgage-backed securities. Costs on 30-year fixed-rate mortgages fell to 4.71 percent Dec. 3, the lowest since mortgage buyer Freddie Mac in McLean, Virginia, began compiling the data in 1971.

The Fed chairman cited the benefits of the central bank’s regional structure, saying it is “well suited” to be the lead regulator for supervising the largest financial institutions.

Held Hostage

“No firm, by virtue of its size and complexity, should be permitted to hold the financial system, the economy, or the American taxpayer hostage,” Bernanke said. “All systemically important financial institutions, not only banks, should be subject to strong and comprehensive supervision on a consolidated, or firm-wide, basis.”

The former Princeton University scholar and self-described Great Depression buff is defending the central bank against efforts in Congress to curtail its authority and independence.

A Senate proposal would remove bank supervision from the Fed, and House legislation would increase oversight of monetary policy. Legislation pending in both chambers would limit the Fed’s ability to lend to troubled institutions and remove the central bank’s rule-writing authority on consumer financial products.

The Fed chairman has prompted concern among lawmakers about taxpayer-sponsored bailouts and rescues that he says were used only to save households and the economy from financial collapse.

The House on Nov. 19 advanced a proposal to remove a three- decade ban on congressional audits of Fed interest-rate decisions, a measure backed by Ron Paul, a Republican from Texas.

Monday, November 30, 2009

Australia May Raise Key Rate for Record Third Month (Update1)

By Jacob Greber and Dan Petrie

Dec. 1 (Bloomberg) -- Australia’s central bank will raise its benchmark interest rate by a quarter percentage point today for a record third straight month as evidence mounts that the nation’s economy is strengthening, economists say.

Reserve Bank Governor Glenn Stevens will boost the overnight cash rate target to 3.75 percent at 2:30 p.m. in Sydney, according to 19 of 20 economists surveyed by Bloomberg. Futures traders say there is a 76 percent chance of an increase.

Central bank policy makers say the economy has entered a “new upswing” that will last several years, boosted by rising consumer confidence and China’s demand for resources such as iron ore. Still, some analysts say Stevens may delay an increase until the bank’s next meeting in February to gauge whether the recovery will slow as the government cuts stimulus spending.

“We are tipping a rate hike, but not with a high degree of certainty,” said Craig James, a senior economist at Commonwealth Bank of Australia. “Cash rates remain at historically low levels and our economy is continuing to improve. But on the other side of the equation, a slump in manufacturing investment would be weighing on board members’ minds.”

Investors have raised bets on a quarter-point rate increase today to 76 percent, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 9:38 a.m. Chances of such a move stood at 56 percent late yesterday.

‘Open Question’

The pace of interest-rate increases is an “open question” as policy makers balance the risk of keeping borrowing costs too low against an economy that may cool as government stimulus abates, central bank officials said in minutes of their November meeting, when they became the first central bankers in the world to raise borrowing costs twice since the height of the global crisis.

Business and consumer confidence, which helped Australia skirt the global recession, “could prove fragile,” and growth may slow as the effects of more than A$20 billion ($18.4 billion) in cash handouts from Prime Minister Kevin Rudd’s government and his A$22 billion of spending on roads, schools and hospitals fades next year, central bank policy makers said at their Nov. 3 meeting.

Rory Robertson, an economist at Macquarie Group Ltd. in Sydney, who yesterday forecast no change in the rate, today changed his view and said his official position is: “I don’t know.”

Retail Sales

Reports published since the bank’s last meeting showed Australia’s unemployment rate climbed in October to 5.8 percent from 5.7 percent, company profits fell in the three months through Sept. 30 for a fourth straight quarter, and retail sales unexpectedly dropped in September.

Business investment also unexpectedly fell 3.9 percent in the third quarter, led by a record 13.4 percent slump in spending by manufacturers.

Governor Stevens raised the overnight cash rate target by a quarter percentage point in October and this month. By contrast, officials in the U.S., U.K. and Europe have kept their benchmark lending rates at historic lows this year.

Speculation Stevens will continue to lead the world in raising rates has stoked this year’s 31 percent surge in the nation’s currency. The Australian dollar traded at 91.75 U.S. cents at 9:46 a.m. in Sydney yesterday.

Economic Growth

“It is now 18 years since Australia has experienced a negative in year-ended gross domestic product growth, a very prolonged expansion,” central bank Deputy Governor Ric Battellino said last week. “It is reasonable to assume that we will see this growth extended for a few more years yet.”

The economy expanded 1 percent in the first half of the year and is forecast by the Reserve Bank to grow 3.25 percent next year and in 2011. Third-quarter gross domestic product figures will be published on Dec. 16.

House prices rose 1.4 percent in October, taking this year’s increase to 10 percent, real-estate monitoring company RP Data-Rismark said yesterday.

“The strength in housing prices adds strongly to the case for tighter monetary policy,” said Alex Joiner, an economist at Australia & New Zealand Banking Group Ltd. in Melbourne.

Stevens is also under pressure to raise borrowing costs as a rebound in demand for commodities such as iron ore, coal and gas prompts energy companies to increase spending.

BHP Billiton Ltd. and Rio Tinto Group boosted iron-ore production to a record in the third quarter to satisfy Chinese demand for steel, which helped exports surge 5 percent in September.

The nation’s single biggest investment project, the A$43 billion Gorgon natural-gas venture involving Chevron Corp., Exxon Mobil Corp. and Royal Dutch Shell Plc, will create as many as 10,000 jobs when construction starts early next year, Chevron said on Sept. 14.

Thursday, November 26, 2009

Fujii Watching Yen Rise to 14-Year High Very Closely (Update3)

By Kyoko Shimodoi and Keiko Ujikane

Nov. 26 (Bloomberg) -- Japanese Finance Minister Hirohisa Fujii said the government is watching currencies “very closely” after the yen advanced to a 14-year high against the dollar, threatening the country’s export-led recovery.

Fujii spoke to reporters in Tokyo today after investors shrugged off remarks he made less than an hour earlier that Japan needs to “take appropriate action against abnormal movements” in foreign-exchange markets.

The comments suggest Japan is closer to stepping into currency markets for the first time in more than five years as the rising yen erodes exporters’ profits in the wake of the country’s worst postwar recession. The currency’s more than 8 percent advance over the past three months has also added to Japan’s deflationary pressure by driving import costs lower.

“The possibility of intervention has apparently increased,” said Masafumi Yamamoto, Tokyo-based chief foreign- exchange strategist at Barclays Bank Plc. “Stocks have been falling and the government declared Japan is in a deflationary state. In this environment, there’s no reason for it to tolerate a higher yen.”

The yen rose to 86.66 per dollar at 1:33 p.m. in Tokyo, after climbing to 86.53, the highest since July 1995. The Nikkei 225 Stock Average slid 0.5 percent to a four-month low.

Support for Dollar

Fujii, 77, said yesterday that the dollar’s weakness is spurring the yen’s advance. Today he said “a strong U.S. dollar is in their national interest. There is no change in our support for that.”

Manufacturers are contemplating shifting operations abroad because the yen’s gains make it costlier to run factories at home. A stronger yen would be a “huge risk” to producing autos in Japan, Nissan Motor Co. Chief Operating Officer Toshiyuki Shiga said this month.

Japanese authorities haven’t stepped into the currency market since the first three months of 2004, when it sold a record 14.8 trillion yen ($171 billion). Fujii, who assumed his post in September, spurred some of the yen’s gains by saying he opposed “easy intervention,” only later to tone down his remarks by saying Japan will act if currency moves are “abnormal or disorderly.”

Vice Finance Minister Yoshihiko Noda said the government isn’t considering stepping into the currency market now, Reuters reported earlier today.

Below 85

“The chances of intervention would increase if the dollar-yen breaks below 85,” Tomoko Fujii, a foreign-exchange strategist at Bank of America-Merrill Lynch in Tokyo, wrote in a report published today. “Intervention backed by a monetary policy change is more effective than intervention without supportive monetary policy action.”

Fujii at Bank of America-Merrill Lynch said it’s unlikely that the U.S. would join Japan in stepping into foreign- exchange markets, barring a “meltdown caused by a dollar crisis.” Expectations for the Bank of Japan to add liquidity to the economy will grow should the yen’s gains “sharply” lower stock prices, hurt business sentiment and exacerbate deflation, she wrote.

The government last week said Japan was in a “mild deflationary phase.” Price declines blighted Japan during its so-called lost decade of stagnation after an asset bubble burst in the early 1990s.

Meanwhile Finance Minister Fujii said yesterday that China’s currency is probably too weak, backing calls from the U.S. and Europe to let the yuan appreciate.

“It can’t be helped that people see the yuan as undervalued given the strength of the Chinese economy,” Fujii said in an interview in Tokyo. “The yuan is pegged to the dollar. I don’t think such a situation is necessarily good.”

The remarks are Fujii’s strongest on the Chinese currency since he took office in September, adding to concerns voiced by officials including European Central Bank President Jean-Claude Trichet this month about the yuan’s flexibility. The yuan’s peg to the dollar has sheltered China from the slide in the U.S. currency that’s making Japanese and European exports more expensive.

Wednesday, November 25, 2009

BOJ Can Resume Collateralized Lending, Minutes Show (Update1)

By Mayumi Otsuma

Nov. 26 (Bloomberg) -- Bank of Japan board members said last month they could reinstate an emergency-lending program for banks after it expires in March, minutes show.

All members agreed “the bank should employ appropriate measures -- including reutilization of the special funds- supplying operations -- to facilitate corporate financing in a flexible and timely manner,” if necessary, according to minutes of the bank’s Oct. 30 meeting published in Tokyo today.

Governor Masaaki Shirakawa and his colleagues decided at the meeting to stop buying corporate debt at the end of the year and terminate its special program of providing unlimited collateral-backed loans to banks on March 31. It also indicated it would keep its benchmark overnight rate at 0.1 percent to cement the nation’s recovery from its deepest postwar recession.

“Members agreed that the bank should maintain the extremely accommodative financial environment by holding interest rates at their current low levels,” the minutes said, adding the bank would provide “ample funds sufficient to meet demand in financial markets.”

A Cabinet Office official who attended the meeting urged the central bank to monitor the risk of falling prices taking hold of a recovery that has yet to show signs of sustainability, the minutes showed. Concerns about prices grew after the meeting, prompting the government to declare that the economy is in deflation on Nov. 20.

Deflation Risk

Keisuke Tsumura, a parliamentary secretary at the Cabinet Office, told the central bank it needs to be aware of the risk of deflation given that the economic recovery isn’t “autonomous,” the minutes showed.

“With the government’s declaration of deflation, political pressure on the central bank may intensify,” said Mari Iwashita, chief market economist at Nikko Cordial Securities in Tokyo. “The government is finding it difficult to secure funds for spending, so they’ll probably turn to monetary policy to stimulate the economy.”

For its part, the government has limited room to spur demand, with tax revenue declining and the public debt approaching twice the size of the economy.

Finance Minister Hirohisa Fujii, who has called on the central bank to work with the government to fight falling prices, has pledged to ensure bond sales next fiscal year don’t exceed the record 44 trillion yen ($504 billion) budgeted for the current period.

The bank’s board last week kept interest rates unchanged by a unanimous vote. All except two of 17 economists surveyed by Bloomberg News this month said they expect borrowing costs to stay on hold at least through 2010.

Monday, November 23, 2009

Dollar Weakens on Speculation Fed to Maintain Stimulus Measures

By Matthew Brown and Ron Harui

Nov. 23 (Bloomberg) -- The dollar fell for the first time in three days against the euro on speculation the Federal Reserve will keep its stimulus measures in place and ensure interest rates remain low.

The U.S. currency slid against 15 of its 16 major counterparts after Fed Bank of St. Louis President James Bullard said in New York yesterday that he supported extending the central bank’s purchases of mortgage-backed securities beyond the first quarter of next year. The yen weakened as commodities and stocks advanced, boosting demand for higher-yielding assets such as the South African rand.

“The central bank language at the moment is still pretty dovish and that’s making riskier assets more attractive than the dollar into the end of the year,” said Mark O’Sullivan, director of dealing in London at Currencies Direct Ltd.

The dollar weakened to $1.4965 per euro as of 8:05 a.m. in London, from $1.4862 in New York last week. The yen depreciated to 132.84 versus the euro, from 132.09, and was at 88.77 per dollar, from 88.88. The South African rand was the biggest gainer versus the dollar, strengthening 1.3 percent to 7.5124.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, declined 0.7 percent to 75.101. It slid to 74.679 on Nov. 16, the lowest level since August 2008.

Fed’s Bullard

U.S. policy makers repeated on Nov. 4 that they will complete the Fed’s planned $1.25 trillion in purchases of mortgage securities by March and said they will buy $175 billion of agency debt, down from a previous maximum of $200 billion. They kept their benchmark rate in a range of zero to 0.25 percent and repeated borrowing costs will stay low for an “extended period.”

In his speech, Bullard said “unemployment is high, and labor markets are lagging,” while repeating his view that economic recovery in the U.S. has started.

Futures contracts on the Chicago Board of Trade on Nov. 20 showed a 32 percent chance the Fed raise rates by June, down from 68 percent odds a month ago.

The yen and dollar also declined as gold climbed to a record and shares advanced for the first time in three days. Bullion for immediate delivery rose as much as 1.5 percent to $1,167.88 an ounce, and the MSCI World Index gained 0.9 percent.

Benchmark interest rates are as low as zero in the U.S. and 0.1 percent in Japan, compared with 3.5 percent in Australia, attracting investors to the South Pacific nation’s higher- yielding assets.

Futures traders decreased bets the euro will strengthen against the dollar, figures from the Washington-based Commodity Futures Trading Commission showed on Nov. 20.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 11,956 on Nov. 17, compared with 25,173 a week earlier.

Monday, November 16, 2009

Bernanke Says ‘Not Obvious’ Asset Prices Misaligned (Update2)

By Scott Lanman

Nov. 16 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said it’s “not obvious” that asset prices in the U.S. are out of line with underlying values after a 64 percent jump in the Standard & Poor’s 500 Index from its March low.

“It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” he said today in response to audience questions after a speech in New York. “It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system.”

The U.S. central bank chief didn’t address asset prices outside of the country. Financial officials in Japan and China, Asia’s two largest economies, said this week that the Fed’s interest-rate policy risks spurring speculative capital that may inflate asset prices and derail the global economic recovery.

“The best approach here if at all possible is to use supervisory and regulatory methods to restrain undue risk-taking and to make sure the system is resilient in case an asset-price bubble bursts in the future,” Bernanke said.

Bernanke said in his speech that the “headwinds” of reduced bank lending and a weak labor market will probably restrain the pace of the U.S. economic recovery, warranting continued low borrowing costs. Bernanke also said the Fed is “attentive” to changes in the dollar’s value and “will help ensure that the dollar is strong.”

Stocks in the U.S. extended gains after his comments, while the dollar slumped against the euro for a second day as traders doubted Bernanke can do much to bolster the currency.

Stocks Rose

The S&P 500 Index rose today 1.5 percent to 1,109.30. The price of gold has climbed 55 percent in the past year to $1,142.65 an ounce, reaching a record today for the fourth time in six sessions. Crude oil is up 77 percent in 2009.

The dollar weakened to $1.4974 per euro from $1.4903 on Nov. 13.

The U.S. economy has suffered two booms and busts in asset prices -- one in technology stocks and the other in housing -- in 10 years. Economists have blamed former Fed Chairman Alan Greenspan for standing aside in the first, and aiding the second by keeping interest rates too low earlier this decade.

On the possibility of using interest rates to pop bubbles, “we can never say never,” Bernanke said today. “We have to keep an open mind.”

In some markets, including U.S. stocks, gold and oil, “there may not necessarily be a bubble, but you certainly have valuations that are above where near-term conditions would suggest they’re going to be at,” said Keith Hembre, chief economist at U.S. Bancorp’s FAF Advisors Inc. in Minneapolis, which oversees $103 billion.

‘Robust Improvement’

“They’re certainly priced for robust improvement,” said Hembre, who previously worked at the Fed.

Bank of Japan Governor Masaaki Shirakawa said earlier today that emerging economies “might overheat and experience financial turmoil,” while Liu Mingkang, China’s top banking regulator, yesterday called risks from low rates and the dollar’s weakness “new, real and insurmountable.”

“The continuous depreciation in the dollar, and the U.S. government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” Liu, chairman of the China Banking Regulatory Commission, said in Beijing.

Donald Tsang, the chief executive of Hong Kong, said Nov. 13 that record-low U.S. interest rates are encouraging investors to borrow dollars cheaply to invest in Asian stock markets, driving up asset prices in Korea, Taiwan, Singapore and Hong Kong “to levels that are incompatible or inconsistent with the economic fundamentals.”

Wednesday, November 11, 2009

U.K. Unemployment Rises Least in 18 Months as Recession Eases

By Jennifer Ryan and Svenja O’Donnell

Nov. 11 (Bloomberg) -- U.K. unemployment rose at the slowest pace in 18 months in October, bolstering government claims that efforts to lift the economy out of recession are working.

Claims for jobless benefits increased by 12,900, the least since April 2008, the Office for National Statistics said in London today. The median forecast in a Bloomberg News survey of 20 economists was an increase of 20,000. The number of people seeking work in the three months through September rose 30,000, the smallest increase since the period through May 2008.

Prime Minister Gordon Brown is counting on an economic revival to narrow the Conservative lead over his Labour Party before a general election due by June 2010. Economists expect unemployment to keep rising long after the economy returns to growth, casting doubt over the strength of the recovery.

“I think we probably are out of the woods but I’m not convinced how sustainable it is,” said George Buckley, chief U.K. economist at Deutsche Bank AG. “We see a recovery that peters out next year.”

Tuesday, November 3, 2009

English Says N.Z. Jobless Rate Will Peak at About 7% (Update1)

By Tracy Withers

Nov. 4 (Bloomberg) -- New Zealand’s jobless rate will probably peak at about 7 percent some time in 2010, less than the 8 percent the government previously expected, Finance Minister Bill English said.

The unemployment rate is lagging the economic recovery and it will take some time to level off, English said in an e-mailed statement. A report tomorrow will probably show the rate was 6.4 percent in the third quarter, according to the median forecast in a Bloomberg survey.

New Zealand’s economy grew for the first time in six quarters in the three months ended June 30, and the Treasury Department this week said the recovery is likely to accelerate in the second half of 2009. The New Zealand currency’s 25 percent surge against the U.S. dollar the past six months is a “head wind” for exports, English said.

New Zealand’s dollar bought 71.98 U.S. cents at 9.03 a.m. in Wellington trading from 71.82 cents in late New York trading yesterday.

“Clearly the dollar is stronger than we would expect at this point in the economic cycle,” English said in his Focus on Finance statement.

The government’s plan to control public spending and reduce debt will reduce the pressure on the exchange rate, he said.

Lower costs will make exporters more competitive and allow them to take advantage as key global markets show signs of recovery, English said.

Monday, November 2, 2009

Australia Will Raise Key Rate to at Least 3.5% (Update2)

By Jacob Greber

Nov. 3 (Bloomberg) -- Australia’s central bank will raise its benchmark interest rate today by at least a quarter percentage point, the second increase in four weeks, amid signs the economy is strengthening, economists and traders say.

Reserve Bank Governor Glenn Stevens will boost the overnight cash rate target to 3.5 percent from 3.25 percent at 2:30 p.m. in Sydney, according to 18 of 22 economists surveyed by Bloomberg News. The rest expect a half-point increase. Futures traders are betting on a quarter-point boost.

Keeping borrowing costs at “very low levels” may be “imprudent” and threaten its inflation target, the bank said last month, amid surging consumer confidence, house price gains and Chinese demand for natural resources. Stevens, the first Group of 20 policy maker to raise borrowing costs since the height of the global recession, has also signaled this year’s 29 percent gain in the nation’s currency may help contain inflation.

“The case for a larger-than-expected increase is always strongest at the early stages of the tightening cycle,” said Bill Evans, chief economist at Westpac Banking Corp. in Sydney, who predicts a half-point gain. “The risks of tightening too slowly are also high when policy is at its most stimulatory since imbalances are more likely to emerge.”

The Australian dollar rose for a second day to 90.80 U.S. cents as of 1:13 p.m. in Sydney from 90.40 in New York yesterday.

Australia’s economy is growing faster and generating more jobs than Treasurer Wayne Swan forecast six months ago, helped by A$20 billion ($18 billion) in government cash handouts to consumers and Stevens’ record interest-rate cuts between September 2008 and April, when he slashed the benchmark rate by 4.25 percentage points to a half-century low of 3 percent.

Economic Growth

Stevens raised the rate by a quarter point Oct. 6. The only other countries to raise borrowing costs this year are Israel and Norway.

Gross domestic product will expand 1.5 percent in the 12 months to June 30, 2010, Treasurer Wayne Swan said yesterday after scrapping his May prediction of a 0.5 percent contraction. GDP will accelerate to 2.75 percent the following fiscal year, he said. The economy grew 1 percent in the first six months of this year.

Unemployment is also expected to peak at 6.75 percent in the second quarter of next year, well below the 8.5 percent rate Swan forecast in May for the three months through June 30, 2011.

“The Australian economy has turned out to be quite a lot stronger than we thought,” Reserve Bank Assistant Governor Philip Lowe said last month. “It’s entirely appropriate we go back to a more normal setting in monetary policy. And that’s the process that’s under way.”

House Prices

There are also signs of a surge in some asset prices. A report published yesterday showed Australian house prices jumped 4.2 percent in the three months through September from the previous quarter, when they rose by the same amount. The nation’s benchmark S&P/ASX 200 index of stocks has climbed more than 20 percent this year.

Stevens should raise borrowing costs today to keep a lid on an “irrational exuberance” in the housing market that is “arguably now out of line,” Mark Joiner, National Australia Bank Ltd.’s chief financial officer, told the Australian Financial Review in an interview published on Oct. 31.

Still, Stevens has scope to limit today’s increase to a quarter-point move, which would add A$50 to monthly repayments on an average A$300,000 home loan.

Reports published in recent days show bank lending unexpectedly fell in September for the first time in nine months amid weaker demand for business credit, and manufacturing growth slowed in October.

Inflation Slows

The consumer price index rose in the third quarter by an annual 1.3 percent, the smallest gain since the second quarter of 1999, after advancing 1.5 percent in the previous three months, a government report showed on Oct. 28.

Inflation isn’t “sufficiently high to justify the Reserve Bank accelerating to a half-point hike,” said David de Garis, a senior economist at National Australia Bank Ltd. in Sydney.

Investors are certain Stevens will raise the overnight cash rate target by a quarter point, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange. They expect only an 8 percent chance of a half-point increase, the index showed at 8:33 a.m.

The Reserve Bank, which scrapped its forecast in August for the economy to contract this year, will publish revised predictions on Nov. 6. Its most recent estimate was for GDP to expand 2.25 percent in 2010 and 3.75 percent in 2011.

“The Reserve Bank’s rate hikes will come regularly -- at every meeting until February -- but in small steps,” said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney. “There is little to be gained from spooking the horses” today with a half-point gain.

Wednesday, October 28, 2009

Dollar ‘Over-Owned,’ Will Fall to Record, Gross Tells CNBC

By Ruby Madren-Britton

Oct. 28 (Bloomberg) -- The dollar is an over-owned currency and likely to fall to an all-time low against major counterparts, Pacific Investment Management Co.’s Bill Gross said in an interview on CNBC.

“The Chinese, the Asians, have owned too many dollars for too long,” said Gross, a founder and co-chief investment officer of the world’s biggest manager of bond funds. “The dollar becomes more and more owned and less and less desirable, so ultimately the direction is down. I don’t sense stability in the dollar.”

The U.S. currency stands a chance of moving “substantially lower” unless the Chinese decide the world has renormalized enough that they can start seeking higher-yielding assets, Gross said. Global investors have much less tolerance for risk as the world recovers from the financial crisis, Gross said.

A weaker dollar is positive as it rebalances production levels in the U.S. and Asia, Gross said. With “half the earnings” of the Standard & Poor’s 500 Index coming from overseas, U.S. stocks have been propelled by a weaker dollar, according to Gross.

“The extent that the dollar goes up, it reverses all of those positive trends,” he said.

The Dollar Index, which the ICE uses to gauge the greenback against currencies including the euro, yen and pound, increased 0.2 percent today to 76.289. It reached an all-time low of 70.698 in March 2008.

The six-month rally in high-risk assets is likely at its peak as U.S. economic growth lags behind historical averages, according to Gross.

Gross made the forecast yesterday in commentary posted on Newport Beach, California-based Pimco’s Web site. The company predicts a “new normal” in the global economy that will include heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy.

Tuesday, October 27, 2009

Yen Rises as Economic Concerns Damp Demand for Higher Yields

By Yasuhiko Seki and Ron Harui

Oct. 28 (Bloomberg) -- The yen gained against major counterparts on speculation the global economic recovery will slow, reducing demand for high-yielding assets.

The yen traded near a one-week high against the euro before reports this week forecast to show German consumer prices and unemployment worsened, backing the case for the European Central Bank to keep interest rates low. Australia’s dollar fell toward a one-week low after a government report showed annual inflation slowed, easing pressure on the central bank to accelerate interest-rate increases.

“As the market shifts attention to the sustainability or the strength of a recovery from a cyclical upturn, the mood of euphoria may wane,” said Masahide Tanaka, senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second- largest bank. “The risk of unwinding, of a capital flight into higher-yielding currencies, may increase.”

The yen rose to 135.55 per euro as of 10:03 a.m. in Tokyo from 135.89 in New York yesterday, after earlier reaching 135.43, the highest level since Oct. 21. Japan’s currency fetched 91.50 per dollar from 91.80. The dollar traded at $1.4813 per euro from $1.4804 yesterday, when it touched $1.4770, the strongest level since Oct. 13.

Australia’s currency lost 0.2 percent to 91.47 U.S. cents. It fell 0.6 percent to 83.60 yen.

The Conference Board’s consumer confidence index dropped to 47.7 in October from a revised 53.4 in the previous month, the New York-based research group reported yesterday. The median forecast of 74 economists in a Bloomberg survey was for an advance to 53.5.

German Prices

The German jobless rate probably rose to 8.3 percent in October from 8.2 percent in the previous month, according to a Bloomberg News survey of economists before the report tomorrow.

German consumer prices, calculated using a harmonized European Union method, fell 0.1 percent in October from a year earlier after slipping 0.5 percent in September, according to a Bloomberg News survey of economists. The Federal Statistics Office in Wiesbaden will release the report later today.

“We expect German CPI to remain weak,” Brian Kim, a currency strategist in Stamford, Connecticut, at UBS AG, wrote in a research note yesterday. “We continue to target the euro- dollar back at $1.45 in one month as sentiment is clearly showing signs of strain.”

The ECB will maintain its benchmark interest rate at 1 percent through the second quarter of 2010, a separate Bloomberg survey showed. The central bank next meets on Nov. 5.

Australia’s consumer price index advanced 1 percent from the second quarter, when it gained 0.5 percent, the Bureau of Statistics said in Sydney today. The median estimate of 20 economists surveyed by Bloomberg News was for a 0.9 percent increase. Prices gained 1.3 percent from a year earlier.

Unsustainable Rally

The yen rose against all 16 of the most-active currencies on speculation a rally in stocks and commodities can’t be sustained.

The six-month rally in shares and raw materials is probably at its peak as U.S. growth lags behind historical averages, according to Bill Gross at Newport Beach, California-based Pacific Investment Management Co.

Gross, a founder and co-chief investment officer of the world’s biggest manager of bond funds, has predicted a “new normal” in the global economy that will include heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy.

“What has happened is that our ‘paper asset’ economy has driven not only stock prices, but all asset prices higher than the economic growth required to justify them,” Gross wrote yesterday on Pimco’s Web site.

The Standard & Poor’s 500 Index slipped 0.3 percent to 1,063.41 yesterday in New York. The Nikkei 225 Stock Average fell 0.8 percent today.

Geithner Comments

Adding to signs the recovery will be slow, Japan’s retail sales fell for a 13th month in September, the Trade Ministry said today in Tokyo. Sales slid 1.4 percent from a year earlier,. The median estimate of 13 economists surveyed by Bloomberg was for a 1.6 percent decline.

Gains in the dollar may be tempered after U.S. Treasury Secretary Timothy Geithner said he expects the government will receive repayment “relatively quickly” from most of the big banks helped by the $700 billion financial rescue program.

“I expect you’re going to see a lot of the rest of the money out in the system there come back relatively quickly,” Geithner said yesterday in New York at a conference of the Securities Industry and Financial Markets Association. The organization is a trade group that includes Goldman, Sachs & Co., Banc of America Securities LLC and State Street Corp.

Monday, October 26, 2009

U.S. Markets Wrap: Stocks, Commodities Slide as Dollar Rebounds

By Rita Nazareth

Oct. 26 (Bloomberg) -- U.S. stocks slid, erasing an early rally, on concern lawmakers will phase out a tax credit for homebuyers and Bank of America Corp. will have to sell shares to pay back its government bailout. The dollar rebounded from a 14- month low against the euro and oil wiped out an early advance.

All 12 shares in a gauge of homebuilders dropped as senators discussed reducing an $8,000 tax credit for first-time buyers. Bank of America sank 5.1 percent on speculation the government will force the bank to raise more capital, while Fifth Third Bancorp, SunTrust Banks Inc. and U.S. Bancorp lost at least 3.2 percent on downgrades from analyst Dick Bove. Treasuries fell, with 10-year yields touching a two-month high.

The Standard & Poor’s 500 Index tumbled 1.2 percent to 1,066.95 at 4:04 p.m. in New York. The Dow Jones Industrial Average retreated 104.22 points, or 1.1 percent, to 9,867.96. Almost five stocks dropped for each that rose on the New York Stock Exchange.

“Plenty of news for traders to sell on,” said James Paulsen, who helps oversee $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “We’ve still got a rise in loan losses. Some banks will probably have to raise further capital. And on the tax-credit front, we already know we won’t have that forever. But after a nice stock market run, a lot of players wanted to have a pause.”

Equities rallied earlier, sending the S&P 500 up as much as 1.1 percent, as investors grew more confident that better-than- estimated profits will fuel further equity gains. About 80 percent of companies in the S&P 500 that reported third-quarter results have topped analysts’ earnings projections, exceeding the record pace of 72.3 percent for the period ended in June.

Builders Slump

A gauge of 12 homebuilders in S&P indexes slumped 3.4 percent, led by declines of at least 3.8 percent in Pulte Homes Inc. and D.R. Horton Inc. Senate leaders are negotiating to extend and gradually reduce the housing tax credit through 2010, Senator Bill Nelson said. The credit was set to expire at the end of November.

“The phase out is worse than a straight extension and probably worse for housing than the consensus,” ISI Group Inc. analysts said in a note

Banks fell 3.3 percent collectively, the steepest decline in the S&P 500 among 24 industries, after Bove downgraded Fifth Third Bancorp, SunTrust and U.S. Bancorp on concern loan losses will remain high.

Fifth Third, Ohio’s largest lender, retreated 7.9 percent to $9.52. SunTrust, the seventh-largest U.S. bank, lost 5.4 percent to $19.85, while Minneapolis-based U.S. Bancorp dropped 3.2 percent to $24.15. Bank of America, the largest U.S. lender by assets, sank 5.1 percent to $15.40.

‘Meaningfully Harm’

“The government apparently wants the bank to raise $45 billion in the market from a new capital offering before it will let the bank redeem the TARP preferreds,” Bove wrote in a note dated Oct. 23, referring to the preferred stock purchased by the government as part of the Troubled Asset Relief Program. “Selling more stock would meaningfully harm Bank of America’s shareholders. If the bank did what the government wants it would have to sell 3 billion shares or increase its share base by 35 percent.”

Bank of America pared an earlier slide of as much as 7.1 percent after Citigroup Inc. added the stock to its “top picks” list, saying it is “very attractive” after the sell- off.

‘Serious Challenges’

Federal Deposit Insurance Corp. Chairman Sheila Bair said that banks continue to face “serious challenges.” Bair also said tapping a Treasury Department credit line to replenish funds depleted by a surge of bank failures would harm her agency and the banking industry. She made the comments today during a speech at an American Bankers Association convention in Chicago.

Monsanto Co. fell 6 percent to $70.69, its biggest drop since May. Goldman Sachs Group Inc. lowered its earnings estimates for the world’s largest seed producer, citing company discounts on corn-seed prices.

Producers of raw materials and energy dropped 2.5 percent and 1.5 percent, respectively, after the dollar rose, curbing demand from investors who buy commodities as a hedge against inflation. Copper prices retreated from the highest level in almost 13 months, while crude oil dropped 2.3 percent, the most in a month, to below $79 a barrel. Gold fell after gaining for four straight weeks.

Commodity Producers Slump

Newmont Mining Corp., the largest U.S. gold producer, dropped 3.5 percent to $43.34. Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, declined 2.3 percent to $79.48. ConocoPhillips, the second- largest U.S. refiner, lost 2.4 percent to $50.74.

The U.S. Dollar Index, a measure of the currency against those of six major trading partners, rose 0.7 percent, erasing an earlier loss.

Newspaper shares slumped after the Audit Bureau of Circulations said that four of the top five U.S. newspapers, including the New York Times, the Washington Post and Gannett Co.’s USA Today, posted average weekday circulation declines. The Wall Street Journal’s circulation rose.

New York Times Co. slumped 6.2 percent to $10.08, while Gannett dropped 7.1 percent to $12.28.

The S&P 500’s rebound of as much as 62 percent since March 9 propelled the index to a one-year high on Oct. 19 and pushed its valuation to more than 20 times the reported operating income of its companies, the most expensive level since 2004.

Robert Doll, chief investment officer of equities at BlackRock Inc., said in an interview with CNBC that he expects some “digestion” in the market after recent gains. He also suggested health-care stocks may be a “defensive” strategy for investors, particularly those in oil services.


“We’ve already had a good move,” said Richard Sichel, chief investment of officer at Philadelphia Trust Co. in Philadelphia, which manages $1.3 billion. “Some investors are taking a wait-and-see attitude. Certain companies have been richly rewarded as corporate earnings beat expectations.”

The S&P 500 is about 40 percent overvalued and headed for a decline as central banks pull back on securities purchases that pushed up asset prices, according to economist Andrew Smithers. Asset purchases have doubled the size of the Federal Reserve’s balance sheet to $2.1 trillion since the start of the current financial crisis.

In his March 2000 book “Valuing Wall Street,” co-authored with economist Stephen Wright, Smithers argued that U.S. equities were overvalued and should be sold. The S&P 500 then plunged 49 percent over 2 1/2 years.

Technical Watch

The S&P 500 may decline as measures based on the ratio of rising stocks to falling shares are “not confirming” the rally, according to technical analysts at Bank of America’s Merrill Lynch Global Research who base forecasts on price and volume charts.

The Bloomberg Cumulative Advance-Decline Line for New York Stock Exchange shares, which is calculated by subtracting the number of falling stocks from the number of rising stocks, fell 6.7 percent to 18,838 on Oct. 23, the lowest level since Oct. 7.

“The advance-decline diffusion index shows a strong bearish divergence off the August, September and October highs,” Mary Ann Bartels and Stephen Suttmeier wrote in a report today. “This is a sign that the strong uptrends for the advance-decline lines have become overextended and that breadth may begin to narrow.”

Better-than-estimated earnings at companies from Verizon Communications Inc. to Corning Inc. also helped fuel earlier gains in stocks today. Verizon, the second-largest U.S. phone company, erased a gain of as much as 0.8 percent and fell 0.7 percent to $28.64 as the overall market turned lower. Corning, the world’s biggest maker of glass for flat-panel televisions, declined 0.9 percent to $15.51 after earlier rising 2.1 percent.

‘Seen the Bottom’

“We’ve seen the bottom in terms of prices with respect to stocks,” Brian G. Belski, chief investment strategist at Oppenheimer & Co. Inc, told Bloomberg Television. “We’ve seen it in earnings and now the economy will turn as a result.”

Microsoft Corp. had the biggest gain in the Dow, climbing 2.4 percent to $28.68. JPMorgan Chase & Co. raised its share price estimate by 50 percent to $30 after boosting its earnings estimates for the December quarter and fiscal years 2010 and 2011, citing strong performance.

American Express Co. had the second-steepest gain in the Dow, rising 0.9 percent to $34.88. The biggest U.S. credit-card issuer by purchases was raised to “buy” from “hold” at Stifel Nicolaus & Co., which also boosted earnings estimates and said the company is best positioned for “new normal.”

Treasuries fell as the U.S. began to sell a record $123 billion of notes to fund its stimulus program and record deficits. The yield on the 10-year note increased eight basis points, or 0.08 percentage point, to 3.57 percent. The yield touched 3.58 percent, the highest level since Aug. 24.

Wednesday, October 21, 2009

Pound, New Zealand Dollar Rise on Rate Speculation; Oil Falls

By Justin Carrigan

Oct. 21 (Bloomberg) -- The pound and the New Zealand dollar rose after central bankers signaled interest rates may increase as economies emerge from the recession. Oil and emerging-market stocks declined for a second day.

The U.K. currency climbed 0.9 percent against the dollar as of 9:34 a.m. in London and the New Zealand dollar strengthened 0.9 percent. Crude oil dropped 0.9 percent in New York. The MSCI Emerging Markets Index slid 0.7 percent.

Bank of England Governor Mervyn King started preparing Britons for higher interest rates, writing in the Herald newspaper of Scotland that “it would be wise to take account” of the prospect of rising borrowing costs. Reserve Bank of New Zealand Governor Alan Bollard said a strengthening currency isn’t an obstacle to raising rates. Australia last week became the first Group of 20 nation to lift its benchmark rate since the start of the global financial crisis.

“This is the sort of stage where the market gets excited about currencies, when central banks start priming the market to expect higher rates,” Steven Barrow, head of Group of 10 research at Standard Bank Plc, said in a Bloomberg Television interview in London.

The pound advanced against all but one of the 16 most- traded currencies tracked by Bloomberg, rising 0.9 percent compared with the euro. The New Zealand dollar climbed versus all 16, adding 1 percent against the dollar and 0.9 percent compared with the euro.

‘Seismic Shift’

“King is turning and so is the pound,” Neil Jones, head of European hedge-fund sales in London at Mizuho Corporate Bank Ltd., wrote in an e-mailed note. This is a “seismic shift in thinking at the Bank of England,” he said.

U.K. gilts led declines in government bonds, with the yield on the 10-year note rising 9 basis points to 3.63 percent after King’s remarks. Minutes of the Bank of England’s Oct. 8 meeting published today showed policy makers voted 9-0 to hold the benchmark rate at a record low 0.5 percent and keep its asset- purchase program unchanged at 175 billion pounds ($289 billion).

More than $2 trillion in stimulus packages and rising demand in Asia are helping to haul the world economy out of its first recession since World War II. This month, the International Monetary Fund raised its forecast for global growth next year, predicting 3.1 percent expansion, compared with a July forecast of 2.5 percent. The U.K. economy will increase 0.9 percent, up from an earlier forecast of 0.2 percent, the IMF said.

Emerging Markets

The MSCI Emerging Markets Index posted its first back-to- back declines in almost three weeks after China Mobile Ltd. earnings missed analysts’ estimates and the retreat in oil dragged down energy producers. China Mobile, the world’s first phone company with more than half a billion subscribers, declined 1.9 percent in Hong Kong.

Europe’s Dow Jones Stoxx 600 Index slipped for a second day, losing 0.3 percent. Deutsche Bank AG retreated 3.7 percent in Frankfurt after saying it depended on a tax gain for a threefold increase in third-quarter profit.

Automakers posted the steepest drop among 19 industry groups in the Stoxx 600, falling 1.8 percent. PSA Peugeot Citroen, Europe’s second-biggest carmaker, slid 6.2 percent in Paris after reporting a 7.7 percent drop in third-quarter sales.

Futures on the Standard & Poor’s 500 Index decreased 0.2 percent, indicating the benchmark gauge for U.S. equities may drop for a second straight day. The measure retreated yesterday as a disappointing report on housing starts overshadowed better- than-estimated profits at Apple Inc. and Caterpillar Inc.

Improving Earnings

Earnings have surpassed analysts’ projections for 79 percent of the S&P 500 companies that have released results third-quarter results so far, according to Bloomberg data. About 72 percent beat the average estimate in the second quarter, matching the highest proportion in data going back to 1993.

More than 130 S&P 500 companies are reporting results this week, with Morgan Stanley, Boeing Co., Wells Fargo & Co. and Freeport-McMoran Copper & Gold Inc. scheduled to announce today.

Base metals prices were mostly higher on the London Metal Exchange, with copper for three-month delivery rising 0.3 percent to $6,435.75 a ton. Crude oil for December delivery fell 71 cents to $78.41 a barrel in electronic trading on the New York Mercantile Exchange, after reaching a one-year high this week.

Sunday, October 18, 2009

Housing, Leading Index Probably Improved: U.S. Economy Preview

By Courtney Schlisserman

Oct. 18 (Bloomberg) -- Homebuilders and real-estate agents were probably busier in September, and the index of leading indicators increased, adding to evidence the next U.S. expansion has begun, economists said before reports this week.

Construction started last month on 610,000 houses at an annual rate, the most since November, according to the median forecast of 53 economists surveyed by Bloomberg News before an Oct. 20 Commerce Department report. Sales of existing homes rose to a two-year high and the gauge of the economy’s future course advanced for a sixth month, other reports may show.

Housing is stabilizing as Americans take advantage of government programs, including credits for first-time buyers and efforts to lower borrowing costs, aimed at stemming the recession. Some Federal Reserve policy makers remain concerned the economy will relapse should the stimulus be removed too soon, signaling interest rates will remain low for months.

“The housing market is recovering from very depressed levels,” said Zach Pandl, an economist at Nomura Securities International Inc. in New York. “We’re definitely emerging from recession, finding a bottom in some sectors, but the recovery is still uneven and it’s not particularly vigorous.”

Building permits, a sign of future activity, may have risen to a 590,000 pace, also the highest since November, the Commerce Department’s report on housing starts may show, according to the survey median.

In April, builders broke ground on new homes at a record- low 479,000 pace.

Leading Index

The index of leading economic indicators, due from the New York-based Conference Board on Oct. 22, may have risen 0.9 percent, according to the survey of economists. The gain was probably driven by the increase in building permits, a drop in claims for jobless benefits and an improvement in consumers’ outlooks, economists said.

A sixth consecutive gain in the leading index would mark the best performance since early 2004.

U.S. stocks have risen in recent weeks amid better-than- forecast earnings and signs the economy is improving. The Standard & Poor’s 500 Index closed at the highest level in a year on Oct. 15.

Google Inc., the world’s most popular Internet search engine, plans to resume hiring and acquisitions after the recovering economy helped third-quarter sales beat analysts’ estimates. Large customers stepped up spending on Google ads last quarter, a rebound from the first half of the year, Chief Financial Officer Patrick Pichette said.

‘Incredible Recession’

“We weathered what is an incredible recession,” Pichette said in an interview last week. “If you have all this behind you, the only outcome you should have as management is: ‘OK, let’s build now.’”

Fed policy makers at their September meeting decided to slow purchases of mortgage securities to avoid disrupting the housing market while extending the duration of the program by three months. In the minutes of the Sept. 22-23 meeting, which were released last week, they noted the housing market and retail sales got a boost from government incentives.

The Fed’s Beige Book report on regional economies, scheduled to be released on Oct. 21, will be used by policy makers to gauge the state of the housing market and the economy overall when they meet again in the first week of November.

An Oct. 23 report from the National Association of Realtors may show that sales of existing homes rose to a 5.35 million rate last month, according to the Bloomberg survey. That would be the highest level since August 2007.

Less Pessimistic

Tomorrow, a report may show builder confidence continued to climb this month. The National Association of Home Builders/Wells Fargo index probably rose to 20 from 19, economists surveyed said. It would be the seventh straight increase. While higher, readings less than 50 still signal that most respondents view conditions as poor.

Finally, a Labor Department report on Oct. 20 may show wholesale prices were unchanged in September, compared with a 1.7 percent increase a month earlier. Excluding food and energy, prices increased 0.1 percent, compared with a 0.2 percent gain in August, according to the survey, indicating inflation isn’t a risk as the economy recovers.

Bloomberg Survey

Release Period Prior Median
Indicator Date Value Forecast
NAHB Housing Index 10/19 Oct. 19 20
PPI MOM% 10/20 Sept. 1.7% 0.0%
Core PPI MOM% 10/20 Sept. 0.2% 0.1%
PPI YOY% 10/20 Sept. -4.3% -4.3%
Core PPI YOY% 10/20 Sept. 2.3% 2.0%
Housing Starts ,000’s 10/20 Aug. 598 610
Building Permits ,000’s 10/20 Aug. 580 590
Initial Claims ,000’s 10/22 10-Oct 514 517
Cont. Claims ,000’s 10/22 3-Oct 5992 5990
LEI MOM% 10/22 Sept. 0.6% 0.9%
Exist Homes Mlns 10/23 Sept. 5.10 5.35
Exist Homes MOM% 10/23 Sept. -2.7% 5.0%

Friday, October 9, 2009

Dollar Rises, Bonds Fall on Bernanke Comments; Commodities Drop

By Justin Carrigan

Oct. 9 (Bloomberg) -- The dollar rose against the yen and the euro and government bonds fell after Federal Reserve Chairman Ben S. Bernanke said the bank will tighten monetary policy once the economy improves. Commodities slipped.

The U.S. currency advanced as much as 1.2 percent versus the yen, the most since Aug. 7, and was up 0.4 percent at 8:08 a.m. in New York. Yields on two-year Treasuries and German notes jumped as much as eight basis points. Copper fell 1.1 percent. Futures on the Standard & Poor’s 500 Index declined 0.3 percent.

The Fed will need to raise rates “at some point” to control inflation, Bernanke said at a Board of Governors conference yesterday in Washington. Australia’s Reserve Bank unexpectedly increased its key rate Oct. 6. The MSCI World Index of 23 developed stocks has advanced 4.5 percent this week as U.S. jobless claims fell more than analysts estimated and Alcoa Inc. reported an unexpected profit.

Bernanke’s remarks “were interpreted to suggest that the Fed stood ready to tighten,” Gareth Berry, a currency strategist at UBS AG in Singapore, wrote in a note today. “The comments come as investors look for evidence that the policy tightening timetables of other central banks will be brought forward” after the Australian move.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against the yen, euro, Swiss franc, pound, Swedish krona and Canadian dollar, rose 0.2 percent to 76.054. It fell to 75.767 yesterday, the lowest level since August 2008.

Yen Drops

The yen fell against 13 of the 16 most-traded currencies tracked by Bloomberg, losing 0.4 percent versus the dollar, after Japan’s Cabinet office said machinery orders rose 0.5 percent in August, compared with the 2.1 percent increase predicted in a Bloomberg survey of 27 economists.

The increase in the German two-year yield narrowed the gap, or spread, with the 10-year bund by three basis points to 184 basis points, the lowest level since May 1, based on closing prices. The U.S. Treasury spread also narrowed two basis points, to 234 basis points.

Copper for delivery in three months fell as much as 1.4 percent on the London Metal Exchange, leading a decline in industrial metals. Crude oil slipped 0.7 percent to $71.18 a barrel in New York trading. Gold for immediate delivery declined 0.5 percent to $1,050.03 an ounce. The metal rose to a record for three consecutive days this week.

European Stocks

Basic-resource producers led the decline in Europe’s Dow Jones Stoxx 600 Index, which slipped 0.6 percent after earlier rising as much as 0.3 percent. BHP Billiton Ltd., the world’s largest mining company, fell for the first time in five days, losing 1.5 percent. U.S. futures dropped after the S&P 500 posted four days of gains, the longest streak in a month.

Developing-nation shares rose for a fifth day. The MSCI Emerging Markets Index added 0.3 percent, extending its weekly increase to 4.6 percent, the most since Sept. 11.

The Shanghai Composite Index of stocks in China posted its biggest gain in five weeks as the nation’s markets opened after an eight-day holiday.

China’s banking regulator said today it would be premature for the government to start winding down stimulus efforts in the world’s third-largest economy.

“It’s far too early to talk about an exit strategy,” Liu Mingkang, chairman of the China Banking Regulatory Commission, told a conference in Hong Kong. The economy “may face a bumpy road ahead.”

The International Monetary Fund on Oct. 1 raised its forecast for global growth next year as more than $2 trillion in stimulus packages and demand in Asia pull the world economy out of its worst recession since World War II. The Washington-based IMF said the economy will expand 3.1 percent in 2010, after a July forecast of 2.5 percent.

Monday, October 5, 2009

Australia’s August Trade Deficit Narrows as Oil Imports Fall

By Jacob Greber

Oct. 6 (Bloomberg) -- Australia’s trade deficit narrowed in August as imports of oil and consumer goods fell.

The shortfall narrowed to A$1.52 billion ($1.33 billion) from a revised A$1.78 billion in July, the Bureau of Statistics said in Sydney today. The median estimate in a Bloomberg survey of 19 economists was for a A$900 million gap.

Kamei Says Moratorium Won’t Increase Japan Bad Loans (Update1)

By Finbarr Flynn, Takahiko Hyuga and Shingo Kawamoto

Oct. 6 (Bloomberg) -- Japanese banks’ bad loans won’t be driven higher by a proposed moratorium on debt payments by struggling small companies, said Financial Services Minister Shizuka Kamei.

Lenders won’t have to classify loans encompassed by the plan as non-performing, Kamei, 72, said in an interview yesterday at his office in Tokyo. That means they won’t be forced to boost provisions when borrowers postpone repayments of interest or principal, he said. At the same time, Kamei vowed to push banks to extend more credit to small businesses after bankruptcies hit a six-year high in Japan.

“We’re going to get financial institutions to provide these firms with more loans,” said Kamei. “Banks won’t have to treat debt on which they provide a moratorium as bad.”

The Topix Banks Index has fallen 11 percent since Kamei, who has blamed “unbridled capitalism” for the global credit crisis, was appointed by Prime Minister Yukio Hatoyama on Sept. 16. Japan’s three largest banks, including Mitsubishi UFJ Financial Group Inc., posted combined losses of almost $14 billion last fiscal year as bad-debt charges surged.

“There is a potential for any proposal along the lines Kamei has made of debt moratoriums to backfire horribly,” said David Threadgold, a Tokyo-based analyst at Fox-Pitt Kelton. The plan could make banks more reluctant to lend to small firms, Threadgold said.

The moratorium, postponing repayment of principal and interest, will be extended to individuals as well as firms Kamei said. It will aim at giving relief to companies with about 100 million yen ($1.1 million) or less in capital.

‘Extremely Easy’ Money

Corporate bankruptcies increased 12 percent to 16,146 in the year ended March 31, the highest in six years, according to data from Tokyo Shoko Research Ltd.

“As long as I’m financial services minister, I’m not going to leave small companies in the lurch unable to get loans,” Kamei said. “If a bank takes that approach, I’ll hit them with a business improvement order.”

Publicly traded companies probably won’t be encompassed by the program, Kamei said. Japanese “salarymen” struggling to pay mortgages after bonus cuts may be eligible, he said. “We’re going to make it extremely easy for very small companies to get money,” Kamei said.

Bank Stocks Rise

The government will make allowances for any lenders whose capital ratios fall because of the moratorium legislation, which may be submitted to parliament next month.

Bank stocks rose, with Mitsubishi UFJ Financial Group Inc., the nation’s biggest lender by market value, gaining 3.7 percent to 472 yen as of 9:16 a.m. in Tokyo. Sumitomo Mitsui Financial Group Inc. increased 3.3 percent and Mizuho Financial Group Inc. rose 2.2 percent.

Kamei’s deputy minister, Kouhei Ohtsuka, who is leading a team that’s studying options for legislation, told Fuji Television on the weekend that banks shouldn’t “worry” because the government’s proposals will be workable.

Lawmakers and government officials were set to hold their first working-team meeting on legislation yesterday, Ohtsuka told reporters on Sept. 29.

Katsunori Nagayasu, president of Mitsubishi UFJ’s main banking unit and head of the Japanese Bankers Association, is ready to cooperate in aiding small companies, Kamei said Oct. 1. Kamei, who met Nagayasu that day, said at the time he would start taking opinions from banker lobbies from Oct. 7.

Kamei met yesterday with Tadashi Ogawa, head of Regional Banks Association and president of Bank of Yokohama Ltd. Ogawa in September said regional lenders aren’t forcing troubled borrowers to repay loans and are dealing with requests to reschedule repayments on an individual basis.

Thursday, October 1, 2009

U.S. Markets Wrap: Stocks Tumble as Treasuries, Dollar Rally

By Matt Townsend

Oct. 1 (Bloomberg) -- U.S. stocks fell the most in three months as Treasuries and the dollar rallied after a decline in a gauge of manufacturing and an increase in jobless claims spurred concern over the strength of a recovery from the recession.

JPMorgan Chase & Co., DuPont Co. and American Express Co. fell at least 4.2 percent to lead all 30 stocks in the Dow Jones Industrial Average lower. Treasury 30-year bond yields fell below 4 percent for the first time since April as a report showed inflation remains subdued. The dollar rallied against most of its major counterparts. Crude oil was little changed.

“The market had gotten a little ahead of the economy,” said Wayne Wilbanks, chief investment officer at Wilbanks, Smith & Thomas in Norfolk, Virginia, which manages $1.3 billion. “For the month of October we are on alert for a correction driven by the acknowledgment of a weak economic recovery.”

The Standard & Poor’s 500 Index slid 2.6 percent to 1,029.85 at 5:22 p.m. in New York a day after capping its biggest back-to-back quarterly rally since 1975. The Dow sank 203 points, or 2.1 percent, to 9,509.28. Both gauges lost the most since July 2. About 18 stocks fell for each that rose on the New York Stock Exchange, the broadest sell-off since April.

Benchmark indexes opened lower after the number of Americans filing first-time claims for unemployment benefits climbed by 17,000 to 551,000 last week. Stocks extended losses after the Institute for Supply Management said its manufacturing index dropped to 52.6 in September, lower than the reading of 54 projected by economists in a Bloomberg survey.

Not Double-Dip

Bonds rallied as signs recovery from the worst slump since the Great Depression will be slow prompted traders to reverse bets that yields would increase before tomorrow’s monthly employment report. The Labor Department may say that job losses last month totaled 175,000, according to a Bloomberg survey. The Treasury announced plans to sell $78 billion of notes and bonds over four consecutive days next week.

“We are not in the double-dip camp, but there are still headwinds for the economy,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. “There is a ton of money on the sidelines. Investors are feeling more comfortable with interest-rate risk and are moving out on the curve.”

The yield on the 30-year bond fell nine basis points, or 0.09 percentage point, to 3.97 percent, according to BGCantor Market Data. The yield touched 3.93 percent, the lowest level since April 29. The 4.50 percent security due in August 2039 rose 1 18/32, or $15.63 per $1,000 face amount, to 109 1/4.

The 10-year note yield touched 3.17 percent, the lowest level since May 21.

Prices Rise

The Fed’s preferred price measure, which excludes food and fuel, climbed 0.1 percent from the previous month and was up 1.3 percent from a year earlier, the smallest year-over-year gain since September 2001. Spending by U.S. consumers climbed 1.3 percent in August, Commerce Department figures showed in Washington.

The dollar gained much as 0.8 percent to $1.4517 versus the euro as Federal Reserve Chairman Ben S. Bernanke said he doesn’t see an “immediate risk” to the dollar’s status as the world’s main reserve currency.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the U.S. currency versus six counterparts including the euro and yen, rose as much as 0.8 percent to 77.231 today.

“We’ve seen hiccups in consistent improvement to data,” said Todd Elmer, currency strategist at Citigroup Inc. in New York. “The underlying uptick in risk aversion lent the dollar some support ahead of the payroll report.”

Gold prices fell for the first time this week as the dollar’s rebound eroded the precious metal’s appeal as an alternative investment. Silver also dropped.

‘Problem For Gold’

“It’s all dollar-related,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. “If we do see a significant rally in the dollar, that’s a problem for gold.”

Gold futures for December delivery fell $9.50, or 0.9 percent, to $999.80 an ounce on the Comex division of the New York Mercantile Exchange.

Oil for November delivery rose 12 cents to $70.73 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Futures are up 59 percent this year.

Japan’s Jobless Rate Unexpectedly Falls From Postwar Record

By Aki Ito

Oct. 2 (Bloomberg) -- Japan’s unemployment rate unexpectedly retreated in August from a postwar record.

The jobless rate fell to 5.5 percent from a record 5.7 percent in July, the statistics bureau said today in Tokyo. The median forecast of economists surveyed by Bloomberg was for an increase to 5.8 percent.

Fed Balance Sheet Shrinks 0.8% for First Decline in Eight Weeks

By Scott Lanman

Oct. 1 (Bloomberg) -- The Federal Reserve’s balance sheet contracted for the first time in eight weeks as lending to banks in the U.S. and abroad declined.

The Fed’s assets shrank $17.6 billion, or 0.8 percent, to $2.14 trillion in the week ended yesterday, the central bank said today in Washington. Credit extended through the Term Auction Facility, which sells cash loans to commercial banks, fell $17.6 billion to $178.4 billion. Currency swaps to central banks outside the U.S. slipped $2.37 billion to $56.8 billion.

While the Fed is completing purchases of housing debt and Treasuries, demand for some of the Fed’s emergency liquidity programs has waned. Fed Vice Chairman Donald Kohn said yesterday that when conditions are no longer “unusual and exigent,” some emergency lending programs “will be terminated.”

Mortgage-backed securities declined by $1.23 billion to $692.4 billion and Treasury-bond holdings increased $3.53 billion to $769.2 billion. Federal agency debt gained $1.97 billion to $131.2 billion.

Fed Chairman Ben S. Bernanke and his colleagues are trying to balance two goals: securing an economic recovery after the deepest contraction and financial crisis since the Great Depression while withdrawing fiscal and monetary stimulus in time to avoid driving inflation and borrowing costs higher.

The Fed said Sept. 24 it will further shrink auctions of cash loans to banks and Treasury securities to bond dealers, reducing the combined initiatives to $100 billion by January from $450 billion. The central bank cited “continued improvements” in financial markets.

Policy makers said Sept. 23 they will complete the Fed’s planned $1.25 trillion in purchases of mortgage securities and extended the end-date of the program to March from December. They kept the benchmark interest rate in a range of zero to 0.25 percent and repeated that rates will stay low for an “extended period.”

The Fed is reducing the TAF’s capacity to $75 billion in January from $375 billion in September.

Discount-window lending to commercial banks fell to $28.2 billion from $28.5 billion the previous week. The face value of commercial paper held by the Fed under an emergency program begun last October shrank to $36.8 billion from $38 billion on Sept. 23.

M2 money supply fell by $8 billion in the week ended Sept. 21, the Fed said. That left M2 growing at an annual rate of 7.8 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

The Fed reports two measures of the money supply each week. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M2, the more widely followed, adds savings and private holdings in money market mutual funds.

For the latest reporting week, M1 fell by $31.1 billion, and over the past 52 weeks, M1 rose 17.5 percent. The Fed no longer publishes figures for M3.

Wednesday, September 23, 2009

Bullish Estimates Fail to Keep Up With S&P 500 Gain (Update1)

By Lynn Thomasson and Michael Tsang

Sept. 23 (Bloomberg) -- Strategists at Wall Street’s biggest securities firms can’t keep up with the Standard & Poor’s 500 Index after the steepest surge since the 1930s.

The benchmark gauge for U.S. equities climbed 0.7 percent yesterday to 1,071.66, leaving it above all but one of the 10 projections by forecasters in a Bloomberg survey this month, the first time that’s happened in data going back to 1999. The average forecast for the S&P 500 from the strategists is 1,022, about 5 percent below the index’s current level.

While the strategists raised estimates by an average of 5.8 percent from March this year, they’re divided on whether the U.S. economy will be strong enough to justify further revisions. The last time the S&P 500 rose above the consensus was in 2006, when Wall Street responded by increasing projections, helping spur an 11 percent advance that ended when the index hit a record high in October 2007.

“There’s a little bit of a wall of worry right now, but the market just feels like it wants to go up,” said Michael Mullaney, a Boston-based fund manager at Fiduciary Trust Co., which oversees $9 billion. “There’s going to be a very strong near-term economic rebound greater than expectations. I think we’ll end the year higher.”

Bulls say the 58 percent advance since March 9 can continue because the U.S. economy will emerge from the worst recession since the 1930s and grow 2.9 percent in the third quarter, according to the median of 61 economists in a Bloomberg survey. S&P 500 futures rose 0.2 percent at 8:51 a.m. today in London.

Bond Sales

Credit markets are healing from the collapse of subprime mortgages in 2007 and the bankruptcy of Lehman Brothers Holdings Inc. a year ago. Investment-grade companies sold a record $836.9 billion of corporate bonds in the U.S. this year through Sept. 18 as the relative cost of borrowing narrowed, according to data compiled by Bloomberg.

The decline in credit costs will improve profitability, according to JPMorgan Chase & Co.’s Thomas Lee, the only strategist whose year-end forecast of 1,100 is above the S&P 500’s level. The index’s valuation doesn’t yet reflect prospects for a “strong” economic recovery, he said.

Bears say the highest U.S. unemployment rate since 1983 and concern the housing market will continue to deteriorate means the best is over for the rally. Frankfurt-based Deutsche Bank AG said last month that almost half of U.S. homeowners may owe more on mortgages than the properties are worth by 2011.

Share Valuations

Forecasters at Barclays Plc and Goldman Sachs Group Inc. say the gains may falter because stocks are no longer bargains. Since March, the S&P 500’s valuation doubled to 20 times the reported profit from continuing operations of its companies.

“When you start looking at valuations relative to other asset classes and relative to history, the equity market is not looking cheap any longer,” Barry Knapp, Barclays’ New York- based head of U.S. equity strategy, said in a Bloomberg Television interview. “The market looks somewhat extended.”

About $4.9 trillion has been restored to U.S. equity markets on signs that the more than $12 trillion spent, lent or committed by the U.S. government and the Federal Reserve has ended the credit crisis and revived the economy. Bond sales by investment-grade companies are 10 percent more than the record pace of 2007, Bloomberg data shows. Borrowing costs fell to the lowest in four years.

Investment-grade bond yields slipped to 5.04 percent on Sept. 22 from 9.3 percent in October 2008, the highest level since 1991, according to Merrill Lynch & Co. index data. Companies pay 230 basis points more to borrow on average than the government, the narrowest gap since February 2008. A basis point is 0.01 percentage point.

Money Flow

U.S. companies are piling up cash at the fastest rate ever compared with interest costs, setting the stage for a surge in mergers and acquisitions.

Cash relative to share prices will climb to the highest level in at least two decades next year compared with yields on corporate bonds, according to data compiled by Bloomberg and Zurich-based Credit Suisse Group AG. The previous high in 2005 preceded the two busiest years ever for takeovers.

The S&P 500 has added 5 percent this month as Northfield, Illinois-based Kraft Foods Inc.’s $16 billion bid for Cadbury Plc in London and Burbank, California-based Walt Disney Co.’s $4 billion purchase of Marvel Entertainment Inc. in New York signaled increasing confidence among executives.

Rally Conditions

Improving credit markets and more mergers aren’t enough to extend the gain in stocks, said Quincy Krosby, a market strategist for Newark, New Jersey-based Prudential Financial Inc., which oversees $580 billion. The economy must create jobs and companies earn more before that happens, she said.

“What the markets want to see, what investors want to see, is demand is picking up,” Krosby said. “We should see a pullback and the market just waiting for the data to come in. Much will depend on the earnings and guidance.”

The third-quarter earnings season starts in two weeks, when New York-based Alcoa Inc., the largest U.S. aluminum producer, reports results. Profits will have to be “dramatically” above analysts’ estimates to justify higher stock prices, according to Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist in New York.

Increasing estimates now would be “just chasing the tape,” Levkovich said in a telephone interview. “I could make an argument that momentum carries the market because people just want to throw money at it, but that’s not a really good reason to buy stocks.”

Gun Shy

The U.S. unemployment rate climbed to 9.7 percent last month, bringing the number of Americans thrown out of work since the recession began in December 2007 to 6.9 million, the most in any post-World War II contraction, Bloomberg data show.

The S&P 500’s 38 percent loss last year, the biggest since 1937, has kept some investors from pouring more money back into stocks. Individuals withdrew a total of $7.5 billion from U.S. equity mutual funds on a net basis in the four weeks ended Sept. 9, even as the index rose to an 11-month high, according to Washington-based Investment Company Institute. That’s the longest stretch of selling in more than a year.

“It’s hard for people to let go that the crisis is over,” New York-based JPMorgan’s Lee said in a telephone interview. “In a lot of people’s minds, not enough has changed since March to declare things are better.”

The S&P 500 fell as much as 57 percent from Oct. 9, 2007, through March 9. Stocks plunged as the credit-market freeze spurred $1.6 trillion in losses and writedowns at the world’s biggest financial firms, data compiled by Bloomberg.

Bouncing Back

This year’s rebound was underpinned by signs the economy is bouncing back from the longest contraction since the Great Depression. Fed Chairman Ben S. Bernanke said last week in Washington that “the recession is very likely over,” while reports on industrial production and consumer prices showed the U.S. economy is emerging from the economic slump without spurring inflation.

“We’re in the part of the business cycle where you do want exposure to equity risk,” Michael Aronstein, president of Marketfield Asset Management in New York, said on Bloomberg Television. His mutual fund has gained 14 percent since the S&P 500 peaked, compared with a 32 percent drop in the index. “For people who expect the market to make a new low, which means that sentiment would be worse, the wealth destruction would be worse, the fundamental environment would be worse -- you shouldn’t be in the business if that’s your expectation.”