Manufacturing in the U.S. probably grew in November at the fastest pace in five months, showing factories will keep supporting the economic expansion through the end of the year, economists said before a report today.
The Institute for Supply Management’s factory index rose to 51.8 last month from 50.8 in October, economists surveyed by Bloomberg News forecast the Tempe, Arizona-based group’s data showed today. Fifty is the dividing line between growth and contraction. Jobless claims fell last week and construction spending increased in October, other data may show.
Thursday, December 1, 2011
Majority of Economists Still See Deflation Gloom
After concern last summer of an imminent double-dip recession in the U.S., the data got a bit brighter in the fall. The economy grew faster than expected in the third quarter and has created almost 2.8 million private- sector jobs since the labor market bottomed in early 2010.
“It looks like recovery to me,” says Chris Rupkey, a New York-based economist for Bank of Tokyo-Mitsubishi UFJ Ltd. Even as he’s encouraged by an uptick in consumer spending and slow but steady gains in employment, Rupkey says he knows his optimism is a minority view.
“It looks like recovery to me,” says Chris Rupkey, a New York-based economist for Bank of Tokyo-Mitsubishi UFJ Ltd. Even as he’s encouraged by an uptick in consumer spending and slow but steady gains in employment, Rupkey says he knows his optimism is a minority view.
China’s Manufacturing at Weakest Since 2009 Augurs Further Easing: Economy
China’s manufacturing recorded the weakest performance since the global recession eased in 2009, underscoring the case for monetary stimulus as Europe’s crisis weighs on the world’s second-largest economy.
A purchasing managers’ index compiled by the China Federation of Logistics and Purchasing slid to 49 in November, lower than all but two of 18 forecasts in a Bloomberg News survey. Readings below 50 signal a contraction. Separate reports showed slowing retail sales and an industrial slump in Australia, which relies on China as its biggest export customer.
A purchasing managers’ index compiled by the China Federation of Logistics and Purchasing slid to 49 in November, lower than all but two of 18 forecasts in a Bloomberg News survey. Readings below 50 signal a contraction. Separate reports showed slowing retail sales and an industrial slump in Australia, which relies on China as its biggest export customer.
France-Spain Bond Sales Win Investor Backing After Bank Palliative
Spain and France sold 8.1 billion euros ($10.9 billion) of bonds, sending yields lower across Europe, a day after six central banks jointly moved to reduce financing costs to banks.
Spain sold 3.75 billion euros of notes and had to pay the most since at least 2005 to borrow for five years, with investors ordering more than twice the amount sold. Top-rated France auctioned 4.3 billion euros of debt, including 10-year bonds at 3.18 percent, less than at the Nov. 3 sale.
The debt sales were a test of investor confidence after the Federal Reserve, the European Central Bank and four other central banks in a globally coordinated effort yesterday cut the cost of emergency dollar funding for European banks. The central banks acted after financing costs rose following euro-area leaders’ failure to bolster the region’s rescue fund as planned.
“They were both pretty good auctions,” said Huw Worthington, fixed-income strategist at Barclays Capital in London “The levels are higher than they would like, but the actual auctions were strong. The central bank action yesterday has certainly helped.”
French 10-year yields fell 27 basis points, the most in 20 years, to 3.12 percent after the auction, while Spanish 10-year bond yields declined 21 basis points to 6.015 percent. That compares with a euro-era high of 6.781 percent on Nov. 17, when Spain last auctioned bonds.
Summit
European leaders are due to meet on Dec. 9 and German Chancellor Angela Merkel said Nov. 29 that her priority is to put the “whole euro zone on a stronger treaty basis.” ECB President Mario Draghi told the European Parliament in Brussels today that the bank’s bond-buying program, which has included Spain and Italy since August, was “limited” and that euro- region governments unifying their fiscal policies would be a more effective way to end the crisis.
“We know that on Dec. 9 there are supposed to be some political developments from the euro zone but there’s a risk those developments could materialize earlier, so that may have created a bit of caution for those who are bearish on the periphery,” Peter Chatwell, a fixed-income strategist at Credit Agricole said. “It looks like shorts are being closed here.”
Spanish Cancelation
Italy, with the second-largest public debt burden in the euro region after Greece, paid almost 8 percent to sell three- year debt on Nov. 29, the highest since 1996. The same day, Belgium paid the most in three years to sell six-month notes.
France sold bonds due in October 2017, October 2021, April 2026, and April 2041. Spain auctioned notes maturing in April 2015, January 2016 and January 2017.
Spain changed the securities it planned to sell at the auction, opting for longer-dated notes that already trade instead of a new benchmark three-year bond, citing market conditions. Spain’s short-term borrowing costs started approaching the levels of longer-term yields last week as the gap between two-year and 10-year rates narrowed to the least in three years. Greek and Portuguese short-term rates rose above long-term yields just before they sought bailouts.
The difference between yields for three-year and five-year notes, which narrowed to 10 basis points on Nov. 23, widened to 42 basis points as of 11:00 a.m. London time today after the auction.
Big Banks
Spain’s Treasury has already issued more than 16 billion euros each of the 2015 and 2016 bonds and more than 14 billion euros of the 2017 securities, according to data compiled by Bloomberg, making them more liquid than a new bond.
Spanish banks increased their holdings of the nation’s bonds to 142.4 billion euros in September, the highest on record, from 140.6 billion euros in August, according to Tressury data. Lenders are also increasing their dependence on the ECB, borrowing 76 billion euros in October, the most in more than a year, Bank of Spain data show.
France decided to press ahead with the sale of bonds today, braving the market turbulence, even though it has completed its funding requirements for 2011. The extra yield demanded to lend to France for 10 years rather than Germany rose to 204 basis points on Nov. 17, the widest since 1990. It narrowed to 88 basis points today.
Spain sold 3.75 billion euros of notes and had to pay the most since at least 2005 to borrow for five years, with investors ordering more than twice the amount sold. Top-rated France auctioned 4.3 billion euros of debt, including 10-year bonds at 3.18 percent, less than at the Nov. 3 sale.
The debt sales were a test of investor confidence after the Federal Reserve, the European Central Bank and four other central banks in a globally coordinated effort yesterday cut the cost of emergency dollar funding for European banks. The central banks acted after financing costs rose following euro-area leaders’ failure to bolster the region’s rescue fund as planned.
“They were both pretty good auctions,” said Huw Worthington, fixed-income strategist at Barclays Capital in London “The levels are higher than they would like, but the actual auctions were strong. The central bank action yesterday has certainly helped.”
French 10-year yields fell 27 basis points, the most in 20 years, to 3.12 percent after the auction, while Spanish 10-year bond yields declined 21 basis points to 6.015 percent. That compares with a euro-era high of 6.781 percent on Nov. 17, when Spain last auctioned bonds.
Summit
European leaders are due to meet on Dec. 9 and German Chancellor Angela Merkel said Nov. 29 that her priority is to put the “whole euro zone on a stronger treaty basis.” ECB President Mario Draghi told the European Parliament in Brussels today that the bank’s bond-buying program, which has included Spain and Italy since August, was “limited” and that euro- region governments unifying their fiscal policies would be a more effective way to end the crisis.
“We know that on Dec. 9 there are supposed to be some political developments from the euro zone but there’s a risk those developments could materialize earlier, so that may have created a bit of caution for those who are bearish on the periphery,” Peter Chatwell, a fixed-income strategist at Credit Agricole said. “It looks like shorts are being closed here.”
Spanish Cancelation
Italy, with the second-largest public debt burden in the euro region after Greece, paid almost 8 percent to sell three- year debt on Nov. 29, the highest since 1996. The same day, Belgium paid the most in three years to sell six-month notes.
France sold bonds due in October 2017, October 2021, April 2026, and April 2041. Spain auctioned notes maturing in April 2015, January 2016 and January 2017.
Spain changed the securities it planned to sell at the auction, opting for longer-dated notes that already trade instead of a new benchmark three-year bond, citing market conditions. Spain’s short-term borrowing costs started approaching the levels of longer-term yields last week as the gap between two-year and 10-year rates narrowed to the least in three years. Greek and Portuguese short-term rates rose above long-term yields just before they sought bailouts.
The difference between yields for three-year and five-year notes, which narrowed to 10 basis points on Nov. 23, widened to 42 basis points as of 11:00 a.m. London time today after the auction.
Big Banks
Spain’s Treasury has already issued more than 16 billion euros each of the 2015 and 2016 bonds and more than 14 billion euros of the 2017 securities, according to data compiled by Bloomberg, making them more liquid than a new bond.
Spanish banks increased their holdings of the nation’s bonds to 142.4 billion euros in September, the highest on record, from 140.6 billion euros in August, according to Tressury data. Lenders are also increasing their dependence on the ECB, borrowing 76 billion euros in October, the most in more than a year, Bank of Spain data show.
France decided to press ahead with the sale of bonds today, braving the market turbulence, even though it has completed its funding requirements for 2011. The extra yield demanded to lend to France for 10 years rather than Germany rose to 204 basis points on Nov. 17, the widest since 1990. It narrowed to 88 basis points today.
Fed Dollar-Funding Cut Shows Limits of Action on
The Federal Reserve-led global effort to ease borrowing costs for financial firms shows both the central bank’s power to jolt markets -- and the limits of its ability to alleviate the European debt crisis.
Stocks rallied worldwide, commodities rose and yields on most European debt fell after the Fed and five other central banks yesterday cut the cost of emergency dollar loans to banks outside the U.S. At the same time, the action falls short of more-drastic moves that central banks are reluctant to take, including purchases or guarantees of countries’ bonds.
Fed Chairman Ben S. Bernanke and his counterparts are revisiting their playbook from the U.S. housing-induced financial crisis that started in 2007 to cushion markets and economies from Europe’s fiscal turmoil today. Yesterday’s move deals with the consequences of the crisis without addressing the causes, said John Ryding, chief economist at RDQ Economics LLC.
“You have to do something to stabilize the sovereign-debt situation,” Ryding, a former Fed and Bank of England economist who is based in New York, said in a Bloomberg Television interview. That requires European Central Bank bond purchases that are “far beyond what they’ve been willing to do so far,” he said.
Stocks Rally
The Dow Jones Industrial Average rose 4.2 percent to 12,045.68 in the biggest gain since March 2009, boosted in part by reports on U.S. private employment, business activity and home-purchase contract signings that all exceeded forecasts. The Standard & Poor’s GSCI index of 24 raw materials gained 0.7 percent.
The Stoxx Europe 600 Index, which surged 3.6 percent yesterday, was little changed today. Yields on 10-year French debt fell to 3.13 percent from 3.5 percent on Nov. 29, while Italy’s dropped 42 basis points to 6.76 percent.
The S&P 500 Index (SPX) of stocks is still 9 percent below its 2011 high in May. Italy’s bond yields need to fall below 6 percent, where they haven’t been for more than a month, to calm the debt turmoil, Ryding said.
The premium banks pay to borrow dollars overnight from central banks will fall by half a percentage point to 50 basis points, the Fed said yesterday in a statement in Washington. The so-called dollar swap lines will be extended by six months to Feb. 1, 2013. The Fed coordinated the move with the ECB and the central banks of Canada, Switzerland, Japan and the U.K.
‘Not a Solution’
“Central banks appear to be willing to respond to the situation with the tools that they have,” said Roberto Perli, a former economist in the Fed’s Division of Monetary Affairs. Investors probably understand that cheaper dollar funding is “not something that can fix the problem” in Europe, said Perli, now a managing director at International Strategy & Investment Group in Washington.
Bank of England Governor Mervyn King also said today that lowering the cost of dollar funding won’t solve imbalances in the global financial system.
“This is not a solution,” King said at a press conference in London to present the Financial Stability Report. “All this can be is to help with temporary relief for liquidity problems, but those problems are a result of solvency issues.”
The Fed has additional tools available, including cutting the U.S. discount lending rate or restarting crisis programs such as the Term Auction Facility, said Michelle Girard, senior U.S. economist at RBS Securities Inc. in Stamford, Connecticut.
‘Zero Probability’
Still, the central bank will want to avoid the appearance of bailing out foreign banks or shifting U.S. monetary policy, said Robert Eisenbeis, former research director at the Atlanta Fed and now chief monetary economist in Atlanta for Sarasota, Florida-based Cumberland Advisors Inc. He put “zero probability” on buying foreign debt.
In yesterday’s move, the Fed and the other five central banks also agreed to create temporary bilateral swap programs so funding can be provided in any of their currencies, “should market conditions so warrant.” Those swap lines were also authorized through Feb. 1, 2013.
Fed policy makers voted 9-1 for the action in a Nov. 28 videoconference, with Richmond Fed President Jeffrey Lacker dissenting. Lacker said in a statement that the swaps amount to “fiscal policy, which I believe is the responsibility of the U.S. Treasury.”
Markets also got a boost from China’s decision, two hours before the Fed’s announcement at 8 a.m. New York time, to cut the amount of cash the nation’s banks must set aside as reserves. The level for the biggest lenders will fall to 21 percent from a record 21.5 percent in the first reduction since 2008.
Easing Moves
The moves from the Fed-led group and China both take effect Dec. 5. Brazil cut its benchmark interest rate late yesterday by 50 basis points to 11 percent.
The decisions by Brazil and China are the latest in a round of easing moves by central banks seeking to shield their economies from the consequences of the European crisis.
The U.S., the U.K. and nine other nations, along with the European Central Bank, have bolstered monetary stimulus in the past three months. Australia, Brazil, Denmark, Romania, Serbia, Israel, Indonesia, Georgia and Pakistan have all reduced interest rates.
“The Europeans in particular, but also all central bankers, appreciate the urgency of the moment,” said Christine Lagarde, managing director of the International Monetary Fund and a former French finance minister. Leaders inside and outside Europe “will also understand that timing is of the essence” and the need for an “urgent resolution of the current crisis,” Lagarde said at a press conference in Mexico City.
Swap Revival
Under the liquidity-swap program, the Fed lends dollars to the ECB and other central banks in exchange for collateral in other currencies, including euros. The central banks lend the dollars to commercial banks in their jurisdictions through an auction process.
The swap arrangements were revived in May 2010 when the debt crisis in Europe worsened. The Fed three months earlier had closed all swap lines opened during the financial crisis triggered by the subprime-mortgage meltdown in 2007.
Fed lending in the second round of swaps has been a fraction of the first round. The swap lines had $2.4 billion outstanding as of Nov. 23, the most since the program was revived in 2010, compared with a peak of about $583 billion in December 2008.
Credit Shortage
“There has been a real constriction of credit within the European community and the banking system,” Stephen Schwarzman, chairman of Blackstone Group LP, the world’s largest private- equity firm, said in a Bloomberg Television interview. “That has to be addressed because if you grind lending to a halt, a variety of predictable, very bad things happen throughout not just the eurozone but also around the world.”
Yesterday’s decision will help European banks that need dollar funding, letting them borrow money instead of having to sell U.S.-denominated assets, including mortgages and corporate loans, said Neal Soss, chief economist at Credit Suisse in New York. Still, the involvement of central banks outside the Fed and ECB made the joint announcement appear more potent than it actually was, said Soss, who was an aide to former Fed Chairman Paul Volcker.
“It doesn’t mean it’s not important, but the atmospherics of this were in that sense quite brilliant,” Soss said.
Stocks rallied worldwide, commodities rose and yields on most European debt fell after the Fed and five other central banks yesterday cut the cost of emergency dollar loans to banks outside the U.S. At the same time, the action falls short of more-drastic moves that central banks are reluctant to take, including purchases or guarantees of countries’ bonds.
Fed Chairman Ben S. Bernanke and his counterparts are revisiting their playbook from the U.S. housing-induced financial crisis that started in 2007 to cushion markets and economies from Europe’s fiscal turmoil today. Yesterday’s move deals with the consequences of the crisis without addressing the causes, said John Ryding, chief economist at RDQ Economics LLC.
“You have to do something to stabilize the sovereign-debt situation,” Ryding, a former Fed and Bank of England economist who is based in New York, said in a Bloomberg Television interview. That requires European Central Bank bond purchases that are “far beyond what they’ve been willing to do so far,” he said.
Stocks Rally
The Dow Jones Industrial Average rose 4.2 percent to 12,045.68 in the biggest gain since March 2009, boosted in part by reports on U.S. private employment, business activity and home-purchase contract signings that all exceeded forecasts. The Standard & Poor’s GSCI index of 24 raw materials gained 0.7 percent.
The Stoxx Europe 600 Index, which surged 3.6 percent yesterday, was little changed today. Yields on 10-year French debt fell to 3.13 percent from 3.5 percent on Nov. 29, while Italy’s dropped 42 basis points to 6.76 percent.
The S&P 500 Index (SPX) of stocks is still 9 percent below its 2011 high in May. Italy’s bond yields need to fall below 6 percent, where they haven’t been for more than a month, to calm the debt turmoil, Ryding said.
The premium banks pay to borrow dollars overnight from central banks will fall by half a percentage point to 50 basis points, the Fed said yesterday in a statement in Washington. The so-called dollar swap lines will be extended by six months to Feb. 1, 2013. The Fed coordinated the move with the ECB and the central banks of Canada, Switzerland, Japan and the U.K.
‘Not a Solution’
“Central banks appear to be willing to respond to the situation with the tools that they have,” said Roberto Perli, a former economist in the Fed’s Division of Monetary Affairs. Investors probably understand that cheaper dollar funding is “not something that can fix the problem” in Europe, said Perli, now a managing director at International Strategy & Investment Group in Washington.
Bank of England Governor Mervyn King also said today that lowering the cost of dollar funding won’t solve imbalances in the global financial system.
“This is not a solution,” King said at a press conference in London to present the Financial Stability Report. “All this can be is to help with temporary relief for liquidity problems, but those problems are a result of solvency issues.”
The Fed has additional tools available, including cutting the U.S. discount lending rate or restarting crisis programs such as the Term Auction Facility, said Michelle Girard, senior U.S. economist at RBS Securities Inc. in Stamford, Connecticut.
‘Zero Probability’
Still, the central bank will want to avoid the appearance of bailing out foreign banks or shifting U.S. monetary policy, said Robert Eisenbeis, former research director at the Atlanta Fed and now chief monetary economist in Atlanta for Sarasota, Florida-based Cumberland Advisors Inc. He put “zero probability” on buying foreign debt.
In yesterday’s move, the Fed and the other five central banks also agreed to create temporary bilateral swap programs so funding can be provided in any of their currencies, “should market conditions so warrant.” Those swap lines were also authorized through Feb. 1, 2013.
Fed policy makers voted 9-1 for the action in a Nov. 28 videoconference, with Richmond Fed President Jeffrey Lacker dissenting. Lacker said in a statement that the swaps amount to “fiscal policy, which I believe is the responsibility of the U.S. Treasury.”
Markets also got a boost from China’s decision, two hours before the Fed’s announcement at 8 a.m. New York time, to cut the amount of cash the nation’s banks must set aside as reserves. The level for the biggest lenders will fall to 21 percent from a record 21.5 percent in the first reduction since 2008.
Easing Moves
The moves from the Fed-led group and China both take effect Dec. 5. Brazil cut its benchmark interest rate late yesterday by 50 basis points to 11 percent.
The decisions by Brazil and China are the latest in a round of easing moves by central banks seeking to shield their economies from the consequences of the European crisis.
The U.S., the U.K. and nine other nations, along with the European Central Bank, have bolstered monetary stimulus in the past three months. Australia, Brazil, Denmark, Romania, Serbia, Israel, Indonesia, Georgia and Pakistan have all reduced interest rates.
“The Europeans in particular, but also all central bankers, appreciate the urgency of the moment,” said Christine Lagarde, managing director of the International Monetary Fund and a former French finance minister. Leaders inside and outside Europe “will also understand that timing is of the essence” and the need for an “urgent resolution of the current crisis,” Lagarde said at a press conference in Mexico City.
Swap Revival
Under the liquidity-swap program, the Fed lends dollars to the ECB and other central banks in exchange for collateral in other currencies, including euros. The central banks lend the dollars to commercial banks in their jurisdictions through an auction process.
The swap arrangements were revived in May 2010 when the debt crisis in Europe worsened. The Fed three months earlier had closed all swap lines opened during the financial crisis triggered by the subprime-mortgage meltdown in 2007.
Fed lending in the second round of swaps has been a fraction of the first round. The swap lines had $2.4 billion outstanding as of Nov. 23, the most since the program was revived in 2010, compared with a peak of about $583 billion in December 2008.
Credit Shortage
“There has been a real constriction of credit within the European community and the banking system,” Stephen Schwarzman, chairman of Blackstone Group LP, the world’s largest private- equity firm, said in a Bloomberg Television interview. “That has to be addressed because if you grind lending to a halt, a variety of predictable, very bad things happen throughout not just the eurozone but also around the world.”
Yesterday’s decision will help European banks that need dollar funding, letting them borrow money instead of having to sell U.S.-denominated assets, including mortgages and corporate loans, said Neal Soss, chief economist at Credit Suisse in New York. Still, the involvement of central banks outside the Fed and ECB made the joint announcement appear more potent than it actually was, said Soss, who was an aide to former Fed Chairman Paul Volcker.
“It doesn’t mean it’s not important, but the atmospherics of this were in that sense quite brilliant,” Soss said.
King Urges Banks to Boost Capital as ‘Systemic Crisis’ Looms
Bank of England Governor Mervyn King urged banks to enhance efforts to bolster their defenses against the euro area’s debt turmoil, which now looks like a “systemic crisis.”
“An erosion of confidence, lower asset prices and tighter credit conditions are further damaging the prospects for economic activity and will affect the ability of companies, households and governments to repay their debts,” threatening banks’ balance sheets, King told reporters in London today. “This spiral is characteristic of a systemic crisis.”
The U.S. Federal Reserve cut the cost of dollar funding for European financial institutions yesterday in a coordinated move with other central banks. That measure came two days after King said there are “early signs” of a credit crunch in the euro region, where leaders face increasing pressure to resolve intensifying turmoil.
“Sovereign and banking risks emanating from the euro area have intensified and remain the most significant and immediate threat to U.K. financial stability,” the central bank said in its Financial Stability Report published today. It said that if banks’ earnings aren’t enough to build capital, they should limit payments of bonuses and dividends and “give serious consideration” to raising external capital.
Credit Squeeze
The central bank’s Monetary Policy Committee restarted bond purchases in October to aid the recovery and cut its growth forecasts this month. Officials warned today that the strains in interbank markets could threaten economic growth.
“Against a backdrop of slowing global growth prospects, concerns about the sustainability of government debt positions of smaller economies have broadened to larger euro-area economies,” the central bank said. “The current funding pressures facing banks could lead to a renewed tightening in credit conditions for real economy borrowers.”
The central bank also published the recommendations of its Financial Policy Committee, which met on Nov. 23. The panel said the Financial Services Authority should encourage banks to disclose leverage ratios to investors by the start of 2013, two years earlier than Basel rules originally required.
The Bank of England said in the FSR that U.K. banks have 140 billion pounds ($220 billion) of term funding due to mature in 2012, concentrated in the first half of the year. It said short-term money market funding conditions have “been fragile over the past few months, with banks finding it harder to roll over all of their maturing funding and tenors shortening.”
Contingency Plans
U.K. authorities are working on “a wide range of contingency plans” to deal with a further intensification of the crisis, including a possible breakup of the euro, King said. The central bank is working with the Financial Services Authority and the government on plans, he said.
After a series of stop-gap accords failed to protect Italy and Spain from surging bond yields, Europe is under growing pressure from U.S. leaders and international financial markets. European leaders will meet next week to discuss the next steps in resolving the debt crisis.
The cost for European banks to borrow in dollars fell for a second day after the coordinated central bank action. The three- month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 118 basis points below the euro interbank offered rate at 12:24 p.m. in London. The gap had widened to 162.5 below Euribor yesterday, the most in three years, before the Fed move.
Underlying Problems
King said the central bank measure was “designed to deal with clear evidence that there were problems in banks around the world finding difficulty in accessing dollar funding in particular.” Still, he added it can only provide “temporary relief” and is not a “solution to the underlying problems.”
He also said that said resolving the wider problems of global financial imbalances are beyond the U.K. authorities to deal with on their own and “only the governments directly involved can find a way out of this crisis,” referring to the euro-area debt turmoil.
“The crisis in the euro area is one of solvency and not liquidity,” he said. “Here in the U.K. we must try and find a way to bolster the resilience” of the financial system.
While Britain’s banks have 15 billion pounds of exposure to sovereign debt in the most vulnerable euro-area economies, they have “significant” exposures to the private sectors of Ireland, Spain and Italy, the Bank of England said. This amounts to about 160 billion pounds, or 80 percent of their core Tier 1 capital.
“U.K. banks have made significant progress in improving their capital and funding resilience,” the bank said. “But progress has been set back recently and they have been affected by strains in bank funding markets.”
“An erosion of confidence, lower asset prices and tighter credit conditions are further damaging the prospects for economic activity and will affect the ability of companies, households and governments to repay their debts,” threatening banks’ balance sheets, King told reporters in London today. “This spiral is characteristic of a systemic crisis.”
The U.S. Federal Reserve cut the cost of dollar funding for European financial institutions yesterday in a coordinated move with other central banks. That measure came two days after King said there are “early signs” of a credit crunch in the euro region, where leaders face increasing pressure to resolve intensifying turmoil.
“Sovereign and banking risks emanating from the euro area have intensified and remain the most significant and immediate threat to U.K. financial stability,” the central bank said in its Financial Stability Report published today. It said that if banks’ earnings aren’t enough to build capital, they should limit payments of bonuses and dividends and “give serious consideration” to raising external capital.
Credit Squeeze
The central bank’s Monetary Policy Committee restarted bond purchases in October to aid the recovery and cut its growth forecasts this month. Officials warned today that the strains in interbank markets could threaten economic growth.
“Against a backdrop of slowing global growth prospects, concerns about the sustainability of government debt positions of smaller economies have broadened to larger euro-area economies,” the central bank said. “The current funding pressures facing banks could lead to a renewed tightening in credit conditions for real economy borrowers.”
The central bank also published the recommendations of its Financial Policy Committee, which met on Nov. 23. The panel said the Financial Services Authority should encourage banks to disclose leverage ratios to investors by the start of 2013, two years earlier than Basel rules originally required.
The Bank of England said in the FSR that U.K. banks have 140 billion pounds ($220 billion) of term funding due to mature in 2012, concentrated in the first half of the year. It said short-term money market funding conditions have “been fragile over the past few months, with banks finding it harder to roll over all of their maturing funding and tenors shortening.”
Contingency Plans
U.K. authorities are working on “a wide range of contingency plans” to deal with a further intensification of the crisis, including a possible breakup of the euro, King said. The central bank is working with the Financial Services Authority and the government on plans, he said.
After a series of stop-gap accords failed to protect Italy and Spain from surging bond yields, Europe is under growing pressure from U.S. leaders and international financial markets. European leaders will meet next week to discuss the next steps in resolving the debt crisis.
The cost for European banks to borrow in dollars fell for a second day after the coordinated central bank action. The three- month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 118 basis points below the euro interbank offered rate at 12:24 p.m. in London. The gap had widened to 162.5 below Euribor yesterday, the most in three years, before the Fed move.
Underlying Problems
King said the central bank measure was “designed to deal with clear evidence that there were problems in banks around the world finding difficulty in accessing dollar funding in particular.” Still, he added it can only provide “temporary relief” and is not a “solution to the underlying problems.”
He also said that said resolving the wider problems of global financial imbalances are beyond the U.K. authorities to deal with on their own and “only the governments directly involved can find a way out of this crisis,” referring to the euro-area debt turmoil.
“The crisis in the euro area is one of solvency and not liquidity,” he said. “Here in the U.K. we must try and find a way to bolster the resilience” of the financial system.
While Britain’s banks have 15 billion pounds of exposure to sovereign debt in the most vulnerable euro-area economies, they have “significant” exposures to the private sectors of Ireland, Spain and Italy, the Bank of England said. This amounts to about 160 billion pounds, or 80 percent of their core Tier 1 capital.
“U.K. banks have made significant progress in improving their capital and funding resilience,” the bank said. “But progress has been set back recently and they have been affected by strains in bank funding markets.”
Fed’s Discount Rate Among Tools to Offset European Sovereign-Debt Crisis
The Federal Reserve could if necessary dig deeper into its toolkit to ease the sovereign-debt crisis in Europe, by cutting the U.S. discount lending rate or restarting a program that auctions loans to banks.
Six central banks led by the Fed yesterday lowered the cost of emergency dollar funding for financial companies, reducing the premium banks pay to borrow dollars overnight from central banks by half a percentage point to 50 basis points.
The Fed may reduce what it charges on emergency loans to banks by a quarter point to 0.5 percent by early next week, said Michael Cloherty, head of U.S. interest rate strategy at RBC Capital Markets. It probably won’t resort to its other options, including reopening the Term Auction Facility to give U.S. banks more access to funding, without a worsening in Europe’s crisis, said Charles Lieberman, chief investment officer with Advisors Capital Management LLC in Hasbrouck Heights, New Jersey.
“The Fed is willing to be active if it thinks that’s necessary,” said Lieberman, a former head of monetary analysis at the New York Fed. “But I think the Fed will move a bit more cautiously, unless conditions weaken further in Europe. The U.S. side is looking much better.”
The U.S. central bank raised the so-called discount rate to 0.75 percent in February 2010. Yesterday’s cut in the swap rate, which takes effect Dec. 5, means European banks will pay about 0.60 percent to borrow dollars, cheaper than what U.S. banks would pay. The Fed is unlikely to let that situation persist, Cloherty said.
“Just to level the playing field, we would expect a 25 basis point cut” in the discount rate, he said.
Coordinated Action
Richmond Fed President Jeffrey Lacker, who dissented from the coordinated action, said yesterday that he opposed making the swap rate lower than the discount rate.
The Fed will want to avoid the appearance of bailing out foreign banks or shifting U.S. monetary policy, said Robert Eisenbeis, former research director at the Atlanta Fed and now chief monetary economist in Atlanta for Sarasota, Florida-based Cumberland Advisors Inc. He put “zero probability” on buying foreign debt.
“I think the liquidity problem is one in Europe and the swaps will deal with that,” he said. “A domestic move would be seen as a monetary-policy move and also a move to bail out foreign banks, whereas the swaps program is viewed differently and done with zero risk and without requiring collateral.”
While the European Central Bank is buying the bonds of debt-strapped governments such as Italy and Spain, it says the purchases are limited, temporary and aimed solely at restoring the effectiveness of its interest rates on financial markets. It has bought 203.5 billion euros ($273.5 billion) of bonds since the purchase program began in May last year.
‘What’s Necessary’
“Most of what’s necessary right now is in European hands,” Lieberman said. “I find it hard to understand how the Fed would justify buying European sovereign debt if the ECB is reluctant to do so.”
Bringing back the Fed’s Term Auction Facility would allow U.S. banks to get funding if needed, while avoiding the stigma of borrowing at the Fed’s discount window, said Michelle Girard, senior U.S. economist at RBS Securities Inc. in Stamford, Connecticut.
“If there end up being funding difficulties for U.S. institutions, I do think that the Fed in the past obviously has employed various liquidity facilities, and some of those could be reopened if in fact we saw U.S. institutions facing some difficulties in funding,” Girard said.
Coordinated Effort
The new interest rate instituted by central banks is the dollar overnight index swap rate plus 50 basis points, and the program was extended by six months to Feb. 1, 2013, the Fed said yesterday in a statement in Washington. The Fed coordinated the move with the European Central Bank as well as the Bank of Canada, Bank of England, Bank of Japan, and Swiss National Bank.
“Everything is on the table right now, but I think they will try to wait to have bigger impact with or without other banks,” said Diane Swonk, chief economist for Mesirow Financial Inc. in Chicago. “Right now, our banks are doing OK on funding, so an immediate cut in discount rate shouldn’t be necessary.”
The Fed said in its statement that U.S. financial companies “currently do not face difficulty obtaining liquidity in short- term funding markets.”
“However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses,” the central bank said in the statement.
Six central banks led by the Fed yesterday lowered the cost of emergency dollar funding for financial companies, reducing the premium banks pay to borrow dollars overnight from central banks by half a percentage point to 50 basis points.
The Fed may reduce what it charges on emergency loans to banks by a quarter point to 0.5 percent by early next week, said Michael Cloherty, head of U.S. interest rate strategy at RBC Capital Markets. It probably won’t resort to its other options, including reopening the Term Auction Facility to give U.S. banks more access to funding, without a worsening in Europe’s crisis, said Charles Lieberman, chief investment officer with Advisors Capital Management LLC in Hasbrouck Heights, New Jersey.
“The Fed is willing to be active if it thinks that’s necessary,” said Lieberman, a former head of monetary analysis at the New York Fed. “But I think the Fed will move a bit more cautiously, unless conditions weaken further in Europe. The U.S. side is looking much better.”
The U.S. central bank raised the so-called discount rate to 0.75 percent in February 2010. Yesterday’s cut in the swap rate, which takes effect Dec. 5, means European banks will pay about 0.60 percent to borrow dollars, cheaper than what U.S. banks would pay. The Fed is unlikely to let that situation persist, Cloherty said.
“Just to level the playing field, we would expect a 25 basis point cut” in the discount rate, he said.
Coordinated Action
Richmond Fed President Jeffrey Lacker, who dissented from the coordinated action, said yesterday that he opposed making the swap rate lower than the discount rate.
The Fed will want to avoid the appearance of bailing out foreign banks or shifting U.S. monetary policy, said Robert Eisenbeis, former research director at the Atlanta Fed and now chief monetary economist in Atlanta for Sarasota, Florida-based Cumberland Advisors Inc. He put “zero probability” on buying foreign debt.
“I think the liquidity problem is one in Europe and the swaps will deal with that,” he said. “A domestic move would be seen as a monetary-policy move and also a move to bail out foreign banks, whereas the swaps program is viewed differently and done with zero risk and without requiring collateral.”
While the European Central Bank is buying the bonds of debt-strapped governments such as Italy and Spain, it says the purchases are limited, temporary and aimed solely at restoring the effectiveness of its interest rates on financial markets. It has bought 203.5 billion euros ($273.5 billion) of bonds since the purchase program began in May last year.
‘What’s Necessary’
“Most of what’s necessary right now is in European hands,” Lieberman said. “I find it hard to understand how the Fed would justify buying European sovereign debt if the ECB is reluctant to do so.”
Bringing back the Fed’s Term Auction Facility would allow U.S. banks to get funding if needed, while avoiding the stigma of borrowing at the Fed’s discount window, said Michelle Girard, senior U.S. economist at RBS Securities Inc. in Stamford, Connecticut.
“If there end up being funding difficulties for U.S. institutions, I do think that the Fed in the past obviously has employed various liquidity facilities, and some of those could be reopened if in fact we saw U.S. institutions facing some difficulties in funding,” Girard said.
Coordinated Effort
The new interest rate instituted by central banks is the dollar overnight index swap rate plus 50 basis points, and the program was extended by six months to Feb. 1, 2013, the Fed said yesterday in a statement in Washington. The Fed coordinated the move with the European Central Bank as well as the Bank of Canada, Bank of England, Bank of Japan, and Swiss National Bank.
“Everything is on the table right now, but I think they will try to wait to have bigger impact with or without other banks,” said Diane Swonk, chief economist for Mesirow Financial Inc. in Chicago. “Right now, our banks are doing OK on funding, so an immediate cut in discount rate shouldn’t be necessary.”
The Fed said in its statement that U.S. financial companies “currently do not face difficulty obtaining liquidity in short- term funding markets.”
“However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses,” the central bank said in the statement.
MacArthur Era Redux for Japan Planning Fourth Extra Budget to Aid Recovery
Japan plans a fourth extra budget, a step unprecedented since postwar reconstruction, to help shore up a rebound that’s under threat from a surge in the yen, Europe’s crisis and Thai floods that have disrupted production.
Prime Minister Yoshihiko Noda today ordered the measure, which will probably be at least 2 trillion yen ($26 billion), Finance Minister Jun Azumi told reporters in Tokyo. The step won’t require the sale of deficit-covering bonds, he said. Japan has already allocated 18 trillion yen in three packages since the record earthquake in March.
“The yen’s gains, Thailand’s flooding and the European debt crisis are some of the factors that have increased the uncertainty of the economic outlook,” Noda said in a press conference in Tokyo. “I ordered the compilation of the fourth extra budget to secure the public’s peace of mind.”
The plan is Japan’s latest effort to secure its recovery, building on efforts including 15 trillion yen in asset purchases by the central bank and record amounts of yen sales to counter the currency’s surge. Nissan Motor (7201) Co. Chief Executive Officer Carlos Ghosn said yesterday his company will gradually shift production abroad because of Japan’s challenges.
“Economic growth will probably decelerate more than expected this quarter and next amid the global economic slowdown,” said Chotaro Morita, chief fixed-income strategist at Barclays Capital in Tokyo. “Not relying on new bond sales to fund it means the government will be able to avoid any political disputes about expanding fiscal spending further.”
MacArthur Era
Azumi said the supplementary budget will be drafted this month. The last time Japan had four extra fiscal packages was 1947, when General Douglas MacArthur was head of the Allied occupation forces after World War II. The finance chief said the outlays will be paid for in part through left over funds from the current fiscal-year’s budget.
The step adds to stimulus efforts under way around the world to cope with deteriorating prospects for the global economy next year. The Bank of Japan (8301) was one of five central banks participating in an effort led by the U.S. Federal Reserve to make it cheaper for banks to borrow dollars in emergencies. China lowered its required reserve ratio for lenders late yesterday, and Brazil lowered interest rates.
The Nikkei 225 Stock Average gained 1.9 percent to 8,597.38, joining a global rally in equities sparked by the dollar swaps announcement by the Fed, BOJ and central banks of Canada, U.K., Switzerland and the euro region.
Currency Strength
Companies from Toyota Motor Corp. (7203) to Sony Corp. (6758) have been contending with a surging yen against the dollar that threatens to crimp profits as well as flooding in Thailand that forced factory closures. The currency, at 77.68, is about 3 percent off of its highest against the dollar in the postwar era.
Authorities spent a record 9.09 trillion yen the foreign- exchange markets from Oct. 28 to Nov. 28, the Finance Ministry said yesterday, more than double what they sold when they intervened in August.
Reports in recent weeks have indicated Japan’s rebound from the March disaster is waning -- exports slid in October and the unemployment rate advanced, with data yesterday showing manufacturers planned to cut output in November.
Noda last month won parliamentary approval for his 12.1 trillion yen stimulus package, which also included 2 trillion yen worth of measures to help companies cope with the stronger currency. Two earlier stimulus packages totaled 6 trillion yen.
‘Top Priorities’
The prime minister today said he aims to get his ruling Democratic Party of Japan and its coalition partner to draft a plan this month on doubling the 5 percent national sales tax by the middle of the decade to cope with the world’s largest debt.
“Strengthening the structure of social security and ensuring stable revenue to make the system sustainable are top priorities,” Noda said. He said he wants to include a time table for a gradual increase in the consumption tax in this month’s draft “as much as possible.”
Thailand’s floods cost Toyota about 190,000 units of production globally from Oct. 10 through Nov. 19, the company said. About 30 electrical parts are still in “critical” supply, it said.
Prime Minister Yoshihiko Noda today ordered the measure, which will probably be at least 2 trillion yen ($26 billion), Finance Minister Jun Azumi told reporters in Tokyo. The step won’t require the sale of deficit-covering bonds, he said. Japan has already allocated 18 trillion yen in three packages since the record earthquake in March.
“The yen’s gains, Thailand’s flooding and the European debt crisis are some of the factors that have increased the uncertainty of the economic outlook,” Noda said in a press conference in Tokyo. “I ordered the compilation of the fourth extra budget to secure the public’s peace of mind.”
The plan is Japan’s latest effort to secure its recovery, building on efforts including 15 trillion yen in asset purchases by the central bank and record amounts of yen sales to counter the currency’s surge. Nissan Motor (7201) Co. Chief Executive Officer Carlos Ghosn said yesterday his company will gradually shift production abroad because of Japan’s challenges.
“Economic growth will probably decelerate more than expected this quarter and next amid the global economic slowdown,” said Chotaro Morita, chief fixed-income strategist at Barclays Capital in Tokyo. “Not relying on new bond sales to fund it means the government will be able to avoid any political disputes about expanding fiscal spending further.”
MacArthur Era
Azumi said the supplementary budget will be drafted this month. The last time Japan had four extra fiscal packages was 1947, when General Douglas MacArthur was head of the Allied occupation forces after World War II. The finance chief said the outlays will be paid for in part through left over funds from the current fiscal-year’s budget.
The step adds to stimulus efforts under way around the world to cope with deteriorating prospects for the global economy next year. The Bank of Japan (8301) was one of five central banks participating in an effort led by the U.S. Federal Reserve to make it cheaper for banks to borrow dollars in emergencies. China lowered its required reserve ratio for lenders late yesterday, and Brazil lowered interest rates.
The Nikkei 225 Stock Average gained 1.9 percent to 8,597.38, joining a global rally in equities sparked by the dollar swaps announcement by the Fed, BOJ and central banks of Canada, U.K., Switzerland and the euro region.
Currency Strength
Companies from Toyota Motor Corp. (7203) to Sony Corp. (6758) have been contending with a surging yen against the dollar that threatens to crimp profits as well as flooding in Thailand that forced factory closures. The currency, at 77.68, is about 3 percent off of its highest against the dollar in the postwar era.
Authorities spent a record 9.09 trillion yen the foreign- exchange markets from Oct. 28 to Nov. 28, the Finance Ministry said yesterday, more than double what they sold when they intervened in August.
Reports in recent weeks have indicated Japan’s rebound from the March disaster is waning -- exports slid in October and the unemployment rate advanced, with data yesterday showing manufacturers planned to cut output in November.
Noda last month won parliamentary approval for his 12.1 trillion yen stimulus package, which also included 2 trillion yen worth of measures to help companies cope with the stronger currency. Two earlier stimulus packages totaled 6 trillion yen.
‘Top Priorities’
The prime minister today said he aims to get his ruling Democratic Party of Japan and its coalition partner to draft a plan this month on doubling the 5 percent national sales tax by the middle of the decade to cope with the world’s largest debt.
“Strengthening the structure of social security and ensuring stable revenue to make the system sustainable are top priorities,” Noda said. He said he wants to include a time table for a gradual increase in the consumption tax in this month’s draft “as much as possible.”
Thailand’s floods cost Toyota about 190,000 units of production globally from Oct. 10 through Nov. 19, the company said. About 30 electrical parts are still in “critical” supply, it said.
Wal-Mart Waits With Carrefour as India’s Stores Win Instant Gains: Retail
Wal-Mart Stores Inc. (WMT) and Carrefour SA (CA) waited seven years for access to India’s $400 billion retail market. They may have to wait almost as long to make a profit in the world’s second most populous nation.
Expensive real estate, a warehouse shortage and congested roads will force foreign retailers to spend about 20 billion rupees ($382 million) on supply systems, said Anand Ramanathan, associate director at KPMG Advisory Services in India.
India on Nov. 24 said it will allow overseas companies to invest up to 51 percent in retail stores selling more than one brand. The decision, which ends at least seven years of debate, may benefit local merchants, such as Pantaloon Retail India Ltd. (PF), that foreign retailers need as partners. The market will almost double to $785 billion by 2015, London-based Business Monitor International estimates.
“It will take at least two to three to five years before we see the full impact of this change in policy,” said Saloni Nangia, senior vice president at Technopak Advisors Pvt. “While all these retailers would invest in the supply chain and food processing, it’s going to take time, so this expectation that things would transform very soon or overnight won’t happen.”
Head Start
Overseas retailers such as Tesco Plc (TSCO) and Metro AG may not be able to set up more than 10 stores each in the first year and may take at least five years to break even because of infrastructure and real estate hurdles, Ramanathan said. “I don’t think any of the foreign players is looking at a return over the next five years,” he said.
Shares of India’s three biggest retailers jumped in Mumbai trading on news about the changes. Pantaloon climbed 13 percent on Nov. 24, the day after a government official said the cabinet may ease restrictions, and rose a further 16 percent the day after the news was confirmed. The stocks fell back on Nov. 29 when lawmakers demanded the policy be reversed. Still, Pantaloon is up 9.5 percent since Nov. 23, while Shopper’s Stop Ltd. (SHOP), India’s No. 2 retailer, has gained 2.1 percent and Trent Ltd. (TRENT), the third-biggest, has advanced 3.7 percent.
Local companies have a “positive” outlook because they may get chosen as partners by retailers seeking to do business in India, said Nangia. They also have a head start over foreign companies that were barred from multi-brand retailing in India and restricted to wholesale ventures before last week’s decision.
Possible Credit Boost
The easing of rules may improve Indian companies’ credit profiles as they gain access to equity and improved liquidity, Fitch Ratings India Pvt. said in a statement today. The effect would be moderated by the need for investment in logistics and increased competition in the long term, the statement said.
Pantaloon, which began as a men’s clothing retailer in 1997, operates as many as 498 supermarkets and department stores and more than 17 million square feet of retail space, according to the company’s website. Reliance Industries Ltd. (RIL), India’s largest public company, has more than 1,200 stores through a subsidiary.
India’s retail industry will get investments of $8 billion to $10 billion over the next five to ten years as overseas competitors enter and local companies spend to keep pace, according to billionaire Kishore Biyani, Pantaloon’s founder and managing director. “It’s still going to be a while” before a foreign retailer can catch up, Biyani said in a Nov. 18 phone interview.
Bharti Venture
Wal-Mart has 14 wholesale outlets through a joint venture with Bharti Enterprises, Germany’s Metro owns six and France’s Carrefour announced the opening of its second wholesale store on Nov. 28.
Less than $1 billion of Wal-Mart’s $422 billion sales last year came from India. The company has plans to aggressively expand its India operations, Scott Price, chief executive officer for Asia, said in March.
The chains face the challenge of finding affordable locations and the competition may intensify as newcomers enter, said Nangia.
As the industry grows, “spaces won’t be available where the customers are,” said Biyani. The nation’s largest retailer on Nov. 10 reported a 36 percent drop in fiscal first-quarter earnings because of interest costs on borrowing to increase retail space. India has the highest interest rates among Asia’s major economies.
Rising Overhead
Real-estate costs for retailers have risen at least 2 1/2 times since 2006, according to Kumar Rajagopalan, chief executive of the Retailers Association of India. Merchants in India pay 9 percent to 10 percent of revenue in rent, he said. The global average is 3.5 to 4 percent, Rajagopalan said.
Retailers such as Carrefour, the world’s second-biggest, and Tesco, the U.K.’s largest supermarket chain, face infrastructure that lags China’s and Brazil’s. “There are still very frequent power outages in a number of cities and the roads need a hell of a lot of improvement in terms of operating an efficient supply chain,” said Bryan Roberts, director of retail research at Kantar Retail in London.
That means the global chains need to build trucking and distribution systems in India, where government estimates show 40 percent of fruit and vegetables rot before being sold because of a lack of cold-storage facilities and poor transport infrastructure.
Infrastructure Needs
India’s roads are of “very poor quality” and local trucks cover less than 400 kilometers (249 miles) a day, compared with the 700 to 800 kilometers covered by trucks in the developed world, Transport Corporation of India Ltd. said in a 2009 report. Vehicular speeds can be limited to under 15 kilometers an hour in business areas of some cities.
Indian consumers also tend to buy groceries in neighborhood shops. Organized retail operations -- professionally managed chains, as opposed to family-owned independent stores -- account for just 5 percent of the retail market, according to the Associated Chambers of Commerce and Industry of India. “It’s a country in which infrastructure is not fully developed,” said Rajagopalan. “For any individual to travel to a large store is not the easiest of things.”
Political pressures remain. Shops and markets across India were shut today as traders supported a daylong strike demanding the government scrap its decision on foreign investment.
Faster Growth
States have a say in allotting licenses and West Bengal may not allow foreign investment in retailing, Chief Minister Mamata Banerjee said in televised comments Nov. 28.
Foreign firms “still need to be cautious about rushing in,” said Kantar’s Roberts.
Arti Singh, an India spokeswoman for Bentonville, Arkansas- based Wal-Mart, didn’t respond to calls. Carrefour India spokesman Mohan Shukla said it was too early to comment on retail plans.
Developing countries still offer faster growth for companies like Wal-Mart, whose international sales grew 20% in the quarter ended Oct. 31, compared with 3.8 percent in the U.S., according to data compiled by Bloomberg.
Wal-Mart, which entered China in 1996, has in the past decade increased its stores in the world’s most populous nation to more than 350 from eight. Third-quarter sales grew 16 percent in China, with 6 percent growth for stores open more than a year, according to a Bloomberg transcript of its Nov. 15 earnings briefing.
“Their story in India is not short term,” said KPMG’s Ramanathan. “These companies will not be able to face their boards if they decide not to enter India.”
Expensive real estate, a warehouse shortage and congested roads will force foreign retailers to spend about 20 billion rupees ($382 million) on supply systems, said Anand Ramanathan, associate director at KPMG Advisory Services in India.
India on Nov. 24 said it will allow overseas companies to invest up to 51 percent in retail stores selling more than one brand. The decision, which ends at least seven years of debate, may benefit local merchants, such as Pantaloon Retail India Ltd. (PF), that foreign retailers need as partners. The market will almost double to $785 billion by 2015, London-based Business Monitor International estimates.
“It will take at least two to three to five years before we see the full impact of this change in policy,” said Saloni Nangia, senior vice president at Technopak Advisors Pvt. “While all these retailers would invest in the supply chain and food processing, it’s going to take time, so this expectation that things would transform very soon or overnight won’t happen.”
Head Start
Overseas retailers such as Tesco Plc (TSCO) and Metro AG may not be able to set up more than 10 stores each in the first year and may take at least five years to break even because of infrastructure and real estate hurdles, Ramanathan said. “I don’t think any of the foreign players is looking at a return over the next five years,” he said.
Shares of India’s three biggest retailers jumped in Mumbai trading on news about the changes. Pantaloon climbed 13 percent on Nov. 24, the day after a government official said the cabinet may ease restrictions, and rose a further 16 percent the day after the news was confirmed. The stocks fell back on Nov. 29 when lawmakers demanded the policy be reversed. Still, Pantaloon is up 9.5 percent since Nov. 23, while Shopper’s Stop Ltd. (SHOP), India’s No. 2 retailer, has gained 2.1 percent and Trent Ltd. (TRENT), the third-biggest, has advanced 3.7 percent.
Local companies have a “positive” outlook because they may get chosen as partners by retailers seeking to do business in India, said Nangia. They also have a head start over foreign companies that were barred from multi-brand retailing in India and restricted to wholesale ventures before last week’s decision.
Possible Credit Boost
The easing of rules may improve Indian companies’ credit profiles as they gain access to equity and improved liquidity, Fitch Ratings India Pvt. said in a statement today. The effect would be moderated by the need for investment in logistics and increased competition in the long term, the statement said.
Pantaloon, which began as a men’s clothing retailer in 1997, operates as many as 498 supermarkets and department stores and more than 17 million square feet of retail space, according to the company’s website. Reliance Industries Ltd. (RIL), India’s largest public company, has more than 1,200 stores through a subsidiary.
India’s retail industry will get investments of $8 billion to $10 billion over the next five to ten years as overseas competitors enter and local companies spend to keep pace, according to billionaire Kishore Biyani, Pantaloon’s founder and managing director. “It’s still going to be a while” before a foreign retailer can catch up, Biyani said in a Nov. 18 phone interview.
Bharti Venture
Wal-Mart has 14 wholesale outlets through a joint venture with Bharti Enterprises, Germany’s Metro owns six and France’s Carrefour announced the opening of its second wholesale store on Nov. 28.
Less than $1 billion of Wal-Mart’s $422 billion sales last year came from India. The company has plans to aggressively expand its India operations, Scott Price, chief executive officer for Asia, said in March.
The chains face the challenge of finding affordable locations and the competition may intensify as newcomers enter, said Nangia.
As the industry grows, “spaces won’t be available where the customers are,” said Biyani. The nation’s largest retailer on Nov. 10 reported a 36 percent drop in fiscal first-quarter earnings because of interest costs on borrowing to increase retail space. India has the highest interest rates among Asia’s major economies.
Rising Overhead
Real-estate costs for retailers have risen at least 2 1/2 times since 2006, according to Kumar Rajagopalan, chief executive of the Retailers Association of India. Merchants in India pay 9 percent to 10 percent of revenue in rent, he said. The global average is 3.5 to 4 percent, Rajagopalan said.
Retailers such as Carrefour, the world’s second-biggest, and Tesco, the U.K.’s largest supermarket chain, face infrastructure that lags China’s and Brazil’s. “There are still very frequent power outages in a number of cities and the roads need a hell of a lot of improvement in terms of operating an efficient supply chain,” said Bryan Roberts, director of retail research at Kantar Retail in London.
That means the global chains need to build trucking and distribution systems in India, where government estimates show 40 percent of fruit and vegetables rot before being sold because of a lack of cold-storage facilities and poor transport infrastructure.
Infrastructure Needs
India’s roads are of “very poor quality” and local trucks cover less than 400 kilometers (249 miles) a day, compared with the 700 to 800 kilometers covered by trucks in the developed world, Transport Corporation of India Ltd. said in a 2009 report. Vehicular speeds can be limited to under 15 kilometers an hour in business areas of some cities.
Indian consumers also tend to buy groceries in neighborhood shops. Organized retail operations -- professionally managed chains, as opposed to family-owned independent stores -- account for just 5 percent of the retail market, according to the Associated Chambers of Commerce and Industry of India. “It’s a country in which infrastructure is not fully developed,” said Rajagopalan. “For any individual to travel to a large store is not the easiest of things.”
Political pressures remain. Shops and markets across India were shut today as traders supported a daylong strike demanding the government scrap its decision on foreign investment.
Faster Growth
States have a say in allotting licenses and West Bengal may not allow foreign investment in retailing, Chief Minister Mamata Banerjee said in televised comments Nov. 28.
Foreign firms “still need to be cautious about rushing in,” said Kantar’s Roberts.
Arti Singh, an India spokeswoman for Bentonville, Arkansas- based Wal-Mart, didn’t respond to calls. Carrefour India spokesman Mohan Shukla said it was too early to comment on retail plans.
Developing countries still offer faster growth for companies like Wal-Mart, whose international sales grew 20% in the quarter ended Oct. 31, compared with 3.8 percent in the U.S., according to data compiled by Bloomberg.
Wal-Mart, which entered China in 1996, has in the past decade increased its stores in the world’s most populous nation to more than 350 from eight. Third-quarter sales grew 16 percent in China, with 6 percent growth for stores open more than a year, according to a Bloomberg transcript of its Nov. 15 earnings briefing.
“Their story in India is not short term,” said KPMG’s Ramanathan. “These companies will not be able to face their boards if they decide not to enter India.”
Draghi Says ECB Bond Purchases ‘Limited’
European Central Bank President Mario Draghi signaled the ECB could do more to fight the debt crisis as long as governments push the euro area toward a fiscal union.
“A new fiscal compact” is “definitely the most important element to start restoring credibility,” Draghi said in an address to the European Parliament in Brussels today. “Other elements might follow, but the sequencing matters. It is first and foremost important to get a commonly shared fiscal compact right.” Draghi didn’t specify what more the ECB could do and said the central bank’s bond purchases “can only be limited.”
Still, he “appeared implicitly to hold up the offer of a significantly higher pace of debt purchases” and “potentially other measures, provided that euro-area governments were to commit to a new fiscal pact,” said Julian Callow, chief European economist at Barclays Capital in London.
The ECB yesterday joined forces with the Federal Reserve to cut the cost of emergency dollar loans to banks outside the U.S. While the coordinated action fuelled a global stock market rally, the yield on Italy’s 10-year bond is still close to 7 percent as contagion spreads to the euro region’s core.
The euro initially fell on Draghi’s remarks before rebounding to trade at $1.3486 at 1:25 p.m. in Frankfurt. The Stoxx Europe 600 Index also recouped its losses.
Managing Expectations
“Draghi is trying to manage market expectations to make people understand the ECB won’t behave like the Bank of England and the Federal Reserve,” Michala Marcussen, global head of economics at Societe Generale in Paris, told Bloomberg Television. “It doesn’t mean it can’t be supportive.”
The ECB unexpectedly cut its benchmark interest rate by a quarter point to 1.25 percent earlier this month, and all but one of 26 economists in a Bloomberg News survey predict another quarter-point reduction when policy makers meet on Dec. 8.
Draghi said the central bank’s bond purchases aim solely to ensure its rates are transmitted on markets, not to create new money or “subsidize governments.”
The ECB is already lending banks as much money as they ask for in an attempt to stimulate the flow of credit to households and businesses.
Not Circulating
“The ECB has created an enormous amount of liquidity, and we see now that this liquidity is being redeposited with the ECB deposit facility,” Draghi said. “Which means it is not so much the amount of liquidity that is the matter, but it’s the fact that this liquidity is not actually circulating.”
The most important thing for the ECB to do is restore the flow of credit to the economy, he said.
“We have observed serious credit tightening in the most recent period, which combined with the weakening of the business cycle doesn’t bode at all well for the months to come,” Draghi said.
European leaders will meet next week to discuss the next steps in stopping a crisis that will soon enter a third year. Draghi’s approach is backed by German Chancellor Angela Merkel, who says politicians must drive the euro region toward a fiscal union rather than rely on the ECB’s bond purchases.
“Governments must restore their credibility vis-a-vis financial markets,” Draghi said.
“A new fiscal compact” is “definitely the most important element to start restoring credibility,” Draghi said in an address to the European Parliament in Brussels today. “Other elements might follow, but the sequencing matters. It is first and foremost important to get a commonly shared fiscal compact right.” Draghi didn’t specify what more the ECB could do and said the central bank’s bond purchases “can only be limited.”
Still, he “appeared implicitly to hold up the offer of a significantly higher pace of debt purchases” and “potentially other measures, provided that euro-area governments were to commit to a new fiscal pact,” said Julian Callow, chief European economist at Barclays Capital in London.
The ECB yesterday joined forces with the Federal Reserve to cut the cost of emergency dollar loans to banks outside the U.S. While the coordinated action fuelled a global stock market rally, the yield on Italy’s 10-year bond is still close to 7 percent as contagion spreads to the euro region’s core.
The euro initially fell on Draghi’s remarks before rebounding to trade at $1.3486 at 1:25 p.m. in Frankfurt. The Stoxx Europe 600 Index also recouped its losses.
Managing Expectations
“Draghi is trying to manage market expectations to make people understand the ECB won’t behave like the Bank of England and the Federal Reserve,” Michala Marcussen, global head of economics at Societe Generale in Paris, told Bloomberg Television. “It doesn’t mean it can’t be supportive.”
The ECB unexpectedly cut its benchmark interest rate by a quarter point to 1.25 percent earlier this month, and all but one of 26 economists in a Bloomberg News survey predict another quarter-point reduction when policy makers meet on Dec. 8.
Draghi said the central bank’s bond purchases aim solely to ensure its rates are transmitted on markets, not to create new money or “subsidize governments.”
The ECB is already lending banks as much money as they ask for in an attempt to stimulate the flow of credit to households and businesses.
Not Circulating
“The ECB has created an enormous amount of liquidity, and we see now that this liquidity is being redeposited with the ECB deposit facility,” Draghi said. “Which means it is not so much the amount of liquidity that is the matter, but it’s the fact that this liquidity is not actually circulating.”
The most important thing for the ECB to do is restore the flow of credit to the economy, he said.
“We have observed serious credit tightening in the most recent period, which combined with the weakening of the business cycle doesn’t bode at all well for the months to come,” Draghi said.
European leaders will meet next week to discuss the next steps in stopping a crisis that will soon enter a third year. Draghi’s approach is backed by German Chancellor Angela Merkel, who says politicians must drive the euro region toward a fiscal union rather than rely on the ECB’s bond purchases.
“Governments must restore their credibility vis-a-vis financial markets,” Draghi said.
Brazil Signals No Shift Ahead in Monetary Policy After Cutting Rate to 11%
Brazil’s central bank signaled it will keep cutting interest rates at its current half-point pace as it tries to prevent Europe’s spreading debt crisis from stunting growth in Latin America’s biggest economy.
The bank’s board, led by President Alexandre Tombini, yesterday voted unanimously to reduce the benchmark rate 50 basis points for a third straight meeting, to 11 percent, matching the forecast by 64 of 65 analysts surveyed by Bloomberg.
Policy makers, in a statement identical to the one from their previous meeting, said that “moderate” rate cuts can mitigate the effects of the worsening global economy without putting at risk its 2012 inflation target. Tombini’s commitment to the current pace of rate cuts may lead traders to pare bets on bigger reductions to come, said Jankiel Santos, chief economist at Espirito Santo Investment Bank.
“They are really comfortable with the pace they have adopted so far, and with the strategy of being conservative in response to these international jitters,” Santos said in a phone interview from Sao Paulo.
Tombini was among the first policy makers to react as Europe’s crisis deepened. The country’s surprise interest rate cut in August, the first in more than two years, has since been followed by Australia, Israel and the European Central Bank. Traders are betting Tombini will cut the Selic rate as low as 9.25 percent by July, according to Bloomberg forecasts based on interest rate futures contracts.
The yield on the interest rate futures contract maturing in January 2013 rose 8 basis points, or 0.08 percentage point, to 9.710 percent at 6:45 a.m. New York time.
Slowdown, Yields
The deterioration of the world economy is in line with policy makers’ forecasts, so they don’t see a need to step up the pace of rate cuts, said Gray Newman, Morgan Stanley’s chief Latin America economist.
“When the central bank first embarked on rate cuts they were already expecting a pretty difficult global scenario,” Newman said, speaking by phone from New York.
More than $3 trillion was wiped off world stock markets last month, as yields on Italian and Spanish sovereign debt rose to Euro-era highs, and a failed German bond auction signaled that the debt crisis has spread to core European nations.
The real weakened 5.1 percent in November, the most of seven major Latin American currencies tracked by Bloomberg.
Inflation Forecasts
Annual inflation in Brazil slowed for a second straight month in mid-November, to 6.69 percent. Tombini said last week that inflation rates will “fall sharply” by the second quarter of next year. Inflation has been above the 6.5 percent upper limit of its target range since April.
Breakeven rates, the difference between yields on 2015 inflation-linked and fixed rate bonds, show that traders are wagering on average annual inflation of 5.6 percent over the next four years, down from 6.2 percent at the end of September. Inflation has exceeded the 6.5 percent upper limit of the central bank’s target range since April.
Even as the economy shows signs of cooling, credit growth and full employment conditions continue to stoke consumer demand.
Unemployment fell to 5.8 percent in October, a record low for the month. Total outstanding loans expanded 18 percent in the year through October, led by a 46.9 percent rise in mortgage credit.
Brazilian economists in weekly central bank surveys have reduced their forecasts for growth this year 11 times since Tombini’s first rate cut, to 3.1 percent from 3.79 percent. Last year, Brazil grew 7.5 percent, its fastest pace in more than two decades.
The bank’s board, led by President Alexandre Tombini, yesterday voted unanimously to reduce the benchmark rate 50 basis points for a third straight meeting, to 11 percent, matching the forecast by 64 of 65 analysts surveyed by Bloomberg.
Policy makers, in a statement identical to the one from their previous meeting, said that “moderate” rate cuts can mitigate the effects of the worsening global economy without putting at risk its 2012 inflation target. Tombini’s commitment to the current pace of rate cuts may lead traders to pare bets on bigger reductions to come, said Jankiel Santos, chief economist at Espirito Santo Investment Bank.
“They are really comfortable with the pace they have adopted so far, and with the strategy of being conservative in response to these international jitters,” Santos said in a phone interview from Sao Paulo.
Tombini was among the first policy makers to react as Europe’s crisis deepened. The country’s surprise interest rate cut in August, the first in more than two years, has since been followed by Australia, Israel and the European Central Bank. Traders are betting Tombini will cut the Selic rate as low as 9.25 percent by July, according to Bloomberg forecasts based on interest rate futures contracts.
The yield on the interest rate futures contract maturing in January 2013 rose 8 basis points, or 0.08 percentage point, to 9.710 percent at 6:45 a.m. New York time.
Slowdown, Yields
The deterioration of the world economy is in line with policy makers’ forecasts, so they don’t see a need to step up the pace of rate cuts, said Gray Newman, Morgan Stanley’s chief Latin America economist.
“When the central bank first embarked on rate cuts they were already expecting a pretty difficult global scenario,” Newman said, speaking by phone from New York.
More than $3 trillion was wiped off world stock markets last month, as yields on Italian and Spanish sovereign debt rose to Euro-era highs, and a failed German bond auction signaled that the debt crisis has spread to core European nations.
The real weakened 5.1 percent in November, the most of seven major Latin American currencies tracked by Bloomberg.
Inflation Forecasts
Annual inflation in Brazil slowed for a second straight month in mid-November, to 6.69 percent. Tombini said last week that inflation rates will “fall sharply” by the second quarter of next year. Inflation has been above the 6.5 percent upper limit of its target range since April.
Breakeven rates, the difference between yields on 2015 inflation-linked and fixed rate bonds, show that traders are wagering on average annual inflation of 5.6 percent over the next four years, down from 6.2 percent at the end of September. Inflation has exceeded the 6.5 percent upper limit of the central bank’s target range since April.
Even as the economy shows signs of cooling, credit growth and full employment conditions continue to stoke consumer demand.
Unemployment fell to 5.8 percent in October, a record low for the month. Total outstanding loans expanded 18 percent in the year through October, led by a 46.9 percent rise in mortgage credit.
Brazilian economists in weekly central bank surveys have reduced their forecasts for growth this year 11 times since Tombini’s first rate cut, to 3.1 percent from 3.79 percent. Last year, Brazil grew 7.5 percent, its fastest pace in more than two decades.
Dollar Proves Best Bet as Investors Shun Stocks
The dollar (DXY) was the best place for investors to be in November, beating returns on worldwide bonds, commodities and stocks as Europe’s debt crisis threatened to derail global growth.
The Dollar Index tracking the U.S. currency against six foreign-exchange peers rose 2.9 percent last month, leaving it down less than 1 percent for the year. Even as Treasuries gained 0.7 percent, fixed-income securities around the world lost 0.5 percent, Bank of America Merrill Lynch index data show. The Standard & Poor’s GSCI Total Return Index of commodities rose 1.4 percent, and the MSCI All Country World Index (MXWD) of shares fell 2.9 percent with dividends.
“There’s been a flight to quality, which means investors are keeping their money in U.S. dollars and Treasuries,” said Sean Callow, a Sydney-based senior currency strategist at Westpac Banking Corp., the second-most-accurate foreign-exchange forecaster measured by Bloomberg News. “The U.S. hasn’t been a bad bet, whether you’re on the safe-haven side or you see signs of life in the economy,” he said in a phone interview Nov. 29.
Contagion in Europe’s debt markets spread to Italy last month, boosting yields to euro-era record highs, and curbed demand for German bunds. The Organization for Economic Cooperation and Development this week cited doubts about the survival of Europe’s monetary union as the main risk to the world economy.
OECD Forecasts
The 34 OECD nations will grow 1.9 percent this year and 1.6 percent next, the Paris-based organization said in its twice- annual global economic outlook released Nov. 28, down from 2.3 percent and 2.8 percent predicted in May.
To alleviate stresses in the financial system, six central banks led by the Federal Reserve made it cheaper for banks to borrow dollars in emergencies. The premium banks pay to borrow dollars overnight from central banks will fall by half a percentage point to 50 basis points, the Fed said yesterday in a statement in Washington.
The Fed coordinated the move with the European Central Bank and the central banks of Canada, Switzerland, Japan and the U.K., sparking gains in stocks and commodities, and losses in Treasuries and the dollar.
IntercontinentalExchange Inc.’s Dollar Index rebounded from a 3 percent loss in October to 78.388 as of yesterday, and it’s up from the low this year of 72.696 in May. It will climb to 80 by year-end, Callow said.
Dollar Forecasts
The U.S. currency will trade at $1.35 on Dec. 31 against its 17-nation European counterpart, from $1.3446 yesterday, and 77 versus Japan’s currency from 77.62, according to the median estimate of strategist and economists in Bloomberg surveys.
The euro fell 2.97 percent against the dollar in November, according to data compiled by Bloomberg. The yen advanced 0.71 versus the dollar, even after Japan sold its currency for the third time this year on Oct. 31 and Finance Minister Jun Azumi indicated he may do so again. The Brazilian real was the biggest loser among the 16 most-widely traded currencies, depreciating 5.14 percent.
The haven appeal of U.S. assets has been burnished amid signs of strength in the world’s largest economy. The New York- based Conference Board said last month that its index of consumer confidence rose in November by the most since April 2003.
‘Favorite Strategy’
“The favorite strategy will be to locate the cleanest dirty shirts -- the United States, Canada, United Kingdom and Australia at the moment,” Bill Gross, who runs the world’s biggest bond fund as co-chief investment officer at Pacific Investment Management Co. in Newport Beach, California, wrote in his monthly commentary this week.
Bond markets in November showed that a debt crisis that began in Europe’s so-called peripheral markets of Greece and Portugal is starting to impact core economies. Germany failed to get bids for 35 percent of the 6 billion euros ($8 billion) of bonds it planned to sell on Nov. 23. Italy issued bonds this week with coupons that exceeded 7 percent, the threshold that preceded bailouts for Greece, Portugal and Ireland.
Euro-area finance ministers approved enhancements this week to their rescue fund, though they refrained from setting a target for its size.
Europe’s woes helped send Bank of America’s Global Broad Market Index, which consists of more than 19,000 sovereign, corporate, asset-backed and other debt securities with a value of $41.4 trillion, down for the second straight month. The losses trimmed this year’s gains through Nov. 29 to 4.3 percent, after reinvested interest.
Government Bonds
America’s government bonds are up 8.8 percent in 2011, set for the best year since returning 14 percent in 2008. The debt extended gains in November even after the U.S. lost its last stable outlook from the three biggest credit-ranking companies. Fitch Ratings on Nov. 28 lowered its outlook on the U.S.’s AAA grade to “negative” following a congressional committee’s failure to agree on deficit cuts.
Treasuries due in 10 years and more have returned 25 percent in 2011, the second most after Sweden among 144 bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
“Confusion in Europe will help the Treasury market,” said Tsutomu Komiya, a bond investor at Daiwa Asset Management Co. in Tokyo, which oversees the equivalent of $118.7 billion and is a unit of Japan’s second-biggest brokerage. Demand for safety will help keep U.S. yields low, he said.
Yield Forecasts
The nation’s 10-year yield will finish 2011 at 2.20 percent from 2.07 percent yesterday, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. The record low of 1.67 percent was set on Sept. 23.
Investment-grade corporate bonds lost 1.8 percent last month, while junk-rated debt plunged 2.7 percent, based on the Bank of America indexes. High-yield, high-risk securities are rated below Baa3 by Moody’s Investors Service and less than BBB- at S&P.
The S&P GSCI Total Return Index of 24 commodities advanced in November after surging 9.8 percent in October for its best monthly performance since May 2009.
West Texas Intermediate crude oil futures traded in New York had some of the biggest gains among raw materials, rallying 7.7 percent to $100.36 a barrel. The futures rose after Enbridge Inc. and Enterprise Products Partners LP announced plans to start shipping oil from Cushing, Oklahoma, the contract’s delivery point, in 2012.
Crude Outlet
The change would add an outlet for North American crude at Gulf Coast refineries, easing a glut at the hub that helped cut the price of the U.S. benchmark against London-traded Brent crude. Brent cost $10.16 per barrel more than West Texas Intermediate oil as of yesterday. The gap has narrowed from a record $27.88 a barrel Oct. 14.
West Texas Intermediate will average $90 a barrel and Brent will average $108.50 a barrel in the fourth quarter, based on the median forecast in a Bloomberg survey of banks.
Concern that Europe’s crisis will curb global growth weighed on demand for other raw materials, with cocoa and nickel posting the biggest losses for the month.
Cocoa futures traded in the U.S. slumped 14.5 percent as exports from Ivory Coast, the world’s biggest producer, resumed after a civil war. Nickel on the London Metal Exchange tumbled about 11 percent as global stockpiles swelled.
No ‘Great Market’
“You can’t get really optimistic or really bullish about the commodity markets,” Jeremy Friesen, commodity strategist at Societe Generale SA, said by phone from Hong Kong on Nov. 29. As long as Europe’s crisis lingers, he said, “it’s not going to be a great market for anything that’s levered to global growth.”
The MSCI All Country World Index retreated after October’s 11 percent rally. The equity benchmark tracking 45 global markets has declined 6.2 percent this year.
The MSCI index is valued at 12.4 times reported profit, 18 percent below the median from the past five years, according to data compiled by Bloomberg. The price-earnings ratio reached 10.4 in September, the lowest in more than two years.
Denmark’s OMX Copenhagen 20 Index rose 6.2 percent and Ireland’s ISEQ Overall Index climbed 0.9 percent, for the only monthly advances among 24 developed markets, according to data compiled by Bloomberg. Venezuela’s IBC Index (IBVC) was the biggest gainer among benchmark emerging market indexes, climbing 7.3 percent.
S&P 500 Retreats
The S&P 500 retreated 0.2 percent in November, after the U.S. equity benchmark posted the worst Thanksgiving-week loss since 1932 as American policy makers failed to reach agreement on reducing the federal budget.
A gauge of financial stocks in the S&P 500 tumbled 4.8 percent as Fitch said Europe’s debt crisis poses a threat to American banks and S&P cut credit ratings of large lenders including Bank of America Corp. and Goldman Sachs Group Inc.
Analysts have reduced 2012 profit estimates (SPX) for companies in the S&P 500 by 4.2 percent since Aug. 4 to $108.93 a share. The projections now imply earnings will increase 10 percent next year, the slowest pace of growth since 2009.
The S&P 500 will rise to 1,265 by Dec. 31 from 1,246.96 yesterday, the median forecast of banks surveyed by Bloomberg shows.
“We’re concerned that we have lower levels to plumb before we’re through with this, given what’s happening with the economies in Europe,” Bruce McCain, who helps oversee more than $20 billion as chief investment strategist at the private- banking unit of KeyCorp in Cleveland, told Adam Johnson Bloomberg Television’s “Street Smart” Nov. 29. “We have a harder time seeing positive catalysts than negative ones.”
The Dollar Index tracking the U.S. currency against six foreign-exchange peers rose 2.9 percent last month, leaving it down less than 1 percent for the year. Even as Treasuries gained 0.7 percent, fixed-income securities around the world lost 0.5 percent, Bank of America Merrill Lynch index data show. The Standard & Poor’s GSCI Total Return Index of commodities rose 1.4 percent, and the MSCI All Country World Index (MXWD) of shares fell 2.9 percent with dividends.
“There’s been a flight to quality, which means investors are keeping their money in U.S. dollars and Treasuries,” said Sean Callow, a Sydney-based senior currency strategist at Westpac Banking Corp., the second-most-accurate foreign-exchange forecaster measured by Bloomberg News. “The U.S. hasn’t been a bad bet, whether you’re on the safe-haven side or you see signs of life in the economy,” he said in a phone interview Nov. 29.
Contagion in Europe’s debt markets spread to Italy last month, boosting yields to euro-era record highs, and curbed demand for German bunds. The Organization for Economic Cooperation and Development this week cited doubts about the survival of Europe’s monetary union as the main risk to the world economy.
OECD Forecasts
The 34 OECD nations will grow 1.9 percent this year and 1.6 percent next, the Paris-based organization said in its twice- annual global economic outlook released Nov. 28, down from 2.3 percent and 2.8 percent predicted in May.
To alleviate stresses in the financial system, six central banks led by the Federal Reserve made it cheaper for banks to borrow dollars in emergencies. The premium banks pay to borrow dollars overnight from central banks will fall by half a percentage point to 50 basis points, the Fed said yesterday in a statement in Washington.
The Fed coordinated the move with the European Central Bank and the central banks of Canada, Switzerland, Japan and the U.K., sparking gains in stocks and commodities, and losses in Treasuries and the dollar.
IntercontinentalExchange Inc.’s Dollar Index rebounded from a 3 percent loss in October to 78.388 as of yesterday, and it’s up from the low this year of 72.696 in May. It will climb to 80 by year-end, Callow said.
Dollar Forecasts
The U.S. currency will trade at $1.35 on Dec. 31 against its 17-nation European counterpart, from $1.3446 yesterday, and 77 versus Japan’s currency from 77.62, according to the median estimate of strategist and economists in Bloomberg surveys.
The euro fell 2.97 percent against the dollar in November, according to data compiled by Bloomberg. The yen advanced 0.71 versus the dollar, even after Japan sold its currency for the third time this year on Oct. 31 and Finance Minister Jun Azumi indicated he may do so again. The Brazilian real was the biggest loser among the 16 most-widely traded currencies, depreciating 5.14 percent.
The haven appeal of U.S. assets has been burnished amid signs of strength in the world’s largest economy. The New York- based Conference Board said last month that its index of consumer confidence rose in November by the most since April 2003.
‘Favorite Strategy’
“The favorite strategy will be to locate the cleanest dirty shirts -- the United States, Canada, United Kingdom and Australia at the moment,” Bill Gross, who runs the world’s biggest bond fund as co-chief investment officer at Pacific Investment Management Co. in Newport Beach, California, wrote in his monthly commentary this week.
Bond markets in November showed that a debt crisis that began in Europe’s so-called peripheral markets of Greece and Portugal is starting to impact core economies. Germany failed to get bids for 35 percent of the 6 billion euros ($8 billion) of bonds it planned to sell on Nov. 23. Italy issued bonds this week with coupons that exceeded 7 percent, the threshold that preceded bailouts for Greece, Portugal and Ireland.
Euro-area finance ministers approved enhancements this week to their rescue fund, though they refrained from setting a target for its size.
Europe’s woes helped send Bank of America’s Global Broad Market Index, which consists of more than 19,000 sovereign, corporate, asset-backed and other debt securities with a value of $41.4 trillion, down for the second straight month. The losses trimmed this year’s gains through Nov. 29 to 4.3 percent, after reinvested interest.
Government Bonds
America’s government bonds are up 8.8 percent in 2011, set for the best year since returning 14 percent in 2008. The debt extended gains in November even after the U.S. lost its last stable outlook from the three biggest credit-ranking companies. Fitch Ratings on Nov. 28 lowered its outlook on the U.S.’s AAA grade to “negative” following a congressional committee’s failure to agree on deficit cuts.
Treasuries due in 10 years and more have returned 25 percent in 2011, the second most after Sweden among 144 bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
“Confusion in Europe will help the Treasury market,” said Tsutomu Komiya, a bond investor at Daiwa Asset Management Co. in Tokyo, which oversees the equivalent of $118.7 billion and is a unit of Japan’s second-biggest brokerage. Demand for safety will help keep U.S. yields low, he said.
Yield Forecasts
The nation’s 10-year yield will finish 2011 at 2.20 percent from 2.07 percent yesterday, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. The record low of 1.67 percent was set on Sept. 23.
Investment-grade corporate bonds lost 1.8 percent last month, while junk-rated debt plunged 2.7 percent, based on the Bank of America indexes. High-yield, high-risk securities are rated below Baa3 by Moody’s Investors Service and less than BBB- at S&P.
The S&P GSCI Total Return Index of 24 commodities advanced in November after surging 9.8 percent in October for its best monthly performance since May 2009.
West Texas Intermediate crude oil futures traded in New York had some of the biggest gains among raw materials, rallying 7.7 percent to $100.36 a barrel. The futures rose after Enbridge Inc. and Enterprise Products Partners LP announced plans to start shipping oil from Cushing, Oklahoma, the contract’s delivery point, in 2012.
Crude Outlet
The change would add an outlet for North American crude at Gulf Coast refineries, easing a glut at the hub that helped cut the price of the U.S. benchmark against London-traded Brent crude. Brent cost $10.16 per barrel more than West Texas Intermediate oil as of yesterday. The gap has narrowed from a record $27.88 a barrel Oct. 14.
West Texas Intermediate will average $90 a barrel and Brent will average $108.50 a barrel in the fourth quarter, based on the median forecast in a Bloomberg survey of banks.
Concern that Europe’s crisis will curb global growth weighed on demand for other raw materials, with cocoa and nickel posting the biggest losses for the month.
Cocoa futures traded in the U.S. slumped 14.5 percent as exports from Ivory Coast, the world’s biggest producer, resumed after a civil war. Nickel on the London Metal Exchange tumbled about 11 percent as global stockpiles swelled.
No ‘Great Market’
“You can’t get really optimistic or really bullish about the commodity markets,” Jeremy Friesen, commodity strategist at Societe Generale SA, said by phone from Hong Kong on Nov. 29. As long as Europe’s crisis lingers, he said, “it’s not going to be a great market for anything that’s levered to global growth.”
The MSCI All Country World Index retreated after October’s 11 percent rally. The equity benchmark tracking 45 global markets has declined 6.2 percent this year.
The MSCI index is valued at 12.4 times reported profit, 18 percent below the median from the past five years, according to data compiled by Bloomberg. The price-earnings ratio reached 10.4 in September, the lowest in more than two years.
Denmark’s OMX Copenhagen 20 Index rose 6.2 percent and Ireland’s ISEQ Overall Index climbed 0.9 percent, for the only monthly advances among 24 developed markets, according to data compiled by Bloomberg. Venezuela’s IBC Index (IBVC) was the biggest gainer among benchmark emerging market indexes, climbing 7.3 percent.
S&P 500 Retreats
The S&P 500 retreated 0.2 percent in November, after the U.S. equity benchmark posted the worst Thanksgiving-week loss since 1932 as American policy makers failed to reach agreement on reducing the federal budget.
A gauge of financial stocks in the S&P 500 tumbled 4.8 percent as Fitch said Europe’s debt crisis poses a threat to American banks and S&P cut credit ratings of large lenders including Bank of America Corp. and Goldman Sachs Group Inc.
Analysts have reduced 2012 profit estimates (SPX) for companies in the S&P 500 by 4.2 percent since Aug. 4 to $108.93 a share. The projections now imply earnings will increase 10 percent next year, the slowest pace of growth since 2009.
The S&P 500 will rise to 1,265 by Dec. 31 from 1,246.96 yesterday, the median forecast of banks surveyed by Bloomberg shows.
“We’re concerned that we have lower levels to plumb before we’re through with this, given what’s happening with the economies in Europe,” Bruce McCain, who helps oversee more than $20 billion as chief investment strategist at the private- banking unit of KeyCorp in Cleveland, told Adam Johnson Bloomberg Television’s “Street Smart” Nov. 29. “We have a harder time seeing positive catalysts than negative ones.”
China PMI Falls for First Time Since 2009
China’s manufacturing contracted for the first time since February 2009 as the property market cooled and Europe’s crisis cut export demand, a survey showed.
The Purchasing Managers’ Index fell to 49.0 in November from 50.4 in October, the China Federation of Logistics and Purchasing said in a statement today. The median estimate in a Bloomberg News survey of 18 economists was 49.8. A level above 50 indicates expansion.
The central bank last night announced the first cut in banks’ reserve requirements since 2008, moving two hours before the U.S. Federal Reserve led a global effort to ease Europe’s sovereign-debt crisis. The move will add about 370 billion yuan ($58 billion) to the financial system and more reductions may follow as the government seeks to support growth, Citigroup Inc. said.
Today’s report “clearly adds to the urgency for easing,” said Yao Wei, a Hong Kong-based economist with Societe Generale SA. “The PMI is showing weakness across the board and this would seem to be the reason the government cut banks’ reserve requirements. If this trend continues we should see another cut pretty soon.”
The Shanghai Composite Index (SHCOMP) fell 3.3 percent yesterday, the biggest decline in almost four months. India yesterday reported that its economy grew the least in two years and Thailand cut interest rates as a slowdown in Asia limits the region’s ability to support a faltering world recovery.
Weaker Demand
The manufacturing index compiled by the logistics federation and National Bureau of Statistics is based on a survey of purchasing managers in more than 820 companies in 20 industries.
A gauge of new orders contracted for the first time since January 2009 and the output index expanded at the slowest pace since the same month, today’s survey showed. New export orders fell below 50 for a second straight month.
JinkoSolar Holding Co. (JKS), a Chinese maker of solar panels, said last week third-quarter net income fell 74 percent from a year earlier on slumping prices. The company, based in eastern Jiangxi province, also cut its full-year shipment estimate by as much as 23 percent citing weaker demand from Europe.
“China’s growth will slow further over the next six months,” Li Wei, a Shanghai-based economist with Standard Chartered Plc said before the data. “If the deterioration in Europe and the U.S. accelerates in the first half of next year, the government will have to put maintaining growth as its top priority.”
The Purchasing Managers’ Index fell to 49.0 in November from 50.4 in October, the China Federation of Logistics and Purchasing said in a statement today. The median estimate in a Bloomberg News survey of 18 economists was 49.8. A level above 50 indicates expansion.
The central bank last night announced the first cut in banks’ reserve requirements since 2008, moving two hours before the U.S. Federal Reserve led a global effort to ease Europe’s sovereign-debt crisis. The move will add about 370 billion yuan ($58 billion) to the financial system and more reductions may follow as the government seeks to support growth, Citigroup Inc. said.
Today’s report “clearly adds to the urgency for easing,” said Yao Wei, a Hong Kong-based economist with Societe Generale SA. “The PMI is showing weakness across the board and this would seem to be the reason the government cut banks’ reserve requirements. If this trend continues we should see another cut pretty soon.”
The Shanghai Composite Index (SHCOMP) fell 3.3 percent yesterday, the biggest decline in almost four months. India yesterday reported that its economy grew the least in two years and Thailand cut interest rates as a slowdown in Asia limits the region’s ability to support a faltering world recovery.
Weaker Demand
The manufacturing index compiled by the logistics federation and National Bureau of Statistics is based on a survey of purchasing managers in more than 820 companies in 20 industries.
A gauge of new orders contracted for the first time since January 2009 and the output index expanded at the slowest pace since the same month, today’s survey showed. New export orders fell below 50 for a second straight month.
JinkoSolar Holding Co. (JKS), a Chinese maker of solar panels, said last week third-quarter net income fell 74 percent from a year earlier on slumping prices. The company, based in eastern Jiangxi province, also cut its full-year shipment estimate by as much as 23 percent citing weaker demand from Europe.
“China’s growth will slow further over the next six months,” Li Wei, a Shanghai-based economist with Standard Chartered Plc said before the data. “If the deterioration in Europe and the U.S. accelerates in the first half of next year, the government will have to put maintaining growth as its top priority.”
S. Korean Inflation Quickens to 3-Month High, Above Central Bank’s Target
South Korea’s inflation accelerated to a three-month high and above the central bank’s target limit in November, posing a dilemma for policy makers as risks to growth increase.
Consumer prices rose 4.2 percent from a year earlier, after a revised 3.6 percent gain in October, Statistics Korea said today in Gwacheon, south of Seoul. The reading used a new inflation gauge system after the government this week changed the base year for the index to 2010 from 2005. A separate report showed exports rose a more-than-forecast 13.8 percent.
Elevated inflation may leave limited room for the Bank of Korea to cut interest rates as Europe’s debt crisis dims the outlook for exports. China’s central bank last night announced the first cut in lenders’ reserve requirements since 2008, as the U.S. Federal Reserve led a global effort to ease strains in financial markets.
“Today’s data indicate inflation remains a concern,” Kong Dong Rak, a fixed-income analyst at Taurus Investment & Securities Co. in Seoul, said. “The central bank is likely to stay pat for another three months before considering a rate cut due to Europe.”
The won rose 1.5 percent to 1,126.15 per dollar as of 9:21 a.m. in Seoul, according to data compiled by Bloomberg. The Kospi stock index gained 3.4 percent.
The gain in exports compared with a median estimate of 10.4 percent in a Bloomberg News survey.
Calculation Revisions
Consumer prices rose 4.6 percent last month from a year earlier under the previous calculation system, according to today’s report. The median estimate in a Bloomberg News survey of 14 economists using the previous system was for a 4.4 percent increase. Prices rose 0.1 percent from October.
Core prices, which exclude agricultural and oil products, advanced 3.5 percent in November from a year earlier, it showed.
The government changed its inflation calculation system in a regular revision this week, cutting the number of items in its consumer price index basket to 481 from 489. A total of 21 items were removed, including gold rings and electronic dictionaries, while 43 items such as broadband fees and smart-phone charges were added. Some 57 items were merged into 25 categories, Statistics Korea said on Nov. 29.
Exports, which is half of the nation’s economy, rose to $47 billion last month from a revised $46.8 billion in October, today’s report showed. Imports climbed 11.3 percent to $43 billion. The trade surplus was $3.9 billion.
Economic Slowdown
Asia’s fourth-largest economy grew 0.7 percent last quarter from the three months through June, when it expanded 0.9 percent, the central bank said Oct. 27.
The nation’s industrial output slipped in October from the previous month as Europe’s sovereign-debt crisis damped demand for exports. Production fell 0.7 percent, the fifth decline this year, after expanding a revised 1.2 percent in September, Statistics Korea said yesterday.
South Korean manufacturers’ confidence held close to a 27- month low because of ongoing concerns over Europe’s debt crisis, according to a central bank report on Nov. 28. An index measuring expectations for December rose to 83 from 82 for November. A measure of expectations at non-manufacturing companies slipped to 82 from 84.
Consumer prices rose 4.2 percent from a year earlier, after a revised 3.6 percent gain in October, Statistics Korea said today in Gwacheon, south of Seoul. The reading used a new inflation gauge system after the government this week changed the base year for the index to 2010 from 2005. A separate report showed exports rose a more-than-forecast 13.8 percent.
Elevated inflation may leave limited room for the Bank of Korea to cut interest rates as Europe’s debt crisis dims the outlook for exports. China’s central bank last night announced the first cut in lenders’ reserve requirements since 2008, as the U.S. Federal Reserve led a global effort to ease strains in financial markets.
“Today’s data indicate inflation remains a concern,” Kong Dong Rak, a fixed-income analyst at Taurus Investment & Securities Co. in Seoul, said. “The central bank is likely to stay pat for another three months before considering a rate cut due to Europe.”
The won rose 1.5 percent to 1,126.15 per dollar as of 9:21 a.m. in Seoul, according to data compiled by Bloomberg. The Kospi stock index gained 3.4 percent.
The gain in exports compared with a median estimate of 10.4 percent in a Bloomberg News survey.
Calculation Revisions
Consumer prices rose 4.6 percent last month from a year earlier under the previous calculation system, according to today’s report. The median estimate in a Bloomberg News survey of 14 economists using the previous system was for a 4.4 percent increase. Prices rose 0.1 percent from October.
Core prices, which exclude agricultural and oil products, advanced 3.5 percent in November from a year earlier, it showed.
The government changed its inflation calculation system in a regular revision this week, cutting the number of items in its consumer price index basket to 481 from 489. A total of 21 items were removed, including gold rings and electronic dictionaries, while 43 items such as broadband fees and smart-phone charges were added. Some 57 items were merged into 25 categories, Statistics Korea said on Nov. 29.
Exports, which is half of the nation’s economy, rose to $47 billion last month from a revised $46.8 billion in October, today’s report showed. Imports climbed 11.3 percent to $43 billion. The trade surplus was $3.9 billion.
Economic Slowdown
Asia’s fourth-largest economy grew 0.7 percent last quarter from the three months through June, when it expanded 0.9 percent, the central bank said Oct. 27.
The nation’s industrial output slipped in October from the previous month as Europe’s sovereign-debt crisis damped demand for exports. Production fell 0.7 percent, the fifth decline this year, after expanding a revised 1.2 percent in September, Statistics Korea said yesterday.
South Korean manufacturers’ confidence held close to a 27- month low because of ongoing concerns over Europe’s debt crisis, according to a central bank report on Nov. 28. An index measuring expectations for December rose to 83 from 82 for November. A measure of expectations at non-manufacturing companies slipped to 82 from 84.
Brazil Central Bank Lowers Rate for Third Meeting to 11% as Economy Slows
Brazil’s central bank cut borrowing costs by half a point for a third straight meeting as a global economic slowdown threatens to exacerbate a slump in domestic demand.
The bank’s board, led by President Alexandre Tombini, today voted unanimously to reduce the benchmark Selic rate to 11 percent from 11.5 percent, as forecast by 64 of 65 analysts surveyed by Bloomberg. One analyst predicted a full-point cut.
Policy makers said that “by timely mitigating the effects coming from a more restrictive global environment, a moderate adjustment in the level of the basic rate is consistent with the scenario of inflation converging to the target in 2012,” according to their statement posted on the central bank’s web site. The language in today’s statement was unchanged from the bank’s Oct. 19 decision.
Brazil has taken the lead among emerging markets in trying to prevent spillover from Europe’s sovereign-debt crisis. The country’s surprise interest rate cut in August, the first in two years, has since been followed by ones in Australia and Israel. Traders are betting Tombini will cut the Selic rate as low as 9.25 percent by July, according to interest-rate futures.
“The external crisis is more prolonged, and the data from the domestic economy came in below expectations,” Solange Srour, chief economist at BNY Mellon ARX Investimentos, said in a phone interview from Rio de Janeiro before the decision.
‘Moderate Adjustments’
While the bank’s focus has shifted from the fastest inflation in six years to shoring up economic growth, Tombini has quashed bets that he would accelerate rate cuts. Last week, he said that the global slump had not yet led to an “extreme event” and repeated his forecast that “moderate adjustments” would be sufficient to address any fallout in Brazil.
In addition to lowering rates, Brazil has unwound most of the credit curbs it imposed last December to stave off a bubble in vehicle, personal and payroll loans.
More than $3 trillion has been wiped off world stock markets this month, as yields on Italian and Spanish sovereign debt rose to Euro-era highs. Brazil’s benchmark Bovespa stock index has fallen 2.6 percent this month and is down 25 percent this year in dollar terms.
Falling industrial output and business confidence to levels unseen since 2008 are weighing on investor sentiment in Latin America’s biggest economy. Since Tombini’s first rate cut, economists have reduced their forecast for growth this year 11 times, to 3.1 percent from 3.79 percent, according to weekly central bank surveys. Last year, Brazil grew 7.5 percent, its fastest pace in more than two decades.
‘One of the First’
“Brazil is often one of the first economies to feel the effects of a weaker global environment,” said Neil Shearing, an emerging markets economist at Capital Economics Ltd. in London. “The major driver of this slowdown in Brazil has been external factors, with weaker capital inflows, and weakening terms of trade.”
Annual inflation in Brazil slowed for a second straight month in mid-November, easing to 6.69 percent, in line with the central bank’s forecast that consumer prices peaked in the third quarter. Inflation has exceeded the 6.5 percent upper limit of the central bank’s target range since April.
Tombini said last week that inflation rates will “fall sharply” by the second quarter of next year. The central bank has repeatedly pledged to slow the annual rate to 4.5 percent by the end of 2012.
Even as the economy shows signs of cooling, 18 percent annual credit growth and full employment conditions continue to stoke consumer demand.
Brazilian companies had a “somewhat negative earnings season” in the third quarter as a weaker real raised debt service costs on foreign currency debts, said Carlos Firetti, an analyst at Banco Bradesco SA, in a Nov. 29 note to clients.
The bank’s board, led by President Alexandre Tombini, today voted unanimously to reduce the benchmark Selic rate to 11 percent from 11.5 percent, as forecast by 64 of 65 analysts surveyed by Bloomberg. One analyst predicted a full-point cut.
Policy makers said that “by timely mitigating the effects coming from a more restrictive global environment, a moderate adjustment in the level of the basic rate is consistent with the scenario of inflation converging to the target in 2012,” according to their statement posted on the central bank’s web site. The language in today’s statement was unchanged from the bank’s Oct. 19 decision.
Brazil has taken the lead among emerging markets in trying to prevent spillover from Europe’s sovereign-debt crisis. The country’s surprise interest rate cut in August, the first in two years, has since been followed by ones in Australia and Israel. Traders are betting Tombini will cut the Selic rate as low as 9.25 percent by July, according to interest-rate futures.
“The external crisis is more prolonged, and the data from the domestic economy came in below expectations,” Solange Srour, chief economist at BNY Mellon ARX Investimentos, said in a phone interview from Rio de Janeiro before the decision.
‘Moderate Adjustments’
While the bank’s focus has shifted from the fastest inflation in six years to shoring up economic growth, Tombini has quashed bets that he would accelerate rate cuts. Last week, he said that the global slump had not yet led to an “extreme event” and repeated his forecast that “moderate adjustments” would be sufficient to address any fallout in Brazil.
In addition to lowering rates, Brazil has unwound most of the credit curbs it imposed last December to stave off a bubble in vehicle, personal and payroll loans.
More than $3 trillion has been wiped off world stock markets this month, as yields on Italian and Spanish sovereign debt rose to Euro-era highs. Brazil’s benchmark Bovespa stock index has fallen 2.6 percent this month and is down 25 percent this year in dollar terms.
Falling industrial output and business confidence to levels unseen since 2008 are weighing on investor sentiment in Latin America’s biggest economy. Since Tombini’s first rate cut, economists have reduced their forecast for growth this year 11 times, to 3.1 percent from 3.79 percent, according to weekly central bank surveys. Last year, Brazil grew 7.5 percent, its fastest pace in more than two decades.
‘One of the First’
“Brazil is often one of the first economies to feel the effects of a weaker global environment,” said Neil Shearing, an emerging markets economist at Capital Economics Ltd. in London. “The major driver of this slowdown in Brazil has been external factors, with weaker capital inflows, and weakening terms of trade.”
Annual inflation in Brazil slowed for a second straight month in mid-November, easing to 6.69 percent, in line with the central bank’s forecast that consumer prices peaked in the third quarter. Inflation has exceeded the 6.5 percent upper limit of the central bank’s target range since April.
Tombini said last week that inflation rates will “fall sharply” by the second quarter of next year. The central bank has repeatedly pledged to slow the annual rate to 4.5 percent by the end of 2012.
Even as the economy shows signs of cooling, 18 percent annual credit growth and full employment conditions continue to stoke consumer demand.
Brazilian companies had a “somewhat negative earnings season” in the third quarter as a weaker real raised debt service costs on foreign currency debts, said Carlos Firetti, an analyst at Banco Bradesco SA, in a Nov. 29 note to clients.
Brazil Central Bank Lowers Rate for Third Meeting to 11% as Economy Slows
Brazil’s central bank cut borrowing costs by half a point for a third straight meeting as a global economic slowdown threatens to exacerbate a slump in domestic demand.
The bank’s board, led by President Alexandre Tombini, today voted unanimously to reduce the benchmark Selic rate to 11 percent from 11.5 percent, as forecast by 64 of 65 analysts surveyed by Bloomberg. One analyst predicted a full-point cut.
Policy makers said that “by timely mitigating the effects coming from a more restrictive global environment, a moderate adjustment in the level of the basic rate is consistent with the scenario of inflation converging to the target in 2012,” according to their statement posted on the central bank’s web site. The language in today’s statement was unchanged from the bank’s Oct. 19 decision.
Brazil has taken the lead among emerging markets in trying to prevent spillover from Europe’s sovereign-debt crisis. The country’s surprise interest rate cut in August, the first in two years, has since been followed by ones in Australia and Israel. Traders are betting Tombini will cut the Selic rate as low as 9.25 percent by July, according to interest-rate futures.
“The external crisis is more prolonged, and the data from the domestic economy came in below expectations,” Solange Srour, chief economist at BNY Mellon ARX Investimentos, said in a phone interview from Rio de Janeiro before the decision.
‘Moderate Adjustments’
While the bank’s focus has shifted from the fastest inflation in six years to shoring up economic growth, Tombini has quashed bets that he would accelerate rate cuts. Last week, he said that the global slump had not yet led to an “extreme event” and repeated his forecast that “moderate adjustments” would be sufficient to address any fallout in Brazil.
In addition to lowering rates, Brazil has unwound most of the credit curbs it imposed last December to stave off a bubble in vehicle, personal and payroll loans.
More than $3 trillion has been wiped off world stock markets this month, as yields on Italian and Spanish sovereign debt rose to Euro-era highs. Brazil’s benchmark Bovespa stock index has fallen 2.6 percent this month and is down 25 percent this year in dollar terms.
Falling industrial output and business confidence to levels unseen since 2008 are weighing on investor sentiment in Latin America’s biggest economy. Since Tombini’s first rate cut, economists have reduced their forecast for growth this year 11 times, to 3.1 percent from 3.79 percent, according to weekly central bank surveys. Last year, Brazil grew 7.5 percent, its fastest pace in more than two decades.
‘One of the First’
“Brazil is often one of the first economies to feel the effects of a weaker global environment,” said Neil Shearing, an emerging markets economist at Capital Economics Ltd. in London. “The major driver of this slowdown in Brazil has been external factors, with weaker capital inflows, and weakening terms of trade.”
Annual inflation in Brazil slowed for a second straight month in mid-November, easing to 6.69 percent, in line with the central bank’s forecast that consumer prices peaked in the third quarter. Inflation has exceeded the 6.5 percent upper limit of the central bank’s target range since April.
Tombini said last week that inflation rates will “fall sharply” by the second quarter of next year. The central bank has repeatedly pledged to slow the annual rate to 4.5 percent by the end of 2012.
Even as the economy shows signs of cooling, 18 percent annual credit growth and full employment conditions continue to stoke consumer demand.
Brazilian companies had a “somewhat negative earnings season” in the third quarter as a weaker real raised debt service costs on foreign currency debts, said Carlos Firetti, an analyst at Banco Bradesco SA, in a Nov. 29 note to clients.
The bank’s board, led by President Alexandre Tombini, today voted unanimously to reduce the benchmark Selic rate to 11 percent from 11.5 percent, as forecast by 64 of 65 analysts surveyed by Bloomberg. One analyst predicted a full-point cut.
Policy makers said that “by timely mitigating the effects coming from a more restrictive global environment, a moderate adjustment in the level of the basic rate is consistent with the scenario of inflation converging to the target in 2012,” according to their statement posted on the central bank’s web site. The language in today’s statement was unchanged from the bank’s Oct. 19 decision.
Brazil has taken the lead among emerging markets in trying to prevent spillover from Europe’s sovereign-debt crisis. The country’s surprise interest rate cut in August, the first in two years, has since been followed by ones in Australia and Israel. Traders are betting Tombini will cut the Selic rate as low as 9.25 percent by July, according to interest-rate futures.
“The external crisis is more prolonged, and the data from the domestic economy came in below expectations,” Solange Srour, chief economist at BNY Mellon ARX Investimentos, said in a phone interview from Rio de Janeiro before the decision.
‘Moderate Adjustments’
While the bank’s focus has shifted from the fastest inflation in six years to shoring up economic growth, Tombini has quashed bets that he would accelerate rate cuts. Last week, he said that the global slump had not yet led to an “extreme event” and repeated his forecast that “moderate adjustments” would be sufficient to address any fallout in Brazil.
In addition to lowering rates, Brazil has unwound most of the credit curbs it imposed last December to stave off a bubble in vehicle, personal and payroll loans.
More than $3 trillion has been wiped off world stock markets this month, as yields on Italian and Spanish sovereign debt rose to Euro-era highs. Brazil’s benchmark Bovespa stock index has fallen 2.6 percent this month and is down 25 percent this year in dollar terms.
Falling industrial output and business confidence to levels unseen since 2008 are weighing on investor sentiment in Latin America’s biggest economy. Since Tombini’s first rate cut, economists have reduced their forecast for growth this year 11 times, to 3.1 percent from 3.79 percent, according to weekly central bank surveys. Last year, Brazil grew 7.5 percent, its fastest pace in more than two decades.
‘One of the First’
“Brazil is often one of the first economies to feel the effects of a weaker global environment,” said Neil Shearing, an emerging markets economist at Capital Economics Ltd. in London. “The major driver of this slowdown in Brazil has been external factors, with weaker capital inflows, and weakening terms of trade.”
Annual inflation in Brazil slowed for a second straight month in mid-November, easing to 6.69 percent, in line with the central bank’s forecast that consumer prices peaked in the third quarter. Inflation has exceeded the 6.5 percent upper limit of the central bank’s target range since April.
Tombini said last week that inflation rates will “fall sharply” by the second quarter of next year. The central bank has repeatedly pledged to slow the annual rate to 4.5 percent by the end of 2012.
Even as the economy shows signs of cooling, 18 percent annual credit growth and full employment conditions continue to stoke consumer demand.
Brazilian companies had a “somewhat negative earnings season” in the third quarter as a weaker real raised debt service costs on foreign currency debts, said Carlos Firetti, an analyst at Banco Bradesco SA, in a Nov. 29 note to clients.
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