U.K. Third Quarter Growth Rebounds Before Crisis

The U.K. economy grew faster than economists forecast in the third quarter as it rebounded from one-off factors before an escalation of Europe’s debt crisis that threatens to push Britain back into recession. Gross domestic product rose 0.5 percent from the second quarter, when it increased 0.1 percent, the Office for National Statistics in London said today. Economists forecast 0.3 percent, based on the median of 36 estimates in a Bloomberg News survey. A separate report showed manufacturing unexpectedly shrank the most in 28 months in October, pointing to weakness at the start of the fourth quarter.

Papandreou Seeks Greek Vote on EU Debt Accord

Greek Prime Minister George Papandreou called a referendum and a parliamentary confidence vote, raising the prospect of derailing Europe’s bailout effort and pushing Greece into default. Stocks and the euro tumbled. Papandreou’s gambit risks pushing the country into default if rejected by voters, and raises the ante with dissidents in his own party. Papandreou’s popularity has plunged after a raft of austerity measures cut pensions and wages, increased taxes and sparked a wave of social unrest. An opinion poll published Oct. 29 showed most Greeks believe the accord on a new bailout package and a debt writedown is negative.

China’s Manufacturing Index Declines for First Time in 3 Months on Orders

A Chinese manufacturing index dropped to the lowest level since February 2009, bolstering the case for fiscal or monetary loosening to support the expansion of the world’s second-biggest economy. The Purchasing Managers’ Index fell to 50.4 in October from 51.2 in September, the China Federation of Logistics and Purchasing said in a statement today. That was lower than any of 16 economist estimates in a Bloomberg News survey that had a median forecast of 51.8. A reading above 50 indicates expansion.

U.S. Manufacturing Probably Grew Faster in October

Manufacturing in the U.S. probably expanded at a faster pace in October, driven by gains in exports and consumer spending that are keeping the recovery intact, economists said before a report today. The Institute for Supply Management’s factory index rose to 52 from 51.6 a month earlier, according to the median forecast in a Bloomberg News survey. A level of 50 is the dividing line between growth and contraction. Construction spending rose in September, another report may show. American factories may keep leading the economy as growing demand from emerging economies drives orders and production. The industry is also benefiting from increasing business investment as companies take advantage of tax depreciation allowances on equipment purchased before the end of the year. “Manufacturing is holding its own amid what is being characterized as a very moderate recovery,” Sean Incremona, a senior economist at 4Cast Inc. in New York, said before the report. “Whatever sort of economy we have going forward, manufacturing should be toward the top tier.” The Tempe, Arizona-based ISM’s survey results will be released at 10 a.m. New York time. Estimates from 85 economists ranged from 50.5 to 55. While 50 is the midway point between expansion and contraction, a reading greater than 42.5 generally indicates an expansion in the overall economy, the group says. Global Manufacturing Other figures today showed global manufacturing cooled last month. A Chinese factory index dropped to the lowest level since February 2009, while a U.K. manufacturing gauge declined to a 28-month low. The Purchasing Managers’ Index fell to 50.4 in October from 51.2 in September, the China Federation of Logistics and Purchasing said in a statement today. The U.K. measure, based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply, dropped to 47.4 from a revised 50.8 in September, according to an e-mailed report in London today. Federal Reserve officials begin a two-day meeting today to determine whether additional steps, including another round of securities purchases or changes to public communication, are needed to spur growth. In August and September, the central bank used unconventional tools aimed at lowering borrowing costs. Peoria, Illinois-based Caterpillar Inc., the world’s largest maker of construction and mining equipment, said last month it expects sales and revenue to increase 10 percent to 20 percent from the 2011 outlook of around $58 billion. ‘Slow Recovery’ “We believe continued economic recovery, albeit a slow recovery, is the most likely scenario as we move forward,” Doug Oberhelman, chairman and chief executive officer of Caterpillar Inc. (CAT), said in an Oct. 24 statement. Recent regional factory surveys were mixed. New York-region factories shrank for a fifth straight month in October, while manufacturing in the Philadelphia area expanded after two months of contraction, figures from the Fed showed. A report from ISM- Chicago Inc. yesterday showed business activity grew last month at about the same pace as in September. A Commerce Department report last week showed orders for durable goods other than transportation gear rose in September by the most in six months. Demand for all durable goods fell, reflecting fewer commercial-aircraft bookings, the report said. Corporate spending on equipment and software climbed at a 17.4 percent pace in the third quarter, the most in a year, as the economy grew at a 2.5 percent pace, the Commerce Department reported last week. Equipment Depreciation A rush to qualify for a government tax incentive may be contributing to the increase in business investment. The Obama administration’s compromise with Congress allows companies to depreciate 100 percent of investment in capital outlays in 2011 and 50 percent in 2012. “We are starting to see our customers resume their investment activity,” Richard S. Hill, chairman and chief executive officer at San Jose, California-based Novellus Systems Inc. (NVLS), a maker of machinery used in semiconductor production, said on a conference call last week. Consumer spending on autos is also improving. Chrysler Group LLC, boosted by deliveries of Ram pickups, led September U.S. auto sales gains that exceeded analysts’ estimates. General Motors Co. (GM) and Ford Motor Co. (F) also beat estimates on Silverado and F-Series trucks. Auto Sales Auto purchases climbed to a 13.04 million annual pace, the highest since April, compared with a 12.1 million rate the prior month. Purchases may have increased to a 13.2 million pace last month, according to the median forecast in a Bloomberg survey ahead of industry data today. A dollar that has lost 11 percent of its value since June 2010 has made American goods more competitive. July and August were the best months for U.S. exports on record, according to figures from the Commerce Department. Data from the Commerce Department at 8:30 a.m. may show construction spending rose 0.3 percent in September after a 1.4 percent gain the prior month, according to the median estimate of economists surveyed by Bloomberg. Bloomberg Survey ==================================================== Construct ISM ISM Spending Manu Prices MOM% Index Index ==================================================== Date of Release 11/01 11/01 11/01 Observation Period Sept. Oct. Oct. ---------------------------------------------------- Median 0.3% 52.0 55.0 Average 0.3% 52.3 54.5 High Forecast 1.5% 55.0 57.0 Low Forecast -0.5% 50.5 51.0 Number of Participants 50 85 23 Previous 1.4% 51.6 56.0 ---------------------------------------------------- 4CAST 0.5% 52.0 --- ABN Amro --- 52.0 --- Action Economics 0.5% 52.0 55.0 Aletti Gestielle --- 52.5 55.5 Ameriprise Financial 0.0% 53.0 57.0 Banca Aletti --- 51.7 56.0 Banesto 0.4% 52.1 --- Bank of Tokyo- Mitsubishi --- 52.5 --- Bantleon Bank AG --- 51.5 --- Barclays Capital 0.4% 52.0 --- Bayerische Landesbank --- 52.0 --- BBVA 0.2% 52.0 --- BMO Capital Markets 0.3% 52.0 55.0 BNP Paribas 0.3% 52.5 --- BofA Merrill Lynch 0.2% 52.5 --- Briefing.com 0.8% 53.0 --- Capital Economics 0.5% 52.5 --- CIBC World Markets --- 53.0 --- Citi -0.3% 52.0 51.0 ClearView Economics --- 51.0 53.0 Comerica 0.8% 52.0 --- Commerzbank AG --- 52.0 --- Credit Agricole CIB --- 52.7 --- Credit Suisse --- 52.5 56.0 Daiwa Securities America 0.0% 52.0 55.0 Danske Bank --- 52.5 54.5 DekaBank 0.3% 52.5 --- Desjardins Group 1.0% 52.0 --- Deutsche Bank Securities 0.4% 52.0 --- Deutsche Postbank AG --- 52.5 --- DZ Bank --- 51.6 --- Exane --- 52.0 --- Fact & Opinion Economics 0.4% 52.2 --- First Trust Advisors 0.3% 51.8 --- FTN Financial --- 53.1 --- Goldman, Sachs & Co. 0.3% 51.5 --- Helaba --- 52.0 --- High Frequency Economics 0.0% 52.0 --- HSBC Markets --- 53.0 --- Hugh Johnson Advisors --- 53.0 --- IDEAglobal 0.2% 53.0 55.0 IHS Global Insight 0.1% 52.2 --- Informa Global Markets -0.2% 51.8 55.0 ING Financial Markets 0.4% 52.2 52.0 Insight Economics 0.5% 52.0 --- Intesa-SanPaulo 0.3% 52.0 --- J.P. Morgan Chase 0.3% 52.0 --- Janney Montgomery Scott 0.0% 51.5 --- Jefferies & Co. 0.2% 52.5 --- Landesbank Berlin 1.5% 50.5 --- Landesbank BW --- 52.0 --- Maria Fiorini Ramirez --- 52.5 --- Market Securities --- 52.4 --- MF Global 0.2% 51.8 54.0 Mizuho Securities 0.1% 52.0 --- Moody’s Analytics 0.5% 51.9 --- Morgan Keegan & Co. 0.3% --- --- Morgan Stanley & Co. -0.3% 52.0 --- National Bank Financial --- 52.1 --- Natixis --- 52.0 --- Nomura Securities --- 53.7 56.3 Nord/LB --- 53.0 55.0 OSK Group/DMG --- 52.0 --- Parthenon Group -0.2% 50.9 53.7 Pierpont Securities --- 52.3 --- PineBridge Investments 1.0% 55.0 --- PNC Bank -0.5% 53.0 --- Prestige Economics --- 52.5 --- Raiffeisenbank International --- 52.5 55.0 Raymond James -0.5% 52.5 --- RBC Capital Markets --- 51.8 --- RBS Securities --- 52.2 --- Scotia Capital --- 51.5 54.0 SMBC Nikko Securities 1.0% 52.0 --- Societe Generale 1.2% 53.5 54.0 Standard Chartered --- 53.0 --- State Street Global Markets 0.2% 52.3 54.5 Stone & McCarthy Research -0.5% 52.7 --- TD Securities --- 53.0 --- UBS 0.0% 52.5 53.0 Union Investment --- 51.6 --- University of Maryland 0.4% 51.8 55.0 Wells Fargo & Co. 0.1% 52.1 --- WestLB AG -0.2% 52.0 --- Westpac Banking Co. 0.6% 53.0 --- Wrightson ICAP -0.1% 52.0 --- ====================================================

Europe Debt Crisis Threatens Asian Growth

Australia’s central bank cut interest rates for the first time since 2009 and a Chinese manufacturing index slid, stoking concern that Europe’s debt crisis is weighing on Asia’s export-dependent economies. The Reserve Bank of Australia today reduced its key lending rate to 4.5 percent from 4.75 percent, saying Europe’s woes are starting to hit Asian trade. In China, a purchasing managers’ index fell to 50.4, the lowest level since February 2009, while South Korea reported the smallest gain in exports in two years. Asian stocks fell for a second day as slowing growth in the region threatens to limit a global expansion already constrained by elevated unemployment in the U.S. and Europe’s crisis. The Chinese report showed a contraction in export orders, fueling speculation that Premier Wen Jiabao may loosen policies to support the world’s second-biggest economy. “Similar to 2008, China has a lot of potential for fiscal stimulus and that’s true across the region as well,” said Frederic Neumann, co-head of Asian economics at HSBC in Hong Kong. “The situation in Europe clearly remains challenging.” The MSCI Asia Pacific Index slipped 2 percent as of 5:10 p.m. in Tokyo. RBA Governor Glenn Stevens indicated that easing inflation had allowed the nation’s first rate cut since April 2009. The local currency and government bond yields fell. ‘Significant Slowdown’ Trade “is starting to see some effects of a significant slowing in economic activity in Europe, where the prospects are for economic weakness to continue,” Stevens said in a statement. It is “likely to be some time yet before concerns about the European situation can definitively be laid to rest” and financial turmoil may have made companies and households cautious, he said. The Australian dollar dropped to $1.0485 at 3:18 p.m. in Sydney from $1.0530 yesterday in New York and $1.0527 before the decision. The yield on 10-year government bonds fell eight basis points, or 0.08 percentage point, from yesterday’s close to 4.43 percent. Stevens joins Group of 20 counterparts from Jakarta to Ankara to Brasilia in easing monetary policy to bolster domestic demand. In Japan, officials yesterday intervened to weaken the yen as the currency’s gains to post-World War II highs threaten that nation’s exports. G-20 leaders next meet in Cannes, France, on Nov. 3-4 to tackle Europe’s crisis after Greek Prime Minister George Papandreou pledged to hold a referendum on the latest bailout plan for his nation. Policy Outlook The reading for China’s official PMI, released by the government and the logistics federation, “is a reflection of slowing momentum in the economy” and export growth may decline “sharply in coming months,” said Wang Tao, a Hong Kong-based economist at UBS AG. “Policy will ease more visibly in the first quarter of 2012.” Goldman Sachs Group Inc. said seasonal distortions may have dragged the number lower. Released by the logistics federation and the statistics bureau, the index is based on a survey of purchasing managers in more than 820 companies in 20 industries. The gauge hasn’t fallen below 50, the level dividing expansion from contraction, since February 2009. A separate index released today by HSBC Holdings Plc (HSBA) and Markit Economics rose to 51 from 49.9. The gauges have different sample sizes and methodologies, with the official measure giving a bigger weighting to state-owned enterprises, according to Societe Generale SA. Weaker Exports South Korea’s overseas shipments rose 9.3 percent in October from a year earlier, the least since 2009. Speaking in Gwacheon, south of Seoul, trade official Han Jin Hyun said Europe’s crisis will weigh on exports this quarter. The October number was also pulled back by a high year-earlier base for comparison. Taiwan’s economy expanded at the slowest pace in two years last quarter, gaining 3.37 percent from a year earlier, a government report showed yesterday. In a more positive sign for the region, India’s manufacturing growth accelerated last month, according to a report today from HSBC and Markit. HSBC economist Leif Eskesen cited “resilient domestic demand.” Gauges of manufacturing in the U.S. and Europe are also pending. A U.S. factory index released by the Institute of Supply Management rose to 52 in October from 51.6 in September, according to the median estimate in a Bloomberg survey. A manufacturing gauge based on a survey of purchasing managers in the 17-nation euro region fell to 47.3 in October from 48.5 in September, according to the median forecast in another survey.

Japan May Prepare Sustained Intervention Effort as Noda’s Agenda at Risk

. Japan’s government signaled it is prepared for sustained intervention to ward off speculators from yen purchases after currency appreciation forced companies from Panasonic Corp. (6752) to Honda Motor Co. to lower earnings forecasts. Finance Minister Jun Azumi said in Tokyo he will “continue to intervene until I am satisfied,” after yen sales yesterday that Credit Suisse Group AG analysts estimated may have exceeded $50 billion. The intervention was the first since August, when Japan spent 4.51 trillion yen ($57 billion) seeking to stem the currency’s surge to a postwar high against the dollar. The effort showed support by Prime Minister Yoshihiko Noda for exporters seeing a loss in competitiveness after the yen rose 15 percent against the dollar and 21 percent versus the euro the past two years. With Nissan Motor Co. Chief Executive Officer Carlos Ghosn warning last month about a hollowing out of industry, lack of action risked undermining Noda’s agenda, said Hideo Kumano, an economist at Dai-Ichi Life Research Institute. “Noda will encounter difficulty in gaining support for his budget package and participation in the Trans-Pacific Partnership,” if the yen’s exchange rate provokes a wave of corporate complaints, said Tokyo-based Kumano, who previously worked at the Bank of Japan. Noda has placed a priority on a third package of reconstruction spending from the aftermath of the March earthquake and tsunami, and on considering joining the TPP forum of trade talks with the U.S. Impact of Sales Yesterday’s sales spurred the biggest intraday drop in the yen against the dollar since October 2008. It sank 2.9 percent in New York after reaching a low of 79.53 earlier and also declined 1.9 percent versus the euro, to 109.33. The Japanese currency traded at 78.13 per dollar and 107.62 per euro at 4:53 p.m. in Tokyo today. Japanese media speculated today that the intervention was bigger than the previous one, with the Asahi newspaper estimating sales of 10 trillion yen and the Yomiuri newspaper reporting intervention of 6 trillion yen. Japan’s policy makers gave no indication of a Swiss-style target for their currency. Like Japan, Switzerland has seen its exchange rate appreciate as investors sought a haven from the euro-region’s debt crisis and from a U.S. economy burdened by the wreckage of a housing-market collapse. Swiss officials put a floor on the euro versus the franc and pledged to defend it. ‘Powerful Precedent’ “A Japanese floor would create a powerful precedent for the rest of Asia, something both the U.S. and Europe are loath to see,” Credit Suisse strategists led by Ray Farris in Singapore wrote in a note to clients. American policy makers have sought to persuade China, which manages its exchange rate, to allow greater appreciation against the dollar. Rather than a target for the yen, Japanese policy makers have indicated they are concerned about any speculative trading that causes sharp, one-sided moves. A government official said on condition of anonymity that yesterday’s move was triggered by an abrupt climb in the yen in Sydney trading that was indicative of speculative activity. It reached a post-World War II high of 75.35 during Australian morning trading. Azumi reiterated today that he is ready to take appropriate action in currency markets. He also said he will tell the G-20 that authorities acted because yen movements were straying from economic fundamentals. Noda said in Tokyo today that a 10 percent appreciation in the yen over a year may shave off about 0.19 percent from Japan’s gross domestic product. Tactical Approach While currency policy in Japan is set by the finance ministry, comments by Bank of Japan Governor Masaaki Shirakawa also indicated a more tactical than strategic approach toward the yen. He told reporters in Osaka yesterday that it isn’t really strong in nominal effective terms. “Shirakawa’s remark that the yen is not particularly strong on a trade-weighted basis suggests little real enthusiasm at the central bank” for intervention, said Julian Jessop, chief global economist at Capital Economics Ltd. in London. With the U.S. Federal Reserve and European Central Bank meeting this week to consider monetary stimulus, and no sign yet that the euro-region debt crisis is over, economic fundamentals argue in favor of continued yen strength, analysts said. Brown Brothers Harriman & Co. strategists predicted the currency will “retest levels near 76.” European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo indicated disapproval of the yen sales, saying yesterday that “unilateral interventions neither have a lasting effect nor are they good from the point of view of global stability.” G-20 Criticism Even so, Europeans may be loath to criticize Japan at the Group of 20 summit in Cannes, France, Nov. 3-4 given that they are seeking Asian contributions for an expanded rescue fund, UBS AG analysts said in a note. For Noda, who took office in September, the yen’s surge risked distracting from his efforts to foster an economic rebound from three quarters of contraction, worsened by a record earthquake in the northeast that left about 19,000 people dead or missing and triggered a nuclear crisis. Noda’s cabinet last month approved a 12.1 trillion yen spending plan to rebuild after the March disaster and to help companies cope with the currency. The package is subject to parliamentary approval. Japan’s industrial output fell 4 percent in September from August, a sharper drop than analysts surveyed by Bloomberg News forecast. Export growth slowed to 2.4 percent from a year earlier in September from 2.8 percent in August, while retail sales also fell more than expected. Stocks Fall Stocks in Japan fell yesterday as Mitsui O.S.K. Lines Ltd. projected a loss and Fujifilm Holdings Corp. (4901) cut its profit forecast. Even after the intervention, which at one point during the day sparked a gain in the benchmark Nikkei 225 Stock Average of as much as 1.1 percent, the Nikkei closed down 0.7 percent. It finished 1.7 percent lower today. Panasonic, the maker of Viera televisions, yesterday forecast a full-year loss of 420 billion yen, its biggest in a decade. It cited the impact of a stronger yen and one-time charges. Honda, Japan’s third-largest carmaker, reported second- quarter profit that missed analysts’ estimates as the strong yen eroded earnings. “We’d like the government to do more intervention,” Yuji Isoda, manager of investor relations at Nippon Yusen K.K. told reporters in Tokyo yesterday. “Ideally we’d like the yen to weaken to around 85 yen to 90 yen against the dollar.” BOJ Pressure Pressure may also rise on the central bank to do more, after it expanded planned government-bond purchases by 5 trillion yen last week. “The root cause for yen appreciation is the Bank of Japan’s passive stance toward monetary policies, compared with the Federal Reserve,” said Atsushi Ito, a senior rate strategist in Tokyo at UBS AG. Former Japanese Finance Ministry official Eisuke Sakakibara said earlier this month that intervention efforts by Japan will only be successful if coordinated with other nations. Sakakibara became known as “Mr. Yen” during his 1997-1999 tenure at the Ministry of Finance. “The most we can expect is for intervention to slow the speed of the yen’s gains,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. In Tokyo and a former official in the BOJ’s foreign exchange division. “The government can’t keep intervening forever.”

South Korea Plans $50 Billion Fund to Pay for Unification With the North

South Korea will set up a fund as early as this year to begin raising up to 55 trillion won ($50 billion) to pay for its eventual reunification with North Korea. Individual Koreans at home and abroad will be able to make donations to the fund and the government in Seoul may earmark money including budget surpluses, Unification Minister Yu Woo Ik said in his first interview since being sworn in on Sept. 19. While foreigners will also be allowed to donate, there is no plan to ask overseas governments to contribute, he said. Yu, 61, is asking South Koreans to put aside more than 60 years of animosity on the divided peninsula and prepare for the fiscal shock of incorporating their impoverished northern neighbors. Fifty South Koreans died last year in attacks blamed on Kim Jong Il’s regime and negotiations to resume six-nation talks aimed at shutting down North Korea’s nuclear-weapons program have made little progress. “Government agencies are near an agreement over the unification account and I hope lawmakers will pass legislation within this year,” Yu said in his office in Seoul yesterday. “This will unite people and foster their desire for unification.” Yu, who begins a six-day visit to the U.S. tomorrow to meet lawmakers, State Department officials and United Nations Secretary-General Ban Ki-moon, said he expects the two Koreas to reunite within his own lifetime. Peaceful Transition The fund would meet the minimum cost of unification estimated by external researchers, assuming it takes place within the next 20 years and is a peaceful transition, according to his ministry. Yu and his counterparts at other government agencies are not considering the idea of a special tax to fund unification, said Park Soo Jin, the ministry’s deputy spokeswoman. President Lee Myung Bak called on South Koreans to think about the option of a “unification tax” in a speech on Aug. 15, 2010. North Korea said the idea was as a “petty trick” to conceal Lee’s aim of regime change in Pyongyang. “We’re looking at the issue of how to finance the possible unification from various perspectives, considering public opinion and fiscal conditions,” said Suh Kyu Sik, a deputy director of the Finance Ministry. “Unification is one of major reasons that we are trying to improve our fiscal strength as fast as possible.” Food Handouts Yu said figures for the cost reach as high as 269 trillion won, or almost a quarter of South Korea’s 2010 gross domestic product. Its economy is more than 40 times larger than North Korea’s, which has relied on outside handouts since the mid-1990s when an estimated 2 million people died from famine, according to South Korea’s central bank. The population of Kim’s totalitarian state is almost half that of South Korea’s 49 million people. East Germany’s population was about one-quarter that of West Germany’s 61 million when the Berlin Wall fell in 1989, and per capita income was almost one-third that of its larger neighbor, according to a 2009 report by Goldman Sachs Group Inc. “We cannot apply the German unification model to Korea as the North is much poorer and has a bigger population,” said Moon Chung In, a professor of political science at Yonsei University in Seoul. “Germany had a strong economy while ours is still fragile.” Generational Costs South Korea’s budget, which has been in deficit since 2008, is projected to be balanced in 2013, according to the finance ministry. North Korea relies on China to prop up its economy, with bilateral trade accounting for 83 percent of the nation’s $4.2 billion in international commerce last year, according to the Seoul-based Korea Trade-Investment Promotion Agency. “Reunification won’t result in a debt crisis or multiple sovereign-rating downgrades as most people fear,” said Kwon Young Sun, a Hong Kong-based economist at Nomura Holdings Inc. “South Korea could spread the cost across generations and share the burden with other countries.” Yu, a former South Korean ambassador to China and chief-of- staff to Lee, promised a more "flexible" approach to North Korea when he replaced Hyun In Taek. Hyun, who once suggested abolishing the Unification Ministry, was vilified by the state- run media in Pyongyang as an "anti-reunification maniac." Artillery Attack Still, he dismissed the chances of a summit between Lee and Kim in the near-term after the deadly shelling of a border island and sinking of a South Korean navy ship last year. North Korea blames the South for provoking the artillery attack and denies responsibility for torpedoing the ship. “A summit between the leaders of the two Koreas would be a very strong and effective event,” said Yu, a former professor of geography at the Korea Military Academy and Seoul National University who received his doctorate from the University of Kiel in Germany. “But we don’t have any specific plan for it at the moment because it’s hard to see any tangible or substantial results.” North Korea, which remains technically at war with the South after their 1950-1953 conflict ended in a cease-fire, tested nuclear weapons in 2006 and 2009. Six-nation talks on its nuclear program involving China, Japan, Russia, the U.S. and South Korea haven’t convened since 2008. U.S. and North Korean officials resumed direct talks last month that have not yielded any breakthroughs. ‘Fear of War’ Working toward unification with North Korea is better than living with the fear of war, said Kim Seok Joong, 43-year-old orthopedic surgeon from Seoul. “I want peaceful unification for my five-year-old son, he said. ‘‘I will contribute regularly to the fund if it’s run in a transparent way and not to be used for political purpose.’’ Kim Do Hyung, 38, a manager at SK Telecom Co. in Seoul, said he questions the goal of unifying the Korean peninsula and that he won’t be paying many into the fund. ‘‘My parents may want a unified Korea at whatever cost but my generation is different,’’ he said. ‘‘We’re the ones who’d have to shoulder all the burden and my life is tough enough.” Kim’s regime has vowed to build a “thriving nation” where all citizens can enjoy meat soup by 2012, the 100th birthday of his father and North Korea’s founder, Kim Il Sung. He is grooming his son Kim Jong Un to succeed him amid worsening food shortages and a “rapid” rise in child malnutrition, according to a UN report in September. The country faces a shortfall of as much as 700,000 metric tons of food this year, which could affect a quarter of the population, Hiroyuki Konuma, the UN Food & Agriculture Organization’s Asia representative said on Sept. 15. The Korean Central News Agency reports on an almost daily basis on Kim Jong Il’s exploits, ranging from the multiple holes-in-one he scored in his first game of golf to advice given to farmers and engineers to improve farm and factory output. “All the stories idolizing the Kim family may undermine North Korea’s credibility both at home and abroad,” Yu said. “The North Koreans I’ve met haven’t been free to say they whether they believe these myths, but defectors from the North don’t believe in them.”

U.K. Economy May Struggle to Grow as Recession Risk Mounts

Britain’s economic recovery will continue to falter in the current quarter after it struggled to build momentum in the previous three months, economists said. Gross domestic product rose 0.3 percent in third quarter compared with a 0.1 percent increase in the second quarter, according to the median of 36 forecasts in a Bloomberg News survey. The Office for National Statistics will publish the data at 9:30 a.m. in London. Manufacturing probably stagnated in October and services growth slowed, according to separate surveys of economists before reports this week. The Bank of England expanded stimulus for the first time in two years last month and the government is working on a plan to boost lending as Europe’s debt crisis raises the risk of another U.K. recession. With the increase in third-quarter GDP partly due to a rebound from one-off factors, Bank of England Markets Director Paul Fisher said the pace may not be sustained and there’s a chance of stagnation in the current quarter. “The risks are still skewed to the downside,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “As long as the data continues to come in on the weak side, the Bank of England will be minded to loosen more.” The central bank expanded its bond-purchase program by 75 billion pounds ($120 billion pounds) to 275 billion pounds on Oct. 6, and left its benchmark interest rate at a record-low 0.5 percent. Walker, who sees the economy expanding 0.1 percent in the current quarter and the first three months of 2012, forecasts the central bank will add another 50 billion pounds of so-called quantitative easing in February. Greek Concern The pound declined for a second day against the dollar. It traded at $1.6016 as of 8:04 a.m. in London, down 0.4 percent from yesterday. European stocks fell after Greek Prime Minister George Papandreou pledged to hold a referendum on the European Union’s latest bailout plan for the nation, raising concern it may default. The FTSE 100 Index fell 2.3 percent and the Stoxx 600 dropped 2.5 percent. An index of U.K. manufacturing by Markit Economics and the Chartered Institute of Purchasing and Supply probably declined to 50 in October from 51.1 in September, according to the median forecast of 29 economists in a Bloomberg survey. An index of services, which account for about 75 percent of the economy, may have fallen to 52 from 52.9, another survey shows. The manufacturing gauge will be published today and the services measure on Nov. 3. A reading above 50 indicates growth. Domestic Pressure In addition to the euro-area crisis, the U.K. economy is under pressure from Prime Minister David Cameron’s budget squeeze, the nation’s biggest since World War II. With unemployment at a 15-year high, Cameron’s government is working on a credit easing plan to boost lending to small companies and aid the recovery. Tesco Plc (TSCO), Britain’s biggest supermarket chain, said last month it is seeing “subdued” U.K. demand in what is “the most challenging retail market we have seen for a generation.” Bank of England officials hold their next policy meeting on Nov. 9-10. Fisher said in an interview last week that U.K. growth may be “not much better than flat” in the fourth quarter and there is a “significant” chance of another recession. U.K. second-quarter output was affected by the March 11 earthquake in Japan and an additional public holiday to mark the wedding of Prince William and Kate Middleton on April 29. The statistics office estimated when it released the second-quarter data that growth would have been about 0.5 percentage points higher excluding temporary factors. “The temporary influences that held GDP down during the second quarter reversed in the third quarter, which in turn is likely to boost growth,” said Alan Clarke, an economist at Scotia Capital. “It will not be until the fourth quarter, assuming no disasters such as snow, hurricanes or floods, that we have an undistorted gauge of growth. At that point, we expect confirmation that the recovery has stalled.”

Bank of Japan Losses Exceed $281 Million From Buying ETFs as Stocks Slump

The Bank of Japan has lost as much as 22.4 billion yen ($281.7 million) purchasing exchange-traded funds as the Topix Index approaches a 27-year low. The central bank’s stock holdings have fallen about 4 percent since buying began on Dec. 15, 2010, according to estimates calculated by Bloomberg using government filings. Losses climbed above 67.6 billion yen in September as equities plunged amid concern Europe’s debt crisis would trigger a global recession, the data show. The purchases are part of a 20 trillion yen BOJ plan to stimulate economic growth and boost investor confidence by buying securities, such as government debt, commercial paper and real estate investment trusts. The central bank expanded the program last week by 5 trillion yen after the country’s currency reached a postwar record against the dollar, threatening the export-led economy. “This is not what a central bank should be doing,” said Masaaki Kanno, the Bank of Japan’s former chief foreign-exchange dealer and now chief Japan economist at JPMorgan Chase & Co., referring to the ETF purchases. “The program started in an emergency, and it’s been snowballing.” The ETFs aren’t likely to hurt the central bank’s finances and the BOJ may take action should losses increase, said a spokeswoman, who declined to be named, citing bank policy. While the central bank hasn’t provided details on the performance of its ETF holdings, Bloomberg News estimated the loss by calculating the return if it spent all the money on Nomura Holdings Inc.’s Nikkei 225 ETF or the Topix ETF, the biggest Japan funds that trade on exchanges. Topix, Nikkei ETFs The central bank said in a statement on Nov. 5, 2010, that it would buy ETFs that track the Topix or Nikkei 225 (NKY) Stock Average and target the volume-weighted average price. The Nikkei 225 entered a bear market seven months ago and the Topix of 1,663 Japanese companies is about 9 percent away from erasing its advance since March 12, 2009. The Nikkei 225 posted the biggest decline in a month, falling 1.7 percent to 8,835.52 today. The index has declined 14 percent this year. It’s too early to tell if the BOJ’s program has been a success or failure because the purchases haven’t finished yet, said Naomi Fink, head of Japan strategy at Jefferies Japan Ltd. in Tokyo. She predicts the investments will eventually be profitable as shares recover from “extremely depressed valuations.” ‘Tolerate Losses’ The Topix trades at 0.92 times book value, a measure of corporate assets minus liabilities, near the lowest level since March 2009, according to data compiled by Bloomberg. The index is valued at 16.7 times reported profit, 5.7 percent less than the median multiple from the past five years. “They should be able to tolerate losses during a bad period for the stock market,” said Fink. “But if they’re in the red in a couple years, then you can safely say, ‘Well, that facility wasn’t very useful.’” This isn’t the first time the central bank has bought stocks. The BOJ in October 2002 purchased shares that financial firms owned in other companies to stem losses at banks after the Topix plunged 52 percent from a peak in February 2000. The BOJ’s investment foreshadowed a rally in the Topix, which bottomed in March 2003 and more than doubled over the next four years. More ETF Buying The BOJ’S ETF purchases accelerated this year after concern over Europe’s sovereign-debt crisis triggered a global equity rout and sent the Nikkei Stock Average Volatility Index on Aug. 9 to the highest level since the aftermath of Japan’s March 11 earthquake and tsunami. The central bank spent 403.5 billion yen on ETF shares tracking the Nikkei 225 or Topix since August, compared with 340.4 billion yen in the previous eight months, filings show. The purchases, which are listed on the BOJ’s website, have taken place when Japanese stocks declined and have signaled better performance the next day. The Nikkei 225 fell an average of 1.9 percent on days when the BOJ bought, slipping 0.1 percent the following day, data compiled by Bloomberg show. The investments represent a small part of Japan’s ETF market. The central bank spent 17.3 billion yen buying shares on Oct. 18, less than 1.5 percent of the total value traded in either Nomura’s Nikkei 225 or Topix ETFs, according to data compiled by Bloomberg. “Given circumstances back then, the BOJ didn’t have a choice but to do this program in order to lift sentiment,” said Tetsuya Inoue, a former BOJ official who is now chief researcher for financial markets for Nomura Research Institute Ltd. in Tokyo. “Maybe they didn’t expect these assets to drop this much.”

Australia Central Bank Cuts Key Rate to 4.5%

Australia’s central bank lowered its benchmark interest rate today for the first time since April 2009 as inflation eases and weaker global growth threatens to slow the nation’s resource-driven economy. “Recent information suggests the subdued demand conditions and the high exchange rate have contained inflation,” Reserve Bank of Australia Governor Glenn Stevens said in a statement after reducing the developed world’s highest borrowing costs by a quarter of a percentage point to 4.5 percent. Sixteen of 27 economists surveyed by Bloomberg News predicted the move; the rest forecast no change. The cut, which sent the local currency and government bond yields falling, reflects a decline in the nation’s underlying inflation rate to the weakest in 14 years as Europe’s debt crisis dims prospects for the world economy. Stevens joins Group of 20 counterparts from Jakarta to Ankara to Brasilia in easing monetary policy to bolster domestic demand. “It’s very much about shifting from what was a slightly restrictive stance to one that is now more neutral and supportive of activity,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at RBC Capital Markets in Sydney. “It was quite a balanced statement. There was nothing in it that we can see that really suggests they want to move again anytime soon or anything that signals a series of cuts.” Currency Drops The Australian dollar dropped to $1.0485 at 3:18 p.m. in Sydney from $1.0530 yesterday in New York and $1.0527 before the decision. The yield on 10-year government bonds fell eight basis points, or 0.08 percentage point, from yesterday’s close to 4.43 percent. “With overall growth moderate, inflation now likely to be close to target and confidence subdued outside the resources sector, the board concluded that a more neutral stance of monetary policy would now be consistent with achieving sustainable growth and 2 percent to 3 percent inflation over time,” Stevens said. Australian Prime Minister Julia Gillard said the decision brought “welcome relief” to households. Commonwealth Bank of Australia (CBA), the nation’s biggest lender, and Westpac Banking Corp. (WBC) matched the RBA’s rate reduction. Westpac said its lower borrowing costs announced today would save customers A$41 ($43) monthly on a A$250,000 mortgage. Rate-Cut Bets Traders’ bets indicate a 74 percent chance that Stevens will reduce rates by another quarter point in December to 4.25 percent, interbank cash-rate futures show. China is Australia’s biggest trading partner and its demand for iron ore, coal and energy has driven the nation’s terms of trade, or export prices relative to import prices, to a record. Earlier today, the China Federation of Logistics and Purchasing said a manufacturing index fell in October for the first time in three months. Across Asia, “trade performance, however, is starting to see some effects of a significant slowing in economic activity in Europe, where the prospects are for economic weakness to continue,” Stevens said in today’s statement. Australia’s overseas shipments and a A$430 billion pipeline of resource projects helped spur the local currency to $1.1081 on July 27, the highest level since it was freely floated in 1983. Retail, Housing A government report today showed Australian house prices declined in the three months through September, the third straight quarterly drop. An index measuring the weighted average of prices for established houses in eight major cities dropped 1.2 percent last quarter from the previous three months, when it fell a revised 0.5 percent. Prices fell in each of the cities surveyed. “The rate cut is especially good news for the beleaguered retail and housing sectors,” said Craig James, a Sydney-based senior economist at Commonwealth Bank. “But even tourism and export sectors receive a boost as the rate cut keeps a cap on the Aussie dollar.” Margy Osmond, chief executive officer of the Australian National Retailers Association, said “retail in Australia needs this boost, particularly going into Christmas.” Earlier today, a gauge of Australian manufacturing declined at a slower pace in October as weaker sales and a stronger currency continued to weigh on industries from clothing to publishing. The manufacturing index rose to 47.4 from 42.3 in September, the Australian Industry Group and PricewaterhouseCoopers said in a survey. Europe’s Troubles Europe’s fiscal troubles have weighed on the so-called Aussie in recent months. The world’s fifth most-traded currency fell 10 percent last quarter on concern Greece would default and trigger a repeat of the 2008 credit freeze after the collapse of Lehman Brothers Holdings Inc. European Union leaders agreed on Oct. 27 to increase a bailout fund to 1 trillion euros ($1.4 trillion), recapitalize banks and write down Greek debt by 50 percent. Stevens today noted stronger economic data in the U.S. and signs that Europe is getting its fiscal turmoil under control. “But it is likely to be some time yet before concerns about the European situation can definitively be laid to rest and the effects of the recent turmoil on confidence may result in a period of precautionary behavior by firms and households,” he said. Australian employment has weakened this year from record growth in 2010 and the unemployment rate reached a 10-month high in August before falling to 5.2 percent in September. Wage Threat Weakens “With labor market conditions now softer, the likelihood of a significant acceleration in labor costs outside the resources and related sectors in the near term has lessened,” Stevens said. An Australian government report last week showed the average of two core measures of consumer prices closely watched by the RBA was a 0.3 percent gain in the three months through September, the smallest rise since the third quarter of 1997. On an annual basis, the two measures averaged about 2.5 percent, the mid-point of the central bank’s target of 2 percent to 3 percent inflation. Economists including Bill Evans at Westpac and Kieran Davies at Royal Bank of Scotland Group Plc predict the RBA will lower its inflation forecasts when it releases its quarterly monetary policy statement on Nov. 4.

Indonesia’s Inflation Slowed in October, Giving Scope for Further Rate Cut

Indonesia’s inflation unexpectedly slowed in October, increasing the central bank’s room to cut interest rates further to boost economic growth. Consumer prices rose 4.42 percent from a year earlier, the Central Bureau of Statistics said in Jakarta today. That compares with a 4.61 percent gain reported earlier for September, and the 4.76 percent median of 17 estimates in a Bloomberg News survey. Bank Indonesia lowered rates last month for the first time in more than two years, joining policy makers in other emerging- market nations who have cut borrowing costs or increased fiscal measures to shield their economies from a global slowdown. Governor Darmin Nasution said last month inflation isn’t the country’s primary challenge at a time when the world economy is weakening. “With inflation still manageable, there is a chance the central bank will cut rates further,” Destry Damayanti, chief economist at PT Bank Mandiri in Jakarta, said before the report. “The global economy is still full of uncertainties and the markets haven’t stabilized yet so the central bank may want some clarity before moving again.” Indonesia’s currency fell 0.4 percent to 8,893 per dollar as at 11:03 a.m.in Jakarta. The central bank has said it would buy bonds and intervene to support the rupiah “until the market cools.” Rate Cut Bank Indonesia lowered the reference rate by a quarter of a percentage point to 6.5 percent at its October meeting. The next decision will be announced Nov. 10. The $707 billion economy is forecast to expand 6.6 percent this year, with growth easing to 6.5 percent in 2012, Nasution said Oct. 11. “Inflation is still manageable this year but price pressures will increase next year,” Juniman, chief economist at PT Bank Internasional Indonesia in Jakarta, said before the report. “Electricity tariffs may be raised and rice prices will probably gain due to floods in Thailand.” Bank Indonesia targets inflation of about 4 percent to 6 percent this year and around 3.5 percent to 5.5 percent next year. Consumer prices fell 0.12 percent in October from the previous month, today’s report showed. Core inflation slowed to 4.43 percent in October from a year earlier, compared with 4.93 percent in September. Indonesia’s exports rose 46.3 percent in September from a year earlier, the statistics department said in a separate report today. That compares with the 37.1 percent pace reported earlier for August.

Taiwan GDP Rises Least in Two Years

Taiwan’s economy expanded at the slowest pace in two years last quarter as a faltering global recovery hurt exports, prompting the government to cut its growth outlook for this year and 2012. Gross domestic product climbed 3.37 percent in the three months through September from a year earlier, after rising 5.02 percent in the second quarter, the statistics bureau said in a preliminary estimate in Taipei yesterday. The median of 13 forecasts in a Bloomberg News survey was for a 3.56 percent gain. Europe’s debt crisis and elevated U.S. unemployment have sapped demand for Asian exports, contributing to an easing in economic growth in nations from China to South Korea. Taiwan’s central bank left interest rates unchanged in September, snapping a run of five straight quarterly increases, as emerging-market officials try to shield expansion. “Taiwan’s economy slowed considerably with the latest round of global market turmoil in August,” said Raymond Yeung, an economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. GDP performance this and next quarter may be “subpar,” and the central bank will probably leaving borrowing costs unchanged in December, he said. The island’s benchmark Taiex stock index has slumped 15 percent so far in 2011 after investors pared bets on emerging markets. The Taiwan dollar has climbed about 1.2 percent against its U.S. counterpart over the same period, according to Taipei Forex Inc. The stock index rose 0.4 percent as of 10:17 a.m. local time today, while the local currency weakened 0.2 percent. Contraction The economy contracted 0.28 percent last quarter from the prior three months, shrinking for the first time since 2009. The government lowered its 2011 GDP growth forecast to 4.56 percent from 4.81 percent, and cut its estimate for 2012 to 4.38 percent from 4.58 percent. It predicted an inflation rate of 1.51 percent this year, less than an earlier projection of 1.59 percent. Consumer prices may rise 1.12 percent in 2012, the administration said, compared with an earlier forecast of 1.21 percent. Exports, which are equivalent to about two-thirds of Taiwan’s $355 billion GDP, rose 11.6 percent in the third quarter from a year earlier, compared with a 14.6 percent pace in the three months through June. The statistics bureau predicted 13.18 percent export growth this year compared with an earlier estimate of 15.24 percent. Overseas sales may climb 6.68 percent in 2012, it said, lowering a previous forecast of 8.52 percent. Europe Crisis Europe’s sovereign-debt turmoil is clouding the outlook for Asia as the Group of 20 readies for further crisis resolution talks at its Nov. 3-4 summit in France. The meeting takes place a week after euro-area authorities pledged to magnify the capacity of their rescue fund to 1 trillion euros ($1.4 trillion). In Asia, South Korea’s economy expanded at a slower pace in the third quarter compared with the previous three months as companies cut spending. China, Taiwan’s largest trading partner and investment destination, grew 9.1 percent in the three months through September from a year earlier, the least since 2009. Risks are prompting Asian officials to boost fiscal measures, cut interest rates or hold off on further monetary tightening. Taiwan’s central bank has increased its key rate in five steps to 1.875 percent currently from 1.25 percent at the start of June 2010, partly to curb gains in property prices. Consumer- price inflation eased to 1.35 percent in September from 1.95 percent in June. China Buffer Signs of an improvement in manufacturing in China should help limit the dip in Taiwan’s economy, enabling the island’s monetary authority to leave rates unchanged in December rather than cut borrowing costs, according to HSBC Holdings Plc. “Taiwan’s slowing, but the domestic economy’s still holding up,” Donna Kwok, an economist at HSBC in Hong Kong, wrote in a research note on Oct. 24. “With China’s manufacturing activity now stabilizing, the island should be able to lean a bit more heavily on mainland demand as it fends off the impact of U.S. and European” deleveraging, she said. For now, exporters are taking steps to counter slowing demand. Hsinchu-based Taiwan Semiconductor Manufacturing Co., the island’s biggest company by market value, last week cut its 2011 spending budget for the second time this year after posting its biggest quarterly profit decline in two years. Inventec Corp. said Oct. 27 it will fire about 400 workers after an earlier decision to shut tablet computer production. The Taipei-based PC maker said Oct. 6 the closure was triggered by “changes in the macro environment and external factors.” Taiwan’s President Ma Ying-jeou, seeking re-election in January, has sought closer commercial ties with China to bolster growth. Ma would get 43.9 percent of the vote, compared with 38.4 percent for the opposition Democratic Progressive Party’s candidate Tsai Ing-wen, the Taipei-based China Times reported Oct. 25, citing its own poll.

Yen Slides Most in Three Years After Japan Intervenes; Euro, Krone Weaken

The yen slumped the most since 2008 against the dollar as Japan stepped in to foreign-exchange markets to weaken the currency for the third time this year after its gain to a postwar record threatened exporters. The dollar rose against all its major peers after MF Global Holdings Ltd. filed for bankruptcy after making bets on European sovereign debt, driving stocks down and boosting refuge demand. The yen fell against its 16 most-traded counterparts tracked by Bloomberg after Japan’s Finance Minister Jun Azumi ordered the intervention. The euro extended its drop after Greek Prime Minister George Papandreou said he will put the region’s new agreement on financing for his nation to a referendum. “The yen is no longer a safe-haven instrument to buy in times of risk aversion,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “When you do get risk aversion going forward, the dollar is the only true remaining currency that won’t be debauched by authorities. The reason to buy risk today is few and far between.” The yen depreciated 3 percent to 78.17 per dollar at 5 p.m. New York time, after touching the post-World War II high of 75.35. Japan’s currency dropped 1.4 percent in October. The yen slid 1 percent to 108.33 per euro and weakened 1.5 percent to 82.31 per Australian dollar. The euro fell 2 percent to $1.3858, paring this month’s rally to 3.5 percent. The franc gained 0.5 percent to 1.2152 per euro. Japan’s currency earlier today dropped as much as 4.9 percent after the intervention. That’s the biggest decline on an intraday basis since a 6.1 percent plunge on Oct. 28, 2008, three days before the Bank of Japan cut its target lending rate. The dollar rose 2.6 percent to 1.7157 Brazilian reais today as a drop in stocks reduced demand for high-yielding assets. The greenback increased 2.7 percent to 13.3517 Mexican pesos. MF Global The board of MF Global, the futures broker run by Jon Corzine, met through the weekend in New York to consider options including a sale to avert failure, according to a person with direct knowledge of the situation. It was stopped from doing new business with the Federal Reserve Bank of New York until it shows it’s able to fulfill its responsibilities as a primary dealer, according to a statement on the regulator’s website. The Standard & Poor’s 500 Index dropped 2.5 percent. Crude oil for December delivery fell 1 percent to $92.57 a barrel. The Treasury 10-year note yield slid to 2.11 percent. The yen weakened as Japan’s Azumi pledged to keep selling the currency after it climbed to the postwar record versus the dollar earlier today. Japan last intervened to weaken the yen in August, when it sold 4.51 trillion yen ($57.8 billion), the largest monthly amount since March 2004. ‘Bold Action’ “I’ve repeatedly said that we’ll take bold action against speculative moves in the market,” Azumi told reporters today after the government acted unilaterally. The Group of Seven nations jointly sold the yen in March, following the country’s record earthquake and tsunami. It was the first such effort in more than a decade. The yen and franc have climbed to records this year as investors sought havens from fiscal crises in the U.S. and Europe. The Swiss currency has weakened since Sept. 6, when the Swiss National Bank imposed a ceiling of 1.20 per euro and resumed purchases of foreign exchange. ‘Partly Reversed’ “Once the yen started printing new highs, the chance of intervention was there,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “The move has already been partly reversed, and it still suggests that the market’s bias is strongly toward buying the yen rather than selling the yen.” The yen and franc tend to strengthen in periods of financial turmoil because current-account surpluses in the nations make them less reliant on foreign capital. A stronger local currency hurts the overseas competitiveness of exporters and cuts the value of their overseas income when repatriated. Euro-region’s leaders agreed last week to increase their bailout fund to 1 trillion euros ($1.4 trillion) and recapitalize financial institutions. They convinced banks to write down their holdings of Greek debt by 50 percent. Greece’s Papandreou said today he’ll put the new agreement to a referendum, saying he has faith in receiving support from Greeks. Papandreou is suffering from a slump in popularity from repeated cuts to pensions and wages as well as tax increases to qualify for international financing. His gambit threatens to bring down his government. Most Greeks believe the latest European Union accord on a new bailout package and a debt writedown for the country is negative, an opinion poll showed on Oct. 29. Italian Bond Yields Italian bond yields have remained elevated, with the 10- year yield rising today as much as 16 basis points, or 0.16 percentage point, to 6.18 percent, the highest level since Aug. 5. Spanish yields increased as much as 15 basis points to 5.66 percent, matching the level Aug. 8. The dollar Libor-OIS spread widened to 34 basis points, the highest level since July 2009, in an indication of financial institutions’ reluctance to lend. Norway’s krone slid against most major counterparts after the central bank said it will buy foreign exchange equivalent to 1.6 billion kroner ($290 million) a day for the country’s global pension fund in November. The amount was larger than what some market participants were expecting, Valentin Marinov, foreign-exchange strategist at Citigroup Inc. in London, wrote in a note to clients. Investors had forecast an addition of about 800 million kroner, he said. The krone fell 2.2 percent to 5.5535 per dollar and depreciated 0.2 percent to 7.6957 against the euro. IntercontinentalExchange Inc.’s Dollar Index, used to track the greenback against the currencies of six major U.S. trading partners, increased 1.9 percent to 76.476 and pared its monthly drop as investors sought an alternative refuge to the yen. Fed Vice Chairman Janet Yellen and other central bank officials have said the central bank should be prepared to do more to spur growth as policy makers prepared for a two-day meeting that starts tomorrow.

Business Activity in U.S. Grows as Factories Accelerate Economic Recovery

Business activity in the U.S. expanded in October at about the same pace as in the prior month, a sign overseas demand and business investment will help keep the economy expanding. The Institute for Supply Management-Chicago Inc. said today its business barometer decreased to 58.4 in October from 60.4 the prior month. A level of 50 is the dividing line between expansion and contraction. The group’s employment gauge climbed to a six-month high. Improving consumer spending is lifting sales at manufacturers like Chrysler Group LLC, combined with rising demand from emerging economies and the need to replace outdated equipment, means assembly lines will keep humming. Some Federal Reserve policy makers, ahead of their meeting this week, have said they are willing to take additional steps to spur growth. “Manufacturing is still moving along quickly,” said Samuel Coffin, an economist at UBS Securities in Stamford, Connecticut. “It seems pretty broad-based, autos helped. We have growth perking along in the fourth quarter.” Stocks fell, trimming the biggest monthly advance since 1991 for the Standard & Poor’s 500 Index, on concern European leaders will struggle to raise funds to contain the region’s sovereign debt crisis. The S&P 500 dropped 2.5 percent to 1,253.3 at the close in New York. Treasury securities rose, sending the yield on the benchmark 10-year note down to 2.13 percent at 4:16 p.m. in New York from 2.32 percent on Oct. 28. Economists forecast the gauge would drop to 59, according to the median of 55 estimates in a Bloomberg News survey. Projections ranged from 56 to 62.5. Hiring Picks Up The Chicago group’s production gauge decreased to 63.4 from 63.9. The gauge of new orders fell to 61.3 from 65.3. The employment measure climbed to 62.3, the highest level since April, from 60.6 the prior month. The measure of prices paid increased to 66 from 62.3, and a gauge of inventories dropped to 54.4 from 60.3. Economists watch the Chicago index and other regional manufacturing reports for an early reading on the national outlook. The Chicago group says its membership includes both manufacturers and service providers with operations in the U.S. and abroad, making the gauge a measure of overall growth. The ISM’s national factory index rose in October to 52 from 51.6 the prior month, according to the median projection in a Bloomberg survey ahead of the group’s report tomorrow. Like the Chicago survey, a reading greater than 50 signals expansion. Mixed Results Other regional surveys released this month showed a mixed picture for factories. New York-region factories shrank for a fifth straight month in October and manufacturing in the Philadelphia area expanded after two months of contraction, figures from the Federal Reserve showed. A Commerce Department report last week showed orders for durable goods other than transportation gear rose in September by the most in six months. Demand for all durable goods fell, the report said. Corporate spending on equipment and software climbed at a 17.4 percent pace in the third quarter, the most in a year, as the economy grew at a 2.5 percent pace, the Commerce Department reported last week. A rush to qualify for a larger government credit may be contributing to the increase in businesses investment. The Obama administration’s tax compromise allows companies to depreciate 100 percent of investment in capital outlays in 2011 and 50 percent in 2012. More Investment “We are starting to see our customers resume their investment activity,” Richard S. Hill, chairman and chief executive officer at San Jose, California-based Novellus Systems Inc. (NVLS), a maker of machinery used in semiconductor production, said on a conference call last week. Chrysler, boosted by deliveries of Ram pickups, led September U.S. auto sales gains that exceeded analysts’ estimates. General Motors Co. and Ford Motor Co. also beat estimates on Silverado and F-Series trucks. Auto sales rose to a 13.04 million annual pace, the highest since April, compared with a 12.1 million rate the prior month Chrysler, the U.S. automaker majority owned by Fiat SpA, last week reported third-quarter net income of $212 million and boosted its 2011 profit forecast. A dollar that has lost 15 percent of its value since June 2010 has made American goods more competitive. July and August were the best months for U.S. exports on record, according to figures from the Commerce Department.

U.S. Treasury Raises Borrowing Needs Estimate on Spending, Lower Revenue

The U.S. Treasury Department raised its estimate for fourth-quarter government borrowing by $21 billion to $305 billion, reflecting in part lower revenue and higher spending. The estimates set the stage for the Treasury’s quarterly refunding announcement later this week. Officials on Nov. 2 will reveal their plans for sales of longer-term notes and bonds during the current quarter. “The increase in borrowing relates to lower receipts, higher outlays and changes in the cash balance assumptions partially offset by higher net issuances of state and local government series securities,” the Treasury said in a statement today in Washington, revising upward the fourth-quarter projection of about $285 billion made three months ago. U.S. Treasury officials also project borrowing of $541 billion from January through March of next year. That projection is the highest since the October-to-December 2008 period. The outlook for Treasury borrowing depends in large part on congressional action, economists said, citing the Nov. 23 deadline for the supercommittee charged with cutting at least $1.2 trillion from the budget deficit. In the fiscal year ended Sept. 30, the government reported the second-highest annual deficit on record, $1.3 trillion. ‘Probably Overstate’ The “estimates probably overstate the actual amount of borrowing the Treasury will have to do in the first quarter, as the government’s financing requirement would only rise to that level if the administration’s jobs proposal were passed in its entirety,” Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, said after the borrowing statement was released. The Treasury said its forecasts assume a cash balance of $60 billion for Dec. 31 and the same amount for the end of March. In the quarter that ended Sept. 30, the Treasury borrowed $286 billion, compared with a previous estimate of $331 billion, according to the statement. “‘The decrease in borrowing was related to lower receipts offset by lower outlays and cash balance adjustments that lowered the estimated end-of-quarter cash balance,” the Treasury said. ‘Consistent Misses’ Carl Steen, a market analyst for MFR Inc., said in a statement following the release: “The Treasury has again not explained the consistent misses in end-of-month cash balance.” House Speaker John Boehner and Minority Leader Nancy Pelosi have urged the supercommittee to agree on a plan before its Nov. 23 deadline. The full Congress has until Dec. 23 to approve whatever proposal the supercommittee delivers. Failure to reach an agreement would lead to an automatic $1.2 trillion in across- the-board cuts for domestic programs as well as the military that would take effect in 2013. Standard and Poor’s downgraded U.S. debt to AA+ from AAA on Aug. 5, although the markets have shrugged off concerns about the U.S.’s creditworthiness. The Treasury financing outlook has shifted considerably due to the Federal Reserve’s program to lengthen maturities in its portfolio, said Stephen Stanley, chief economist for Pierpont Securities LLC. The effort is known as Operation Twist after a similar program in the 1960s. “Treasury will probably need to begin modestly raising coupon auction sizes in the spring to account for the rise in maturing debt held by the public caused by Operation Twist,” Stanley said in a preview note dated Oct. 28. “Second, the Fed’s efforts to manipulate the yield curve complicate the Treasury’s efforts to manage its strategy in terms of optimizing the average maturity of the debt.” Floating-Rate Notes In addition, Treasury debt managers sparked speculation about the possibility of floating-rate notes by seeking comment in this quarter’s agenda questions, according to Stanley. He said he does not “rule out the idea that the Treasury may choose to issue floating-rate notes.” President Barrack Obama is asking Congress for assistance in reviving the labor market. Through September, the economy had recovered about 2.09 million of the 8.75 million jobs lost as a result of the 18-month recession that ended in June 2009. The unemployment rate has been at or above 9 percent since April. While household-sentiment measures are at levels typically observed during a recession, an increase in spending during the third quarter boosted growth to the highest level of the year, Commerce Department figures showed Oct. 27. “Everyone including the Treasury has an uncertainty quotient,” Ward McCarthy, chief financial economist at Jefferies & Co. Inc. in New York, said before the report.