Friday, April 30, 2010

* Spanish Unemployment Tops 20%, Hurting Deficit Fight (Update2)

By Emma Ross-Thomas

April 30 (Bloomberg) -- Spain’s unemployment rate rose above 20 percent for the first time in more than a decade, undermining Prime Minister Jose Luis Rodriguez Zapatero’s fight to cut the euro region’s third-largest budget deficit.

The jobless rate rose to 20.1 percent in the first quarter from 18.8 percent in the previous three months, the Madrid-based National Statistics Institute said today. The rate is above a median forecast of 19.8 percent in a Bloomberg News survey of 10 economists. Spanish unemployment is the highest in the euro region and double the average rate in the European Union, according to separate data from the EU’s statistics office.

Spanish borrowing costs have surged in the past two weeks on concern the country will struggle to push the deficit below the EU limit of 3 percent of economic output. Standard & Poor’s cut Spain’s credit rating on April 28, saying the government was underestimating its fiscal problems and overestimating growth prospects. Adding to public spending, Zapatero has extended benefits for the long-term unemployed.

“The government’s scenario is a bit more optimistic than what we’re seeing, so the welfare costs for the unemployed are going to be higher,” said Jesus Castillo, an economist at Natixis in Paris. “If they don’t take new measures the 3 percent deficit target is not going to be met.”

Bond Yields

The extra yield investors demand to hold Spanish debt rather than German equivalents fell to 97 basis points today from 99 basis points yesterday. The premium reached the highest in more than a year this week.

Deputy Finance Minister Jose Manuel Campa said the unemployment rate would not affect Spain’s budget-deficit forecasts, and the government was sticking to a forecast for an average jobless rate of 19 percent this year. He said the number of unemployed, at 4.6 million in the first quarter, was not expected to reach 5 million.

The Cabinet is expected to approve measures today to reduce public-administration costs and reach a 50 billion-euro ($66 billion) spending-cut target announced in January. Finance Minister Elena Salgado will appear at a weekly news conference after today’s Cabinet meeting in Madrid.

Budget Gap

At 11.2 percent of gross domestic product, Spain’s budget shortfall was the third-biggest in the euro area last year, trailing only Greece and Ireland. S&P said it expects the Spanish deficit to stay above 5 percent in 2013, the year the government has pledged to cut it to the EU’s 3 percent limit.

EU officials are speeding up efforts to agree a bailout package for Greece as the market turmoil caused by its fiscal crisis spreads through the southern euro region. Salgado urged European colleagues to be “clearer and faster” in lending aid to Greece as the situation is “generating instability” that’s affecting Spain, according to an interview published in Cinco Dias newspaper today.

S&P expects Spain’s economy to grow an average of 0.7 percent a year through 2016, and sees the jobless rate reaching 21 percent this year. The government, which says unemployment is peaking, forecasts 1.8 percent expansion next year, accelerating to 3.1 percent in 2013.

“I suspect employment will continue falling for most of the rest of this year,” said Ben May, an economist at Capital Economics Ltd. in London. “Clearly it has knock-on implications for fiscal policy.”

Jobless Benefits

The Socialist government has extended unemployment benefits for the long-term unemployed and 80 percent of those out of work receive some kind of subsidy, Labor Ministry data shows. Zapatero has pledged to maintain welfare payments even as he works to cut the budget shortfall.

Spain has some of the highest firing costs for open-ended contracts in Europe, according to the World Bank’s Doing Business Index, while around a quarter of the country’s workers have temporary contracts. The Bank of Spain says a labor-market overhaul is “urgent” as high unemployment poses a risk to banks and the Socialist government has pledged to change labor legislation after talks with unions and employers.

“If Spain maintains for a prolonged period these millions of workers out of jobs, the banking system could become an obstacle to achieving economic recovery after being a support for the economy during the crisis,” Bank of Spain Governor Miguel Angel Fernandez Ordonez said on April 13.

Banco Santander SA Chief Executive Officer Alfredo Saenz said yesterday that changes to labor rules should be carried out immediately.

The surge in unemployment is eroding support for Zapatero, who was re-elected in 2008 on pledges of full employment. The opposition People’s Party would win 40 percent of the vote, compared with 36.2 percent for the ruling Socialists, according to a poll by the state-run Center for Sociological Research carried out in January.

Yen Weakens, Euro Climbs on Greece Talks, Outlook for Growth

By Matthew Brown and Candice Zachariahs

April 30 (Bloomberg) -- The yen fell against higher- yielding currencies and the euro climbed on signs Greece may reach an agreement on budget cuts needed to win a potential $159 billion bailout.

The euro strengthened for a third day versus the dollar and the yen after European Commission President Jose Barroso said he is confident a rescue package for Greece will be completed “in days.” Japan’s currency tumbled toward the lowest level since September 2008 against Australia’s dollar as stocks gained. The pound rose versus the yen as U.K. opposition leader David Cameron won a television debate, boosting the likelihood of there being an outright winner in next week’s election.

“It looks like we’re going to get an announcement early next week, which is bringing a bit of optimism that’s hurting the yen and giving the euro some support,” said Ian Stannard, a foreign-exchange strategist at BNP Paribas SA in London. “Upside for the euro will be short-lived, because whatever aid package is agreed, the underlying problems remain.”

The yen depreciated 0.9 percent to 87.94 per Australian dollar as of 6.30 a.m. in New York, after earlier reaching 88.03, the weakest level since September 2008. Japan’s currency declined 1.1 percent to 11.7234 won.

The yen weakened to 125.89 per euro, from 124.45 yesterday. The euro advanced to $1.3315, from $1.3233, paring this week’s loss to 0.5 percent. The dollar increased to 94.55 yen, from 94.03, poised for a second monthly gain.

The euro fell 1.5 percent against the dollar in April as Greece struggled to contain its deficit and its debt was downgraded to junk status by Standard & Poor’s. That marks a fifth monthly decline, the longest stretch since November 2008.

‘Austerity’ Package

The International Monetary Fund told German lawmakers this week Greece may need as much as 120 billion euros ($159 billion). The nation has agreed on the outlines for an “austerity” package of as much as 24 billion euros in return for a loan from the European Union and the IMF, the Financial Times said, citing people familiar with the talks.

The EU, IMF and the European Central Bank are making “rapid progress” on a rescue package, Barroso said today at a briefing in Beijing. Debt restructuring is not a part of the package, he said. Barroso also said he has “no doubts” about the solidity of the euro.

“Greece looks like it’ll be rescued, suggesting the worst is over at this stage,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. Ltd. in Tokyo. “This is leading to a short-term relief rally in the euro.”

‘Risk Appetite’

The EU’s statistics office in Luxembourg said consumer prices in the euro area rose 1.5 percent in April from a year earlier, in line with the average of analyst estimates in a Bloomberg survey.

“If you can get the focus off of Greece, the incoming economic indicators for the euro zone actually look pretty good,” said Ray Attrill, global research director at Forecast Ltd. in Sydney. “The dollar and yen have benefited most from the loss of risk appetite, so any reversal of that and you’d expect to see the dollar and yen being the weaker currencies.”

The U.S. Commerce Department will say today gross domestic product expanded at a 3.3 percent annual pace from January through March, a Bloomberg survey showed. Korean factory output rose a greater-than-estimate 22.1 percent from a year earlier, according to a report from the statistics office today.

The MSCI World Index of shares rose 0.4 percent, while the Stoxx Europe 600 Index added 0.3 percent.

Australian Dollar

Australia’s dollar was set for a second weekly advance against the greenback before a Reserve Bank of Australia meeting on May 4, where policy makers will increase the benchmark interest rate, a survey of economists indicated.

“The mess in Greece is likely to settle down gradually,” said Morio Okayasu, chief analyst in Tokyo at Japan Co., a unit of the online currency trading firm Gain Capital in Bedminster, New Jersey. “An improvement in risk appetite will encourage investors to chase higher-yielding currencies such as Australia’s dollar.”

Reserve Bank Governor Glenn Stevens has raised rates five times over the past six meetings to 4.25 percent, making Australian assets a favorite among those seeking higher-yielding investments using low-cost funds. Benchmark rates are 0.1 percent in Japan and as low as zero in the U.S.

The Bank of Japan kept interest rates near zero today and said it will examine ways to help strengthen the economic recovery. The central bank’s decision came hours after government figures showed the export-led recovery is spreading, even as deflation persists.

Ichimoku Cloud

The U.S. dollar may extend this month’s gains against the yen to reach the strongest since August 2008 should it close above 95 yen, rising through the top of a weekly ichimoku cloud and its 21-month average, said Barclays Capital.

The dollar “is testing its weekly cloud cap” at 94.30 yen, strategists led by Jordan Kotick, the New York-based head of technical strategy, wrote in an e-mailed note. The dollar’s 21-month moving average is at 94.76 yen, Bloomberg data show.

“Both these trend-following techniques have a remarkably good track record of calling one- to three-year U.S. dollar moves over the last 25 years,” the analysts wrote. A close above 95 yen “would target 110.”

The greenback last traded above 110 yen on Aug. 25, 2008.

Conservative leader Cameron won the final debate of the U.K. election campaign, three instant-reaction polls showed, gaining momentum in his bid to oust Prime Minister Gordon Brown in the May 6 vote.

Cameron’s central message in the 90-minute debate in Birmingham, central England, was that 13 years of Labour Party rule had left Britain struggling to recover from its longest recession and the highest unemployment in 16 years.

The pound climbed 0.6 percent to 144.93 yen. It was little changed at $1.5323, after earlier rising as much as 0.5 percent.

Sunday, April 18, 2010

Greek Prime Minister George Papandreou has said his country is making "preparatory moves" to take advantage of a multi-billion euro rescue package.

BBC News

He added, however, that Greece would not necessarily make a formal request for help.

On Sunday, the eurozone and International Monetary Fund (IMF) agreed details of a loan package to help debt-ridden Greece.

Concerns about Greece's high levels of debt have put pressure on the euro.

The currency fell by 1 cent against the dollar on Thursday, and slipped a further 0.54% on Friday to close at $1.3506.

High debts

On Tuesday, Greece successfully raised 1.56bn euros ($2.1bn; £1.4bn) in an over-subscribed issue of bonds, designed to raise money to repay some of its debt.

However, the country's finance ministry said on Thursday that it had written to the European Union, European Central Bank and IMF to discuss the rescue plan.

The IMF's managing director, Dominique Strauss-Kahn, responded to the letter, saying he would send a team to Athens on Monday to begin negotiations.

Many analysts believe Greece will have little choice but to ask for help as it will not be able to raise enough money, at an affordable rate, to pay off its debts.

Greece needs to borrow about 11bn euros by the end of May, and a total of 54bn euros by the end of the year.

Monday, April 12, 2010

Australian Business Confidence Near Eight-Year High (Update1)

By Jacob Greber

April 13 (Bloomberg) -- Australian business confidence held in March close to its highest level in almost eight years as companies reported a surge in forward orders that suggests the economy is weathering higher central bank borrowing costs.

The confidence index slipped 3 points from February to 16, according to a National Australia Bank Ltd. survey of more than 400 companies between March 25 and March 31 released in Sydney today. The bank’s business conditions gauge, a measure of hiring, sales and profits, rose 5 points to a two-year high of 13.

Robust business sentiment was a key reason central bank Governor Glenn Stevens continued this month a series of world- leading interest rate increases to prevent a surge in inflation. National Australia today raised its forecast for gross domestic product growth this year to 3.5 percent from a previous prediction of 3 percent and said GDP is expected to expand 4.25 percent in 2011.

“The key drivers are faster than previously expected business investment, stronger consumption spending and export growth,” said Alan Oster, chief economist at National Australia in Melbourne. “This environment is clearly more challenging for inflation with faster wages growth, as skill shortage issues re- emerge, and the output gap reversing quickly.”

The Australian dollar traded at 92.50 U.S. cents as of 11:34 a.m. in Sydney from 92.47 cents just before the report was released. The two-year government bond yield was unchanged at 4.94 percent.

Mining Boom

Governor Stevens cited a forecast surge in exports of raw materials such as iron ore and coal, as well as energy from projects such as Chevron Corp.’s Gorgon gas project in Western Australia, after boosting Australia’s benchmark overnight cash rate target on April 6 by a quarter percentage point to 4.25 percent, the fifth such move since early October.

“The situation where we needed historically low interest rates has passed,” central bank Assistant Governor Guy Debelle told a Senate committee hearing in Sydney yesterday. “So we’re moving back to something around average levels, which is not far from where we are now.”

GDP grew in the fourth quarter at the fastest pace in almost two years, rising 0.9 percent from the previous three months. The economy expanded 2.7 percent from a year earlier.

Companies such as BHP Billiton Ltd. have already signaled that rising demand for resources threatens to deepen a skills shortage in regions such as Western Australia, where most of the nation’s iron ore for export is mined.

‘Watched Carefully’

“Wage pressures continue to build,” said Oster, and will “need to be watched carefully in the period ahead.” Payroll costs increased 1.1 percent in the three months through March, the fastest pace since October 2008, today’s report shows.

Employers added 19,600 jobs last month, keeping Australia’s unemployment rate at 5.3 percent, a report showed last week. That’s almost half the level of the U.S. and Europe, where the jobless rates are 9.7 percent and 10 percent respectively.

“Perhaps the most marked development has been the surge in mining confidence as Asian economies rebound and commodity prices surge,” said Oster.

That echoes comments by Governor Stevens last week, when he said income from exports is rising, “adding to incomes and fostering a build-up in investment in the resources sector.”

Reserve Bank of Australia policy makers will boost borrowing costs again in May, August, September and December, National Australia predicts.

A gauge of forward orders jumped 4 points to 10, capacity utilization rose to 82.1 percent from 80.7 percent, today’s report shows.

Monday, April 5, 2010

RBA to make close call on rate hike

ABC News

Economists are divided about whether the Reserve Bank will lift interest rates today.

Last month the bank lifted the official cash rate by 25 basis points to 4 per cent after having left rates on hold in February.

Fourteen out of 23 economists surveyed by Bloomberg expect the Reserve to lift rates by a quarter of a percentage point today.

Financial markets have also been factoring in a greater than 50 per cent chance of rates rising.

But JP Morgan economist Stephen Walters says recent weak economic data may not justify back-to-back rate rises.

"We suspect that it's still a very close call and yes, there's a chance that rates could go up to 4.25 per cent," he said.

"But I think on balance when you look through the factors that the Reserve Bank board will be looking through, I think there's still a fairly persuasive case for the Reserve Bank to be pretty cautious here."

He says RBA governor Glenn Stevens's recent warnings to home owners about rising interest rates may actually be intended to remove the need to lift rates today.

Mr Stevens made the warnings in an unprecedented appearance on commercial breakfast television, saying property was not an easy path to prosperity.

But Mr Walters says Mr Stevens's comments could have the same effect as a rate rise this month.

"It's quite legitimate for him to be out, as he was last week, talking about what his medium-term view is on interest rates and some of the exuberant activity we're seeing in the housing market," he said.

"And in fact we look at that as a substitute for an interest rate hike this week."

Meanwhile, a business research company says its latest business expectations survey points to an improvement in the economy.

But it adds that this does not necessarily mean a rise in interest rates.

Dun and Bradstreet's outlook for the June quarter predicts a strong finish to the financial year with sales and profit expectations at their highest in at least five years.

The survey also shows concerns about wages growth is overtaking worries about rising interest rates.

Dun and Bradstreet's economic consultant Dr Duncan Ironmonger says the survey's positive outlook does not necessarily mean higher interest rates are on the cards.

"There are some other indicators around looking a bit backwards, like the February retail sales and February building approvals, which showed some seasonally adjusted declines which shows a bit of tempering of the optimism," he said.

Thursday, April 1, 2010

Treasuries Poised for Second Weekly Loss Before Payrolls Report

By Theresa Barraclough

April 2 (Bloomberg) -- Treasuries headed for a second weekly loss on speculation a Labor Department report today will show U.S. companies added the most jobs in three years last month, damping demand for the safety of government debt.

Ten-year yields were within five basis points of the highest level since June after the U.S. announced yesterday it will sell $82 billion of notes and bonds next week, including a record-tying $40 billion sale of three-year securities. Trading of Treasuries will close early today for the Good Friday holiday.

“People will be accumulating short positions before the payrolls data,” said Akira Takei, a manager in the international bond-investment department in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank. “The market might have a knee-jerk reaction to sell after the data. The reaction may be intensified due to the lack of liquidity.”

The yield on the benchmark 10-year note fell one basis point to 3.87 percent as of 1:55 p.m. in Tokyo, according to BGCantor Market Data. The 3.625 percent security due February 2020 rose 2/32, or 63 cents per $1,000 face amount, to 98. The yield has increased two basis points this week.

Ten-year yields climbed to 3.92 percent on March 25, the highest level since June 11. Treasuries lost 0.9 percent in March in the first monthly drop this year, indexes compiled by Bank of America Corp.’s Merrill Lynch unit show.

Payrolls Report

U.S. payrolls increased by 184,000 last month, the most since March 2007, after falling by 36,000 in February, according to a Bloomberg News survey. The jobless rate held at 9.7 percent for a third month, a separate survey showed.

First-time jobless claims fell to 439,000 last week, from 445,000 the previous week, the Labor Department said yesterday.

“The labor markets are showing proof of finally starting to turn positive,” said Guy Lebas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia.

Manufacturing expanded in March at the fastest pace in more than five years, the Institute for Supply Management reported yesterday. Its factory index rose to 59.6, the highest level since July 2004. Readings greater than 50 signal growth.

Next week’s U.S. debt sales will also include $8 billion in 10-year Treasury Inflation Protected Securities, $21 billion in 10-year notes and $13 billion in 30-year bonds, the Treasury announced. The auctions will take place over four days starting with the TIPS sale on April 5.

‘Quite Muted’

Bonds found buyers on speculation yields near the highest since June will lure investors as the Federal Reserve maintains it pledge to keep interest rates low for an “extended period.”

“This level is attractive,” said Yasutoshi Nagai, chief economist in Tokyo at Daiwa Securities Capital Markets Co., a unit of Japan’s second-largest brokerage.

Fed Bank of New York President William Dudley said yesterday the U.S. economic recovery may be “quite muted” and job growth is too slow, justifying low borrowing costs for a long period.

Inflation will probably stay very low as slack diminishes slowly in an economy that’s “qualitatively different from previous post-World War II business cycles,” Dudley said in a speech in Lexington, Virginia.

The difference between yields on 10-year notes and TIPS, a gauge of trader expectations for consumer prices, was 2.26 percentage points, compared with 2.41 percentage points at the beginning of the year.

“Current yields still look attractive against the backdrop of the Fed remaining on hold for an extended period,” Sergey Bondarchuk, an interest-rate strategist in New York at BNP Paribas SA, one of 18 primary dealers that are obliged to bid at Treasury auctions, wrote in a report dated yesterday.

BOJ Said to Consider Raising Japan Economy Assessment (Update1)

by Masahiro Hidaka and Mayumi Otsuma

April 2 (Bloomberg) -- Bank of Japan policy makers will consider raising their economic assessment next week after mounting evidence that the export-led recovery exceeds their expectations, three people familiar with the matter said.

The board may stop saying the expansion will “remain moderate” in coming months at the April 6-7 meeting because demand from emerging markets is spurring exports and production, according to one of the people, who spoke on condition of anonymity. The central bank’s Tankan survey yesterday showed big manufacturers became the least pessimistic since 2008.

Signs of a sustained recovery may be enough for Governor Masaaki Shirakawa to put off any decision to increase the central bank’s liquidity injections until the following policy meeting at month-end. Board members remain open to adding more cash because of the nation’s persistent deflation, according to the people.

“Robust demand from overseas, especially from China, is driving Japan and the benefit is gradually spreading to households,” said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. “There won’t be any change to rates and other credit policy next week,” he said, adding that he anticipates the BOJ will raise its assessment.

Second Meeting

The board’s April 30 meeting includes a discussion of members’ semiannual economic projections, and may serve as a better time to consider further changes to monetary policy. The bank last month increased by 10 trillion yen ($107 billion), to 20 trillion yen, a program that offers three-month loans to banks at 0.1 percent, the same as the benchmark interest rate.

Prime Minister Yukio Hatoyama’s government will probably sustain pressure on the bank to bring an end to consumer-price declines this year, economists said. Finance Minister Naoto Kan repeatedly urged the BOJ to step up its efforts to defeat deflation, which threatens to erode corporate earnings and make debts harder to pay off, before the March move.

The semiannual outlook “will provide the bank with a good opportunity to take further policy easing,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo, who has previously worked at the Bank of Japan. “Political pressure on the bank to do more will undoubtedly increase” ahead of a July upper-house election, she said.

Term of Loans

The BOJ is reluctant to extend the period of loans beyond three months, the people said. Such a step may hamper the money market’s ability to function without the central bank’s lifeline.

Should the central bank ease policy further, some board members are likely to dissent because of the economy’s improvements, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. Members Miyako Suda and Tadao Noda opposed last month’s credit expansion.

“The number of dissenters may increase from the March board meeting,” Muto said.

The Tankan index of sentiment among large industrial companies rose in March to minus 14, the fourth quarterly gain and the highest level since September 2008, the month when Lehman Brothers Holdings Inc. collapsed. The negative figure means pessimists still outnumber optimists.

The Nikkei 225 Stock Average climbed 1.4 percent yesterday to the highest level since October 2008 as the survey reinforced optimism that exports will sustain Japan’s recovery from its worst postwar recession, even amid lingering deflation.

Renesas Electronics

Renesas Electronics Corp. is among exporters benefiting from Asian demand. The company forecasts revenue may climb about 10 percent in its first year of operations, thanks to demand from China and chips used in factory equipment, President Yasushi Akao said this week.

The central bank said last month that the economy is “picking up” because of policy stimulus measures at home and abroad and there is “not yet sufficient momentum to support a self-sustaining recovery in domestic private demand.”

JPMorgan Chase & Co. economists yesterday boosted their estimates for economic growth for the first half of 2010 to an annual rate of 2.75 percent from 1.6 percent. In a research note, the analysts said the expansion may slow to around 2 percent in subsequent quarters on “reduced fiscal stimulus to consumption and public works and a more modest contribution from net trade.”

The improvement may prompt BOJ officials to predict price changes will approach zero percent next fiscal year when they update their outlook later this month, one of the people said. Currently they predict a 0.2 percent decline in consumer prices excluding fresh food next fiscal year, following a 0.5 percent drop in the period ending March 2011.

Inflation Forecast

Any upgrade to the price assessment is unlikely to be big enough to herald an end to the bank’s policy of keeping interest rates near zero. The board considers inflation to be stable within a positive range of up to 2 percent, with a median of 1 percent.

Japan, the only Group of Seven nation still reporting consumer-price declines, is easing monetary policy just as its counterparts in Asia and elsewhere are beginning to tighten credit.

“The BOJ is making it clear that it will maintain an accommodative stance, while the central banks of the U.S. and Europe are exploring ways to exit,” said Ryutaro Kono, chief economist at BNP Paribas in Tokyo. “The prevailing view is that the BOJ will keep an ultra-low interest-rate policy for longer than anyone else in the world.”