Finance News

U.S. Consumer Credit Climbed by $19.3B in Dec.

2012-02-07T15:46:00.000-08:00

By Meera Louis - Feb 8, 2012 4:26 AM GMT+0800

Consumer borrowing in the U.S. rose more than forecast in December, driven by demand for auto and student loans.

Credit increased by $19.3 billion to $2.5 trillion, Federal Reserve figures showed today in Washington. The gain topped the $7 billion median forecast of economists surveyed by Bloomberg News and followed a $20.4 billion advance the prior month.

Consumers “are willing to take on this debt because there is some increasing degree of confidence in the economy,” said Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, who projected credit would climb by $15 billion, the highest in the Bloomberg survey. “Consumers over the past several years have done a pretty good job of repairing their balance sheets.”

An improving job market may be giving households the courage to take on more debt in order to sustain spending, which accounts for about 70 percent of the economy. At the same time, increasing dependence on credit may be an indication the gains in employment have yet to push wages high enough to single- handedly give consumers the means to keep shopping.

The median forecast was based on a survey of 37 economists. Estimates ranged from a decrease of $8 billion to an increase of $15 billion.

The back-to-back increase at the end of 2011 was the biggest since October-November 2001.
Auto, School Lending

Non-revolving debt, including educational and auto loans increased by $16.6 billion in December, the biggest gain since November 2001, today’s report showed. The Fed’s report doesn’t track debt secured by real estate, such as home equity lines of credit.

Industrywide sales of cars and light trucks totaled 12.8 million for all of 2011, a 10 percent increase from 2010, according to researcher Autodata Corp.

Demand for credit may keep growing as demand keeps improving. Auto sales climbed to a 14.1 million annual rate last month, according to industry data. Excluding a surge in August 2009 that reflected the government’s “cash-for-clunkers” program, it was the strongest month since May 2008.

General Motors Co. (GM) and Ford Motor Co. (F), the largest automakers by U.S. sales, forecast industrywide deliveries will rise to as much as 14 million in 2012, including medium- and heavy-duty trucks.

Revolving debt, which includes credit cards, climbed by $2.76 billion, according to the Fed’s statistics.
Credit Cards

MasterCard Inc., the world’s second-biggest payments network, last week said fourth-quarter profit climbed 24 percent as spending with credit and debit cards increased. Debit-card purchases increased 18 percent from the same time a year earlier, while those on credit cards rose 6.6 percent. Shares of the Purchase, New York-based company surged 66 percent in 2011, the fourth-best performer in the Standard & Poor’s 500 Index.

Employers added 243,000 workers to payrolls in January, exceeding all forecasts of economist surveyed by Bloomberg, and the jobless rate unexpectedly dropped to a three-year low of 8.3 percent, figures from the Labor Department showed last week.

A report from the Labor Department today showed there were almost four unemployed Americans vying for each job vacancy in December, more than twice the number before the recession began in December 2007. That may explain why wages have yet to pick up, prompting households to borrow.

Hourly earnings were up 1.9 percent in January from the same month in 2011 on average, the smallest year-over-year gain since April, the Labor Department reported last week. For production workers, the 1.5 percent increase was the smallest in records going back to 1965.

Greece, Troika Work on Final Rescue Draft

2012-02-07T15:45:00.000-08:00

By Maria Petrakis, Natalie Weeks and Marcus Bensasson - Feb 8, 2012 4:59 AM GMT+0800

Greek Prime Minister Lucas Papademos postponed a meeting with heads of the political parties supporting his caretaker government a second time in as many days as the government and international creditors haggled over terms to secure a second aid package.

Papademos will meet with the leaders in Athens tomorrow, instead of tonight as previously scheduled, a spokeswoman for his office said. Instead, he will meet tonight with the so- called troika, comprising the European Commission, the European Central Bank and the International Monetary Fund, to put the final touches to terms required for a 130 billion-euro ($172 billion) rescue package, the spokeswoman said.

The delay is yet another hitch in completing a package that’s been on the table since July as the government struggles to wind up financing to avert a collapse of the economy, risking a new round of contagion in the euro area. With the country facing a 14.5 billion-euro bond payment on March 20, German Chancellor Angela Merkel warned yesterday that “time is running out” to reach an accord.

A Greek official said earlier the government and international creditors were close to a final draft of an agreement on budget and structural measures needed to extend the financial lifeline.
Further Cuts

While the prime minister and party chiefs have agreed to make further cuts this year equal to 1.5 percent of gross domestic product, they have yet to close gaps over measures demanded by creditors for the rescue. Unions, which struck today, have derided the conditions as “blackmail.”

“It is clear we are going into another drama for Greece with many questions unanswered,” Patrick Legland, head of research at Societe Generale SA, told Bloomberg Television today. “It’s kind of a catch-22 where they have to reduce their deficit but there is no growth. It’s very tricky.”

At stake is whether Greece wins the bailout, secures a debt write-off with private creditors and remains in the euro region. Finance Minister Evangelos Venizelos told reporters late yesterday that “failure of these talks, failure of the plan, the country’s bankruptcy, means even greater sacrifice.”

The euro rose 0.9 percent to $1.3254 at 10:16 p.m. Athens time after touching $1.3270, the highest level since Dec. 12. The Stoxx Europe 600 Index slipped 0.3 percent.
Elections Due

With elections due as early as April, Greek political leaders are arguing over demands such ensuring the viability of pension funds and reducing wage- and non-wage costs to boost competitiveness. Greece still needs to agree on 600 million euros of fiscal measures for 2012, a government official told reporters in Athens today.

Efforts to win a second bailout from the troika have hung in the balance over the past five days as negotiations in Athens failed to clinch an agreement on measures demanded by lenders, which may include a cut in the minimum wage, lower pensions and immediate layoffs for as many as 15,000 state employees.

Citigroup Inc. raised the probability that Greece will be forced to leave the euro area in the next 18 months to 50 percent from 25 percent to 30 percent previously.

Merkel said today that the impact of a Greek exit from the euro would be “incalculable,” and restated her determination to keep Greece in the single currency region.

“I don’t want Greece to leave the euro and therefore the question doesn’t arise,” Merkel said in a speech in Berlin. “I won’t take part in any effort to push Greece out of the euro. It would have incalculable consequences.”

Even so, Merkel said that there is “no way around” Greece carrying out reforms. Greece is in a “very complicated situation”, she said.
Museums Shut

Adding to pressure on Papademos and political leaders jostling ahead of the elections, about 10,000 people marched through the capital after the biggest public-sector and private- sector union groups, ADEDY and GSEE, held a 24-hour general strike. The walkout shut down government services, courts, schools, museums and ferry services. Dockworkers and bank employees also walked off the job.

The troika argues that lower wage costs and pension cuts are among reforms necessary to boost competitiveness in the country. Those opposed say the cuts would deepen the country’s recession, now in its fifth year.
New Democracy

Antonis Samaras, the head of the second-biggest party, New Democracy, has indicated he will oppose measures that will deepen the country’s downturn. George Karatzaferis, the head of Laos, one of the three supporting Papademos, said he would seek assurances that the measures would lead the country out of the crisis and said the “aggressive humiliation” of Greece is unacceptable.

Guarantees from Greek political leaders such as Samaras, who leads in opinion polls, are key to securing the funds from the EU and IMF. International lenders want assurances that whoever wins the next election will stick to pledges made now to receive financing.

Samaras’s party has 31 percent support from voters, according to a Public Issue poll released today, compared with 8 percent for the socialist Pasok party, which is the biggest party in the current parliament. The survey of 1,002 Greeks showed a growing number of Greeks wanting elections immediately and waning support both for Papademos and the three parties that back him.
Rescue Blueprint

The rescue blueprint includes a loss of more than 70 percent for bondholders in a voluntary debt exchange that will slice 100 billion euros off 200 billion euros of privately-held Greek debt and loans that will probably exceed the 130 billion euros now on the table.

Papademos met tonight for “constructive” talks with Charles Dallara, managing director of the International Institute of Finance, which has negotiated the terms of the swap and Deutsche Bank AG Chairman Joseph Ackermann, according to an IIF statement.

A formal offer for the debt swap must be made by Feb. 13 to allow all procedures to be completed before the March 20 bond comes due. Parliament may be called to vote on the terms of the writedown on Feb. 12, state-runs Athens News Agency reported, without saying how it got the information.

Creditors are prepared to accept an average coupon of as low as 3.6 percent on new 30-year bonds in the exchange, said a person familiar with the talks, who declined to be identified because a final deal hasn’t been struck yet.

Dow Rises Toward Highest Level Since ’08

2012-02-07T15:44:00.000-08:00

By Rita Nazareth - Feb 8, 2012 5:28 AM GMT+0800

U.S. stocks advanced, sending the Dow Jones Industrial Average to its highest level since May 2008, as Greece made progress on measures to secure international aid.

Seven out of 10 groups in the Standard & Poor’s 500 Index gained, helping the measure rebound from an earlier decline. McDonald’s Corp., the world’s biggest restaurant chain, added 1.4 percent ahead of its sales report. Yum! Brands Inc., owner of the KFC and Taco Bell fast-food chains, climbed 2.6 percent as earnings surged 30 percent. Anadarko Petroleum Corp. (APC), the biggest U.S. independent oil and natural-gas producer by market value, increased 5.2 percent as profit beat estimates.

The S&P 500 rose 0.2 percent to 1,347.05 at 4 p.m. New York time, wiping out an earlier decline of as much as 0.6 percent. The Dow advanced 33.07 points, or 0.3 percent, to 12,878.20.

“We need to see some real austerity from Greece,"Hank Smith, chief investment officer at Haverford Trust Co. in Radnor, Pennsylvania, said in a telephone interview. His firm manages about $6.5 billion. "When we see that, we will have more confidence that Europe is serious about growth. I have confidence that we’ll get some sort of resolution that allows for additional funding."

Greek Prime Minister Lucas Papademos postponed a meeting with heads of the political parties supporting his caretaker government a second time in as many days as the government and international creditors haggled over terms to secure a second aid package. Papademos will meet with the leaders in Athens tomorrow, instead of tonight as previously scheduled, a spokeswoman for his office said. In the U.S., consumer borrowing rose more than forecast in December.
Earnings Season

Today’s gain put the S&P 500 about 1.2 percent away from its peak nine months ago, which would send it to the highest level since June 2008. The index rose 7.1 percent this year amid better-than-expected economic data and corporate profits. Earnings beat projections at 68 percent of the 280 companies in the S&P 500 that reported quarterly results since Jan. 9, according to data compiled by Bloomberg.

The S&P 500 Consumer Services Index had the biggest advance among 24 industries, rising 0.9 percent.

McDonald’s added 1.4 percent, the most in the Dow, to $100.91. It may say tomorrow that sales at global stores open at least 13 months gained 5.8 percent in January, according to the average estimate of six analysts surveyed by Bloomberg News.

Yum gained 2.6 percent to $64.85. The company, with about 18,800 restaurants outside the U.S., said fourth-quarter sales at stores open at least 12 months grew 21 percent in China. Yum said it opened a record 656 stores last year in the Asian nation, where it gets more than 40 percent of its revenue.
Coca-Cola

Coca-Cola Co. advanced 0.8 percent to $68.55. The largest soft-drink maker reported fourth-quarter profit that topped analysts’ estimates as teas and juices boosted sales in Asia.

Anadarko climbed 5.2 percent to $87.21. Output rose 12 percent to the equivalent of 683,000 barrels of oil a day during the last three months of 2011, The Woodlands, Texas-based company said. Sales volumes climbed to 63 million barrels at an average price of $104.82 a barrel of oil and condensate, more than the $98 estimate from Raymond James & Associates Inc.

Cliffs Natural Resources Inc. rose 0.7 percent to $75.51. The iron-ore producer yesterday sold for 6.4 times its cash from operations, after deducting capital expenses, according to data compiled by Bloomberg. That was less than every other metals or mining company in the U.S. or Canada exceeding $5 billion in market value, and a 70 percent discount to the median.
Takeover Target

With Glencore International Plc and Xstrata Plc agreeing to merge to create a $90 billion global mining company, Cliffs may attract interest from BHP Billiton Ltd. or Rio Tinto Group, Lutetia Capital said. An acquirer could pay a 30 percent premium and still get Cliffs for less than any comparable publicly traded mining company versus its free cash flow, the data show.

"There could be more vertical integration” after Glencore and Xstrata, Mark Keller, chief executive officer of Confluence Investment Management in St. Louis, which manages $1 billion including shares of Cliffs, said in a telephone interview. As a result, “the first-rate mid-sized companies like Cliffs I think potentially become takeover targets,” he said.

Becton Dickinson & Co. slipped 3.8 percent to $77.51. The maker of medical devices and supplies cut its forecast for 2012 to no more than $5.70 a share, below an earlier projection of as much as $5.85 and the average analyst estimate of $5.80.

Walgreen Co., the largest U.S. drugstore chain, slumped 2.4 percent to $33.46. Citigroup cut its recommendation for the shares to “sell” from “neutral.”
Bull Market

A potential retreat in U.S. stocks will set the stage for the S&P 500 to approach 1,370, the level where the current bull market ran out of steam last year, according to analysts who study charts to predict market moves.

The S&P 500 had gained for five weeks through Feb. 3, the longest streak in a year, sending its 14-day relative strength index, which measures the degree that gains and losses outpace each other, to the highest level since February 2011, according to data compiled by Bloomberg.

“We need to pause, rest, consolidate in order to stay healthy,” Carter Worth, New York-based chief market technician at Oppenheimer & Co., wrote in a note yesterday. “Any such consolidation would cure the market from a tad unhealthy right back to very healthy, and would be the perfect ‘setup’ for a breakout-type move to new 52-week highs.”

China Money Supply Growth Exceed Estimates

2012-01-08T18:19:00.000-08:00

By Bloomberg News - Jan 9, 2012 9:42 AM GMT+0800

China’s December lending and money supply growth exceeded economists’ estimates, signaling monetary conditions may be easing as the nation’s central bank said it must be prepared for possible shocks from the U.S. and Europe.

New loans (CNLNNEW) totaled 640.5 billion yuan ($101 billion) for the month, exceeding the estimates of all 18 economists surveyed by Bloomberg. M2, a measure of money supply (CNMS2YOY), rose 13.6 percent, compared with the 12.9 percent median of 18 estimates.

People’s Bank of China Governor Zhou Xiaochuan said yesterday the nation must be ready to combat possible shocks from Europe’s debt crisis and an uncertain U.S. economic outlook, echoing comments by Premier Wen Jiabao. China last month cut the reserve requirement for banks for the first time since 2008 as Europe’s debt crisis eroded demand for its exports and consumer prices moderated to the slowest pace in 14 months.

“This is better-than-expected monetary data, suggesting monetary conditions have started to ease,” said Liu Li-Gang, a Hong Kong-based economist with Australia & New Zealand Banking Group Ltd., who previously worked at the World Bank. Liu said he expects that the central bank may cut the reserve requirement again before the Lunar New Year on Jan. 23. “Such easing will help ensure a soft landing for the Chinese economy,” he said.

The statement posted to the central bank’s website yesterday didn’t contain a figure for China’s foreign-exchange reserves, which are usually released with lending and money supply data issued at the end of each quarter.
External Shocks

Stocks in China fell. The benchmark Shanghai Composite Index (SHCOMP) was 0.4 percent lower at 9:35 a.m. local time. The measure lost 1.6 percent last week.

Money-market rates had the biggest weekly decline (CNRR007) since November last week as the central bank refrained from selling bills to help ease a cash shortage ahead of the week-long New Year public holiday. The PBOC said on Jan. 6 it will suspend debt sales ahead of the festival.

Zhou yesterday said in an interview with the official Xinhua News Agency that the global economy will face “a string” of difficulties in 2012 as a result of the European debt crisis, uncertainties in the U.S. and slowing growth in emerging markets. China must be ready to pick appropriate policy instruments to combat external shocks, Zhou was cited as saying.

Fighting inflation (CNCPIYOY) is not as urgent now as it was in early 2011, Xinhua cited Zhou as saying after a two-day meeting of financial regulators in Beijing. The National Financial Work meeting, which was attended by senior officials including Premier Wen, is held every five years to form development plans for the financial sector, Xinhua reported.
‘Relatively Difficult’

Wen last week pledged to fine tune monetary policy to preserve growth as business conditions in the first quarter may be “relatively difficult.” The nation’s export growth slowed in November to the weakest pace since 2009.

China is scheduled to release data for December exports, imports and trade balance on Jan. 10. It’s also due to issue December inflation figures on Jan. 12 and data for annual 2011 and fourth-quarter economic growth on Jan. 17, according to the nation’s statistics bureau.

The central bank’s data yesterday showed that December money supply grew at the fastest pace since July. The 12.7 percent pace reported for November was the weakest since 2001.

Lending in December was the highest monthly figure since April (CNLNNEW). The median estimate of 18 economists surveyed by Bloomberg was for 575 billion yuan of loans in the month.
Ease Liquidity

For the year, lending totaled 7.47 trillion yuan, according to the statement. The central bank may target lending in 2012 of 9 trillion yuan to 9.5 trillion yuan, said Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong.

The central bank still needs to ease liquidity in the money market to achieve more lending this year, Kowalczyk said. He said there is likely to be a cut of 250 basis points this year in the amount banks have to hold as reserves, with the first cut before the Lunar New Year holiday.

Easing in monetary conditions as indicated by the December data could also reduce the urgency for further policy easing, said Ken Peng, a Beijing-based economist at BNP Paribas SA.

In addition to lending and money supply, the December data also showed Chinese banks added 1.43 trillion yuan of deposits in the month. These funds largely came from the release of fiscal deposits into the commercial banking system as government agencies conducted concentrated spending at the end of the year, Peng said.

A “tepid” M1 money supply growth of 7.9 percent in December suggests that the increased bank deposits may have a “lifting impact” on January money supply, Peng said.

In a separate statement also issued yesterday, the central bank said it will continue to implement prudent monetary policy this year while maintaining policy continuity and controlling inflation expectations (CNCPIYOY). It will also make adjustments more targeted, flexible and forward looking, the central bank said.

Stocks, Euro Fall Before Merkel-Sarkozy Meeting

2012-01-08T18:16:00.000-08:00

By Lynn Thomasson and Masaki Kondo - Jan 9, 2012 9:03 AM GMT+0800

Asian stocks (MXAP) fell for a third day, while the euro and oil retreated before German Chancellor Angela Merkel and French President Nicolas Sarkozy meet to develop rescue plans for the euro over the next three months.

The MSCI Asia Pacific Index lost 0.3 percent as of 8:50 a.m. in Hong Kong. Standard & Poor’s 500 Index (SPX) futures declined 0.4 percent. The euro fell to an 11-year low against the yen and weakened to its least in nearly 16 months versus the dollar. The Australian dollar dropped 0.6 percent. Gold slid 0.5 percent to $1,610.20 an ounce, while oil decreased 0.3 percent.

“People are now saying that a recession in Europe, or a double dip, is far more likely than in the U.S.,” said Kara Ordway, a foreign-exchange strategist at City Index Asia Pacific in Sydney.

Germany will sell 4 billion euros ($5.1 billion) of six- month bills today, while France will auction a total of 7.7 billion euros of debt maturing in 364 days or less. China’s December lending and money supply growth exceeded economists’ estimates, signaling monetary conditions may be easing as the nation’s central bank said it must be prepared for possible shocks from the U.S. and Europe.

The meeting between Merkel and Sarkozy will be followed by a round of talks among euro-area leaders before the next summit meeting in Brussels on Jan. 30. Italian Prime Minister Mario Monti also will visit Berlin this week, and Sarkozy and Merkel will both travel to Rome on Jan. 20 for negotiations with the Italian government.

German industrial production (GRIPIMOM) probably dropped 0.5 percent in November after a 0.8 percent increase the previous month, according to the median estimate of economists surveyed by Bloomberg News before the figures are released today.

‘Buy French’ Becomes Crisis Battle Cry in France

2011-12-07T04:15:00.000-08:00

By Helene Fouquet - Dec 7, 2011 6:52 PM GMT+0800

With France’s economy slowing and joblessness at its highest in 12 years, politicians are turning to a well-worn credo: “Buy French.”

France is entering the height of its holiday spending season with politicians egging consumers on to buy “Made in France” products to keep jobs at home. Consumer spending, which accounts for 56 percent of the $2.56 trillion economy, may create jobs if the French buy local goods, says Francois Bayrou, a centrist candidate in the presidential elections next year.

“My proposal is to rectify our country’s brand image, to encourage consumers to buy French and to support very small-and medium-sized companies,” Bayrou said in a posting on his website today, ahead of the official announcement of his candidacy this afternoon.

As the European debt crisis rips through France, President Nicolas Sarkozy, who faces an election in April and May next year, is struggling to cap unemployment. Joblessness is the biggest concern for French people, ahead of wages and pensions, according to a CSA survey for BFM radio in November.

Sarkozy’s Union for a Popular Movement party unveiled its platform last month, saying it wants “Made in France” to become a trademark that’s as recognizable as “Made in Germany.” His Socialist Party rival Francois Hollande has made creating jobs at home a cornerstone of his campaign.

A poll last month showed that more than 50 percent of French people are willing to pay more for a “Made in France” product. The willingness is even greater in the purchase of food products, at 78 percent, according to the Opinion Way survey for the monthly Terra Eco.
‘Economic Solidarity’

Buying products that are local rather than low-cost is driven largely by “national economic solidarity,” the poll showed.

A separate Ifop survey for Cedre, an association to promote local entrepreneurs, showed that French consumers are ready to pay 5 to 10 percent more for domestic products.

Goods manufactured in France are on average 15 to 25 percent more expensive than in countries such as China, according to Vincent Gruau, head of Paris-based Cedre.

“The crisis is pushing French people to realize they must stop being naïve; they understand that to keep jobs at home they must consume locally,” said Gruau, who also heads Majencia, an office-supplies maker.

The number of people actively looking for work in France has jumped by 91,500 to 2.82 million since the start of the year, figures published last month by the Labor Ministry show.
Record Trade Deficit

The Organization for Economic Cooperation and Development said Nov. 28 that French unemployment will exceed 10 percent next year and gross domestic growth in the euro-zone’s second- largest economy will expand no more than 0.3 percent. That’s less optimistic than Sarkozy’s target of 1 percent. The unemployment rate was 9.7 percent at the end of September.

The push to buy local products also comes as France’s trade deficit rose to 72 billion euros ($97 billion) in the year through October, heading toward an annual record.

The rising shortfall has prompted calls from Sarkozy for greater “reciprocity” in trade. He has suggested that the European Union block products from countries that don’t have the same labor, quality and environmental standards as the region.

Socialist lawmaker Arnaud Montebourg, who was defeated in the Socialist presidential primaries, has gone so far as to call for “de-globalization.”

Earlier this year, the far-right National Front party candidate Marine Le Pen, who ranks third in presidential polls, promised to create 500,000 jobs over a five-year period using “strategic planning” and a protectionist economic policy.
‘Patriotic Purchase’

Hollande, the frontrunner in the presidential race, is visiting a 20-person Montceau-Les-Mines, France-based factory today to celebrate the return of the production of an electronic cooking recipes tablet called “Qook” to France from China.

Meanwhile, in spite of the economic slump, French people will spend 1.9 percent more on Christmas shopping this year from 2010, according to a November study from Deloitte LLP. They’ll shell out on average 606 euros on gifts, food and socializing, compared with 449 euros for Germany, Deloitte said.

French leaders want them to spend it on goods produced at home, making the ”Made in France” leitmotiv pervasive.

A recent advertisement for Renault SA’s Megan car showed off French quality with a spoof of an Opel ad that praised German technology and reliability.

“It’s a funny ad, but it’s a symptomatic one,” said Gruau. “We laugh because we have hang ups about our industrial capability. Germans don’t; they are proud of their industry.”

As French Christmas shoppers flock to department stores and browse the Internet for presents, they’ll find websites touting Gallic products.

“To make a patriotic purchase, the solution is offer a gift produced in France!” says www.100pour100-madeinfrance.fr, a Montpellier-based online gift shop that sells liquor, umbrellas, shoes and jewelry.

European Stocks, U.S. Futures Decline on Italy

2011-11-07T05:13:00.000-08:00

By Sarah Jones - Nov 7, 2011 8:07 PM GMT+0800

European stocks resumed their losses after a report that Italian Prime Minister Silvio Berlusconi said he’s not planning on stepping down.

The Stoxx Europe 600 Index slipped 0.6 percent to 238.3 at 12:06 p.m. in London. In response to earlier reports that he may quit within hours, Berlusconi denied that he’s stepping down, Ansa said, citing comments from the premier.

“We are all looking for the next policy maker’s speech,” Robert Talbut, chief investment officer at Royal London Asset Management, said in an interview with Bloomberg Television. “There is an enormous amount of uncertainty around how this crisis is going to play out.”

Asian Stocks Rise After U.S., Europe Shares Jump on Debt Pledge; Rio Gains

2011-10-10T18:01:00.000-07:00

By Shani Raja - Oct 11, 2011 8:42 AM GMT+0800

Asian stocks rose, driving a regional benchmark index higher for the fourth straight day, after U.S. and European shares jumped in response to a pledge by German and French leaders to stem Europe’s debt crisis.

Rio Tinto Group, the world’s second-largest mining company by sales, rose 1.6 percent in Sydney. Korea Zinc Co. surged 6.5 percent in Seoul. Mitsubishi Corp., which gets 43 percent of its revenue from commodities trading, gained 2.9 percent in Tokyo, while Sony Corp., Japan’s largest exporter of consumer electronics, jumped 5.2 percent. Japanese markets resumed trading today after a public holiday yesterday.

The MSCI Asia Pacific Index gained 1.1 percent to 114.94 as of 9:25 a.m. in Tokyo, led by exporters and mining companies as commodity prices advanced after German Chancellor Angela Merkel and French President Nicholas Sarkozy pledged at the weekend to deliver a plan to recapitalize the Europe’s banks and address Greece’s sovereign-debt crisis by Nov. 3. More than four stocks rose for each that fell on the gauge.

“There is hope that if a comprehensive European bank package is announced, the damage on the real economy will be less than currently expected,” said Belinda Allen, a senior investment analyst at Colonial First State Global Asset Management in Sydney, which oversees about $145 billion. “That would be better news for global growth and commodity demand.”
Estimated Earnings

The MSCI Asia Pacific Index dropped 17 percent this year through yesterday, compared with a 5 percent loss for the S&P 500 and a 14 percent decline for the Stoxx Europe 600 Index. Stocks in the Asian benchmark were valued at 11.6 times estimated earnings on average, compared with 12 times for the S&P 500 and 10 times for the Stoxx 600.

Australia’s S&P/ASX 200 Index gained 0.4 percent today, South Korea’s Kospi Index climbed 2.2 percent and Japan’s Nikkei 225 Stock Average advanced 2 percent.

Futures on the Standard & Poor’s 500 Index slid 0.1 percent today. In New York yesterday, the gauge rose 3.4 percent, its biggest rally since August, with all 10 industry groups advancing. The S&P 500 last week rebounded from the threshold of a bear market on optimism Europe will tame its debt crisis and after U.S. economic data improved.

The Stoxx Europe 600 Index completed its biggest four-day gain since 2008 yesterday.

“Commodity prices and stocks fell sharply over the last few months on worries Europe would blow up, causing a collapse in global growth,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has almost $100 billion under management. “The pledges from Merkel and Sarkozy help provide confidence that this won’t happen.”

Copper futures for December delivery climbed 2.9 percent on the Comex in New York yesterday and gold futures rose 2.1 percent, while crude oil for November delivery gained 2.9 percent. The London Metal Exchange Index of prices for six industrial metals, including copper and aluminum, added 1.7 percent for its third straight daily gain.

Swiss franc falls sharply after SNB sets target rate

2011-09-06T02:03:00.001-07:00

LONDON, Sept 6 | Tue Sep 6, 2011 4:15am EDT

(Reuters) - The Swiss franc fell sharply and Swiss shares rose on Tuesday after the Swiss National Bank set an exchange rate target at 1.20 francs per euro.

The euro soared 7 percent on the day to 1.220 francs, according to electronic trading platform EBS, from around 1.1270 francs, while the dollar jumped the same amount against the Swiss currency to 0.8579 francs.

The Swiss National Bank said on Tuesday it would set a minimum exchange rate target of 1.20 francs to the euro and would enforce it by buying foreign currency in unlimited quantities.

Switzerland's share benchmark SMI extended gains to trade 3.2 percent higher at 5,306.54 points. It traded at 5,209.77 points before the announcement. (Reporting by London Markets Team)

Big Banks Bet Crude Oil Prices Would Fall in 2008 Run-Up, Leaked Data Show

2011-08-29T01:41:00.000-07:00

By Matthew Leising and Silla Brush - Aug 29, 2011 12:00 PM GMT+0800

Just before crude oil hit its record high in mid-2008, 15 of the world’s largest banks were betting that prices would fall, according to private trading data released by U.S. Senator Bernie Sanders.

The net positions of the banks undermine arguments made by Sanders that speculative trades on Wall Street drove oil prices in 2008, said Craig Pirrong, director of the Global Energy Management Institute at the University of Houston. Retail gasoline reached a record $4.08 a gallon on July 7, 2008, and oil peaked at $147.27 a barrel on July 11 that year.

“If you believe the banks are jerking around the market and the market is going the way they were trading, the price should have been lower,” Pirrong, who reviewed the data, said in an interview.

The records of oil futures and derivatives trades in the first half of 2008 were compiled by the Commodity Futures Trading Commission and made public Aug. 19 by Sanders. Banks including Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Morgan Stanley and UBS AG collectively held 229,460 net short contracts compared with 101,537 net long contracts, the data show. Short trades make money if prices fall.

Sanders, a Vermont Independent, and other supporters of curbs on speculation have said the CFTC documents demonstrate the need for the agency to complete its rule on so-called position limits. The Dodd-Frank regulatory overhaul enacted last year requires the CFTC to limit traders’ positions in exchange- traded and over-the-counter derivatives for oil, natural gas, wheat and other commodities.
‘Major Reason’

In an Aug. 22 letter to CFTC Chairman Gary Gensler, Sanders said the 2008 data showed that banks and other speculators harmed the economy. “We now know that excessive oil speculation is a major reason why oil prices have risen so sharply,” he wrote.

Asked to comment specifically on the analysis of the banks’ positions, Warren Gunnels, senior policy adviser to Sanders, declined, saying the senator’s office would need more information from the industry and regulators. “The bottom line is that we need the CFTC to obey the law, do its job and eliminate excessive oil speculation,” Gunnels said in an interview.

The position-limits rule, first proposed by the agency in January, spurred more than 13,000 public comments filed with the CFTC from supporters including Delta Air Lines Inc. (DAL) and opponents including Barclays Capital.

The data released by Sanders lists transactions by more than 200 traders, offering a dated but rare glimpse into an opaque market. It was collected by the CFTC for a Sept. 11, 2008, report on the run-up in oil prices. The agency said at the time that the data had limitations and, while it was the best available snapshot of trading, it might not be definitive.
‘Utmost Concern’

When the agency told Congress in 2008 that its review found no evidence that non-commercial trading had driven the spikes in prices, three House Democrats questioned the conclusion and sought the underlying data about companies and their positions.

The CFTC data was kept confidential until Sanders publicized it. John Damgard, president of the Futures Industry Association, said in an Aug. 19 statement that the release was of “utmost concern” to the trade group’s members and could “seriously jeopardize the CFTC’s ability to gather information from market participants and carry out its market surveillance mission.”

The CFTC and its inspector general should investigate if any laws were broken because of the leak, the association said on Aug. 25.
‘Laughable’

Sanders has suggested he acted in part to counter the CFTC’s assertion when it released its January proposal that it needed more data on the private over-the-counter swaps market to implement position limits on contracts that settle outside of the current month.

Sanders’ office said the data he released included both exchange-traded and over-the-counter transactions. “It is my understanding that the CFTC is still claiming that it cannot impose strict speculation limits because it does not have enough information,” Sanders said in the Aug. 22 letter to Gensler. That, Sanders said, is “laughable.”

Steve Adamske, CFTC spokesman, declined to comment on Sanders’s letter.

The swaps market was largely unregulated until those trades helped fuel the 2008 credit crisis. Dodd-Frank, enacted last year, aims to reduce risk, boost transparency and give regulators access to databases of information about exchange- traded and private trades.
Meeting the Burden

Opponents of the position-limit proposal have argued that the agency doesn’t have enough data and that regulators haven’t demonstrated that excessive speculation is driving prices.

“The commission has not met its burden of showing that the proposed position limit regime is ‘necessary’ and ‘appropriate,’” Craig S. Donohue, chief executive of CME Group Inc. (CME), the world’s largest futures exchange, wrote in a March 28 letter to the CFTC.

The agency has come under the opposite pressure from Senators Maria Cantwell, a Washington Democrat, Carl Levin, a Michigan Democrat, and Sanders, among other lawmakers. “The CFTC is breaking the law” by not meeting the Jan. 17 deadline set by Dodd-Frank, Sanders said in the Aug. 22 letter.

The agency may vote to complete the position-limit rule as early as Sept. 22, Gensler said Aug. 25. The regulation has split the agency’s five commissioners: Jill E. Sommers, a Republican, opposed the January proposal, while Scott O’Malia, a Republican, and Michael V. Dunn, a Democrat, supported seeking further public comment even as they registered concerns about imposing trading limits. Bart Chilton, a Democrat, has urged the agency to implement the trading curbs.
Offset Positions

All banks included in the data released by Sanders held both long and short positions, which when offset against each other provide a net view of expectations of where oil prices were headed. Credit Suisse held the largest net-short position at 109,655 contracts, which was 2.7 times as large as the largest net long position of 41,338 lots held by Deutsche Bank. Each lot represents 1,000 barrels of oil.

“Goldman Sachs, Morgan Stanley (MS) and other speculators on Wall Street dominated the crude oil futures market causing tremendous harm to the entire economy,” Sanders said on Aug. 19. Mark Lake, a spokesman at Morgan Stanley, and Andrea Raphael, a spokeswoman at Goldman Sachs, declined to comment.
Limited Data

Pirrong, who has consulted for exchanges and whose research on derivatives regulation has been published by the industry, said that one of the limitations of the CFTC data is that it doesn’t distinguish between banks’ trading positions for their own accounts and those handled for clients.

The aggregate position of the more than 200 traders was net short by 36,327 contracts, according to the data. T. Boone Pickens, the billionaire Texas hedge-fund manager, had 145,257 lots and was net short 1,983, according to the data.

A separate set of CFTC data provided to Bloomberg News by Sanders’s office on Aug. 24 shows commodity index fund investments holding net long positions on Dec. 31, 2007, March 31, 2008 and June 30, 2008. The data, also collected for the CFTC’s 2008 report, shows index funds, institutional investors, sovereign wealth funds and other clients all holding net long positions expecting crude oil to rise.

A third set of data released by Sanders showed six hedge and pension funds with crude positions exceeding so-called accountability levels -- which are set by exchanges, not the CFTC. Traders that exceed accountability levels may be required to provide information about the positions to exchanges, while not necessarily facing hard limits on the overall size of the transactions.

The data shows non-commercial trades on exchanges and in private over-the-counter markets. D.E. Shaw & Co., the now $21- billion hedge fund, and Caisse de Depot et Placement, now Canada’s biggest pension fund, held net short positions. Meanwhile, Bridgewater Associates LP, the hedge fund founded by Ray Dalio, expected crude prices to increase.

Bank Long Short Difference

Deutsche Bank 273,403 232,065 41,338
Goldman Sachs 451,997 419,324 32,673
UBS AG 100,206 82,383 17,823
Lehman Brothers 154,507 146,165 8,342
Barclays 277,461 276,731 730
Credit Agricole 89,346 88,715 631
Total= 101,537

Credit Suisse 81,638 191,293 -109,655
JPMorgan 200,062 245,261 -45,199
BNP Paribas 106,994 123,944 -16,950
Societe Generale 141,186 155,518 -14,332
Bank of America 50,893 62,412 -11,519
Macquarie Bank 42,611 51,820 -9,209
Citigroup 87,070 94,943 -7,873
Morgan Stanley 312,527 320,223 -7,696
Merrill Lynch 115,396 122,423 -7,027
Total= -229,460

Dollar Undervalued in Purchasing Parity

2011-08-29T01:33:00.000-07:00

By Allison Bennett and Catarina Saraiva - Aug 29, 2011 11:46 AM GMT+0800

The dollar is poised for its biggest monthly gain since May, reclaiming its status as a haven while Switzerland and Japan boost efforts to weaken their currencies.

The greenback has appreciated 1.2 percent in August against a basket of the developed world’s nine most-traded exchange rates, according to data compiled by Bloomberg. That compares with a decline of 14 percent in the world’s reserve currency from this time last year through July.

Demand for U.S. assets is rising even though the Federal Reserve has pledged to keep its benchmark interest rate near zero through mid-2013 and Standard & Poor’s cut the nation’s credit rating from AAA. The two other currencies considered havens in times of financial and political strife -- the Swiss franc and yen -- are under siege by their governments and central banks after strengthening to records.

“The dollar is a buy through the end of the third quarter,” Nick Bennenbroek, head of currency strategy in New York at Wells Fargo & Co., the third-most accurate forecaster in the last six quarters as measured by Bloomberg, said in an Aug. 23 telephone interview. “The yen and the Swiss franc are very expensive and the dollar is very cheap and it’s the only major central bank that is not standing in the way of a currency advance.”

The dollar strengthened 0.1 percent to 76.64 yen last week, and rallied 2.7 percent versus the franc to 80.63 centimes. The Bloomberg Correlation-Weighted Currency Index for the dollar closed at 89.4521, up from 88.3486 at the end of July. The U.S. currency bought 76.68 yen today and gained 0.4 percent to 80.96 centimes.
Purchasing Power Parity

Even with the gains, America’s currency is 47 percent too weak against the franc and 31 percent undervalued compared with the yen, based on an index developed by the Organization for Economic Cooperation and Development in Paris that measures currencies using prices for similar goods and services in two countries.

The dollar may continue to appreciate as the Swiss National Bank and Bank of Japan intervene to stem gains and currencies of commodity-producing nations such as Australia, New Zealand and Canada lose some of their luster amid a global economic slowdown.
‘Dollar Is Cheap’

“The dollar is cheap against the G-10 small currencies like Australia, Canada, New Zealand, Sweden, Norway, Swiss and also against the yen,” Greg Anderson, a senior currency strategist at New York-based Citigroup Inc., said in a telephone interview Aug. 14. “If we have continued turbulence with commodities and equities selling off, the dollar is a short-term buy.”

America’s currency is 37 percent below fair value against the Australian dollar and 20 percent versus the Canadian dollar, according to the OECD index.

The dollar has mainly weakened since Fed Chairman Ben S. Bernanke signaled last year at an annual conference sponsored by the Federal Reserve Bank of Kansas City that the central bank may boost the economy by printing money and buying bonds. It purchased $600 billion of Treasuries between November and June, contributing to a 6.25 percent drop in the U.S. currency as measured by Bloomberg Correlation-Weighted Indexes.
Fed’s Toolbox

Bernanke said at an annual forum in Jackson Hole, Wyoming, on Aug. 26 that the central bank still has tools to stimulate the economy without providing details or signaling when or whether policy makers might deploy them.

Slowing growth in the U.S. and the Fed’s pledge to keep its target rate for overnight loans between banks at a record low of zero to 0.25 percent until mid-2013 may constrain the greenback. Citigroup lowered its 2011 U.S. growth estimate to 1.6 percent from 1.7 percent, and Goldman Sachs Group Inc. said it saw a one-in-three chance of a recession as it cut its gross domestic product forecast to 1.7 percent from 1.8 percent.

“Until we can get to a point where the dollar can demonstrate some independent strength, like the economic data justifies the Fed to provide some interest rate support, we don’t think the dollar can shine,” Robert Sinche, the global head of foreign exchange strategy at Royal Bank of Scotland Group Plc, said Aug. 24 in a telephone interview from Stamford, Connecticut.

RBS predicts the dollar will trade at $1.45 versus the euro by the end of the third quarter, from $1.4499 last week, and at $1.06 against the Australian currency, from $1.0573.
Increased Dollar Demand

Demand for the U.S. currency has increased as S&P’s Aug. 5 downgrade of the nation’s credit rating to AA+ caused stock markets to gyrate and sent investors to the safety of Treasuries. Investors repudiated the ratings company’s assertion that the U.S. was less creditworthy, driving 10-year note yields to record low 1.9735 percent on Aug. 18. The dollar appreciated the last month against all but one of the 16 most-traded currencies as tracked by Bloomberg, falling versus the yen.

“The downgrade obviously caused a big risk-aversion theme that is still en vogue,” Blake Jespersen, the director of foreign-exchange at Bank of Montreal in Toronto said Aug. 24 by telephone.

Strategists don’t expect the dollar to falter in the slowing economy. It will remain unchanged on average by the fourth quarter against currencies of the Group of 10 Nations, according to estimates of strategists compiled by Bloomberg.
Main Reserve Currency

The dollar represents 60.7 percent of the world’s currency reserves, compared with 26.6 percent for the euro, which has the next biggest portion, according to the International Monetary Fund in Washington. That leaves investors with few alternatives as the Swiss National Bank and Bank of Japan step up their efforts to curb gains in their currencies, according to Jespersen.

“The SNB and the BOJ have been very aggressive, not only in talk but in action, and therefore safe-haven flows are being allocated more toward the U.S. dollar,” Jespersen said.

Gains of 10 percent in the Swiss franc and 4.5 percent for the yen in the past three months have weighed on the export- reliant economies and prompted the central banks to take action to curb further appreciation.

The SNB lowered its target for three-month franc London interbank offered rate, or the rate banks charge to lend to each other in Swiss francs for three months, to “as close to zero as possible” on Aug. 3. It said it may take further steps.

The yen has erased all its losses since the Bank of Japan intervened Aug. 4 and expanded monetary stimulus by 10 trillion yen ($130.5 billion). Finance Minister Yoshihiko Noda introduced a $100 billion funding program last week for Japanese businesses intended to encourage the exchange of “yen-denominated funds to foreign currencies.”

“There are few currencies left to buy that don’t mind going up,” Kit Juckes, head of foreign-exchange research in London for Societe Generale SA and the second-most accurate currency forecaster as measured by Bloomberg said in an interview last week. “How much weaker can the dollar get?”

Industrial Production in U.S. Rose 0.9% in July

2011-08-16T07:26:00.000-07:00

By Jillian Berman - Aug 16, 2011 9:52 PM GMT+0800

Industrial production in the U.S. climbed in July by the most this year as carmakers started to shake off the effects of the disaster in Japan and higher temperatures boosted utility use.

The 0.9 percent increase in production at factories, mines and utilities followed a revised 0.4 percent gain that was more the previously estimated, figures from the Federal Reserve showed today. Economists projected a 0.5 percent rise in July, according to the median estimate in a Bloomberg News survey. Factory output rose by the most in four months.

Production of business equipment picked up, showing gains in the industry that led the recovery may be sustained even as manufacturers contend with a slowdown in consumer spending and exports. Factories have also kept a tight rein on inventories, limiting the need for large-scale cutbacks that could trigger an economic slump.

“Given some of the other negatives in the economy, I think you still have to point to manufacturing as a bit of a bright spot,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, who correctly predicted the gain. Production was bolstered “by a beginning of the recovery in the auto sector. Manufacturing excluding motor vehicles was still up. Not great, but a decent outcome.”

Forecasts for industrial production in the Bloomberg survey of 85 economists ranged from gains of 0.1 percent to 1 percent.

Stocks declined after the report on growing concern over a global growth slowdown after Germany said its economy almost stalled in the second quarter. The Standard & Poor’s 500 Index fell 1.3 percent to 1,189.24 at 9:51 a.m. in New York. Treasury securities rose, sending the yield on the benchmark 10-year note down to 2.28 percent from 2.31 percent late yesterday.
Housing Starts

The housing market is still struggling, separate figures from the Commerce Department showed today. Housing starts dropped 1.5 percent in July to a 604,000 annual rate.

Manufacturing output increased 0.6 percent last month, led by gains at the nation’s automakers, the Fed’s report showed.

Production of automobiles and parts surged 5.2 percent last month, a rebound from the supply-chain disruptions that resulted from the March earthquake in Japan, the Fed report showed. Manufacturing excluding motor vehicles climbed 0.3 percent after a 0.2 percent gain in the prior month.

Motor-vehicle assemblies rose to 8.73 million units at an annual rate in July from 7.89 million, today’s report showed. Cars and light trucks sold at a 12.2 million annual pace in July, up from 11.4 million annual rate a month earlier, Autodata Corp. said last week. Deliveries at Detroit-based General Motors Corp. climbed 7.6 percent from the same month in 2010 to 214,915.
Second Half

“Although the economy has clearly lost some momentum, we do believe that it will continue to recover, but more gradually than we had originally anticipated as we move through the second half of the year,” Don Johnson, GM’s vice president of U.S. sales said on an Aug. 2 conference call.

Business equipment production rose 0.6 percent in July following a 0.2 percent gain in June. Output of computers and electronic products increased 0.5 percent after a 0.8 percent decline in June. Furniture production rose 0.7 percent after a 2.4 percent decrease.

Capacity utilization, which measures the amount of a plant that is in use, increased to 77.5 percent, the highest since August 2008, from 76.9 percent in June. The gauge compares with the average of 79.5 percent over the past 20 years.

Mining production, which includes oil drilling, rose 1.1 percent after a 1.2 percent gain. Utility output increased 2.8 percent, the most this year, after a 0.8 percent gain.
Heat Wave

Temperatures soared across the U.S., with July records in Texas and Oklahoma, according to the National Climatic Data Center. Last month, temperatures were “above normal” or “much above normal” in 41 of the 48 contiguous U.S. states, it said.

The U.S. economy grew at a 1.3 percent annual rate during the second quarter after almost stalling in the previous three months, according to Commerce Department figures. Fed policy makers pledged to keep the benchmark interest rate near zero to bolster a recovery that’s moving “considerably slower” than expected, policy makers said in a statement last week.

The drop in the value of the dollar could boost confidence among manufacturers. A weaker dollar benefits American companies by making their products more attractive to buyers overseas. The dollar dropped 7.9 percent in the 12 months ended in July against a weighted basket of currencies from the country’s biggest trading partners.
Growth Overseas

Peoria, Illinois-based Caterpillar Inc., the world’s largest construction- and mining-equipment maker, posted increased profits and sales in the second quarter, largely due to growth overseas, the company said July 22.

“China is doing a good job of balancing growth and inflation, and our expectations for China remain positive,” Chief Executive Officer Douglas Oberhelman said in the statement. “While we’ve seen some softening of growth in China, dealer deliveries to end users were up in the second quarter of 2011 compared with the second quarter of last year."

U.S. Sovereign Debt Rating Is Affirmed by Fitch at AAA; Outlook Is Stable

2011-08-16T07:22:00.000-07:00

By Will Daley - Aug 16, 2011 9:21 PM GMT+0800

Fitch Ratings affirmed its AAA credit rating on the U.S. and said the outlook on the long-term ratings is stable.

Standard & Poor’s on Aug. 5 cut the U.S. credit rating to AA+ from AAA, saying lawmakers failed to cut spending enough to reduce record deficits. S&P dropped the ranking after warning on July 14 that it would reduce the rating in the absence of a “credible” plan to lower deficits even if the nation’s debt limit was lifted.

Fitch said Aug. 2 that the U.S. is under review as the nation’s debt burden increases at a pace that isn’t consistent with an AAA sovereign credit rating.

Moody’s Investors Service affirmed the U.S.’s top Aaa ranking on Aug. 8 in part because the dollar’s status as the main reserve currency allows it to support higher debt levels than other countries. Lawmakers’ agreement on Aug. 2 put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years was a “positive step” toward addressing the nation’s record deficits, Steven Hess, the senior credit officer at Moody’s in New York, said Aug. 8 in a telephone interview.

House Passes $2.1 Trillion U.S. Debt Ceiling Plan

2011-08-01T20:04:00.000-07:00

By James Rowley and Catherine Dodge - Aug 1, 2011 4:21 PM PT

The House approved legislation to raise the U.S. debt limit by at least $2.1 trillion and cut federal spending by $2.4 trillion or more, one day before a threatened default.

The House voted 269-161 for the plan negotiated by leaders and President Barack Obama over the weekend. Ninety-five Democrats voted in favor and 66 Republicans in opposition. The measure goes to the Senate for a final vote planned tomorrow.

“We’re coming up to a deadline we all must recognize: default,” said Representative Paul Ryan, a Wisconsin Republican and chairman of the Budget Committee. “Both parties got us in this mess; both parties are going to have to work together to get us out.”

Ryan called the spending cuts connected to the debt-ceiling increase “a huge cultural change” for Congress.

Representative Gabrielle Giffords, the Arizona Democrat wounded in a shooting attack, drew a long standing ovation as she arrived to vote for the measure, making her first appearance on the House floor since the Jan. 8 assault in Tucson.

Final approval in the Senate would send the debt-limit measure to Obama for his signature and conclude a months-long battle over raising the $14.3 trillion debt ceiling and reining in government spending.
‘Not One Red Cent’

“It’s hard to believe we are putting our best foot forward with the legislation that comes before us today,” said House Democratic leader Nancy Pelosi of California. “Not one red cent” will come from the wealthiest Americans to cut the deficit, she said. Still, she said she supports the plan because it ends economic uncertainty and prevents cuts in Social Security and Medicare.

Treasuries rose, pushing the yields on 10-year notes to the lowest level since November, as an index showed U.S. manufacturing expanded in July at the slowest pace in two years.

Yields on benchmark 10-year notes fell five basis points, or 0.05 percentage point, to 2.74 percent at 5:02 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities due in May 2021 gained 14/32, or $4.38 per $1,000 face amount, to 103 8/32.

U.S. stocks slumped. The Standard and Poor’s 500 lost 0.4 percent to 1,286.94 at 4:19 p.m. in New York after climbing as much as 1.2 percent earlier. The Dow Jones Industrial Average retreated 10.75 points, or 0.1 percent, to 12,132.49 today after rising 139 points.
Averting Crisis

Democrats and Republicans praised the agreement for averting an economic crisis, even as both sides said the compromise fell short of their goals.

Republicans called the bill a step in the right direction while saying government spending wasn’t pared enough. Democrats expressed concern about making deep spending cuts in a fragile economy and not spreading the sacrifice to the nation’s wealthiest through higher taxes.

“I am voting for this bill not because I like this bill,” said Representative Steny Hoyer, the second-ranking Democrat in the House. “Default for the United States of America is not an option. This would affect all of the people I represent and all of the people of this country.”

Both parties worked today to sell the deal to their rank and file.

“We’re very optimistic we’re going to do well,” Senate Republican leader Mitch McConnell, of Kentucky said after a meeting where he briefed Senate Republicans on the plan.
No Tax Increase

House Republican leaders cast the deal as a victory because it doesn’t raise taxes and makes most of the spending cuts they sought.

“It gives us the best shot that we’ve had in the 20 years that I’ve been here to build support for a balanced budget amendment to the Constitution,” to put “fiscal handcuffs” on Congress, House Speaker John Boehner of Ohio told reporters.

Ryan said his party got two-thirds of the cuts to discretionary spending that it wanted.

“This legislation is typical for compromise legislation,” said Senate Majority Leader Harry Reid, a Nevada Democrat. “Neither side got what they wanted.”

Senator Mark Warner, a Virginia Democrat, said he will support the legislation though it doesn’t do enough to tackle long-term spending and revenue. Warner, one of a bipartisan group that offered a $3.7 trillion deficit-cutting plan, said, “This doesn’t get us to the core problem of how do we take on tax reform, how do we take on entitlement reform.”
Defense Spending Cuts

Senator Lindsey Graham, a South Carolina Republican, said he won’t support the plan in part because of cuts to defense spending. Initially, the Defense Department could see $325 billion in cuts over 10 years as part of the bill’s first round of deficit-cutting, similar to what the Obama administration has proposed, according to an administration official. It’s the second phase of $1.5 trillion in cuts envisioned, with about half coming from national security, that could jeopardize Defense Department operations.

“If fully implemented, the consequences to our nation’s defense infrastructure would be severe,” Graham said in a statement. “What has happened to the party of Reagan who viewed the primary purpose of the federal government was to provide a strong national defense?”

The overall plan would save $2.1 trillion over the next 10 years, according to the nonpartisan Congressional Budget Office.
Money Out of Pockets

Representative Brad Miller, a North Carolina Democrat, said the immediate spending cuts will contract the economy. The measure “is going to take money out of the economy, it is going to take money out of people’s pockets,” he said.

The Treasury Department has said it will reach the borrowing limit and run out of options for avoiding default tomorrow without action by Congress.

“The threat of default is now for certain off the specter of this economy, no longer a headwind” for the U.S. economy, Gene Sperling, director of the National Economic Council, said today on Bloomberg Television.

The measure would raise the debt ceiling in two installments, sufficient to serve the nation’s needs into early 2013. The framework would cut $917 billion in spending over a decade, raise the debt limit initially by $900 billion and assign a special congressional committee to find another $1.5 trillion in deficit savings by late November, to be enacted by Christmas.
Constitutional Amendment

If Congress met that deadline and deficit target, or voted to send a balanced-budget constitutional amendment to the states, Obama would receive another $1.5 trillion borrowing boost.

In the case of Congress failing to take either step, or not producing debt savings of at least $1.2 trillion, the plan allows the president to obtain a $1.2 trillion debt-ceiling extension. That would trigger automatic spending cuts across the government -- including in defense and Medicare -- to take effect starting in 2013. The Medicare cuts would only affect provider reimbursements, not benefits.

An initial $400 billion increase in borrowing authority couldn’t be blocked under the deal. While Congress would get a chance to avert both debt-limit increases through disapproval resolutions, there’s little chance opponents could muster the two-thirds majorities needed in both chambers to override Obama’s veto.
Concessions

Both sides made concessions. Republicans dropped their insistence on withholding some of the borrowing authority until future spending cuts had been made and a balanced budget amendment to the Constitution had been passed by both chambers of Congress.

The White House agreed to forgo an automatic tax increase, a sticking point for Republicans, as one of the consequences to kick in if no debt-reduction law was enacted by Christmas.

Even so, Obama has an opportunity to increase revenue in the future if he opts to allow the tax cuts enacted under George W. Bush to expire as scheduled in 2013. He could veto legislation to extend those cuts -- producing an estimated $3.5 trillion.

White House officials said the enforcement mechanisms will help them press Obama’s agenda as further deficit reductions are made, including additional tax revenue.

The automatic spending cuts would include deep reductions in the defense budget, which Republicans oppose. That measure preserves leverage for Democrats in committee negotiations, the officials told reporters on condition of anonymity.
Spending Cuts Delayed

Because any spending cuts would be delayed until 2013, timed to coincide with the expiration of the Bush tax cuts, Republicans would have an added incentive to agree to overhaul taxes, which Democrats want to use for raising revenue.

Republicans argue that while the super-committee could propose tax increases, it wouldn’t likely do so because the rules of the deal require that it assume -- as the CBO does -- the Bush tax cuts expire as scheduled at the end of 2012. That would mean that to count any new revenue toward deficit reduction, the committee would need to both erase the Bush tax reductions and then generate additional revenue on top of that.

In addition to guaranteeing a vote on the balanced-budget constitutional amendment between October and the end of the year, the agreement could give Republicans a chance to renew their push for the measure at the height of 2012 campaigns.

Geithner Says He Wants Biggest Deal Possible on Deficit Cuts

2011-07-10T16:16:00.000-07:00

By Ian Katz and Susan Decker - Jul 10, 2011 11:33 PM GMT+0800

Treasury Secretary Timothy F. Geithner said the Obama administration wants the most comprehensive deficit-cutting deal possible and reiterated that failing to raise the debt limit could have “catastrophic” consequences.

“We have to find a way to pass an agreement, but the president is going to keep working toward the largest deal we can do, because that’s the right thing for the country,” Geithner said today on NBC’s “Meet the Press” program.

Obama and congressional leaders are seeking a deficit- slashing deal to pave the way for a vote in Congress to increase the government’s $14.3 trillion debt limit, a move the Treasury Department says is needed by Aug. 2 to avert a default on the nation’s financial obligations.

Geithner said Congress has no alternative to raising the debt limit and there are no “constitutional” delays available. A default resulting from failure to raise the ceiling could do “catastrophic” damage to the U.S. economy, he said.

Some Democrats in Congress have discussed the idea of claiming presidential authority to continue borrowing without congressional approval based on an interpretation of the Constitution’s 14th Amendment.
Boehner’s Proposal

House Speaker John Boehner said yesterday he will pursue a smaller deficit reduction accord than the one that President Barack Obama is seeking because the White House won’t approve a bigger deal without tax increases.

Boehner told the president yesterday that he wants to pursue a deal along the lines of that being discussed by the working group led by Vice President Joe Biden.

Obama was spending the weekend at Camp David, the presidential retreat in Maryland, and will return today for further debt talks with congressional leaders.

Geithner, in a separate appearance on the CBS program “Face the Nation,” said the outlines of a deal must be completed in the next two weeks to make the Aug. 2 deadline. The Obama administration won’t accept a deal that puts the “burden” on the middle class and elderly, he said.

An agreement without any “tax reforms, without revenues” would force “terribly deep cuts in benefits to Medicare beneficiaries,” Geithner said. The House Republicans’ budget proposal, “when fully phased in,” would increase the average cost to Medicare beneficiaries by $6,500 a year, he said.
‘Balanced’ Approach

“That’s like a $6,500 tax increase on elderly Americans,” Geithner said. “So the only way to do this is in a balanced way.”

Geithner reiterated that he will remain Treasury secretary for the “foreseeable” future, without being more specific. Geithner has signaled to White House officials that he’s considering leaving after a debt-limit deal is reached, Bloomberg News reported June 30, citing three people familiar with the matter.

Senate Minority Leader Mitch McConnell, a Kentucky Republican, said on “Fox News Sunday” that he also favors “the biggest deal possible. We’re just not going to raise taxes in the middle of this horrible situation.”

Senator Jim DeMint, a South Carolina Republican, said Geithner has “been irresponsible” in his comments on the impact of failing to raise the debt limit. Any deal should include a pledge to let states vote on a constitutional amendment requiring the federal government to balance its budget each year, DeMint said on “Fox News Sunday.”

White House Chief of Staff Bill Daley, speaking on ABC’s “This Week” program, said “there’s no question in my mind” that congressional leaders “will not allow the first default in the history of the country to occur.”

EU to Discuss Greek Plan That Skirts Default Risk

2011-06-19T16:01:00.000-07:00

By Tony Czuczka - Jun 19, 2011 7:36 PM GMT+0800

European finance ministers meet today to hammer out a new Greek bailout package watertight enough to avoid triggering a default that German Chancellor Angela Merkel says would be uncontrollable.

Officials must figure out how to design a plan that will encourage investors to roll over expiring Greek debt after Merkel on June 17 ended a standoff with the European Central Bank over restructuring the country’s debt load. Talks start at 6 p.m. in Luxembourg and continue tomorrow. EU leaders meet on June 23-24, where Spanish Prime Minister Jose Luis Rodriguez Zapatero expects a “political commitment” to aid Greece.

“Now comes the tricky part,” said Tullia Bucco, an economist at Unicredit Global Research in Milan. “This proposal is fraught with difficulties in identifying ways to provide banks with incentives to rollover their bonds. Any deterioration in bond conditions via new coupons below market rates would be seen by rating agencies as the trigger of a credit event.”

Stocks, bonds and the euro jumped after Merkel on June 17 ended a feud with the ECB that roiled markets. Highlighting the risks still facing the euro region, Greek Prime Minister George Papandreou must win a parliamentary confidence vote this week that could delay the next austerity round, and Moody’s Investors Service said on June 17 it may cut its Aa2 rating on Italy.
Lehman Experience

Merkel said yesterday in Berlin that policy makers must make sure the Greek crisis doesn’t infect the rest of the euro region and spark a new global financial crisis.

“We all lived through Lehman Brothers,” she told a meeting of activists from her ruling Christian Democrat party. “I don’t want another such threat to emanate from Europe. We wouldn’t be able to control an insolvency.”

Luxembourg Prime Minister Jean-Claude Juncker, who chairs today’s talks, says the ECB must agree on a new Greek plan.

“If we made a move that would be rejected by the ECB, by the rating agencies and therefore the financial markets, we risk setting the euro area aflame,” La Libre Belgique quoted Juncker as saying in an interview published yesterday.

German officials have indicated that a final agreement on Greece may not come until July 11.
Form of Default

The risk is that any accord will still be classified as a form of default by rating companies, effectively cutting Greek banks off from emergency ECB funding. Fitch Ratings said on June 15 that a rollover would prompt it to cut Greece’s sovereign rating to “restricted default.” The bonds themselves would still avoid default and be left at “a low non-investment grade probably in the region of CCC,” it said.

Dutch central bank Governor Nout Wellink told NRC in an interview published yesterday that banks and pension funds may lose money if they contribute on a voluntary basis to another Greek rescue.

Greek debt is graded B+ at Fitch. Standard & Poor’s on June 13 cut its rating on Greece by three levels to CCC, branding it with the world’s lowest debt grade.

EU officials have discussed incentives for investors to reinvest the proceeds of their maturing bonds into new debt, according to people familiar with the situation. They include giving investors preferred status, higher coupon payments or collateral as inducements to buy bonds replacing Greek debt maturing between 2012 and 2014, they said.

The yield on Greece’s two-year bond, which topped 30 percent for the first time on June 16, fell 90 basis points to 28.79 percent the next day. The signs of flexibility from Germany sent the euro up as much as 1 percent to $1.4339.
Zapatero Prediction

Spain’s Zapatero said in St. Petersburg yesterday that he expects investors to contribute voluntarily to a new Greek rescue in a “commonsense” way.

Merkel said on June 17 she is now willing to accept that the so-called Vienna initiative of 2009, which encouraged western banks to continue funding their eastern European units, may be a model for private-investor participation in the new Greek aid package.

That marked a reversal from the position set out by her finance minister, Wolfgang Schaeuble, who had insisted that Greek bond maturities be extended by seven years. The approach met ECB resistance and led to credit-rating company warnings that the move was tantamount to default, stalling efforts to craft an aid package.

ECB President Jean-Claude Trichet said today in Kiel, Germany, that a widening of global imbalances poses challenges for international policy makers. He didn’t speak about Greece.
Cabinet Changes

Officials will be meeting two days after Papandreou announced a Cabinet reshuffle that included replacing Finance Minister George Papaconstantinou in a bid to get rebelling allies to back the 78 billion-euro ($112 billion) austerity plan that the EU and the International Monetary Fund have made a condition for new aid.

Papandreou named Evangelos Venizelos, his defense minister and a former rival for leadership of the ruling Socialist party, to replace Papaconstantinou. He then called for a vote of confidence in his new government that will probably be held the evening of June 21.

Today, Papandreou said he requested the confidence vote to be able to have a stronger hand in talks with the EU. Greece is at a “critical crossroads” and its debt and deficit are a national problem that require national coordination, he said at the beginning of a three-day debate in Athens on the motion.
‘Genuine Problem’

Greece’s inability to return to the markets next year for financing is an “unforeseen threat” and the government is in talks with other EU nations to find a solution for the country’s funding needs, Papandreou said.

“The new government has a duty to complete the talks,” he told lawmakers in comments televised live on state-run Vouli TV. “It is a genuine problem.”

Greek opposition leader Antonis Samaras, leader of New Democracy, the largest opposition party, said he won’t back Papandreou in the confidence vote and demanded early elections.

Merkel is still pushing for private investors to play a “substantial” role in any new package, without specifying what that would look like.

“Let us try to get together a substantial contribution in this participation of private creditors,” she said in Berlin yesterday. “But we don’t do this on the street, we don’t do this in press conferences, we do this in serious talks with those making the contribution.”

European estimates put Greece’s 2012-14 financing gap at as much as 170 billion euros ($243 billion). It would be filled by about 45 billion euros of loans, plus 57 billion euros in unspent aid from the 2010 bailout, roughly 30 billion euros in asset-sale proceeds and about 30 billion euros from creditors.

Chairman Ben S. Bernanke Speech At the International Monetary Conference, Atlanta, Georgia

2011-06-07T18:02:00.000-07:00

June 7, 2011

The U.S. Economic Outlook

I would like to thank the organizers for inviting me to participate once again in the International Monetary Conference. I will begin with a brief update on the outlook for the U.S. economy, then discuss recent developments in global commodity markets that are significantly affecting both the U.S. and world economies, and conclude with some thoughts on the prospects for monetary policy.

The Outlook for Growth
U.S. economic growth so far this year looks to have been somewhat slower than expected. Aggregate output increased at only 1.8 percent at an annual rate in the first quarter, and supply chain disruptions associated with the earthquake and tsunami in Japan are hampering economic activity this quarter. A number of indicators also suggest some loss of momentum in the labor market in recent weeks. We are, of course, monitoring these developments. That said, with the effects of the Japanese disaster on manufacturing output likely to dissipate in coming months, and with some moderation in gasoline prices in prospect, growth seems likely to pick up somewhat in the second half of the year. Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.

As is often the case, the ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming quarters. A range of positive and negative forces is currently influencing both household finances and attitudes. On the positive side, household incomes have been boosted by the net improvement in job market conditions since earlier this year as well as from the reduction in payroll taxes that the Congress passed in December. Increases in household wealth--largely reflecting gains in equity values--and lower debt burdens have also increased consumers' willingness to spend. On the negative side, households are facing some significant headwinds, including increases in food and energy prices, declining home values, continued tightness in some credit markets, and still-high unemployment, all of which have taken a toll on consumer confidence.

Developments in the labor market will be of particular importance in setting the course for household spending. As you know, the jobs situation remains far from normal. For example, aggregate hours of production workers--a comprehensive measure of labor input that reflects the extent of part-time employment and opportunities for overtime as well as the number of people employed--fell, remarkably, by nearly 10 percent from the beginning of the recent recession through October 2009. Although hours of work have increased during the expansion, this measure still remains about 6-1/2 percent below its pre-recession level. For comparison, the maximum decline in aggregate hours worked in the deep 1981-82 recession was less than 6 percent. Other indicators, such as total payroll employment, the ratio of employment to population, and the unemployment rate, paint a similar picture. Particularly concerning is the very high level of long-term unemployment--nearly half of the unemployed have been jobless for more than six months. People without work for long periods can find it increasingly difficult to obtain a job comparable to their previous one, as their skills tend to deteriorate over time and as employers are often reluctant to hire the long-term unemployed.

Although the jobs market remains quite weak and progress has been uneven, overall we have seen signs of gradual improvement. For example, private-sector payrolls increased at an average rate of about 180,000 per month over the first five months of this year, compared with less than 140,000 during the last four months of 2010 and less than 80,000 per month in the four months prior to that. As I noted, however, recent indicators suggest some loss of momentum, with last Friday's jobs market report showing an increase in private payrolls of just 83,000 in May. I expect hiring to pick up from last month's pace as growth strengthens in the second half of the year, but, again, the recent data highlight the need to continue monitoring the jobs situation carefully.

The business sector generally presents a more upbeat picture. Capital spending on equipment and software has continued to expand, reflecting an improving sales outlook and the need to replace aging capital. Many U.S. firms, notably in manufacturing but also in services, have benefited from the strong growth of demand in foreign markets. Going forward, investment and hiring in the private sector should be facilitated by the ongoing improvement in credit conditions. Larger businesses remain able to finance themselves at historically low interest rates, and corporate balance sheets are strong. Smaller businesses still face difficulties in obtaining credit, but surveys of both banks and borrowers indicate that conditions are slowly improving for those firms as well.

In contrast, virtually all segments of the construction industry remain troubled. In the residential sector, low home prices and mortgage rates imply that housing is quite affordable by historical standards; yet, with underwriting standards for home mortgages having tightened considerably, many potential homebuyers are unable to qualify for loans. Uncertainties about job prospects and the future course of house prices have also deterred potential buyers. Given these constraints on the demand for housing, and with a large inventory of vacant and foreclosed properties overhanging the market, construction of new single-family homes has remained at very low levels, and house prices have continued to fall. The housing sector typically plays an important role in economic recoveries; the depressed state of housing in the United States is a big reason that the current recovery is less vigorous than we would like.

Developments in the public sector also help determine the pace of recovery. Here, too, the picture is one of relative weakness. Fiscally constrained state and local governments continue to cut spending and employment. Moreover, the impetus provided to the growth of final demand by federal fiscal policies continues to wane.

The prospect of increasing fiscal drag on the recovery highlights one of the many difficult tradeoffs faced by fiscal policymakers: If the nation is to have a healthy economic future, policymakers urgently need to put the federal government's finances on a sustainable trajectory. But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery. The solution to this dilemma, I believe, lies in recognizing that our nation's fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk. At the same time, establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence.

The Outlook for Inflation
Let me turn to the outlook for inflation. As you all know, over the past year, prices for many commodities have risen sharply, resulting in significantly higher consumer prices for gasoline and other energy products and, to a somewhat lesser extent, for food. Overall inflation measures reflect these price increases: For example, over the six months through April, the price index for personal consumption expenditures has risen at an annual rate of about 3-1/2 percent, compared with an average of less than 1 percent over the preceding two years.

Although the recent increase in inflation is a concern, the appropriate diagnosis and policy response depend on whether the rise in inflation is likely to persist. So far at least, there is not much evidence that inflation is becoming broad-based or ingrained in our economy; indeed, increases in the price of a single product--gasoline--account for the bulk of the recent increase in consumer price inflation.1 Of course, gasoline prices are exceptionally important for both family finances and the broader economy; but the fact that gasoline price increases alone account for so much of the overall increase in inflation suggests that developments in the global market for crude oil and related products, as well as in other commodities markets, are the principal factors behind the recent movements in inflation, rather than factors specific to the U.S. economy. An important implication is that if the prices of energy and other commodities stabilize in ranges near current levels, as futures markets and many forecasters predict, the upward impetus to overall price inflation will wane and the recent increase in inflation will prove transitory. Indeed, the declines in many commodity prices seen over the past few weeks may be an indication that such moderation is occurring. I will discuss commodity prices further momentarily.

Besides the prospect of more-stable commodity prices, two other factors suggest that inflation is likely to return to more subdued levels in the medium term. First, the still-substantial slack in U.S. labor and product markets should continue to have a moderating effect on inflationary pressures. Notably, because of the weak demand for labor, wage increases have not kept pace with productivity gains. Thus the level of unit labor costs in the business sector is lower than it was before the recession. Given the large share of labor costs in the production costs of most firms (typically, a share far larger than that of raw materials costs), subdued unit labor costs should remain a restraining influence on inflation. To be clear, I am not arguing that healthy increases in real wages are inconsistent with low inflation; the two are perfectly consistent so long as productivity growth is reasonably strong.

The second additional factor restraining inflation is the stability of longer-term inflation expectations. Despite the recent pickup in overall inflation, measures of households' longer-term inflation expectations from the Michigan survey, the 10-year inflation projections of professional economists, the 5-year-forward measure of inflation compensation derived from yields on inflation-protected securities, and other measures of longer-term inflation expectations have all remained reasonably stable.2 As long as longer-term inflation expectations are stable, increases in global commodity prices are unlikely to be built into domestic wage- and price-setting processes, and they should therefore have only transitory effects on the rate of inflation. That said, the stability of inflation expectations is ensured only as long as the commitment of the central bank to low and stable inflation remains credible. Thus, the Federal Reserve will continue to closely monitor the evolution of inflation and inflation expectations and will take whatever actions are necessary to keep inflation well controlled.

Commodity Prices
As I noted earlier, the rise in commodity prices has directly increased the rate of inflation while also adversely affecting consumer confidence and consumer spending. Let's look at these price increases in closer detail.

The basic facts are familiar. Oil prices have risen significantly, with the spot price of West Texas Intermediate crude oil near $100 per barrel as of the end of last week, up nearly 40 percent from a year ago. Proportionally, prices of corn and wheat have risen even more, roughly doubling over the past year. And prices of industrial metals have increased notably as well, with aluminum and copper prices up about one-third over the past 12 months. When the price of any product moves sharply, the economist's first instinct is to look for changes in the supply of or demand for that product. And indeed, the recent increase in commodity prices appears largely to be the result of the same factors that drove commodity prices higher throughout much of the past decade: strong gains in global demand that have not been met with commensurate increases in supply.

From 2002 to 2008, a period of sustained increases in commodity prices, world economic activity registered its fastest pace of expansion in decades, rising at an average rate of about 4-1/2 percent per year. This impressive performance was led by the emerging and developing economies, where real activity expanded at a remarkable 7 percent per annum. The emerging market economies have likewise led the way in the recovery from the global financial crisis: From 2008 to 2010, real gross domestic product (GDP) rose cumulatively by about 10 percent in the emerging market economies even as GDP was essentially unchanged, on net, in the advanced economies.3

Naturally, increased economic activity in emerging market economies has increased global demand for raw materials. Moreover, the heavy emphasis on industrial development in many emerging market economies has led their growth to be particularly intensive in the use of commodities, even as the consumption of commodities in advanced economies has stabilized or declined. For example, world oil consumption rose by 14 percent from 2000 to 2010; underlying this overall trend, however, was a 40 percent increase in oil use in emerging market economies and an outright decline of 4-1/2 percent in the advanced economies. In particular, U.S. oil consumption was about 2-1/2 percent lower in 2010 than in 2000, with net imports of oil down nearly 10 percent, even though U.S. real GDP rose by nearly 20 percent over that period.

This dramatic shift in the sources of demand for commodities is not unique to oil. If anything, the pattern is even more striking for industrial metals, where double-digit percentage rates of decline in consumption by the advanced economies over the past decade have been overwhelmed by triple-digit percentage increases in consumption by the emerging market economies.4 Likewise, improving diets in the emerging market economies have significantly increased their demand for agricultural commodities. Importantly, in noting these facts, I intend no criticism of emerging markets; growth in those economies has conferred substantial economic benefits both within those countries and globally, and in any case, the consumption of raw materials relative to population in emerging-market countries remains substantially lower than in the United States and other advanced economies. Nevertheless, it is undeniable that the tremendous growth in emerging market economies has considerably increased global demand for commodities in recent years.

Against this backdrop of extremely robust growth in demand, the supply of many commodities has lagged behind. For example, world oil production has increased less than 1 percent per year since 2004, compared with nearly 2 percent per year in the prior decade. In part, the slower increase in the supply of oil reflected disappointing rates of production in countries that are not part of the Organization of the Petroleum Exporting Countries (OPEC). However, OPEC has not shown much willingness to ramp up production, either. Most recently, OPEC production fell 1.3 million barrels per day from January to April of this year, reflecting the disruption to Libyan supplies and the lack of any significant offset from other OPEC producers. Indeed, OPEC's production of oil today remains about 3 million barrels per day below the peak level of mid-2008. With the demand for oil rising rapidly and the supply of crude stagnant, increases in oil prices are hardly a puzzle.

Production shortfalls have plagued many other commodities as well. Agricultural output has been hard hit by a spate of bad weather around the globe. For example, last summer's drought in Russia severely reduced that country's wheat crop. In the United States, high temperatures significantly impaired the U.S. corn crop last fall, and dry conditions are currently hurting the wheat crop in Kansas. Over the past year, droughts have also afflicted Argentina, China, and France. Fortunately, the lag between planting and harvesting for many crops is relatively short; thus, if more-typical weather patterns resume, supplies of agricultural commodities should rebound, thereby reducing the pressure on prices.

Not all commodity prices have increased, illustrating the point that supply and demand conditions can vary across markets. For example, prices for both lumber and natural gas are currently near their levels of the early 2000s. The demand for lumber has been curtailed by weakness in the U.S. construction sector, while the supply of natural gas in the United States has been increased by significant innovations in extraction techniques.5 Among agricultural commodities, rice prices have remained relatively subdued, reflecting favorable growing conditions.

In all, these cases reinforce the view that the fundamentals of global supply and demand have been playing a central role in recent swings in commodity prices. That said, there is usually significant uncertainty about current and prospective supply and demand. Accordingly, commodity prices, like the prices of financial assets, can be volatile as market participants react to incoming news. Recently, commodity prices seem to have been particularly responsive to news bearing on the prospects for global economic growth as well as geopolitical developments.

As the rapid growth of emerging market economies seems likely to continue, should we therefore expect continued rapid increases in the prices of globally-traded commodities? While it is certainly possible that we will see further increases, there are good reasons to believe that commodity prices will not continue to rise at the rapid rates we have seen recently. In the short run, unexpected shortfalls in the supplies of key commodities result in sharp price increases, as usage patterns and available supplies are difficult to change quickly. Over longer periods, however, high levels of commodity prices curtail demand as households and firms adjust their spending and production patterns. Indeed, as I noted earlier, we have already seen significant reductions in commodity use in the advanced economies. Likewise, over time, high prices should elicit meaningful increases in supply, both as temporary factors, such as adverse weather, abate and as investments in productive capacity come to fruition. Finally, because expectations of higher prices lead financial market participants to bid up the spot prices of commodities, predictable future developments bearing on the demands for and supplies of commodities tend already to be reflected in current prices. For these reasons, although unexpected developments could certainly lead to continued volatility in global commodity prices, it is reasonable to expect the effects of commodity prices on overall inflation to be relatively moderate in the medium term.

While supply and demand fundamentals surely account for most of the recent movements in commodity prices, some observers have attributed a significant portion of the run-up in prices to Federal Reserve policies, over and above the effects of those policies on U.S. economic growth. For example, some have argued that accommodative U.S. monetary policy has driven down the foreign exchange value of the dollar, thereby boosting the dollar price of commodities. Indeed, since February 2009, the trade-weighted dollar has fallen by about 15 percent. However, since February 2009, oil prices have risen 160 percent and nonfuel commodity prices are up by about 80 percent, implying that the dollar's decline can explain, at most, only a small part of the rise in oil and other commodity prices; indeed, commodity prices have risen dramatically when measured in terms of any of the world's major currencies, not just the dollar. But even this calculation overstates the role of monetary policy, as many factors other than monetary policy affect the value of the dollar. For example, the decline in the dollar since February 2009 that I just noted followed a comparable increase in the dollar, which largely reflected flight-to-safety flows triggered by the financial crisis in the latter half of 2008; the dollar's decline since then in substantial part reflects the reversal of those flows as the crisis eased. Slow growth in the United States and a persistent trade deficit are additional, more fundamental sources of recent declines in the dollar's value; in particular, as the United States is a major oil importer, any geopolitical or other shock that increases the global price of oil will worsen our trade balance and economic outlook, which tends to depress the dollar. In this case, the direction of causality runs from commodity prices to the dollar rather than the other way around. The best way for the Federal Reserve to support the fundamental value of the dollar in the medium term is to pursue our dual mandate of maximum employment and price stability, and we will certainly do that.

Another argument that has been made is that low interest rates have pushed up commodity prices by reducing the cost of holding inventories, thus boosting commodity demand, or by encouraging speculators to push commodity futures prices above their fundamental levels. In either case, if such forces were driving commodity prices materially and persistently higher, we should see corresponding increases in commodity inventories, as higher prices curtailed consumption and boosted production relative to their fundamental levels. In fact, inventories of most commodities have not shown sizable increases over the past year as prices rose; indeed, increases in prices have often been associated with lower rather than higher levels of inventories, likely reflecting strong demand or weak supply that tends to put pressure on available stocks.

Finally, some have suggested that very low interest rates in the United States and other advanced economies have created risks of economic overheating in emerging market economies and have thus indirectly put upward pressures on commodity prices. In fact, most of the recent rapid economic growth in emerging market economies appears to reflect a bounceback from the previous recession and continuing increases in productive capacity, as their technologies and capital stocks catch up with those in advanced economies, rather than being primarily the result of monetary conditions in those countries. More fundamentally, however, whatever the source of the recent growth in the emerging markets, the authorities in those economies clearly have a range of fiscal, monetary, exchange rate, and other tools that can be used to address any overheating that may occur. As in all countries, the primary objective of monetary policy in the United States should be to promote economic growth and price stability at home, which in turn supports a stable global economic and financial environment.

Monetary Policy
Let me conclude with a few words about the current stance of monetary policy. As I have discussed today, the economic recovery in the United States appears to be proceeding at a moderate pace and--notwithstanding unevenness in the rate of progress and some recent signs of reduced momentum--the labor market has been gradually improving. At the same time, the jobs situation remains far from normal, with unemployment remaining elevated. Inflation has risen lately but should moderate, assuming that commodity prices stabilize and that, as I expect, longer-term inflation expectations remain stable.

Against this backdrop, the Federal Open Market Committee (FOMC) has maintained a highly accommodative monetary policy, keeping its target for the federal funds rate close to zero and further easing monetary conditions through large-scale asset purchases. The FOMC has indicated that it will complete its purchases of $600 billion of Treasury securities by the end of this month while maintaining its existing policy of reinvesting principal payments from its securities holdings. The Committee also continues to anticipate that economic conditions are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets. In this context, monetary policy cannot be a panacea. Still, the Federal Reserve's actions in recent years have doubtless helped stabilize the financial system, ease credit and financial conditions, guard against deflation, and promote economic recovery. All of this has been accomplished, I should note, at no net cost to the federal budget or to the U.S. taxpayer.

Although it is moving in the right direction, the economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established. At the same time, the longer-run health of the economy requires that the Federal Reserve be vigilant in preserving its hard-won credibility for maintaining price stability. As I have explained, most FOMC participants currently see the recent increase in inflation as transitory and expect inflation to remain subdued in the medium term. Should that forecast prove wrong, however, and particularly if signs were to emerge that inflation was becoming more broadly based or that longer-term inflation expectations were becoming less well anchored, the Committee would respond as necessary. Under all circumstances, our policy actions will be guided by the objectives of supporting the recovery in output and employment while helping ensure that inflation, over time, is at levels consistent with the Federal Reserve's mandate.

1. Through April, personal consumption expenditures (PCE) inflation over the previous six months was 3.6 percent at an annual rate; excluding gasoline, inflation over that period was 2 percent. Over a 12-month span, inflation through April was 2.2 percent; excluding gasoline, it was 1.2 percent.

2. In the Thomson Reuters/University of Michigan Surveys of Consumers, the median reading on expected inflation over the next 5 to 10 years was 2.9 percent in May after having averaged 2.8 percent in 2010. In the Survey of Professional Forecasters (SPF) compiled by the Federal Reserve Bank of Philadelphia, the median projection for PCE inflation over the next 10 years was 2.3 percent in May, up from the 2.1 percent average reading last year. The equivalent SPF projection for CPI inflation was 2.4 percent, versus 2.3 percent in 2010. The 5-year forward measure of inflation compensation derived from TIPS stood at about 2-3/4 percent in May, down noticeably from the levels observed toward the end of 2010.

3. The GDP data cited here are from the International Monetary Fund's World Economic Outlook database. The difference between the advanced and emerging market economies is also evident in the statistics on industrial production, which is perhaps more directly relevant to the demand for commodities. According to the CPB Netherlands Bureau for Economic Policy Analysis, from March 2009 to March 2010, industrial production rose 26 percent in the emerging market economies and 11 percent in the advanced economies.

4. A portion of commodity use in the emerging market economies serves as inputs to the production of exports, some of which are ultimately consumed in advanced economies.

5. As natural gas is difficult to transport overseas, the increased supplies of natural gas in North America have not translated into significantly lower prices abroad. In the first quarter of 2011, natural gas prices in the United States were less than half of those in Germany.

Pound Gains to a Two-Month High Against Euro; IMF May Not Give Greece Aid

2011-05-26T17:01:00.000-07:00

By Emma Charlton - May 26, 2011 11:37 PM GMT+0800

The pound reached an 11-week high against the euro after a European Union policy maker said the International Monetary Fund may not give Greece its next portion of aid, boosting the relative appeal of the U.K. currency.

Britain’s pound appreciated to the highest in two weeks versus the dollar after a report showed the U.S. economy grew less than economists forecast. A gauge of U.K. consumer-services companies dropped to minus 23 in the three months through May from minus 11 in the quarter through February, data showed today. The Bank of England left borrowing costs at a record low of 0.5 percent this month because some policy makers said an increase in interest rates might hurt consumer confidence.

“We’re seeing these comments come out, and that’s weakening the euro against the pound,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “There is still nervousness around in the market with respect to the dollar and anything that is to do with the economic outlook.”

Sterling gained 0.4 percent to 86.26 pence per euro as of 4:36 p.m. in London, after reaching 86.11 pence, the strongest since March 11. It appreciated 0.5 percent to $1.6348, after touching $1.6377, the most since May 12. It was 0.4 percent weaker at 132.93 yen.
‘IMF Rules’

“There are specific IMF rules and one of those rules says that IMF can only take action when the refinancing guarantee is given over 12 months,” Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said today at a conference. “I don’t think that the troika will come to the conclusion that this is given,” he said, referring to the representatives from the IMF, European Central Bank and European Commission who assess Greece’s progress.

The dollar dropped against the yen and euro as data showed the U.S. economy grew at a 1.8 percent annual rate in the first quarter, less than the 2.2 percent forecast by economists in a Bloomberg survey.

The pound weakened against the euro earlier today after the consumer-services report, which showed a gauge of U.K. companies such as hotels and restaurants, fell to the lowest since November 2009.

U.K. central bank officials are locked in a debate over whether to tighten monetary policy after inflation accelerated to 4.5 percent in April, the fastest since 2008. While the European Central Bank and Sweden’s Riksbank have already started raising rates, Bank of England Governor Mervyn King says it’s too soon because the recovery remains weak. Advocates of a rate increase say the price surge risks becoming embedded in the economy unless policy makers act.

U.K. Exports

The pound strengthened against the dollar and the euro yesterday as a report showed U.K. exports helped the economy resumed growth in the first quarter, outweighing the biggest slump in consumer spending in almost two years.

Sweden’s SEB AB advised selling the pound against the euro, saying the Bank of England won’t be able to raise interest rates without harming exports that boost the economy.

“Yesterday’s gross domestic product report underlines that a hike from the BOE is impossible within a foreseeable future,” Richard Falkenhall, a Stockholm-based currency strategist, wrote in an e-mailed note today. “Higher rates would probably strengthen the pound, at least short term, and hurt the only part having a positive impact on growth -- external demand. Domestic demand is extremely weak.”

U.K. government bonds were little changed, with the yield on the 10-year gilt down one basis point to 3.32 percent and the two-year note yield at 0.93 percent.

Obama Says U.S. Default May ‘Unravel’ Global Finances

2011-05-15T17:54:00.000-07:00

By Roger Runningen and James Rowley - May 16, 2011 1:11 AM GMT+0800

President Barack Obama said failure to raise the U.S. debt ceiling by early August might disrupt the global financial system and plunge the nation into another recession.

If investors “around the world thought the full faith and credit of the U.S. was not being backed up, if they thought we might renege on our IOUs, it could unravel the entire financial system,” Obama said on a segment taped for today’s “Face the Nation” program on CBS. “We could have a worse recession than we’ve already had.”

Obama is reaching out to Republican and Democratic lawmakers to win approval of an increase in the debt ceiling. The government projected this month that the $14.3 trillion debt limit will be reached tomorrow. Treasury Secretary Timothy Geithner says that while he can juggle accounts for a time, he will run out of options for avoiding default by early August.

Republicans including House Speaker John Boehner of Ohio and Senate Minority Leader Mitch McConnell of Kentucky are seeking trillions of dollars of spending cuts and no tax increases in exchange for supporting a higher debt limit. Obama on April 13 proposed a long-term deficit-reduction package of about $4 trillion over 12 years. It includes $2 trillion in spending cuts, $1 trillion in tax increases and $1 trillion in reduced interest payments.
‘Totally Irresponsible’

Boehner, who in a May 9 speech demanded spending cuts greater than the amount of any debt-ceiling increase, said today that he understood “what the president was saying about jeopardizing the full faith and credit of the United States.”

“Our obligation is to raise the debt ceiling,” he said on CBS’s “Face the Nation.” “But to raise the debt ceiling without dealing with the underlying problem is totally irresponsible.”

Obama appointed Vice President Joe Biden to lead negotiations with congressional leaders to try to strike a deal on reducing debt and deficits. The small group of negotiators has met three times with Biden. The president held separate talks with Senate Republicans and Democrats May 11 and May 12.

“I’ve said, ‘Get them in a room, hammer out a deal, and make sure that we don’t even get close’” to defaulting on the nation’s debt, Obama said.

Debt reduction must be “balanced” and include tax increases, Obama said.
‘Shared’ Burden

“Are we going to make sure no single group -- not seniors, not poor folks, not any single group -- is carrying the whole burden? Let’s make sure the burden is shared,” Obama said on the CBS program, which was taped May 11 in Washington for broadcast today.

Obama said he would resist cuts in such areas as medical research; infrastructure such as roads, bridges or railroads; or college loans for needy students.

“My hope is that Congress is going to say, ‘This is so serious, we can’t play politics with it,’” Obama said. “Have faith that usually after trying everything else, we end up doing the right thing.”

Obama’s statement “makes me think he is really not serious about tackling the big problems that face our country,” Boehner said. “He’s talking about it, but I am not seeing real action yet.”

Still, Boehner said he was optimistic that the talks led by Biden would yield an agreement on legislation to cut spending and extend the government’s borrowing authority.
‘Opportunity to Act’

“We don’t have to wait to the eleventh hour” like Congress did last month to extend federal spending and avoid a government shutdown, Boehner said. “But I am not going to walk away from this moment” of “opportunity to act” to make serious spending cuts, he said.

“At the end of this process, it’s going to have to come to that,” Boehner said of extending the government’s borrowing authority.

The speaker said that “for quite a while” he has privately discussed with Obama his idea for making drastic spending cuts and changes in entitlements like Medicare and other programs in tandem with raising the debt ceiling.

Boehner said he told Obama, “‘Let’s lock arms and jump out of the boat together.’ I am serious about dealing with this. And I hope he is just as serious.”

One of Boehner’s predecessors as House speaker, Republican presidential candidate Newt Gingrich, said on NBC’s “Meet the Press” that Congress should “avoid default if you possibly can” but that the president shouldn’t get “a blank check.”

McConnell, appearing today on CNN’s “State of the Union,” said he wants extension of the debt limit coupled with broad- reaching fiscal reforms.

“We need to do something significant,” he said. “We need to impress the markets, impress foreign countries that we’re going to get our act together, and astonish the American people that the adults are in charge in Washington and are actually going to deal with this issue.”

Australia Prepares to Tighten Fiscal Policy in Hit to Consumers

2011-05-05T17:52:00.000-07:00

By Gemma Daley - May 5, 2011 10:01 PM GMT+0800

Australia’s government next week will unveil spending cuts aimed at assuring a return to a budget surplus, helping the nation’s central bank contain inflation at the expense of growth in the economy’s 20th year of expansion.

Treasurer Wayne Swan is scheduled to detail on May 10 the programs to be trimmed even after Australia’s costliest natural disasters and a currency appreciation that may undermine export competitiveness. The steps are designed to strengthen the fiscal position of a country reliant on Chinese demand for its minerals that has left what officials call a “patchwork” economy.

The plans would leave the government’s fiscal stance supporting monetary policy in the developed nation with the highest borrowing costs. Prime Minister Julia Gillard may be trying to head off rate rises that would add to challenges for an administration with a 15-year-low public approval rating.

“Officials are worried they will be blamed for rate hikes,” said Helen Kevans, an economist at JPMorgan Chase & Co. in Sydney. “This surplus promise is a political imperative and it’s the one promise they don’t want to break.”

JPMorgan says the government may toughen rules for 800,000 people on the disability pension, scrap or reduce welfare payments, cut family-tax incentives, stop higher-paid workers from receiving a private health-insurance incentive and pare back medical-testing payments.
Consumption Drag

Such steps would add to a drag on consumer spending after households boosted savings rates in the aftermath of the global financial crisis. Retail sales fell in March for the first time in five months, sending shares lower for Myer Holdings Ltd. (MYR), David Jones Ltd. (DJS) and Woolworths Ltd. (WOW) Yesterday’s retail report spurred some economists to predict a first-quarter contraction.

“The main impact of the budget on the economy will be quite contractionary in terms of growth,” said Brian Redican, senior economist in Sydney at Macquarie Group Ltd., Australia’s biggest investment bank. “The imposition of a flood levy is going to ensure that consumers stay in their holes.”

Swan has described it as a “tough” budget as the government tries to deliver a surplus in the year ending June 30, 2013, to improve its reputation for fiscal stewardship. Flooding across Australia, Tropical Cyclone Yasi, bushfires, an 18 percent gain in the local dollar from a year ago against the U.S. currency and slower consumer spending have seen revenue fall by A$6.5 billion ($6.9 billion) since a November budget forecast.
Levy for Recovery

The flood levy, applying a range of increases in income taxes, is forecast to raise about A$1.8 billion. Deloitte Access Economics forecasts the budget gap will shrink to A$21.7 billion in the 2011-12 fiscal year, from A$51.4 billion deficit this year.

Standard & Poor’s and Moody’s Investors Service, which have awarded the nation their top investment grade, have said the government could delay the budget surplus and not affect ratings.

The bonds have lured Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co. He said May 3 investors should prefer Australian and Canadian government debt and shun U.S. Treasuries.

Australia will tighten fiscal policy by 3.7 percentage points of gross domestic product in the two years through 2012, the second-steepest reduction in deficits in the world, the International Monetary Fund predicted last month. GDP rose 0.7 percent in the fourth quarter, accelerating from 0.1 percent in the previous three months.

Rate Increases

The tightening would add to a monetary brake on the economy that has amounted to a 175 basis point cumulative increase in the benchmark interest rate from October 2009 to November last year. The Reserve Bank of Australia has kept the cash rate target unchanged at 4.75 percent since then.

“Interest rates have to go up, but that will have enormous damage on some sectors of the economy that aren’t doing so well,” said Gerry Harvey, executive chairman of No. 1 furniture and electrical retailer Harvey Norman Ltd.

Harvey said consumers of his items had “never had it so good” with a stronger dollar making imported electronics cheaper. By contrast, industries such as manufacturing and tourism are hurting under the currency gains, Treasurer Swan has said.

All told, a tighter fiscal stance is appropriate given job gains and strength in commodity exports, according to Art Woo, director of Asia sovereign ratings at Fitch Ratings. “Australia probably needs a combination of tightening to take place in both fiscal and monetary policy,” he said.

Worst Since ‘96

Separate efforts by the Gillard administration to impose a tax on mining companies’ profits and charge companies for their pollution to reduce greenhouse emissions have proven unpopular. Those who would choose the Labor Party as their first pick in an election fell to 31 percent, the lowest since May 1996, according to a Nielsen opinion survey of 1,400 people published in the Age newspaper on April 18.

“Voters are turned off by the carbon tax, the mining tax and the flood tax,” said Nick Economou, political analyst at Melbourne’s Monash University. “The government is drowning and because of its tenuous hold on power, this budget won’t save it,” he predicted.

Japan Monetary Base Jumps 23.9% In April

2011-05-05T17:47:00.000-07:00

by RTT Staff Writer 5/5/2011 7:58 PM ET

TOP MARKET NEWS

(RTTNews) - The monetary base in Japan climbed 23.9 percent on year in April, the Bank of Japan said on Friday, standing at 121.893 trillion yen. That follows a 16.9 percent annual expansion in March.

Banknotes in circulation added 3.7 percent on year, while coins in circulation rose just 0.1 percent. The current account balances surged 123.4 percent on year, including a 109.3 percent annual spike in reserve balances.

The adjusted monetary base climbed a seasonally adjusted 119.5 percent annualized to 119.740 trillion yen.

Obama Says U.S. Probing Speculators, Traders in Oil Markets

2011-04-21T14:32:00.000-07:00

By Nicholas Johnston and Roger Runningen - Apr 21, 2011 12:29 PM PT

President Barack Obama said a Justice Department probe will examine the role of “traders and speculators” in oil markets and how they contribute to high gas prices.

“The attorney general’s putting together a team whose job it us to root out any cases of fraud or manipulation in the oil markets that might affect gas prices, and that includes the role of traders and speculators,” Obama said today in Reno, Nevada. “We are going to make sure that no one is taking advantage of American consumers for their own short-term gain.”

The administration today created a working group to explore whether oil and gasoline prices are being driven higher by illegal manipulation.

The group, which includes representatives of federal agencies and state attorneys general, will check for fraud, collusion or misrepresentation at the retail and wholesale level, the Justice Department said in a statement today. The group also will examine investor practices and the role of speculators and index traders in oil futures markets.

Obama faces political pressure over rising gasoline prices. Crude oil futures have increased 22 percent and gasoline surged 34 percent this year as Middle East unrest reduced supply and the global economic rebound bolstered fuel demand. Both futures contracts touched the highest levels this month since the records reached in 2008.
Gasoline Prices

The average price nationwide of regular gasoline at the pump was $3.84 a gallon yesterday, the highest since Sept. 16, 2008, AAA said on its website.

“It hurts. Every time you go to work a big chunk of your paycheck is eaten up,” Obama said. “This gas issue is serious.”

The president is on a cross-country trip to sell his deficit reduction plan, speaking today in Reno after earlier holding town-hall discussions in Palo Alto, California and Annandale, Virginia.

The White House and House Republicans have offered separate plans to reduce cumulative budget deficits by $4 trillion, over 12 years and 10 years respectively.

“We have to tackle this challenge,” Obama said today in Reno. “We’re going to cut spending in a way that’s fair” without damaging investments in such items as medical research and basic science, he said.
Bond Yields

While the deficit dominates political debate in Washington, bond market yields in the U.S. are lower now than when the government was running a budget surplus a decade ago even as Treasury Department data show that the amount of marketable debt outstanding has risen to more than $9 trillion from about $4.3 trillion in mid-2007. The yield on the benchmark 10-year note is below the average of about 7 percent since 1980 and the average of 5.48 percent in 1998 through 2001, the last time the U.S. had a budget surplus, according to Bloomberg Bond Trader prices.

Ten-year yields fell 1 basis point, or 0.01 percentage point, to 3.40 percent at 2:32 p.m. in New York, according to Bloomberg Bond Trader prices. The Dow Jones Industrial Average rose 0.2 percent to 12,481.69 at 3:14 p.m., after surging 1.5 percent yesterday to its highest closing level since June 2008.

In addition to negotiations between the administration and Congressional Republicans over long-term federal spending, Congress must soon act to raise the federal debt limit.
‘Immediate Spending Cuts’

Virginia Representative Eric Cantor, the No. 2 Republican in the U.S. House, said today that his party won’t agree to a debt-limit increase “without binding budget reforms and immediate spending cuts.”

Asked about Cantor’s comment, White House press secretary Jay Carney told reporters traveling with Obama on Air Force One that it’s “risky” for Cantor to suggest that “if he or others did not get what they wanted, that they would then throw the government into default.”

While traveling in the western U.S., Obama is attending fundraising events in San Francisco and Los Angeles that are expected to bring in between $4 million and $5 million. The president returns to Washington tomorrow.

Dollar Weakens as Global Growth Optimism Buoys Riskier Assets

2011-04-21T14:29:00.000-07:00

By Catarina Saraiva - Apr 21, 2011 1:05 PM PT

April 20 (Bloomberg) -- Nick Bennenbroek, head of currency strategy at Wells Fargo & Co., talks about the outlook for the dollar and euro. Bennenbroek, speaking with Julie Hyman on Bloomberg Television's "Fast Forward," also discusses Federal Reserve monetary policy. (Source: Bloomberg)

The dollar slid to a record against the Australian dollar and touched the lowest level in 16 months versus the euro as signs of sustained global growth boosted demand for higher-yielding assets.

The greenback depreciated to the weakest in at least 40 years versus the Swiss franc and lows of two years or more against the Swedish krona, the South Korean won and the New Zealand dollar on speculation the Federal Reserve will lag behind other central banks in raising interest rates.

“Fed policy is going to stay the way it is for some time,” said Mary Nicola, a currency strategist at BNP Paribas SA in New York. “You’re looking to capture yield, so you’re going to move out of the dollar, which is lower-yielding, and move into something that’s higher-yielding.”

The dollar depreciated 0.2 percent to $1.4556 versus the euro at 3:59 p.m. in New York, from $1.4523 yesterday, extending this week’s decline to 0.9 percent. It earlier slid to $1.4649, the weakest level since December 2009. The greenback dropped 0.9 percent to 81.82 yen, from 82.56, after touching 81.62, the lowest level since March 29. The yen appreciated 0.7 percent to 119.10 versus the euro, from 119.90.

Sterling rallied against the dollar as a report showed retail sales unexpectedly rose 0.2 percent in March as spending on food surged. The median forecast of 20 economists in a Bloomberg News survey was for a 0.5 percent decline.
Gain in Pound

The pound gained 0.5 percent to 88.07 pence against the euro and advanced 0.7 percent to $1.6528 after touching $1.6599, the highest level in 16 months.

Australia’s dollar climbed as much as 0.6 percent to $1.0775, the strongest level since it was freely floated in 1983, before trading at $1.0745, compared with $1.0714.

Producer prices in Australia rose 1.2 percent in the first quarter after a 0.1 percent gain in the prior three months, the Bureau of Statistics said. The median forecast of 14 economists in a Bloomberg News survey was for a 1 percent gain.

Australian Foreign Minister Kevin Rudd ruled out intervention in the Aussie, which has gained 16 percent in the past year against the greenback. Spurred by revenue from shipments of coal and iron ore to China, the currency’s surge has hurt Australian tourism, manufacturing and education.

“We are not in the business of regulating exchange rates,” Rudd told Bloomberg Television at his Brisbane office yesterday. “We don’t intend to drift back to anything which seeks to manipulate our exchange rate.”
ECB Rate Outlook

The euro rose earlier against the dollar on speculation the European Central Bank will boost its main refinancing rate further after increasing it on April 7 for the first time since the financial crisis.

Spain’s 2.49 billion euros ($3.63 billion) offering yesterday of 10-year bonds drew higher demand, damping speculation the nation will require a bailout.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback versus the currencies of six major U.S. trading partners, dropped as much as 0.9 percent to 73.735, the lowest level since August 2008.

The Fed isn’t expected to increase its target lending rate until the first quarter of 2012, according to the median forecast in a Bloomberg News survey of economists.

“The dollar is paralyzed, absolutely paralyzed by the low-rate structure here while the rest of the world is hiking rates,” Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York, said in a radio interview on “Bloomberg Surveillance” with Tom Keene.
Multiyear Lows

The dollar fell to multiyear lows against the Swiss franc, Sweden’s krona, the South Korean won, New Zealand’s kiwi and Canada’s dollar.

The U.S. currency sank to a record low against the franc, touching 87.81 centimes, the weakest level since at least 1971, when Bloomberg records start.

Sweden’s krona appreciated as much as 0.9 percent to 6.0736 versus the dollar, the strongest level since August 2008, a day after the Riksbank raised its benchmark lending rate by a quarter-percentage point to 1.75 percent.

The won reached 1,078.30 per dollar, the strongest level since September 2008. The kiwi, as New Zealand’s currency is known, reached 80.38 U.S. cents, the highest since March 2008, and the loonie touched 94.55 cents per U.S. dollar, the strongest level November 2007.

The euro pared its gain on reduced risk demand as reports showed the U.S. economic recovery may be losing momentum. Initial claims for jobless benefits fell less than economists forecast, the Labor Department reported. Manufacturing in the Philadelphia region slowed more than forecast as measures of orders and sales dropped, the Philadelphia Fed reported.

“The slight disappointment on the U.S. data side led to a little bit less optimism and a little bit of a decline in risk appetite,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York.

Greece's Surging Unemployment May Become ‘Bomb’ to Society, Minister Says

2011-03-28T16:06:00.001-07:00

By Marcus Bensasson - Mar 28, 2011 3:03 AM PT

Greece’s increasing jobless rate may become a “bomb in the foundations of society” as the government struggles to lower the country’s budget gap, Economy and Competitiveness Minister Michalis Chrisochoides said.

“The economic problem will at some point be solved but the social problems are getting continually more toxic,” Chrisochoides said in an interview on March 22 in Athens. “At the moment we have a society that is patient and dealing with the problem, but we have to show people that what we are doing is working.”

Greece’s unemployment rate surged to a record 14.8 percent in December, making it the second highest after Spain in the 17- member euro region. The government has been forced to toughen spending cuts and raise taxes in exchange for last year’s 110 billion-euro ($115 billion bailout from the European Union and the International Monetary Fund as the nation grapples with its third year of recession.

A possible doubling of investment under the country’s National Strategic Reference Framework may help shift the growth drivers from consumer spending to exports and output, Chrisochoides said. The funds are unaffected by government efforts to implement deficit-cutting measures equivalent to 0.75 percent of gross domestic product this year, he said.

“We are trying to create a Greece that is friendly to investment,” Chrisochoides said. “Many businesses that didn’t have a healthy foundation will close during this crisis. The issue is to avoid strong ones closing because of a lack of available bank finance.”

Among those at risk is Elefsina Shipyards, which filed for creditor protection on March 10. The shipyard, which builds commercial and military ships, is in talks with the government and its lenders, Alpha Bank SA and Emporiki Bank SA (TEMP) about a restructuring.

Elefsina closing “would be a defeat because it is a very strong operation that employs 700 people and gives work to small businesses,” Chrisochoides said.

Euro May Extend Its Recent Decline, Commerzbank Says: Technical Analysis

2011-03-28T16:04:00.000-07:00

By Anchalee Worrachate - Mar 28, 2011 4:05 AM PT

The euro’s decline last week against the dollar may be part of a “failure pattern,” and the currency may drop further if it breaks below $1.3975, Commerzbank AG said, citing trading patterns.

The initial so-called support level is $1.400, which represents the euro’s 20-day moving average, Karen Jones, a London-based technical analyst at Commerzbank, wrote in an e- mailed note today. The next level to watch is $1.3975, she said.

“Failure here will instigate a slide to $1.3752/$13718 and eventually $1.3430,” she wrote. It’s not clear whether the euro’s recent move “is a consolidation or failure pattern at this stage, but we suspect the latter.”

The euro fell 0.7 percent against the dollar last week, the biggest decline since the week that ended on Jan. 7, paring its monthly gain against the U.S. currency to 1.82 percent. It traded at $1.4056 as of 12:20 p.m. in London.

A moving average is an indicator that displays the average value of a security’s price over a period of time. A close below the level suggests the asset may be on a downtrend.

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index. A support level on a chart is where technical analysts expect orders to buy a bond and its related securities. Resistance is where sell orders may be clustered.

EU Debt-Relief Pact Puts Pressure on Nations to Cut Deficits: Euro Credit

2011-03-14T04:52:00.000-07:00

By Simon Kennedy and Anchalee Worrachate - Mar 14, 2011 8:01 AM GMT+0800

European leaders are betting their retooled bailout plan can defuse the region’s debt crisis as they reject costlier remedies and put the onus for stopping the turmoil on cash-strapped governments.

In a pact struck in the early hours of the weekend and two weeks sooner than investors expected, officials broadened the size and scope of their 440 billion-euro ($614 billion) bailout fund and eased the terms of Greek rescue loans. They resisted calls to buy bonds in the open market or finance buybacks.

The test of the accord will be whether investors reverse a slump that sent yields on Greek and Portuguese debt to euro-area records last week. Greece is fighting to show it can remain solvent and Portugal may be the next to seek aid. Further selling may force policy makers back to the drawing board when they reconvene March 24-25.

“Policy makers understand that market sentiment is crucial, and at least in the near-term, these measures are likely to improve sentiment,” said John Stopford, head of fixed income at Investec Asset Management Ltd. in London, which manages $80 billion. “I need to see how they are implemented. I’m happy to stay away from peripheral bonds for now.”

The euro climbed, advancing to $1.3978 as of 6:29 a.m. in Sydney from $1.3903 in New York on March 11.

The weekend agreement, which finance ministers will detail in meetings later today and tomorrow, may boost demand for the short-term debt of strained economies, said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London.

‘Genuine Surprise’

“European leaders have delivered a genuine surprise just when the market was starting to fear the worst,” he said.

Thirteen months since they began crisis-fighting, euro leaders find themselves still needing to assure investors they have the tools and the will to protect the single currency.

The latest salvo of measures sends “an important message on the political pledge of the euro members to fight for the euro’s stability,” German Chancellor Angela Merkel said after the Brussels talks. “Everyone had to make a contribution. I hope that this will also be a good message to the world in terms of the euro as a major currency.”

The European Financial Stability Facility will now be able to spend its full 440 billion-euro capacity and buy bonds directly from governments after collateral rules required to secure an AAA credit rating previously limited its lending power to about 250 billion euros and Germany opposed asset purchases.

The primary-market purchases will still just be used as an exception and only in return for austerity commitments.

They would hand a backstop to indebted nations should a Greek restructuring spook markets and threaten to derail other government bond auctions, said Andrew Bosomworth, a fund manager at Pacific Investment Management Co. in Munich.
Greek Return

Dimitris Drakopoulos, an economist at Nomura International Plc in London, said such purchases may also ease the way for Greece to begin selling bonds again in the first quarter of 2012. The yield on the country’s 10-year debt touched 12.5 percent on March 11. Germany’s comparable bund was 3.2 percent.

Almost doubling the amount available in the fund frees up enough money to support Ireland, Portugal and Spain for about two and half years, although it would not be large enough to bail out Italy and Belgium, said Bosomworth, who used to work at the European Central Bank.

“I’m positively surprised, for a change,” he said. “The agreement contains important elements of a firewall” that could stop the crisis worsening.

Where the leaders held back was in rejecting the lobbying of ECB President Jean-Claude Trichet to allow the facility to buy bonds in the open market. The ECB has pushed such a decision to enable it to withdraw from markets after buying about 77 billion euros of bonds since last May.
Missing Detail

The commitment wasn’t matched with detail as Merkel indicated states will increase their guarantees. She herself may face political obstacles at home with an electorate and lawmakers opposed to putting more German money at stake and bond purchases, said Holger Schmieding, chief economist at Joh Berenberg Gossler & Co. in London.

“The risk that the parties backing Merkel may possibly lose a string of regional elections on March 27 does not make the situation easier,” said Schmieding. “Still, German politicians have a record of living up to their pro-European credentials whenever it really counts.”

In a reward for its austerity program and 50 billion euro privatization program, leaders made a provisional agreement to lower Greece’s interest rates of about 5 percent for aid by 100 basis points. They also extended the repayment period of the loans to 7 1/2 years from three years. Greek Prime Minister George Papandreou estimates the moves would save about 6 billion euros over the life of the loans.
Irish Bind

Ireland failed to secure similar relief on its 85 billion- euro bailout as recently elected Prime Minister Enda Kenny refused to yield to calls to raise its 12.5 percent company tax rate, calling the proposal of Germany and France “harmonization of taxes through the back door.” Negotiations will continue with the aim of a deal at the March-end talks.

Among the other deals done at the summit was a plan to tighten economic cooperation -- committing nations to enact budget rules into law, a core German demand. A basic accord was also reached on a permanent 500 billion euro safety net from 2013, the European Stability Mechanism, with a mix of guarantees and capital.

The immediate focus for investors is now whether to keep avoiding the debt of Portugal, pushing it closer to pressing the aid button. With the yield on his government’s five-year debt surging to 8 percent on speculation a bailout will be tapped, Prime Minister Jose Socrates’s government last week announced new commitments on deficit reduction amounting to 0.8 percent of gross domestic product for this year.
Pressure on Portugal

“The measures are not specific enough at this stage to allow us to formulate a clear assessment, but we would not be surprised to see markets put Portugal to the test in the coming weeks,” Goldman Sachs Group Inc. economists including London- based Francesco Garzarelli said in a note to clients.

David Mackie, chief European economist at JPMorgan Chase & Co. in London, says the weekend sent a “powerful signal” that countries willing to do all they can to restore budgetary order will be supported by neighbors and debt restructurings could still be avoided, said.

That leaves the responsibility for ending the crisis with individual countries and whether they can cut budget deficits enough to again enjoy the trust of investors, said Charles Morris, who oversees $2.5 billion as head of HSBC Global Asset Management’s Absolute Return Fund.
Debt Load

Greece, for example, faces a debt that the European Commission forecasts will reach 159 percent of GDP next year and which Moody’s Investors Service last week cut by another three levels. On the eve of last week’s talks its 10-year bond yields rose to a record and it cost more than ever to insure against a default.

“To solve the debt crisis, these countries will have to lower their debt proportion to GDP, and interest rate payments will have to be low,” said Morris. “The measures show leaders are serious about tackling the problem and it will improve sentiment in the near term. It remains to be seen if it will solve the problem. We are not in a hurry to buy bonds from peripheral countries.”

Europe May Face More Ratings Cuts, Greek Default, S&P Says

2011-03-08T15:23:00.000-08:00

By Anchalee Worrachate - Mar 8, 2011 12:45 PM PT

Some countries in the euro region may have their credit ratings cut further while a Greece debt default is a “possibility,” said Moritz Kraemer, managing director of European sovereign ratings at Standard & Poor’s.

Asked if the worst was over for the region’s sovereign credit-rating outlook, Kraemer said: “I wish I could say yes, but the answer is no.”

The debt ratings of Portugal and Greece remain at risk of being cut due to concern about how a European Union rescue fund may affect holders of the two nations’ sovereign bonds, S&P said March 1. Ireland retained a negative outlook after S&P cuts its ratings on Feb. 2. Moody’s Investors Service downgraded Greece’s government bond ratings yesterday to B1 from Ba1, and assigned a negative outlook to the rating.

“We still have a number of countries with a negative outlook or CreditWatch negative, indicating their credit ratings may be going down further,” Kraemer said in an interview at a EuroMoney conference in London. “Trigger points for that could be slippage in fiscal consolidation and structural reforms, but also decisions that will be taken at the European level later this month.”

Greek 10-year bond yields and credit-default swaps surged to a record as borrowing costs increased at a debt sale and before European leaders begin meetings aimed at containing the sovereign debt crisis.
Recovery Levels

Spanish bonds also slid as the government sold debt through banks. Greek bond losses extended declines to a ninth day after the nation’s credit rating was cut by Moody’s. Portuguese 10- year bonds fell for a second day before a notes auction tomorrow. German 10-year bonds dropped amid speculation the nation’s economic growth will add to pressure on central bankers to increase interest rates.

A debt default by the Greece’s government is “a possibility” and that investors may recover between 30 percent and 50 percent of the total value if that happens, Kraemer said. Greece is rated BB+ by S&P, or one level below investment grade.

“We do rate Greece as a non-investment grade for about a year now, so clearly a default is a possibility,” said Kraemer. “Defaults out of investment grade are extraordinarily unlikely and we don’t think there will be any.”
Further Downgrades

The Greek Finance Ministry said yesterday that Moody’s decision was “incomprehensible.” Moody’s didn’t heed the progress Greece made in cutting the deficit by 6 percentage points of gross domestic product last year, according to a ministry statement.

Ireland, also at risk of further downgrades based on its outlook at S&P, may fare better than Greece as the country has the “economic resilience and adaptability to face up to its challenge,” Kraemer said.

European Union policy makers intends to approve “comprehensive” package of measures at a March 24-25 summit in a bid to restore confidence in bond markets. This may include setting up a permanent rescue facility, known as the European Stability Mechanism, which will take over the existing mechanism after 2013.

Credit ratings of some euro-region countries, particularly Greece and Portugal, will also depend on the outcome of the summit, Kraemer said.
Yields Climb

“Our concerns about features that we believe will be part of it have to do with the preferred credit status effectively subordinating senior bondholders, and also the possibility to introduce conditionality for lending that would entail the restructuring of commercial debt,” said Kraemer. “Both of those we would consider bad news for bondholders.”

As a consequence, S&P “would consider downgrading ratings of countries that are possible clients of the ESM after 2013,” he said. “These countries, in the first instance, are Portugal and Greece.”

The yield on 10-year Greek bonds jumped as much as 52 basis points to 12.85 percent, the most since Bloomberg began collecting the data in 1988, with the increase in yields the biggest since Oct. 27. It was at 12.84 percent as of 5 p.m. in London. The 6.25 percent securities maturing in June 2020 fell 2.04, or 20.4 euros per 1,000-euro ($1,389) face amount, to 65.29.

The extra yield investors demand to hold the securities instead of German bunds widened to as much as 956 basis points, the most since Jan. 10. The euro fell 0.4 percent to $1.3912.

Credit-default swaps insuring Greek government bonds rose five basis points to an all-time high 1,037 basis points, meaning it costs $1.04 million annually to insure $10 million of debt for five years. They ended the day seven basis points lower at 1,025 basis points.

Fed: Labor Market Strengthened on Manufacturing, Retail

2011-03-02T15:55:00.000-08:00

By Joshua Zumbrun - Mar 2, 2011 2:28 PM PT

The Federal Reserve said the labor market improved throughout the country early this year, driven by rising retail sales and “solid growth” in manufacturing.

“Labor market conditions continued to strengthen modestly, with all Districts reporting some degree of improvement,” the Fed said today in its Beige Book report, an anecdotal account of the economy released two weeks before meetings of the Federal Open Market Committee. Its last survey, released Jan. 12, said the job market was “firming somewhat.”

Overall, the economy “continued to expand at a modest to moderate pace,” the central bank said in Washington. Eleven of the Fed’s 12 regional banks, including San Francisco and Philadelphia, described their regions as expanding, improving or experiencing moderate growth. Only Chicago reported growth “at a pace not quite as strong” as before.

Fed policy makers at their last meeting in January took a more optimistic view of the economy while maintaining their dissatisfaction with job growth. Policy makers, who are pressing ahead with their plan to buy $600 billion in Treasuries through June, raised projections for economic growth this year and made little change to forecasts after 2011 for unemployment and inflation.

The Beige Book reported that all districts except St. Louis “experienced solid growth in manufacturing production” and noted an increase in retail sales in every district except Richmond and Atlanta.
‘Just Great’

“The manufacturing sector is doing just great,” Michael Moran, Chief Economist at Daiwa Securities America Inc., said in an interview on “Bloomberg Bottom Line” with Mark Crumpton, adding that the report wouldn’t dissuade Fed Chairman Ben S. Bernanke from completing the asset-purchase plan, known as QE2 for the second round of quantitative easing.

“He’s planning to go ahead with QE2,” said Moran. “There’s nothing in the Beige Book today which would suggest they should back away from that either.”

The Standard & Poor’s 500 Index rose 0.2 percent to 1,308.44 at the 4 p.m. close of trading in New York. The yield on the 10-year Treasury note rose to 3.47 percent as of 4:48 p.m. in New York, from 3.39 percent yesterday.

The Beige Book followed a report earlier in the day from ADP Employer Services showing that U.S. companies added more workers in February than forecast by economists. Employment increased by 217,000 after a revised 189,000 gain in January. The median estimate in the Bloomberg News survey called for a gain of 180,000 last month.

Jobs Report

The Labor Department will report March 4 that the world’s largest economy added 190,000 jobs in February, the most since May 2010 when the government was hiring to conduct the decennial census, according to the median forecast of a Bloomberg News survey. The unemployment rate will rise to 9.1 percent.

Bernanke, in congressional testimony today, said he’s still not satisfied with the strength of the recovery from a recession that the National Bureau of Economic Research describes as the longest since the Great Depression.

“The economy’s recovery is not firmly established, and we think monetary policy needs to be supportive,” Bernanke said in semiannual testimony to the House Financial Services Committee.

Responding to a question, Bernanke said the Fed’s policy of keeping its benchmark rate near zero for an “extended period” helps provide support to the economy, “which in our judgment, it still needs.”
Economies Growing

The Beige Book’s characterization of growth was little changed from January, when six Fed regions, including Atlanta and Chicago, showed local economies expanding “modestly to moderately,” and four, including New York and Boston, reported “improving” conditions.

The Commerce Department last week reduced its estimate of fourth-quarter growth to a 2.8 percent annual pace from 3.2 percent as state and local governments made deeper cuts in spending. Consumer purchases rose at a 4.1 percent rate, the most since 2006, providing a boost for retailers.

Last week Target Corp., the second-largest U.S. discount retailer, projected sales at stores open at least a year may rise as much as 5 percent this year, after a 2.1 percent gain the prior period.

“Retail spending strengthened compared with a year ago across all Districts except Richmond and Atlanta,” today’s report said, while noting that winter weather “had a negative impact on retail activity” in Boston, New York, Philadelphia, Atlanta, Kansas City and Dallas.

The Beige Book report released today reflects information collected on or before Feb. 18 and summarized by the Atlanta Fed.
Labor Demand

Boston, Cleveland, Minneapolis, and Dallas cited “noticeable improvements” in manufacturing, and Boston and Cleveland “also observed increased labor demand in the health- care and medical sectors,” the report said.

Four districts, including Dallas and Boston, described the manufacturing outlook as “optimistic” and four, including Philadelphia and Atlanta, reported “more rapid improvement in factory orders.”

Manufacturing grew in February at the fastest pace in almost seven years, driven by gains in orders, employment and exports that signal factories will continue to propel the expansion, according to a report this week from the Institute for Supply Management.

Auto dealers are seeing improved demand. General Motors Co. yesterday said U.S. sales of its four remaining brands rose 49 percent in February, topping analysts’ estimates.
Berkshire Hathaway

Berkshire Hathaway Inc.’s quarterly profit rose 43 percent to the highest since 2007, boosted in part by Chairman Warren Buffett’s purchase last year of Burlington Northern Santa Fe, the second biggest railroad in the United States.

The Beige Book described the real estate market as “varied, but overall sales and construction remained at low levels across all districts.”

The improvement in the job market has not translated to pay increases, the report said, describing wage pressures as “minimal across all Districts.”

The report noted that “non-wage input costs increased for manufacturers and retailers” and that many manufacturers “reported having greater ability to pass through higher input costs to customers.”

“Retailers in some Districts mentioned they had implemented price increases or were anticipating such action in the next few months,” the Fed said.
Price Gauge

The Fed’s preferred price gauge, which excludes food and fuel, rose 0.8 percent in January from a year earlier, matching December’s year-over-year gain, the lowest in five decades of record-keeping. Fed officials aim for long-run overall inflation of 1.6 percent to 2 percent.

Oil and crop prices have soared even as core inflation has remained low. The price of gasoline, among the most visible expenses consumers, has risen 25 percent in the last year, according to an index from the American Automobile Association.

Experience with such price gains in recent decades, along with currently stable labor costs, suggests a “temporary and relatively modest increase in U.S. consumer price inflation,” Bernanke told Congress today.

Brent Crude Jumps to Two-Year High of $105.70, Gold Rises on Libya Unrest

2011-02-21T15:47:00.000-08:00

By Stephen Kirkland and Boris Korby - Feb 21, 2011 2:35 PM PT

Oil rose to the highest since September 2008 and gold rallied for a sixth day surpassing $1,400 an ounce as tension in the Middle East escalated. Stocks fell the most in a month as Eni SpA led companies with operations in Libya lower.

Brent crude gained 5.3 percent to $107.93 at 5:34 p.m. New York time. Gold climbed 1.2 percent and silver added 3.8 percent. The Stoxx Europe 600 Index declined 1.3 percent, with Eni sinking the most since July 2009. Standard & Poor’s 500 Index futures lost 0.9 percent. Bahrain’s 2020 bond yield increased for a 10th day after S&P cut the nation’s debt rating. The yen and the dollar strengthened against most of their major peers. U.S. markets were closed for the Presidents’ Day holiday.

Libyan security forces attacked anti-government protesters as demonstrations spread across the Middle East and North Africa, a region that accounts for 36 percent of global crude output. Chinese authorities blocked foreign news reports on protests across the country to stamp out any movement toward pro-democracy revolts.

“You’ve got to be very concerned, particularly because it can affect the oil price, and if you have the oil price spike up another $20, $30, you could reenter a global recession,” Bill Belchere, global chief economist at Mirae Asset Securities, said in a Bloomberg Television interview in Hong Kong.

West Texas Intermediate oil for April delivery jumped 6.3 percent to $95.39 a barrel in New York. Gold climbed to as high as $1,408.45 an ounce, and last traded at $1,406.45. The six days of gains is the longest streak since August. Silver rose to a 30-year high of $33.8925 an ounce.
Libya Ties

Eni, the largest foreign oil and gas producer in Libya, lost 5.1 percent, while OMV AG, central Europe’s biggest oil company, which has been in Libya since 1975, slid 4.2 percent. Tekfen Holding AS tumbled 7.9 percent as the Turkish builder suspended work on a Libyan project, saying its priority now is the safe evacuation of 1,197 non-Libyan employees.

Merck KGaA gained 4.5 percent as earnings beat forecasts. Alpha Bank SA rose 5 percent as the shares resumed trading following a takeover bid from National Bank of Greece SA.

The MSCI Emerging Markets Index slid 0.1 percent. Benchmark indexes in Russia and South Africa rose at least 0.9 percent while gauges in Turkey, Dubai and Morocco sank more than 1 percent. Brazil’s Bovespa fell 1.2 percent.
Facing Civil War

Muammar Qaddafi’s son called on protesters to engage in dialogue or face a civil war, as violence escalated amid reports protesters seized control of Libya’s second-biggest city. Violence has flared in Yemen, Djibouti, Iran and Bahrain as governments sought to crack down on demands for change.

Bahrain’s dollar bond due 2020 fell as S&P cut its rating and signaled further downgrades were possible, saying it expected protests to persist.

Default swaps on Dubai jumped 11 basis points to 448, contracts on Qatar increased seven basis points to 113, and those for Saudi Arabia climbed five basis points to 144, according to CMA.

India’s Sensitive Index climbed 1.3 percent on gains by oil shares and Wipro Ltd.’s biggest rally since November after Credit Suisse Group AG recommended the software services provider. Vietnam’s VN Index slumped 4 percent, the most since November 2009, after the government said it will raise electricity prices by a record 15.3 percent.

The yield on Germany’s 10-year bund slid seven basis points to 3.18 percent after Chancellor Angela Merkel’s Christian Democratic Union lost an election in the city-state of Hamburg to the Social Democrats.

The yen strengthened 0.1 percent.

Europe Economy Expands Less Than Economists Forecast

2011-02-15T03:01:00.000-08:00

By Simone Meier - Feb 15, 2011 6:30 PM GMT+0800

Bayerische Motoren Werke AG this month forecast a “significant” sales increase in the first half and German business confidence surged to a record in January, suggesting the recovery is gathering strength. Photographer: Michele Tantussi/Bloomberg

Europe’s economy expanded less than economists forecast in the fourth quarter as cold weather curbed German output and French growth unexpectedly stalled.

Gross domestic product in the euro region rose 0.3 percent from the previous three months, when it increased at the same rate, the European Union’s statistics office in Luxembourg said today. Economists had forecast the economy to expand 0.4 percent, the median of 37 estimates in a Bloomberg News survey showed. Exports fell 0.4 percent in December from the previous month, a separate report showed today.

Companies have relied on faster-growing markets to boost sales as governments from Spain to Greece toughened budget cuts, undermining consumer demand. Bayerische Motoren Werke AG, the world’s largest luxury-car maker, this month forecast a “significant” sales increase in the first half and German investor confidence rose for a fourth month in February, suggesting the recovery is gathering strength.

“Weaker growth is no reason for concern because it was mainly to special factors such as bad weather,” said Alexander Krueger, head of capital market analysis at Bankhaus Lampe KG in Dusseldorf. “Germany will remain the role model, while other countries will have slightly weaker growth.”

The euro was little changed against the dollar after the data, trading at $1.3530 at 11:26 a.m. in Frankfurt, up 0.3 percent on the day.
Cold Temperatures

German GDP rose 0.4 percent in the fourth quarter from the previous three months, when it increased 0.7 percent, as unusually cold temperatures hurt construction output. France’s economy maintained its pace, growing 0.3 percent. In Italy, GDP rose 0.1 percent while Finland’s economy grew 2.5 percent.

In Greece and Portugal, the economies contracted from the previous three months, today’s report showed. The statistics office didn’t provide figures for Ireland.

Reviving exports have boosted the region’s expansion as budget cuts and the highest unemployment in more than 12 years prompted consumers to cut spending. The International Monetary Fund raised its global economic forecast on Jan. 25 and projected China’s economy will expand 9.6 percent and Indian GDP will increase 8.4 percent. Euro-area GDP may rise 1.5 percent, the Washington-based fund said.

“We consider the economic recovery becoming more vigorous and more self-reliant,” Luxembourg Prime Minister Jean-Claude Juncker said at a briefing in Brussels late yesterday after chairing a meeting of euro-region finance ministers. “Growth has surprised upwards and prospects remain encouraging.”
Largest Market

The trade report showed that shipments to the U.S. rose 18 percent in the 11 months through November from a year earlier. Exports to the U.K., the region’s largest market, increased 12 percent, while sales to China and Russia surged 38 percent and 29 percent, respectively. Detailed data are published with a one-month lag. The seasonally adjusted trade deficit was 2.3 billion euros ($3.1 billion) in December, down from 3.2 billion euros.

Infineon Technologies AG, Europe’s second-largest chipmaker, on Feb. 1 raised its full-year sales forecast on surging demand. Munich-based BMW expects “double-digit growth” in markets including Brazil, while Europe “will be flat,” Chief Financial Officer Friedrich Eichiner said on Feb. 3.

“There are still many problems in Europe in countries like Spain,” Eichiner said. “What we are intending is not to be heavily dependent on one market.”
Two Decades

From a year earlier, euro-area GDP rose 2 percent, up from 1.9 percent in the previous quarter, today’s report showed. The statistics office will publish a detailed breakdown of the data on March 3. Estonia joined the euro region this year, making it 17 countries sharing the currency.

Adding to signs the recovery is gathering strength, German business confidence surged to a record last month and unemployment dropped to the lowest in almost two decades. European economic sentiment held near the highest in more than three years, while the services and manufacturing industries expanded at a faster pace in January.

LVMH Moet Hennessy Louis Vuitton SA, the world’s largest maker of luxury goods, said on Feb. 4 that the outlook for 2011 is “excellent” after the Paris-based company reported full- year profit that beat analysts’ estimates. Schaeffler Group, the world’s second-biggest maker of roller bearings, said last month that it may add about 5,000 workers this year to meet orders.

“Business surveys suggest that the economy made a good start to 2011,” said Nick Kounis, an economist at ABN Amro Bank NV in Amsterdam. “It should remain supported by strong, albeit moderating, global growth during the course of this year, as well as a recovery in investment. Fiscal consolidation and sluggish labor markets should weight on domestic demand, leaving the overall economy growing at a moderate pace.”

EU to Double Rescue Fund in 2013, Takes No Fresh Portugal Steps

2011-02-15T00:15:00.000-08:00

By James G. Neuger and Stephanie Bodoni - Feb 15, 2011 8:01 AM GMT+0800

Jean-Claude Juncker, Luxembourg's prime minister and president of the Eurogroup. Photographer: Hannelore Foerster/Bloomberg

European governments agreed to double the lending capacity of the rescue fund for debt-laden countries in 2013, while seeing no need for immediate steps to shield Portugal from the fiscal crisis.

Finance ministers decided that the future emergency aid mechanism will be able to lend 500 billion euros ($675 billion), twice the size of the fund set up in the wake of Greece’s near- default last year.

“The situation on the sovereign-debt markets remains worrying,” Luxembourg Prime Minister Jean-Claude Juncker told reporters after chairing a meeting of European finance ministers in Brussels yesterday. “The Portuguese authorities did take effective actions. If this action would reveal itself as not having been sufficient, other measures will have to be taken, but I have no indications that this has to be done in the short term.”

Bonds in Greece, Italy and Portugal fell as Germany opposed stepping up the rescue effort until European governments take fresh measures to bolster the competitiveness of the 17-nation economy. The maneuverings over longer-term economic policies pushed the near-term crisis management into the background.

“They only want to talk about the future, and not the present,” said Carsten Brzeski, an economist at ING Group NV in Brussels. “EU leaders seem to be trying to ring-fence the current crisis and not address its pressing issues.”

Portugal’s 10-year yield increased 11 basis points to 7.42 percent yesterday. The extra yield over benchmark German bonds, a measure of investors’ doubts about Portugal’s fiscal health, widened to 413 basis points, the highest since Jan. 7.
Deficit Overruns

German Finance Minister Wolfgang Schaeuble said the “stable” situation in the markets enables the European Union to play for time, sticking to a late-March timetable for measures to bolster the current rescue fund and prevent future deficit overruns.

“The markets are so stable right now that it’s better not to unsettle them with superfluous discussions,” Schaeuble told reporters before the meeting.

Germany, the biggest contributor to last year’s 110 billion-euro rescue of Greece and 67.5 billion-euro aid for Ireland, is under domestic pressure to hitch the rest of Europe to Germany’s low-inflation, low-deficit orthodoxy.

With her party facing elections in seven of Germany’s 16 states this year, Chancellor Angela Merkel is seeking to reassure voters that Europe’s largest economy is getting something in return for handouts to debt-strapped governments.
Distressed Countries

Merkel’s coalition allies, the Free Democrats, are trying to counter a slump in the polls by opposing more generous bailout terms or using the fund to enable distressed countries to retire debt at a discount.

Backed by French President Nicolas Sarkozy, Merkel struck a blow for German-style economic management with a Feb. 4 proposal for a “competitiveness pact” including caps on wages and spending as well as a lengthening of the retirement age. The proposal, one of Germany’s conditions for expanding the euro- support operations, was criticized for overlapping with policies already pursued at the European level.

“Almost everybody is in favor to improve competitiveness, but what’s the way to do it? I’m not sure the Franco-German proposal is the best way,” Finnish Finance Minister Jyrki Katainen said.

The pact will be aired at a special March 11 summit called at Merkel’s bidding. Finance ministers may hold an extra meeting on March 21 to prep for a March 24-25 summit designed to unveil a “global response” to the debt crisis, Juncker said.
Collateral Rules

Germany has put the focus on getting the full potential out of the temporary fund, known as the European Financial Stability Facility. While nominally worth 440 billion euros, collateral rules that underpin its AAA credit rating limit the fund’s lending capacity to about 250 billion euros.

The permanent fund will take effect in mid-2013, with its size adjustable at two-year intervals. As with the current mechanism, the International Monetary Fund will kick in 50 cents for every euro from European governments, under what EU Economic and Monetary Commissioner Olli Rehn called an “unwritten understanding.”

German politics will complicate the permanent rescue facility as well, after legal experts in the lower house of parliament concluded yesterday that it will require a two-thirds majority to win Germany’s endorsement. Merkel would have to fall back on opposition support.
Upgraded Toolkit

While European officials have said direct purchases of struggling countries’ bonds in the primary market are likely to be part of the current fund’s upgraded toolkit, other pieces -- such as Ireland’s plea for lower interest rates on aid -- have yet to fall into place.

“The interest-rate facility is higher, is designed to give a profit to other member states, and there is an issue about whether the interest rate should be reduced to reflect the need to have sustainability,” Irish Finance Minister Brian Lenihan said in Brussels.

The opposition in Ireland’s Feb. 25 election has made the average 5.8 percent rate a campaign issue, promising to cut it in case of victory. The EU might approve lower rates starting next year, not for 2011, Rehn said.

It is “essential to respect” the arrangements for this year, Rehn said. “Concerning outer years, there is more room for maneuver.”

The European Central Bank, which has propped up markets by buying 76.5 billion euros of weaker countries’ bonds, is looking to hand over that job to governments as it pivots to its main mission of combating inflation.
‘Their Responsibility’

“Governments have to take on their responsibility,” ECB President Jean-Claude Trichet said in an interview with Les Echos. “I’ve asked for an improvement in the interventions of the EFSF, qualitatively and quantitatively. The possibility of the EFSF buying sovereign bonds forms part of this logic.”

Separately, the ministers picked Belgium’s Peter Praet to fill the next opening on the central bank’s Executive Board. Praet, 62, will take the seat set to be vacated on May 31 by Gertrude Tumpel-Gugerell of Austria, currently the only woman on the board.

The selection collides with intensified speculation over who will succeed Trichet when his term ends in October. A top candidate for that post, German Bundesbank President Axel Weber, took himself out of the running by announcing last week that he will step down and return to academia.

Weber Says ECB Will Act If Inflation Expectations Increase

2011-02-10T07:22:00.001-08:00

By Christian Vits and Gabi Thesing - Feb 10, 2011 9:16 PM GMT+0800

Bundesbank President Axel Weber said the European Central Bank will raise interest rates if inflation expectations pick up.

While rates are “appropriate” for now and the ECB still expects the inflation rate to fall below 2 percent, “we will very closely monitor any potential deviation” to consumer price expectations “and act appropriately,” Weber said in a speech in Vienna today.

“There should be no doubt about the Eurosystem’s determination to continue to secure price stability in the euro area,” he said.

A survey of professional forecasters, published in the ECB’s monthly bulletin today, predicted that inflation in the longer term would breach the ECB’s limit. The ECB, which tries to keep annual price gains just below 2 percent, has signaled concern about faster inflation feeding into wage demands. Economists forecast the bank to start raising borrowing costs from the fourth quarter, a Bloomberg survey shows

Euro-area inflation accelerated to 2.4 percent last month after energy and food costs surged. Economists surveyed by the ECB forecast annual price gains of 1.9 percent in 2011, compared with a previous projection of 1.5 percent. They predict 1.8 percent for 2012, compared with 1.6 percent before.

Weber said the increase in the inflation rate has been boosted by “one-off factors” and should be “even if they remain for a few months of a temporary nature.”

Weber’s appearance in Vienna was overshadowed by reports that he will step down as Bundesbank President and has dropped out of the race to succeed ECB President Jean-Claude Trichet.

Weber said he won’t comment on his plans for the future, having spoken with German Chancellor Angela Merkel.

Oil Gains a Second Day Amid Concern Egyptian Unrest Will Spread

2011-01-30T16:30:00.001-08:00

By Ben Sharples - Jan 31, 2011 8:18 AM GMT+0800

Oil rose for a second day in New York after unrest in Egypt prompted concern that protests may spread to crude-producing parts of the Middle East.

Futures increased 4.3 percent on Jan. 28, the most since September 2009, after clashes between police and protesters demanding an end to Egyptian President Hosni Mubarak’s 30-year regime. Any disruption to Middle East oil supplies “could actually bring real harm,” U.S. Energy Secretary Steven Chu said on a conference call.

“The concerns in Egypt are playing on the commodity and financial markets,” said Ben Westmore, a minerals and energy economist at National Australia Bank Ltd. in Melbourne. “The proximity to the Suez Canal and the possibility that there might be some constraints to supply is having an impact on the crude price.”

Crude for March delivery gained $1.53, or 1.7 percent, to $90.87 a barrel, in electronic trading on the New York Mercantile Exchange at 11:14 a.m. Sydney time. The contract increased $3.70 to $89.34 on Jan. 28. Oil was up 0.3 percent last week and is down 1.3 percent this year.

President Mubarak met with top military commanders yesterday as tens of thousands of protesters defied a curfew and gathered in central Cairo, chanting slogans against his new prime minister and vice president. The unrest in Egypt followed an uprising that led to the Jan. 14 overthrow of Tunisian president Zine El Abidine Ben Ali.

Risk Premium’

“Tensions in Egypt and potential spreading tensions to surrounding regions added a risk premium to oil prices,” Mark Pervan, head of commodity research at Australia & New Zealand Banking Group Ltd., said in a note today.

Saudi Arabia is the world’s largest oil exporter. The kingdom and the other seven Middle Eastern and North African countries in the Organization of Petroleum Exporting Countries pumped 78 percent of the group’s oil in January, based on Bloomberg estimates.

The Suez Canal, which connects the Mediterranean and Red Seas, passes through Egypt. About 1 million barrels a day of oil and refined products moved north through the canal to European and other developed economies in 2009, according to the Energy Information Administration, the statistical arm of the U.S. Energy Department.

Crude futures also rose on Jan. 28 as U.S. gross domestic product grew 3.2 percent between October and December, the fastest since the first quarter, according to the Commerce Department. It was up from a 2.6 percent rate in the previous three months. The most recent figure fell short of the 3.5 percent forecast by economists in a Bloomberg News survey.

Brent crude for March delivery rose 29 cents, or 0.3 percent, to $99.71 a barrel on the London-based ICE Futures Europe exchange. It gained $2.03, or 2.1 percent, to $99.42 on Jan. 28.

Dollar, Yen, Swiss Franc Gain Versus Euro on Unrest in Egypt

2011-01-30T16:29:00.001-08:00

By Candice Zachariahs and Ron Harui - Jan 31, 2011 7:08 AM GMT+0800

The dollar, yen and Swiss franc advanced for a second day against the euro on concern Egypt’s political turmoil will destabilize the Middle East, spurring demand for safer assets.

The greenback and yen also gained versus higher-yielding currencies such as the Australian and New Zealand dollars after Egyptian President Hosni Mubarak yesterday met with top military commanders as tens of thousands of protesters defied a curfew and gathered in central Cairo. The yen touched a one-week high against the euro as unrest in Egypt fueled concern that Asian stocks will extend a global equity slump.

“The concerns are that we’re going to see contagion from Egypt to other parts of the Middle East,” said Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington. “As long as these concerns about Egyptian political tensions persist, flight-to-safety flows are likely to favor the dollar, yen and Swiss franc.”

The dollar rose to $1.3581 per euro at 8:01 a.m. in Tokyo from $1.3611 in New York last week. The yen gained to 111.58 per euro from 111.77 after earlier touching 111.28, the most since Jan. 20. The Swiss franc advanced to 1.2794 per euro from 1.2821 after rising 1.3 percent against Europe’s common currency on Jan. 28. The greenback was at 82.16 yen from 82.12.

Egypt’s banks and markets stayed shut yesterday after six days of clashes in the most populous Arab country that left as many as 150 people dead. Markets throughout the Middle East declined yesterday on concern the unrest may spread.

The yen also strengthened as futures signaled most regional stock markets will slide after the Standard & Poor’s 500 Index decreased 1.8 percent on Jan. 28.

“The volatile political situation in Egypt has triggered a bout of investor risk aversion with traders buying the ‘safe haven’ yen, franc and dollar,” analysts including John Kyriakopoulos, Sydney-based head of currency strategy at National Australia Bank Ltd., wrote in a research note today.

Sentance Says Rate Rise Needed to Tackle Accelerating Inflation

2011-01-24T15:04:00.000-08:00

By Jennifer Ryan - Jan 24, 2011 10:00 AM PT

Bank of England policy maker Andrew Sentance said officials need to increase interest rates to keep price pressures from the global recovery and a weaker pound from getting entrenched in the economy.

“When it is clear that global inflationary pressures, coupled with a substantial decline in the exchange rate and reasonably healthy growth of domestic demand are all contributing to a sustained period of above-target inflation, then the time has come to act,” Sentance said in a speech in London today.

While food and fuel prices pushed U.K. inflation to 3.7 percent in December, the 10th month above the government’s 3 percent upper limit, the Monetary Policy Committee held the key rate at 0.5 percent this month to support growth. The central bank targets a 2 percent inflation rate and Sentance said officials’ refusal to curtail emergency stimulus may undermine their credibility and stoke further price gains.

“The lack of a substantive policy response” to consumer- price gains “enhances the risk of a loss of credibility in the inflation target itself and a loss of belief in the commitment of the MPC to achieving it,” he said.

The panel has split three ways since October, when Adam Posen said the bank should expand its bond-purchase plan to prevent inflation from slowing too much once a government spending squeeze takes hold. Posen last week described recent price gains as temporary, indicating he may keep pushing for more stimulus.

The Office for National Statistics may say tomorrow that U.K. economic growth slowed to 0.5 percent in the fourth quarter from 0.7 percent in the previous three months, according to a Bloomberg News survey of economists.

Trichet Expects EU to Agree on More Automatic Enforcement of Budget Rules

2011-01-23T15:29:00.000-08:00

By Martijn van der Starre and Jurjen van de Pol - Jan 23, 2011 4:41 AM PT

European Central Bank President Jean-Claude Trichet expects the European Union to agree on more automatic sanctions for violations of its budget rules.

“I hope very much and I would say I expect that this governance will be reinforced and that the quasi-automaticity for the start of the adjustment procedure and for the sanctions will be incorporated in the future governance,” Trichet said in an interview with Dutch television program “Buitenhof” broadcast today.

ECB policy makers are increasing the pressure on governments to adopt stricter rules after swelling budget deficits helped trigger Europe’s sovereign-debt crisis, which so far has forced bailouts of Greece and Ireland. EU governments plan to sign off on their version of revamped crisis-fighting- rules by the end of March.

Separately, Trichet said officials have to be “alert” to avoid second-round effects on inflation. “When you have such increase of commodity prices you have an immediate increase of CPI, which is unavoidable of course,” he said.

European inflation accelerated to the fastest pace in more than two years in December, led by surging energy costs, complicating the ECB’s efforts to deal with the sovereign debt crisis. Inflation quickened to 2.2 percent in December, the fastest since October 2008.

“What is important for us is to avoid that there is any increase of the other prices that would create a problem for price-stability in the medium term,” Trichet said.

When asked about a possible debt restructuring by Portugal, Greece or Ireland this year, Trichet said “this not the assumption that we have in mind.”

Inflation Fight Won't Drive Yuan Appreciation, Hu Says Ahead of U.S. Visit

2011-01-16T15:44:00.001-08:00

By Sandrine Rastello - Jan 17, 2011 3:04 AM GMT+0800

Jan. 14 (Bloomberg) -- U.S. Senator Richard G. Lugar of Indiana, the top Republican on the Foreign Relations Committee, talks with Bloomberg's Al Hunt about U.S.-China relations and his concern that China isn’t doing enough to control the spread of nuclear material. Bloomberg's Hans Nichols and Mike Forsythe preview Chinese President Hu Jintao's Jan. 18-19 visit to the U.S. Mike Tackett discusses President Barack Obama's speech at the memorial for the victims of the Jan. 8 shooting spree in Tucson, Arizona. Commentators Margaret Carlson and Kate O'Beirne speak about reaction to the shooting spree including an Internet video by Sarah Palin, former Republican governor of Alaska. (Source: Bloomberg)

Chinese President Hu Jintao rejected U.S. arguments that allowing the yuan to appreciate against the dollar would help the government in Beijing tame inflation.

Hu, who will meet President Barack Obama in Washington this week, made the comments in responses to written questions from the Wall Street Journal and the Washington Post, the newspapers reported on their websites.

The Chinese president said his government is fighting inflation with a package of policies, including interest rate increases, and that rising prices can “hardly be the main factor in determining the exchange rate policy,” according to a transcript of the answers. He said the increase in the cost of living is “on the whole moderate and controllable,” according to the transcript.

Prices are climbing faster in China than in the U.S., making Chinese goods less competitive, Treasury Secretary Timothy F. Geithner said last week. Speaking in Washington on Jan. 12, he said that, while the yuan was still “substantially undervalued,” the “fundamental forces that are pushing Chinese productivity growth and are pushing inflation higher will bring about the necessary adjustment in exchange rates.”

U.S. lawmakers argue that an undervalued yuan hurts U.S. manufacturers and widens the U.S. trade deficit by artificially holding down the price of exported Chinese goods.

While “there are some differences and sensitive issues” between the two countries, Hu said, “we both stand to gain from a sound China-U.S. relationship, and lose from confrontation.”

‘Product of the Past’

The current international currency system, with the dollar’s primacy in as a reserve currency and in trade is “the product of the past,” Hu also told the newspapers.

He pointed to China’s effort to expand the role of the yuan in cross-border trading and investment, while acknowledging it “will be a fairly long process” to make it a fully fledged international currency.

In an allusion to the Federal Reserve’s policy of buying $600 billion of Treasuries to stimulate the economy, Hu told the newspapers that U.S. monetary policy has a “major” impact on global liquidity and on capital flows.

Hu pledged to “continue to improve laws and regulations concerning foreign investment,” and offer “a stable and transparent legal and policy environment.” He said U.S. companies have a level playing field in his country and their “innovation, production and business operations in China enjoy the same treatment as Chinese enterprises.”

Socialist Democracy

Hu said China will continue to develop a “socialist democracy. He called for an “increased dialogue and contact” with the U.S. and said the countries should “abandon the zero- sum Cold War mentality” and “respect each other’s choice of development path.”

Hu answered only some of the questions submitted by the newspapers, not addressing one about Nobel Peace Prize winner Liu Xiaobo and another on China’s growing naval power, among others, according to the Journal.

Hu said that China, which “made relentless efforts to help ease the tension” between South Korea and North Korea, “pays a great deal of attention to the Korean nuclear issue” and stands “for achieving denuclearization of the peninsula in a peaceful way through dialogue and consultation to maintain peace and stability of the peninsula and Northeast Asia.”

Bernanke Says Higher Interest Rates Reflect Improved Economy

2011-01-13T17:30:00.000-08:00

By Scott Lanman and Joshua Zumbrun - Jan 13, 2011 11:58 AM PT

Federal Reserve Chairman Ben S. Bernanke said increased interest rates since the central bank expanded record monetary stimulus reflect an improved economic outlook, not a failure in the Fed’s program of buying bonds.

“Interest rates are higher, but I think that’s mostly because the news is better,” Bernanke said today at a forum in Arlington, Virginia, hosted by the Federal Deposit Insurance Corp. “It’s responding to a stronger economy and better expectations. So I think that the policy has helped.”

Yields on 10-year Treasuries have risen to 3.31 percent today from 2.57 percent on Nov. 3, when the Fed approved buying $600 billion of Treasuries in a move criticized by Republican lawmakers and some foreign governments. Bernanke said he’s more optimistic for a pickup in U.S. growth this year that may boost credit to small businesses, as well as their sales.

“We see the economy strengthening,” Bernanke said as part of a panel discussion on boosting lending to small businesses. “It looks better in the last few months. We think that a 3 to 4 percent-type of growth number for 2011 seems reasonable.”

“Now you’re not going to reduce unemployment at the pace that we’d like it to,” Bernanke said. “But certainly it would be good to see the economy growing. That means more sales, more business for companies of all sizes.”

Treasuries extended gains after Bernanke said joblessness may not fall as quickly as Fed officials would like. The 10-year Treasury yield declined to 3.31 percent from 3.37 percent. Stocks extended their drop, with the Standard & Poor’s 500 Index falling 0.2 percent to 1,283.91 at 2:32 p.m. in New York. The dollar remained lower against the euro.

Weak Flow

Bernanke and his Fed colleagues are trying to determine the reasons for a weak flow of credit to small companies and to identify ways other than continued record monetary stimulus to reduce an unemployment rate close to a 26-year high.

“If the sales come, that will make these businesses stronger, make them more creditworthy and be a virtuous circle,” Bernanke said on a panel that included FDIC Chairman Sheila Bair and Senator Mark Warner, a Democrat from Virginia.

Fed officials last year joined more than 40 meetings around the U.S. with small businesses, lenders, bank examiners and local government officials. Bernanke said in a Jan. 7 Senate hearing that “we are working very hard in our role as a regulator to try to improve the availability of credit to small businesses and to other borrowers.” He said the issue was “our top priority.”

Bernanke, in the hearing, attributed the decline in credit to bank losses and lower values of collateral. He said the Fed won’t criticize a bank for lending to a small business or a company where the collateral value has dropped.

More Lending

As the economy expands “we’re going to see more lending take place,” Bernanke said on Jan. 7.

Yesterday the Fed said in its anecdotal Beige Book report that holiday-season spending and increased manufacturing drove an economic expansion across the U.S. in November and December, with businesses cautiously optimistic about their 2011 outlooks.

Since the last meeting of Fed policy makers on Dec. 14, indicators have been “somewhat stronger,” and the “holiday season seemed to be particularly strong” across large and small businesses, St. Louis Fed President James Bullard said yesterday in a telephone interview.

Trichet Says Emerging Economies Face `Inflationary Threats' Amid Recovery

2011-01-10T17:29:00.001-08:00

By Jana Randow and Simone Meier - Jan 10, 2011 5:43 AM PT

European Central Bank President Jean-Claude Trichet said growth is stronger in emerging economies, though euro-area data have also been better than expected. Photographer: Denis Doyle/Bloomberg

European Central Bank President Jean-Claude Trichet, speaking on behalf of the world’s central bankers, said the global economy has recovered better than expected, boosting inflation pressures in emerging markets.

“Inflationary threats present some kind of general feature in the emerging world; it’s something you don’t see necessarily in advanced economies,” Trichet said today at a briefing in Basel, Switzerland, after chairing the Global Economy Meeting. “It’s clear that it is extremely important that we all keep control of inflation expectations, and that calls for appropriate decisions.”

Global rate setters are growing more concerned about inflation threats as the world economy gathers strength and surging food and oil prices fuel price gains. Trichet said growth is stronger in emerging economies, though euro-area data have also been better than expected.

“Since the start of the recovery, we were observing results in terms of facts and figures, in terms of real economic evolution, that were better than forecast,” Trichet said. “I would say that it’s also the case until now in the euro area.”

John Lipsky, the International Monetary Fund’s first deputy managing director, said on Jan. 4 that this year will be “pivotal” for the global recovery. The outlook for the world economy, while “promising,” is still “clouded” by risks of more turmoil in sovereign debt markets, failure to reduce unemployment in some advanced economies and overheating in some developing countries, Lipsky said.

IMF Forecasts

The Washington-based institution forecasts growth in the world economy will slow to 4.2 percent from 4.8 percent in 2010. While advanced economies will expand 2.2 percent, developing nations will grow 6.4 percent this year, driven by strong expansion in China, which last year overtook Japan as the world’s second-largest economy, the IMF said.

Speculation central banks from China to India and Indonesia will raise rates to curb inflation drove Asian stocks lower today. Emerging-market stocks fell the most in a month, with the MSCI Emerging Markets Index declining as much as 1.2 percent. Food-price inflation in Asian countries excluding Japan in November was at its highest level in the past decade except for the 2007-2008 period, according to Credit Suisse Group AG.

Food Prices

“The reasons that are behind the food price increases were considered important” at today’s meeting, Trichet said. “It’s an element of the possible threat to inflation,” he added. “There is a unity of purpose at the level of the global economy meeting, which is that we have to deliver price stability and need to be credible in this delivery.”

Brazil’s consumer prices rose more than economists expected in December, pushing last year’s inflation rate to the highest since 2004. Central bank President Alexandre Tombini, who attended the Basel meeting after being sworn in on Jan. 3, may raise borrowing costs when he chairs his first policy meeting this month, according to Bloomberg estimates based on interest- rate futures contracts.

In the euro area, inflation accelerated to 2.2 percent in December, exceeding the ECB’s 2 percent limit for the first time in more than two years. Economists forecast the bank will raise its key interest rate from a record low of 1 percent in the fourth quarter of this year, a Bloomberg survey shows. Trichet declined to speak in his role as ECB President.

Debt Crisis

Euro-region governments are struggling to contain a sovereign-debt crisis that’s spread from Greece to Ireland and is threatening to force other highly-indebted countries into seeking international aid.

While there was “an absolutely clear understanding” that sound fiscal policies are “very important” at the global level, central bankers didn’t discuss Portugal’s situation, Trichet said. The ECB today purchased bonds issued by the Iberian nation, which is struggling to convince investors that it can push down its budget deficit, according to three traders with knowledge of the transactions.

Trichet met in Basel with his counterparts from the world’s largest central banks including Federal Reserve Chairman Ben S. Bernanke, China’s Zhou Xiaochuan, Japan’s Masaaki Shirakawa, and Germany’s Axel Weber. The meeting is held every two months under the auspices of the Bank for International Settlements, which oversees central banks.

FOREX-Dollar steadies vs euro; falls vs Aussie, yen

2010-12-29T05:47:00.000-08:00

Wed Dec 29, 2010 6:39am EST

* Dollar steady vs euro, comes off lows as U.S. yields spike

* Swiss franc near record high; commodity currencies gain

* Dollar falls vs yen; trade thin, volatile

(Updates prices, changes byline, dateline; previous TOKYO)

By Jessica Mortimer

LONDON, Dec 29 (Reuters) - The dollar steadied against the euro on Wednesday as a spike in U.S. Treasury yields helped it recover from losses the previous day, while gains in commodity prices buoyed the likes of the Australian and Canadian dollars.

The market remained very thin, however, and susceptible to exaggerated moves after a yo-yo session the previous day which was marked by year-end flows and saw the dollar fall sharply against a range of currencies.

The turnaround came as U.S. Treasury yields rose across the board, with the benchmark 10-year issue gaining 16 basis points to just shy of 3.50 percent after a poor auction of five-year bonds. [US/]

The auction also served as a reminder of fiscal problems facing the United States. Coupled with concerns about a debt crisis in the euro zone, this buoyed the yen and kept the Swiss franc near record highs versus the dollar and euro as investors sought safety.

The dollar index, which tracks the greenback's performance against a basket of currencies, was slightly easier on the day at 80.276 .DXY, though it held above Tuesday's low of 79.596.

Weak U.S. consumer confidence and home price data on Tuesday, pointing to a fragile economy, [ID:nN28251373] weighed on the dollar and tempered its recovery.

"Cheaper U.S. Treasury prices make them more attractive but only to a point, and there could come a point when investors don't want to buy them any more," said Neil Mellor, currency strategist at Bank of New York Mellon.

He added that the greenback was soft against the yen as Japanese exporters have been selling on concerns about a weakening dollar, as well as against commodity-linked currencies, though he cautioned against reading too much into moves in such an illiquid market.

Investors will watch for a sale of seven-year U.S. debt on Wednesday.

The euro was steady on the day at $1.3123 EUR= after a whipsaw move on Tuesday that took it to $1.3275, its strongest since Dec. 17. It held above support at its 200-day moving average, now at $1.3084, and last week's low just above $1.3050.

Trichet Exit Looms as Sovereign Debt Woes Keep ECB Rate at 1%: Euro Credit

2010-12-27T03:07:00.000-08:00

By Jana Randow and Simon Kennedy - Dec 24, 2010 8:00 AM GMT+0800

Jean-Claude Trichet will retire as European Central Bank president next October with the euro area still needing record-low interest rates, according to economists who accurately predicted the region’s monetary policy this year.

The Frankfurt-based central bank will keep its key interest rate unchanged throughout 2011 amid low inflation, moderate growth and persisting fallout from the sovereign-debt crisis, said 12 of 17 economists in a Bloomberg News survey. The sample was taken among forecasters who correctly anticipated in January that the ECB’s benchmark would stay this year at 1 percent.

The new year approaches with Trichet celebrating his 68th birthday this week after leading Europe’s response to the turmoil, which at one point threatened to destroy the single currency and has already engulfed Greece and Ireland. Even after those nations received international bailouts, the cost of insuring Greek debt rose yesterday to the highest in a month and investors speculate that Portugal may be next to require aid. The euro has fallen 8.7 percent against the dollar in 2010.

“Problems in the banking sector won’t be resolved quickly, and banks in peripheral countries will continue to need support,” said Juergen Michels, chief euro-region economist at Citigroup Inc. in London. “There won’t be any major inflation pressures that would warrant a rate increase before 2012.”

The 17 economists questioned this month participated in a similar survey of 61 forecasters in January on the outlook for ECB policy in 2010. The median forecast then was the benchmark would be at 1.5 percent now with Deutsche Bank AG and Bank of America Merrill Lynch analysts among those predicting 2 percent.

Buying Bonds

The ECB cut its rate to 1 percent in May 2009 to fight the worst recession in its history. A year later the central bank began buying government bonds for the first time to ease credit- market tensions as investors focused on outsized budget deficits. As recently as this month, the ECB was forced to delay a further withdrawal of unlimited liquidity support to euro-area banks.

Lingering questions on whether Portugal and Spain require external help will keep the ECB “patient, cautious and prudent” as it leaves its rate on hold through next year, said Cedric Thellier, an economist at Natixis in Paris. He says the region faces a sluggish recovery even as Germany’s strength offsets weakness in the so-called peripheral economies.

Portugal’s credit rating was downgraded yesterday by Fitch Ratings to A+ from AA-. The company predicted the nation will suffer a recession next year.

The ECB this month forecast growth will slow in 2011 to about 1.4 percent from this year’s 1.7 percent, while inflation will advance to 1.8 percent from 1.6 percent. That’s still under the bank’s target of just below 2 percent. The region will expand in size in January as Estonia becomes its 17th member.

Recession Prospects

David Owen, chief economist at Jefferies International Ltd. in London, said the ECB’s numbers imply the “weakest growth on record.” Carl Weinberg, chief economist at High Frequency Economics Ltd. in Valhalla, New York, predicts the economy will “lapse into a deep recession, squeezed by a credit crunch and plagued by multiple bank failures.” Both forecasters expect no change in the main interest rate next year.

Adding to pressure on growth is the push to curb budget deficits to pacify investors. Portuguese 10-year bond yields rose by almost half a percentage point in the past two weeks. Those on similar Greek securities have returned to the 12 percent level they reached in May. The cost of insuring Greek debt jumped 38 basis points yesterday to 1,019, according to CMA prices for credit-default swaps.

Deficit Measures

Measures to restore order to budget deficits will amount to 1.3 percent of the euro zone’s gross domestic product in 2011, with Ireland and Portugal cutting back about 4 percent and Greece as much as 6 percent, according to Julian Callow, chief European economist at Barclays Capital. He also forecasts no rate change in 2011.

Analysts at UniCredit SpA, Royal Bank of Scotland Group Plc and Standard Chartered Plc are among five forecasters expecting the ECB to begin rate increases in the second half of 2011.

“The ECB will want to start re-establishing its anti- inflation credentials,” said Sarah Hewin, senior economist at Standard Chartered in London, whose forecast for a 1.75 percent rate was the highest of those surveyed. Jacques Cailloux, chief euro-area economist at RBS, expects an increase to 1.5 percent as strength in core economies such as Germany keep them “ring- fenced” from debt strains.

Surging bond yields prompted the ECB to step up bond purchases following Ireland’s aid package. The region’s central banks have bought 72.5 billion euros ($95 billion) of government debt since the bond program was announced in May. The ECB has also committed to aid banks with as much liquidity as needed through the first quarter for periods of up to three months.

Crisis Response

“The ECB made very clear that in their view the crisis needs to be resolved by governments,” said Ken Wattret, an economist at BNP Paribas SA in London and another forecaster who was right in 2010. “But governments aren’t very quick, so the ECB is going to feel continuously obliged to step in.”

Economists are divided over how long the ECB will take to return to its pre-crisis refinancing system of cash auctions. While Greet Vander Roost at KBC Asset Management in Brussels expects the exit to be finished by the end of the second quarter, Citigroup’s Michels says the ECB will keep supplying unlimited liquidity in weekly operations into 2012.

Michels’s scenario would turn responsibility for normalizing ECB monetary policy to the next president as Trichet’s central banking career comes to an end after almost two decades and eight years at the ECB. Who will replace him will be a subject of heated debate for leaders next year with Bundesbank President Axel Weber and Bank of Italy Governor Mario Draghi most often linked to the job.

“By next November it ought to be a lot clearer how the crisis is playing out,” said Callow of Barclays Capital. “The challenge for Trichet’s successor is to mold the euro area into a more cohesive economic and financial entity.”

ECB Rate at end of 2011

Analistas Financieras International 1 percent
Barclays Capital 1 percent
BHF-Bank AG 1.5 percent
BNP Paribas SA 1 percent
Capital Economics Ltd. 1 percent
Citigroup Inc. 1 percent
High Frequency Economics Ltd. 1 percent
Jefferies International Ltd. 1 percent
JPMorgan Chase & Co. 1 percent
KBC Asset Management 1 percent
Lloyds TSB Corporate Markets 1.25 percent
Natixis 1 percent
Royal Bank of Scotland Group Plc 1.5 percent
Standard Chartered Bank 1.75 percent
Societe Generale SA 1 percent
UniCredit Group 1.25 percent
Wermuth Asset Management GmbH 1 percent

Greece Faces `Heightened' Probability of Debt Rating Downgrade, Fitch Says

2010-12-21T16:00:00.000-08:00

By Greg Chang and Anchalee Worrachate - Dec 21, 2010 10:51 AM PT

Greece may have its credit rating cut to non-investment grade by Fitch Ratings within six weeks after a review of the nation’s “fiscal sustainability.”

The assessment will focus on government measures to lower the budget deficit, the economic outlook and the “political will and capacity of the Greek state” to push through austerity measures, the company said in a statement today. Greece is rated BBB- at Fitch, its lowest investment-grade rating.

Fitch said it expects the review to be completed in January and there is a “heightened probability” of a downgrade.

Greece, the first euro-area nation to seek international aid this year, already has non-investment grade ratings at Moody’s Investors Service and Standard & Poor’s. The Greek bailout in May and subsequent aid for Ireland last month have so far failed to quell investors’ concerns that Europe’s debt crisis may spread to other nations.

“On the margin, this will further put pressure on peripheral spreads at the time when sovereign credit quality is a major concern,” said David Keeble, New York-based head of fixed-income strategy at Credit Agricole Corporate & Investment Bank. “But this is barely a surprise move. Fitch is the final guy to catch up. The market has moved way ahead.”

Moody’s has Greece on a Ba1 rating, while S&P has it on BB+. The extra yield investors charge to hold Greek 10-year debt over German bunds was at 898 basis points today, compared with a record of more than 965 basis points in May.

The so-called yield premium on Ireland’s debt, which rose to a euro-era high of 680 basis points on Nov. 30, was at 590 basis points today. Portugal was at 354 basis points.

Greece is cutting spending and raising taxes as a condition of its aid from the European Union and International Monetary Fund. The IMF said on Dec. 17 that the country’s rescue program has “continued to perform well” and it approved payment of another 2.5 billion euros ($3.3 billion) under the deal.

“The overall fiscal adjustment to date has been impressive,” the IMF said last week. “It is important that fiscal structural reforms be forcefully advanced to ensure a lasting consolidation.”

EU Leaders Create Debt-Management Mechanism From 2013

2010-12-17T05:59:00.000-08:00

European Union leaders agreed to amend the bloc’s treaties to create a permanent debt-crisis mechanism in 2013 as they struggled to bridge divisions over immediate steps to stabilize bond markets.

A day after the European Central Bank armed itself with more capital to resist the crisis, the EU started to discuss measures such as offering shorter-term credits or using the bloc’s main rescue fund to buy bonds of distressed countries.

“My vision is of a Europe that grows ever closer together - - at different speeds in some cases, to be sure,” German Chancellor Angela Merkel told reporters after an EU summit in Brussels today.

For now, Germany ruled out topping up the current 750 billion-euro ($1 trillion) emergency fund or rushing aid to Portugal or Spain, reinforcing skepticism in markets about Europe’s search for the right formula to quell the fiscal contagion that threatens the euro.

The future setup “is to some extent window-dressing as it does not solve the current crisis,” said Carsten Brzeski, an economist at ING Group NV in Brussels. “European leaders failed to address the issue of debt sustainability and possible insolvency problems prior to 2013.”

The euro gained 0.1 percent to $1.3254 at 2:45 p.m. in Brussels, while bonds of Portugal, Spain, Greece and Ireland slipped. Moody’s Investors Service followed up warnings that it may cut the credit ratings of Spain and Greece by announcing today that it downgraded Ireland by five notches to Baa1 from Aa2, with a negative outlook.

Talks Under Way

Luxembourg Prime Minister Jean-Claude Juncker said deliberations are under way over more flexible use of the main 440 billion-euro component of the fund instead of waiting until the last minute to arrange all-or-nothing lifelines like the 85 billion-euro package granted to Ireland on Nov. 28.

Asked whether shorter-term credits or bond purchasing are up for debate, Juncker said measures being considered are “exactly those that you mentioned.”

Such steps would ease strains on the ECB, which has bought 72 billion euros of weaker countries’ debt since May to stabilize markets. Yesterday, the ECB shored up its capital base to guard against losses from the purchases, voting to almost double its capital to 10.76 billion euros.

“Let’s be candid,” International Monetary Fund Managing Director Dominique Strauss-Kahn said in an interview on “Charlie Rose” on PBS. “The European Union needs a little more time, until maybe the beginning of next year, to be able to produce a comprehensive package.”

No ‘Speculation’

Driven by a German public outcry against propping up fiscally reckless countries, Merkel opposed putting more money on the table or further entwining Europe’s economies through joint bond sales. Merkel didn’t rule out more flexible use of the current fund, declining to enter into “speculation.”

In a departure from German insistence that each country determine its own fate, Merkel said today that maintaining national fiscal discipline won’t alone put the 16-nation euro region on a sounder footing.

Merkel and French President Nicolas Sarkozy indicated that closer coordination of business tax rates might come back onto the agenda as Europe tries to forge a more unified economy and fix flaws in the euro’s makeup.

In a jab at Ireland’s 12.5 percent corporate tax rate, Sarkozy said “I don’t think you can have the lowest corporate taxes in the euro zone and then transfer your debt.” Spanish Prime Minister Jose Luis Rodriguez Zapatero said the tax discussion is an “important novelty” that will play out over years.

‘Needs to Mature’

Italian Prime Minister Silvio Berlusconi put calls for joint euro-area borrowing in the same category, noting the German opposition “but that the proposal needs to mature. It will be studied more deeply.”

On the summit’s main business, Germany won an EU commitment for a treaty amendment to set up a crisis-resolution system in 2013 that would allow financial aid “if indispensable” to underpin the euro and might force bondholders to bear some of the costs of future rescues.

German insistence on cutting bond values when countries get into trouble in the future triggered the latest phase in the debt crisis, culminating in Ireland’s support package and triggering concern that Portugal and Spain will be next.

While costs for bondholders aren’t mentioned in the two- sentence amendment agreed on last night, the leaders endorsed a Nov. 28 decision by finance ministers that writedowns may take place on a “case by case” basis in accord with IMF practices.

‘Useful Clarification’

ECB President Jean-Claude Trichet called the pledge not to mandate bond writeoffs a “useful clarification.”

Merkel needed the amendment to prevent German high-court challenges to the future aid mechanism, which the EU wants to get up and running when the current rescue package lapses in mid-2013.

The compromise text reads: “The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.”

Merkel didn’t get everything she wanted. Germany originally pushed to allow financial aid only as a “last resort,” language that might have ruled out contingency credit lines or given the IMF the lead in sorting out Europe’s economic woes.

Last overhauled a year ago, the treaty is the EU’s equivalent of a constitution, binding on EU institutions in Brussels and on national governments’ handling of European affairs. All 27 countries, including the 11 outside the euro region, must ratify the amendment.

European finance ministers plan to work out details of the future system by March so it can take effect in the middle of 2013.

EU Faces More Bailouts as Euro Contagion Spreads to Portugal: Euro Credit

2010-11-30T06:37:00.000-08:00

By John Fraher and James Hertling - Nov 30, 2010 5:20 PM GMT+0800

The failure of the Irish rescue to stem a selloff across euro-region bond markets may spell more bailouts to come, starting with Portugal.

The costs to insure Portuguese debt against default rose to a record today and Spanish bonds slid the most since the euro’s debut for a second day, highlighting investor concerns that officials lack the tools to contain a debt crisis threatening the currency’s survival. The extra yield that investors demand to hold Italian debt over German 10-year bonds rose to the highest in more than 13 years.

“We are barely halfway through the current crisis in the euro zone,” Paul Donovan, deputy head of global economics at UBS AG in London, said in an interview with Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance” program. “Unless we can see a further significant decline in bond yields in Portugal, the market is going to expect another bailout. And then market attention will turn to Spain.”

Market declines began yesterday less than 24 hours after European Union finance ministers confirmed their second bailout of a euro nation after Greece’s in May, handing Ireland an 85 billion-euro package ($111 billion) to rescue its banks and bolster government finances. While EU officials also agreed on a mechanism to smooth bond restructurings after 2013, investors are speculating that debt-strapped nations won’t be able to cut deficits fast enough before then.

Euro Drops

The single currency dropped for a third day to a 10-week low of $1.3034. The premium on Spanish 10-year bonds over German bunds rose 28 basis points to a euro-era high of 295. The yield on Italy’s 10-year government bond rose 18 basis points to 4.83 percent, about 80 basis points more than Brazil. Portuguese credit-default swaps jumped 11.5 basis points to a record 551, after surging 40 basis points yesterday, according to CMA, a data provider.

The challenge for EU leaders is to stop the crisis without a fiscal union or a clear mechanism to kick profligate members out of the single currency.

Finance ministers found themselves meeting on Sunday, Nov. 28, to calm markets just six months after agreeing to a 750 billion-euro bailout package for the euro region.

While the fund’s size was supposed to head off future speculative attacks, Spanish Finance Minister Elena Salgado arrived at the meeting rejecting talk that she would soon join Ireland in seeking a bailout.

“Speculation exists because it’s part of the fabric of the markets,” she said. “We have certainty that we can control it.”

Focus Turns to ECB

Investors’ attention will soon turn to the European Central Bank, whose 22-member Governing Council will decide on Dec. 2 whether it can afford to stick to a plan to withdraw emergency stimulus at the start of next year.

While the ECB has so far signaled no willingness to deploy new measures, London-based HSBC Holdings Plc says it may provide more help to banks in Spain and Portugal and may even have to conduct broader asset purchases.

“The ECB will once again have a role to play to ensure that financial stability is maintained, albeit reluctantly,” said Janet Henry, chief European economist at HSBC in London. The ECB last week bought the most government bonds in two months.

Investors have also expressed concerns that the European Union’s bailout pot may be smaller than advertised and insufficient to save Spain, whose economy is twice the size of Ireland, Greece and Portugal combined. HSBC’s sums show the country needs 351 billion euros over the next three years.

Enough Cash?

In practice, the EU may only be able to deploy 255 billion euros of the 440 billion-euro European Financial Stability Facility, according to analysts at Nomura International Plc.

That’s because the rescue fund is financed by issuing bonds and in order to secure a AAA rating, governments agreed to set aside a pool of cash, depleting the total amount available to pump into economies. The rest of the bailout pool consists of 60 billion euros from the European Commission and 250 billion euros pledged by the International Monetary Fund.

“There isn’t enough official money to bail out Spain if trouble occurs,” Nouriel Roubini, the New York University professor who predicted the global financial crisis, said yesterday in Prague. While it’s “quite likely that Portugal” will be next in line for financial assistance, “the big elephant in the room” is Spain, he said.

At 9.3 percent of gross domestic product, Spain will have the largest budget deficit in the euro area this year after Ireland and Greece, the European Commission forecast yesterday. Portugal’s shortfall will be 7.3 percent of GDP.

‘Fiscal Union’

Some economists point out that the euro region may ultimately be strengthened by the current crisis if it forces EU governments to work more on coordinating fiscal policy. The Greek crisis led earlier this year to the creation of the euro region’s first bailout fund and Ireland’s rescue accelerated talks over a permanent crisis resolution mechanism.

“In the next 5 to 10 years there has got to be more of a fiscal union within the euro region than we have today,” said UBS’s Donovan. “One of the things that Europe does well is integrate in a crisis.”

Harvinder Sian, a senior fixed-income strategist in London at Royal Bank of Scotland Group Plc says the crisis needs to threaten Germany and its banks before a long-term solution for the euro region can be found.

Until now, German Chancellor Angela Merkel has been reluctant to spend her taxpayers’ money on bailouts. She sparked the latest stage of the crisis by demanding that bondholders help foot the bill of any future rescues.

“The problems need to hit Germany before more viable solutions such as more fiscal and political integration look likely,” Sian said. “That is, it may take a near death experience for the periphery and core EMU banking systems before this realization dawns.”

Ireland Wins $113 Billion Bailout as EU Ministers Seek to Halt Debt Crisis

2010-11-28T15:07:00.000-08:00

European governments threw debt- strapped Ireland an 85 billion-euro ($113 billion) lifeline and scaled back proposals to saddle bondholders with losses in future budget crises, seeking to reverse the market selloff menacing the euro.

European finance ministers backed a Franco-German compromise on post-2013 bailouts that watered down calls by German Chancellor Angela Merkel for investors to be forced to take losses to share the cost with taxpayers. The ministers agreed that a future crisis-management system won’t automatically cut the value of bond holdings, easing away from a proposal that led investors to dump assets of Portugal, Spain and Italy.

The twin decisions on Ireland and the post-2013 crisis facility “should address the current nervousness in the financial markets,” European Union Economic and Monetary Commissioner Olli Rehn told reporters after an emergency EU meeting in Brussels today.

Ireland, swamped by the bursting of a decade-long real- estate bubble, became the second country after Greece to tap European aid as investors questioned whether Europe has the resolve and financial firepower to stem the panic. Ten-year bond yields soared in Portugal, Spain and Italy last week, in a vote of no-confidence in Europe’s handling of the debt shock that exposed flaws in the euro’s makeup and fueled doubts whether 16 countries belong in the same currency.

“The euro is under threat,” Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin, said before the Brussels meeting. “The market has got it into its head that it is going to pick off one country at a time.”

Fiscal Emergencies

Europe’s bailout of Greece in May and setup of a 750 billion-euro fund for fiscal emergencies drove the euro as high as $1.4282 against the dollar on Nov. 4. It has since fallen to $1.3241.

Germany, which built the euro on the principle of budgetary rigor, unleashed the latest phase of the crisis by demanding a “permanent” system as of 2013 that would enable fiscally troubled countries to restructure their debts cut the value of bond holdings.

The German push ran into criticism from central bankers such as European Central Bank President Jean-Claude Trichet, who warned that it would unsettle current bondholders. Romano Prodi, who as Italian prime minister shepherded Italy into the euro, said in a Nov. 26 Bloomberg Television interview that it was hazy on detail and led to “unthinkable problems” in the markets.

Germany backed away from the call for an automatic penalty on future bondholders, agreeing to give the International Monetary Fund a role in determining losses on a case-by-case basis. The new proposal would introduce “collective action clauses” for debt sold as of 2013, enabling fiscally hard-hit governments to renegotiate bond contracts. EU governments aim to enshrine it in the bloc’s treaties by mid-2013 and pair it with a new emergency liquidity fund to replace the one expiring then.

‘Useful Clarification’

“I had asked for a clarification,” Trichet said. He saluted the new proposal as a “useful clarification” that paves the way to an EU setup “fully consistent with the global doctrine, fully consistent with IMF policies.” Rehn said: “There’s plenty of herd behavior in the market. We want to clarify any possible confusion.”

Germany last week also muffled talk by the head of its central bank, Axel Weber, that the EU could put more money into the bailout fund if necessary.

Germany’s export-led economy has powered through the euro crisis, with business confidence at a record high in November and the government projecting growth of 3.7 percent this year, the fastest pace in over a decade.

German resilience contrasts with recession in Greece and Ireland, splitting the euro region between better-off countries in Germany’s economic slipstream and poorer ones on the continent’s fringes.

Cash Reserves

Ireland said it will pay average interest of 5.8 percent on the package, which breaks down into 45 billion euros from European governments, 22.5 billion euros from the IMF and 17.5 billion euros from Ireland’s cash reserves and national pension fund.

“I don’t believe there were any other real options,” Irish Prime Minister Brian Cowen told reporters in Dublin.

A day after more than 50,000 protesters marched through Dublin to denounce Cowen’s budget cuts to stave off financial ruin, the EU gave Ireland an extra year, until 2015, to get its budget deficit to the euro limit of 3 percent of gross domestic product.

Including the bill for propping up Irish banks, the deficit is set to reach 32 percent this year, the highest in the euro’s 12-year history.

Banking System

Cowen has overseen the collapse of Ireland’s banking system and public finances, leading to recession and unemployment of close to 14 percent. Cowen’s government is also unraveling. The Green Party, a junior coalition partner, wants January elections and some lawmakers from his own party are slamming his leadership.

Close banking links led Britain, a non-euro user that didn’t contribute to Greece’s 110 billion-euro rescue in May, to contribute 3.8 billion euros to Ireland’s package.

““That is money we fully expect to get back,” Chancellor of the Exchequer George Osborne told reporters in Brussels. “It’s in everyone’s national interest and it’s in Britain’s national interest that we get some economic stability in Ireland and indeed across the euro zone,”

The deal for Ireland shifted attention to Portugal, which last week passed the deepest spending cuts in more than three decades with the goal of getting back under the EU’s deficit limits by 2012.

Housing Boom

While Greece let the budget get out of hand and Ireland fell prey to a housing boom that turned to bust, Portugal suffers from a lack of competitiveness that kept average economic growth below 1 percent in the past decade.

Like Ireland, Portugal doesn’t immediately need money to run the government. It has completed this year’s bond sales and doesn’t face a redemption until April. The government debt agency plans to hold an auction of 12-month bills on Dec. 1.

“Portugal doesn’t see a need to ask for help,” German Finance Minister Wolfgang Schaeuble said.

Spain, the fourth-largest economy in the euro region, doesn’t need a bailout, Spanish Economy Minister Elena Salgado said.

Ireland Long-Term Sovereign Rating Lowered by Standard & Poor's

2010-11-23T19:25:00.000-08:00

By Christopher Anstey - Nov 24, 2010 9:34 AM GMT+0800

Ireland’s debt rating was lowered two steps by Standard & Poor’s, with a negative outlook, as the nation’s bailout of its banking system is set to escalate the government’s borrowing needs.

“The Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland’s troubled banking system,” S&P said in a statement. Putting the rating on “CreditWatch with negative implications” reflects risk of a further downgrade if talks on a European Union-led rescue fail to stanch capital flight, it said.

The downgrade risks worsening an investor exodus from Irish bonds that has sparked contagion through the euro region, with Spanish bonds tumbling yesterday, pushing the 10-year yield premium over German bunds to a euro-era record. Ireland is hammering out an aid package with the EU and the International Monetary Fund to rescue its banking system.

S&P cut Ireland’s long-term sovereign rating to A from AA- and the short-term grade to A-1 from A-1+, today’s statement said. The reduction leaves its long-term grade five steps above junk, or high-risk, high-yield status, and five steps higher than Greece. It’s now on a par with foreign currency ratings of Israel, the Czech Republic and South Korea, according to data compiled by Bloomberg.

‘Lots of Risks’

“There are lots of risks in the European markets,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. “The flight to quality is supporting Treasuries.”

U.S. Treasuries have advanced the past three days, with 10- year notes slipping today in Asian trading. Yields on 10-year notes were at 2.787 percent as of 9:34 a.m. in Tokyo. The euro was up 0.3 percent at $1.34 after two days of losses.

Moody’s Investors Service said two days ago a “multi- notch” downgrade in Ireland’s credit rating was “most likely” because the bailout would increase its debt burden. Moody’s has an Aa2 long-term rating for the government, three steps higher than S&P’s new grade. Fitch Ratings has an A+ grade, one above S&P, data compiled by Bloomberg show.

An Irish finance ministry spokesman didn’t immediately respond to a call and e-mail seeking comment on S&P’s decision.

EU officials estimate that a rescue package for Ireland may amount to about 85 billion euros ($114 billion), according to two officials familiar with the talks.

Financing Breakdown

The European Commission cited the figure as a preliminary estimate on a conference call of euro-region finance ministers on Nov. 21, said the people, who spoke on condition of anonymity because the talks were private. Of the total, 35 billion euros would be earmarked for banks and 50 billion euros to help finance the Irish government.

“With domestic demand unlikely in our view to recover until 2012, gross debt to GDP at end-2011 looks set to exceed our previous projections of 120 percent,” S&P said today. Ireland’s gross domestic product has contracted for three consecutive years, and Irish Central Bank Governor Patrick Honohan has declared his country’s fiscal deterioration “worse than almost any other country.”

Ireland’s Finance Minister Brian Lenihan will today lay out a four-year deficit-cutting program, a proposal endangered by the ruling party’s coalition partner announcing it will exit the government next month. Opposition parties are calling for Prime Minister Brian Cowen to agree to an immediate election.

Risk Premium

The risk premium on Ireland’s 10-year debt over German bunds, Europe’s benchmark, widened 45 basis points to 589 basis points yesterday on concern that the budget may not pass and the government will fall. The yield spread reached a record 652 basis points on Nov. 11.

Irish banks forced the government to seek the bailout after loan impairments surged following the collapse of the country’s decade-long real estate boom in 2008. That year, the government pledged to back most liabilities, including all deposits in Irish banks, a promise that led the government to inject 33 billion euros to support the lenders.

As loan losses climbed, the government put the cost of the rescue at 50 billion euros in September this year, fueling investor doubts that Ireland could afford the rescue.

Allied Irish Banks Plc may be 99.9 percent state controlled after the government uses external aid to boost its capital levels, and Bank of Ireland Plc may be majority state controlled after the injection, broadcaster RTE said yesterday, without citing anyone.

Irish lenders core tier 1 capital level may be raised to 12 percent from 8 percent, according to the broadcaster.

The government may seek to share losses with Allied Irish’s subordinated bondholders, though senior debt would be honored, RTE also said.

G-20 Spat Risk Eases as U.S. Eschews Pushing Targets

2010-11-08T05:26:00.000-08:00

By Shamim Adam and Aki Ito - Nov 8, 2010 4:19 PM GMT+0800

U.S. Treasury Secretary Timothy F. Geithner refrained from pushing for current-account targets and China hailed the potential effect of Federal Reserve easing at a finance ministers’ meeting days before the Group of 20 summit.

The Fed’s move to buy $600 billion of Treasuries could contribute “tremendously” to global growth, Vice Finance Minister Wang Jun said after Asia-Pacific Economic Cooperation forum finance chiefs met in Kyoto, Japan, Nov. 6. At the same gathering, Geithner said current-account deficits or surpluses aren’t “something that is amenable to limits or targets.”

Policy makers from Asia to South America have warned that the Fed’s decision to pump liquidity into the U.S. will depress the dollar and spark flows of capital to emerging markets that threaten asset-price bubbles. China’s Vice Foreign Minister Cui Tiankai said Nov. 5 the U.S. step may hurt global confidence, while rejecting state-planning style targets for trade deficits.

“It looked like there was going to be quite a lot of conflict or lack of agreement going into the G-20 but this suggests there may be a bit more accord,” said Mitul Kotecha, head of global foreign-exchange strategy at Credit Agricole CIB in Hong Kong. “There is some toning down of the rhetoric on the Fed’s policy but in return, the U.S. will be looked upon to tone down” its push to shrink trade and investment imbalances.

Summit Agenda

Geithner said G-20 leaders, who meet in Seoul Nov. 11-12, are poised to approve last month’s agreement among finance ministers to avoid long-term current account surpluses or deficits, “assessed against indicative guidelines to be agreed.” The G-20 includes the largest developed and emerging nations, from the U.S. and Germany to Japan, China, India and Brazil.

While the Treasury chief said last month that 4 percent of gross domestic product was “likely to emerge as the basic benchmark countries look to,” he refrained from repeating that guideline in Kyoto. He instead noted policy makers have tried to address persistent trade and investment imbalances since the 1940s, and “it’s a process that’s going to take some time.”

China’s response to the Fed’s quantitative easing continued today, with Vice Finance Minister Zhu Guangyao saying it will provide a “shock” to the global economy and increase “hot money” flows to emerging economies. Zhu told reporters in Beijing the U.S. hasn’t “fully realized” the possible impact of the policy, which China hopes will help the global economy.

U.S. Responsibility

In Kyoto, Wang highlighted language in the APEC finance chiefs’ statement that nations with reserve currencies must be “vigilant against excess volatility disorderly movements.” The dollar has a majority of global foreign-exchange reserves, according to the International Monetary Fund.

“We pay close attention to the U.S. quantitative easing policy,” Wang said two days ago. “Quantitative easing policy that’s aimed at boosting the U.S. economy will help the revival of the global economy tremendously.”

Wang’s comments contrasted with those of Vice Foreign Minister Cui, who demanded an explanation from the Fed in a Nov. 5 press briefing in Beijing because “many countries are worried about the impact of the policy on their economies.”

Officials from China, Germany and Japan opposed a set target for current accounts in the past month even as Canada and Australia indicated openness to the idea. Among the G-20 nations, Saudi Arabia, Germany, Russia and China all run surpluses larger than 4 percent, and Turkey and South Africa have deficits bigger than that, according to the International Monetary Fund.

Geithner Objective

“We’re trying to make sure as the world economy recovers, that future growth is sustainable and we don’t see re-emerge the kind of excess imbalances on the trade side, either surpluses or deficits, that could threaten future growth and the future financial stability,” Geithner said at a joint press conference after the Kyoto meeting.

Thai Finance Minister Korn Chatikavanij said in a Nov. 5 interview with Bloomberg Television that while Geithner’s push to discuss global imbalances in trade and investment flows is a “constructive approach,” Southeast Asian nations oppose setting specific targets.

“We didn’t discuss a specific number,” Japan’s Finance Minister Yoshihiko Noda said after the APEC meeting. “However, both surplus and deficit countries must address these imbalances. We hold the same understanding that there is a need for multi- faceted cooperation to ensure that current accounts are sustainable.”

Capital Flows

Underlying the U.S. push to address the imbalances is the assessment by the Fed that a surfeit of Asian savings helped spark the credit boom earlier this decade, which ended in the biggest financial crisis since the 1930s. Now, officials from Asia to Latin America counter it’s the American central bank’s liquidity injections that are warping global capital flows and driving down the dollar.

Brazilian Finance Minister Guido Mantega escalated the international rhetoric in September, saying a “currency war” had begun, with nations seeking to cheapen their exchange rates to bolster exports. G-20 finance ministers and central bank governors then aimed to defuse the tensions with their Oct. 23 communique pledging to avoid “competitive devaluation.”

China has kept its currency’s advance against the dollar to less than 3 percent since mid-June, a strategy that’s contributed to other currencies rising and nations taking steps to prevent an “unfair disadvantage,” Geithner said last month.

Todd Elmer, a Singapore-based currency strategist, wrote today in a note to investors that Geithner’s “shift in rhetoric represents a modest dollar negative since it suggests the status quo which has resulted in trend dollar weakening is likely to remain in place.”

‘Strong Dollar’

Geithner told reporters in Kyoto two days ago that the U.S. views a “strong dollar” as in its interest and “we will never use our currency as a tool to gain competitive advantage.” The Dollar Index, which IntercontinentalExchange Inc. uses to track the dollar against the currencies of six major U.S. trading partners including the euro and yen, slid last week to the lowest level since December 2009.

Geithner’s plan was in part designed to broaden discussions beyond China’s exchange-rate policy, blamed by U.S. lawmakers and companies for keeping the yuan artificially low in a subsidy for local exporters.

“The fact that the Fed is undertaking quantitative easing has made it very difficult for U.S. officials to accuse other countries” of manipulating their currencies “when they are indirectly debasing the dollar,” Kotecha said.

CEOs Most Optimistic on U.S. Profits in Bull Signal for S&P 500

2010-11-08T05:25:00.000-08:00

By Lynn Thomasson and Whitney Kisling - Nov 8, 2010 6:39 PM GMT+0800

More U.S. executives than ever are increasing earnings forecasts compared with those lowering them, helped by almost $2 trillion of Federal Reserve spending and a recovery in the global economy.

EBay Inc., United Parcel Service Inc. and 196 other companies raised profit estimates above analysts’ projections last month as 130 firms cut them, the biggest gap since Bloomberg began tracking the data in 1999. Shipping companies and computer makers boosted forecasts the most, pushing the Morgan Stanley Cyclical Index of businesses most tied to the economy up 27 percent since July 2. That beat the 20 percent rally in the Standard & Poor’s 500 Index.

Companies are raising the outlook for U.S. profits at the same time the Fed is trying to prevent deflation and reduce unemployment by purchasing an additional $600 billion in Treasuries. The last time executives were this optimistic, stocks climbed 39 percent over the next 3 1/2 years, data compiled by Bloomberg show.

“It’s important for the rally and for the general health of the market that investors continue to anticipate higher earnings,” said Dean Gulis, who manages $3 billion for Loomis Sayles & Co. in Bloomfield Hills, Michigan. “That companies themselves are expecting better profits is very positive. As we see rising earnings, we’ll see improving stock prices.”

GDP Growth

About 1.5 U.S. companies boosted earnings estimates above analysts’ forecasts for each that cut projections in October. That’s about three times the average of 0.59 in the past 10 years, data tracked by Bloomberg show. The ratio fell to a record low of 0.1 in December 2008, three months after New York- based Lehman Brothers Holdings Inc. filed for bankruptcy. When it reached 1.1 in March 2004, the S&P 500 rose from 1,126.21 to a record 1,565.15 in October 2007, Bloomberg data show.

The S&P 500 has gained 203 points since falling to a 10- month low on July 2 after companies from Baltimore-based T. Rowe Price Group Inc. to Google Inc. in Mountain View, California, topped analysts’ estimates and investors speculated the Fed would act to boost growth. The benchmark measure of U.S. stocks rose 3.6 percent to 1,225.85 last week, the fifth-straight gain. S&P 500 futures expiring in December slipped 0.4 percent to 1,218.3 at 10:37 a.m. in London.

Earnings at EBay, the owner of the second most-visited e- commerce site, are getting a boost as consumers make more purchases online and use its PayPal service to handle money transfers. The San Jose, California-based company forecast more fourth-quarter sales and earnings than analysts estimated on Oct. 20, spurring the biggest gain in the shares in nine months.

Credit Expansion

Consumer borrowing in the U.S. unexpectedly increased in September by the most in two years, led by a surge in non- revolving credit such as college loans and auto financing, the Federal Reserve said on Nov. 5. The report was released the same day the Labor Department said employers added 151,000 jobs in October, more than twice the median economist prediction.

“We have outperformed our expectations through the first three quarters of the year, and enter the holiday season with confidence in our payments business,” said Bob Swan, EBay’s chief financial officer, on a conference call following the earnings release. “From a business standpoint, our global footprint is expanding.”

Rising international demand for everything from transportation services to tobacco and power tools is helping drive profits at companies such as UPS, Philip Morris International Inc. and Danaher Corp. While forecasts for U.S. gross domestic product in 2011 have fallen to 2.4 percent from 2.9 percent in July, the biggest emerging markets are expected to expand at least twice as fast, based on economist estimates and International Monetary Fund forecasts compiled by Bloomberg.

Freight Traffic

UPS, the world’s largest package-delivery company, raised its estimate for 2010 income on Oct. 21 and projected growth of 51 percent to 53 percent for the year. That would be the biggest annual earnings increase for the Atlanta-based firm since before 2000, data compiled by Bloomberg show.

Freight-train traffic has risen 16 percent since July 9, according to the Association of American Railroads. The index of carloads at the largest U.S. lines plunged 31 percent from its highest level in 2008 to May 2009, Bloomberg data show.

“Looking towards peak season, customer sentiment is mixed, but leaning towards cautious optimism,” UPS CFO Kurt Kuehn told investors and analysts on Oct. 21. “We’re expecting a good, strong fourth quarter, and I’m extremely confident we’re on our way back to the high levels of profitability that we’ve demonstrated in the past.”

Overseas Edge

Investors are betting profits at S&P 500 companies with the most sales outside the U.S. will beat the market. Corporations getting at least 50 percent of their revenue from foreign sources rose 10 percentage points more than American-focused stocks since July 2.

Earnings for the 30 companies in the Morgan Stanley index of economically sensitive shares will grow 25 percent next year, almost twice the rate of the S&P 500, according to analyst estimates compiled by Bloomberg. The cyclicals gauge trades for 12.2 times estimated 2011 earnings, or 0.5 point lower than the S&P 500, Bloomberg data show.

Philip Morris said on Oct. 21 that currency fluctuations, lower taxes and rising sales in countries from Algeria to Indonesia led the New York-based company to increase its 2010 income projection. The biggest publicly traded tobacco maker has advanced 30 percent since July 2.

“We have strong business momentum going into the fourth quarter and will benefit from higher margins in Japan as well as price increases in Argentina, France, Indonesia, Italy, Poland, Portugal, Russia and the U.K.,” said Hermann Waldemer, the CFO, in a conference call. “We have market leadership and are growing volume and overall share in emerging markets.”

Craftsman Tools

Danaher cited faster growth in emerging markets as one of the reasons for increasing its 2010 profit forecast on Oct. 21 to between $2.25 and $2.30 a share, the highest since at least 1999, up from a range of $2.16 to $2.23. The Washington-based maker of Craftsman tools said on Nov. 4 that it gets about 20 percent of revenue from developing nations.

Increased regulation of the financial and health-care industries is leading businesses to outsource computer services, Cognizant Technology Solutions Corp. said on Nov. 1. The Teaneck, New Jersey-based provider of data systems support raised its 2010 earnings forecast and beat analysts’ third- quarter estimates. The shares are up 28 percent since July 2.

“Clients continue to search for cost savings in order to fund growth and innovation in other areas,” Chief Executive Officer Francisco D’Souza said on the call after the quarterly profit report.

Already Rallied

Stock prices have already risen to account for higher corporate earnings and shares will require a strengthening economy to climb more, said Trym Riksen, chief investment officer for the private-banking division of DnB NOR ASA. The valuation for the companies in the S&P 500 has climbed to 15.4 times reported profit from the past year, from a 14-month low of 13.7 in July, according to data compiled by Bloomberg.

“This huge wave of positive guidance has already been priced into the market,” said Riksen, whose Oslo-based firm oversees the equivalent of about $391 billion. “It would be very surprising if that huge wave were to be prolonged.”

Rising raw-material prices are reducing profitability for Clorox Co., a maker of household-cleaning products, and apparel company Jones Group Inc. Earnings are being squeezed as companies struggle to pass costs onto shoppers at a time when year-over-year gains in the consumer price index have averaged 1.8 percent in 2010, compared with a 10-year average of 2.5 percent, data compiled by Bloomberg show.

Record Cotton

Clorox lowered its annual profit forecast on Nov. 2, citing weakening U.S. growth and higher commodity costs. Shares of the Oakland, California-based company fell the most in almost two years. Jones Group cut its 2010 sales projection on Oct. 27 amid soaring cotton prices, which reached a record $1.446 a pound on Nov. 5. Shares of the New York-based clothing maker are down 6.9 percent this year.

Gains in U.S. GDP are trailing the average pace following a contraction, according to data compiled by the National Bureau of Economic Research and Bloomberg. NBER said the worst recession since the 1930s ended in June 2009, and Bloomberg data show GDP growth will average 2.5 percent a quarter through June 2011, or half the average rate in the two years following contractions since 1949.

Most companies are earning more than analysts expected. More than 70 percent in the S&P 500 beat profit forecasts in the July-to-September period for the sixth straight quarter, the longest streak in Bloomberg data going back to 1993. S&P 500 earnings since Oct. 7 were 7 percent higher than analysts predicted, the data show.

Biggest Nations

Brazil, Russia, India and China, the biggest developing nations, are forecast to expand more than the U.S. next year. Their growth will average 6.6 percent, according to the median economist forecasts in a Bloomberg survey and IMF projections.

“Earnings have been phenomenal out of corporate America,” Robert Doll, who oversees $3.45 trillion as chief equity strategist at New York-based BlackRock Inc., said in a Nov. 3 interview on Bloomberg Television’s “First Up” with Susan Li. “They’ve delivered versus expectations, yet again outshining the tepid economic recovery. I think that’s the real story.”

Gold Closes Lower after China Rate Hike

2010-10-19T21:10:00.001-07:00

James Hyerczyk, Futures Hound
Published 10/19/2010 - 8:58 p.m. EST

December Gold sold off on Tuesday after China’s central bank raised interest rates. The move by China surprised traders who began selling riskier currencies and commodities.

The People’s Bank of China raised its benchmark one-year lending and deposit rate by 25 basis points effective from October 20, the first increase in nearly three years. The move was most likely tied to pressure from the U.S. to increase the value of the Yuan. Others believe it was an effort to prevent the economy from overheating. The action by China triggered a rally in the U.S. Dollar, thereby weakening demand for gold and silver.

The current break in the gold market is the largest in terms of price and time on the daily chart in a few months. This could be an indication that further downside movement is coming.

The current main bottom on the daily swing chart is $1325.60. A trade through this price will turn the main trend down.

Based on the current closing price reversal formation, the first down side target is the 50% level at $1313.00, followed by the Fibonacci level at $1295.30. On Wednesday, an uptrending Gann angle comes in at $1293.00. This makes $1295.30 to $1293.00 an important support cluster.

Wanna know when the BOJ will intervene?

2010-10-19T21:07:00.000-07:00

By Sean Lee || October 18, 2010 at 22:48 GMT

If so, keep a sharp eye on this page from the BOJ, http://www.boj.or.jp/en/type/stat/boj_stat/fx_daily10/index.htm, and add it to you favourites. The number to watch is the trade weighted index down the bottom of each pdf. The BOJ intervened when the index got close to 120 and as its now back above 124, the pressure is probably off.

Dollar Trades Near a 15-Year Low Versus Yen After Federal Reserve Minutes

2010-10-12T16:52:00.000-07:00

By Candice Zachariahs and Catarina Saraiva - Oct 13, 2010 7:15 AM GMT+0800

The dollar traded near the weakest in 15 years against the yen and a record low versus the Swiss franc on speculation Federal Reserve officials will reiterate they are poised to resume bond purchase to support growth.

The Dollar Index, which tracks the greenback against major trading partners, was near its lowest since January after the Fed said yesterday in minutes of its September meeting that it was set to take more credit-easing steps “before long.” The bank will announce increases in Treasury purchases, or so-called quantitative easing, in November, Goldman Sachs Group Inc. has said. The euro was near a nine-month high before a report likely to show European industrial production rose in August.

“The Dollar Index will remain under pressure,” said Kurt Magnus, executive director of foreign exchange sales at Nomura Australia. A second round of quantitative easing “is imminent and the minutes suggest that it will be large and aggressive.”

The dollar traded at 81.81 yen as of 8:02 a.m. in Tokyo, from 81.72 yesterday in New York. It reached 81.39 on Oct. 11, the lowest level since April 1995. The euro fetched $1.3915 from $1.3924 yesterday and touched $1.4029 on Oct. 7, the most since Jan. 28. The yen traded at 113.84 against the euro from 113.79.

The Dollar Index, used by IntercontinentalExchange Inc. to track the greenback against currencies including the euro, yen and Swiss franc, slid 0.1 percent to 77.363 yesterday. It touched 76.906 on Oct. 7, the lowest level since Jan. 15.

The index will decline to 76.70 this week, corresponding to the euro advancing through $1.41, Magnus said.

The gauge of the U.S. currency has fallen 3.8 percent since Sept. 21, when the central bank said in a statement following its policy meeting that it’s prepared “to provide additional accommodation if needed” to support the recovery.

‘Before Long’

That phrase was meant to be in accord “with the members’ sense that such accommodation may be appropriate before long,” according to the central bank’s minutes yesterday.

The Fed will announce increases in its Treasury purchases at its policy meeting Nov. 2-3, helping the U.S. avoid the “very bad” economic outcome of a renewed recession, New York- based Jan Hatzius, chief U.S. economist at Goldman Sachs, said yesterday via e-mail.

Fed Chairman Ben S. Bernanke will discuss business innovation in Pittsburgh today and speak on monetary policy objectives and tools in Boston on Oct. 15.

The Swiss franc traded at 95.71 centimes after yesterday gaining as much as 1 percent to 95.56 centimes against the dollar. It touched 95.55 centimes on Oct. 7, the strongest ever.

Weber Comments

Industrial production in the euro region probably rose 0.8 percent in August, economists forecast before the European Union’s statistics office report today.

The report supports European Central Bank Governing Council member Axel Weber’s comments yesterday that the risk of Europe sliding back into recession is “negligible.” The central bank should stop its bond-buying program, he said.

“These securities purchases should now be phased out permanently,” said Weber, who also heads Germany’s Bundesbank, in a speech delivered in New York yesterday. With policy makers debating when to withdraw other emergency measures, Weber said the risk of “exiting too late” is greater than the danger of “exiting too early.”

Britain shows no sign of double-dip recession-Cable

2010-09-19T20:54:00.000-07:00

LIVERPOOL, England, Sept 19 (Reuters) - Britain shows no signs of a double-dip recession and manufacturing is growing strongly, Business Secretary Vince Cable said on Sunday.

"On the double dip recession, there is no sign of it," Cable told an event at his Liberal Democrat party's conference in Liverpool.

"In fact, the private sector is growing quite strongly in certain areas, particularly manufacturing," Cable added.

"Certainly we are not heading for a double-dip recession. It's an outside risk. I can't promise that it won't happen, but it certainly looks improbable," he said.

Slowing growth in Britain's services sector have prompted concerns the economy may go into reverse only months after emerging from the worst recession in generations following the global financial crisis.

British service sector activity grew last month at its slowest pace since April 2009, with a marked fall in hiring as employers worried about an economic slowdown and public spending cuts, according to the latest Markit/CIPS services purchasing managers' index. (Reporting by Tim Castle, editing by Maureen Bavdek)

Australian Dollar Trades Near Two-Year High on Growth View, Fed Purchases

2010-09-14T17:16:00.000-07:00

By Candice Zachariahs - Sep 14, 2010 4:22 PM PT

The Australian dollar traded near its strongest level in two years as a strengthening domestic economy and concern the Federal Reserve will expand efforts to keep down borrowing costs spurred demand for the currency.

New Zealand’s currency was near a seven-week high as speculation increased that U.S. policy makers will buy additional Treasury securities this year to help sustain growth as the recovery falters. Gains in the so-called kiwi were tempered on speculation the Reserve Bank of New Zealand will leave interest rates unchanged at a meeting tomorrow.

“Aussie can probably track a bit higher,” said Joseph Capurso, a currency strategist in Sydney at Commonwealth Bank of Australia, the nation’s largest lender. “The Australian economy is outperforming the rest and the market’s pricing in the prospect of quantitative easing in the U.S.”

The Australian dollar traded at 93.96 U.S. cents as of 9:22 a.m. in Sydney from 93.97 cents in New York yesterday, when it climbed to 94.58 cents, the highest level since July 2008. The currency was at 78.01 yen from 78.03 yesterday.

New Zealand’s dollar bought 73.28 cents from 73.43 cents yesterday when it advanced to 73.95, the strongest since July 27. It traded at 60.84 yen from 60.97.

Economists at Goldman Sachs & Co. expect the Fed to announce as early as November a program of asset purchases to support a weak economy. Treasury purchases may total about $1 trillion in another round of quantitative easing, said Jan Hatzius, chief U.S. economist at Goldman Sachs.

Benchmark interest rates are 4.5 percent in Australia and 3 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

ECB Trichet: Strong 2Q Confirms No Double Dip

2010-09-05T18:03:00.000-07:00

First Published Sunday, 5 September 2010 05:37 pm - © 2010 Need to Know News

--But Too Early To Declare "Victory"

PARIS (MNI) - The Eurozone's strong second quarter growth performance confirms that there won't be a double-dip recession, but there are plenty of challenges in the coming years, ECB President Jean-Claude Trichet said in a newspaper interview published Saturday.

"I've already said on many occasions that I didn't foresee a double dip in Europe, and the latest results confirm it," Trichet told the French daily Le Figaro.

He warned against reading too much into quarterly figures, however, saying that the economy must be judged in a longer-term perspective. "That said, I am delighted with the growth in the second quarter and with the upward revision to the European Central Bank staff forecasts that I announced last Thursday," he added.

However, "with regard to growth in the coming years, we remain cautious and are not declaring victory," Trichet said.

Trichet and his ECB colleagues have said many times recently that they do not expect growth in the second half of this year to match the second quarter's torrid pace. They expect momentum to slow in the third quarter and even more so in the fourth, though they believe a modest recovery will continue.

The Eurozone economy surpassed expectations in the second quarter with a robust 1.0% q/q growth rate, driven largely by Germany's dizzying 2.2% quarterly pace. Largely on the basis of the strong second quarter, the ECB staff revised upward its midpoint growth forecast for 2010 to 1.6% from the previous projection of 1%.

Trichet suggested that the strong 2Q performance cannot be attributed to the euro's weaker tone in foreign exchange markets, which many say has been a big boon for exports - especially Germany's.

"I note with great interest that the Eurozone's second quarter growth rests above all on its domestic demand [consumption and investments]: a total contribution of 0.7% to growth of 1%, with a contribution of 0.1% from foreign trade and 0.2% from inventories," the ECB president said.

He downplayed the idea that Germany's disproportionate share of 2Q EMU growth meant that a "two-speed" Europe was emerging.

"Germany is the biggest economy in the [currency] union and the top market for the exports of the near-totality of the other countries. When it improves, it is clearly good for the Eurozone as a whole," Trichet said.

He lauded Germany, saying its success was the fruit of the measures it has undertaken in recent years to reduce production costs and increase productivity, as well as the adaptability of German companies to the realities of globalization.

In a comment that could be aimed at France, which is facing a week of strikes, protests and general tension over the government's pension reform plan, Trichet noted that Germany's success was built on "a high degree of confidence among social partners [unions and employers], which we be desirable to regain in all countries of the Eurozone."

Given its attention to production costs and the reforms it has undertaken to make the economy "more flexible," Germany "can serve as an example to all its neighbors," Trichet said.

Asked to explain why the U.S. Federal Reserve was worried about deflation while the ECB was not, Trichet said there were "important structural differences on the two sides of the Atlantic, and that the fear of deflation "manifested itself from time to time in the United States, even if, very fortunately, the risk has not materialized."

In Europe, he added, "we are lucky to have a remarkable anchoring of inflation expectations in line with our definition of price stability of less than but close to 2%." He repeated, as he has for many months, that "the ECB considers the current interest rates appropriate to give us medium-term price stability, without inflation or deflation."

Trichet also repeated his criticism of the big three ratings agencies, saying "it is not necessarily healthy" that the important task of evaluating securities be share among only three institutions at the global level. "I don't think the solution is necessarily the creation of a public institution. We must continue to reflect," he said, adding that, "the right answers in this domain as in others can only be worldwide ones."

Trichet also renewed his call for China to exercise "greater flexibility" with regard to the exchange rate of its currency, the yuan. "From this point of view, I appreciated, along with all the [finance] ministers and [central bank] governors of countries with floating currencies, the move in the direction of more flexibility that was made public by China last June 19," he said.

Canadian Dollar Falls for Fifth Day Marking Longest Streak in 19 Months

2010-08-25T07:12:00.000-07:00

By Chris Fournier - Aug 25, 2010 8:10 PM GMT+0800

Canada’s dollar depreciated for a fifth day versus its U.S. counterpart, the longest string of losses since January 2009, as risk aversion drove global stocks lower, weakening the outlook for currencies tied to growth.

The loonie, as the currency is sometimes known, is down 1.1 percent this year. A faltering economic recovery means the chances for further Bank of Canada interest-rate increases in 2010 are diminishing, dimming the currency’s appeal.

“It’s a simple reflection of risk aversion,” Shaun Osborne, chief currency strategist in Toronto at Toronto- Dominion Bank’s TD Securities unit, wrote in an instant message. “It feels a little as if the impetus for higher rates in Canada beyond September is perhaps fading a little more.”

The Canadian currency retreated 0.4 percent to C$1.0652 per U.S. dollar at 8:09 a.m. in Toronto, compared with C$1.0615 yesterday, when it touched C$1.0665, the lowest point since July 6. One Canadian dollar buys 93.88 U.S. cents.

Osborne predicted the loonie will head toward C$1.0775 if it breaks through C$1.0675.

The MSCI World Index, a gauge of equities in 24 developed nations, also fell a fifth day.

Bank of Canada policy makers next meet on Sept. 8, after raising interest rates by a quarter percentage point to 0.75 percent on July 20, the second increase in two months.

Cameron Economy Set to Take a Pounding as Traders Turn Bearish

2010-08-23T00:37:00.000-07:00

By Lukanyo Mnyanda and Paul Dobson - Aug 23, 2010 12:25 PM GMT+0800

U.K. Prime Minister David Cameron attends a summit in New Delhi. Investors drove the pound as much as 11.8% higher against the euro from its low this year on March 1 on speculation Cameron's austerity measures would shrink the nation's 11 percent deficit and preserve its top debt rating. Photographer: Pankaj Nangia/Bloomberg
Audio Download: Debate on Pound

The British pound’s biggest rally in 14 months is in jeopardy as Prime Minister David Cameron’s budget cuts begin to curb economic growth.

Foreign-exchange forecasters are the most pessimistic on the pound since May 2009, when Standard & Poor’s said the U.K. was at risk of losing its AAA credit rating, according to data compiled by Bloomberg. Bears in a Bloomberg survey of strategists outnumber bulls 29 to 12, while TD Securities in Toronto, the most-accurate forecaster in the six quarters ended June 30, has the lowest estimate, predicting sterling will depreciate 15 percent versus the dollar by year-end.

“The story has changed,” said Richard Benson, an executive director at Millennium Asset Management in London who oversees $14 billion and correctly predicted in the first half of 2009 the pound would gain versus the euro. “The prospects for growth look quite soft and fiscal retrenchment is about to be undertaken,” said Benson, who is betting against sterling as the U.K. expansion lags behind Germany.

Investors drove the pound as much as 11.8 percent higher against the euro from its low this year on March 1 on speculation Cameron’s austerity measures would shrink the nation’s 11 percent deficit and preserve its top debt rating. It’s starting to retreat as the planned cuts risk undermining the recovery.

Trimming Forecasts

The Bank of England lowered its 2012 growth forecast on Aug. 11, to 3 percent from 3.6 percent, citing “tight credit conditions” and the budget program. The U.K. will probably expand 1.2 percent this year, the median estimate of 24 economists surveyed by Bloomberg showed. German gross domestic product may increase 2 percent this year, with the U.S. rising 3 percent, separate surveys show.

Gains in London house prices in the first-half of 2010 were wiped out this month as the market weakened, Rightmove Plc, operator of the U.K.’s biggest property website, said on Aug. 16. Consumer confidence dropped in July for a third month, data from Nationwide Building Society showed on Aug. 11.

Benson said sterling will weaken more than 8 percent against the euro by year-end, from 81.83 pence last week. It rose 0.2 percent 81.69 pence and to $1.5564 from $1.5534 as of 12:42 p.m. in Tokyo.

“It’s a turning point for the pound,” said Ian Stannard, a London-based senior currency strategist at BNP Paribas SA, the third-most-bearish of 34 forecasts for the pound against the dollar compiled by Bloomberg as of Aug. 20. “The data has peaked and it’s set to deteriorate.”

The pound fell 12 percent from the start of the year to a low of $1.4231 on May 20 on concern former Prime Minister Gordon Brown’s Labour Party would fail to tackle a budget deficit that had reached 12.6 percent of the economy.

Cameron Takes Over

Cameron’s Conservative Party ended 13 years of Labour rule in the May 6 election and formed a coalition government with Nick Clegg’s Liberal Democrats, promising cuts to tackle the shortfall. Sterling jumped 7.9 percent against the dollar in the two months through July.

Governments across Europe are attacking deficits after the region’s debt crisis sent bond yields in Greece, Portugal and Spain to the highest relative to German bunds since the euro was introduced in 1999 and prompted credit downgrades by S&P, Fitch Ratings and Moody’s Investors Service. S&P reiterated the “negative” outlook for the U.K. on July 12, saying its projections for the economy were less optimistic than those Chancellor of the Exchequer George Osborne presented in his emergency budget on June 22.

Osborne, 39, the youngest chancellor since 1886, pledged to almost erase the deficit by 2015 via spending cuts worth 30 billion pounds ($47 billion) annually and measures including a public-sector wage freeze, firings and tax increases.

Gilts Rise

Gilts climbed that day as the Debt Management Office reduced the amounts of bonds to be sold in the fiscal year through March to 165 billion pounds from 185.2 billion pounds. U.K. bonds have returned 5.74 percent since May 6, compared with 3.95 percent on average for government bonds globally, according to Bank of America Merrill Lynch index data.

“The actions we took in the budget have removed the biggest downside risk to the recovery, a loss of confidence and a sharp rise in market interest rates,” Osborne said in a speech at Bloomberg’s London offices on Aug. 17. “Britain now has a credible plan to deal with our record deficit. We must stick by it.”

Strategists who boosted fourth-quarter predictions for the pound to as high as $1.67 in January now see the currency declining to $1.51 by year-end, according to the Bloomberg survey’s median forecast.

Pound Forecasts

TD Securities predicts sterling will end the year at $1.32. BNP Paribas, based in Paris, estimates the pound may slide to $1.40, while Zurich-based UBS AG, ranked by Euromoney Institutional Investor Plc as the world’s second-biggest foreign-exchange trader, forecasts a drop to $1.35.

Against the euro, the pound will likely end the year at 81 pence, based on the median estimate of 27 economists and strategists. As recently as April they forecast 87 pence.

“The appreciation we expected several months ago has now occurred and most likely overshot,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto, who sees the pound at $1.53 by Dec. 31. “The pound faces several ongoing hurdles, including the outlook for inflation and the Bank of England.”

The pound is weakening even as inflation shows few signs of slowing. The currency fell 0.5 percent on Aug. 17 even though the Office for National Statistics said U.K. consumer-prices increased 3.1 percent in July from a year earlier, above the government’s 3 percent limit.

Futures Traders

Futures traders have reversed bets that the pound will gain against the U.S. dollar, data from the Washington-based Commodity Futures Trading Commission showed on Aug. 20.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the pound compared with bets on an advance, so-called net shorts, was 4,431 on Aug. 17, compared with net longs of 5,021 a week earlier. Net shorts were as much as 76,745 in May.

“We still find sterling attractive,” said Thanos Papasavvas, who helps invest about $5 billion as head of currencies at Investec Asset Management Ltd. in London. “It’s more to do with the U.S., which is behind the curve on the fiscal adjustments. Economic reports coming out of the U.S. have been disappointing, whereas data from the U.K. has been better than expected.”

The pound will trade between $1.65 and $1.70 by year-end, Papasavvas said.

‘Cautiously Optimistic’

Osborne said in his speech on Aug. 17 that economic data pointed to a “gradual recovery.”

“We can start to be cautiously optimistic about the economic situation,” he said.

Bank of England Governor Mervyn King may resist further gains in the pound to promote exports and industries including tourism that have benefited from a 24 percent drop in sterling on a correlation-weighted basis since the start of 2007.

Retail sales in central London grew at the fastest rate since 2006 in the five weeks to July 3 as visitors to the U.K. took advantage of the weaker currency, the British Retail Consortium and accounting firm KPMG LLP said on July 19.

“The governor has been arguing the case for an export-led recovery,” said Robin Marshall, a director of fixed income at Smith & Williamson Investment Management in London, which oversees $20 billion. “A much stronger exchange rate would not be very welcome. He would attempt to talk it back down if we did get back toward the $1.70 level.”

A weaker pound may not be enough to give an additional kick to the economy as Cameron’s austerity program slows the recovery, said Brian Kim, a currency strategist at UBS in Stamford, Connecticut.

“The fiscal side in the U.K. is going to hamper growth,” Kim said in an interview. “We could see more sterling weakness in the second half of the year.”

European Bank Stress Tests Said to Describe Three Scenarios

2010-07-21T01:08:00.000-07:00

By Meera Louis and Jann Bettinga - Jul 20, 2010

European regulators plan to detail three scenarios when they publish the results of their stress tests on the region’s banks this week, according to a document by the Committee of European Banking Supervisors.

Banks will publish their estimated Tier 1 capital ratios under a benchmark for 2011, an adverse scenario and a third test that includes “sovereign shock,” according to a template prepared by CEBS for the banks and obtained by Bloomberg News.

In the last scenario, banks will publish their estimated losses on sovereign debt they hold in their trading book as well as “additional impairment losses on the banking book” that they may suffer after a sovereign debt crisis, according to the document that was dated July 15.

Under accounting rules, banks have to adjust the value of sovereign bonds held in the trading book according to changes in market prices, said Konrad Becker, a financial analyst at Merck Finck & Co. in Munich. For government debt held in the banking book, lenders must write down their value only if there is serious doubt about a state’s ability to repay its debt in full or make interest payments, he said.

The sovereign-shock scenario doesn’t assume a European nation will default, said a person with knowledge of the matter, who spoke on the condition of anonymity because the information is private. Instead, it will assume that rising government-bond yields will push up borrowing costs, spurring defaults in the private sector that would lead to losses in lenders’ banking books, said the person.

EU Stress Tests

CEBS coordinates national banking authorities and makes policy recommendations to the European Union on regulation. Spokeswoman Efstathia Bouli declined to comment.

EU regulators are examining the strength of 91 banks to determine if they can survive potential losses from both a recession and a decline in the value of their government bond holdings. They are using the tests to reassure investors about the health of financial institutions from Germany’s WestLB AG and Bayerische Landesbank to Spanish savings banks as the debt crisis pummels the bonds of Greece, Spain and Portugal.

The banks may publish how much they will need to raise in capital if their Tier 1 ratio, a key measure of financial strength, falls below 6 percent under the sovereign scenario, the draft shows. Lenders will also provide estimated loss rates for their corporate and retail holdings for the adverse cases, according to the template.

Greece provides an opportunity to sell the EUR

2010-07-13T04:30:00.000-07:00

Posted by Dean Popplewell at 6:16 am EDT, 07/13/2010

Moody’s paranoia of being forgotten decided to downgrade Portugal two notches to A1 this morning. This has given the Euro-zone sovereign debt crisis top-billing again, surpassing the disappointing ZEW Business survey from Germany, which did not fall, but plummeted from 28.7 to 21.2. All this negative news has hit a market that was already looking for safer heaven trading ideas after China made it clear that it will halt any property speculation and on fear that their GDP report on Thursday will show that their economy is slowing down. Global sentiment again has taken a hit. Will earnings season save the day? Solid demand for the Greek bill auction has given the EUR some support, but sellers are lurking.

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

The market yesterday felt motionless ahead of this week’s earnings report and tomorrows US sales data. Investors are looking for some ‘concrete’ guidance before they go out on a limb again. The US trade deficit has been virtually unchanged for the last three months and analysts do not expect much movement in the May report either. Consensus is pegging this morning’s headline print just above the -$40b mark again, as a price related decline in petroleum imports will be negated by an increase in the non-oil deficit. The market is anticipating solid gains in both the import and export non-petroleum gains, but with a greater weighting on the imports category. Digging deeper, the ‘nominal deficit is expected to be restrained by lower oil prices, while the ‘real’ should rise.

The USD$ is higher against the EUR -0.44%, GBP -0.24%, CHF -0.15% and lower against JPY +0.21%. The commodity currencies are mixed this morning, CAD +0.12% and AUD -0.52%. All good things temporarily come to an end and that includes the loonies advance after stellar fundamental reports of late. Last weeks unemployment report blew all analysts estimates out of the water (+93k), but with equities floundering temporarily reduced the appeal of growth based currencies. Any dollar rallies will only give speculators a better ‘average’ opportunity to own the CAD. It’s difficult to find any technical or fundamental reason to ‘not’ own the currency, whether it’s growth, the BOC attempt to normalize rates (+0.50%) somewhat or as a safer-haven proxy. Couple this with commodities has speculators wagering bets that the CAD will outperform other economies whose monetary policy is expected to experience a prolonged period of near-zero benchmark rates. For most of this month, the loonie has followed equities, in fact, the currency has a +85% correlation with the Dow. If the BOC remains in a ‘normalizing’ rate mood then the currency will be more sought after. The futures market has priced in a 0.25% hike by the BOC next week. On the crosses, CAD is holding its own and under normal conditions is seen as a safer way to play a global economic recovery with links to commodities and less banking.

The AUD has continued its slide for a second consecutive day, retreating from its highest level in three weeks amid speculation that the recent rally was overdone and before Chinese GDP reports that analysts expect will show that their growth is slowing, thus damping demand for higher-yielding assets. Currently the AUD is running out of momentum, and the market expects to see more of the same this week. Last week we saw that there was nothing better to drag a currency higher that strong employment numbers. This week, economic sentiment seems to rule the coop. Fundamentally, with a strong domestic growth base it is buffering the economy from any outside negative influence at the moment. Last week, Governor Stevens left the cash O/N rate unchanged for a second consecutive month (4.50%). In his following communiqué, the RBA stated that consumer spending and business investment are expanding. Policy makers are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. However, that been said, the currency pressure is coming mostly from investors who want to own safer heaven position. On the crosses especially, like AUD/JPY one can expect further pressure being exerted. For now, speculators will be better sellers on upticks (0.8753).

Crude is little changed in the O/N session ($74.94 -1c). Crude prices felt the heat yesterday, declining from a one week high as investors locked in profits. Earlier, the commodity rose on the back of China’s import fuel data (net imports +2m-metric tones to +22.14m), setting up the market nicely to offload winning positions ahead of an anticipated softer US sales data tomorrow. Last week, the black-stuff had a + 5.5% gain, the biggest rally in six weeks, as a drop in jobless claims ‘bolstered speculation the country would sustain its economic recovery’. The earning’s season and an equity market finding it difficult to maintain traction will pressurize commodities, as will cooler weather being predicted coupled with no threats of hurricanes in the Gulf of Mexico. Last week’s EIA report revealed a drawdown of -5m barrels, somewhat inline with market expectation because of hurricane Alex, but, it was the other subcategories that were capable of reining in the price advance. Data showed an increase of +1.3m barrels for gas stockpiles and an increase of +300k for distillates stocks (heating and oil). While the headline for crude is bullish, the numbers for gas was bearish. Analysts believe that the gas markets numbers continue to show ‘lackluster demand and will put pressure on the entire energy complex in the days to come’. The EIA revealed a larger than expected increase in natural-gas stockpiles to +78 bcf vs. +60 bcf’s. Currently there are too many negative variables that support the bear’s short positions with speculators preferring to sell on rallies.

The ‘yellow metal’ had the largest rally on Friday in three week’s as investors demanded the commodity that had been trading close to its technical lows for a few day’s. Investors continue to weigh ‘the signs of hope in the US labor market against concerns of impending European bank stress-tests (July 23). Yesterday, with consolidation the name of the game, the metal pared some of its advances on speculation that a strengthening dollar will erode demand for the precious metal as an alternative asset. Technically, the bullish sentiment has been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally aggressively, as historically, this is the ‘slowest’ season for physical demand. India, the world’s biggest consumer, expects imports to plunge as much as -36% this year. Despite this, longer term view, market concerns over global economic growth is supporting the ‘yellow’ metal, at least until the technical support of $1,175-80 is broken. Year-to-date, the commodity has gained +11.5% as investors have been content in using the commodity as a hedge against any European holdings, believing that the EUR has not bottomed out just yet ($1,204 +$5)!

The Nikkei closed at 9,537 down -11. The DAX index in Europe was at 6,149 up +72; the FTSE (UK) currently is 5,230 up +63. The early call for the open of key US indices is higher. The US 10-year backed up 3bp yesterday (3.05%) and are little changed in the O/N session. Debt prices remain soft on the back of investors diminishing concerns that the US will slip back into a double dip recession and also on investors radar, is the US governments auction of $69b’s worth of new product this week (3’s $35b, 10’s $22b and Bonds $12b). Throw in a revised IMF forecast for global growth, +4.6% vs. an April estimate of +4.2, warrants dealers to cheapen up the curve and keep 10-year yields above the +3% level to take down product. With the current market sentiment dealers will want to sell product on up-ticks.

EU Stress Tests Will Cover 91 Banks, Assume Bond Value Drop

2010-07-07T16:54:00.000-07:00

By Ben Moshinsky - Jul 7, 2010

European Union regulators are carrying out stress tests on 91 banks, accounting for 65 percent of the area’s banking industry, to examine whether they can withstand a shrinking economy and a drop in government bond values.

The lenders being tested include 14 from Germany, six from Greece and four from the U.K., the Committee of European Banking Supervisors said in an e-mailed statement. EU banking regulators have told lenders that their planned stress tests may assume a loss of about 17 percent on Greek government debt and 3 percent on Spanish bonds, according to two people briefed on the talks.

“This sounds like the softest option possible,” said Stephen Pope, London-based chief global equity strategist at Cantor Fitzgerald. “If that is the indicator how stringent the stress tests will be, then they aren’t worth too much.”

Regulators are counting on the tests to reassure investors that banks have enough capital to withstand a debt default by a European country. U.S. bank stocks rebounded last year after government analysis of their balance sheets found that 10 lenders needed to raise $74.6 billion of capital.

EU leaders have pledged to disclose the results of the tests, showing how individual banks would hold up to economic and market shocks, by the end of July. CEBS is working with the European Central Bank on the tests.

CEBS’s role is to coordinate national banking authorities and make policy recommendations to the EU on regulation. The London-based regulator is working with the European Central Bank on the tests. An ECB spokeswoman declined to comment.

Sovereign ‘Deterioration’

The adverse scenario being tested “assumes a 3 percentage point deviation of GDP for the EU compared to the European Commission’s forecasts over the two-year time horizon and a “deterioration of sovereign risk” from early-May government bond values, according to the CEBS statement.

The commission has said it expects the EU’s economy to grow by 1 percent this year and 1.7 percent next year.

The results will be disclosed “both on an aggregated and on a bank-by-bank basis, on July 23,” CEBS said. The agency didn’t specify scenarios for so-called haircuts on European sovereign bonds.

Greek Bonds

Credit markets are pricing in losses of about 60 percent on Greek bonds should the government default, more than three times the level said to be assumed by CEBS. Derivatives known as recovery swaps are trading at rates that imply investors would get back about 40 percent in a Greek default or restructuring.

The tests originally covered only big cross-border lenders, later broadening out to include smaller EU banks such as Spain’s savings banks, known as cajas.

German Landesbanken such as Bayerische Landesbank, Landesbank Baden-Wuerttemberg and WestLB AG, and Spanish cajas are undergoing the tests. Landesbanken are owned by regional governments and groups of savings banks.

Billionaire investor George Soros said it would be impossible to judge the state of the European banking industry without including “the smaller banks, notably the cajas in Spain and the Landesbanken in Germany,” in the stress-testing exercise, during a speech in Berlin on June 23.

Banks including Spain’s Banco Santander SA and Bankinter SA, as well as Deutsche Bank AG, Commerzbank AG and HSH Nordbank AG, are also involved in the stress testing.

The U.K. banks being tested are HSBC Holdings Plc, Lloyds Banking Group Plc, Barclays Plc and Royal Bank of Scotland Group Plc. BNP Paribas SA and Societe Generale SA are among the French banks under examination.

Orders to U.S. Factories Declined in May More Than Forecast

2010-07-02T07:57:00.000-07:00

By Timothy R. Homan

July 2 (Bloomberg) -- Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC, discusses the June U.S. employment report released today and outlook for the economy. Payrolls declined by 125,000 last month as the government cut 225,000 temporary workers conducting the 2010 census, Labor Department figures showed. Employment at companies rose 83,000. The jobless rate fell to 9.5 percent from 9.7 percent. Lebas talks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Orders placed with U.S. factories declined in May more than forecast, a sign that manufacturing may be starting to cool.

The 1.4 percent decrease in bookings was the biggest since March 2009 and followed a revised 1 percent gain in April, the Commerce Department said today in Washington. Economists forecast orders would drop 0.5 percent, according to the median projection in a Bloomberg News survey.

Manufacturers are seeing a pause in demand after the industry helped the world’s largest economy emerge from the worst recession since the 1930s. Today’s figures underscore the Federal Reserve’s concerns that the European debt crisis poses a risk to a self-sustaining U.S. recovery.

“Manufacturing has been the star of the economy this year so any signs that conditions are turning would cause some concern,” Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, said before the report. “The demand for products is slowing.”

Estimates of total orders in the Bloomberg survey of 70 economists ranged from a decline of 2 percent to a gain of 1.5 percent. The decrease in May was the first in nine months.

Manufacturing in June expanded at the slowest pace this year as factories received fewer orders and demand from abroad slowed, a report showed yesterday. The Institute for Supply Management’s manufacturing gauge fell to 56.2 from 59.7 a month earlier. Readings greater than 50 indicate expansion. The Tempe, Arizona- based group’s new orders measure fell to the lowest level since October.

June Employment

Earlier today, the Labor Department said the U.S. lost 125,000 jobs in June, reflecting a drop in the number of federal census workers and a smaller-than-forecast gain in private hiring. Factory employment rose by 9,000 in June, the smallest gain this year.

Demand for durable goods, which make up just over half of total factory demand, decreased 0.6 percent in May. Shipments of durable goods fell 0.3 percent.

Bookings of non-durable goods, including food, petroleum and chemicals, decreased 2.1 percent. The decline reflected a drop in the value of orders for petroleum products, clothing, fertilizers and beverages.

Orders for capital goods excluding aircraft and military equipment, a measure of future business investment, increased 3.9 percent after a 2.8 percent drop in April. Shipments of these goods, used in calculating gross domestic product, rose 1.4 percent after rising 0.4 percent.

Factory Inventories

Factory inventories declined 0.4 percent in May, and manufacturers had enough goods on hand to last 1.25 months at the current sales pace.

Sales and inventories “are very much in sync,” Samuel Allen, chief executive officer of Deere & Co., said in a June 23 interview in reference to the manufacturer’s agricultural business. “We do believe the recovery is underway,” he said. “We do believe it is moving slowly.”

Manufacturing, which accounts for about 11 percent of the economy, faces the risk of a slowdown in exports as the debt crisis threatens Europe’s economy and factory activity in China cools.

European recession next year "almost inevitable"-Soros

2010-06-15T16:15:00.000-07:00

By Adrian Croft

LONDON, June 15 (Reuters) - Europe faces almost inevitable recession next year and years of stagnation as policymakers' response to the euro zone crisis causes a downward spiral, billionaire U.S. investor George Soros said on Tuesday.

Flaws built into the euro from the start had become acute, Soros told a seminar, warning that the euro crisis could have the potential to destroy the 27-nation European Union.

The euro's lack of a correction mechanism or of a provision for countries to leave it could be a fatal weakness, he said.

Germany had imposed its criteria on how a 750 billion euro ($1 trillion) euro zone rescue mechanism should be used and was imposing its own standards -- a trade surplus and a high savings rate -- on the rest of Europe, Soros said.

"But you can't be a creditor country, a surplus country, without somebody being in deficit," he said.

"That's the real danger of the present situation -- that by imposing fiscal discipline at a time of insufficient demand and a weak banking system, by wanting to have a balanced budget you are actually ... setting in motion a downward spiral," he said.

Germany would do relatively well because the decline in the euro had boosted its economy, he told the seminar on the euro zone crisis organised by two thinktanks, the European Council on Foreign Relations and the Centre for European Reform.

"Germany is going to smell like roses but (the rest of) Europe is going to be pushed into a downward spiral, stagnation lasting many years and possibly worse than that," he said.

"In other words, I think a recession next year is almost inevitable given the current policies," Soros said, later clarifying that he meant a recession in Europe as a whole.

WARNS OF SOCIAL UNREST

"If there is no exit, (it) is liable to give rise to social unrest and, if you follow the line, social unrest can give rise to demand for law and order and (sow the) seeds of what happened in the inter-war period," he said.

Political will to forge a common fiscal policy in Europe was absent and since Europe was liable to move backwards if it did not advance, "the crisis of the euro could actually have the potential of destroying the European Union," he said.

European banks had bought large amounts of the sovereign bonds of weaker euro zone countries for a tiny interest rate differential, Soros said.

"That's one of the reasons why the banks are so over-leveraged and why the German and the French banks own Spanish bonds," he said.

"Now ... they have a loss on their balance sheets which is not recognised and it reduces the credibility of those banks so the banking system is in serious trouble," he said.

"The commercial paper market, for instance, in America is now refusing to lend to European banks so there is even a funding crisis and the ECB (European Central Bank) has to step in and the banks are unwilling to lend to each other," he said. (Editing by Chizu Nomiyama)

Retail Sales in U.S. Probably Rose, Sparked by Auto Bargains

2010-06-11T01:26:00.000-07:00

By Bob Willis

June 11 (Bloomberg) -- Sales at U.S. retailers probably rose in May for the first time in three months as shoppers returned to automobile showrooms seeking bargains, economists said before a government report today.

Purchases climbed 0.5 percent, according to the median estimate of 76 economists surveyed by Bloomberg News. Sales probably increased 0.2 percent excluding autos, led by gains at service stations as gasoline prices rose, economists said.

The pending demise of some Chrysler LLC and General Motors Corp. dealers gave sales a boost as consumers, grappling with rising unemployment, sought discounts. Tax breaks and income supplements from the Obama administration’s stimulus plan are also propping up demand, even as the need to boost savings signals sustained gains in spending will be slow to develop.

“Spending improved as the fiscal stimulus put cash in consumers’ pockets,” said Ryan Sweet, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania. “There are still a number of headwinds which threaten the economy’s recovery.”

The Commerce Department’s report is due at 8:30 a.m. in Washington. Economists’ forecasts for total sales ranged from a decline of 0.3 percent to a gain of 1.4 percent. Estimates for non-auto purchases ranged from a 0.5 percent drop to an increase of 1.2 percent.

At the same time, the Labor Department may report that 615,000 workers filed claims for jobless benefits last week, compared with 621,000 a week earlier, according to the survey median.

Job Cuts

Employers eliminated 345,000 workers from payrolls in May, the fewest since September and a sign the recession is abating, Labor figures last week showed. Retailers cut 17,500 positions, the smallest reduction since June 2008, the month before spending started to sink.

Sales of cars and light trucks rose to a 9.9 million annual unit pace in May from a 9.3 million rate the prior month, according to industry figures released June 2. Purchases reached a 9.1 million pace in February, the lowest level since 1981.

General Motors, Chrysler and Ford Motor Co., the only major U.S. automaker not in bankruptcy, all had smaller declines than forecast in comparison with May 2008.

“It’s just a slight uptick,” Ken Czubay, Ford vice president of sales and marketing, said on a conference call June 2. “This is still a very fragile industry.”

Only Essentials

The International Council of Shopping Centers last week said May same-store sales dropped 4.6 percent from the same month last year, more than double its forecast of a 2 percent decline. Macy’s Inc., Dillard’s Inc. and Saks Inc. were among merchants that reported steeper declines than analysts estimated as Americans focused on buying essentials rather than discretionary items.

With home values falling, credit tight and unemployment forecast to keep rising after reaching a 25-year high of 9.4 percent reached in May, consumers are reluctant to spend on anything beyond necessities such as gasoline and food.

Wal-Mart Stores Inc., the biggest retailer, projected last month that its U.S. comparable-store sales may rise as much as 3 percent in the 13 weeks through July 31.

With demand still weak, companies probably cut inventories by 1 percent in April, an eighth consecutive decrease, economists said another Commerce report at 10 a.m. will show.

Federal Reserve Chairman Ben S. Bernanke last week told Congress that the pace of decline in the economy was slowing and consumer spending had stabilized.

Spending “has been roughly flat since the turn of the year,” he said. While the fiscal stimulus will boost spending power, weak labor conditions, tight credit and falling wealth may limit sales, he said.

Bloomberg Survey

================================================================
Initial Retail Retail Business
Claims Sales ex-autos Inv.
,000’s MOM% MOM% MOM%
================================================================

Date of Release 06/11 06/11 06/11 06/11
Observation Period 6-Jun May May April
----------------------------------------------------------------
Median 615 0.5% 0.2% -1.0%
Average 613 0.5% 0.3% -0.9%
High Forecast 640 1.4% 1.2% 1.4%
Low Forecast 580 -0.3% -0.5% -1.3%
Number of Participants 45 76 71 52
Previous 621 -0.4% -0.5% -1.0%
----------------------------------------------------------------
4CAST Ltd. 610 0.6% 0.5% ---
Action Economics 610 0.5% 0.2% -1.2%
AIG Investments --- 1.1% 0.9% -1.3%
Aletti Gestielle SGR 620 0.4% 0.0% -1.2%
Ameriprise Financial Inc 612 0.4% 0.2% -1.0%
Argus Research Corp. --- 0.0% 0.2% -0.8%
Bank of Tokyo- Mitsubishi 625 1.2% 1.0% -1.0%
Bantleon Bank AG --- 0.4% 0.3% ---
Barclays Capital 615 0.4% 0.3% -1.1%
BBVA 615 0.5% 0.3% -1.1%
BMO Capital Markets 600 0.5% 0.2% -1.2%
BNP Paribas 606 0.6% 0.1% -0.7%
Briefing.com 610 0.3% 0.0% -0.8%
Calyon --- 0.5% 0.3% ---
CIBC World Markets --- 0.3% 0.1% -1.0%
Citi 590 0.5% 0.2% -0.8%
ClearView Economics --- 0.6% 0.2% -0.8%
Commerzbank AG 620 0.5% 0.1% -1.0%
Credit Suisse 610 0.4% 0.3% -1.0%
Daiwa Securities America --- 0.3% 0.1% -1.2%
DekaBank --- 0.6% 0.3% -1.0%
Desjardins Group 625 0.3% 0.1% -1.1%
Deutsche Bank Securities --- 0.5% 0.1% -0.9%
Deutsche Postbank AG --- 0.3% 0.1% ---
DZ Bank --- 0.5% 0.3% ---
First Trust Advisors 621 1.3% 1.2% -1.1%
Fortis --- 0.5% --- -0.8%
FTN Financial --- -0.3% -0.5% ---
Goldman, Sachs & Co. --- 0.7% 0.4% ---
Helaba 620 1.0% 0.6% -1.0%
Herrmann Forecasting 609 0.6% 0.3% -1.0%
High Frequency Economics 621 1.0% 0.7% -1.1%
Horizon Investments --- 0.3% 0.3% -1.2%
HSBC Markets 620 0.9% 0.7% -0.9%
IDEAglobal 625 0.5% 0.2% -0.8%
IHS Global Insight --- 0.9% 0.6% ---
Informa Global Markets 625 0.7% 0.2% -0.8%
ING Financial Markets 615 0.5% 0.1% -1.1%
Intesa-SanPaulo --- 0.3% 0.2% ---
J.P. Morgan Chase 625 1.4% 0.6% -1.0%
Janney Montgomery Scott L --- 0.7% 0.3% -1.3%
Johnson Illington Advisor --- 0.4% 0.1% -1.0%
JPMorgan’s Private Wealth --- 0.3% 0.2% 0.4%
Landesbank Berlin 600 0.3% -0.3% -1.2%
Landesbank BW --- 0.8% --- ---
Maria Fiorini Ramirez Inc 605 0.7% 0.5% ---
Merrill Lynch 580 0.4% 0.1% -1.0%
MFC Global Investment Man 599 0.1% -0.1% -0.5%
Mizuho Securities 625 0.1% 0.0% -1.2%
Moody’s Economy.com 615 0.5% 0.3% -0.9%
Morgan Stanley & Co. --- 0.1% 0.2% ---
National Bank Financial 600 0.6% 0.3% ---
Natixis --- 0.5% 0.4% ---
Newedge --- 0.4% 0.2% ---
Nomura Securities Intl. --- -0.1% 0.3% ---
PNC Bank --- 1.1% 1.0% -0.7%
Raymond James 595 0.3% 0.0% ---
RBC Capital Markets --- 0.4% 0.1% ---
RBS Securities Inc. 630 0.6% 0.4% -0.9%
Ried, Thunberg & Co. 620 0.9% 0.6% -0.9%
Schneider Foreign Exchang 610 -0.2% -0.2% -0.4%
Scotia Capital 630 -0.1% -0.2% ---
Societe Generale --- 0.7% 0.5% ---
Stone & McCarthy Research 640 0.8% 0.6% -1.1%
TD Securities 610 0.9% 0.3% ---
Thomson Reuters/IFR 610 0.8% 0.5% 1.4%
Tullett Prebon 615 0.4% --- -0.5%
UBS Securities LLC 625 1.1% 0.4% -1.0%
Unicredit MIB 600 0.2% 0.2% ---
University of Maryland 600 0.3% 0.0% -1.0%
Wachovia Corp. --- 0.2% 0.7% -1.0%
Wells Fargo & Co. 610 0.5% --- -1.2%
WestLB AG --- 0.1% 0.0% ---
Westpac Banking Co. 605 0.5% 0.1% -0.8%
Wrightson Associates 620 0.9% 0.6% -0.9%
================================================================

Trichet Life Compass Points to Euro at Center of European Unity

2010-06-08T16:14:00.001-07:00

By James G. Neuger and Simon Kennedy

June 8 (Bloomberg) -- Jean-Claude Trichet used a simple chart to convince European leaders the euro was in grave danger.

It was Friday, May 7. Spanish, Greek, Portuguese and Irish government bonds were plunging, sending shudders through world markets and fueling speculation Europe’s 11-year-old monetary union could collapse. The European Central Bank’s president traveled to an emergency Brussels summit of heads of government armed with graphs to dramatize how bad things were.

“My main message for the governments was: Some of you have behaved very improperly and have created an element of vulnerability for your own country, and by way of consequence for Europe,” Trichet recalls. “Now the situation calls for taking up responsibilities.”

By 3:15 a.m. the following Monday, Europe knew the price of that responsibility: an unprecedented 750 billion-euro ($900 billion) aid package to prevent a debt spiral, backed by a credibility-testing pledge from the ECB to purchase the bonds of distressed governments, all to keep the $11 trillion, 16-nation economic and monetary experiment afloat.

Guiding the euro’s fate from the 35th floor of the ECB’s headquarters in downtown Frankfurt, Trichet says he’s never known “calm waters” and is “used to crisis.”

Yet the turmoil casting a shadow over the last 17 months of his eight-year term is unlike anything he has faced before. Throughout his career he has battled crises, ranging from the oil-price surge when he was a French presidential aide in the 1970s, to the euro’s birth pangs and his acquittal in 2003 on decade-old charges of helping Credit Lyonnais SA cover up losses. As ECB chief he then had to confront the global credit crunch and recession.

Euro Survival

Now, investors are questioning the survival of the euro itself, along with the tight-money orthodoxy that Trichet has promoted as a central banker. As the 67-year old Frenchman nears retirement from the ECB in October 2011, he is having to rework parts of the German-inspired policy rulebook underpinning the euro in a bid to save the currency he helped create.

“If you cross a typhoon, the manual doesn’t help,” says Tommaso Padoa-Schioppa, 69, who served seven years on the ECB’s Executive Board and now chairs the European unit of Washington- based financial-services consulting firm Promontory Financial Group. “Trichet has had the ability to understand that the decisions during this crisis could not be exclusively based on the manuals written for ordinary times.”

One Size Fits All

The euro has slumped 19 percent against the dollar in the past six months as the fiscal crisis that started in Greece made money managers wary that some debt-swamped nations might default, or even revert to old currencies to devalue their way to salvation.

With investors selling sovereign paper from Athens to Dublin and buying safer German bonds, yield spreads ballooned in the first week of May, rendering the ECB’s one-size-fits-all monetary policy ineffective and threatening to tear the currency union apart.

So Trichet made the biggest gamble of his career, agreeing to buy government debt to halt the surge in yields in the hope politicians will respond by fixing their budgets, allowing the ECB to return to fighting inflation.

The risk is that profligate nations will renege on the deal, expecting stronger euro-area neighbors such as Germany and France to save them just as they rescued Greece.

Critics say the ECB has abandoned a founding principle not to bail out cash-strapped governments and may be left having to buy more debt, which could ultimately undermine its primary price-stability mandate.

Worsening Crisis

“The last months of Trichet’s presidency are going to be among the most difficult of his time,” says Laurent Bilke, a former ECB economist who is now with Nomura International Plc in London. “The ECB more and more will have to arbitrage between a financial stability role and price stability.”

A rare communications misstep by Trichet contributed to the worsening crisis at the start of May. Speaking in Lisbon on May 6, he told reporters that the purchase of government bonds wasn’t even discussed by ECB officials during their meeting that day.

His perceived ambivalence shook European markets and briefly helped drive the Dow Jones Industrial Average down almost 1,000 points.

Within 24 hours, ECB aides were talking to the region’s primary dealers, and Trichet was at the center of emergency consultations with EU leaders throughout the weekend to get a rescue package in place before Asian markets opened.

Vocal Opposition

Adding controversy to the bond move is the vocal opposition of Bundesbank President Axel Weber, a leading candidate to succeed Trichet next year, who said the policy creates “significant” risks.

Another German dissenter is Helmut Schlesinger, who ran the Bundesbank from 1991 to 1993 and raised its benchmark discount rate to a record high of 8.75 percent in 1992 to choke off the inflationary consequences of German reunification.

“Confidence in the system of European central banks is at stake,” says Schlesinger, 85. “The most important thing would be to keep the purchases of government debt to a minimum and stop them as soon as possible.”

Trichet defended his actions in four interviews with German print and broadcast media in the space of a week. The ECB is dealing with “the most difficult situation since the Second World War, perhaps even since the First World War,” he told Spiegel magazine in an article published May 15. The ECB prodded governments into acting, not the other way around, and the bond purchases will be offset to ensure they have no inflationary impact, he said.

Higher Goal

Trichet’s supporters say the program shows his ability to set aside dogma in pursuit of a higher goal.

“The ECB was flexible in its approach and willing to act very strongly when a clear crisis was building up,” says Marie Diron, who spent five years in the ECB’s economics department and is now at Oxford Economics Ltd. “What it was trying to do was restore normality in government bond markets and not lose sight of its price stability mandate or bailing out a country.”

As of June 4, the ECB had bought 40.5 billion euros of bonds.

“He has shown a lot of sang-froid and rigor and pragmatism in managing the crisis,” says Jean Arthuis, a French senator who worked alongside Trichet as finance minister from 1995 to 1997.

Inflation Fighters

Trichet learned his trade during the 1970s and early 1980s, when the U.S. Federal Reserve, under Paul Volcker, and the Bundesbank led the world in taming price pressures generated by oil shocks.

Their success in proving the mettle of independent central banks with a mission to fight inflation led the European Union to insist that all would-be euro users make their monetary authorities free of government control. It also ensured that the blueprint for the euro was the deutsche mark.

As head of the French Treasury from 1987 to 1993 and governor of the French central bank from 1993 to 2003, Trichet extolled the German mantra of low inflation and budget discipline to France’s elite, earning him a reputation as the Bundesbank’s representative in Paris.

Trichet “was able to resist political pressure coming particularly from his own government,” says Lamberto Dini, 79, a former Italian prime minister who knows Trichet from European exchange-rate negotiations in the 1980s. “When he was criticized because monetary policy was too strict and France wanted to ease up, he did not.”

Mining Engineer

Political haggling put the French civil servant -- trained first as a mining engineer, then in politics and economics before attending the Ecole Nationale d’Administration, the finishing school for the French leadership -- in charge of Europe’s money.

France acquiesced to the demands of Germany and the central banking community to let Wim Duisenberg of the Netherlands become the ECB’s first president at a summit in 1998, on condition he step down before the end of his term to make way for Trichet.

The deal set a precedent for political meddling with a central bank that, under the euro treaty, would not “seek or take instructions” from European or national leaders.

From the start, the ECB had to defend its turf, with Duisenberg saying in 2001 that “I hear, but I do not listen” to politicians’ pleas for lower interest rates.

Without the Dutchman’s gruffness, the courtly Trichet resisted similar pressure after taking over in 2003, deflecting calls from German Chancellor Gerhard Schroeder among others for easier credit.

Track Record

The result is a price-stability record that surpasses even the Bundesbank’s. Inflation in the euro region has averaged 1.98 percent since the ECB took control on Jan. 1, 1999, in line with its self-set target of “below but close to 2 percent.”

The ECB’s standing is now in jeopardy. Trichet’s detractors argue the decision to buy bonds breaches a rule that the central bank doesn’t rescue governments, undermining the independence it needs to breed confidence in the euro. They also say that the ECB risks stoking inflation by increasing the money supply.

To David Mackie, chief European economist at JPMorgan Chase & Co. in London, the danger is that a lack of follow-through from governments will leave the ECB exposed.

ECB in Danger

“If governments don’t deliver on the fiscal side, will the ECB get sucked into buying more and more amounts of outstanding debt?” asks Mackie, who predicts the central bank won’t raise interest rates on Trichet’s watch again. “The ECB has got itself into a situation where it’s in danger.”

It’s also far from certain that the asset purchases will work. By June 2, Spanish and Italian yield premiums over German bonds had exceeded pre-intervention levels. The Spanish spread was at 203 basis points yesterday, 39 basis points above its May 7 level. The Italian spread was 177 basis points and Portugal’s 264 basis points.

That may require the ECB to do even more to ease market strains. Policy makers next meet on June 10 in Frankfurt.

David Owen, chief European financial economist at Jefferies Group Inc. in London, says he would not be surprised if the ECB stopped sterilizing its bond purchases at some point, meaning it would effectively be printing new money.

Deficit Obstacle

Trichet’s success will partly be decided by governments’ ability to overcome sluggish economic growth and cut their deficits. Even with the ECB’s record-low interest rate of 1 percent and emergency liquidity measures for banks, the Paris- based Organization for Economic Cooperation and Development forecasts euro-region growth will be 1.2 percent this year, barely a third that of the U.S. The bloc has lagged the U.S. in seven of the euro’s 11 years.

The currency’s recent slide leaves it at $1.20, roughly in the middle of its historic trading range. It debuted at $1.17 in January 1999, troughed at 83 cents in October 2000 and peaked at $1.60 in July 2008. Economists at BNP Paribas SA and Capital Economics Ltd. are among those predicting it will return to parity with the dollar.

Amid accusations the euro now looks more like the Greek drachma than the German mark, Trichet blames governments for what went wrong. Greece’s budget deficit was 13.6 percent of output last year, Ireland’s shortfall was 14.3 percent and Spain’s 11.2 percent. Germany’s deficit was 3.3 percent.

‘Quantum Leap’

Trichet “had a lot of reasons to consider himself as playing a part in the euro’s story and he has a stake in its success,” says Eric Chaney, a former French Finance Ministry official and now chief economist at AXA Group in Paris. “That’s why he came to take such tough decisions like buying government bonds. It’s a big bet on the political will of the governments and the oppositions who may win elections.”

For now, governments are pledging to tighten their belts and the likes of Greece and Spain are introducing austerity packages. Trichet’s demand for a “quantum leap” in economic management may also be heeded, with finance ministers vowing on May 21 to stiffen sanctions on high-deficit countries.

Yet the history of the euro is littered with examples of governments casting aside central bankers’ appeals for fiscal prudence, from France raiding France Telecom SA’s pension fund in 1996 to Greece fudging its budget data to qualify for the currency in 2001.

“It’s definitely the biggest challenge of Trichet’s professional life,” says Joachim Fels, co-chief economist at Morgan Stanley in London. “This is his chance to save his legacy.”

Trichet himself is optimistic, noting that Europe often progresses through crisis.

“You must be inflexible on your long-term compass,” he says. “My long-term compass as a central banker is price stability. My life compass has been the deepening of European unity based upon reconciliation and a profound friendship to the service of prosperity and peace. This historical endeavor, which started 60 years ago and was reinforced by the fall of the Soviet Union, goes on.”

G-20 Central Banks Delay Exit on Euro Debt Woes (Update1)

2010-06-04T03:14:00.000-07:00

By Simon Kennedy and Shamim Adam

June 4 (Bloomberg) -- Group of 20 central banks are delaying their withdrawal of emergency stimulus as Europe’s debt crisis shakes financial markets and threatens to hinder the global recovery.

G-20 finance chiefs begin talks today in South Korea after central banks from Australia to Canada identified investor reaction to Europe’s indebtedness as a hurdle to higher interest rates. European Central Bank President Jean-Claude Trichet has reversed his exit strategy to combat the euro’s biggest test, while the Federal Reserve’s Charles Evans and Dennis Lockhart signaled market stress will delay a rise in U.S. rates.

“Given the increase in uncertainty in the economy, it would be perfectly natural for people to be less eager to tighten,” William White, a former Bank for International Settlements chief economist who pointed to risks in financial markets before the 2008 credit crisis, said in an interview in Seoul.

The need for central bankers to keep rates lower for longer may spark tension in Busan, South Korea, as monetary policy makers intensify their public demands for fiscal authorities to restrain debt in return. The pressure is an echo of the 1990s, when then-Fed Chairman Alan Greenspan and counterparts lobbied leaders to narrow deficits that threatened a bondholder revolt.

Europe’s Rescue

Trichet, Chinese Finance Minister Xie Xuren and their G-20 counterparts convene today for the first time since a Greek-led sell-off in the bonds of the euro-area’s most indebted nations spurred the European Union to craft a 750 billion-euro ($918 billion) rescue plan and the ECB to buy the bonds of “dysfunctional” markets.

The package hasn’t been enough to pacify investors concerned sovereign debt is the biggest threat yet to the recovery from last year’s global slump.

The MSCI World Index of stocks has fallen 12 percent since mid-April and the rate banks say they pay for three-month loans in dollars last week reached the highest level since July. The market for corporate bonds closed on June 1 as concern European banks will take more writedowns and losses led investors to shun all but the safest government debt.

“Investors are going to stay cautious,” said Andrew Milligan, the Edinburgh-based head of global strategy at Standard Life Investments, which manages the equivalent of $214 billion. He predicts they will seek “ballast” for their portfolios amid volatility by buying investment-grade corporate debt. Bonds from governments with lower borrowing levels will also outperform, he forecast.

Credit Crunch

Central banks are concerned the biggest threat to the recovery is banks ceasing to lend and financial markets freezing as happened in 2008, rather than weaker European demand, said Julian Callow, chief European economist at Barclays Capital in London. He estimates Greece, Ireland, Portugal and Spain accounted for just 4 percent of world gross domestic product last year.

“They are traumatized by what happened in 2008,” said Callow, who previously worked at the Bank of England. “Investors are nervous again so central banks are picking up on that.”

Trichet’s ECB is leading the pullback, announcing May 10 it would intervene in markets to buy government bonds, renew its auctions of unlimited cash to banks for up to six months and revive a currency swap line with the Fed.

Shifting Forecast

Goldman Sachs Group Inc. Chief European Economist Erik Nielsen now expects the ECB to wait until the second quarter of next year to raise its benchmark rate rather than during the first three months of the year as he previously anticipated.

Other G-20 central banks are also taking note of Europe’s woes. Australia kept its key rate at 4.5 percent on June 1 and signaled it may leave it there for the “near term,” noting in a statement that “investors have generally displayed a good deal more caution.”

Turkey’s central bank said on May 18 that indebtedness elsewhere in Europe means “uncertainty over external demand is likely to remain important for a long time.” Russia’s Bank Rossii cut its main interest rate for the 14th time in as many months on May 31 to support its recovery, while Indonesia yesterday kept its benchmark unchanged at a record low.

‘Extended’ Period

Fed Bank of Chicago President Evans said May 31 he “wouldn’t be surprised” if the Fed’s policy of keeping rates near zero “gets extended just a little bit.”

Atlanta Fed President Lockhart said yesterday that “the pressures in Europe may slow the movement toward any removal of accommodation.” Bank of England policy maker Adam Posen said in a May 20 interview Europe’s crisis is going to inflict “some negative drag on the U.K.”

“If you have volatility in markets and implications for the financial system then central bankers are going to be concerned about the risks to growth so may be relatively more conservative in scaling back support,” said Paul Donovan, a UBS AG economist in London.

Even central banks that have raised rates may now be slower to do so. In India, where the Reserve Bank increased borrowing costs in March and April, Deputy Governor Subir Gokarn last month said officials will be more cautious with future moves. Bank of Canada Governor Mark Carney mentioned Europe and its crisis four times in a one-page statement on June 1, a signal his bank may not soon repeat its quarter-point rate rise.

Brazil Exception

Brazil, where inflation has exceeded the government’s target each month this year, may be an exception. Brazil central bank President Henrique Meirelles said the nation’s policy makers are in a “tightening mood.”

“We are committed to keeping inflation on target,” Meirelles said today in a Bloomberg Television interview from Busan.

The market jitters may also have given China reason to refrain so far from letting its currency rise against the dollar. G-20 members have repeatedly called for an end to the peg China adopted in July 2008 to aid its exporters. The euro’s 15 percent slide against the yuan this year already threatens to undermine Chinese shipments.

Twelve-month non-deliverable yuan forwards reflect bets the yuan will strengthen 0.7 percent from the spot rate of 6.83 per dollar compared with projections of a 3.2 percent appreciation at the start of May.

China’s Yuan

“China’s economic strength certainly justifies a stronger yuan and higher interest rates, but policy makers don’t want to give an impression that they are tightening at a time when exporters are suffering,” said Tomo Kinoshita, an economist at Nomura Holdings Inc. in Hong Kong.

In return for doing more to aid expansion, central banks may demand governments work harder to outline and enact plans to narrow budget gaps, with southern Europe an example of what may happen if they fail. Citigroup Inc. economists estimate G-20 governments must tighten fiscal policy an average of 8 percent of GDP over the next decade to reduce debt burdens to 60 percent of GDP.

Trichet said May 31 that he will no longer tolerate a lack of budget discipline in the euro area after all but Luxembourg and Finland last year violated a rule to hold budget deficits to less than 3 percent of GDP. Fed Chairman Ben S. Bernanke said April 27 that a failure to reduce the U.S. deficit may imperil the recovery by pushing up borrowing costs.

Finance ministers headed to Busan seeking to juggle the goals of protecting growth and consolidating budgets. U.S. Treasury Secretary Timothy F. Geithner said he wanted fiscal reform that was “growth-friendly,” while France’s Christine Lagarde said the G-20 was aiming to restore confidence in public borrowing, yet not “suffocate growth.”

Gold ATMs Going Global – A Sign for Currencies?

2010-06-02T15:06:00.000-07:00

Posted on June 3, 2010 by Yohay

Gold to Go, the manufacturer of gold ATMs, is working hard to meet the demand for its vending machines. From a gimmick of two machines operating now, their business will grow to 50 quite soon. This is the result of the rising prices in gold. Is this is a sign for the Euro? For the Aussie?

Gold to Go is a German company that created a Automatic Teller Machine (ATM) for buying gold, similar to the everyday action of withdrawing cash – just gold coins or gold bars. The first machine was launched in Abu Dhabi about a month ago, and the second machine started operating in Germany last week. This was only the beginning.

It is now reported that there is high demand for these gold ATMs – they are not a gimmick anymore. The company is working hard on producing 50 additional machines. The ATMs will be deployed in all of Malaysia’s airports, in Italy, Turkey and Russia. Gold rates are updated every 10 minutes according to global gold prices.

Gold and forex

The company’s appeal to average customers shows that physical gold is becoming more popular also outside the electronic charts. While these funny machines aren’t only a gimmick anymore, their scale is still small. But it could be a sign.

This trend is a good sign for Australia, which produces gold, as well as for South Africa and other countries.

But it’s a bad sign for paper money, with weak currencies like the Euro being more vulnerable. One of the outcomes of the recent turmoil in Europe is new highs for paper gold. Gold touched $1250 per ounce on May 14th – a new all-time record. It’s now stable at $1233. The correlation between the Euro’s weakness and the strength of gold is very strong.

The drops in the Euro triggered a rise in gold prices. A rise in the demand for gold could trigger a sell off in the Euro.

While their own currency plunges, European might turn to shining metal. Gold slowly becomes a true “safe haven” currency, like in old times.

Speaking of safe haven currencies, the yen lost its role this week with the resignation of the Japanese Prime Minister. The political uncertainty in Japan may be temporary, but at least for now, gold seems to take the yen’s place, alongside the dollar. The greenback won’t lose its status as the world’s reserve currency. The talks a few months ago were definitely too soon.

The dollar clings to its throne. But gold, physical gold is behind it.

E.C.B. Says Banks at Risk From Slower Growth

2010-05-31T16:41:00.000-07:00

By JACK EWING
Published: May 31, 2010

NY Times-FRANKFURT — Despite recent improvements in the health of European banks, they remain vulnerable to a daunting array of hazards that are expected to produce another round of sizable write-offs during the next couple of years, the European Central Bank said Monday, in a report that catalogued in alarming detail the problems facing the region’s financial institutions.
Enlarge This Image
Heinz-Peter Bader/Reuters

Ewald Nowotny, left, the Austrian National Bank governor, with the European Central Bank president, Jean-Claude Trichet, before a conference in Vienna on Monday.

The challenges for banks in the euro zone include exposure to a weakening commercial real estate market, hundreds of billions of euros in bad debts, economic problems in East European countries, and a potential collision between the banks’ own substantial refinancing needs and government demand for additional loans, the E.C.B. said.

In its twice-yearly review of risks facing the 16-country euro zone, the E.C.B. expressed particular concern about banks’ need to refinance an estimated €800 billion, or $984 billion, in long-term debt by the end of 2012.

Borrowing costs could rise as the banks compete with governments in the bond market, “making it challenging to roll over a sizable amount of maturing bonds by the end of 2012,” the report said.

The increased demand for credit is likely to further strain banks as well as companies in need of credit. As it is, many European companies are suffering from low profitability as well as too much debt, the report said.

“The financial markets remain fragile and especially the developments in recent weeks have shown the necessity of heightened alertness,” Axel A. Weber, president of the Bundesbank and a member of the E.C.B.’s governing council, said Monday during a speech in Mainz, Germany.

Lucas D. Papademos, the departing vice president of the E.C.B., struck a more upbeat tone at a news conference Monday to present the so-called Financial Stability Review. While attempts by European governments to lower debt will cut demand, he said, growth could ultimately improve as economies became more productive.

“It is possible that the short-term impact will not be as severe as seems to be expected at the moment,” said Mr. Papademos, whose term ended Monday.

European banks will need to set aside an estimated €123 billion in 2010 for bad loans, and an additional €105 billion in 2011, the report said, in addition to the €238 billion they set aside from 2007 to 2009.

The sum for 2010, however, was lower than previous estimates. Banks also benefited from a rebound in securities markets, the report said.

While profitability of larger banks has improved, their shares are likely to fall in the near future, the E.C.B. said, citing an analysis of options that investors use to bet on the direction of stock prices.

The E.C.B. report also noted that some banks remained dependent on the central bank for loans.

Since the advent of the financial crisis, the E.C.B. has granted almost unlimited credit to banks at 1 percent interest to offset a reluctance by banks to lend to each other.

“The continued reliance of some smaller or medium-sized euro-area banks on central bank refinancing continues to be a cause for concern,” the report said.

Mr. Papademos said the number of banks involved was small, but he declined to give details. He also expressed concern about what he called “adverse feedback” between the sovereign debt crisis and the banking system. The E.C.B. report noted that higher risk premiums for government debt fed through into the private sector and raised the cost of credit for companies.

The problems would be exaggerated if growth or unemployment were worse than expected, increasing the chances that companies and individuals would be unable to repay their loans.

The report also noted that some financial markets were still not functioning normally. Issuance of corporate bonds has declined since the end of last year, especially for banks and other financial institutions. In addition, the market for securitizations, in which banks package loans and resell them to investors, is “dysfunctional,” the E.C.B. report said.

Bond issues and securitizations are crucial ways that banks raise money to loan to companies and individuals.

The report, as well as separate statements by E.C.B. officials Monday, also shed light on the central bank’s decision on May 10 to buy government and corporate bonds on open markets. In the days leading up to the decision, trading in some government debt had come nearly to a standstill, the report said. The lack of a market for government bonds endangered the functioning of the whole financial system, in part because banks typically use sovereign debt as collateral in making loans to each other.

“The tensions in the sovereign bond markets spilled over to other market segments, such as the foreign exchange market and equity markets,” the E.C.B. president, Jean-Claude Trichet, said during a speech Monday in Vienna. “Trading volumes and liquidity became erratic, and volatility spiked.

“In view of these exceptional circumstances prevailing in the financial markets, we decided that exceptional intervention was necessary,” he said.

Mr. Weber, in his speech Monday, repeated his criticism of the bond purchases and said that they would remain limited in scope. Some economists see the bond purchases as breaking a taboo and risking inflation, since they amount to the E.C.B. financing governments that have borrowed irresponsibly.

Mr. Trichet repeated that the central bank was “permanently alert and always prepared to act when necessary” in response to crises.

But he made clear that the E.C.B. could do only so much to restore stability to the financial system.

Euro-zone governments must ultimately create a system for disciplining countries that violate treaty limits on debt and deficits, he said.

“I call on euro-area governments in particular to work actively together to reach agreement on a quantum leap of the effectiveness of their collegial surveillance,” Mr. Trichet said.

Australia May Hold Rate at 4.5% as Increases Start to ’Bite’

2010-05-30T16:04:00.000-07:00

By Jacob Greber and Daniel Petrie

May 31 (Bloomberg) -- Australia’s central bank may keep its benchmark interest rate unchanged this week after the most aggressive round of increases in the Group of 20 restrained retail sales and slashed mortgage lending by a quarter.

The central bank will leave the overnight cash rate target at 4.5 percent at 2:30 p.m. in Sydney tomorrow, according to all 22 economists surveyed by Bloomberg News. A separate report this week may show economic growth slowed to 0.6 percent last quarter from 0.9 percent in the previous three months, analysts predict.

The Reserve Bank of Australia’s decision may be echoed across Asia this week as central banks from Indonesia to Thailand and the Philippines are forecast to hold off on rate increases as they gauge fallout on the global economy from Europe’s debt crisis. Investors boosted bets this month that Governor Glenn Stevens will keep Australia’s policy rate unchanged until 2011.

“Uncertainty has increased regarding the global economic outlook,” said Shane Oliver, senior economist in Sydney at AMP Capital Investors, which manages $90 billion in assets. “The rate hikes to date are starting to bite.”

Stevens increased rates six times since early October from a half-century low of 3 percent, citing surging Asian demand for Australian commodities and a jobs boom that has pushed down unemployment to around half that of the U.S. and Europe.

European Rescue

The interest-rate moves helped stoke a 27 percent gain in Australia’s dollar in the 12 months through April 30, making it the second-best performer among the world’s 16 most-traded currencies. The currency has since pared around half of those gains as European Union policy makers scrambled this month to prevent a potential Greek debt default.

Thailand’s central bank will probably maintain its benchmark rate at 1.25 percent on June 2 and Bank Indonesia may keep borrowing costs at 6.5 percent on June 4, according to separate Bloomberg surveys. The key rate in the Philippines is forecast to be held at 4 percent on June 3.

Australia’s economy, which skirted last year’s global recession and surged in the final three months of 2009, shows signs of slowing as higher borrowing costs and the end of government stimulus weigh on domestic demand. First-quarter GDP figures will be published at 11:30 a.m. in Sydney on June 2.

“It’s now clear that the Reserve Bank should have left rates on hold in May and arguably in April,” said Craig James, a senior economist at Commonwealth Bank of Australia in Sydney. “And it’s not just the volatility on global markets. The one common element across businesses is the reluctance to spend.”

‘Rapid Deterioration’

Virgin Blue Holdings Ltd., Australia’s No. 2 carrier, cut its profit forecast last week on a “rapid deterioration” in leisure travel and rising industrywide capacity.

Reports to be released ahead of tomorrow’s rate decision will show retail sales increased 0.3 percent in April, matching the weakest growth rate in a year, and building approvals fell for the third month in four, analysts forecast. Those figures will be published at 11:30 a.m. in Sydney.

The nation’s property market, which surged 20 percent in the year to March 31, is also showing signs of weakening. Home- loan approvals dropped 25 percent in the six months through March to the lowest level in nine years.

“The slowdown in the housing market over the past month is a real concern,” said David Airey, president of the Real Estate Institute of Australia. “Since early April, we’ve seen the market change from buoyant to slow and depressed.”

Consumer Behavior

Australia’s monetary policy is now “well placed” and interest-rate increases so far are “beginning to affect behavior” of consumers, central bank officials said in the minutes of their last meeting on May 4.

Investor bets that Stevens will resume boosting rates in coming months because of faster inflation have all but evaporated this month.

Traders are betting there is no chance of a quarter-point rate increase at central bank monthly meetings until December, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange. There is also a 14 percent chance of a rate cut tomorrow, the futures showed at 11:42 a.m. on May 28.

Keeping rates on hold in coming months may assist Prime Minister Kevin Rudd’s campaign to win an election that is likely to be called this year.

“With rates now broadly neutral and risk aversion so elevated, we see little reason for tightening” soon, said Tim Toohey, chief economist at Goldman Sachs JBWere Ltd. in Melbourne. Still, the “risk of meaningful financial spillovers from European sovereign concerns to the domestic economy is limited,” he said, adding that the bank may resume tightening monetary policy as early as August.

U.K. Coalition Seeks to Limit Budget, Political Damage After Laws Resigns

2010-05-30T15:55:00.000-07:00

By Thomas Penny - May 30, 2010

Leaders of the U.K.’s three-week-old coalition government sought to limit political damage from their first crisis and preserve their deficit-cutting plans after Chief Secretary to the Treasury David Laws resigned over revelations about his parliamentary expenses.

Laws, a Liberal Democrat, stepped down yesterday after the Daily Telegraph reported he’d claimed more than 40,000 pounds ($58,000) in expenses for renting a room from his long-term partner. Laws, 44, was a key negotiator in forming the nation’s Conservative-Liberal Democrat partnership and had been charged with finding cuts to public spending to tackle Britain’s 156 billion-pound fiscal deficit.

Prime Minister David Cameron described Laws as a “good and honorable man” in a letter accepting his resignation. “In your short time at the Treasury, you have made a real difference, setting the Government on the right path to tackle the deficit which poses such a risk to our economy,” Cameron wrote. “I hope that, in time, you will be able to serve again.”

Cameron’s government is seeking to reassure investors it is serious about reducing a deficit that that swelled to 11.1 percent of the U.K.’s gross domestic product in the fiscal year ended in March, the highest since World War II. The government on May 25 promised to accelerate the reduction of the structural deficit, estimated by the previous Labour government to be 69 billion pounds, with spending cuts taking the strain.

Danny Alexander

Laws will be replaced as Treasury Chief Secretary by Scotland Secretary Danny Alexander, 38, a former chief of staff to Liberal Democrat leader and Deputy Prime Minister Nick Clegg. Alexander worked in press relations before being elected to Parliament in 2005.

Alexander will follow the agreement made by the coalition to make spending cuts, Deutsche Bank chief U.K. economist George Buckley said today.

“It’s not going to mean a great deal of difference in what’s going to happen on spending cuts and deficit reduction,” Buckley said. “It’s not like Alexander’s going to change what would have happened under David Laws.”

Conservative Chancellor of the Exchequer George Osborne is “is setting the agenda and these guys are simply looking for where the savings can be made,” Buckley said.

The resignation may have strengthened Osborne’s hand in forcing through cuts, according to Justin Fisher, professor of Politics at London’s Brunel University.

‘Weaker Position’

“The Liberal Democrats are in a weaker position because they’ve done damage to the coalition,” Fisher said in a telephone interview today. “They’re not in a position to say ‘hang on a minute’. It gives George Osborne the upper hand.”

The pound has fallen 11 percent against the dollar this year amid concern the government will struggle to narrow the deficit.

Laws is one of the most hawkish on the deficit in the Liberal Democrat Party, and there is “respect” for him as an economic thinker among Conservatives, said Andrew Russell, who teaches politics at Manchester University and is author of ‘Neither Left Nor Right,’ a history of the Liberal Democrats.

“Laws is one of the few in the Parliamentary Liberal Democrat party for whom the Conservatives would have seemed a natural coalition partner,” Russell said in a telephone interview today. “Both coalition partners need each other so I don’t think it’s about to fall, but Laws was one of the lynchpins holding the thing together, and it does damage the long-term prospects of the coalition.”

Aptitude

The appointment of Alexander as the new Chief Secretary may upset some Conservative lawmakers who think they are better qualified, Russell said. They may think Alexander is being rewarded for his part in the negotiations that formed the coalition rather than his aptitude for the job, Russell said.

In a statement late May 28, Laws, a former head of Dollar and Sterling treasuries at Barclays de Zoete Wedd Ltd., apologized for claiming expenses to share a home with his male partner and said that he will repay the money.

“I’ve been involved in a relationship with James Lundie since around 2001, about two years after first moving in with him,” Laws said in the statement issued through the Press Association after the Daily Telegraph reported that he used public money to pay rent to Lundie. “Our relationship has been unknown to both family and friends throughout that time.”

Laws said “at no point” did he consider himself to be in breach of parliamentary rules that define a partner as “one of a couple” who live together and treat each other as spouses.

Euro Rises as European Leaders Work to Set Up Emergency Funding Measures

2010-05-09T17:21:00.000-07:00

By Yoshiaki Nohara and Candice Zachariahs - May 09, 2010

The euro rose as European leaders moved toward agreement on a loan package worth at least $645 billion to prevent Greece’s fiscal woes from triggering a broader sovereign-debt crisis.

Europe’s common currency gained against 14 of its 16 major counterparts as European Union government officials said the International Monetary Fund may add money to the emergency facility agreed to by European finance ministers. The yen slid against all 16 major counterparts as prospects the Greek crisis won’t spread damped demand for Japan’s currency as a refuge.

“The fact they’ve been trying to put together something over the weekend is very positive,” said Phil Burke, chief dealer for global foreign exchange and rates at JPMorgan Chase in Sydney. “Risk has been put back on. The market seems to be happy to take back some of the short positions on the euro.”

The euro climbed to $1.2878 as of 8:02 a.m. in Tokyo from $1.2755 on May 10, after falling 4.1 percent last week, the most since the five days ended Oct. 24, 2008. The 16-nation currency rose to 118.69 yen from 116.81 yen. The dollar gained to 92.15 yen from 91.59 yen.

European officials declined to disclose the size of the stabilization fund, to be made up of money borrowed by the EU’s central authorities. The mechanism may be worth 500 billion euros ($645 billion), said a government official familiar with the talks in Brussels.

‘Fortunes of Euro’

“Markets’ assessment of the effectiveness of the package will be critical to the fortunes of the euro, equity markets and risk appetite early in the week,” Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington, wrote in a note to clients.

Futures traders increased bets to a record that the euro will fall against the dollar in the days after the May 2 announcement of a 110 billion-euro bailout package for Greece on speculation the aid wouldn’t be enough to halt the spread of the region’s fiscal woes.

The number of wagers by hedge funds and other large speculators for a decline in the currency rose on May 4 to 103,402 contracts more than those anticipating a gain, up from 89,013 a week earlier, according to Commodity Futures Trading Commission data. It was the second consecutive week that the amount climbed to a record. As recently as December, traders were anticipating gains in the euro.

‘Blood on the Street’

“There was blood on the street,” Samarjit Shankar, a managing director for the foreign-exchange group in Boston at Bank of New York Mellon, the world’s largest custodial bank, with more than $20 trillion in assets under administration, said May 7. “The focus has been on the inability of European policy makers to come up with something coherent to try to calm investor nerves.”

The extra yield that investors demand to hold Greek, Portuguese and Spanish 10-year debt instead of benchmark German bonds rose to the highest last week since before the euro’s 1999 debut as European leaders’ efforts failed to assuage concern that the region’s most-indebted nations will struggle to reduce their budget deficits. The yield on Germany’s 10-year bund fell to a record.

“We will defend the euro, whatever it takes,” European Commission President Jose Barroso told reporters on May 8 after the leaders met in Brussels.

Led by Italy’s $126 billion, Greece, Spain, Portugal, Ireland and Italy have a total of $215 billion of debt coming due in the next three months, according to JPMorgan Chase & Co.

‘Rates Appropriate’

Europe’s common currency posted its biggest intraday decline against the dollar in more than a year on May 6 after European Central Bank President Jean-Claude Trichet said a meeting of policy makers didn’t discuss buying government bonds, an option some economists said would help to contain the region’s debt crisis.

Trichet also said the ECB’s benchmark interest rate, a record-low 1 percent, is “appropriate,” indicating he saw no immediate need to cut borrowing costs.

The euro has lost 6.5 percent this year, based on Bloomberg Correlation-Weighted Indexes. The dollar is up 5.1 percent.

Analysts reduced forecasts every month this year for where Europe’s common currency will trade by June on speculation the region’s expansion will slow as nations from Greece to Portugal are forced to curb spending. The ECB will raise its main refinancing rate from a record low 1 percent in the first quarter of 2011, according to the median estimate of economists in a Bloomberg News survey.

In the U.S., traders are still anticipating a rate increase this year after the Labor Department said May 7 that payrolls jumped 290,000 last month, the biggest increase in four years and more than the median estimate of economists surveyed by Bloomberg News.

Australia Raises Interest Rate for Sixth Time to 4.5% (Update1)

2010-05-03T22:29:00.000-07:00

By Jacob Greber

May 4 (Bloomberg) -- Australia’s central bank raised its benchmark interest rate for the sixth time in seven meetings after inflation accelerated and officials judged the nation is insulated from the Greece-sparked sovereign debt concerns.

Governor Glenn Stevens increased the overnight cash rate target to 4.5 percent from 4.25 percent, the Reserve Bank of Australia said in a statement in Melbourne today. The decision was predicted by 18 of 24 economists surveyed by Bloomberg News.

Continued rate increases may pose a danger for Prime Minister Kevin Rudd’s Labor Party, which has seen voter support slump to the lowest level since before taking power in 2007 and faces an election within a year. The government, which presents its annual budget next week, also faces a backlash from mining firms after announcing plans to levy a 40 percent “super tax” on the profits of resources companies.

“If the average voter’s economic prospects deteriorate, that’s when interest rates become a factor in the political cycle,” Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney, said ahead of today’s decision.

The Australian dollar fell to 92.38 U.S. cents at 2.34 p.m. in Sydney from 92.44 cents just before the decision was announced, after Stevens said today that interest rates for most borrowers will now be “around average levels.”

Stevens, unlike counterparts in the U.S. and Europe, is under pressure to extend a world-leading round of rate increases as Australia’s economy accelerates, stoking inflation and property prices, which surged more than 20 percent in the 12 months through March. Stronger growth and higher borrowing costs have pushed the Australian dollar up 26 percent in the past year.

Greek Turmoil

Today’s decision also suggests policy makers are less concerned about factors such as Greece’s debt turmoil, which Stevens cited as a reason for keeping rates unchanged in February. The European Central Bank yesterday said it would indefinitely accept Greek debt as collateral regardless of the credit rating, after European ministers and the International Monetary Fund at the weekend agreed on a 110 billion-euro ($145 billion) bailout plan.

Governor Stevens said last month that “one would expect interest rates to be pretty close to average” given the economy is expanding at or close to “trend” and with inflation near the bank’s target range of 2 percent to 3 percent.

The pace of gains in the consumer price index almost doubled in the first quarter to 0.9 percent from 0.5 percent in the previous three months, a report showed last week. A measure of so-called core inflation, the weighted-median, rose 3.1 percent from a year earlier.

Inflation Outlook

“Even if the Reserve Bank is still comfortable that inflation will stay within the target range in 2010, it should be increasingly concerned about the outlook for 2011,” Kevin Grice, an economist at Capital Economics Ltd. in London, said ahead of today’s decision.

Australia is “likely to be the first of the world’s major economies to move beyond neutral,” pushing borrowing costs “into restrictive territory” with a benchmark rate of 6 percent by the end of next year, Grice said.

Forecasts for higher borrowing costs come as Australia’s political parties prepare for an election, due within the next 11 months. Australian leaders are vulnerable to rate increases as more than two-thirds of the population own homes, compared with less than 50 percent in some European nations.

More than 90 percent of mortgages taken out last year, when the benchmark rate was slashed to a half-century low of 3 percent and Rudd’s government temporarily increased grants to first-time buyers of new dwellings to as much as A$21,000 ($19,500), were on variable rates.

Voter Support

The central bank has increased its benchmark rate by 150 basis points since early October, adding about A$300 a month to repayments on an average A$300,000 mortgage.

Support for Rudd’s government has fallen behind the opposition Liberal-National coalition for the first time since 2006, according to a Newspoll published today by the Australian newspaper.

The so-called two-party preferred vote for Labor dropped to 49 percent in the survey of 1,200 voters taken last weekend from 54 percent in mid April, and 52.7 percent when Rudd won in November 2007. The coalition’s support rose to 51 percent from 46 percent. The margin of error is plus or minus 3 percent.

“Most people are focused towards the end of the year,” Craig James, a senior economist at Commonwealth Bank of Australia in Sydney, said ahead of today’s report. “At some time they’ve got go pause, and there are indications the economy is already starting to slow.”

Consumer Confidence

A measure of consumer confidence published on April 14 by Westpac Banking Corp. slipped 1 percent last month, and separate reports showed retail sales dropped 1.4 percent in February and home-building approvals slumped 3.3 percent.

Woolworths Ltd., Australia’s biggest retailer, cut its annual sales growth forecast on April 30 in the absence of government cash handouts that stoked demand last year.

Still, Stevens is likely to remain among Asia-Pacific policy makers withdrawing monetary stimulus this year. Malaysia and India have boosted borrowing costs, while the New Zealand central bank said last week it expects to begin raising rates “in coming months.”

Australia’s economy, which skirted last year’s recession, is being stoked by increased investment in resources projects such as Chevron Corp.’s Gorgon liquefied-natural-gas project in Western Australia, potentially worsening a shortage of skilled workers that threatens to boost wage growth.

Manufacturing growth accelerated in April to the fastest pace in almost eight years, a report showed yesterday.

Inflation pressures may also intensify as a result of the government’s planned changes to the tax system, announced in Canberra on May 2, which are estimated to increase Australian real wages growth by as much as 1.1 percent.

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

2010-04-30T06:10:00.001-07:00

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

2010-04-30T06:07:00.000-07:00

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 FOREX.com 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.

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

2010-04-18T15:45:00.000-07:00

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.

Australian Business Confidence Near Eight-Year High (Update1)

2010-04-12T19:37:00.000-07:00

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.

RBA to make close call on rate hike

2010-04-05T18:12:00.000-07:00

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.