All About Work & Financial

Japan’s Fiscal Pressure Grows on Tax-Boost Plan

2012-01-24T15:26:00.008+08:00

Japan’s government said it will probably miss its goal of balancing the budget by 2020 even with its proposed doubling of the sales tax, underscoring the scale of the nation’s fiscal challenges.

The primary budget deficit, which excludes the cost of servicing debt, will be the equivalent of 3.1 percent of gross domestic product for the year through March 2021, the Cabinet Office said in Tokyo today. Hours after the release, Prime Minister Yoshihiko Noda reiterated his call for opposition lawmakers to engage in talks on boosting the sales levy.

Addressing the shortfall through faster growth may be a limited option for Japan, where the central bank has already cut the key interest rate near zero and the traditional boost from a trade surplus last year evaporated -- for the first time since 1980. Absent structural changes that boost incentives to spend and invest, today’s report signals further fiscal tightening will be needed to rein in the world’s largest public debt.

“To balance the budget, the rate needs to rise further,” said Takuji Okubo, chief Japan economist at Societe Generale SA in Tokyo, referring to the sales-tax level. “We’ve passed the point where we can soft-land the fiscal situation. The question is how hard the landing is going to be.”

The Cabinet Office release assumed average growth of 1 percent annually over the period through the 2020 fiscal year. The Bank of Japan today cut its projection for gross domestic product for the year starting April 1 to 2 percent from an October estimate of 2.2 percent.

‘Flat’ Economy

“Japan’s economic activity has been more or less flat, mainly due to the effects of a slowdown in overseas economies and the appreciation of the yen,” the BOJ said. “Growth prospects for fiscal 2012 and 2013 will likely remain broadly unchanged because the economy is expected to gradually return to a moderate recovery path,” it said.

Europe’s debt crisis has both hampered Japanese exports and contributed to a strengthening in the yen, which has benefited from investor risk aversion because of Japan’s status as the world’s largest net creditor -- a legacy of past trade surpluses. The currency has climbed about 17 percent versus the dollar in the past two years, undermining earnings from shipments abroad.

The yen traded little changed today at 77.04 per dollar as of 2:44 p.m., compared with the postwar high of 75.35 reached on Oct. 31. Toyota Motor Corp. Chief Executive Officer Akio Toyoda said this month the “ideal” rate is 90. Asia’s largest automaker cut its profit forecast by more than half in December.

First Since ‘80

A government report tomorrow may show a 170 billion yen ($2 billion) merchandise trade deficit for December, the median estimate in a Bloomberg News survey shows. That would cap the first annual excess of imports over exports since 1980, Finance Ministry data show. While the figure reflects disruptions to factories after the March 2011 earthquake, UBS AG analysts this month projected that net exports won’t contribute to growth again until 2013.

Among other economic releases today, India’s central bank cut the cash reserve ratio to 5.5 percent from 6 percent and signaled future cuts. The International Monetary Fund will unveil revisions to its World Economic Outlook at 10 a.m. in Washington. Without giving specific estimates, IMF Managing Director Christine Lagarde said yesterday in Berlin that “we will lower growth forecasts for most parts of the world.”

French Manufacturing

In Europe, preliminary reports on French manufacturing and services may show both deteriorated this month, according to economists’ estimates before purchasing managers surveys are released. Similar reports from Germany and a broader measure for the euro region may show manufacturing and services improving, other surveys of economists showed. A report on Russia’s unemployment rate is forecast to show an increase in December to 6.6 percent from 6.3 percent.

In Japan, the central bank today kept its asset-buying fund at 20 trillion yen, and its credit-lending program at 35 trillion yen. The benchmark rate was held in a range of zero to 0.1 percent. The unanimous decisions were in line with predictions of all 14 economists surveyed by Bloomberg News.

Noda, speaking at the opening session for 2012 of the Diet, called for improved coordination with the Bank of Japan (8301) on addressing the yen and deflation, which has afflicted the nation for more than a decade. Finance Minister Jun Azumi told lawmakers that letting public finances deteriorate further would present a “significant risk to stable economic growth” and that efforts to contain debt should be made “as soon as possible.”

“Further fiscal improvements would be necessary” to meet the goal of a primary budget balance in the 2020 fiscal year, the Cabinet Office said today.

S&P Warning

Standard & Poor’s in November said Noda’s administration hasn’t made progress in tackling the issue and indicated it may be preparing to lower the nation’s sovereign grade. S&P rates Japan AA- and has had a negative outlook since April.

Noda’s ruling Democratic Party of Japan plans to raise the sales tax to 8 percent in April 2014 and then to 10 percent in October 2015. Lawmakers opposing the increase in the levy have said it may hamper growth at a time when the economy is recovering from the March 2011 record earthquake.

The government is stepping up efforts to cut the budget deficit, with it saying today it will reduce the number of special accounts, or funds managed separately from the main budget, to 11 by the end of fiscal 2015 from 17. Japan had about 40 special accounts through the early 2000s and the government has sought to reduce them and use the untapped funds and increase fiscal transparency.

Halving Ratio

The country will have a primary deficit that’s 3.6 percent of GDP in the year starting April 2015, today’s report showed. The government in 2010 set a goal of halving the ratio to about 3.4 percent in five years.

Japan, which has enjoyed borrowing costs that are around 1 percent, wouldn’t be able to manage its finances if bond yields surged to 3 percent, Noda said this month. The country risks seeing a spike in government bond yields unless it controls the outstanding borrowing set to approach 230 percent of gross domestic product in 2013, according to the Organization for Economic Cooperation and Development.

The sales tax proposal still needs to be approved by parliament. About 57 percent of the public opposes raising the levy, and the approval rating for Noda’s Cabinet fell to 29 percent from 31 percent last month, according to a survey by the Asahi newspaper.

The Cabinet Office also forecast Japan’s consumer prices will rise 0.1 percent in the next fiscal year and keep advancing through the projected period through 2023.

The forecasts are calculated based on central government debt. When local municipalities are included, the country will have a deficit of 3.3 percent of GDP in fiscal 2015 and 3 percent in fiscal 2020, the government said.

EU Seeks Bondholder Concessions as Greece Seen ‘Off Track’

2012-01-24T15:26:00.005+08:00

European finance ministers balked at putting up more public money for Greece, calling on bondholders to provide greater debt relief in order to point the way out of the two-year-old debt crisis.

Euro governments stood by an October offer of 130 billion euros ($170 billion) for a second Greek aid package. Officials want to fill a deeper-than-expected hole in the nation’s finances by saddling investors with a lower interest rate on exchanged bonds.

Brinkmanship over Greece clouded progress toward new fiscal rules and a beefed-up rescue fund, denting newfound confidence in the anti-crisis strategy and threatening to overshadow next week’s summit of European leaders.

“It’s obvious that the Greek program is off track,” Luxembourg Prime Minister Jean-Claude Juncker told reporters early today after chairing a meeting of European finance ministers in Brussels. He called on creditors to drop demands that new bonds carry coupons averaging 4 percent.

The stalemate is reminiscent of October’s bargaining over bond losses and risks disrupting the Jan. 30 summit. An accord with bondholders is key to a second financing package for the cash-strapped country, which faces a 14.5 billion-euro bond payment on March 20.

Efforts to shore up Greece, the trigger of the crisis, were flanked by headway on a German-inspired deficit-reduction treaty and indications that a cap on rescue lending might be boosted to 750 billion euros from 500 billion euros.

Intrusion

Greece’s struggle intruded on the Brussels meeting after bondholders made what Charles Dallara, managing director of the Washington-based Institute of International Finance, told Antenna TV constitutes a “maximum” debt-relief offer.

“The negotiations need to lead to a certain result and that result is not there,” Dutch Finance Minister Jan Kees de Jager told reporters. The creditors’ offer would leave Greece’s debt “substantially above” 125 percent of gross domestic product in 2020, instead of the targeted 120 percent, he said.

Greek coupons should be below 3.5 percent for debt to be serviced until 2020 and below 4 percent over the full 30-year period, Juncker said.

Greece’s failure to wrap up the debt-reduction accord helped drive two-year yields to an all-time high of 206 percent yesterday. In contrast to earlier episodes in the crisis, investors were optimistic that Greece’s travails won’t spill over to the rest of Europe.

Italian Bonds

Italian bonds rose yesterday, pushing the extra yield over 10-year German bonds down to 418 basis points. The spread, a gauge of the perceived risk of lending to Italy’s government, is now the narrowest since Dec. 7.

Successful short-term debt sales in the past two weeks in Italy, Portugal, Spain, France and Belgium were smoothed by 489 billion euros disbursed by the European Central Bank in unlimited three-year loans to euro-region banks.

The central bank has drawn encouragement from pledges by political leaders to turn Europe into a low-debt economy, enforced by a fiscal treaty that finance ministers said is on track to be signed in March.

The treaty will create an EU-supervised automatic “correction mechanism” that would force governments to fix “significant” deviations from a target structural deficit of 0.5 percent of GDP, according to a Jan. 19 draft obtained by Bloomberg News.

ESM Timetable

Under German pressure, countries that don’t enact the fiscal pact will be denied aid from the permanent rescue fund, the European Stability Mechanism. Finance ministers agreed to set up the ESM in July, a year ahead of schedule, after reaching a compromise with Finland over how it will award aid.

Finland, one of the four remaining euro-area borrowers rated AAA by Standard & Poor’s, forced through changes to provisions that could force it to underwrite loans against its will. Finance chiefs will sign the ESM treaty on Feb. 20, sending it to national parliaments for ratification.

Germany, Europe’s dominant economic power, gave the strongest signal yet that it would allow the temporary rescue fund, the European Financial Stability Facility, to lend its full remaining amount before it expires in mid-2013.

Combining the two funds would boost Europe’s unspent crisis-fighting capacity to 750 billion euros. In the past, Germany has backed plans to limit the combined lending at 500 billion euros.

Two Funds

Running the two funds in parallel “is being discussed,” Norbert Barthle, parliamentary budget spokesman for Chancellor Angela Merkel’s Christian Democratic Union, said in an interview in Berlin. The issue may come up at next week’s summit, government spokesman Steffen Seibert said.

Meanwhile, the temporary fund will soon be ready to offer insurance to persuade investors to buy bonds, said Klaus Regling, the fund’s manager. It would only intervene if a country such as Italy or Spain requests the backup.

“We need a larger firewall,” International Monetary Fund Managing Director Christine Lagarde said in Berlin yesterday. “Without it, countries like Italy and Spain, that are fundamentally able to repay their debts, could potentially be forced into a solvency crisis by abnormal financing costs.”

Lagarde is seeking $500 billion for the IMF -- a number that looks “on the optimistic side,” she said yesterday. Euro- region central banks have pledged 150 billion euros. Debate over the IMF’s coffers will peak at a Group of 20 meeting in February.

ECB Board

A separate battle brewed ove who will take the seat on the ECB’s Executive Board that will open up when Spain’s Jose Manuel Gonzalez-Paramo comes to the end of his eight-year term in May.

In a fight between the richer north and the debt-encumbered south, Luxembourg is seeking to wrest the seat away from Spain by nominating its central bank chief, Yves Mersch, the longest- serving monetary official in Europe.

Spain proposed Antonio Sainz de Vicuna, head of the ECB’s legal department, to hold onto a seat that has been in Spanish hands throughout the euro. A third contender, Mitja Gaspari, was put forward by Slovenia. The ministers put off a decision until the next meeting on Feb. 20.

Noda’s $130B Fund Goes Untapped in M&A Surge

2012-01-24T15:26:00.002+08:00

The biggest year for overseas buyouts by Japan’s companies since at least 2000 was financed without a single yen coming from a $130 billion program Prime Minister Yoshihiko Noda set up to spur such deals.

While “multiple” companies are weighing participation in the 10 trillion-yen fund, none have signed up, Kenji Okamura, director of the finance ministry’s development-policy division, said in an interview in Tokyo. He said it was too early to judge the initiative, which ends in eight months. Japanese companies spent $88.7 billion in overseas acquisitions last year, a record in data compiled by Bloomberg that go back 12 years.

Businesses may be bypassing the money even as purchases boom because of growing cash stockpiles and the need to move more quickly than a government process would allow. The lack of demand for the program unveiled in August underscores how difficult it is for Noda to go beyond the more traditional means of intervening in currency markets to support companies as the yen hovers near its postwar high of 75.35 per dollar.

“Japan is still in need of a quick remedy like intervention to erase the yen’s gains,” said Junko Nishioka, chief Japan economist in Tokyo at RBS Securities Japan Ltd. and a former Bank of Japan official. “There’s a chance Japan will intervene again. Companies have little incentive to increase capital spending and expand at home.”

Currency Reserves

Under the program, the state-run Japan Bank for International Cooperation disperses funds from the country’s foreign-exchange reserves. Authorities’ attempts to intervene to weaken the currency have failed to curb the yen’s 8 percent climb against the dollar in the past 12 months.

Companies in the Topix Index have 97.8 trillion yen of cash, up from 79.5 trillion yen three years ago, according to data compiled by Bloomberg. Takeda Pharmaceutical Co. (4502) bought Swiss drug-maker Nycomed last year for 9.6 million euros in cash, the largest overseas acquisition made by a Japanese company that year. Toshiba Corp., Japan’s largest maker of nuclear reactors, bolstered its stake in Westinghouse Electric for $1.6 billion.

Companies that completed deals after the program was announced said they didn’t want to use a facility they were unfamiliar with. Kirin Holdings Co. (2503), Japan’s largest brewer by market value, in November took full control of Brazilian beer maker Schincariol Participacoes e Representacoes by signing a bridge loan for about 100 billion yen from the Bank of Mitsubishi UFJ Ltd. to help finance the $1.35 billion purchase.

‘Weren’t Sure’

“We weren’t sure how to how to use it,” Kan Yamamoto, a Kirin spokesman, said when asked why his company didn’t tap the program. “We understand the outline of the facility, but we have little know-how without the existence of actual cases.”

The JBIC program offers loans at the six-month Libor rate, which at around 0.34 percent is lower than financing that companies could get with private financial institutions.

Libor, a benchmark for about $360 trillion of financial products worldwide, is derived from a survey of banks conducted each day on behalf of the British Bankers’ Association in London. The lenders are asked how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies including dollars, euros, yen and Swiss francs. After a predetermined number of quotes are excluded, those remaining are averaged and published for each currency by the BBA before noon.

Rates Drop

The loan rates Japanese banks charge have been declining as a global slowdown weighs on corporate demand. New loan rates fell 17.5 basis points in November to 1.019 percent, the lowest since the BOJ started tracking data in October 1993.

“Cash-rich companies can finance mid-sized transactions by themselves, utilizing bank loans,” said Kensaku Bessho, managing director of M&A advisory group Mitsubishi UFJ Morgan Stanley in Tokyo. “Utilizing governmental financing may require some sort of lengthy application process, which would be relatively cumbersome for companies in comparison with a commercial bank loan.”

Besides mergers and acquisitions, the JBIC program supports exports of small and medium-sized companies and securing energy resources, an area where it’s seen more interest. JBIC has so far made three loans worth about $835 million to companies involved with liquefied natural gas projects in Australia and Papua New Guinea.

Intervention Calls

Meantime, large businesses press for currency intervention, on top of the record sales of yen the Noda administration oversaw last year to stem appreciation. The yen traded at 76.98 per dollar at 11:19 a.m. in Tokyo, 17 percent higher than two years ago.

“The facility may have a slight effect,” said Takehiko Seike, economic policy bureau manager at Keidanren in Tokyo. Seike said that Keidanren still hopes the government will intervene when necessary, and that it has no position on other measures that could tame the yen’s rise. Members including Nissan Motor (7201) Corp. and Panasonic Corp. (6752) have announced plans to shift operations abroad as the currency soared.

Former BOJ Deputy Governor Kazumasa Iwata in October suggested that the central bank establish a 50 trillion yen fund to purchase foreign debt to help weaken the yen. Iwata, who was at the central bank from 2003-2008, also advised the government in November to promote Samurai bonds, or debt securities sold in Japan by foreign governments or companies.

Goldman Sachs Says U.S. Performance May Appear Better Than It Is: Economy

2012-01-24T15:25:00.011+08:00

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A decline in unemployment and pickup in manufacturing point to accelerating U.S. growth. Some economists say the numbers may not be as good as they look.

One reason: the severity of the economy’s plunge in late 2008 and early 2009 after Lehman Brothers Holdings Inc. collapsed threw a wrench into models used to smooth the data for seasonal changes, according to analysts at Goldman Sachs Group Inc. and Nomura Securities International Inc.

The jobless rate has dropped 0.4 percentage point over the past two months, according to the Labor Department, and the Institute for Supply Management’s factory index has climbed more than three points since the end of August. Signs the world’s largest economy was strengthening helped propel a 14 percent gain in the Standard & Poor’s 500 Index in the past eight weeks.

“The impact of the financial crisis does seem to have affected seasonal factors for several indicators,” Andrew Tilton, a senior economist at Goldman Sachs, said in a telephone interview from New York. It “might tend to make things look a little better in the early winter and look a little worse in the spring time.”

Most economic data are adjusted for seasonal changes to facilitate month-to-month comparisons. Without those changes, for example, construction would always pick up in the summer, when the weather is milder, and decline in the winter.

The adjustment process is unable to distinguish between a one-time shock, like Lehman’s demise, and a recurring issue that would need to be smoothed away. For that reason, the mechanism gives some data a leg up from about September through about March before turning negative the rest of the year.

The Recession

The economy contracted at an average 7.8 percent annual pace from October 2008 through March 2009, the worst back-to- back quarters in the post World War II era. The 18-month recession ended in June 2009.

The adjustment process “has been knocked out of whack by the financial crisis,” Ellen Zentner, a senior U.S. economist at Nomura in New York, said in a telephone interview. “The model ends up adjusting for a growth pattern that isn’t there. The sudden drop-off in economic activity in late 2008 is not a pattern, it doesn’t happen late every year. It was a one-off event.”

“Around April the seasonal bias turns and starts working against the data,” said Zentner, who shared her findings in research notes issued in December and last week.

Beating Peers

Nomura was the fourth-best employment forecaster for the two years through December, according to Bloomberg calculations. Goldman Sachs was No. 1 among forecasters of gross domestic product during the 12 months through June 2009.

Stocks were little changed today as investors weighed developments in Europe’s efforts to take its debt crisis. The Standard & Poor’s 500 Index closed at 1,316 in New York, up less than 0.1 percent.

French business confidence unexpectedly fell in January to the lowest in almost two years, providing the latest sign that Europe’s second-largest economy is mired in a recession, figures from the statistics office Insee showed today in Paris.

Elsewhere, prices paid by Australian producers decelerated in the October through December period for a third straight quarter, boosting scope for the central bank to lower borrowing costs next month, data from the Bureau of Statistics showed in Sydney.

Jobless Rate

The U.S. seasonal distortions are most acute for the jobless rate, according to a report by Tilton issued Jan. 13. The shift moves the rate by about a tenth of a point per month on average relative to the adjustment before the crisis, he said. The influence is most positive from November through January, Tilton’s research showed.

The overcompensation probably accounts for about 0.2 percentage point of the 0.4-point drop in the jobless rate over the past two months, according to Zentner’s calculations.

Economists at Goldman Sachs forecast unemployment will average 8.5 percent this year, unchanged from December’s reading. Nomura’s estimate is 8.4 percent. Zentner and Tilton agree that data on GDP aren’t affected by the seasonal issues.

In addition to the unemployment rate, the other indicators that show a marked influence include retail sales, consumer prices excluding food and fuel costs and the total number of people on jobless benefit rolls, Tilton said.

Chris Rupkey is among those who are more optimistic.

More Optimistic

“Forecasters have moved too far to the other side of the boat, they’ve gone too pessimistic,” said Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who forecasts unemployment will average 8 percent this year. “The data is surprising to the upside and that leads us to believe the entire year will surprise the market.”

The ISM’s factory gauge has also been skewed by the seasonal adjustment issues, according to Tilton’s and Zentner’s research. Tilton estimates the deviation from the pre-crisis adjustment averages about 0.35 point a month, and the most positive influence occurs from September through December.

The manufacturing index was at 53.9 last month compared with 50.6 in August, last year’s low point.

The bias stemming from the financial crisis has been accompanied this year by warmer and drier weather than usual, which has also boosted some data, said Tilton.

“The housing-related data probably benefited from the fact that the weather was relatively nice in December,” said Tilton.

Construction Gain

Single-family housing starts rose in December to a 470,000 annual pace from 450,000 the prior month and the highest since April 2010, the Commerce Department reported last week.

Homebuilders may not be the only industry benefitting.

Profits at Union Pacific Corp. (UNP), the biggest U.S. railroad, topped estimates in the fourth quarter as carloads advanced 3 percent, led by gains in autos and chemicals.

Shipments of chemicals improved as “favorable weather and strong demand extended the shipping seasons,” John Koraleski, executive vice president of marketing and sales at Union Pacific, said on a Jan. 19 conference call.

While the seasonal adjustment may have augmented the improvement in growth, it does not cast doubt that growth has strengthened, said Tilton.

“The main driver is the fundamental state of the economy,” said Tilton. The drop in fuel prices in the second half of the year and the rebound in confidence from the “uncertainty shock” caused by the debt-ceiling debate have played a bigger role in the improvement, he said.

BOJ Cuts Growth Forecasts, Keeps Rates Steady

2012-01-24T15:25:00.008+08:00

The Bank of Japan cut its growth outlook for the year starting in April while keeping its zero- interest rate policy as Europe’s debt crisis reduced global demand and keep the yen strong.

Governor Masaaki Shirakawa and fellow board members lowered the economic forecast to 2 percent from an October estimate of 2.2 percent for fiscal 2012. The central bank maintained its projection for consumer prices to rise 0.1 percent, according to its statement released in Tokyo today.

The revisions reflect growing BOJ concern that the European debt crisis will slow exports and keep the yen near near a record high, cutting into corporate profits. Shirakawa has said the European situation is the biggest threat, and analysts including Naka Matsuzawa said he may not take further easing steps unless the turmoil widens significantly.

“The BOJ sees European credit crunch as the biggest risk,” Matsuzawa, chief investment strategist at Nomura Securities in Tokyo, said before the statement was released. “It won’t take further easing steps until the problem reignites.”

The central bank kept its asset-buying fund at 20 trillion yen ($260 billion), and its credit-lending program at 35 trillion yen, it said in the statement. The benchmark interest rate was held in a range of zero to 0.1 percent. The unanimous decisions were in line with predictions of all 14 economists surveyed by Bloomberg News.

‘Flat’

“Japan’s economic activity has been more or less flat, mainly due to the effects of a slowdown in overseas economies and the appreciation of the yen,” the BOJ said. “Growth prospects for fiscal 2012 and 2013 will likely remain broadly unchanged because the economy is expected to gradually return to a moderate recovery path in the first half” of the year starting April 1, it said.

GDP will probably expand 1.6 percent in the year starting April 2013, when consumer prices will increase 0.5 percent, the central bank said, little changed from their October projections. In the year ending this March, the economy will contract 0.4 percent and prices will decline 0.1 percent, both lower than initially anticipated, the BOJ said in a statement.

“There is no sign for us as we look at the Japanese economy and the state of inflation to think that the Bank of Japan will do anything other than keep interest rates at zero for another two to three” years at least, Allen Sinai, co- founder and president of Decision Economics Inc. in New York, said last week. “Zero-interest rates as far as you can see, which is a long way out, and expansion of the balance sheet.”

‘Ideal’ Rate

Toyota Motor Corp. Chief Executive Officer Akio Toyoda said on Jan. 5 the “ideal” exchange rate is 90 yen to the dollar after the Asia’s largest automaker cut its profit forecast by more than half in December.

The yen traded at 77.03 per dollar as of 12:52 p.m. after it reached postwar high of 75.35 on Oct. 31. It rose to an 11- year high of 97.04 per euro on Jan. 16.

The World Bank cut its global economic outlook last week to 2.5 percent growth this year from a June estimate of 3.6 percent, citing risks of a widening euro-area crisis. Japan’s economy was forecast to expand 1.9 percent in 2012, slower than a prior estimate of 2.6 percent growth, the World Bank said Jan. 17.

Economists predict a report tomorrow will show exports declined for a third month in December. Consumer prices excluding fresh food fell 0.2 percent in November from a year earlier, a report showed last month, undescoring Japan’s struggle to overcome decades of deflation.

The Bank of Japan has pledged to keep benchmark rates unchanged until it sees sustained signs of inflation.

Indian Growth Outlook Has Weakened Even as Inflation Is Elevated, RBI Says

2012-01-24T15:25:00.005+08:00

India’s economic growth is weakening more than anticipated and inflation remains “high” as the rupee’s fall threatens to stoke price pressures, the central bank said, signaling it may leave interest rates unchanged.

“The growth slowdown, high inflation and currency pressures, complicate policy choices,” the Reserve Bank of India said in a report yesterday before its rate decision in Mumbai. The “critical factors” ahead will be “core inflation and exchange rate pass-through,” it said, adding that keeping the “liquidity deficit” in acceptable limits is also a priority.

India faces slower expansion as the global recovery falters and inflation which at 7.47 percent is the fastest among the so- called BRIC nations. Brazil, Russia and China, the group’s other members, have cut rates or lowered reserve requirements for lenders in recent weeks as they strive to shield growth from the impact of Europe’s debt crisis.

“The RBI is faced with a complex job of curbing inflation and at the same time protecting growth,” said Madan Sabnavis, chief economist at Mumbai-based CARE Ratings. “The prudent action at this juncture will be to keep rates on hold.”

The rupee, Asia’s worst-performing currency in 2011 with a 16 percent slide, climbed 0.5 percent to 50.0825 per dollar at the close in Mumbai yesterday. The BSE India Sensitive Index rose 0.1 percent.

The Reserve Bank will keep its repurchase rate at 8.5 percent today for a second month, all 21 economists in a Bloomberg News survey said. It is due to release its monetary- policy announcement at 11 a.m.

Cash Reserve Ratio

Five respondents predicted it will cut the cash reserve ratio to alleviate a shortage of funds in the economy. The central bank has added 718.8 billion rupees ($14.4 billion) into the banking system since the start of November by purchasing government securities from lenders.

“Growth in India is moderating more than was expected earlier,” the central bank said. “While in the short run, moderating inflation will provide some space for monetary policy to address growth concerns” that will be “temporary respite” at best unless supply bottlenecks are tackled, it said.

India’s wholesale-price inflation slowed to a two-year low of 7.47 percent in December. By comparison, consumer prices rose 6.5 percent in Brazil, 6.1 percent in Russia and 4.1 percent in China last month.

The moderation in inflation is “likely to persist” in the three months through March, the central bank said in the report.

At the same time, it said “price pressures remain.” Risks stem from “suppressed domestic energy prices, the incomplete pass-through of rupee depreciation and slippage in fiscal deficit,” it said.

Maruti Price Rises

Maruti Suzuki India Ltd. (MSIL), maker of half the cars sold in India, has raised prices of all its models this month, citing higher raw material costs and the decline in the currency.

The Reserve Bank raised borrowing costs by a record 375 basis points in 13 moves from mid-March 2010 before pausing in December.

India’s economy may expand 7 percent in the fiscal year through March 31, according to a survey compiled by the central bank of forecasts from agencies including the International Monetary Fund and the Asian Development Bank, yesterday’s report showed. October’s survey projected growth of 7.6 percent.

Inflation may average 8.8 percent in the period, the survey said, the same as the previous estimate.

Indian expansion is set to be “below potential” in the current fiscal year before recovering at a “modest pace,” the Reserve Bank said. Lower external and investment demand has affected growth, it said.

“While headline inflation has eased, price pressures as reflected in demand-side inflation still persist in the economy, thus the RBI is unlikely to cut rates before April,” Arun Singh, a Mumbai-based senior economist at Dun & Bradstreet Information Services India Pvt., said before the report.

Prime Minister Manmohan Singh is under pressure to bolster the economy following street protests against price increases, corruption allegations and the struggle to attract more foreign investment. His government faces regional elections starting this month.

Obama Speech to Embrace U.S. Manufacturing Rebirth, Energy for Job Growth

2012-01-24T15:25:00.002+08:00

President Barack Obama tonight will lay out what he calls a “blueprint” for revitalizing the economy, emphasizing a rebirth for U.S. manufacturing, bolstering domestic energy production and training workers.

In his third State of the Union address before a joint session of Congress, Obama will focus on economic concerns in an election-year speech that sets policy priorities as it lays out themes for his re-election campaign.

The speech will include “the principles that President Obama has brought to public service since he began his career in public service,” White House press secretary Jay Carney said yesterday without giving specifics. “And I’m sure that the campaign is focused on those same ideas, because they are working to get the president re-elected.”

While administration officials have promised the address will include new proposals, Obama is unlikely to get major initiatives enacted before the November election, which will also decide control of the House and Senate. The speech is sandwiched between the Republican presidential primary in South Carolina on Jan. 21 and the Florida primary on Jan. 31.

Obama also will be constrained this year by efforts to reduce the nation’s long-term debt. Last year’s deficit of $1.3 trillion was third-highest as a share of the economy since 1945.

The president is scheduled to deliver the televised address at 9 p.m. Washington time. The Republican response will be delivered by Indiana Governor Mitch Daniels, who flirted last year with running for president.

Little New

Douglas Holtz-Eakin, an economic policy adviser to Republican candidate John McCain in 2008, said he expects Obama will offer little new and instead “talk about the sad state of the middle class and the Republicans’ plans are going to make it worse.”

Obama previewed his message in a Dec. 6 speech in Osawatomie, Kansas, that invoked the populism of President Theodore Roosevelt. Economic inequality has left millions of Americans feeling that “the basic bargain that made this country great has eroded,” he said.

That means more “fairness” is needed in the tax code and in making sure that financial firms play by the same rules as other businesses, according to Obama. More details will be in the president’s 2013 budget, which will go to Congress Feb 13.

Republicans say they are ready for a fight.

‘Same Old Policies’

“It sounds to me like the same old policies that we’ve seen,” House Speaker John Boehner said on the “Fox News Sunday” program on Jan. 22.

“More spending, higher taxes, more regulations -- the same policies that haven’t helped our economy,” the Ohio Republican said. “If that’s what the president is going to talk about Tuesday night, I think it’s pathetic.”

Obama also will devote a section of his speech to U.S. energy production. In a video to supporters over the weekend he said economic growth can be “fueled by homegrown and alternative energy sources.”

Last March he called for new incentives to boost production of oil, natural gas and biofuels, tougher fuel-efficiency standards for vehicles and greater reliance on cleaner sources of energy, including nuclear power.

An Interior Department report last year the Gulf of Mexico alone may have as much as 11.6 billion barrels of untapped crude -- enough to meet U.S. demand for almost two years -- and 59.2 trillion cubic feet of natural gas. He’s also endorsed extracting gas from shale as long as it is done in a way that is environmentally sound.

Economic Outlook

In talking about the economy, Obama may point to signs of a rebound.

The unemployment rate in December dropped to 8.5 percent, a three-year low, and employers expanded payrolls by 200,000, showing the job market is gaining momentum. Employers added 853,000 jobs in the second half of 2011, compared with 782,000 in the first six months. Manufacturing output climbed 0.9 percent, the biggest gain since December 2010, according to Federal Reserve data.

Gross domestic product, the value of all goods and services produced, rose at a 3 percent annual rate in the final three months of 2011 after advancing 1.8 percent in the previous quarter, according to the median forecast of 64 economists surveyed by Bloomberg News before the Commerce Department’s Jan. 27 release.

Flying West

Obama will leave the morning after the State of the Union for a three-day trip to Iowa, Arizona, Nevada, Colorado and Michigan, all battlegrounds in the election.

To talk about manufacturing, Obama tomorrow will stop at Conveyor Engineering & Manufacturing in Cedar Rapids, Iowa, which makes screw-type conveyors for moving materials such as feed, grain and chemicals for farming and processing facilities.

Later in the day he’s scheduled to visit Chandler, Arizona, about 20 miles (32 kilometers) southeast of Phoenix, where Intel Corp. has a manufacturing plant. The world’s largest chipmaker says the facility employs 9,700 people.

Obama’s 2011 State of the Union was watched live by 42.8 million viewers on ABC, CBS, Fox, NBC, Telemundo, Univision, CNN, Centric, CNBC, Fox News Channel and MSNBC, according to Nielsen data. That was down 11 percent from 2010 and 18 percent from Obama’s first address to Congress in 2009. He has so far failed to garner TV audiences to match the most-watched addresses by George W. Bush and Bill Clinton.

Obama’s campaign plans to use social media to spread the messages in his speech. The president plans an online video chat on Jan. 30 on the White House page on Google Plus and the whitehouse.gov website.

No Takers for Texas as NYC Trophies Find Refinancing: Mortgages

2012-01-24T15:24:00.012+08:00

When it comes to the commercial- mortgage bond market these days, location is everything.

From Webster, Texas to Providence, Rhode Island, borrowers in the U.S. are coming up short, unable to get new loans as about $59 billion in mortgages packaged into bonds comes due in 2012, according to data compiled by Bloomberg. In contrast, $930 million has been refinanced on two New York skyscrapers in the past month; Vornado (VNO) Realty Trust’s Park Avenue tower and Sheldon Solow’s 9 West 57th Street, home to Chanel SA and KKR & Co.

Lenders are reluctant to venture from major urban centers, making it harder for property owners in smaller cities to refinance even as unemployment falls to the lowest since February 2009 and confidence in the economic recovery grows. Banks and insurance companies are funneling cash to a select pool of borrowers as mortgages from the real-estate boom start maturing after values fell 42 percent since 2007.

“Having a New York City trophy asset in a CMBS deal, if it is a true trophy, generally is a positive for investors,” said Julia Tcherkassova, a commercial-mortgage bond analyst at Barclays Capital in New York. Outside of major metropolitan areas “there are going to be fewer competitors bidding and when the buildings lose tenants it’s difficult to replace them.”

More than half of the $19 billion in commercial property loans packaged into bonds in 2007 that mature this year may fail to be refinanced, according to Standard & Poor’s. Almost $8 billion in commercial mortgages on New York real estate comes due this year, including $3 billion of five-year loans, according to Trepp LLC, a mortgage data provider.

‘Trickle’ of Financing

Insurers and international banks have zeroed in on lending to the strongest borrowers in the best markets since 2010, according to Ben Thypin, director of market analysis for Real Capital Analytics, a New York-based research firm. While appetite for so-called trophy assets will continue in 2012, some lenders may push into smaller markets, he said.

“One of the big questions this year is whether or not the trickle of activity we saw move into secondary and tertiary markets in 2011 becomes more of a flood,” Thypin said. “The economy is a big determining factor.”

The U.S. added 200,000 jobs in December and the unemployment rate declined to an almost three-year low of 8.5 percent. Investor confidence in commercial property debt is also rising with a benchmark gauge at about the highest since July.

The CMBX.NA.AJ.4, tied to classes of originally AAA rated commercial debt most exposed to losses, has jumped 20.2 cents to 66.8 cents on the dollar since Oct. 18, after dropping from 84.8 in February, according to Markit, the index administrator.

Extra Yield

The extra yield investors demand to hold top-ranked commercial-mortgage bonds rather than Treasuries has declined to 2.31 percentage points from 2.61 percentage points this year, according to the Barclays Capital CMBS AAA Super Duper Index.

That may not be enough to bail out the Baybrook Gateway Mall in Webster, Texas, 22 miles (35 kilometers) northwest of Houston.

A $41 million mortgage on the shopping center, originated by Goldman Sachs Group Inc. in December 2006 and sold as part of a commercial-mortgage bond deal two months later, was handed over to a firm that handles troubled loans because the borrower couldn’t refinance debt that matured this month, according to Fitch Ratings. So-called special servicers determine whether to modify loan terms or foreclose on property owners struggling to make payments.

Texas Mall Negotiates

Baybrook, co-owned by Blackstone Group LP’s Brixmor Property Group Inc. and JP Morgan Chase & Co., is currently working with the special servicer to resolve the finances, Stacy Slater, a spokeswoman for Brixmor, said in a telephone call. The mall lost tenants, such as Linens ‘n Things Inc. which filed for bankruptcy in 2008, she said, declining to comment further.

A $43.5 million mortgage on One Citizens Plaza, a 224,089 square-foot office building that houses the headquarters of Citizens Financial Group in Providence, Rhode Island, also ran into trouble this month before its Jan. 11 maturity date, according to Fitch. Though the building was 98 percent occupied as of September, the borrower didn’t repay the mortgage originated by Wachovia Corp. in 2006, Bloomberg data show.

“We are just beginning communications with the lender about this loan,” said David Snyder, chief financial officer of KBS Realty Advisors, a private-equity real estate investment company in Newport Beach, California that owns the property. “At this juncture we are unable to predict the outcome,” he said in an e-mail.

Late Payments

Late payments on loans packaged into bonds are at 8.95 percent in December, down from 9 percent in November, according to an S&P report. The rating company forecasts delinquencies will rise to between 9.5 percent and 10 percent in 2012.

Borrowers with prime properties in the best neighborhoods of Manhattan, such as the area between 42nd Street and Central Park, aren’t likely to struggle to pay down debt, even as they deal with overhang from the boom years, according to Peter DiCorpo, president of CBRE Global Investors U.S. managed accounts group.

“The assets around Grand Central or near the park district are going to do well all day,” said DiCorpo, who is based in Los Angeles. “If you have an asset that is way off the beaten path, that is going to be a harder sell.”

After losing more than half of their value from the September 2007 peak, Manhattan office properties have recovered to 2006 levels and remain about 20 percent below the top of the market, Green Street Advisors Inc., a real estate research firm, said Jan. 6. Overall commercial property values in the U.S. will be at current levels or slightly lower through 2014, Moody’s Investors Service said in a December report.

New York Finances 350

Vornado, which owns more than 100 million square feet of U.S. properties, acquired the 538,000-square-foot (50,000- square-meter) tower at 350 Park Avenue in December 2006 for $541.5 million. The building was one of several in Midtown Manhattan that were bought for more than $1,000 a square foot during the property boom.

When faced with a $430 million loan maturing this month, Vornado got $300 million from New York Community Bank (89976) and paid the difference in cash, according to a person familiar with the deal, who declined to be identified because they weren’t authorized to speak publicly. The original loan was packaged into securities by Wachovia in March 2007.

“There is a long line of people who are willing and able to recapitalize trophy assets,” said Harris Trifon, global head of commercial real estate debt research at Deutsche Bank AG (DBK) in New York.

‘Better-Than-Expected’

The result for bond investors was a “better-than-expected resolution, given the sponsor’s decision to fund the gap with cash,” said Tcherkassova of Barclays.

Mark Semer, a Vornado spokesman, declined to comment.

In December, New York City developer Solow obtained $625 million in financing from Deutsche Bank to pay off $500 million in five-year debt scheduled to mature next month on 9 West 57th. The property, with its panoramic views of Central Park, commands some of Manhattan’s highest rents. Some of the maturing debt was part of the same $7.9 billion deal sold by Wachovia that included Vornado’s 350 Park Avenue loan, Bloomberg data show.

High-profile towers became more prevalent in commercial- mortgage bond offerings as deals became larger and Wall Street banks gave borrowers the most favorable terms, such as assigning property values based on projections of future rent growth, according to Tcherkassova.

Issuance Plummeted

Sales of commercial-mortgage bonds reached a record $234 billion in 2007, Bloomberg data show. Issuance tumbled to $12.2 billion in 2008 as credit markets seized. The market stayed shut until November 2009. Banks arranged $28 billion in 2011, compared with $11.5 billion in 2010, Bloomberg data show.

Lenders pulled back from making new commercial mortgages for sale as bonds as the European debt crisis rattled markets in July and August, threatening to choke off funding to borrowers with debt coming due in smaller cities where commercial mortgage backed securities lenders are more competitive.

Originations have resumed, with Goldman Sachs and Citigroup Inc. (C) set to sell $1 billion in debt tied to shopping centers, hotels and office buildings this week, Bloomberg data show.

“What we have is a tale of two cities,” Ambrose Fisher, managing director for Oaktree Capital Management LP, a Los Angeles-based investment firm with $73 billion in assets under management, said at a Jan. 20 conference on real estate opportunity investing in Laguna Beach, California. “Outside the core markets and the core products, it’s difficult to get financing.”

Spain’s Two Finance Ministers Clash on Deficit Target as Economy Shrinks

2012-01-24T15:24:00.009+08:00

Economy Minister Luis de Guindos said Spain is sticking to its deficit goal even as the economy shrinks, underlining a rift in the month-old Cabinet over whether the nation can halve its shortfall during a recession.

De Guindos said Spain’s government has an “absolutely inescapable commitment” to austerity, when asked whether he agreed with Budget Minister Cristobal Montoro’s call on Jan. 22 for the European Union to ease Spain’s 2012 deficit goal to take the shrinking economy into account.

Spanish Prime Minister Mariano Rajoy divided the Finance Ministry in two after coming to power in December, putting People’s Party veteran Montoro in charge of the budget and giving de Guindos, a former Lehman Brothers Inc. banker, responsibility for the economy. Rajoy didn’t make either of them deputy prime minister, as the last two finance chiefs were, saying he would oversee economic issues himself.

“It’s a trial of strength to see who’s really in charge of economic issues, and Rajoy will just let it happen,” said Ismael Crespo, a political scientist at the Fundacion Ortega- Maranon research institute in Madrid, who was head of the state polling unit when the PP was last in power.

“Montoro is speaking more to the public and Guindos is speaking more to the foreigners,” he said in a telephone interview.

Economy Contracting

Spain’s government needs to rein in its borrowing costs and convince investors it can cut the euro region’s third-largest budget deficit even as the economy enters its second recession in two years. The Bank of Spain said today the economy contracted in the fourth quarter and may shrink 1.5 percent in 2012, adding to pressure on Rajoy, who won the Nov. 20 election on a pledge of creating jobs.

Budget Minister Montoro, a 61-year-old public-finance professor and lawmaker for Seville, said on Jan. 22 the EU should ease Spain’s budget target of 4.4 percent of gross domestic product this year as the goal was set by the previous government, which expected the economy to grow 2.3 percent. The deficit amounted to 8 percent of GDP last year, overshooting the 6 percent target.

“If Brussels doesn’t adapt the stability program to the new scenario of a recession, it won’t be realistic and not only will Spain sink but the whole of Europe,” Montoro said in an interview with La Vanguardia newspaper in comments confirmed by a Budget Ministry spokeswoman.

Austerity Commitment

Asked about the comments yesterday as he arrived at a meeting of euro-region finance ministers in Brussels, de Guindos, 52, said: “What I’m telling you is that the commitment of the Spanish government to austerity is without a doubt very superior to that of the previous government.”

De Guindos, who described Montoro as his “mentor” and “friend” when he took over as minister in December, holds a news conference today in Brussels after the EU finance ministers meeting ends.

The comments yesterday weren’t the first time the pair has given differing messages in the past week. De Guindos, who is not a member of parliament, wrote in the Wall Street Journal on Jan. 19 that budget cuts were “not a choice.”

The same day Montoro was quoted as telling the Financial Times Deutschland newspaper that the nation may miss its budget goal. The two gave conflicting reports of the 2011 deficit on Jan. 2, as de Guindos said the overshoot may have been even greater than the government’s first estimate.

Montoro’s comments yesterday also clashed with those of Deputy Prime Minister Soraya Saenz de Santamaria, who said on Jan. 20 that the government was “determined” to meet the existing target. A spokesman at the prime minister’s office, who declined to be named in line with policy, had no further comment on Montoro’s remarks yesterday.

Scots Independence Cost May Exceed Oil Money Nationalists Claim

2012-01-24T15:24:00.006+08:00

Ever since oil was discovered in the North Sea off the British coast in December 1969, the Scottish National Party claimed it for Scotland.

Now in power and closer than ever to a referendum on whether to break from the U.K. after more than 300 years, the SNP government in Edinburgh led by Scottish First Minister Alex Salmond is counting on tax revenue from the oil industry as a key pillar of the economy along with financial services.

“We’re talking about quite a significant cash bonanza, but one that’s subject to considerable uncertainty,” David Bell, professor of economics at Stirling University and the budget adviser to the Scottish Parliament’s finance committee, said in an interview. “It’s not quite a get-out-of-jail-free card.”

Oil prices have fluctuated by at least 30 percent in 12 of the last 23 years, according to data compiled by Bloomberg. From 2005 to 2010, oil and gas revenue accounted for 6.8 percent to 10.8 percent of the Scottish economy, said Malcolm Barr, JPMorgan Chase & Co. (JPM)’s chief U.K. economist.

More than 40 billion barrels of oil equivalent, a measure used to include gas, have been extracted from the U.K. Continental Shelf at a cost of 468 billion pounds ($729 billion), according to Oil & Gas U.K., the body that represents about 200 companies operating in the offshore industry.

Talking Points

At current production levels, the U.K. is the third-largest oil producer in Europe, behind Russia and Norway, and the fourth-largest gas producer with Russia, the Netherlands and Norway ranked higher, according to the BP Statistical Review of World Energy published in June.

What will have to be decided should Scotland vote to leave the U.K. is how much of the remaining oil is Scotland’s based on maritime borders and what the associated tax revenues will fund. The oil was discovered off Scotland’s east coast.

Salmond has said the vote on independence will take place in the fall of 2014, while U.K. Prime Minister David Cameron and his government want it earlier.

“The key argument which would have to be settled is where the line would be drawn,” Alex Kemp, an economics professor at Aberdeen University and author of a history of North Sea oil, said in an interview. “There are always some complications.”

Using the existing fishing management line that demarcates the English and Scottish fisheries would give Scotland about 95 percent of the oil and 58 percent of the gas based on 2010 production figures, Kemp said. His model shows 90 percent of industry falling in the Scottish part, he said.

Running Scotland

The SNP government, which has said it would have financed everything from bank bailouts to pensions with oil revenue, accepts Kemp’s figure, John Swinney, the Scottish finance minister, said in an interview.

“That’s an assessment formulated not by the Scottish government but by probably the most significant petroleum analyst and we would accept that as a reflection of the current situation,” Swinney said in London on Jan. 16 after a meeting with Alexander Yakovenko, the Russian ambassador to the U.K.

Opinion polls show increasing support in Scotland for independence, though still a minority in the country has declared an intention to vote for it.

Scotland has had control over such things as health, education, justice and transportation since the re-establishment of the Scottish legislature in 1999, while the U.K. Parliament at Westminster in London retains power over macro-economic affairs, defense and immigration policy.

Current Spending

Based on 90 percent of the oil and gas revenue, Scotland would have received about 10 billion pounds of the 11.1 billion pounds forecast for the current fiscal year that ends in March. That would be equal to 36 percent of the Scottish government’s budget of 28 billion pounds for the current fiscal year.

That budget, allocated from the U.K. Treasury, accounts for about 60 percent of all government spending in Scotland. On that basis, oil revenue would meet about 21 percent of spending. It wouldn’t cover expenditure on health or local government. The SNP also plans to set up a Scotland Futures Fund modeled on the Norwegian Petroleum Fund.

“It’s difficult to see how you’d be able to maintain current spending and set up a sovereign wealth fund,” Bell said. “Oil is a good answer up to a point. It’s hard to see how it would allow us to substantially increase spending.”

Over the past five years, an independent Scotland with control of oil and gas revenue would have had a budget surplus of 7.5 billion pounds, Salmond said in an interview on Jan. 20.

The revenue could alternatively be invested to encourage growth in the economy now, said Salmond, who will publish a referendum consultation document tomorrow on the day Scots commemorate the birth of Robert Burns, their best-known poet.

‘Flexibility’

“It would increase the opportunity for economic flexibility,” Salmond said. “The aim and intention would be to benefit the Scottish economy and Scottish people.”

In the 2008-2009 financial year, when oil prices reached a record, tax revenue from North Sea oil was 12.9 billion pounds before falling by almost half the following year to 6.5 billion pounds and then rising to 8.8 billion in 2010-2011, data from Her Majesty’s Revenue & Customs show.

U.K. oil production more than halved between 1999, when it peaked, and 2010, according to Department of Energy and Climate Change data. Since then, the price has more than quadrupled.

“A newly independent Scotland would need to see a large improvement in its fiscal position to insulate itself from swings in tax revenues coming from the price of oil,” JPMorgan’s Barr said in a note to clients on Jan. 20.

Extracting More

The forecast for North Sea oil revenue was reduced by 2.3 billion pounds in November by the tax authority because of the higher-than-expected drop in production.

What’s more, how much of the remaining oil and gas reserves is extracted will depend on how much is invested in the development of more efficient technology, as well as the taxation and licensing regime and oil prices.

On current estimates, there is somewhere between 14 billion barrels and 24 billion barrels of oil equivalent still to be extracted over the next 30 years, Oil & Gas U.K.’s 2011 Economic Report said. In the event of independence, how that would be split with England also would be up for negotiation.

“The higher the oil price, the more new fields are developed, there is more exploration and more discoveries,” he said by telephone from Aberdeen, Scotland’s oil hub.

There were 14 exploration wells drilled last year, the lowest since 1965, while the number of appraisal wells drilled, 28, was the lowest since 2003, the Department for Energy and Climate Change said Jan. 13. The drilling projects were about half what had been expected at the start of the year after a surprise tax change by the U.K. government, said Mike Tholen, economics director for Oil & Gas U.K.

Instead of production falling by 5 percent in 2011, the estimate at the start of the year, a decline of 15 percent to 17 percent is more likely, Tholen said. That’s about double the 7 percent average annual drop in the previous four years, he said.

“It’s appalling,” Tholen said in an interview. “You have to keep investing to keep producing.”

India Cuts Reserve Ratio as BRICs Act on Growth

2012-01-24T15:24:00.001+08:00

India’s central bank unexpectedly cut the amount of deposits lenders need to set aside as reserves for the first time since 2009 and signaled future interest-rate cuts, joining BRIC nations in aiding growth.

The Reserve Bank of India reduced the cash reserve ratio to 5.5 percent from 6 percent, it said in a statement in Mumbai today. The move would add around 320 billion rupees into commercial banks, it said. The decision was predicted by three of 21 economists in a Bloomberg News survey, with two foreseeing a quarter-point cut and the rest no change. The central bank left the benchmark repurchase rate at 8.5 percent for a second month.

Brazil, China and Russia have either cut borrowing costs or reduced lenders’ reserve requirements in recent weeks as the debt crisis in Europe saps global expansion. While India’s inflation, stoked by rupee weakness, is the fastest in the group, it eased to a two-year low last month, giving Governor Duvvuri Subbarao more scope to inject cash into an economy that grew the least since 2009 in the third quarter.

“With the liquidity deficit becoming worrying, today’s move is aimed at easing the cash crunch but they are still concerned about inflation which is limiting policy options,” Shubhada Rao, Mumbai-based chief economist at Yes Bank Ltd. (YES), said before the release. The RBI may start cutting the policy rate in March, she said.

Bond Yields

The BSE India Sensitive Index (SENSEX) extended gains, rising 0.8 percent to 16,880.17 at 11:04 a.m. in Mumbai. India’s rupee, which has surged about 6.5 percent against the U.S. dollar this year, advanced 0.1 percent to 50.0375. The currency is Asia’s best performer this year after sliding 16 percent in 2011.

The yield on the 8.79 percent note due November 2021 fell four basis points to 8.09 percent, according to the central bank’s trading system.

The Reserve Bank today cut India’s growth forecast to 7 percent in the year through March from the 7.6 percent predicted in October. It kept the inflation estimate at 7 percent, according to today’s statement.

The reduction in the reserve ratio, effective Jan. 28, aims to “address structural pressures on liquidity in a way” consistent with the prevailing monetary stance, the RBI said. The persistence of “tight liquidity conditions” could disrupt the flow of credit and further exacerbate growth risks, it said.

Survey

Inflationary threats make it “premature” to begin reducing the policy rate, it said. These risks include the budget deficit, the rupee’s fall and suppressed inflation from the domestic prices of some administered products such as coal, it said.

At the same time, the reserve-ratio cut “can be viewed as a reinforcement of the guidance that future rate actions will be towards lowering them,” the central bank said.

All 21 respondents in Bloomberg’s survey predicted no change in the repurchase rate today.

The Reserve Bank has added 718.8 billion rupees into the banking system since the start of November by purchasing government securities from lenders, resuming open market operations after 10 months to alleviate the cash shortage and support credit growth.

India’s benchmark wholesale-price inflation rate was 7.47 percent in December. By comparison, consumer prices rose 6.5 percent in Brazil, 6.1 percent in Russia and 4.1 percent in China last month.

Maruti (MSIL) Sales

Brazil on Jan. 18 cut its benchmark rate by half a point for a fourth straight policy meeting to shield the economy from Europe’s debt woes. Russia last month unexpectedly reduced its benchmark rate. China in November cut the amount of cash that banks must set aside as reserves for the first time since 2008.

Higher borrowing costs in India are hurting demand. Maruti Suzuki India Ltd., maker of almost half the cars sold in the country, said Jan. 2 that its local sales for the April to December period declined 17 percent.

Commercial banks sanctioned 339 billion rupees of loans in the three months through September, a 77 percent drop from the same quarter in the previous year, according to the central bank.

“Industrial growth remains fragile and the RBI should reduce interest rates as soon as possible to revive investment,” Harsh Mariwala, chairman of Marico Ltd. (MRCO), an Indian maker of hair oils, said before the release. “India also needs aggressive reforms at the moment to bolster the economy.”

Prime Minister Manmohan Singh is under pressure to boost expansion following a struggle to attract more foreign investment, street protests against inflation and corruption allegations against officials.

His government faces at least five regional elections starting this month, including one in Uttar Pradesh, India’s most populous state. The polls will offer an indication of support two years before national elections are due.

Super-Rich Playing Snow Polo as Davos Igloo Agitators Vie With Duran Duran

2012-01-24T15:23:00.008+08:00

Europe’s rich and famous faced tough decisions as they assembled at a chic Swiss ski resort this weekend: whether to drink Taittinger or whisky-infused hot chocolate, and which piglet to back in the afternoon race.

This wasn’t Davos, where the World Economic Forum will urge presidents and bankers to “rethink capitalism” this week. Neighboring Klosters, a resort favored by the British royal family, held its eighth annual snow polo tournament.

While young Swiss socialists protest against the power of political elites in igloos outside Davos, Duran Duran sang “A View to a Kill” to several thousand polo enthusiasts reveling in a bar and nightclub made out of shipping containers and snow. The four-day event, sponsored by menswear company Hackett Ltd. and Swiss watchmaker Parmigiani Fleurier SA, is a chance to forget the global turmoil, according to founder Daniel Waechter, who runs a family business selling luxury lavatories.

“Despite the financial crisis, we’ve never had so many team requests,” he said. “Last year we had a lot of trouble getting British teams over. Now, either they’ve recovered or they’re saying, enough of this misery, we want to have fun.”

Eight teams of three horses and riders apiece, instead of the usual four, battled it out in a slimmed-down version of summer polo, which was first played in Switzerland by British cavalry officers in St. Moritz in 1899. The horses wear flat shoes with studs to grip the snow and riders, who can use six ponies during four 6 1/2 minute chukkas, wield mallets to hit a ball between goalposts shaped like giant champagne bottles.

Call for Revolution

As Klosters’s VIP guests ate roast saddle of veal with morel mushroom mousse, khaki-clad soldiers rolled out barbed wire in Davos. For David Roth, president of Switzerland’s Young Socialists, there will be fewer comforts this week as he builds an igloo that will serve as a base to protest against the forum.

“In the Arab revolution, it was a revolution for democracy and I think we need also a revolution for democracy,” said Roth. “The politicians are not independent from the money and that is a problem.”

After German Chancellor Angela Merkel opens this week’s Davos forum, which will be attended by close to 40 national leaders, the first debate will ask “Is 20th-century capitalism failing 21st-century society?”

‘Morality Gap’

“We certainly have in the world today a morality gap,” Klaus Schwab, founder of the forum, told reporters in Geneva on Jan. 18. “We have undermined social coherence and we are in danger of completely losing the confidence of future generations.”

The gap between rich and poor is widening across most developed economies as executives, bankers and skilled workers reap more rewards, the Organization for Economic Cooperation and Development said last month.

The average income of the richest tenth of the population is now about nine times that of the poorest tenth, the Paris- based OECD said. The gap has increased about 10 percent since the mid-1980s with Mexico, the U.S., Israel and the U.K. among the countries with the biggest divide between rich and poor.

“I’m going to Davos to talk with business and world leaders about jobs, inequality and the excesses of bankers’ bonuses,” said Philip Jennings, general secretary of the Nyon, Switzerland-based UNI Global Union, which coordinates more than 20 million workers in 150 countries. “I certainly won’t be going there to play polo.”

Global Burnout

Still, while Schwab warns of “global burnout,” the luxury market is close to a record. The Bloomberg European Luxury Goods Index (BNLXGDEU), which includes LVMH Moet Hennessy Louis Vuitton SA and Cie. Financiere Richemont SA, climbed 163 percent since Lehman Brothers Holdings Inc. filed for bankruptcy in September 2008, while the Stoxx Europe 600 Index dropped 5 percent.

The resort’s association with the royal family makes Klosters the ideal place for London-based Hackett to promote its clothing that is a “romantic vision of Englishness,” said Jeremy Hackett, 58, the firm’s co-founder, who arrived in an Aston Martin Rapide.

“I feel like James Bond arriving in Zurich into a Cold War sort of atmosphere,” said Hackett, adding that polo helps give his company “authenticity.” “It’s a way of adding credibility to the brand.”

Parmigiani, which gives watches to the players on the winning team, was attracted by Klosters being the only snow polo tournament played at night, according to Catia Hoffmann, communications director at the Fleurier-based company.

‘Very Exclusive’

“We like to do events that are a little different, not the standard things like golf or Formula One,” she said. “It’s a special atmosphere, very exclusive, but also very welcoming.”

Swiss luxury living costs, including champagne, private jets, a Verbier ski pass and annual polo membership at Club de Veytay outside Geneva, rose 1.2 percent in the year through August, even as the franc strengthened against the dollar, according to London-based Stonehage Group, which manages the affairs of more than 1,000 wealthy families.

At Klosters, the polo matches attract a crowd that outnumbers the 2,600 delegates expected at the forum.

“Some people have just floated to the top and stayed above the crisis, particularly in the luxury sector,” Paul Smith, who worked for Chelsea Football Club before starting his own company to advise soccer clubs on branding, said over a glass of champagne as waitresses served smoked salmon and shrimp canapes in the VIP enclosure in Klosters. “They’re not going to think twice about buying a luxury watch or ordering a limousine.”

Luxury Lavatories

Tournament founder Waechter got involved in polo when he took a job as head of the Klosters tourism board after his travel company was hurt by the Sept. 11 attacks in 2001. Two years ago he inherited the family business and is using snow polo to market The Golden Throne, his range of luxury portable lavatories named after European monarchs -- Elisabeth, George and Sissi.

Polo clubs are “popping up like mushrooms” and they’re not only for the super-rich, Waechter said in a Dec. 23 interview in Zurich, adding that he plays with an architect, an insurer and a restaurateur.

“I got into polo because I loved golf and always wanted to ride a horse,” said Stefan Locher, a doctor by training who runs his own media company and is playing at Klosters. He keeps his string of four ponies over the border in Germany, where costs are lower. “It’s like golf on horseback.”

In Klosters, where Parmigiani’s riders edged Team BMW (BMW) 9-8 in the polo final, the sponsored racing jackets are taken off the piglets after bad weather forces the cancellation of the 3 p.m. event. As Duran Duran takes the stage to sing “Ordinary World,” up the valley in Davos, Roth suspects the polo crowd is out of touch with reality.

“These people are not really connected,” said Roth, as a fellow protester adds the final brick to an igloo and the temperature drops to minus 6 degrees Celsius (21 degrees Fahrenheit). “They don’t relate to the problems of the world.”

Homebuilders Get Cameron Boost With 5% Down Payments: Mortgages

2012-01-24T15:23:00.005+08:00

The British government’s plan to help reduce down payments for new homes to as low as 5 percent will give a boost to a homebuilding industry that’s learned how to survive a slowing economy and four years of stingy credit.

Mortgage lending is less than half the level of 2006, at the end of the housing boom, with buyers now required to pay as much as 25 percent of a home’s value up front. The program would lower that by providing a guarantee, shared by the government and builders, to protect lenders from some losses in a default.

U.K. homebuilders have cut costs, changed their products and acquired discounted land over the past two years to improve margins as home sales fell to about half the level of 2006. Profit growth will likely accelerate from the down payment program, said Charlie Campbell, an analyst who follows builders at London-based Liberum Capital.

“If mortgage lending creeps up a bit and new build continues to take share from existing stock, profits will go up quite a lot because the input costs have come down,” Campbell said in a telephone interview. The government measure may lift prices by as much as 3 percent above current estimates and boost homebuilder shares, he said in a note to investors.

Housing construction may rise by 15 percent or more after the measure goes into effect in the second quarter, Taylor Wimpey Plc (TW/) Chief Executive Officer Pete Redfern said on Jan 17. The same day, the company said it would meet a profit-margin target early after home sales increased 2 percent in 2011.

Santander Sells Bonds

Lenders in the U.K. are the most active issuers of residential mortgage-backed securities in Europe, which banks create by pooling home loans and selling them to investors as notes. Public issuance of the securities climbed to 37 billion euros ($47.8 billion) in 2011, according to JPMorgan Chase & Co. data, representing 74 percent of the overall distributed European market. Sales started to shut down in 2007 as the global financial crisis dried up credit, and began to revive in 2009.

Santander U.K. Plc, a unit of Spain’s largest bank, sold $3.4 billion of prime mortgage-backed bonds in dollars, euros, pounds and yen, last week, according to data compiled by Bloomberg.

The extra yield investors demand to hold the top-rated securities over benchmarks widened 15 basis points or 0.15 percentage point, to 165 basis points last year, JPMorgan data show. Spreads have narrowed from 425 basis points in January 2009.

Government Stimulus

The mortgage plan is also aimed at tackling a shortage of new homes that’s helped push prices out of the range of many buyers. Around 240,000 new homes are needed each year to keep up with a growing population, Steve Turner, a spokesman for the Home Builders Federation, said by e-mail. That compares with 127,780 built in England in 2010.

Prime Minister David Cameron’s coalition of Conservatives and Liberal Democrats is using homebuilding to stimulate the economy and create jobs as it trims public spending to cut the country’s record budget deficit. Gross domestic product rose 0.5 percent in the third quarter from the second, when it expanded 0.1 percent, the Office for National Statistics said Nov. 24.

Ed Balls, treasury spokesman for the opposition Labour Party, criticized the scale of the government initiative, calling it “rather small beer.” Investors weren’t convinced either. The Bloomberg EMEA Homebuilders (BEUHBLD) Index fell 4.5 percent following the Nov. 21 announcement of the lending plan.

‘Got to Deliver’

So far, shares of homebuilders haven’t reflected the potential profit boost from the plan, according to Bovis Homes Group Plc (BVS) CEO David Ritchie.

“You’ve almost got to deliver before people believe you can do it,” Ritchie said in a telephone interview. “I don’t yet think people are giving the house builders the credit when they say they are going to grow their business. They say ‘let’s see what you do.’”

The Bloomberg EMEA Homebuilders Index gained 0.5 percent to 108.16 as of the 4:30 p.m. close of trading in London. Redrow Plc (RDW) led the seven companies with a 2.7 percent increase.

Starting in the second quarter, more people seeking a new home will be able to get a mortgage equal to 95 percent of the property’s value as a guarantee shared by the government and the homebuilders protects lenders from some of the losses they would incur in a default. In July 2007, before the Northern Rock bank collapse touched off the U.K.’s financial crisis, there were 22 mortgages available offering 110 percent of a home’s value, according to personal finance website moneyfacts.co.uk.

Lenders Eager

“The mortgage indemnity scheme will be good news for home buyers and developers and we are working with lenders, the government and home builders to meet the March deadline,” Jayne Walters, spokeswoman for the Council of Mortgage Lenders, said by e-mail. The program will “enable more buyers to buy and so support the flow of new housing development, with all its positive consequences for jobs and the economy as a whole.”

The U.K. housing market crashed between 2006 and 2007, and sales of new and existing homes have dropped by about half since then. In the first quarter of 2011, the most recent available, sales totaled 32,460, down from 52,710 in the first quarter of 2007, according to the Department for Communities and Local Government.

Tight Lending

Mortgages dried up after mounting losses and plunging asset values forced several banks to accept U.K. government bailouts following the credit crisis. The state ended up with a 41 percent stake in Lloyds Banking Group Plc (LLOY) after a taxpayer- financed rescue.

Mortgage approvals totaled 144,000 in the three months through September, down from 305,800 during the same period in 2006, according to the CML. Loans to first-time buyers in the third quarter totaled 53,600, about half the level of five years earlier.

Seven lenders, including HSBC Holdings Plc (HSBA), Barclays Plc and Lloyds, agreed in principle to participate in the proposal, according to the Department for Communities and Local Government. The homebuilders will contribute 3.5 percent of a property’s value to an indemnity fund and the government will add 9 percent.

“This will be a very rich channel for us to find potential customers,” Barratt Developments Plc (BDEV) Chief Executive Officer Mark Clare told analysts on a Jan. 12 conference call. He said about 6,000 visitors to the company’s web site indicated their interest in the program since it was announced two months ago.

Reinvented Homebuilders

Britain’s homebuilders moved away from high-volume apartment development and focused on higher-margin single family homes after facing hundreds of millions of pounds of writedowns and falling sales in the aftermath of the housing collapse. The companies took advantage of the slump by acquiring discounted land to boost margins.

Taylor Wimpey said it would reach a goal of raising its profit margin to more than 10 percent in the second half of 2011, earlier than previously forecast.

Though the 6,000 leads on Barratt’s website may translate into only about 200 sales, the company starts the year with an order book that’s 8.1 percent higher than a year earlier. Forward sales excluding state housing increased 29.8 percent as of Dec. 31 from a year earlier. Barratt sold 11,171 homes in the fiscal year through June.

Persimmon (PSN), Britain’s second-largest homebuilder by value, rose the most in four months on Jan. 9 after saying margins widened and 2011 profit was at the top end of analyst estimates.

First-Time Buyers

Publicly traded homebuilders, which also include Berkeley Group Holdings Plc (BKG), Redrow Plc and Bellway Plc (BWY), have also benefited from earlier government programs to aid first-time buyers. Persimmon sold 600 homes, or 12 percent of the total, in the second half through the FirstBuy program. The plan helps buyers get cheaper mortgages with an interest-free loan from the developer and the government.

A proposal to release government-owned land for development may support up to 200,000 jobs, according to the Cabinet’s Housing Strategy report.

“We will unlock the housing market, get Britain building again, and give many more people the satisfaction and security that comes from stepping over their own threshold,” Cameron and Deputy Prime Minister Nick Clegg said in a statement announcing the government’s housing strategy.

U.K. unemployment rose to a 16-year high in the three months through November, deepening concerns that Britain is heading for recession. Unemployment as measured by International Labor Organization standards rose by 118,000 to 2.69 million, the statistics office said Jan. 18.

“It appears at this stage that these improvements are sustainable,” Panmure Gordon & Co. analyst Rachael Waring said by e-mail. “The new government indemnity scheme that’s due to be launched in March should mean that the new house builders keep that flow of first time buyers that they need.”

Draghi Makes Euro Favorite for Most-Profitable Carry Trades With Rate Cuts

2012-01-24T15:23:00.002+08:00

Betting against the euro may be the most profitable trade in the foreign-exchange market as policy efforts to stave off a European recession debases the currency.

Borrowing in euros and investing in the currencies of Australia, Brazil, Mexico, South Africa and South Korea has returned 7.8 percent since the European Central Bank cut its benchmark interest rate on Nov. 3 for the first time in more than two years, according to data compiled by Bloomberg. So- called carry trades funded with yen have lost 0.3 percent and gained 1 percent when financed with dollars.

While a debt crisis entering its third year has driven the region’s shares to the cheapest levels since 2004 compared with the U.S. and the sovereign-bond market posted its biggest rally on record last month, euro bears say the currency won’t rebound anytime soon to wreck carry-trade profits. With government austerity measures threatening growth, ECB President Mario Draghi may have to cut rates to prop up an economy the World Bank expects to contract.

“We’re seeing a very clear breakdown in the correlation between the euro and risky assets,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “That highlights the fact that the euro is increasingly becoming a funding currency.”

Rate Forecasts

The median forecast of economists surveyed by Bloomberg is for the ECB’s key rate to fall to 0.75 percent in 2012 from the current record low of 1 percent. Draghi reversed the strategy of his predecessor Jean-Claude Trichet, reducing the rate by 0.25 percentage point in November and again last month.

The 17-nation euro has weakened 3.8 percent in the past three months, the worst performance among 10 currencies tracked by Bloomberg Correlation-Weighted Indexes. The common currency was at $1.3041 at 11 a.m. New York time, down from last year’s high of $1.4940 in May. It traded at 100.44 yen after sliding to an 11-year low of 97.04 yen on Jan. 16.

Carry trades funded with one million of euros to buy Australia’s dollar, Brazil’s real, Mexico’s peso, South Africa’s rand and South Korea’s won returned 27 percent, or 270,000 euros, during the two years the ECB held the benchmark rate at 1 percent through April 2011, according to Bloomberg data.

The trade lost 2.8 percent as the central bank tightened monetary policy from April to November.

“It’s unlikely that the authorities will move to avoid the softening of the currency, therefore, it becomes a more attractive carry trade,” Tim Riddell, head of global markets research in Singapore at Australia & New Zealand Banking Group Ltd., said of the euro in a Jan. 16 telephone interview. “Other currencies which have effectively low or zero rates, such as the dollar and yen, are facing a slightly better growth profile.”

Europe’s Economy

Spiraling deficits and debt burdens have spurred Greece, Ireland and Portugal to seek bailouts from the European Union and International Monetary Fund. The contagion spread to larger economies last year, driving up yields in the region to an average of 4.28 percent in November, the highest since 2009, even as rates on Treasuries fell to record lows.

The World Bank said this month that the economy in the euro area will probably contract 0.3 percent this year, compared with global growth of 2.5 percent. Leaders, including Draghi and German Chancellor Angela Merkel, will gather in Davos, Switzerland, this week to discuss tackling the crisis without depressing the economy.

Above Average

For all the concern about Europe, the euro remains higher than its average of $1.2055 since its January 1999 inception. Median analyst estimates compiled by Bloomberg show the currency strengthening this year to $1.29 and 100 yen.

European exporters are benefiting from its depreciation. The weaker currency helps Salvatore Ferragamo SpA (SFR), an Italian maker of handbags and shoes, be more competitive overseas and boosting margins, Chief Executive Officer Michele Norsa said at a Jan. 15 fashion show in Milan.

After Europe’s shares tumbled last year, wiping out 751 billion euros in market value from the Stoxx Europe 600 index, signs of a rebound are emerging. The index is up 4 percent this year, and the region’s sovereign bonds have returned 0.6 percent after soaring 4 percent in December, according to the Bank of America Merrill Lynch EMU Direct Government Index. That may cause investors with bets that profit from declines to reverse those trades.

‘Unwinding’ Positions

“Short positions have accumulated, and positive headlines are likely to spark an unwinding of these positions in the near term,” said Masashi Murata, a currency strategist in Tokyo at Brown Brothers Harriman & Co.

Futures traders have increased bets to a record that the euro will weaken against the dollar. The difference between wagers that the shared currency would fall versus those that it would rise surged to 160,030 in the week ended Jan. 17, data from the Commodity Futures Trading Commission showed. As recently as August, there were net bets on a euro gain.

At the same time, the cost to protect against a drop in the euro against the dollar is falling, suggesting traders see less scope for decline. Risk-reversal rates for three-month options on the euro versus the dollar shrank to negative 1.6 percent today from as low as negative 4.5 percent in November.

Draghi will still likely take further measures to bolster Europe’s financial system to soften the economic blow from austerity measures. In addition to rate cuts, the ECB decided last month to offer unlimited three-year loans to banks and has purchased sovereign bonds.

Assets Swell

Those moves caused its balance-sheet assets to swell to a record 2.74 trillion euros at the end of December, more in dollar terms than the Federal Reserve (FARBAST)’s $2.92 trillion.

“The addition of euros to the market from the ECB tends to weaken the currency,” said Jeremy Hale, head of macro strategy at Citigroup Inc. in London. That “makes it a more attractive carry trade and as a funding currency,” he said.

Citigroup forecasts a rate cut by the ECB in the second quarter. The euro will end the year at $1.20, he said.

The ECB’s easing has helped push yields on German two-year bunds below Treasuries of similar maturity for the first time since mid-2010. They are within eight basis points of Japanese bonds, down from about 170 basis points, or 1.7 percentage points, in May.

“Without a big game-changing development, it is hard to be bullish on the euro,” Sacha Tihanyi, a Hong Kong-based currency strategist at Scotia Capital, the investment banking unit of Bank of Nova Scotia, wrote in a response to an e-mail inquiry on Jan. 16. “Our bank’s view is that the ECB cuts rates to 0.5 percent by the end of first quarter, and under such a scenario, the euro becomes much cheaper to fund with.”

U.K. Retail Sales Rise as Stores Cut Prices

2012-01-20T19:03:00.002+08:00

U.K. retail sales rose in December as stores offered discounts during the holiday shopping season to lure consumers.

Sales including fuel rose 0.6 percent from November, when they fell a revised 0.5 percent, the Office for National Statistics said today in London. The December increase matched the median forecast of 21 economists in a Bloomberg News survey. From a year earlier, sales were up 2.6 percent.

The gain in consumer demand may not be maintained as U.K. unemployment rises, inflation outpaces wage growth and consumer confidence falls. With the euro-area crisis damping export demand, that’s deepening fears Britain is heading for a another recession.

“Sales were driven mainly by heaving discounting of shops in the run up to Christmas,” Joost Beaumont, an economist at ABN Amro Bank NV in Amsterdam, said before the announcement. “But I think that will be as good as it will gets, especially as the weak labor-market conditions will weigh on the consumer spending.”

The pound remained lower against the dollar after the report and traded at $1.5467 as of 9:34 a.m. in London. It was down 0.1 percent from yesterday.

Clothing Sales

The monthly increase was led by clothing sales, which rose 1.8 percent, and the other stores category, which includes computers and telecommunications equipment and increased 2.5 percent. Excluding fuel, retail sales rose 0.6 percent in December from November and increased 1.7 percent from a year earlier.

In the three months through December, retail sales increased 1.1 percent, the biggest quarterly gain since the quarter through August 2010. From a year earlier, three-month sales were up 1.4 percent.

Britain’s unemployment rate rose to 8.4 percent, the highest since January 1996 in the three months through November. An index of consumer sentiment fell to 38 from 40 in November, Nationwide Building Society said yesterday. That’s close to the record-low 36 reached in October.

Retailers such as Tesco Plc (TSCO) and Marks & Spencer Group Plc have had to reduce prices to lure shoppers in what they say is a “challenging” environment. Tesco, the U.K.’s largest food retailer, cut profit expectations this month after lower than expected sales.

The statistics office said the retail sales deflator, a measure of changes in shop prices, fell to 2.4 percent in December, the lowest in 16 months, from 3.6 percent in November. The deflator on food sales was the lowest since March. Excluding auto fuel, the deflator slipped to 1.8 percent from 2.6 percent.

Stimulus Expansion

While the U.K. economy grew at the fastest pace in a year in the third quarter, the Bank of England has said expansion will weaken in the following quarters. The central bank is in the final month of a 75 billion-pound ($116 billion) round of bond purchases to boost growth, and economists at Citigroup Inc. and Nomura International Plc expect a further expansion of stimulus next month.

The Bank of England has also forecast a “sharp” easing of inflation, which it says will ease the squeeze on consumers this year.

“Even if inflation drops it will remain slightly higher than wage growth, especially in the near term,” Beaumont said. “Although we see inflation coming down sharply, which of course will underpin consumption growth, for now I think the labor market is the dominate factor.”

China’s Manufacturing Contraction Boosts Case for Monetary Easing: Economy

2012-01-20T19:02:00.011+08:00

A Chinese purchasing managers’ index signaled manufacturing may contract for a third month as a slowing economy boosts the case for the government to further loosen credit controls.

The preliminary January reading of 48.8 for the gauge, released by HSBC Holdings Plc and Markit Economics today, compares with a final 48.7 number for December. The dividing line between contraction and expansion is 50.

International Monetary Fund Managing Director Christine Lagarde joined global officials today in warning that the world economy is decelerating and faces “significant and urgent challenges.” China has allowed its five biggest banks to boost first-quarter lending and may relax capital requirements, people with knowledge of the matter said.

“We expect more policy easing to stabilize growth and the next reserve ratio cut is likely to be delivered in the coming weeks,” said Qu Hongbin and Sun Junwei, Hong Kong-based economists for HSBC. “Demand is likely to remain relatively subdued for the coming months,” which may weigh on output and employment growth, they said.

The data imply growth in industrial output of about 11 percent to 12 percent in the coming months and economic growth of about 8 percent in the first quarter, the analysts estimate.

Asian stocks rose, with a regional benchmark index heading for its fifth straight weekly advance, as fewer Americans than forecast filed claims for jobless benefits and Spain and France sold bonds at lower yields. The MSCI Asia Pacific Index increased 0.9 percent as of 1:22 p.m. in Tokyo.

Easing Curbs

Stocks in China rose and are on track to send the benchmark index to its first back-to-back weekly gain in two months. The Shanghai Composite Index (SHCOMP) advanced 0.4 percent at the 11:30 a.m. local-time break, on signs the government is easing lending curbs.

China’s central bank last month reduced banks’ reserve requirements for the first time in three years to encourage lending and Premier Wen Jiabao this month reiterated a pledge to “fine-tune” policies as needed to support growth. Zhan Chunxin, chairman of Zoomlion Heavy Industry Science & Technology Co., China’s second-largest maker of construction equipment, told Wen this month that a lack of access to credit was hurting customers and suppliers.

The nation’s central bank is allowing the five biggest lenders to increase first-quarter credit by a maximum of about 5 percent from a year earlier, said two people at state lenders who have knowledge of the matter. Separately, the banking regulator is weighing a plan to relax capital requirements, according to four people with knowledge of the matter. The agency is delaying implementing the most stringent capital adequacy ratios and may lower risk weightings for loans to small businesses, they said.

Australia Exports

Elsewhere in the Asia-Pacific region, a government gauge of Australian export prices dropped 1.5 percent last quarter in a nation where the economy is driven by shipments of iron ore and coal to emerging markets including China. Import prices rose 2.5 percent from the prior quarter.

In Europe, U.K. retail sales including fuel probably rebounded 0.6 percent last month after a 0.4 percent decline in November, the median of 21 estimates in a Bloomberg News survey showed.

German producer prices probably advanced 0.1 percent in December, the same as the prior month’s gain, according to the median estimate of 21 economists in a Bloomberg News survey.

In the U.S., sales of existing homes may have gained 5.2 percent to a 4.65 million annual pace in December after a 4 percent increase in November, according to the median forecasts of 75 economists surveyed by Bloomberg News.

Preliminary Reading

In China, the preliminary reading for the manufacturing index, also known as the flash PMI, is based on 85 percent to 90 percent of responses to HSBC and Markit’s monthly survey of purchasing managers at more than 400 companies. It was carried out from Jan. 9 to Jan. 16 and the final reading will be released early next month.

Gauges of output and new orders probably remained below 50 in January, while an index of new export orders expanded after a contraction the previous month, according to today’s statement.

“Manufacturing PMIs around the Chinese New Year get extra weird as factories shut down en masse,” said Stephen Green, Hong Kong-based head of Greater China research at Standard Chartered Bank Plc. “But given Beijing’s shift to policy loosening is happening only gradually, it makes sense that China continues to slow.”

Migrant Workers

Economic data in January and February are often distorted by the timing of the nation’s weeklong Lunar New Year holiday when factories shut early to allow migrant workers to travel home. The festival starts on Jan. 23 this year.

The separate official PMI, released by the China Federation of Logistics and Purchasing and National Bureau of Statistics, is based on a survey of managers at more than 820 companies in 20 industries. The gauge showed an expansion in December after a contraction the previous month.

Governments need to stem contagion in Europe and restore confidence in financial institutions to end the sovereign-debt crisis and spur growth, Lagarde and other members of the Global Issues Group of the World Economic Forum said in a Call to Action statement today.

China’s gross domestic product increased 8.9 percent in the last three months of 2011 from a year earlier, the fourth straight quarterly slowdown and the weakest pace in 10 quarters. Growth may drop to below 8 percent this quarter, according to estimates from UBS AG, Nomura Holdings Inc. and Societe Generale SA, as export demand cools further and the government maintains its campaign to rein in housing costs.

Home prices fell last month in 52 of 70 Chinese cities from November, according to government data released Jan. 18. The world’s largest exporter posted the smallest gains in overseas sales and in imports for two years in December from a year earlier, excluding holiday distortions.

Europe Luxury-Goods Stocks May Benefit as Weaker Currencies Boost Earnings

2012-01-20T19:02:00.008+08:00

Investors forecasting the euro and Swiss franc will weaken against the dollar may find comfort in shares of European luxury-goods companies.

Cie. Financiere Richemont SA (CFR) and LVMH Moet Hennessy Louis Vuitton SA (MC) are among stocks that would benefit disproportionately if the currencies fall further from year-ago levels, according to Thomas Mesmin, a Paris-based analyst at brokerage CA Cheuvreux. For every 1 percent decline in exchange rates, the industry’s average earnings before interest and taxes may rise 1.3 percent to 1.5 percent, he said.

“This will help luxury-goods companies, because a high proportion of their sales come from outside of Europe, while their cost bases are in euros, Swiss francs or the British pound,” Mesmin said.

Richemont, owner of Cartier and Montblanc, will be “one of the best currency plays,” because about 65 percent of its sales are in non-European denominations, its costs and accounts are euro-dominated, and its shares trade in Swiss francs, he said.

Worldwide sales for the Geneva-based company grew 24 percent at actual and constant exchange rates in the quarter ended Dec. 31, compared with a year ago, it said Jan. 16. Richemont reconfirmed its forecasts that operating profit for the year ending March 31 will be “significantly higher than last year,” Chief Executive Officer Johann Rupert said that day.

A weaker euro helps Salvatore Ferragamo SpA (SFER), the Italian maker of handbags and shoes, by making it more competitive and boosting margins, Chief Executive Officer Michele Norsa said at a Jan. 15 fashion show in Milan.

Rising Luxury Index

The newly-created Bloomberg European Luxury Goods Index (BNLXGDEU), which includes LVMH and Swatch Group AG (UHR), has risen 357 percent since Nov. 18, 2008, while the Stoxx Europe 600 Index has increased 27 percent. The luxury index has outperformed the market by 6 percent this year; between Sept. 21, 2011, and Dec. 30, 2011, it underperformed by 18 percent.

Industry organic growth, before the impact of exchange rates and acquisitions or disposals, probably will outpace global gross domestic product expansion during the next decade, said Scilla Huang Sun, head of equities at Swiss & Global Asset Management in Zurich. She oversees the Julius Baer Multistock - Luxury Brands Fund, with holdings in LVMH and Richemont.

Bloomberg’s luxury index is trading at 14.5 times Mesmin’s estimate for 2012 earnings, before goodwill and extraordinary items, and 12.8 times his 2013 calculation, compared with 19.3 times in 2007. The Stoxx 600 is trading at a multiple of 10.8.

This appeals to investors, particularly if the industry grows 10 percent each year through 2015 and there’s a positive impact from exchange rates this year, Mesmin forecasts.

Worldwide Sales

Because these companies operate in Europe and sell goods worldwide, their sales convert to higher revenue in euros as the currency falls relative to the dollar. There’s also a gain to margins because profits grow more than sales given the euro cost base, Mesmin said.

European currencies will weaken this year as a result of the region’s sovereign-debt crisis, said Valentin Marinov, a London-based senior foreign-exchange strategist at Citigroup Inc. The average exchange rate between the euro and the dollar will decline 10 percent to $1.25, compared with $1.3926 last year, according to Citigroup’s estimates. The pound will drop an average 4 percent to $1.53 from $1.6041, while the Swiss franc- dollar exchange rate will fall about 11 percent to $1.00 compared with $1.1323 in 2011.

The euro will end the year at $1.30, the pound will trade to $1.56 and the Swiss franc will be $1.01, according to the median forecasts of currency strategists in Bloomberg surveys.

‘Strong Growth’

The number of Chinese and Indians who can afford high-end goods is increasing, and they may save for months to buy an expensive handbag, Huang Sun said. “This is a European industry with a high exposure to emerging markets, where you are going to see strong growth in consumer spending.”

A “made in Europe” label is highly coveted abroad, and brands such as Hermes and Louis Vuitton have pricing power, which is “very rare in the current environment,” said Rahul Sharma, founder and managing director of Neev Capital, a London- based consulting company. “In emerging markets, luxury-goods prices are actually much higher than in Europe.”

Shoppers in China accounted for 25 percent of industry sales in 2010, compared with 21 percent for European shoppers, according to a Jan. 4 report written by Goldman Sachs Group Inc. analysts led by William Hutchings in London. By 2025, China may make up 46 percent of total revenue, they wrote.

India’s Potential

The revenue potential is important from China and from India, where market estimates for growth are “very conservative,” Sharma said. India has a longstanding tradition of jewelry consumption, and consumers now are increasingly fond of European high-end brands, making them a significant demographic for luxury products, he said.

Global travel also has been a “key driver” of revenue; as much as 50 percent of sales at luxury-goods retailers in Europe are to foreigners, which may increase to 60 percent by 2015, Hutchings wrote.

Successful Chinese entrepreneurs have created more affluent consumers who can afford brand-name clothing and accessories, while the government has “deliberately encouraged consumption,” said Charles Robertson, global chief economist at Renaissance Capital in London.

These wealthy shoppers are looking for places to spend their money, given the Chinese stock market’s poor performance and a slowdown in the housing market, Robertson said. Meanwhile, there’s been easy access to credit, so “the incentive to spend more is quite high.”

Flagship Markets

For London-based Burberry Group Plc (BRBY), “flagship markets” including London and Hong Kong “benefit from the traveling luxury customer” and performed well in the quarter ended Dec. 31, Chief Financial Officer Stacey Cartwright said on a Jan. 17 conference call. “China comparable-store growth was again strong, up around 30 percent on top of the over-30 percent growth in the prior year,” she said.

Investments for larger companies, including in retail locations, aren’t outpacing sales, so their cash flows remain strong even with these expenditures, Sharma said.

One change that may hurt high-end spending would be a depreciation in luxury-property prices, which have supported growth in the number of Chinese millionaires, Robertson said. Meanwhile, wealthier European consumers may curtail spending if the region slips back into another recession, triggered by a “disorderly default” in Greece, he said.

Slowdown in Spending

Tiffany & Co. already has experienced a slowdown in spending by Americans and Europeans, prompting the New York jeweler to lower its earnings estimate for the year ending Jan. 31. The company now forecasts earnings will be between $3.60 and $3.65 a share, compared with its November estimated range of $3.70 to $3.80, it said Jan. 10.

“Sales weakened markedly in the United States and Europe during the holiday season,” Chairman and Chief Executive Officer Michael Kowalski said in a statement that day.

Even if the euro doesn’t fall any further in relation to the dollar this year, current exchange rates still are “a very big benefit” for European luxury-goods retailers, Sharma said. The euro is down about 12 percent since May and traded at $1.2667 on Jan. 16, the lowest since August 2010. The Swiss franc has fallen almost 23 percent since August, and traded at $1.0730 as of 4:30 p.m. in New York yesterday.

This means luxury stocks will continue to appeal to investors, even as concerns about a euro-area recession persist, Sharma said.

“These companies are much more resilient than they used to be as exposure to new markets in Asia is up sharply from even three years ago,” he said.

Monti Takes Ax to Mussolini-Era Guilds

2012-01-20T19:02:00.005+08:00

Prime Minister Mario Monti’s Cabinet will pass a plan today designed to boost competition and spur economic growth by targeting Italian professional guilds, some of which date to the Fascist era.

The package, Monti’s second major legislative effort since last month’s 30 billion-euro ($39 billion) austerity plan, will facilitate access to and reduce the privileges of many so-called closed professions, such as notaries. It seeks to improve competition by having Eni SpA (ENI) sell off gas-transport unit Snam Rete Gas SpA. (SRG) Monti’s Cabinet is meeting in Rome to pass the plan.

The legislation “contains measures to reduce rents and privileges, which also include the professions, pharmacies and public services,” Monti told a Jan. 18 news briefing in London. The new package aims to “distribute sacrifices needed to boost economic growth.”

Monti, who as European Union competition commissioner blocked General Electric Co. (GE)’s $47 billion takeover of Honeywell International Inc. (HON), is lobbying European leaders to commit to growth policies as the euro-area economy slips into a recession amid a wave of austerity measures demanded to fight the debt crisis. Monti has said jumpstarting the expansion is vital to cutting the 1.9 trillion-euro debt of Italy, whose economy may shrink 1.5 percent in 2012, the Bank of Italy said on Jan. 17.

Growth Boost

Italy’s Antitrust Authority has said that a gradual opening of the professions may add an estimated 1.5 percent a year over the next decade or more to the $2.3 trillion economy. By combining such measures with policies to eliminate barriers to business and commerce, Italy could boost productivity 14.1 percent over 10 years, the Paris-based Organization for Economic Cooperation and Development has said.

Italy may be in its fourth recession since 2001, after the country’s growth averaged 0.2 percent annually in the decade to 2010, compared with 1.1 percent in the euro area.

“Italy runs the risk of transitioning from a recession to a lasting period of stagnation, and only an epic effort on growth-enhancing reforms can materially change this prospect,” said Vladimir Pillonca, an economist at Societe Generale SA in London. said.

Il Duce

Italy’s 28 professional guilds, many of which were set up under dictator Benito Mussolini, take a different. The measures would seek to boost competition and lower costs by eliminating fixed minimum rates for service providers such as architects, engineers and notaries. The decree may also lead to increasing the number of taxi licenses.

“I’m very worried they want to liberalize taxi licenses and give everyone a chance to work, but without basic regulation or professionalism,” Andrea Erhauz, a taxi driver from Trieste, said at a protest of cab drivers against the measures this week in Rome. “Everything at the moment is regulated, but I think it will become wild.”

The guilds, which first arose in medieval Italy, became a key part of Mussolini’s state “corporations” that grouped all facets of the economy by industry. In a 1933 speech, the leader known as “Il Duce” said it was a “disciplined economy, and thus a controlled one, because one can’t think of a discipline that isn’t controlled.”

Institutional Nepotism

The guilds were meant “to protect citizens from possible abuse by professionals by setting and enforcing high standards,” said Franco Stefanoni, author of the “The Real Untouchables,” a book about the guilds. “Nowadays, that function is reduced and research shows their members are often the children or relatives of members.”

Gabriele Noto, an official at the notaries’ lobby, said that only 17 percent of his profession are relatives of notaries. He also defended relatively high fees for notaries compared with countries such as the U.S., saying the so-called robo-signer mortgage-document scandal couldn’t happen in Italy.

“We have faith in the government, which we know is working to improve Italy,” Noto said, while opposing a “lowering of notary standards” that could lead to “fraud and lawsuits that have a social cost in the end that taxpayers must bear.”

With a jobless rate of about 30 percent among Italians between the ages of 15 and 24, Monti’s package seeks to make it easier to join professions. The decree would create 1,500 new notary jobs through 2014.

Monti Yields

Italian borrowing costs have fallen since Monti took over from former Premier Silvio Berlusconi on Nov. 16, when the yield on the nation’s 10-year benchmark bond was 7.37 percent. The yield was 6.38 percent at 10:35 a.m. Rome time, pushing the difference with equivalent-maturity German bunds to 454 basis points, compared with a record 576 basis points on Nov. 9.

“This is a chance in a lifetime that Italy has to introduce and adopt much-needed structural reforms,” Salvatore Zecchini, a former executive director at the International Monetary Fund and a professor at Rome’s Tor Vergata University, said in an interview today on Bloomberg Television.

Under drafts of the decree published by newspaper Corriere della Sera, operators of gas stations were to be given the right to purchase gas from any supplier, a change that may not be included in the final version, according to operators’ unions, which yesterday threatened to hold a 10-day strike in protest.

The legislation also simplifies rules for oil and gas exploration to promote development of domestic resources. Offshore drilling will be allowed in some instances, though not in protected areas and at least five miles from the coast, the draft said.

The decree goes into effect immediately after its passage by the Cabinet, and Parliament must approve it within 60 days for the law to remain in force. Andrea Giuricin, economist at Bruno Leoni Institute in Turin, said he’s concerned that it may be watered down by lawmakers.

“The resistance in Parliament may be huge because many lawmakers are part of the same categories that have to be liberalized,” he said. “But we have to push forward with these reforms to modernize the country.”

Lagarde Warns on Fiscal Cuts Before Davos

2012-01-20T19:02:00.002+08:00

International Monetary Fund Managing Director Christine Lagarde joined world financial and trade organization chiefs in warning policy makers gathering in Davos, Switzerland next week against fiscal cuts that jeopardize growth.

“The world faces significant and urgent challenges that weigh heavily on prospects for future growth,” Lagarde and members of the Global Issues Group of the World Economic Forum said in a statement. “We worry about decelerating global growth and rising uncertainty, high unemployment” and a potential shift to protectionist policies, they said.

While governments need to stem contagion in Europe and restore confidence in financial institutions to end the sovereign-debt crisis and spur expansion, they should manage fiscal consolidation to promote rather than reduce growth prospects, the group said. Its members also include World Bank President Robert Zoellick, World Trade Organization Director- General Pascal Lamy and the heads of eight other multilateral and regional institutions.

Policy makers and business leaders will meet at the World Economic Forum starting on Jan. 25 after the World Bank cut its global growth forecast this month by the most in three years, saying that a recession in the euro region threatens to exacerbate a slowdown in emerging markets. The IMF proposed this week to raise its lending capacity by as much as $500 billion to insulate the world against any worsening of Europe’s debt crisis.

ECB’s Role

Lagarde and the heads of the institutions highlighted an expanded role of the European Central Bank as one option for helping resolve the region’s crisis.

“Different options are being considered for stemming contagion in the euro area,” the Global Issues Group said. “They have involved greater recourse to the European Central Bank’s balance sheet and require a strengthening of the European Financial Stability Fund. Governance reforms are needed to offset the risk of moral hazard involved in short-term support packages and to ensure longer-term fiscal discipline.”

The ECB’s decision to offer banks unlimited three-year loans and the central bank’s purchase of sovereign bonds helped balloon its balance sheet to a record 2.73 trillion euros ($3.5 trillion) in December.

In the short term, confidence in financial institutions can be restored by recapitalizing banks quickly where necessary and ensuring that deleveraging by lenders doesn’t impair trade and project finance, the Global Issues Group said.

Banks Hoarding

Banks are hoarding the European Central Bank’s record 489 billion-euro injection into the banking system, thwarting attempts by policy makers to avert a credit crunch in the region. Almost all of the money loaned to 523 euro-area lenders last month wound up back on deposit at the Frankfurt-based central bank instead of pouring into the financial system, according to estimates by Barclays Capital based on ECB data.

Governments are urging European banks to keep lending to companies and individuals while requiring them to raise an additional 114.7 billion euros of core capital by June to weather a deepening sovereign-debt crisis. Instead of raising equity, most lenders across Europe have vowed to meet capital rules by trimming at least 950 billion euros from their balance sheets over the next two years, either by selling assets or not renewing credit lines, according to data compiled by Bloomberg.

Ensure Funding

Continuing the ECB’s measures to secure bank funding and liquidity will help stem financial contagion and stabilize the region’s fiscal frameworks, while enhancing the European Financial Stability Facility and European Stability Mechanism will “ensure governments can fund at sustainable rates,” the Global Issues Group said.

European governments have redoubled efforts to set up the 500 billion-euro European Stability Mechanism by July, a year ahead of schedule, after a credit rating downgrade raised concerns over the strength of the temporary European Financial Stability Facility aid fund created at the outset of the crisis.

The world economy will grow 2.5 percent this year, down from a June estimate of 3.6 percent, according to the World Bank. The IMF will cut its global growth forecast for 2012 to 3.3 percent from 4 percent when it publishes its World Economic Outlook report next week, the Daily Telegraph said yesterday, citing a leaked draft of the publication.

Leaders of the Group of 20 should intensify efforts to develop a “more comprehensive action plan” for economic expansion and job creation ahead of a planned summit in June in Mexico, the Global Issues Group said.

Political Energy

“We call on leaders to devote the necessary political energy to deliver concrete actions to exit the crisis and boost growth,” they said.

The other members of the group are Mark Carney, chairman of the Financial Stability Board; World Health Organization Director-General Margaret Chan; Angel Gurria, Secretary-General at the Organization for Economic Cooperation and Development; African Development Bank President Donald Kaberuka; Asian Development Bank President Haruhiko Kuroda; Inter-American Development Bank President Luis Alberto Moreno; Josette Sheeran, executive director of the United Nations World Food Programme and International Labour Organization Director-General Juan Somavia.

‘Substantial’ Greek Debt Talks Continue for Third Day

2012-01-20T19:01:00.014+08:00

Greek officials and private creditors will meet for a third day to seek agreement on a debt swap after “long and substantial” discussions yesterday, Finance Minister Evangelos Venizelos said.

Talks were held in a positive climate, Venizelos told reporters in Athens after meeting with Institute of International Finance Managing Director Charles Dallara and Jean Lemierre, a special adviser to the chairman of BNP Paribas SA. (BNP)

European officials and the nation’s private bondholders agreed in October to implement a 50 percent cut in the face value of Greek debt by voluntarily exchanging outstanding bonds for new securities, with a goal of reducing Greece’s borrowings to 120 percent of gross domestic product by 2020. An accord with bondholders is key to a second financing package for the cash- strapped country, which faces a 14.5 billion-euro ($18.8 billion) bond payment on March 20.

The two sides, which broke off negotiations on Jan. 13 before resuming them two days ago, have struggled to reach an accord on the coupon and maturity of the new bonds, which would determine losses for investors, raising the danger of a sovereign default.

Hans Humes, president of Greylock Capital Management and a member of the Greek creditors’ committee, said he’s “cautiously optimistic” the talks are heading in the right direction.

Concerns ‘Resolving Themselves’

“Many of the concerns we had last week seem to be resolving themselves,” Humes said in a Bloomberg Television interview before yesterday’s talks. “I don’t think it’s unfair to say that every single constituency in these negotiations would benefit from a successful round of talks.”

Questions remain how the two sides can craft a deal that will provide the debt relief the Greek government requires while attracting a high enough voluntary level of participation from bondholders. The government has indicated it may submit legislation that would compel full participation from private creditors, a move that would undercut the voluntary nature of any deal and could trigger credit default insurance contracts.

Venizelos said before yesterday’s round of talks that for the final deal to lead to a sustainable level of debt for the country there must be a 100 percent participation rate.

“Critical negotiations are taking place with representatives of the private sector on how they will participate as radically and bravely as possible, but also voluntarily,” Venizelos told lawmakers in Athens, in comments televised live. “It must be voluntary and participation must be 100 percent,” he said.

Hedge Funds

Hedge funds holding Greek bonds may resist the deal, seeking greater profit by getting paid in full, either by the Greek government or by triggering payouts from credit-default swaps. Winning support from banks seeking to limit their losses may be easier than including hedge funds and other speculators who bought securities at distressed levels.

Vega Asset Management LLC resigned from the committee of Greek creditors negotiating the debt swap last month because the Madrid-based hedge fund refused to accept a net present value loss exceeding 50 percent, according to a Dec. 7 e-mail sent to other panel members, which was obtained by Bloomberg News.

Prime Minister Lucas Papademos said yesterday that he secured the “full support” of the three political party leaders backing his government.

“We discussed a wide range of subjects relating to current developments and in particular the troika talks and the private sector involvement process,” Papademos said in comments broadcast on state-run NET TV after his meeting with Pasok’s George Papandreou, New Democracy’s Antonis Samaras and LAOS party leader George Karatzaferis.

‘Interdependent’

Talks on the 130 billion-euro new financing accord for Greece “officially” will start this morning at a meeting with the heads of the so-called troika mission, which is comprised of European Commission, European Central Bank and International Monetary Fund representatives, Venizelos told lawmakers in Athens yesterday, in comments broadcast live on state-run Vouli TV.

“We now start the official negotiations on the new plan,” Venizelos said. Reaching an agreement on the new loans and finishing a debt swap are interdependent, he said.

The creditors’ steering committee negotiating the debt swap includes representatives from banks and insurers with the largest holdings of Greek government bonds, including National Bank of Greece SA, BNP Paribas SA, Commerzbank AG (CBK), Deutsche Bank AG (DBK), Intesa Sanpaolo SpA (ISP), ING Groep NV (INGA), Allianz SE (ALV) and Axa SA. (CS)

Financial firms on the IIF’s private-creditor investor committee, a larger group of 32 members that includes the smaller steering committee, hold more than 47 billion euros in Greek sovereign debt, according to data compiled by Bloomberg from company reports.

EU Toughens Fiscal Pact Bowing to ECB Objection, Draft Shows

2012-01-20T19:01:00.011+08:00

European Union governments set tougher rules on budget deficits in the latest draft of a planned fiscal treaty, bowing to some objections raised by the European Central Bank.

The pact will require a centralized “correction mechanism” to be triggered “automatically” in cases of “significant” deviations from a target structural deficit of 0.5 percent of gross domestic product, according to the draft, which was obtained by Bloomberg News. It is dated Jan. 19.

The blueprint, to be discussed Jan. 23 by EU finance ministers, also empowers the European Commission to set deadlines for budgetary convergence. It gives the European Court of Justice the power to fine countries whose balanced-budget laws don’t pass muster, while stopping short of the ECB’s request that the court more broadly enforce the budget rules.

German Chancellor Angela Merkel has made the deficit- control treaty the centerpiece of efforts to combat the debt crisis, counting on stiffer rules to restore credibility to public finances in the 17-nation euro area. The treaty will enshrine tougher sanctions, which are already in effect, at the constitutional level. It will make it easier to penalize high- deficit states and require each country to enact balanced-budget amendments.

Asmussen Requests

ECB Executive Board Member Joerg Asmussen on Jan. 12 requested “substantial changes” to the treaty draft, saying the measure should include “ambitious and binding calendars” for meeting new budget goals, as well as an automatic correction mechanism. These changes are reflected in the new draft.

An ECB spokesman reached late yesterday declined to comment. Martin Kotthaus, chief spokesman for the German Finance Ministry, also declined to comment on the pact when contacted by telephone in Berlin.

Asmussen also sought to give the Court of Justice an “effective enforcement of all elements” of the balanced-budget rules. And he called for limiting “escape clauses” to natural catastrophes and “serious” emergencies beyond the control of national governments.

The new treaty is tougher on both elements without adopting the full range of the ECB recommendations.

It says the court could impose a lump sum penalty of up to 0.1 percent of a country’s gross domestic product, to be paid into the euro area’s permanent rescue fund, on countries whose budget-balancing provisions are questioned.

‘Exceptional Circumstances’

The draft also says countries could avoid penalties if they face “exceptional circumstances” such as severe economic downturns or an “unusual event” that has a major impact on the affected government’s financial position, according to the draft -- a wider range of exceptions than the ECB sought.

The document says the treaty will enter into force after 12 members of the 17-country euro zone have ratified it. It also says necessary steps to implement the treaty changes shall be taken “within five years at most” after the treaty takes effect.

A spokesman for the European Commission couldn’t immediately be reached for comment late yesterday. The French Finance Ministry didn’t return calls seeking comment.

Record Philippine Stock Inflows Show Confidence in Aquino GDP Growth Plans

2012-01-20T19:01:00.008+08:00

Investors are pouring record amounts of money into Philippine stocks, a sign of growing confidence in President Benigno Aquino’s plan to boost economic growth to a level that may exceed China’s expansion.

Foreign investors bought $1.1 billion of Philippine shares in the past two months, the most since Bloomberg began tracking the data in 1999. The Philippine Stock Exchange Index (PCOMP) rose 9.2 percent in the period, the most among benchmark equity gauges in emerging markets, and closed at an all-time high yesterday.

Aquino, 51, is boosting government spending to a record this year as he seeks to spur the $200 billion economy’s growth rate to as fast as 8 percent from about 5 percent last year. While Bank of the Philippine Islands, the nation’s top- performing equity fund manager, says the rally will continue as falling interest rates boost earnings and infrastructure spending accelerates, Manulife Asset Management says the most expensive valuations since 2004 will limit gains.

“The story of the Philippines is that it’s getting re- rated by the market for its resilient, domestic driven economy,” said Paul Joseph Garcia, who helps manage about $15.3 billion at Manila-based Bank of the Philippine Islands. “Consumer spending will grow at a healthy clip this year on the back of aggressive government pump priming.”

Relative Value

The Southeast Asian nation is pursuing faster growth just as China, the biggest emerging economy, tempers its expansion goals and India struggles to maintain economic momentum. China has set a 7 percent growth target in its five-year plan that runs through 2015, down from more than 9 percent last year. Indian Prime Minister Manmohan Singh said this month that his nation’s gross domestic product will rise about 7 percent in the year ending March 31, less than the 7.5 percent rate he forecast in December.

The Philippine stock index is valued at 17 times earnings, or 39 percent higher than the Shanghai Composite Index, the widest gap in nine years, according to monthly data compiled by Bloomberg. The Philippine gauge trades at an 11 percent premium to the BSE India Sensitive Index, the biggest since February 2009, the data show.

The Philippine stock measure gained 1 percent today to a record 4,747.90. The country’s currency, the peso, rose 0.5 percent, while the yield on the government’s 7.125 percent notes due November 2013 fell 14 basis points to 2.65 percent. The central bank lowered yesterday its benchmark interest rate by 25 basis points, or 0.25 percentage point, to 4.25 percent, matching the median forecast in a Bloomberg survey of economists.

Infrastructure Growth

Domestic spending will probably support economic growth as overseas demand weakens, Amando Tetangco, governor of Bangko Sentral ng Pilipinas, said in a statement yesterday.

“This is a very stable economy,” Stephen Corry, the Hong Kong-based chief investment strategist at LGT Group, which oversees about $12 billion of client assets in Asia, said by telephone yesterday. “Valuations in the equity market are high relative to the rest of the region but there is still potential for growth there, particularly in regards to infrastructure.”

Aquino unveiled a 72 billion-peso ($1.7 billion) stimulus package of public works and poverty reduction projects in October to bolster growth. Property and construction stocks have climbed during the past two months on speculation Aquino’s program will boost profits.

Vista Land, Ayala

Vista Land & Lifescapes Inc., a Manila-based homebuilder, advanced 9.3 percent after the government named Ayala Corp. (AC) as the preferred bidder for a road project on Dec. 15, the first development to be awarded under Aquino’s program.

Vista Land plans to build houses and commercial buildings on more than 500 hectares of land it owns near the road. The shares climbed 1 percent yesterday and trade for 6.4 times estimated 2012 earnings, according to the average of six analyst projections compiled by Bloomberg.

“We have had the land for years and this road project will certainly enhance the value,” Ricardo Tan, a vice president at Vista Land, said by phone on Jan. 17. “This will make life easier for us to attract partners and customers for the development.”

The government said on Jan. 3 it may offer eight to 16 infrastructure projects to investors worth up to $3.2 billion this year. Ayala and Metro Pacific Tollways Corp. (TOL) are among companies that have expressed interest in the projects, according to Cosette Canilao, executive director of the program.

Aquino Is Bullish

Manila-based Ayala, which owns the nation’s largest building company, has climbed 16 percent in the past two months and trades for 17 times estimated profit. Metro Pacific Investments Corp. (MPI), the Manila-based parent of Metro Pacific Tollways, gained 7.4 percent and is valued at 14 times earnings projections, according to data compiled by Bloomberg.

“We are eagerly waiting for the projects to come on stream,” Jose Lim, president at Metro Pacific, said in a phone interview yesterday. “Certainly we intend to participate in these projects and at the moment Metro Pacific has made unsolicited proposals for several projects.”

Aquino said in a Jan. 11 speech in Manila that the stock market may extend gains because the country has become “more economically stable” and businesses are “more profitable.” Earnings in the Philippines index may climb 20 percent in the next 12 months, compared with the 14 percent gain forecast for the MSCI emerging markets index, according to analyst projections compiled by Bloomberg.

‘Not Cheap’

Stocks in the Philippines and other Southeast Asian countries may lag behind other Asian markets this year because their valuations are “not cheap”, Linda Csellak, the Hong Kong-based head of Asia Pacific equities at Manulife Asset Management, said in a Jan. 17 interview. Csellak said her firm is buying shares in China and India on expectations their central banks will ease monetary policy as inflation slows.

The last time Philippine stock purchases by foreign investors approached current levels was in July 2007, just as the Philippine stock index entered a bear market, data compiled by Bloomberg show.

A potential credit-rating upgrade by S&P will spur further gains in stocks, according to Rico Gomez, a money manager at Manila-based Rizal Commercial Banking Corp.

The ratings company raised its outlook on the country’s long-term foreign-currency rating Dec. 16, citing “strong external liquidity and signs of improving growth prospects.” The Philippines is rated BB, or two levels below investment grade. The government is hoping for an upgrade in the next two to three months, Budget Secretary Butch Abad said on Jan. 13.

“A ratings upgrade will allow investors to re-rate the market,” said Gomez, who helps manage about $1.5 billion and favors infrastructure and property stocks. “That could push the index to go beyond 5,000 within the year and sustain valuations.”

Hammer Falls on Australia Home Auctions as Bids Scarce in Faltering Market

2012-01-20T19:01:00.005+08:00

A year ago, when Sydney property agent Peter Green’s clients decided to sell, half opted for auctions, betting competition among buyers would deliver them the best price. Today, less than one in five take that chance.

“The vendors don’t want to embark on the potential of failure,” said Green, 55, principal at property broker Laing+Simmons in Miranda, a suburb 25 kilometers (16 miles) south of Sydney’s center. “In the last three months, the number of people visiting open houses has been cut by half. And buyers may show up to auctions, but they don’t bid.”

Homes sold via auctions in Sydney, Australia’s most populous city, fell to 12.8 percent of total sales in the three months ended November, from a peak of 15.7 percent in the quarter to Nov. 30, 2010, according to real estate researcher Australian Property Monitors. Half of the homes that went to auction in December failed to sell, APM said.

Unlike the U.S., where auctions are used to sell distressed properties such as those in foreclosure, their use in Australia is a barometer of the market’s strength, with newspapers devoting sections to sale results. The declining use of auctions after home prices fell the most in at least 12 years in 2011 may foreshadow another year of prices going down.

“People’s preference for moving away from the auction format is reflecting demand on the ground,” said Ben Jarman, a Sydney-based economist at JPMorgan Chase & Co., who expects prices will fall another 3 percent this year as concerns about the global economy outweigh interest-rate cuts by the central bank. “We’ll see some demand resume, but supply will come on line as well.”

Declines Overdue?

The number of homes listed online for sale across Australia jumped 18 percent in December from a year earlier to 385,036, according to Sydney-based SQM Research.

Stockland (SGP), Australia’s biggest listed residential land developer, slipped 11 percent in Sydney trading last year and remains 62 percent below a 2007 high, while Australand Property Group (ALZ), a unit of Singapore’s CapitaLand Ltd., tumbled 18 percent in 2011 and is 73 percent below its 2007 peak. Both Sydney-based companies are among developers selling smaller homes and plots to preserve margins as the housing market falters.

The six-member S&P/ASX 200 Banks index lost seven percent in 2011 as mortgage lending growth weakened to the slowest pace since World War II. Still, loan delinquencies declined to 1.42 percent in September, according to a report from Fitch Ratings last month. That compares to 8.15 percent in the U.S. in November, according to Lending Processing Services.

Price History

Australia escaped the housing rout seen in the U.S. and U.K., in part due to government measures to boost demand in the wake of the collapse of Lehman Brothers Holdings Inc. Housing prices in the nation’s eight state and territory capital cities surged 11.1 percent in 2009 and 4.7 percent in 2010, according to figures from RP Data. They fell 3.7 percent in the first 11 months of 2011, set for the biggest drop since Brisbane-based RP Data began compiling the figures in 1999.

About 70 percent of Australians own their homes, compared with 66.3 percent in the U.S., according to census data. The quest to own rather than rent has contributed to surging household debt, which, as a proportion of disposable income, tripled over the past 20 years to 150.8 percent in the quarter ended Sept. 30, according to central bank data. That compares with 133 percent in the U.S. at the height of the subprime- mortgage boom.

‘Spectator Sport’

The median price for houses and apartments across all regions in Australia was A$315,000 ($327,000) as of Nov. 30, according to RP Data. That compares with $147,800 in the U.S., Zillow.com figures show.

“Australians’ love of property has made auctions popular here,” said Amanda Lynch, chief executive officer at the Real Estate Institute of Australia. “Auctions are a spectator sport as well as a way to buy, and they can create an atmosphere where there’s some momentum in a hot market.”

The Sunday editions of the Sydney Morning Herald, Melbourne’s Age, and the Brisbane Times have a section with addresses of properties listed for auction the previous day, results and prices achieved of those successfully sold.

The typical home auction in Australia follows six-to-eight weeks of advertising and “open house” displays, where potential buyers are able to view the property and its building plans. On the day of sale, often in a front-yard for homes or an offsite location for apartments, interested buyers must register with the selling agent if they plan to bid.

The Block

When the auction starts, bidders nominate prices or signal acceptance of levels dictated by the auctioneer. Once the seller’s pre-determined minimum level has been passed, the property will be sold to the highest bidder after final checks with the owner and a “going once, going twice, sold” cry and gavel blow from the auctioneer which marks a binding contract.

The Block -- one of Australia’s top-rated television shows -- highlighted the housing market’s malaise in 2011. The series followed four couples as they renovated homes to attract the highest price at auction over set targets. More than 3 million watched the finale on Aug. 21 as just one of the four homes sold, for A$855,000, versus its A$840,000 asking price.

“Auctions are designed to take advantage of competition amongst buyers,” Andrew Wilson, Sydney-based senior economist at APM, said. “When there are competing buyers, auctions maximize the market value of a property, but when there’s not a lot of competition, it’s the buyers who hold the whip hand.”

The rate of successful home auctions in Sydney slumped to 49.4 percent in December, the lowest since January 2011, as purchasers at the middle and top ends of the market stayed on the sidelines, according to APM. The rate dropped from a 2011 high of 58.8 percent and a six-year peak of 71 percent in February 2010.

Turning Cautious

In Melbourne, about 12.2 percent of properties, or 8,396 homes, sold in the three months to Nov. 30 were by auction, compared with a high of 19.6 percent in the November quarter of 2010. Auctions in Sydney dropped to 7,956, from an 8,754 peak. Those numbers exclude canceled auctions and those that fail to meet the seller’s reserve price and are then sold privately, APM’s Wilson said.

Laing+Simmons’ Green, who opened his office with his wife nine years ago, sold 48 homes priced between A$330,000 and A$1.2 million in 2011, he said. More clients opted to set a listing price rather than risk an auction as the market deteriorated, Green said, with only about a quarter of his successful sales resulting from auctions.

Even when a property goes to auction, fewer buyers are bidding, and they’re more conservative in the prices they’re willing to pay, said Matt Lahood, general manager for sales at Sydney-based real estate broker McGrath.

Expectations Fade

“Bidding at auction hasn’t been as bullish as last year,” Lahood said in a telephone interview. “Owners are getting roughly close to their prices now, whereas, a year or two ago, we might have seen people going way above the expectations of owners.”

McGrath, which only operates in New South Wales and Queensland states, had a 60 percent sale rate at its auctions in the December quarter, Lahood said.

The Reserve Bank of Australia reduced the benchmark rate by a quarter percentage point on Nov. 1 and again on Dec. 6 as inflation pressures eased and global risks increased. It said Dec. 20 that conditions in the housing market are “subdued.”

Swaps traders are betting on another 25 basis-point cut next month and 1.02 percentage points within 12 months, Credit Suisse Group AG indexes show.

‘Over Leveraged’

UBS AG Sydney-based bank analysts Jonathan Mott, Chris Williams and Adam Lee wrote in a Jan. 13 report that they don’t expect the rate cuts to boost the housing market as “over- leveraged borrowers” leave repayments unchanged.

“The big thing for the property market, consumer confidence, isn’t there yet,” said Angus Raine, chief executive officer of Sydney-based real estate broker Raine & Horne, who expects sellers to avoid auctions again in 2012. “That’s the key missing piece of the property puzzle.”

Bonds Show Return of Crisis Once ECB Loans Expire: Euro Credit

2012-01-20T19:01:00.002+08:00

European Central Bank President Mario Draghi’s unlimited three-year loans to euro-region banks may give Italy and Spain only temporary respite from the region’s debt crisis.

Two-year Italian and Spanish notes rallied since the ECB said Dec. 8 that it planned to offer as much liquidity as banks wanted in exchange for eligible collateral. The gain on the short end of the market outpaced longer-dated debt on concern the nations’ austerity plans won’t plug deficits and reduce Europe’s largest debt load. Yields on Italian two-year notes fell to the least relative to 10-year bonds in 21 months.

“This is about buying time,” said John Davies, a fixed- income strategist at WestLB AG in London. “It’s only when the market believes Italy and Spain have returned to sustainable debt levels that you can say the crisis has truly ended.”

Investor demand at sales of government bills and short-term debt has increased across the euro region since the ECB injected 489 billion euros ($632 billion) of three-year loans into the financial system on Dec. 21. The loans were offered at the benchmark rate, currently 1 percent, enabling financial institutions to profit by lending the cash at higher rates, including to governments. The banks that borrowed the cash may also use the funds to finance their own maturing debt.

Yield Plunge

Rates on two-year Spanish notes dropped to as low as 2.80 percent on Jan. 13, the least since November 2010, from a euro- era record of 6.12 percent on Nov. 25. The declines widened the difference in yield between two-year notes and 10-year bonds to 223 basis points on Jan. 11, the most since March, based on closing-market rates. The yield spread was 211 basis points, or 2.11 percentage points, at 9:26 a.m. London time, compared with an average over the past five years of 142 basis points.

Italian and Spanish notes rallied on Jan. 12 after borrowing costs for both nations declined at auctions of short- dated debt. Italy sold 12-month bills at a yield of 2.735 percent, down from 5.952 percent at the previous auction. Spain sold a new benchmark three-year note at an average yield of 3.384 percent, down from 5.187 percent at an offering of similar-maturity securities on Dec. 1.

“For the time being, the ECB’s operations are working at the short end, but for the long end, we have a lot of uncertainties around,” said Frankfurt-based Werner Fey, a fund manager at Frankfurt Trust Investment GmbH, which oversees the equivalent of 6.5 billion euros of fixed-income assets.

While Fey said he’s more likely to buy Spanish and Italian paper now, “the government problems for the euro-sovereigns are unresolved and so we are still on the cautious side. We have an underweight bias on the longer-term maturities,” he said.

ECB Buying

Even after the first three-year loan operation, the ECB has been buying bonds, using its Securities Market Program (ECBCSMPW) to keep a lid on yields. It settled 3.77 billion euros of bond purchases in the week ended Jan. 13, up from 1.1 billion euros the previous week.

Spain’s 10-year bonds slid yesterday after the debt agency agreed to sell more than its target amount of securities due between 2016 and 2022, amid speculation the government is rushing to raise money should it miss deficit targets. Spain has completed 19 percent of its gross funding needs for the year, up from 9 percent at the same time in 2011, according to Credit Agricole Corporate & Investment Bank.

The Spanish government said Dec. 30 that its 2011 deficit would reach 8 percent of gross domestic product, exceeding the European Union’s 6.6 percent forecast, after growth stalled. While Italy’s deficit was likely to shrink last year to 4 percent from 4.6 percent a year earlier, according to the EU’s projections, its debt load, estimated at 120.5 percent of GDP last year, is almost double the 69.6 percent forecast for Spain.

Contracting Economy

Bringing down yields beyond the period covered by ECB loans may only be possible with evidence that nations are successfully implementing measures needed to both control spending and ensure growth, WestLB’s Davies said.

The ECB loan does “nothing to bring down debt levels, it’s a liquidity measure to try to buy time to manage the solvency issue,” he said.

Plans to trim spending and curb deficits risk falling short as the euro-region economy contracts. The 17-nation region is forecast to shrink 0.2 percent this year, while the U.S. economy will probably expand 2.3 percent and the U.K. economy will grow 0.6 percent, Bloomberg surveys show.

While Italy’s government is basing its budget program on a worse-case scenario for a 0.4 percent to 0.5 percent contraction in GDP this year, the Bank of Italy said Jan. 17 that the economy may contract as much as 1.5 percent.

Austerity Skepticism

“Confidence won’t be restored if growth is falling,” Nobel Prize-winning economist Joseph Stiglitz said on Jan. 18. “Austerity on its own won’t bring growth.”

The need to promote an expansion may keep the pressure on the central bank as it prepares for a second offering of three- year loans next month.

“I see no short-term solutions to the sovereign crisis, so the ECB must buy time for the governments to work on their consolidation,” said Frankfurt Trust’s Fey. “The ECB will continue to expand its balance sheet. They will probably have to step in and support the long-end of the curve too.”

Four-Year Low in U.S. Jobless Claims May Bolster Spending in 2012: Economy

2012-01-20T19:00:00.011+08:00

Claims for jobless benefits last week dropped to the lowest level in almost four years, pointing to an improvement in the U.S. job market that may help bolster spending in the new year.

Applications (INJCJC) for unemployment insurance payments plunged by 50,000 to 352,000 in the week ended Jan. 14, less than forecast and the fewest since April 2008, according to data from the Labor Department issued today in Washington. Other reports showed consumer prices were little changed in December for a second month and builders started work on the most single-family houses in more than a year.

Jobless claims, which tend to be volatile week to week around holidays, have trended down over the past month, a sign employment may pick up after payrolls grew by 200,000 in December. Gains in incomes, combined with less inflation, will probably underpin household spending, which accounts for about 70 percent of the world’s largest economy.

“We’ve had fundamental improvement in the labor market in the past few months,” said Ellen Zentner, a senior economist at Nomura Securities International Inc. in New York. “Moderate inflation will certainly help households spend more in the face of slower wage growth.”

Stocks climbed on the drop in claims and as Bank of America Corp. showed a profit last quarter. The Standard & Poor’s 500 Index rose 0.5 percent to 1,314.5 at the close in New York. Treasury securities fell, sending the yield on the benchmark 10- year note up to 1.98 percent from 1.90 percent late yesterday.

Less Confidence

In Europe today, consumer confidence in the U.K. dropped in December as rising unemployment and Europe’s debt crisis sapped Britons’ expectations for an economic recovery. An index of sentiment fell to 38 from 40 in November, the Swindon, England- based Nationwide Building Society said today. It reached 36 in October, the lowest since the survey began in 2004.

Elsewhere, Australia unexpectedly lost jobs in December for a second straight month, capping the nation’s worst year for employment in almost two decades.

The cost of living in the U.S. was little changed in December for a second month as stores cut prices to boost holiday sales, other figures from the Labor Department showed. Excluding (CPUPXCHG) volatile food and fuel costs, the so-called core index rose 0.1 percent.

Retailers from Williams-Sonoma Inc. (WSM) to Macy’s Inc. used discounts to attract customers during the holidays. Less inflation means Federal Reserve officials have leeway to take additional steps to spur growth should the economic expansion stumble.

Little Inflation

“There are no signs of budding inflationary pressures,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. (PNC) in Pittsburgh, who accurately forecast prices would remain steady. “The core index is going to be pleasing to the Fed.”

The lack of inflation is helping preserve household buying power. Hourly earnings adjusted for prices rose 0.2 percent on average in December, the Labor Department figures also showed. They were up 2.4 percent at an annual rate over the past three months, the best performance since June 2010, according to Bloomberg News calculations.

Last week’s drop in jobless claims was the biggest since September 2005, when applications first surged then plunged in the aftermath of Hurricane Katrina.

The median forecast of 41 economists in a Bloomberg survey projected a decrease to 384,000. Estimates ranged from 363,000 to 405,000. The Labor Department revised the previous week’s figure up to 402,000 from the 399,000 previously calculated.

Seasonal Volatility

A Labor Department spokesman said the drop reflected volatility seen during this time of year. Claims tend to jump around during holidays as the government has difficulties adjusting the data for seasonal swings in employment.

The four-week average, which smoothes out fluctuations, decreased to 379,000 last week from 382,500.

Last week correlated with the period surveyed by the Labor Department to calculate monthly payrolls. The four-week average was down from 380,800 during the comparable period in December, a sign employment will keep growing.

Initial jobless claims reflect weekly firings and tend to fall as job growth -- measured by the monthly non-farm payrolls report -- accelerates.

The increase in payrolls last month followed a 100,000 gain in November, Labor Department data showed earlier this month. The jobless rate fell to 8.5 percent in December, the lowest in almost three years.

Housing Stabilizing

Another report added to evidence the housing market was starting to stabilize. Builders broke ground on 470,000 single- family houses at an annual rate, the most since April 2010, according to figures from the Commerce Department.

A 20 percent drop in construction of multifamily units, like apartment buildings, which tends to be volatile, paced a 4.1 percent decline in total housing starts last month, the report showed. For all of 2011, work on multifamily dwellings jumped 78 percent as more Americans opt to rent rather than own.

Conversely, construction of single-family houses last year was the weakest in data going back to 1959.

Also today, reports showed consumer confidence retreated last week from a six-month high and manufacturing in the Philadelphia Fed region accelerated this month.

The Bloomberg Consumer Comfort Index (COMFCOMF) declined to minus 47.4 in the period ended Jan. 15 from a reading of minus 44.7 the prior week. An almost 20-cent per gallon increase in gasoline costs over the past month may be starting to counter the benefits of an improving job market.

Philadelphia Fed

The Fed Bank of Philadelphia’s general economic index increased to a three-month high of 7.3 from 6.8 in December. Readings greater than zero indicate expansion in the area covering eastern Pennsylvania, southern New Jersey and Delaware.

Manufacturing is among industries hiring. The Elgin, Illinois, based-U.S. unit of Germany’s Harting Deutschland GmbH, a maker of industrial connectors, will probably hire 20 people this year after doubling the workforce to 120 since the recession, Chief Executive Officer Rolf Meyer said.

“We have a couple of large orders that we’re negotiating on in the broadcast and medical industries, and these will likely hit in the next five or six months,” said Meyer, who, supplies customers such as General Electric Co. (GE) and Siemens AG.

Draghi Says 2012 Will Be ‘Much Better’ for Europe as Financial Crisis Ebbs

2012-01-20T19:00:00.008+08:00

European Central Bank President Mario Draghi said 2012 will be a “much better” year for the euro area as governments push ahead with fiscal reforms and the benefits of the ECB’s flood of cheap cash become more apparent.

“I am confident that the euro will be in better shape in 2012 because I look at the progress that has been achieved on the two root causes of the situation, namely lack of fiscal discipline and lack of structural reform,” Draghi said at a press conference today in Abu Dhabi, where he was attending a central banking conference. “I see both problems being addressed with conviction, with determination and with realism in many countries in euroland.”

Investor confidence in Germany, Europe’s largest economy, jumped by a record this month after politicians pledged to implement a “fiscal compact” to restore budget discipline and the ECB flooded the banking system with a record amount of cash. Draghi said the loans had prevented a “serious funding crisis” and the benefits will become more apparent in coming months.

“We started to see the benefits of these measures,” Draghi said. “Some interbank markets are reopening” and there has been “a dramatic fall in yields” in many sovereign debt markets, he said. “We see encouraging signs.”

Stocks Rally

European stocks gained for a fourth day, extending a five- month high for the Stoxx Europe 600 Index, as Spain and France sold bonds at lower yields. The euro has risen more than two cents this week to $1.2887.

Signs of resilience in the economy give the ECB room to pause and assess the impact of its measures to date, which include cutting its benchmark interest rate to a record low of 1 percent, ongoing government bond purchases and unlimited lending to banks.

While demand for the ECB’s second batch of three-year loans may fall short of the 489 billion euros ($631 billion) allotted last month, it will “still be very high,” Draghi said. The loans will be offered on Feb. 28.

There are still “significant downside risks” to the economic outlook, Draghi said. Asked if the ECB could add to its two interest-rate cuts, he said policy makers “never pre- commit.”

Draghi also said he is “not aware” of any plan to replace the central bank’s government bond purchase program. ECB Governing Council member Ewald Nowotny told the Wall Street Journal that officials are seeking an alternative.

The bond purchases are not eternal or infinite, Draghi said.

Philadelphia-Area Manufacturing Increases

2012-01-20T19:00:00.005+08:00

Manufacturing in the Philadelphia region expanded at faster pace in January as employment picked up and factories grew more optimistic about business in the next six months.

The Federal Reserve Bank of Philadelphia’s general economic index increased to a three-month high of 7.3 from 6.8 in December, according to a report released today. Economists surveyed by Bloomberg News forecast the gauge would rise to 10.3. Readings greater than zero indicate expansion in the area covering eastern Pennsylvania, southern New Jersey and Delaware.

Household and business demand, along with leaner inventories, are encouraging factories to bring on more employees and boost hours worked. At the same time, a possible recession in Europe and a weaker euro pose a risk to U.S. manufacturers’ overseas sales.

“The U.S. economy should grow moderately and that would support decent gains in manufacturing,” Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, said before the report. “How much that will continue is a question as we really don’t know yet the extent of the European downturn.”

Estimates in the Bloomberg survey of 56 economists ranged from 7 to 16.8.

Another report today showed jobless claims plunged by 50,000 to 352,000 last week, the lowest level since April 2008, according to Labor Department figures. The decline was the biggest since September 2005, when claims first surged then slumped in the aftermath of Hurricane Katrina.

Stocks Gain

Stocks gained after the claims figures, with the Standard & Poor’s 500 Index climbing 0.3 percent to 1,311.34 at 10:23 a.m. in New York. The yield on the benchmark 10-year Treasury note rose to 1.94 percent from 1.9 percent late yesterday.

The cost of living was little changed in December for a second month, the Labor Department also reported. The unchanged reading in the consumer-price index was less than the 0.1 percent gain median forecast of economists surveyed by Bloomberg. Costs excluding food and energy rose 0.1 percent last month as projected.

The Commerce Department said builders began work on fewer homes in December, reflecting a slump in multi-family unit construction. Home starts dropped 4.1 percent to a 657,000 annual rate.

The Philadelphia Fed bank’s employment index increased to 11.6, the highest level since May, from 11.5 in the prior month. The new orders measure fell to 6.9 from 10.7 in December. A measure of the average workweek climbed to 5 from 2.8.

Shipments and Prices

The shipments gauge decreased to 5.7 from 9.1 last month. The index of prices paid rose to 31.8 from 30.4 in December, and the measure of prices received advanced to 11.2 from 10.3.

The overall index isn’t composed of the individual measures, so some economists consider it a gauge of sentiment among manufacturers.

The group’s measure of the outlook for the next six months improved to 49 in January, the highest level since March, from a reading of 40 a month earlier.

The Philadelphia-area factory report follows data earlier this week from the Federal Reserve Bank of New York that showed manufacturing in the area expanded in January at the fastest pace in nine months.

Industrial Production

Industrial production in the U.S. rebounded last month, reflecting gains in demand for business equipment, automobiles and construction materials, figures from the Federal Reserve showed yesterday in Washington. Factory production, which makes up about 75 percent of total output, climbed by the most in a year.

Last year “proved to be a challenging environment, most notably with the difficulties in the European region,” Roger Wood, president and chief executive officer at Dana Holding Corp. (DAN), said Jan. 10 at an auto industry conference in Detroit.

The head of the Maumee, Ohio-based maker of truck axles and frames said Europe will also play an important role this year. “Looking forward, we continue to foresee a mixed global outlook. We expect slow growth in North America and much better growth in both Asia and South America. We believe that Europe will continue to lag.”

South Africa Keeps Key Lending Rate at 5.5% to Bolster Economic Recovery

2012-01-20T19:00:00.002+08:00

South Africa’s central bank kept its benchmark lending rate at a 30-year low to support the recovery in Africa’s biggest economy.

The Monetary Policy Committee left the repurchase rate at 5.5 percent for a seventh consecutive meeting, Governor Gill Marcus said today in a televised press conference from the capital, Pretoria. That was in line with the forecasts of all 21 economists surveyed by Bloomberg.

Concerns that Europe’s worsening debt crisis will stifle growth in South Africa have outweighed those about rising prices. Inflation (SACPIYOY) was unchanged at 6.1 percent in December, exceeding the bank’s target for a second month, though lower than economists forecast.

“The MPC maintains a preference for a stable interest rate environment given the conflicting pressures on monetary policy,” Marcus said. “The monetary policy stance is ‘‘accommodative and supportive of the real economy. The outlook for domestic economic growth remains subdued.’’

The European debt crisis threatens to erode growth in a region that buys about a third of South African manufactured exports. South Africa’s government estimates the economy grew 3.1 percent last year, less than half the 7 percent expansion needed to meet a goal to create 5 million new jobs by 2020.

The central bank today cut its growth forecast for this year to 2.8 percent from a previous estimate of 3.3 percent, while projected growth for next year was revised downward to 3.8 percent from 4.2 percent.

No Speedy Resolution

‘‘The primary reason for the worsening domestic growth outlook is the risk of contagion from the persistent crisis in Europe, which shows no sign of a speedy resolution,’’ Marcus said.

Investors have pared bets the central bank will increase interest rates, with the yield on the forward-rate agreement contract due in six months dropping for a third day. The rand was at 7.9373 as of 4:20 p.m. in Johannesburg from 7.9309 before Marcus began speaking.

‘‘It is clear that the bank of late is focused on growth,’’ Arthur Kamp, an economist at Cape Town-based Sanlam Investment Management, said in a telephone interview. ‘‘Rates are likely to remain unchanged this year.’’

Inflation will probably remain outside the bank’s 3 percent to 6 percent target range for 2012, peaking at about 6.6 percent in the second quarter, Marcus said.

Rising Spending

The central bank ‘‘sees the risks to inflation as evenly balanced,’’ Carmen Nel, an economist at Rand Merchant Bank, said by telephone from Johannesburg. ‘‘That doesn’t mean they are not worried about inflation. If they do see demand-led inflation coming through, there is a possibility they may respond by tightening.’’

Pressure to ease interest rates has abated as consumer spending improved. Borrowing (SACEIYOY) by households and businesses rose 6.2 percent in November from the same month last year, the fastest pace since April 2009, the central bank said on Dec. 30. Retail sales rose 6.8 percent in November from a year ago, after expanding 7.5 percent in the previous month, the statistics office said yesterday.

‘‘Christmas trading was above expectation across all divisions with sales growth for December of 17.3 percent,’’ Foschini Group Ltd. (FOS), a Cape Town-based clothing retailer, said yesterday.

Consumer Prices in U.S. Little Changed in December as Fuel Costs Decreased

2012-01-20T18:59:00.001+08:00

The cost of living in the U.S. was little changed in December for a second month as stores cut prices to boost holiday sales and fuel expenses fell, reinforcing the Federal Reserve’s view that inflation will remain in check.

The unchanged reading in the consumer-price index reported by the Labor Department today in Washington compared with a median forecast of a 0.1 percent gain, according to a Bloomberg News survey of 78 economists. Excluding (CPUPXCHG) volatile food and fuel costs, the so-called core rose 0.1 percent as projected.

Retailers from Williams-Sonoma Inc. (WSM) to Macy’s Inc. (M) used discounts to attract customers constrained by stagnant incomes and property values that keep falling as the housing market struggles to recover. Less inflation means Federal Reserve officials have leeway to take additional steps to spur growth should the economic expansion stumble.

“There are no signs of budding inflationary pressures,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, who accurately forecast prices would remain steady. “The core index is going to be pleasing to the Fed.”

Economists’ estimates ranged from a drop of 0.1 percent to a gain of 0.3 percent.

Annual Gain

Consumer prices increased 3 percent in the 12 months ended in December, the biggest annual gain since 2007.

The increase in the core gauge followed a 0.2 percent increase in November and matched the 0.1 percent gain median forecast of economists surveyed. They were up 2.2 percent for all of 2011, also the most since 2007.

Fewer Americans than forecast filed applications for unemployment benefits last week, easing concern that post- holiday firings were on the rise.

Jobless claims plunged by 50,000 to 352,000 in the week ended Jan. 14, the lowest level since April 2008, Labor Department figures showed today in Washington. The median forecast of 41 economists in a Bloomberg News survey projected 384,000. A Labor Department spokesman said the decrease reflected the usual volatility seen during this time of year.

Builders began work on fewer houses than forecast in December, capping the worst year on record for single-family home construction and signaling recovery in the industry will take time to develop, figures from the Commerce Department also showed today. Housing starts dropped 4.1 percent to a 657,000 annual rate last month, reflecting a slump in multifamily units.

Shares Climb

Stock-index futures held earlier gains after the reports. The contract on the Standard & Poor’s 500 Index maturing in March rose 0.5 percent to 1,308.3 at 8:48 a.m. in New York. Treasury securities fell, sending the yield on the benchmark 10- year note up to 1.93 percent from 1.90 percent late yesterday.

Today’s report showed energy costs decreased 1.3 percent from a month earlier.

The cost of a gallon of regular gasoline at the pump averaged $3.26 in December, down from $3.38 the prior month, according to data from AAA, the nation’s largest auto group.

Food costs increased 0.2 percent, reflecting higher prices for meats.

The increase in the core measure was driven by increases in rents and medical care. Falling costs for new and used cars and clothing limited the gain.

Store Discounts

Chains including Macy’s, Gap Inc. and Target Corp. offered discounts on already marked-down merchandise in the week after Christmas. Williams-Sonoma, the owner of the namesake, Pottery Barn and West Elm home-goods chains, last week said profit may be less than previously forecast due to holiday price-cutting.

Williams-Sonoma faced “greater challenges” given the heavy market discounting on nationally branded products, Chief Executive Officer Laura Alber said in a Jan. 12 statement.

Inflation and pressures to raise prices “were very limited” at the end of last year, the Fed said in its Beige Book anecdotal business survey released on Jan. 11. Several district banks reported that “upward price pressures from rising commodity and input prices have eased substantially,” the report said.

Policy makers will use the report as a basis for framing their discussions at their next meeting on Jan. 24-25.

While the labor market is improving, paychecks are failing to keep up with even limited inflation. Hourly earnings adjusted for inflation rose 0.2 percent in December.

The CPI is the broadest of three price gauges from the Labor Department because it includes goods and services. Almost 60 percent of the index covers prices consumers pay for services ranging from medical visits to airline fares, movie tickets and rents.

A report yesterday showed producer prices fell 0.1 percent in December, while the import-price index, released last week, declined for the fourth time in the past five months.

Manufacturing in New York Fed Region Expands at Faster Pace Than Estimated

2012-01-18T07:33:00.002+08:00

Manufacturing in the New York region expanded in January at the fastest pace in nine months, reflecting improving orders, sales and employment.

The Federal Reserve Bank of New York’s general economic index rose to 13.5, the highest level since April, from a revised 8.2 in December. That gauge exceeded the median forecast of 56 economists surveyed by Bloomberg News, which projected an increase to 11. Readings higher than zero signal expansion among companies in the so-called Empire State Index, which covers New York, northern New Jersey and southern Connecticut.

Factories may keep driving the economic expansion as they maintain production to meet household and business demand. At the same time, the financial crisis in Europe and a weaker euro may slow purchases of American-made goods.

“It’s a reflection of improvement in demand,” said Millan Mulraine, a senior U.S. strategist at TD Securities in New York. “The pace of recovery has accelerated. We’re beginning to see signs that the economy is starting to build on the strong momentum that we saw at the end of last year.”

Stocks rose as China’s economy grew more the forecast and German investor confidence jumped by the most on record. The Standard & Poor’s 500 Index rose 1 percent to 1,301.77 at 9:45 a.m. in New York.

Survey Results
Estimates of economists surveyed ranged from 6.5 to 15. The headline index is based on a separate question and does not reflect changes in areas like orders and employment. For that reason, some economists consider it a measure of sentiment.

With today’s report, the New York Fed issued its annual revisions. The December figure was revised down from a previously reported 9.5.

The Empire State gauge of shipments rose to 21.7 from 20.1. New factory orders increased to 13.7 from 6 last month. A measure of the number of employees climbed to 12.1 from 2.3. All three indexes were at their highest levels since May.

Factory executives in the New York Fed’s district became more optimistic about the future, the report showed. The gauge of the outlook six months from now rose to a one-year high of 54.9 from 45.6.

“Manufacturing activity generally continued to expand, although the pace of growth has slowed for selected subsectors such as technology products,” the Federal Reserve said in its Beige Book anecdotal business survey released Jan. 11.

Some companies are boosting spending at U.S. factories.

Business Investment
Bayerische Motoren Werke AG (BMW), the world’s largest maker of luxury autos, will invest about $900 million in its South Carolina factory to expand capacity and prepare the facility to produce a new sport-utility vehicle.

The spending, to be completed by 2014, will help increase capacity at the plant in Spartanburg to 350,000 vehicles a year from the 276,100 autos made there last year, the Munich-based company said last week in a statement. BMW will make the new X4 SUV at the factory, adding to the X3, X5 and X6 models already assembled there.

Carney Extends Record Interest-Rate Pause as World Growth Slows: Economy

2012-01-18T07:32:00.008+08:00

Bank of Canada Governor Mark Carney prolonged a record period of low interest rates to support an economy that he said would be hobbled by slowing growth in China, Europe and the U.S.

Carney kept his benchmark overnight rate at 1 percent for the 11th straight time today, the longest stretch since the central bank began targeting that rate in 1994. Growth in Canada and the U.S. will be “more modest” than forecast in October as European leaders struggle to contain a debt crisis, the Ottawa- based bank said in a statement today.

“It’s quite unusual to have rates this low this far into the cycle, but it’s also unusual to have all these risk factors over their head,” said Stefane Marion, chief economist at National Bank Financial in Montreal.

Canada’s exports of services and goods from oil to automobiles, which account for about 35 percent of the world’s 10th largest economy, are threatened by slowing global demand and the “persistent strength” of its currency, the Bank of Canada said. Recent signs of a pickup in the U.S., Canada’s largest market, are likely to be transitory, it said.

While the U.S. “had more momentum than anticipated in the second half of 2011, the pace of growth going forward is expected to be more modest than previously envisaged, largely due to the external environment,” policy makers led by Carney, 46, said in the statement. “There is considerable monetary policy stimulus in Canada,” the bank said, echoing its previous decision.

Growth Forecasts
Canada’s economy will expand by 2 percent this year and 2.8 percent next year, compared with an October forecast for expansions of 1.9 percent and 2.9 percent, the bank said. The estimate of 2011 growth was increased to 2.4 percent from 2.1 percent.

China’s growth is “decelerating as expected towards a more sustainable pace,” the Bank of Canada said today, adding that commodity prices other than oil through next year will be lower than forecast in October.

China, the world’s second-biggest economy, grew at an 8.9 percent pace in the last three months of 2011 from a year earlier, the slowest rate in 10 quarters, the statistics bureau said today in Beijing. Growth exceeded the 8.7 percent median of 26 estimates in a Bloomberg survey.

In the U.S., the Federal Reserve Bank of New York’s general economic index rose to 13.5, the highest level since April, from a revised 8.2 in December. Readings higher than zero signal expansion among companies in the so-called Empire State Index, which covers New York, northern New Jersey and southern Connecticut.

German Confidence
German investor confidence jumped the most on record in January. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, surged to minus 21.6 from minus 53.8 in December, its second straight increase. The 32.2-point gain is the biggest in two decades of data.

The better-than-projected economic data helped propel a global equity rally. The MSCI All-Country World Index rose 0.7 percent, and the Standard & Poor’s 500 Index added 0.4 percent to 1,293.67 at the close in New York. Canada’s benchmark Standard & Poor’s/TSX Composite Index declined 0.2 percent.

Carney said in a Dec. 12 speech in Toronto that Canada has to reduce its “reliance on debt-fuelled household expenditures.” Consumer spending helped the country exit recession in 2009 faster than other Group of Seven nations.

“A lot of the things that pulled Canada out of the recession quickly can’t continue to lead the way, and now we need help from the rest of the world,” said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto.

Interest Rate Cuts
The European Central Bank, Norway and Australia cut interest rates last month to stem the damage from slowing global growth.

“The bias is still just to keep rates on hold for the foreseeable future,” said Mazen Issa, Canada macro strategist at TD Securities in Toronto “As long as these external headwinds persist, the bank doesn’t have any incentive to take rates higher.”

Carney’s interest-rate freeze comes even as inflation exceeds his 2 percent target. Consumer prices rose 2.9 percent in November from a year earlier, Statistics Canada said Dec. 20. The average monthly gain in consumer prices through November was 3 percent, on pace for the highest average pace since Canada adopted inflation targets two decades ago.

The central bank predicted in October inflation will slow to 1 percent by the middle of this year. Today, the bank said that the economy will return to full output and the pace of price increases will accelerate back to its 2 percent target in the third quarter of 2013, one quarter earlier than it had forecast.

Press Conference
Carney, who was named chairman of the Financial Stability Board in November, will hold a press conference tomorrow after releasing a detailed forecast in a Monetary Policy Report.

Finance Minister Jim Flaherty, who has ended a two-year government stimulus program, said last week he will consider new initiatives if there is new major slowdown. On Nov. 8, Flaherty pushed back his target for eliminating Canada’s budget deficit by a year to 2015 because slower growth will erode revenue.

The Bank of Canada today also reiterated that household debt will keep rising to records, after reaching 153 percent of disposable income in the third quarter. The bank said last month consumer debt is the main domestic risk to financial stability.

Flaherty said today he’s prepared to intervene in the country’s housing market if necessary, though the government has no plans to take immediate action.

“We watch the housing market carefully, and we are prepared to intervene if necessary,” Flaherty told reporters, adding there has been some “softening” in the country’s housing market. “Having said that, we’re not about to intervene in the housing market now.”

Fastest-Aging Society Greets Ma in Taiwan Asset-Price Risk

2012-01-18T07:32:00.005+08:00

Ma Ying-jeou’s second term as president of Taiwan, secured in an election win three days ago, may be one of the island’s last opportunities to address the consequences of something unmentioned on the campaign trail: the world’s fastest-aging society.

Ma’s push for closer ties with China won a fresh mandate as he defeated Tsai Ing-wen, who said the tighter bonds may risk Taiwan’s autonomy. While Taiwan’s top planning body predicts the island’s population will start falling in 11 years, coping with an aging society and low birth rates were absent from the debate because the challenge is intractable, said Chuang Meng-han, an industrial economics professor at Tamkang University in Taipei.

Failure to tackle the change, by reducing the cost of raising families or allowing immigration, will leave Taiwan’s labor force shrinking, putting pressure on growth and asset prices. The economy’s trend rate of expansion is poised to fall to about 3.5 percent annually in the next decade, from 5.1 percent in the 20 years through 2010, according to DBS Bank Ltd.

“The impact will be huge,” said Chuang, who has analyzed the housing market. “Most people aren’t well-prepared for the aging society. The later the government faces the consequences, the more difficult they will be to deal with.”

Taiwan’s 2010 total fertility rate was 0.9 babies per woman, according to baseline estimates compiled by Taiwan’s Council for Economic Planning and Development. That’s less than in the 196 other countries and territories tracked by the United Nations. Taiwan’s 23 million population will fall to less than 19 million by 2060, according to the council.

Bear Market

By 2050, Taiwan will have an aging index of almost 413 percent, compared with Japan’s 339 percent, the CEPD estimates. That makes the island the most rapidly aging society, said Lo Yu-mei, a council researcher. The index is defined as the number of people aged 65 and over per 100 youths under age 15.

“Taiwan is heading the way of Japan, whose population is shrinking,” said Tim Condon, chief Asia economist at ING Groep NV in Singapore, who previously worked at the World Bank. “Taiwan’s stock market resembles Japan’s Nikkei in that both have been in a bear market since asset bubbles burst in 1990.”

Japan has struggled to overcome an aging and declining population, leading to two decades of depressed economic growth. The Nikkei 225 stock index is down 78 percent, the most in the world, since a peak in December 1989. Taiwan’s Taiex (TWSE) index is down 25 percent in the period, the third-worst performance.

Ma, 61, has put in place a monthly childcare stipend of NT$2,500 ($83) for newborns, payable to certain households earning an annual net income below NT$1.13 million until the child is two, to try and turn the birth rate around.

Property Risk
During the election, neither he nor Tsai of the Democratic Progressive Party recommended greater immigration to boost the population. The CEPD has said Taiwan has the world’s second- densest population among territories with more than 10 million people, limiting political scope for such a policy.

Aging raises the risk of substantial future home-price falls, said Laura Ho, an economist at Grand Cathay Services Corp. in Taipei. Property prices “are disproportionately high” and “older people are investing in property they won’t be able to find buyers for in years to come,” she said.

The president has vowed to consider imposing new taxes to rein in property costs. Housing prices in Taipei have more than doubled since 2000 and reached a record last year.

“Young people are discouraged from getting married because they can’t afford to buy a home,” Tamkang’s Chuang said.

Costly real estate and stagnant wages combined with the risk of recession to stir voter discontent. Gross domestic product fell 0.15 percent in the third quarter from the previous three months, as Europe’s fiscal crisis damped the export-led island’s overseas sales.

Stagnating Wages
Household income adjusted for inflation was lower in 2010 than in 2000. Joblessness, at 4.3 percent, compares with less than 2 percent three decades ago.

Ma says detente with former civil-war foe China, the island’s largest trading partner, will help bolster Taiwan’s $430 billion economy. He has relaxed trade, tourism and investment restrictions. Tsai argued his policy risks giving China too much sway over Taiwan.

China’s economy expanded 8.9 percent in the fourth quarter from a year earlier, a report showed today. One consequence of closer economic ties to the nation has been an exodus of factories to the lower-cost mainland, crimping job opportunities at home.

Taipei-based Foxconn Technology Group (FOXCGZ), which assembles Apple Inc. iPhones and iPads, employs more than 1 million workers at its Chinese factories, compared with 10,000 in Taiwan.

About 800,000 Taiwanese live in China, according to Taiwan’s Mainland Affairs Council. Some of them may be counted as part of the island’s population depending on their periods of continuous residence in Taiwan, the statistics bureau said.

Pace of Detente
In his victory speech, Ma said he will “control” the pace of rapprochement with Asia’s largest economy to ensure the policy retains public support. He took 51.6 percent of the vote in last week’s election, compared with Tsai’s 45.6 percent.

“Rapid ageing means declining labor input and, in the long term, suggests population will fall, which will slow the economy,” said Ma Tieying, an economist at DBS Bank in Singapore. “The savings rate will drop too, as older people usually have to spend their savings. That will be negative for investment.”

Taiwan’s predicament echoes a trend across Asia, signaling increased regional pension and healthcare burdens. Asia will account for 62 percent of the global elderly population by 2050, up from 44 percent in 1950, the Asian Development Bank said in a 2009 report.

While 2012, the year of the dragon, may boost Taiwan’s birth rate temporarily as it’s considered an auspicious period, population decline is inevitable, according to the CEPD.

“The economy isn’t in good shape,” Tamkang’s Chuang said. “But you need to have a stable income and feel secure about your job to have children.”

China’s Quarterly Growth Far From ‘Hard Landing,’ Goldman’s O’Neill Says

2012-01-18T07:32:00.002+08:00

Jim O’Neill, the economist who coined the term BRIC a decade ago, said China’s fourth-quarter growth rate, while the slowest in more than two years, was stronger than many analysts had forecast and was a “blow” to those predicting a “hard landing” for the nation’s economy.

China’s economy grew 8.9 percent in the fourth quarter from a year earlier, the statistics bureau said yesterday in Beijing. That exceeded the 8.7 percent median estimate of 26 economists surveyed by Bloomberg News and is above the 8 percent that signals a “soft landing” for China, according to SinoPac Financial Holdings Co.

O’Neill, chairman of Goldman Sachs Asset Management, said in an interview on Bloomberg Television’s “InsideTrack” with Erik Schatzker that if China grew at an annual rate of 7.5 percent this decade, as he forecast, it would contribute more to world growth in dollar terms than the U.S. and Europe combined.

“It’s the most important thing in the world,” said O’Neill, who last month published his new book, “The Growth Map,” with predictions of “rosy prospects” for the BRIC nations of Brazil, Russia, India and China and other developing markets. “Some democracy a la Chinese style is going to emerge,” he said. “They want more freedom but they really want more wealth.”

Overheated Market
One of China’s key economic challenges is its overheated property market. Yet China’s policy makers, by tightening monetary policy, managed to stem the property bubble, O’Neill said, something Western policy makers had failed to do before the subprime property meltdown that began in the U.S. in the middle of the last decade.

“China’s property prices have turned because Chinese authorities have deliberately stopped them,” he said. O’Neill said China’s authorities were raising wages to boost the domestic economy and move away from its dependence on exports, while seeking to address international concerns that its yuan currency is undervalued.

“There are two ways of dealing with exchange-rate issues, one is moving the nominal exchange rate; the second is to raise your prices and wages higher than everybody else, and the Chinese are deliberately doing that with wages,” he said.

The yuan traded at 6.3150 yesterday, compared with 6.3165 Jan. 16, according to the China Foreign Exchange Trade System. The People’s Bank of China set the yuan’s reference rate 0.09 percent stronger at 6.3250. It is allowed to trade 0.5 percent on either side of the daily fixing.

Greek Concerns
Regarding concerns that Greece may default, O’Neill said China’s economy generates the equivalent of Greek gross domestic product every four months. “Greece itself is not that important,” he said. “What is important,” according to O’Neill, is “how Greece deals with the restructuring or a default, which seems quite possible, and the contagion of that through the rest of Europe is extremely important.”

O’Neill said European markets had “sort of” shrugged off last week’s Standard & Poor’s downgrade of France and eight other European countries. He said it wasn’t clear whether that was because people perceived the European Central Bank is “going to be doing more and more” or there are “some signs of some stabilizing in the economy.”

Mukherjee Dividend Drive Sends Bond Risk to Three-Year High: India Credit

2012-01-18T07:31:00.017+08:00

The cost of protecting against a default by India is surging to a three-year high as investors bet that the government will fail to rein in the nation’s budget deficit even after pressing state-run companies for more dividends.

Policy makers met the chiefs of state companies last week to seek higher payouts as a plan to sell stakes in the firms founders, a Finance Ministry official with knowledge of the talks said on Jan. 12. Five-year credit-default swaps insuring the bonds of State Bank of India (SBIN), seen as a proxy for the nation, have risen 52 basis points since September to 405 basis points on Jan. 9, the highest level since March 2009, according to CMA. Similar contracts on China’s debt declined 49 to 150.

Finance Minister Pranab Mukherjee said on Jan. 7 that cutting the deficit is a “serious challenge,” as the economy slows and subsidy payments rise. India may miss by at least 1 percentage point its goal to cut the budget gap to 4.6 percent of gross domestic product by March, according to Standard Chartered Plc and ICICI Securities Primary Dealership Ltd.

“Even if they manage to raise the cash through alternate means, there will be a slippage in the fiscal deficit number,” said Nagaraj Kulkarni, a Mumbai-based fixed-income strategist at Standard Chartered. “If the recent trend of slowing revenue continues, then the government may not be able to consolidate its fiscal position.”

Finance Minister Mukherjee expanded the government’s debt- sales program for the fiscal year ending March 31 by 8.5 percent to a record 5.1 trillion rupees ($101 billion) last month, to bridge the shortfall in revenue.

Rally Stalled
The increased debt sales are curbing a rally in government bonds even after data showed this week that India’s inflation rate fell to a two-year low in December. The benchmark wholesale-price index rose 7.47 percent last month from a year earlier, after gaining 9.11 percent in November, the Commerce Ministry reported on Jan. 16.

The yield on India’s 8.79 percent note due in November 2021 climbed two basis points, or 0.02 percentage point, this week to 8.22 percent, according to the central bank’s trading system. Standard Chartered’s Kulkarni forecasts that the 10-year yield will touch 8.5 percent by March 31. Investors are demanding an extra yield of 633 basis points to hold the notes over similar- maturity U.S. Treasuries, according to data compiled by Bloomberg.

Default swaps protecting against non-payment on the bonds of State Bank have more than doubled in the past year, advancing 206 basis points, according data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

‘New Worry’
“The fiscal deficit is the new worry on the horizon for bonds now that inflation is on a downward trajectory,” Roy Paul, deputy general manager of treasury at Federal Bank Ltd. in Mumbai said in an interview yesterday. “That is holding back a rally in bonds.”

The government is seeking alternatives to boost revenue after meeting only 3 percent of a target to raise 400 billion rupees from the sale of stakes in state-owned firms in the year ending March 31, according to data provided by the Department of Disinvestment. The offerings have been delayed after India’s benchmark BSE Sensitive share index slid 25 percent in 2011.

India’s budget shortfall reached 3.53 trillion rupees, or 85.6 percent of the annual target, in the eight months through November, the Controller General of Accounts said on its website on Dec. 30. Tax receipts rose 48.2 percent in the period from April to November, less than the 55.5 percent advance recorded a year earlier.

‘Good Dividends’
“We are expecting good dividends from the public sector companies this year,” R. Gopalan, India’s economic affairs secretary, said in New Delhi on Jan. 16.

Prime Minister Manmohan Singh said on Jan. 8 that India’s economy will grow about 7 percent in the year ending March 31, less than the 7.5 percent rate of expansion he predicted in December. Gross domestic product rose 6.9 percent in the three months ended Sept. 30, the least in two years, according to the most recent government data.

The extra yield investors demand to hold India’s 10-year bonds instead of one-year notes touched an eight-month high of 33 basis points on Jan. 11, after the government raised its target for sales of longer-dated bonds.

Wider Deficit
“As far as the bond market is concerned, the government has already borrowed extra and the fiscal deficit is higher than what was budgeted,” said Prasanna Ananthasubramanian, a Mumbai- based economist at ICICI Securities Primary Dealership, a unit of India’s second-biggest bank. “We’re looking at at least 5.5 percent on the deficit, even if they raise money from dividends. If they don’t raise the money, it will be 6 percent.”

Indian bonds advanced this month, pushing 10-year yields down by the most since May 2010, as the central bank bought sovereign debt to ease a cash crunch at banks.

The Reserve Bank of India resumed open-market purchases of government notes after 10 months in November and has so far purchased 614 billion rupees of the securities in auctions, official data show.

“The increased supply of government debt is being negated by the RBI’s open-market bond purchases,” Vivek Rajpal, a fixed-income strategist in Mumbai at Nomura Holdings Inc., said in an interview yesterday.

National Aluminum
Indian bonds returned 8.3 percent in the past year, while Indonesian debt earned 27 percent to provide the best returns among 10 Asian fixed-income markets tracked by HSBC Holdings Plc. The rupee strengthened 1.3 percent yesterday to 50.7125 per dollar.

State-owned National Aluminum Co. plans to boost dividend payments in the year through March, said Chairman B.L. Bagra, who attended the Jan. 12 meeting between Finance Ministry officials and executives of state companies in New Delhi. The Bhubaneswar, India-based company, controlled 87.2 percent by the government, had 44.1 billion rupees of cash as of Sept. 30, according to data compiled by Bloomberg.

Coal India, the world’s biggest producer of the fuel, had 550 billion rupees of cash as of Sept. 30 and plans to use the money to increase output and pay more dividends, Chairman Nirmal Chandra Jha said on Sept. 22.

“The government is resorting to temporary measures to get control over the budget deficit,” Dharmakirti Joshi, Mumbai- based chief economist at Crisil Ltd., the local unit of Standard & Poor’s, said in an interview on Jan. 13. “What India needs to do is take durable and credible steps to cut the deficit.”

ECB’s Draghi Questions Role of Ratings Companies After S&P Downgrades

2012-01-18T07:31:00.014+08:00

European Central Bank President Mario Draghi said investors largely priced in the euro-area sovereign downgrades from Standard & Poor’s and questioned the importance of ratings companies.

“I will never comment on ratings as such, but certainly one needs to ask how important are these ratings for the marketplace overall, for investors?” Draghi said late yesterday at the European Parliament in Strasbourg. “It seems to a great extent markets have anticipated these ratings changes and priced them in. We should learn to do without ratings, or at least we should learn to assess creditworthiness” with less reliance on the ratings companies, he said.

S&P stripped France and Austria of their top ratings on Jan. 13 and cut seven other euro countries in a move that left Germany with the bloc’s only stable AAA grade. In an echo of the rally in Treasuries following S&P’s lowering of the U.S. sovereign rating in August, investors shrugged off the judgment on Europe, with France’s borrowing costs dropping at its latest debt sale.

France sold 1.895 billion euros ($2.4 billion) of one-year notes yesterday at a yield of 0.406 percent, down from 0.454 percent on Jan. 9. The Treasury sold a total of 8.59 billion euros in bills, including three and six-month paper. Yields fell on both.

Record-Low Yields
While ratings are intended as an assessment of creditworthiness, instead of eroding the value of American government debt, the U.S.’s loss of its AAA grade from S&P on Aug. 5 sparked financial market turmoil that made Treasuries favorites among investors, with 10-year note yields dropping to a record low 1.97 percent on Aug. 18.

The following month the yields reached 1.67 percent; they were 1.88 percent as ofS 12:51 p.m. in Tokyo. The Chicago Board Options Exchange Volatility Index (VIX), or VIX, surged the most after the downgrade on Aug. 8 since February 2007. Crude oil fell 6.4 percent on the U.S. rating cut.

Efforts to combat the Europe’s debt crisis are falling short, S&P said. The company last night also removed the AAA grade of the European Financial Stability Facility, which is designed to fund rescue packages for Greece, Ireland and Portugal.

Stocks Rebound
The decline in French borrowing costs helped European stocks gain yesterday, with the Stoxx Europe 600 Index adding 0.8 percent. The euro snapped two days of losses, rising 0.5 percent to $1.2731 as of 12:52 p.m. today in Tokyo.

Draghi nevertheless said growth prospects in the euro region are “dismal” and that the situation is “very grave.” The ECB, which last week kept its benchmark rate at a record low of 1 percent, in December cut its 2012 growth forecast for the euro area to just 0.3 percent from 1.3 percent.

The ECB’s three-year loans to banks last month helped to avoid “a major credit crunch,” Draghi said.

“We see that the key refinancing markets for banks are clogged; the interbank market is basically not functioning,” he said. “The unsecured bond market was not functioning -- completely not functioning -- until we launched this facility. We have avoided a major credit crunch, even though in some parts of the area this credit crunch” is “already on its way.”

Liquidity Measures
Draghi indicated the ECB will continue to intervene in bond markets to limit yields without ramping up its purchases for fear of breaching the prohibition on monetary financing.

“The ECB, within the primary remit of price stability and within the remits of the Treaty, will do whatever it takes to assure financial stability,” he said.

Draghi urged politicians to implement budget reforms to win back investor confidence and overcome a debt crisis that has now entered its third year. The “fiscal compact” agreed to by European Union leaders on Dec. 9 was an important signal of willingness to relinquish some sovereignty and take “admittedly tame steps” toward a fiscal union, he said.

“Decisions without matching actions are not enough and due care should be taken to implement measures in the correct sequence,” Draghi said. “We need to restore confidence in sovereigns and ensure that EU firewalls are operational and well equipped with an effective and flexible mandate.”

Canada Retains Benchmark Rate at 1% Amid ‘More Modest’ Economic Recovery

2012-01-18T07:31:00.011+08:00

The Bank of Canada kept its main interest rate unchanged for an 11th consecutive meeting and said economic growth will be “more modest” amid a weaker outlook for the U.S. and Europe.

The Ottawa-based central bank left the target for overnight loans between commercial banks at 1 percent, where it has been since September 2010, as forecast by all 26 economists surveyed by Bloomberg News.

The rate pause is the longest since the central bank adopted the overnight target as its policy rate in 1994, and longer than the “conditional commitment” to hold it at 0.25 percent that lasted from April 2009 to June 2010. European governments are struggling to manage a fiscal crisis and U.S. growth will also be hampered by the need to pare debts, the Bank of Canada said today.

“While the economy had more momentum than anticipated in the second half of 2011, the pace of growth going forward is expected to be more modest than previously envisaged, largely due to the external environment,” policy makers led by Governor Mark Carney, 46, said in a statement. “There is considerable monetary policy stimulus in Canada,” the central bank said, echoing its previous decision.

Slower Growth Ahead
Canadian bonds trimmed losses after the announcement with yields, which move inversely to prices, declining. The benchmark 2-year government bond, which saw its yield rise as high as 0.982 percent, was almost unchanged from yesterday at 0.965 at 10:15 a.m. in Toronto. The six-month overnight index swap rate, which measures what investors think the bank’s policy rate will average over that time, was little changed at 0.965 percent.

Canada’s economy, the world’s 10th largest, will expand 2 percent this year and 2.8 percent next year, compared with an October forecast for expansions of 1.9 percent and 2.9 percent, the bank said. The estimate of 2011 growth was increased to 2.4 percent from 2.1 percent.

“A lot of the things that pulled Canada out of the recession quickly can’t continue to lead the way, and now we need help from the rest of the world,” said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto.

Carney, who was named chairman of the Financial Stability Board in November, will hold a press conference tomorrow after releasing a detailed forecast in a Monetary Policy Report.

The European Central Bank, Norway and Australia cut interest rates last month to stem the damage from slowing global growth.

‘Rates On Hold’
“The bias is still just to keep rates on hold for the foreseeable future,” said Mazen Issa, Canada macro strategist at TD Securities in Toronto “As long as these external headwinds persist the bank doesn’t have any incentive to take rates higher.”

European leaders have spent two years working to stem their crisis. Standard & Poor’s reduced the credit ratings for nine of 17 European countries including France, Italy and Spain on Jan. 13.

“The Bank continues to assume that European authorities will implement sufficient measures to contain the crisis, although this assumption is clearly subject to downside risks,” the Bank of Canada said. “The Bank expects the U.S. recovery will proceed at a more modest pace going forward, owing to ongoing household deleveraging, fiscal consolidation and the spillovers from Europe.”

Inflation Above Target
Carney’s interest-rate freeze comes even as inflation exceeds his 2 percent target. Consumer prices rose 2.9 percent in November from a year earlier, Statistics Canada said Dec. 20. The average monthly gain in consumer prices through November was 3 percent, on pace for the highest average pace since Canada adopted inflation targets two decades ago.

The central bank predicted in October inflation will slow to 1 percent by the middle of this year. Today, the bank said that the economy will return to full output and the pace of price increases will accelerate back to its 2 percent target in the third quarter of 2013, one quarter earlier than it had forecast.

Some Canadian executives also say that the recovery may be curbed by events abroad, including the U.S., which buys three- quarters of Canada’s exports. RealtyTrac Inc., an Irvine, California-based data vendor, said Jan. 12 that banks may seize more than 1 million U.S. homes this year, a 25 percent increase.

Not ‘Immune’
Canada’s consumers have been steady, Rogers Communications Inc. Chief Executive Officer Nadir Mohamed said on a conference call last month, adding “we’re not going to be immune to what’s happening in the rest of the world, Europe and the U.S.”

The Canadian dollar’s “persistent strength” also remains a challenge to exporters, the central bank said again today.

The Canadian dollar hung onto gains after the announcement. The currency was trading at C$1.0149 per U.S. dollar at 10:15 a.m., from c$1.0179 yesterday. One Canadian dollar buys 98.53 cents.

Finance Minister Jim Flaherty, who has ended a two-year government stimulus program, said last week he will consider new initiatives if there is new major slowdown. On Nov. 8, Flaherty pushed back his target for eliminating Canada’s deficit by a year to 2015 because slower growth will erode revenue.

The Bank of Canada today also reiterated that household debt will keep rising to records, after reaching 153 percent of disposable income in the third quarter. The bank said last month consumer debt is the main domestic risk to financial stability.

China’s Slowest GDP Growth in 2 1/2-Years Boosts Scope for Easing: Economy

2012-01-18T07:31:00.008+08:00

China’s economy expanded at the slowest pace in 10 quarters as Europe’s debt crisis curbed export demand and the property market weakened, sustaining pressure on Premier Wen Jiabao to ease monetary policy.

Gross domestic product rose 8.9 percent in the fourth quarter from a year earlier, the statistics bureau said in Beijing today. Growth exceeded the 8.7 percent median of 26 estimates in a Bloomberg survey, staying above the 8 percent that signals a “soft landing” for China, according to SinoPac Financial Holdings Co., which correctly predicted the GDP number.

Asian stocks rose on speculation policy makers will ease lending curbs and increase fiscal spending to bolster the world’s second-biggest economy. Liang Wengen, China’s richest man and chairman of Sany Heavy Industry Co., told Wen this month that construction-machinery demand is weak and called for more infrastructure investment.

“Decelerating GDP growth will provide more room for policy makers to shift towards a pro-growth bias after an extended tightening cycle,” Jing Ulrich, chairman of global markets for China at JPMorgan Chase & Co., said in a note after the data. “At this juncture, the challenge for policy makers is to implement measures that boost domestic demand without setting back progress made in curbing inflation.”

The Shanghai Composite Index (SHCOMP) climbed 4.2 percent today, the most since October 2009, on expectations for more monetary easing and on speculation the government will support equities. The MSCI Asia Pacific Index gained 2 percent at 5:14 p.m. in Tokyo.

Property Meltdown Risk
Full-year economic growth slowed to 9.2 percent from 10.4 percent in 2010, today’s report showed. Industrial production increased 12.8 percent in December from a year earlier, more than the median estimate of 12.3 percent in a Bloomberg survey and a 12.4 percent increase in November. The economy grew 2 percent last quarter from the previous three months, when it expanded 2.3 percent.

China is prepared for a slowdown in economic growth and a mild moderation is “desirable,” Ma Jiantang, head of the statistics bureau, said at a briefing today. The government has set a target of 7 percent annual expansion for the current five- year plan that runs through 2015 and will focus more on the quality of growth, he said.

“The data confirmed no hard landing is likely, more so given the loosening stance already adopted by the policy makers,” said Shen Jianguang, Hong Kong-based chief greater China economist for Mizuho Securities Asia Ltd. Still, there is “no room for complacency, given the risks of a property sector meltdown and global crises,” said Shen, who expects further relaxation in credit, an expansionary fiscal policy and loosening in the property sector in the second quarter.

Home Sales
China’s home sales rose at the slowest pace in three years in 2011, data from the statistics bureau today showed, after the government extended measures to control property prices. Mizuho’s property analyst Alan Jin expects the data to worsen in the next two quarters because developers are short of capital.

The yuan, which was little changed today, dropped the most in more than two months yesterday after Standard & Poor’s stripped France of its top credit rating and downgraded eight other euro-area nations.

In New Zealand, reports today showed business confidence and consumer spending weakened in the final months of 2011, bolstering the case for central bank Governor Alan Bollard to delay raising interest rates until the second half of this year.

Economy Picking Up
Singapore’s exports unexpectedly rose in December as pharmaceutical shipments countered a drop in sales of electronics goods and the city state lured fixed-asset investment of about $S13.7 billion ($10.7 billion) last year, reports today showed.

Japan’s government maintained its assessment that the economy is still picking up from the March earthquake, with exports weakening recently because of slower global growth.

In the U.S., the Federal Reserve Bank of New York’s Empire State manufacturing index rose to an eight-month high of 11 in January, based on a Bloomberg News survey of economists before the report today. Inflation in the euro area and the U.K. may have risen at a slower pace in December from a year earlier, separate surveys showed.

Banks including BNP Paribas SA, Nomura Holdings Inc. and UBS AG forecast weaker economic expansion in China this quarter as overseas sales moderate further and government measures to rein in property prices hurt demand for goods including steel, cement and home appliances.

Stimulus Policies
“Amid a slowdown of both domestic and external economies, the government will continue to roll out stimulus policies,” said Sylvia Chiu, an economist at SinoPac Financial in Taipei who was the only analyst in the Bloomberg survey to predict today’s GDP number. She expects China’s growth to slow to 8.6 percent in 2012.

Chiu says reserve requirement ratios will drop to 19 percent by the end of 2012 and sees the benchmark one-year lending rate at 6.06 percent. The reserve ratio is currently 21 percent for the biggest banks and borrowing costs are 6.56 percent.

Sany’s Liang, who topped Forbes Asia’s 2011 China rich list with an estimated wealth of $9.3 billion, was among business leaders who met Wen during his visit to Hunan province earlier this month. Zhan Chunxin, chairman of competitor Zoomlion Heavy Industry Science & Technology Co., who was also at the meeting, complained a lack of access to credit was hurting customers and suppliers.

Encourage Lending
Fixed-asset investment excluding rural households expanded 23.8 percent last year, compared with the median 24.1 percent estimate in a Bloomberg survey. Retail sales rose 18.1 percent in December from a year earlier, today’s report showed.

The People’s Bank of China last month allowed banks to set aside less of their deposits as reserves and December’s new loans were the highest since April, signs the government is loosening monetary policy to encourage lending even as it maintains curbs on the residential real-estate market to bring down home prices.

The PBOC halted sales of bills and repurchase contracts at the end of December to add funds to the financial system before the Lunar New Year holiday that starts Jan. 23. It will inject more cash through 14-day reverse repurchase operations today and Jan. 19, two traders who declined to be identified said yesterday, after the seven-day repurchase rate, which measures interbank funding availability, surged to the highest since July.

“The economic data is almost in line and haven’t gone beyond the intolerable level of the government,” said Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting Co. “Further monetary policy easing may be pushed back a bit until next month as policy makers are still concerned about a comeback in inflation.”

Consumer-price gains averaged 5.4 percent last year, exceeding the government’s 4 percent target every month, even as the pace slowed to 4.1 percent in December from a year earlier.

Euro Rescue Fund Sells Bills ‘Smoothly’ After S&P Credit Rating Downgrade

2012-01-18T07:31:00.005+08:00

The European Financial Stability Facility issued six-month debt for the first time, selling 1.5 billion euros ($1.9 billion) of securities a day after the euro region’s temporary bailout fund lost its top credit rating.

The EFSF sold the 182-day bills at an average yield of 0.2664 percent, it said in a statement. Investors bid for 3.1 times the amount of bills sold, little changed from the 3.2 bid- to-cover ratio at a Dec. 13 offering of three-month bills. The facility’s longer-dated bonds underperformed their euro-area peers after the Standard & Poor’s downgrade to AA+ from AAA.

“The fact that the bill auction has gone so smoothly is encouraging,” said John Davies, a fixed-income strategist at WestLB AG in London. “The much bigger hurdle will be when, say, the EFSF comes to market with a five-year bond.”

The EFSF, designed to finance rescue packages for Greece, Ireland and Portugal with bond sales, owed its AAA rating to guarantees from its sponsoring nations. Two of those sovereigns, France and Austria, were cut on Jan. 13 to AA+ from AAA by S&P, which also downgraded seven other euro countries.

“The EFSF’s obligations are no longer fully supported either by guarantees from EFSF members rated AAA by S&P, or by AAA rated securities,” S&P said yesterday. “Credit enhancements sufficient to offset what we view as the reduced creditworthiness of guarantors are currently not in place.”

‘Mechanical Consequence’
The decision was a “mechanical consequence” of the previous rating cuts and “does not represent in any way a lack of trust in the European financial backstops,” European Commission spokesman Amadeu Altafaj told reporters in Brussels today.

“The EFSF has sufficient means to fulfill its commitments under current and potential future adjustment programs,” said Klaus Regling, chief executive officer of the EFSF, said in an e-mail late yesterday.

S&P said governments “may currently be exploring credit- enhancement options” and if the EFSF adopts improvements “sufficient to offset its now-reduced creditworthiness,” the rating company “would likely raise” the rating back to AAA.

Euro-area finance ministers will discuss at a Jan. 23 meeting how to respond to the downgrade, a person familiar with the matter said on condition of anonymity because the talks are private.

Taken in Stride
Investors have taken the S&P downgrades of euro-area nations in their stride in an echo of the rally in Treasuries (USGG10YR) that followed the company’s downgrade of the U.S. last year. French borrowing costs fell at a sale of one-year notes yesterday and borrowing costs also dropped for Spain today in its first debt offering after a two-step cut by S&P.

Japan’s support for the EFSF won’t be immediately affected by the rating cut, Finance Minister Jun Azumi told reporters in Tokyo today.

The facility plans to to hold “regular” auctions of three-, six- and 12-month bills, Christophe Frankel , deputy chief executive officer of the EFSF, said in an e-mailed statement. Today’s auction “confirms investors’ confidence in EFSF as a high quality issuer,” he said.

Still, the extra yield investors demand to hold the EFSF’s 2.75 percent bonds due July 2016 rather than benchmark German government debt increased nine basis points, or 0.09 percentage point, to 163 basis points. The spread has widened 15 basis points from Jan. 13, the day France and Austria lost their AAA ratings at S&P. Ten-year EFSF debt underperformed all other euro-area sovereigns, bond-spread data show.

EFSF Replacement
Regling underscored the fact that the EFSF, which has a capacity of 440 billion euros, will be replaced by a permanent fund in July. The European Stability Mechanism will be less vulnerable to rating changes, he told reporters in Singapore.

Luxembourg Prime Minister Jean-Claude Juncker, who leads euro-area finance ministers, said the EFSF “will continue to be backed by unconditional and irrevocable guarantees by euro-area member states.”

While S&P left the door open to return the EFSF to AAA status, it also said that if enhancements are “not likely to be forthcoming,” it would change the outlook to negative to “mirror the negative outlooks of France and Austria.”

German Finance Minister Wolfgang Schaeuble indicated the government won’t increase its guarantee on the facility, saying the nation’s liability of 211 billion euros is sufficient to ensure the EFSF’s ability to lend.

‘Sufficient’
“The guarantee sum that we have is sufficient by far for what the EFSF has to do in coming months,” he said yesterday in an interview on Deutschlandfunk radio. Chancellor Angela Merkel said on Jan. 14 that she was “always of the opinion that the EFSF doesn’t necessarily need a AAA rating.”

The European Commission said yesterday that S&P’s downgrades ignored Europe’s progress in fiscal consolidation. Commission forecasts show the euro area’s aggregate deficit will fall to 3.4 percent of gross domestic product in 2012 from 4.1 percent in 2011, spokesman Olivier Bailly said in Brussels.

Kraemer said in an interview on Bloomberg Television yesterday that while there has been progress on fiscal discipline, “little has been done to address the core underlying problems” of competitiveness and imbalances.

Merkel said the rating company’s criticism of “insufficient” policy steps reinforced her view that leaders must redouble efforts to resolve the crisis.

Germany, France, the Netherlands, Finland, Austria and Luxembourg were the top-rated nations backing the fund, and Germany is now the only one of the 17 euro nations with a stable AAA rating.

Investors Ignore Nordic Housing Bubble Risks as Hunt for Havens Picks Up

2012-01-18T07:31:00.002+08:00

Bond and currency investors in Europe have flocked to Scandinavia to escape the euro area’s debt crisis. They may need to rethink their bets as the risk of asset bubbles threatens to trigger losses in Norway and Sweden.

The notion that the Nordic region is a haven “is really a false perception,” said David Deddouche, a foreign-exchange strategist at Societe Generale SA in Paris, in an interview. “The risk is that at some stage there is a domestic development which pushes every investor out of the market at the same time and it is going to squeeze heavily. It’s quite dangerous.”

The risks aren’t reflected in the countries’ bond or currency markets, which investors are treating as havens from the euro area thanks to fiscal surpluses in Sweden and Norway. Sweden pays less than Germany to borrow for 10 years and Norway’s government bond yields slumped to a record-low last week, approaching parity with the largest euro-area economy.

Yet according to Robert Shiller, the co-creator of the S&P/Case-Shiller home-price index, the two Nordic countries are in the grip of asset bubbles that will damage their economies. He warns that policy makers should do more to protect their credit and property markets from imbalances. In Denmark, where a real estate bubble burst in 2007, home prices may have further to fall, he said.

Policy makers “should start worrying now because when the home prices get so high there’s a problem,” Shiller, who is also an economics professor at Yale University, said in a Jan. 13 interview in Stockholm.

Yields Rise
The yield on Norway’s 10-year bond rose six basis points to 1.88 percent as of 2:56 p.m. in Oslo. The difference between Norway’s 10-year borrowing costs and the yield on similar- maturity German bunds widened three basis points to eight. Sweden’s 10-year yield jumped four basis points to 1.64 percent.

Household debt in Norway will surge to 204 percent of disposable incomes this year, the highest since at least 1988, the central bank estimates. House prices doubled from 2001 to 2010, and jumped an annual 8.5 percent last month, Norway’s Real Estate Brokers Association said on Jan. 2.

In Sweden, the International Monetary Fund said in June homes “appear overvalued with enduring price falls likely,” after values tripled over the past 15 years. House prices dropped 2 percent last quarter from a record, coming off a peak that had been fueled by tax cuts, historically low central bank policy rates and as the economy in 2010 rebounded at the fastest pace in 40 years.

Bernanke, Greenspan
Swedish Housing Minister Stefan Attefall says the boom is probably driven by supply shortages, after two reports commissioned by the central bank found that gains can “largely be explained by what are usually called fundamental factors.”

“That’s what Ben Bernanke and Alan Greenspan did,” said Shiller, who predicted the U.S. housing market crash. “If you’re afraid of being blamed for saying something that alarms people and makes the markets collapse, then you don’t want to say anything that could be wrong. You end up going along with the conventional wisdom.”

U.S. house prices have slumped about 30 percent since a July 2006 peak after the country’s subprime bubble burst, according to the S&P Case/Shiller Index, which tracks 20 major metropolitan areas. Foreclosure rates tripled through 2009. The U.S. unemployment rate swelled as high as 10 percent in late 2009 from an average of 4.6 percent in 2006.

AAA Club
Norway and Sweden, both rated AAA with stable outlooks, are among the world’s safest sovereign credits, default swap contracts show. Norway, which isn’t an EU member, offers the lowest risk and Sweden the third lowest after the U.S., according to bets by credit default swap traders. The club of AAA rated sovereigns grew smaller last week after Standard & Poor’s downgraded nine euro members on Jan. 13, leaving only four in the 17-nation currency bloc with the top rating. The U.S. lost its AAA grade at S&P in August.

“There are some arguments connected to safe havens that are probably in effect these days and that has to do with government finances,” said Kjersti Haugland, a senior economist at DNB ASA in Oslo, in an interview. While it’s fair that fiscal surpluses should bolster the countries’ government bond markets, any imbalances in the economy can disrupt the currency markets very suddenly, she said.

‘Very Illiquid’
“Since the Norwegian krone is such a very illiquid currency it is not a good investment alternative in times of high turbulence,” Haugland said. “We have seen before, around Christmas 2008, we saw it very clearly that the euro/krone exchange rate shot above 10 so it was very dramatic, if they wanted to get out they had to accept a very low price for the Norwegian krone.”

Norway’s krone has gained 2.3 percent against the euro since a Nov. 28 low. It traded at 7.6819 on Jan. 13. Sweden’s krona is up 4.7 percent against the euro in the same period, to trade at 8.8649 at the end of last week. The Swedish currency weakened to more than 11 versus the euro at the height of the crisis in March 2009.

Daily trading in the Norwegian krone averaged $50 billion in April 2010, or 1.3 percent of global turnover, according to a foreign exchange survey from 2010 by the Bank for International Settlements. In Sweden’s krona, the equivalent figure was $83.5 billion, or 2.2 percent of global currency trading.

Sweden, whose government bond market is 550 billion kronor, pays about 17 basis points less than Germany to borrow for 10 years. Norway, where liquidity is much scarcer in the country’s 200 billion-krone government bond market, pays only six basis points more than the largest euro-area economy.

According to Deddouche at Societe Generale, limited liquidity in Norway and Sweden will amplify the fallout of any economic decline as investors all try to leave through the same narrow exit.

“It’s a small market and it makes it a dangerous game,” he said.

Inflation Slows to Six-Month Low of 4.2% as Fuel, Clothing Prices Abate

2012-01-18T07:30:00.010+08:00

U.K. inflation slowed in December to its weakest pace in six months as stores discounted clothing to boost sales and petrol prices fell, easing pressure on consumers amid concern the economy may already be back in recession.

Consumer prices rose an annual 4.2 percent compared with 4.8 percent in November and a peak of 5.2 percent in September, the Office for National Statistics said today in London. It was the biggest drop in the inflation rate since April 2009, the depth of the last recession. Prices rose 0.4 percent on the month.

The Bank of England forecasts inflation will slow sharply this year, providing relief to consumers as the European sovereign debt crisis and rising unemployment weigh on the recovery. Ernst & Young said yesterday a second recession may already be under way. The Bank of England will expand its 275 billion-pound ($423 billion) bond-buying program next month, economists at Citigroup Inc. and Nomura International predict.

“We’re going to see inflation drop very sharply over the next six months, which is quite good news from the point of view of the broader economy in terms of supporting consumer spending,” said David Tinsley, chief U.K. economist at BNP Paribas SA in London. “It’s still the case that there’s plenty of scope for more monetary loosening, or more quantitative easing.”

The pound rose against the dollar after the report and was trading at $1.5384 as of 11:29 a.m. in London, up 0.4 percent on the day. Bonds stayed lower, with the yield on the 10-year gilt up 4 basis points at 2.005 percent.

Core Prices
Core annual inflation, which excludes alcohol, food, tobacco and energy prices, slowed to 3 percent from 3.2 percent. Retail-price inflation, a measure used in wage negotiations, slowed to 4.8 percent from 5.2 percent. The retail-price index excluding mortgage-interest payments rose 5 percent, down from 5.3 percent.

The monthly increase in consumer prices was less than half the 1 percent gain seen a year earlier. Retailers including Marks & Spencer Plc and Tesco Plc (TSCO) cut prices in December to lure cash-strapped shoppers during the key holiday trading period.

There were monthly declines in the prices of clothing and footwear, petrol and alcoholic drinks, while gas and electricity costs were unchanged. Upward pressure on inflation came from landline and mobile telephone charges.

‘Welcome Relief’
The Bank of England predicts that inflation, which has been above its 2 percent target for more than two years, will ease to 1.7 percent at the end of 2012 as a January 2011 sales-tax increase drops out of the annual comparison and energy costs decline.

Slower inflation will be “welcome relief for family budgets,” the U.K. Treasury said in a statement. “Inflation is expected to keep falling through this year, helped by the price cuts announced by energy companies this month.”

Crude oil prices have fallen to $100 a barrel from about $115 a barrel in May, easing pressure on companies and consumers. EON AG and Scottish Power Ltd. cut their tariffs yesterday, joining other large energy suppliers jostling to offer the cheapest supply as wholesale costs fall.

Ernst & Young’s ITEM Club said yesterday the economy will probably shrink in the current quarter after contracting in the last three months of 2011, with no improvement until mid-year. The group cut its 2012 growth forecast to 0.2 percent from 1.5 percent.

Real Yields Turn Positive for First Time in Almost Two Years: India Credit

2012-01-18T07:30:00.007+08:00

India’s inflation rate fell below bond yields for the first time in two years as international investors add to record holdings of the nation’s debt.

Wholesale-price increases slowed to 7.47 percent in December from 9.11 percent a month earlier, the Commerce Ministry said yesterday. Yields (GIND10YR) on 10-year government notes were little changed at 8.21 percent in Mumbai, according to the central bank’s trading system. The nation’s bonds have returned 1.42 percent this month, the best performance among 10 Asian markets tracked by HSBC Holdings Plc.

Global funds have boosted ownership of rupee debt by $3 billion this month to $29.1 billion, Securities & Exchange Board of India data show, on speculation slowing inflation will prompt policy makers to reduce borrowing costs after seven increases last year. The central bank will cut its repurchase rate by 50 basis points to 8 percent by year-end as inflation decelerates to about 7 percent, according to Nomura Holdings Inc.

“The positive real yield will further attract foreign fund inflows,” Vivek Rajpal, a fixed-income strategist at Nomura, Japan’s biggest brokerage, said in an interview yesterday. “Expectations of rate cuts mean that bonds can rally more.”

Rajpal predicts that the benchmark yield will drop to 8 percent by March.

Global funds have added to holdings of Indian bonds every day this year after raising ownership by a record $3.9 billion last month, according to official data. Inflation, which has slowed for three straight months, will be between 6 percent and 7 percent by the end of March, Finance Minister Pranab Mukherjee said in an e-mailed statement after the release of the wholesale prices data. The report comes a week before the Reserve Bank of India meets to review rates and monetary policy.

Better Returns
The inflation-adjusted yield on the nation’s generic 10- year bonds was 74 basis points, or 0.74 percentage point, yesterday, the first time investors earned a so-called real yield on the securities since Dec. 31, 2009. The real yield in China was minus 66 basis points, while South Korea’s was minus 40.

Yields in India on benchmark 8.79 percent notes due in November 2021 have dropped 12 basis points since Jan. 5, when central bank Deputy Governor Subir Gokarn said at a conference in Singapore that India’s “monetary cycle has peaked.”

“The drop in inflation is definitely good news for the bond markets,” said Anoop Verma, a fixed-income trader at Development Credit Bank in Mumbai. “The rally in bonds is likely to be sustained with inflation easing further and on expectation of cuts by the central bank around March.”

Verma expects the 10-year bond yield will drop to 8 percent by the end of the first quarter.

Wait and See
The Reserve Bank will await more data before cutting rates, according to HSBC Global Asset Management, a unit of Europe’s biggest bank that oversees $25 billion in Asian fixed-income assets.

“At this point, with just one inflation number, I wouldn’t be optimistic on bonds,” Gordon Rodrigues, a Hong Kong-based investment director at HSBC Global Asset, said in an interview yesterday. “I would expect the central bank to see at least two or three numbers to draw a conclusion.”

The rupee’s plunge in 2011 will add to price pressures in the coming months, Sujan Hajra, a Mumbai-based chief economist at brokerage Anand Rathi Financial Services Ltd., said in an interview yesterday. The rupee slid 16 percent last year, the most among Asia’s 10 most-traded currencies. India’s currency strengthened 0.7 percent to 51.0350 per dollar today.

Yield Allure
The cost of insuring the debt of State Bank of India using credit-default swaps has dropped 10 basis points this year to 385 basis points, according to CMA, which is owned by CME Group Inc. (CME) and compiles prices quoted by dealers in privately negotiated markets. Some investors consider the lender a proxy for the nation, which doesn’t have dollar debt. The swaps pay the buyer face value for the underlying securities should a company fail to adhere to its debt agreements.

India’s relatively high yields are adding to the allure of the nation’s bonds, according to Nomura. The difference in yields between rupee-denominated notes due in a decade and similar-maturity U.S. Treasuries was 632 basis points today. The comparable yield premium on Chinese securities was 155 and South Korea’s 102.

“The undercurrent is for a softer interest-rate regime,” Roy Paul, deputy general manager of treasury at Federal Bank Ltd. (FB) in Mumbai, said in an interview yesterday. “Investors may boost their bond holdings on positive real yields.”

BOK Signals No Cut in South Korea Rates as Domestic Demand Counters Europe

2012-01-18T07:30:00.004+08:00

Bank of Korea Governor Kim Choong Soo said that South Korea’s interest rates are still below policy makers’ desired level and that discrepancy cannot be left for long.

“We still think our monetary policy is accommodative --by that what I mean is that in the market there still exists a little excess liquidity,” Kim, 64, said in an interview at his office in Seoul today. “Our basic policy direction is to normalize our interest rates compatible with our demand pressures and pressures for inflation.”

The BOK, which kept its benchmark rate at 3.25 percent unchanged four days ago, will need to proceed “cautiously” given instability in external economies, the governor said. At the same time, he predicted growth in South Korea, Asia’s fourth-largest economy, will be little changed this year compared with 2011 as domestic demand offsets an export slowdown.

“Discrepancy cannot be maintained for a long period of time” between actual interest rates and the desirable level, Kim said, without disclosing what the BOK’s calculation is for the so-called neutral rate. “In that case, all sorts of distortions in structure will occur. So it is not wise to maintain such discrepancies for long period of time. That is why I said we have to move but we have to move very cautiously.”

Yields Rise
The yield on South Korea’s 3.5 percent bonds due September 2016 climbed two basis points, or 0.02 percentage point, to 3.50 percent at the close in Seoul, according to Korea Exchange Inc. Three-year bond futures fell 0.1 percent to 104.45, exchange data shows. The won gained 0.8 percent to 1,145.40 per dollar, according to data compiled by Bloomberg.

“There was a certain amount of expectation in the market for a rate cut, but the BOK governor’s interview weakened the sentiment,” said Kong Dong Rak, a Seoul-based fixed-income strategist at Taurus Investment & Securities Co.

By comparison, analysts including those at Nomura Holdings Inc. and Daewoo Securities Co. see the central bank’s next move as a reduction, coming in April.

Turning to risks posed by Europe, which provides more than one-third of the foreign capital that flows into South Korea, Kim said he’s not as pessimistic as some observers. He reiterated South Korea’s readiness to help in broader efforts to stem the crisis.

‘Active Roles’
“The G-20 and IMF should play more active roles” in addressing Europe’s woes, the governor said today. He declined to specify the amount of extra resources his country is willing to provide the International Monetary Fund as the Washington- based lender first needs to come up with its plan.

Risks to South Korea’s economy are increasing and inflation may ease at a moderate pace as growth slows for some time before picking up, the central bank said on Jan. 13, when it decided by a unanimous vote to keep the main rate unchanged for a seventh straight month on Jan. 13. Kim said last week that South Korea may get on a normal recovery path in the second half of the year.

The nation’s inflation rate has remained elevated in recent months in part because a weakening exchange rate has made imported goods more expensive. Consumer prices rose 4.2 percent from a year earlier in November and December, exceeding the central bank’s target limit of 4 percent and the average of 3.2 percent for the decade through 2011.

Oil prices pose another danger, after climbing 16 percent in the past three months. Kim signaled today that monetary policy options are limited to respond to oil, saying “in case oil prices are up, our inflation will go up and our growth rate will go down and it’s kind of unavoidable. Of course domestically we can introduce some policies but those policies will be economically speaking very costly.”

The BOK forecast in December that the economy will grow 3.7 percent in 2012 and 4.2 percent in 2013 after a 3.8 percent expansion in 2011. Consumer prices may increase 3.3 percent this year after a 4 percent gain in 2011, according to the projections.

Singapore Exports Unexpectedly Rose on Boost from Pharmaceutical Shipments

2012-01-18T07:30:00.001+08:00

Singapore’s exports unexpectedly rose in December as pharmaceutical shipments surged, countering a drop in sales of electronics goods.

Non-oil domestic exports climbed 9 percent from a year earlier, after a revised 1.4 percent increase in November, the island’s trade promotion agency said in a statement today. The median of 14 estimates in a Bloomberg News survey was for a 1.2 percent decline.

The advance in overseas sales may be short-lived as Europe’s sovereign-debt crisis curbs demand for Asian goods, with purchasing managers’ indexes in export-dependent economies including Singapore and Taiwan signaling manufacturing is still contracting. Non-oil exports from Singapore may increase 3 percent to 5 percent this year, the trade promotion board said in November.

“The export sector is facing tremendous headwinds as the malaise in Europe and the slow recovery in the U.S. are taking a toll on global demand,” Irvin Seah, an economist at DBS Group Holdings Ltd. in Singapore, said before the report. “Asia is also feeling the chill, with China and key markets expected to report slower growth. The odds are stacking up against Singapore’s export performance.”

China is due to report gross domestic product numbers today. Asia’s largest economy probably grew the least in 10 quarters in the last three months of 2011, according to a Bloomberg News survey ahead of the release.

Electronics Decline
Singapore’s electronics shipments by companies such as contract manufacturer Venture Corp. fell 4.6 percent in December from a year earlier, after rising 0.1 percent the previous month.

Non-electronics shipments, which include petrochemicals and pharmaceuticals, increased 16.7 percent. Petrochemicals exports fell 22.4 percent, while pharmaceutical shipments climbed 38.6 percent after gaining 21.5 percent in November.

The performance of Singapore’s pharmaceutical industry is volatile as production swings by companies such as GlaxoSmithKline Plc can cause industrial output to fluctuate from month to month. Drug companies sometimes shut plants for cleaning before making different products.

Singapore’s non-oil exports gained a seasonally adjusted 16.4 percent last month from November, when they climbed a revised 5.8 percent, today’s report showed.

Dakota Fracking to Ohio Factories Brightens Job Outlook in U.S.: Economy

2012-01-12T07:44:00.009+08:00

Manufacturing and mining are set to power U.S. job gains again this year, from auto assembly plants in Ohio to the oil and gas fields of North Dakota.

The two industries combined helped spark the biggest annual employment increases for the economy in five years in 2011, with factory payrolls expanding the most in 14 years and mining adding more jobs than any period in the past three decades, according to Labor Department figures.

Economists Peter Cappelli and John Silvia say those gains are likely to be extended in 2012. The improvement may spread beyond factory floors and hydraulic fracturing, or fracking, used to drill for oil: retailers, the leisure industry and even construction may also benefit.

Last year’s increases “are good signs for this year,” said Cappelli, a labor economist and director of the Center for Human Resources at the University of Pennsylvania’s Wharton School. “Manufacturing is the most important story because it has spillover effects on other industries in a way that services may not.”

The pace of job growth at service producers that account for about 85 percent of all employment was a step behind the 1.3 percent annual increase in total payrolls. Further progress in the labor market would help bolster incomes and spur consumer spending, which accounts for 70 percent of the world’s largest economy.

Employers added 1.64 million workers in 2011, the best year for the American worker since 2006, after a 940,000 increase in 2010.

Path for Gains
“We’re on a good path here for job gains,” said Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “It’s part and parcel of an economy that’s improving at a pretty decent pace.”

Even with two years of growth, “we’re still a long ways away” from recovering the 8.75 million jobs lost as a result of the recession that ended in June 2009, said Silvia, a former economist at the Joint Economic Committee of Congress.

Weakness in Europe also poses a risk to the U.S. Germany, the continent’s largest economy, shrank about 0.25 percent in the fourth quarter from the previous three months, the Federal Statistics Office in Wiesbaden said today in an unofficial estimate.

The effects of Europe’s debt crisis may cost the U.S. as much as half a percentage point in economic growth this year, Jan Hatzius, chief economist at Goldman Sachs Group Inc., said at an event in Frankfurt today.

Stocks fell amid concern Europe’s slowdown will stifle global growth. The Standard & Poor’s 500 Index dropped 0.2 percent to 1,290.11 at 10:50 a.m. in New York.

Factory Jobs
U.S. factories took on additional 225,000 workers, the most since 1997, the Labor Department reported Jan. 6. Ford Motor Co. (F), the second-largest U.S. automaker behind General Motors Co., is among manufacturers projecting a brighter employment picture.

“Looking ahead, we do expect improved job and income gains associated with better performance” in the economy, Ellen Hughes-Cromwick, Ford’s chief economist, said on a Jan. 4 conference call with analysts.

Auto purchases in the U.S. this year will be in the 13.5 million to 14.5 million range, consistent with economic growth of 2 percent to 3 percent, she said. Sales in 2011 reached 12.8 million, the best year since 2008.

Payrolls in mining last year rose by 89,300, the most since 1981 and up 13 percent from 2010. Oil and gas extraction accounted for 25,200 of those jobs, the biggest gain in 30 years.

Oil and Gas
The employment figures also show how the economy is changing, Cappelli said. Job growth in mining reflects new discoveries, particularly of natural gas deposits, while gains in the retail, leisure and construction industries are evidence of improving confidence and a recovery in the purchasing power of American consumers, he said.

Since 2005, oil production in North Dakota has nearly quadrupled, while employment in mining, quarrying, and oil and gas extraction has increased 185 percent, according to a December report by IHS Global Insight.

Producing natural gas from shale will support 870,000 U.S. jobs and add $118 billion to economic growth in the next four years, IHS Global said in another report last month.

The natural gas drilling boom is behind the reopening of a factory in Youngstown, Ohio, that will have 350 workers and produce seamless pipes used in fracking. The mill for Vallourec SA’s V&M Star is part of a development that an oil and gas industry study calculates will mean more than 200,000 jobs and $22 billion in economic output in Ohio by 2015.

Skilled Workers
The jump in mining and manufacturing jobs, underpinned by the leading role factories played in contributing to the economic recovery, indicates rising demand for skilled, higher- paid workers, Wells Fargo’s Silvia said. A “tick up” in these industries, and in health care and information technology, will boost wage levels and help accelerate the expansion, he said.

“The people getting hired are the ones with more skills,” said Silvia. “These are not your traditional assembly-line, turn-a-screw kind of jobs like we had in the 1950s and ‘60s.”

Among other industries that showed a pickup in jobs, retailers took on 239,700 employees in 2011, the most since 1999. A 268,000 increase last year in leisure and hospitality workers was the biggest since 2006.

Another part of the economy showing signs of stabilization is housing, which may keep headcount from deteriorating. Construction companies added 46,000 workers last year, the first gain since 2006, Labor Department data showed. Employment tied to home building increased by 3,600 last year, the first annual advance since 2005.

Industries that experienced a spurt in payrolls last year may bolster confidence among other employers about hiring.

“A lot of employers make decisions at least in part by looking at what everybody else is doing in the industry,” Cappelli said. “So in each of these industries, the fact that hiring is going up is a confidence builder if you’re an employer in that industry.”

Europe’s $39 Trillion Pension Threat Grows as Regional Economies Sputter

2012-01-12T07:44:00.006+08:00

Even before the euro crisis, people were worried about Europe’s pension bomb.

State-funded pension obligations in 19 of the European Union nations were about five times higher than their combined gross debt, according to a study commissioned by the European Central Bank. The countries in the report compiled by the Research Center for Generational Contracts at Freiburg University in 2009 had almost 30 trillion euros ($39.3 trillion) of projected obligations to their existing populations.

Germany accounted for 7.6 trillion euros and France 6.7 trillion euros of the liabilities, authors Christoph Mueller, Bernd Raffelhueschen and Olaf Weddige said in the report.

“This is a totally unsustainable situation that quite clearly has to be reversed,” Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, said in a telephone interview.

A recession threatening the world’s second-biggest economic bloc, along with efforts to reduce debt across Europe, is exacerbating the financial risks. Stable or falling birthrates, plus rising life expectancies, are adding to pressures, with the proportion of economic output devoted to spending on retirement benefits projected to rise by a quarter to 14 percent by 2060, according to the ECB report.

Ageing Populations
Increased retirement ages and lower benefits must be part of any package to hold the 17-nation euro area together, according to analysts, including Fergal McGuinness, the Zurich- based head of Marsh & McLennan Cos.’s Mercer’s pensions consulting unit for central and eastern Europe.

Europe has the highest proportion of people aged over 60 of any region in the world, and that is forecast to rise to almost 35 percent by 2050 from 22 percent in 2009, according to a report from the United Nations. That compares with a global estimate of 22 percent by 2050, up from 11 percent in 2009.

The number of people aged over 65 in the 34 countries in the Organization for Economic Cooperation and Development is forecast to more than quadruple to 350 million in 2050 from 85 million in 1970. Life expectancy in Europe is increasing at the rate of five hours a day, according to Charles Cowling, managing director of JLT Pension Capital Strategies Ltd. in London.

In so-called developed countries, the average lifespan will reach almost 83 by 2050, up from about 75 in 2009, the UN said.

Cutting Costs
Governments and companies have taken steps to reduce future costs with policy makers having increased retirement ages in countries, including France, Germany, Greece, Italy and the U.K.

“Irrespective of whether you’re inside or outside the euro or anything else, raising retirement ages is one of the structural reforms that all of Europe has to do,” Kirkegaard said. “The crisis has forced them to address this. This is actually a positive thing in many ways.”

By 2060, the average French pension benefit will be 48 percent of the national average wage, compared with 63 percent now, said Stefan Moog, a researcher at Freiburg University in Freiburg, Germany.

Pension managers and governments are relying on economic growth to safeguard the promises they make. If the euro zone grows too slowly to bolster public and private coffers, the retirement plans may become unaffordable, according to Mercer’s McGuinness.

Benefits’ Squeeze
“The amount of money countries are going to spend on social security and long-term care is going to go up,” McGuinness said in an interview. “Governments with more generous social-security systems will have difficulty affording them. They will have to recognize these costs will impact their ability to reduce borrowings.”

State pension obligations in France and Germany are three times the size of their economies, according to data compiled by Mercer. It’s more sustainable in France than Germany because of France’s higher birthrate.

Last year, there were 4.2 people of working age for every pensioner in France. The ratio will fall to 1.9 by 2050, according to a report by Economist magazine in March. In Germany, the proportion will decline to 1.6 from 4.1 in the same period.

“That is going to put a lot of pressure on Germany’s ability to meet their promises,” McGuinness said. “What they are more likely to do is cut back benefits. Governments face a lot of longevity risks.”

Add to Risks
Private pension funds are under pressure too with benchmark euro-area interest rates at the lowest level since the 13-year- old currency was introduced. Low rates mean pension plans have to hold more assets to back their long-term payout projections.

Unless growth returns, fund managers will effectively be forced to take on more risk, said Phil Suttle, chief economist of the Washington-based Institute of International Finance.

“That creates problems because they all head into sectors that seem a great idea now, and then they blow up, whether it’s commodities or equities or whatever,” Suttle said. “You’re going to intensify the boom-bust cycle.”

The growing doubts facing the euro area is another planning hurdle as companies reconsider investment strategies amid concerns that Greece may default on its debt and spark a broader euro breakup.

The implied probability of one country leaving the euro by the end of 2013 fell to 49 percent on Jan. 10 from 51 percent a week earlier, based on wagers at InTrade.com, an Internet betting market. The probability of one country departing by the end of 2014 is 59 percent.

Rates Benefit
Pension plans in countries such as Greece or Portugal may benefit from exiting the euro as higher interest rates that would likely accompany a return to their national currencies would cut the cost of liabilities, while assets invested abroad would almost certainly gain in value, according to Mercer, a unit of Marsh & McLennan Cos.

PensionDanmark, Denmark’s seventh-largest pension fund by assets, sold all its German government bonds last year, Chief Executive Officer Torben Mogen Pedersen told reporters in Copenhagen yesterday.

“Our government debt investments are all in Scandinavian non-euro countries,” Pedersen said. “We think 2012 will be a very hard year for European investors.”

In Britain, which has refused to join the euro, occupational pension funds have moved the risk of ensuring adequate retirement income to the employee from the employer in the past decade to curb pension-fund shortfalls.

Funding Gap
Unfunded public-sector U.K. pension obligations across 1,500 public bodies totaled 1 trillion pounds ($1.57 trillion) in March 2010, the Treasury said Nov. 29 in the first set of audited Whole of Government Accounts. That compares with a total of 808 billion pounds of outstanding U.K. government bonds and accounts for 90 percent of all public-sector pension liabilities.

Royal Dutch Shell Plc (RDSA), Europe’s largest oil company, was the last member of the benchmark FTSE 100 Index to close its defined-benefit pension plan to new entrants when it made the decision last month to do so. The company plans to introduce a fund for new employees next year that makes them responsible for ensuring they have enough to live on in old age.

Governments may have to follow the same path for their own employees as well as increasing the retirement age to at least 70 and possibly 75 to make the pensions affordable, Cowling wrote in an article published in July by Public Service Europe.

French Resignation to Losing AAA Shifts Focus to Size of Cut: Euro Credit

2012-01-12T07:44:00.003+08:00

After weeks of handwringing about a possible loss of France’s top credit rating, President Nicolas Sarkozy now gives a Gallic shrug.

Investors are interpreting the insouciance -- with Sarkozy saying that losing the AAA rating isn’t “insurmountable” -- to mean that France has accepted the inevitable. The question now is whether Standard & Poor’s will follow through with a threat of a two-level cut.

Sarkozy’s shift, intended to ready voters for the blow ahead of April’s presidential elections, contributed to the increase in the premium France pays over Germany to borrow for 10 years. Since Dec. 5, when S&P said that it may downgrade 15 euro nations amid a deepening regional debt crisis, the spread has widened by more than 40 percent to 133 basis points.

“They’re preparing the ground for something they see as inevitable,” said Nicola Marinelli, who manages $150 million at Glendevon King Asset Management in London. “The market is expecting France to be a strong AA; expecting it to be AA+. If any rating change goes lower than that the spread with Germany can widen further.”

France, Europe’s second-largest economy and the No. 2 backer of the region’s rescue fund after Germany, was singled out among the six euro-region holders of the top AAA rating by S&P as the one that risked a two-level lowering of its credit rating. The country’s downgrade would affect the rating of the European Financial Stability Fund, making the bailout of the region’s troubled economies more expensive.

‘Priced In’
That would endanger efforts to put an end to the more-than- two-year-old sovereign debt crisis as Europe slides into recession, economists said.

“The one-notch downgrade, our base scenario, is more or less priced in,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “The wider consequences are not necessarily priced in. It will weaken confidence and could fuel the European debt crisis in a self-fulfilling spiral.”

French 10-year bonds yielded 3.14 percent yesterday, about 133 basis points more than similar German securities. The spread was less than 50 points a year ago. The extra yield investors demand to hold French bonds instead of benchmark German bunds rose to as much as 204 basis points on Nov. 17, the most since 1990, as concern deepened the region’s debt crisis was spreading.

It costs 219 basis points to insure French debt for five years, more than twice as much as AAA rated U.K. and more than the cost of insuring debt issued by Indonesia or the Philippines against a default, CMA prices showed yesterday.

Election Fever
Sarkozy, who has sought to protect his government’s creditworthiness by announcing tax increases and spending cuts, has attempted to position himself for a 2012 re-election campaign as the most credible candidate on economic matters.

After earlier painting the loss of the AAA rating as a catastrophe, he and his ministers have said they’re going to focus on growth and competitiveness rather than worry about what ratings companies might do.

Yesterday, Sarkozy said France needs to focus less on markets and ratings companies.

“Markets and ratings agencies exasperate our citizens,” he said at a reception for lawmakers in Paris. “We must take back control of our destiny.”

Budget Minister Valerie Pecresse said in an interview last week that the government “isn’t working for the rating agencies.”

‘Heightened Risk’
Sarkozy trails his main rival, Socialist Party candidate Francois Hollande, by about 14 points in voting intention for the second round of the election, according to a BVA poll for Le Parisien newspaper published Jan. 9.

Moody’s said Dec. 12 it will review the ratings of all EU countries after a summit on Dec. 9 in Brussels failed to produce “decisive policy measures” to end the region’s debt turmoil. S&P placed the ratings of 15 euro nations, including Germany, on review for possible downgrades on Dec. 5.

Fitch Ratings cut France’s credit outlook on Dec. 16 on the “heightened risk of contingent liabilities” from the euro-region crisis. 17. This week Fitch said it probably won’t downgrade France in 2012 unless the regional debt crisis intensifies.

Since the ratings companies’ announcements, markets have been roiled by frequent speculation about a French downgrade. Finance Minister Francois Baroin yesterday denied having been notified about a downgrade, calling it “false.”

Headwinds
France’s woes, like those of other euro-area countries, are compounded by an economy that’s edging toward recession as budget cuts to contain the fiscal crisis bite.

The French economy is probably already in a recession that will last through March, national statistics office Insee said last month. France has the biggest debt burden of the six top- rated euro nations, at 85 percent of gross domestic product.

A ratings cut would be “another headwind for Sarkozy’s reelection,” Standard Chartered’s Costerg said. “He first tried to raised the stakes to defend AAA and now is trying to downplay it. Why? It’s the election.”

U.K. Inflation Eases to Lowest in 16 Months on Holiday Discounts, BRC Says

2012-01-12T07:43:00.013+08:00

U.K. shop-price inflation slowed in December to the lowest in 16 months as retailers discounted electrical goods and clothes to lure holiday shoppers, the British Retail Consortium said.

Retail prices rose 1.7 percent from a year earlier, down from 2 percent in November, the trade group and Nielsen Co. said in an e-mailed report in London today. A separate report from KPMG LLP showed hiring for full-time jobs dropped for a third month in December.

Slowing inflation may ease pressure on consumers and help encourage domestic demand this year. The Bank of England, which will probably maintain its emergency stimulus for the economy tomorrow, has forecast that consumer-price growth will slow sharply in the coming months.

“This is a good bit of New Year news for customers,” Stephen Robertson, BRC director general, said in a statement. “Consumers are likely to rein in spending in the wake of Christmas and price will remain the key battleground between retailers.”

Food prices gained an annual 4.2 percent in December, up from 4 percent in November, while inflation on non-food products slowed to 0.3 percent from 0.8 percent, today’s report showed. On the month, overall prices fell 0.1 percent.

KPMG and the Recruitment and Employment Confederation said an index of hiring of full-time staff rose to 48.5 in December from 48.2 the previous month. A measure of demand for temporary staff dropped to 49 from 50.9 in November. Readings below 50 indicate contraction.

The Bank of England’s Monetary Policy Committee will maintain its bond-purchase target at 275 billion pounds ($426 billion) tomorrow, according to all but one of 41 economists in a Bloomberg News survey. It will also maintain its benchmark interest rate at a record low of 0.5 percent, according to a separate survey of 53 economists.

Iran Oil Risk Sends Refiners’ Bond Yields to One-Year High: India Credit

2012-01-12T07:43:00.010+08:00

Borrowing costs for India’s biggest refiners are surging to the highest level in at least a year as the prospect of tighter sanctions against Iran threatens supplies to the world’s fourth-largest oil consumer.

Yields on the 4.75 percent dollar-denominated debt of Indian Oil (IOCL) Corp., the nation’s largest refiner, rose 26 basis points in the past month to 4.40 percent, according to data compiled by Bloomberg. Yields on the 2016 dollar convertible bonds of Indian refiner and power plant operator Essar Energy Plc (ESSR) jumped 228 basis points to 19.60 percent. At the same time, yields on London-based BP Plc’s 2019 notes dropped 22 basis points to 2.88 percent.

Disruption to shipments from Iran, India’s second-biggest oil supplier, may deepen losses for oil companies that are required by the government to sell fuels below cost. Costlier energy imports would also stymie central bank efforts to rein in inflation of more than 9 percent and worsen an economic slump that fueled a 16 percent tumble in the rupee in 2011.

“The oil companies will have to bear higher costs if they have to buy oil from elsewhere,” Raj Kothari, a bond trader in London at Sun Global Investments Ltd., said in an interview on Jan. 10. “The bonds that are related to this issue, like those of Indian Oil, are definitely going to get affected negatively.”

U.S. Law

U.S. President Barack Obama signed into law on Dec. 31 measures that block foreign lenders that conduct business with the central bank of Iran from accessing the U.S. financial system. The European Union will also consider restrictions on Iran, including a ban on crude imports, in response to the country’s nuclear program when the bloc’s foreign ministers meet on Jan. 23.

Indian Oil and Essar Energy may struggle to find banks willing to handle payments to Iran because of sanctions against the Gulf state’s lenders. Mangalore Refinery & Petrochemicals Ltd. (MRPL), a unit of India’s largest energy explorer, is the biggest local buyer of Iranian crude.

Turkiye Halk Bankasi AS, which has been routing India’s payments for Iranian crude, told the refiners it may no longer be able to do so, four people with knowledge of the matter said this week, asking not to be identified because the information is confidential.

“This is a serious issue,” Praveen Kumar, an oil and gas analyst at Facts Global Energy in Singapore, said in an interview on Jan. 10. “India doesn’t seem to have a plan B at the moment. The refiners will be worried about what they are going to do.”

Exploring Options
India, which got 11 percent of its crude imports from Iran last year, is exploring the option of making payments to the Gulf state through Russia’s OAO Gazprombank (GZPR), though no deal has been reached, according to three of the people.

“Essar is not being impacted by the Iranian situation,” the company, which operates the nation’s second-largest private refinery at Vadinar in western India, said in an e-mail on Jan. 9. “At our Vadinar refinery, we continue to be able to source the crude we require from Iran, while our Stanlow refinery does not process Iranian crude.”

Two calls made yesterday to Ajit Pathak, a New Delhi-based spokesman for Indian Oil, weren’t answered.

Rising Oil
The risk of supply disruptions threatens to further boost energy costs and fuel inflation in Asia’s third-largest economy, which imports almost 80 percent of the oil it uses. The value of India’s oil imports averaged above $11 billion during the first 11 months of 2011, 34 percent more than a year earlier, as international crude prices gained and the rupee fell, government data show. The Reserve Bank of India raised interest rates by a record 3.75 percentage points in the last two years to moderate wholesale-price gains that averaged 9.6 percent in 2011.

Crude oil in New York climbed 8 percent in 2011, completing a third annual advance, and touched an eight-month high of $103.74 per barrel on Jan. 4, according to data compiled by Bloomberg. India’s rupee lost 16 percent last year in the worst performance among Asian currencies and touched a record low of 54.305 per dollar on Dec. 15. It dropped 0.4 percent to 51.895 yesterday.

“India is much more vulnerable to the price of oil than similar developing economies,” Taina Erajuuri, a money manager in Helsinki at FIM Asset Management Ltd., overseeing about 1 billion euros ($1.3 billion) of emerging-market assets, said in an interview on Jan. 10. “I worry that soon India will have to import 90 percent of its oil needs and it will always be an inflation threat. You can’t get rid of that kind of inflation by raising interest rates.”

Record Losses
A sliding rupee and higher borrowing costs worsened losses at state-controlled oil companies, which are required to sell fuels at a discount under a government plan to cap consumer prices. The firms may lose as much as 1.3 trillion rupees ($25 billion) from such sales in the financial year ending March 31, Oil Secretary G.C. Chaturvedi said on Nov. 22. Every one-rupee drop in the currency against the dollar boosts annual revenue losses for government-owned refiners by 80 billion rupees, Oil Minister S. Jaipal Reddy said on Oct. 10.

Indian Oil, Hindustan Petroleum Corp. (HPCL) and Bharat Petroleum Corp. (BPCL), the three biggest state refiners, reported a combined loss of 141 billion rupees for the three months ended Sept. 30, the most on record, data compiled by Bloomberg show. Total interest expenses at the companies climbed to an all-time high of 22.4 billion rupees last quarter. Combined net debt, or liabilities minus cash, jumped 34 percent in the first half of the financial year to 1.27 trillion rupees.

Dollar Bonds
Oil companies in India are favoring dollar-denominated debt to shield earnings from the rupee’s decline and the surge in local interest rates. They raised at least $1.17 billion last year from overseas loans and bond sales, according to data compiled by Bloomberg. Indian Oil plans to market a $250 million five-year loan next month, a person with direct knowledge of the matter said this week, asking not to be identified as details of the transaction are private.

Benchmark five-year bond yields for AAA rated borrowers in India rose 35 basis points, or 0.35 percentage point, in the past 12 months to 9.36 percent, data compiled by Bloomberg show. Yields on 7.7 percent rupee-denominated debt due April 2013 of Hindustan Petroleum jumped 67 basis points to 9.47 percent, according to prices from the Fixed Income Money Market and Derivatives Association of India.

Default Swaps
Ten-year sovereign yields added seven basis points in the same period to 8.26 percent. They were little changed yesterday, according to the central bank’s trading system. The extra yield demanded by investors to hold the notes over similar-dated U.S. Treasuries widened 148 basis points to 630. India’s sovereign notes earned 7.7 percent in the past 12 months, while Indonesian securities returned 24.6 percent in the biggest gain among 10 Asian fixed-income markets tracked by HSBC Holdings Plc.

The cost to protect the debt of State Bank of India, a proxy for the nation, against non-payment for five years using credit-default swaps jumped 226 basis points in the past year to 403 basis points, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

‘Adds to Costs’
Indian refiners’ debts to Iran for purchases rose to as much as $5 billion in July, said Central Bank Governor Mahmoud Bahmani, according to the Islamic Republic News Agency. The outstanding payments threatened to jeopardize about $9.5 billion in annual trade between the nations, with Iran telling customers that they wouldn’t receive August shipments unless the bills were paid, according to the Fars news agency. The refiners started clearing the outstanding payments in August after Turkey’s Halk Bank agreed to make transfers.

“Refineries are calibrated to process particular kinds of oil,” Hemant Dharnidharka, head of credit research in Hong Kong at SJS Markets Ltd., said in an interview on Jan. 10. “Even if the companies were to get replacements from elsewhere, the price may be higher and they may need to recalibrate their plants, all of which adds to their costs.”

Swiss Cabinet May Take Months on New SNB Head as Council Mulls Candidates

2012-01-12T07:43:00.008+08:00

The Swiss government may take as long as four months to appoint a replacement for Philipp Hildebrand as the central bank’s council mulls internal and external candidates after his surprise resignation.

Asked when the government will be able to announce a new governor to the Swiss National Bank (SNBN)’s three-member board, President Eveline Widmer-Schlumpf said in Bern yesterday that it’s probably “a matter of a few months, maybe April or May.” Thomas Jordan, 48, who was appointed interim president on Jan. 9 is a “very competent personality,” she said.

Hildebrand, a former hedge-fund manager, announced his resignation on Jan. 9 after failing to prove that his wife acted independently on a currency purchase of $504,000 in August, a month before the SNB imposed its first franc cap in three decades. While the SNB’s Bank Council, led by Hansueli Raggenbass, will suggest potential candidates, it’s up to the seven-member Cabinet to take a final decision.

“The SNB board remains fully operational despite Hildebrand’s resignation,” said Alexander Koch, an economist at UniCredit Group in Munich. “It’s not unlikely that the council will suggest an internal candidate, who is already involved in the current crisis management.”

While either Jordan or fellow board member Jean-Pierre Danthine could in theory be named chief immediately, the government favors waiting for the council’s recommendations on a new board member before deciding who will replace Hildebrand as chairman, according to Widmer-Schlumpf. The current deputies are Thomas Moser, Thomas Wiedmer and Dewet Moser.

Franc Ceiling
The SNB’s 11-member supervisory council is looking for a candidate as the central bank seeks to defend its franc ceiling of 1.20 versus the euro. While the franc surged after Hildebrand’s resignation to as high as 1.2108, it weakened later that day. It traded at 1.2121 as of 6:10 p.m. in Zurich.

Janwillem Acket, chief economist at Julius Baer Group Ltd. (BAER) in Zurich, said there’s a “99 percent chance” that Jordan will be elected new president, while any of the deputies would be “experienced and good” candidates to join the board.

“We need a flawless SNB, especially in these stormy waters,” Acket said. “We can’t rule out anything, but an external candidate wouldn’t be ideal as a new president. Jordan was involved in every important decision; he’s perfect.”

‘Utmost Determination’
Jordan, who joined the board in 2007 and became deputy chairman three years later, said on Jan. 9 that he’s willing to take the top job and reiterated that the central bank is ready defend the cap with the “utmost determination” if needed.

“The SNB’s commitment to keep the lower boundary in euro- franc in place remains established,” said Reto Huenerwadel, an economist at UBS AG in Zurich. “It appears merely a matter of time before the SNB will publicly restate their willingness to keep the Swiss monetary framework in place for now.”

Beatrice Weder di Mauro, a Swiss native and currently a member of German Chancellor Angela Merkel’s council of economic advisers, and the Swiss government’s chief economist, Aymo Brunetti, are among possible candidates to join the board, according to economists and newspaper reports. Acket also named Thomas Straubhaar, head of the HWWI economic institute in Hamburg, and Serge Gaillard, head of the Swiss government’s labor department and a former member of the SNB Bank Council.

The government said yesterday it first wants to see the results of an internal probe into the financial transactions of the two remaining board members and the three deputies in the three years through 2011 before making an appointment. The SNB has already pledged to toughen its internal rules.

The Bank Council has appointed a panel to look into possible candidates.

Geithner Will Press China on Yuan While Seeking Support on Iran Sanctions

2012-01-12T07:43:00.005+08:00

U.S. Treasury Secretary Timothy F. Geithner will urge Asia’s two biggest economies to cut Iranian oil imports and seek to narrow differences with China on trade and currency disputes on a visit to Beijing and Tokyo this week.

Geithner, who today holds talks with Premier Wen Jiabao, Vice President Xi Jinping and Vice Premier Li Keqiang, arrived in Beijing yesterday and met Chinese Vice Premier Wang Qishan. In Japan, he is due to meet with Prime Minister Yoshihiko Noda and Finance Minister Jun Azumi tomorrow.

“On economic growth, financial stability around the world, on nonproliferation, we have what we view as a very strong cooperative relationship with the government and we are looking forward to building on that,” Geithner said at the start of his meeting with Xi.

Wang, appearing with Geithner yesterday, said the two countries “have a lot of issues to talk about in the areas of economy, finance, trade and investment.”

“Apart from the bilateral aspect, we are also having important cooperation in the multilateral and global arena in the areas of economy, finance, trade policies and also G-20 related affairs,” Wang said.

Geithner will probably encounter resistance in China, which disagrees with U.S. assertions that its currency is undervalued and is sparring with the Obama administration over trade in goods from chicken to steel. At the same time, he may seek to avert a public split at a time when a likely European slide to recession is already clouding the global economic outlook.

Treasury Bills
“These are the world’s second- and third-largest economies and the two biggest holders of Treasury bills,” said Stephen Myrow, a U.S. Treasury official during the administration of George W. Bush and now managing director of ACG Analytics Inc., a Washington investment research firm. “These are relationships that need to be continually nurtured.”

China is the largest foreign holder of U.S. government securities, with $1.13 trillion in October. Japan is second among foreign nations with $979 billion.

A plea to cut back on Iranian oil, tied to the Obama administration’s sanctions last month aimed at that country’s nuclear program, may not resonate with Chinese officials, intelligence and foreign-affairs analysts said.

“China will be less OK with it than Japan,” Matthew Levitt, a former financial intelligence official at the Treasury Department who is now at the Washington Institute for Near East Policy, said in an interview. “But neither wants to be seen as rogue.”

Iranian Oil
The two countries are the largest importers of Iranian oil, with China accounting for 22 percent and Japan buying 14 percent of Tehran’s crude oil exports during the first half of last year, according to the U.S. Energy Information Administration. As a group, the European Union buys 18 percent of Iran’s oil exports.

Wen, China’s premier, will visit Saudi Arabia, the United Arab Emirates and Qatar from Jan. 14 to Jan. 19, China’s foreign ministry said yesterday.

Wen will attend a conference in Abu Dhabi and make a speech about China’s energy policy, Foreign Ministry spokesman Liu Weimin said in a statement on the ministry’s website. Wen will hold talks with leaders of the three nations during his six-day visit and “promote the development of China-Arab relations and relations with the Islamic world,” Liu said.

Trade Rules
In China, Geithner may tell officials that they need to follow through on pledges to shift the world’s second-largest economy more toward domestic demand and away from exports, William Cline, a senior fellow at the Peterson Institute for International Economics in Washington, said in an interview Jan. 9. The real value of the yuan “needs to rise by 10 to 20 percent,” he said.

President Barack Obama plans to form a government task force to monitor China’s compliance with U.S. trade rules, the Wall Street Journal reported yesterday, citing unidentified people familiar with the matter.

The panel will include officials from the Treasury, Commerce and Energy departments, and the U.S. Trade Representative’s office, it said. An announcement of the enforcement task force is expected later this month, the newspaper said in its online edition.

Substantially Undervalued
The Treasury Department said Dec. 27 in its twice-yearly report on global currencies that the yuan is substantially undervalued and the U.S. will “press for policy changes that yield greater exchange-rate flexibility.” China’s state-run Xinhua News Agency replied in a commentary that the U.S. should move beyond the “useless, meaningless” quarrel over the exchange rate.

The yuan closed at 6.3150 in Shanghai yesterday, little changed from 6.3146 on Jan. 9, according to the China Foreign Exchange Trade System. The currency is allowed to trade 0.5 percent on either side of the daily fixing. In Hong Kong’s offshore market, the yuan slipped 0.03 percent to 6.3159.

China’s growth may slow to 8.5 percent this year, down from 9.2 percent in 2011, according to the median estimate of economists in a Bloomberg News survey. The central bank lowered the required reserve ratio for banks for the first time in almost three years in December to encourage lending, a shifting of its stance from fighting inflation as price pressures ease.

Record Earthquake
The Treasury secretary arrives in Japan as that nation copes with a fading rebound from the aftermath of a record earthquake in March 2011. Gross domestic product probably shrank 0.1 percent in the three months through December, the third contraction in four quarters, according to estimates by the Japan Center for Economic Research, an independent analysis group in Tokyo.

Prime Minister Noda’s administration has overseen record sales of yen to counter exchange-rate appreciation that has prompted companies including Nissan Motor (7201) Co. and Panasonic Corp. (6752) to plan shifting some operations abroad. The U.S. Treasury criticized the currency intervention in a report last month, saying Japan should instead focus on domestic policy initiatives.

“Geithner may be looking for input from America’s key trading partners in Asia on how to promote a sustainable recovery in world economic demand,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., said in an e-mail. “He may want to hear directly as well in face-to- face meetings on just how worried are China and Japan officials about the outlook for their own domestic economies.”

WTO Panel
Commerce may also be on the agenda. The U.S. Trade Representative asked the World Trade Organization last month to establish a panel that will seek a settlement in a conflict with China over duties on American poultry.

China set a duty of as much as 105.4 percent last year on U.S. broiler-chicken products. About 300,000 workers and farmers have been hurt by China’s actions, Trade Representative Ron Kirk said in September.

The chicken-import dispute may add to tensions between the world’s two largest economies, which have clashed over access to each others’ markets for products including steel pipes, tires, movies and music. The WTO rejected in September China’s appeal of a ruling that backed U.S. duties on Chinese tire imports.

Geithner hasn’t been to China since March 2011 and to Japan since November 2010. Treasury officials traveling with him include Lael Brainard, undersecretary for international affairs; Robert Dohner, deputy assistant secretary for Asia; and David Loevinger, senior coordinator for China affairs.

Foreign Sanctions
Obama signed into law Dec. 31 a defense-spending bill that includes a provision that would impose sanctions on foreign financial institutions that conduct transactions with the Central Bank of Iran.

The law gives the administration flexibility by allowing it to waive sanctions for as long as 120 days at a time if the president determines they would threaten national security. Iran threatened last month to shut the Strait of Hormuz, a transit point for one-fifth of oil traded worldwide, if sanctions are imposed on its crude exports.

“The regular economic and trade relations and energy cooperation between China and Iran has nothing to do with the nuclear issue,” Chinese Vice Foreign Minister Cui Tiankai told reporters in Beijing Jan. 9. “We should not mix issues with different natures.”

Chinese officials aren’t “as committed to a unified position with the United States, don’t philosophically agree the sanctions should hurt the Iranian people or the Iranian economy,” said Kenneth Katzman, an Iran specialist for the nonpartisan Congressional Research Service.

South Korea, Indonesia May Hold Rates on Currency Drop: Economy

2012-01-12T07:43:00.002+08:00

South Korea and Indonesia will probably keep interest rates unchanged this week as a drop in their currencies risks heightening inflationary pressures even as the faltering global economy undermines growth prospects.

All 14 economists surveyed by Bloomberg News expect the Bank of Korea to keep the benchmark seven-day repurchase rate unchanged at 3.25 percent on Jan. 13 for a seventh straight month, the longest pause since tightening began in July 2010. Bank Indonesia will keep the reference rate at 6 percent tomorrow, 13 of 18 economists surveyed predict, while the rest see a quarter-percentage-point cut.

Europe’s protracted sovereign-debt crisis has hurt Asian exports and caused growth to slow from China to Singapore, with the death of North Korean leader Kim Jong Il last month compounding risks to regional economies. While the Philippines has said it may ease monetary policy this quarter, elevated inflation may stay South Korea’s hand and a weakening currency may prevent a resumption in Indonesian rate cuts.

“The European fiscal crisis is dragging on Asia and now possible political instability in North Korea is adding to risks,” said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul. “Still, many central banks including South Korea will likely hold rates as they also grapple with volatile foreign-exchange rates and high inflation.”

The Central Bank of Sri Lanka kept its benchmark interest rates unchanged for a 12th straight month, it said in a statement today. The bank held the reverse repurchase rate at 8.5 percent and the repurchase rate at 7 percent.
Currencies Fall

The faltering growth outlook has caused most Asian currencies to fall in the past six months, with the South Korean won declining more than 8 percent as weaker overseas demand eroded the earnings of exporters from LG Electronics Inc. to Posco, the world’s third-biggest steelmaker. The won fell 0.3 percent to 1,159.6 against the dollar as of 11:28 a.m. in Seoul today, according to data compiled by Bloomberg.

Indonesia’s rupiah dropped more than 7 percent against the dollar as the central bank lowered borrowing costs in October and November before pausing last month. The rupiah weakened 0.5 percent to 9,210 a dollar as of 9:28 a.m. in Jakarta.

In Australia, a report showing retail sales unexpectedly stalled in November spurred declines in the nation’s currency on Jan. 9, as traders increased bets that the central bank will cut interest rates again after quarter-percentage-point cuts on Nov. 1 and Dec. 6.
Exports May Ease

China’s central bank lowered the required reserve ratio for banks for the first time in almost three years in December to encourage lending, shifting its stance from fighting inflation as price pressures eased.

Malaysia’s trade ministry may say today exports rose 12.9 percent in November from a year earlier, after climbing 15.8 percent the previous month, according to a Bloomberg survey of economists.

Germany may say today its economy grew 3 percent last year after a 3.6 percent expansion in 2010, according to the median estimate of 27 economists surveyed by Bloomberg. Spain’s industrial production probably dropped 5.4 percent in November from a year earlier after a 4 percent decline in October, while the U.K. may say its goods-trade deficit widened in November to 8.4 billion pounds ($13 billion) from 7.56 billion pounds in October, other surveys showed before reports today.

In the U.S., the Federal Reserve will release its Beige Book survey, and the Mortgage Bankers Association will give data on mortgage applications for the week ended Jan. 6.
Growth Threats

The Bank of Korea’s board has highlighted potential threats to growth from instability in the North following the death of Kim Jong Il, which was announced on Dec. 19. The leader’s son Kim Jong Un, thought to be under 30, succeeded as ruler.

“Geopolitical risks” relating to the North have the potential to escalate, unnerving financial markets and causing consumption and investment in the South to contract “severely,” the bank said in a Dec. 29 statement. Officials pledged to monitor closely the North Korean situation and Europe’s debt crisis, that they said contribute to “substantial” downside risks for Asia’s fourth-biggest economy.

“The leadership transition in North Korea has been smooth thus far, but geopolitical risks remain, as ever,” said Ma Tieying, an economist with DBS Group Holdings Ltd. in Singapore. “The risk is that North Korea may provoke a confrontation with the South, should the new leader find it necessary to enhance his political standing and strengthen his grip on power.”

Accelerating inflation may limit the scope for immediate rate cuts to protect growth. South Korea’s consumer prices rose 4.2 percent from a year earlier in November and December, exceeding the central bank’s target limit of 4 percent and quickening from 3.6 percent in October.
Case for Cut

South Korea’s unemployment rate unexpectedly held at 3.1 percent last month as hiring by the health, welfare service, wholesale and retail sectors helped offset the effect of slowing export growth on the job market.

“Sticky inflation” is the only thing in the way of a South Korean rate cut, said Ronald Man, a Hong Kong-based analyst at HSBC Holdings Plc. “Contraction lights have started to flash, even if they are not bright red for now. The case for a rate cut by the end of the first quarter has therefore grown.”

In Indonesia, central bank Deputy Governor Hartadi Sarwono said this week the government’s plan to limit the sale of subsidized fuel may add as much as 0.9 percentage point to inflation this year. He said earlier this month Bank Indonesia remains mindful of inflation even as it sees room to cut interest rates further if needed.

The rupiah’s decline has also threatened to raise import costs in Southeast Asia’s largest economy, even as inflation slowed for a fourth straight month in December to 3.79 percent, the lowest level since March 2010.

“We believe that current pressures over the Indonesian rupiah will prevent the central bank from cutting the rate in January,” said Eric Alexander Sugandi, a Jakarta-based economist at Standard Chartered Plc. “Bank Indonesia still has room to cut rates in March as it needs to anticipate the impact of the global slowdown on domestic activity.”

Debt Trap Looms in Convertibles Due After 25% Sensex Plunge: India Credit

2012-01-12T07:42:00.007+08:00

Indian companies with a record $5.3 billion of convertible bonds due this year may see borrowing costs more than quadruple after the worst performance among the world’s 10 biggest stock markets.

Reliance Communications Ltd., Suzlon Energy Ltd. (SUEL) and Tata Steel Ltd. (TATA), sold a third of the total debt, according to data compiled by Bloomberg. Their shares are trading as much as 88 percent below the bond conversion prices. Should they choose to issue debt that can’t be converted into equity to meet repayments, companies will face an average yield of 6.92 percent on dollar-denominated bonds, a HSBC Holdings Plc index shows, compared with 1.55 percent on convertible notes, according to Barclays Capital data.

“Companies are heading into a debt trap,” Raj Kothari, a convertible bond trader at Sun Global Investments Ltd., said in a phone interview from London on Jan. 4. “Companies have no option but to repay the debt.”

Cash levels for Indian borrowers relative to their interest commitments fell to a five-year low after the central bank raised interest rates a record 13 times since March 2010 to combat inflation and as operating profits declined, Standard & Poor’s Indian unit Crisil Ltd. (CRISIL) said in a report this month. Corporate earnings will probably post the biggest drop in three years in the financial year ending March, according to analysts’ estimates compiled by Bloomberg.

Reliance Communications, India’s second-largest mobile- phone operator, is due to repay $925 million of convertible debt on March 1, the largest amount by any Indian company this year, according to data compiled by Bloomberg.

Zero Coupon
The company’s zero-coupon bonds, sold five years ago to help fund capacity expansion in the world’s fastest-growing wireless services market, can be exchanged into stock at 661.23 rupees ($12.7). Reliance Communications (RCOM) rose 1.3 percent to 82.1 rupees at close in Mumbai, about 88 percent below the conversion price. The shares more than halved in value last year.

The Mumbai-based company’s 30 billion rupees of 11.2 percent securities maturing in March 2019 were little changed today at a yield of 9.72 percent, or 147 basis points more than equivalent-maturity government notes, according to data compiled by Bloomberg.

“Reliance Communications will ensure timely redemption of its foreign-currency convertible bonds,” Rohit Khanna, a Mumbai-based spokesman said by e-mail on Jan. 9.

Suzlon Energy, India’s biggest wind-turbine maker, has a total of $389 million of equity-linked debt maturing in June and October with conversion prices of 76.7 rupees and 97.3 rupees, according to data compiled by Bloomberg. The company’s shares advanced 4.3 percent to 20.5 rupees in Mumbai.

‘Adequate Liquidity’
Tata Steel, the biggest producer of the alloy, will redeem $382 million of convertible bonds that exchange into equity at 730.5 rupees in September. The stock rose 3 percent to 383 rupees today.

“We have adequate liquidity,” Prabhat Sharma, Tata Steel’s spokesman, said by e-mail yesterday. “Refinancing is always an option depending upon the terms.”

Kirti Vagadia, head of corporate finance at Pune, western India-based Suzlon Energy, declined to comment when contacted yesterday.

Earnings forecasts for companies in the benchmark Sensitive index fell 8.7 percent this financial year to 1,150 rupees per share, according to about 1,500 estimates compiled by Bloomberg. The 25 percent decline in the measure last year compares with 22 percent for China’s benchmark, 17 percent for Russia and 18 percent for Brazil.

Crisil Report
Companies’ abilities to meet interest payments may weaken because sales have decelerated amid the global economic slowdown, Crisil said on Jan. 3. The report, based on financials of 420 companies in the S&P CNX 500 Index, said the “interest coverage” ratio had dropped to a five-year low.

Dollar bond costs for India borrowers are seven basis points, or 0.07 percentage point, below the 6.99 percent yield reached in October, the highest level since Oct. 30, 2009, according to HSBC. Similar rates for Chinese companies dropped to 5.88 percent, from a 31-month high of 6.84 percent touched on Oct. 4, the data show.

Subex Ltd. (SUBX), a telecommunications software maker, is looking at “multiple options to raise funds” such as selling equity or raising debt to repay two convertible bonds of $99 million maturing in March, Ramanathan J., a vice president at the Bangalore-based company, said in a phone interview on Jan. 9. The company will decide how to get $135 million to refinance the notes within the next month, he said.

Higher Rates
All except for $116 million of the bonds due this year were sold before 2008, according to data compiled by Bloomberg, as investors were attracted by the Sensex trebling in value in 2006 and 2007.

Indian stock markets fell last year as growth slowed to below 7 percent for the first time since June 2009, the central bank raised interest rates more than any other Asian monetary authority and European leaders failed to find a resolution to the region’s debt crisis.

The Sensex (SENSEX) advanced 0.1 percent to 16,175.86 in Mumbai, extending gains this year to 4.7 percent. The yield on the benchmark 8.79 percent note due in November 2021 was unchanged at 8.23 percent in Mumbai, according to the central bank’s trading system.

India’s sovereign bonds returned 7.7 percent in the past year, trailing gains in two of the 10 Asian local-currency markets monitored by HSBC. In the corporate bond market, the difference in yields between top-rated five-year debt and similar-maturity government bonds rose one basis point to 96 basis points.

Rupee Rebound
The rupee slid 16 percent in 2011 as Europe’s debt crisis reduced the allure of higher-yielding assets. India’s currency fell 0.4 percent to 51.8950 per dollar in Mumbai.

The cost of protecting the debt of eight Indian borrowers against default fell one basis point to 454 basis points yesterday, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Five companies defaulted on $183 million of convertible debt in 2011, according to data compiled by Bloomberg. Indian borrowers sold $797 million of equity-linked bonds last year, down 55 percent from 2010, the data show.

Equity Dilution
Issuers will be able to avoid diluting their stock by repaying the bonds, said Prabal Banerji, chief financial officer at Adani Power Ltd., India’s 15th most-indebted company with $7.4 billion of loans outstanding.

“Repayment will be a challenge for many companies, but it’s still a blessing in disguise because borrowers won’t need to offer their shares at cheap prices to investors,” Banerji said in a phone interview from the western Indian city of Ahmedabad on Jan. 9.

Indian companies sought to borrow $92.2 million overseas in November to redeem foreign-currency convertible bonds, the most since permission to raise such loans without prior approval from the central bank was given in July, data published on Jan. 4 on the Reserve Bank of India’s website show.

“Equity prices have gone below the conversion prices on convertible bonds,” Samir Shah, head of technical analysis at BP Equities Pvt. said in a phone interview from Mumbai on Jan. 6. “There’s no option for companies but to repay the debt.”

Germany on Brink of Recession as Euro Debt Crisis Damps Exports: Economy

2012-01-12T07:42:00.004+08:00

Germany may be on the brink of recession after the sovereign debt crisis caused the economy to contract in the final quarter of 2011.

Europe’s largest economy shrank “roughly” 0.25 percent in the fourth quarter from the third, the Federal Statistics Office in Wiesbaden said today in an unofficial estimate. Economists such as Christian Schulz at Berenberg Bank expect gross domestic product to contract again in the current quarter. A recession is defined as two consecutive quarters of declining GDP.

“If the euro crisis does not get worse or is finally brought under control after another wave in early 2012, the German economy can rebound nicely from the summer onwards,” said Schulz, a senior economist with Berenberg in London. “However, we see a 25 percent chance of the euro crisis remaining out of control longer, or completely spiraling out of control with a series of sovereign and bank defaults. In such a scenario, Germany would enter a major recession.”

Growth slowed to 3 percent in 2011 from 3.7 percent in 2010, which was the most since German reunification two decades earlier, the statistics office said. The economy last contracted in 2009, when it was in the throes of the global financial crisis. Unemployment at a two-decade low may bolster growth this year by supporting consumer spending.

Domestic Demand
Domestic demand was the main contributor to GDP growth last year, adding 2.1 percentage points, today’s report showed. Private consumption increased 1.5 percent in the year, while government spending rose 1.2 percent. Investment in plant and machinery gained 8.3 percent.

The euro rose after the 2011 GDP report before giving up its gains to trade at $1.2755 at 11:50 a.m. in Frankfurt. European stocks fluctuated, with the Stoxx Europe 600 Index little changed. The MSCI Asia Pacific Index added 0.3 percent today, while Standard & Poor’s 500 Index futures gained less than 0.1 percent.

The weaker global economy and waning demand from debt- stricken euro-area neighbors have eroded German foreign sales, the main pillar of its economic expansion. Net trade contributed 0.8 percentage point to growth last year, with exports up 8.2 percent and imports gaining 7.2 percent. In 2010, exports increased 13.7 percent.

“All in all, the German economy has remained relatively resilient,” said Annalisa Piazza, an economist at Newedge Group in London. “Signs of moderation have recently emerged but we expect the German economy to remain afloat in the coming quarters, maintaining its role as the major engine of growth for the euro area.”

2012 Forecast
German growth will slow to 0.6 percent this year before recovering to 1.8 percent in 2013, the Bundesbank predicted on Dec. 19. The European Central Bank, which has cut interest rates to a record low and flooded the banking system with cash during the debt crisis, last month reduced its 2012 growth forecast for the 17-nation euro region to just 0.3 percent.

Spanish industrial production fell the most in two years in November reflecting a contraction in the euro area’s fourth- largest economy as the government prepares to implement a new wave of austerity. Output at factories, refineries and mines adjusted for the number of working days declined 7 percent from a year earlier, the most since October 2009, the National Statistics Institute in Madrid said today.

In the U.K., the goods-trade deficit widened more than economists forecast in November as exports dropped, the Office for National Statistics said. The trade gap widened to 8.64 billion pounds ($13.6 billion) from 7.87 billion pounds in October. Exports fell 1.5 percent on the month while imports rose 1.1 percent.

Beige Book

The effects of Europe’s debt crisis may cost the U.S. as much as half a percentage point in economic growth this year, Goldman Sachs Chief Economist Jan Hatzius said at an event in Frankfurt today.

The U.S. Federal Reserve will release its Beige Book survey later today, and the Mortgage Bankers Association will give data on mortgage applications for the week ended Jan. 6.

“The debt crisis is unprecedented and economic forecasts in this environment are very difficult,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt, who expects the German economy to contract “a little” in the first three months of this year. “For 2012 as a whole, we expect stagnation,” he said.

There are signs Germany’s economic downturn will be shallow. Business confidence unexpectedly rose for a second month in December and service industries expanded.

The statistics office said today it may revise its fourth- quarter GDP assessment by the time official data are published on Feb. 15.

“Minus 0.25 percent is a too-pessimistic call both on the basis of hard and soft data,” said Andreas Rees, chief German economist at UniCredit in Munich. “Our bottom line: Don’t worry too much about 2012, and let’s be grateful about last year.”

Spain’s Rajoy May Need Back Door Bailout for Regional Rescues: Euro Credit

2012-01-12T07:42:00.001+08:00

Prime Minister Mariano Rajoy may need to skirt Spanish law to backstop the nation’s indebted regions, mimicking the European Union’s dodging of its no- bailout rule to save Greece, Ireland and Portugal from default.

“We consider the Spanish government should guarantee or take responsibility for the debt it has authorized the regions to issue,” said Albert Carreras de Odriozola, Catalonia’s deputy finance chief, in a telephone interview. “It must be possible to talk and find a mechanism.”

Catalonia, Valencia, Andalusia and Madrid, which account for 60 percent of Spain’s economy, are shut out of markets as they brace to repay 9 billion euros ($11.5 billion) to lenders this year, according to data compiled by Bloomberg. Spain’s 10- year yield has risen to 5.3 percent from 5.09 percent on Dec. 30 when the government said its 2011 deficit had ballooned to a third larger than its target.

Regional shortfalls drove Spain’s deficit to 8 percent of gross domestic product, breaching the 6 percent pledged to the EU. Spain’s Parliament today examines 15 billion euros of tax increases and spending cuts announced by Rajoy’s government on Dec. 30 to compensate the slippage.

Failure not Option
“Rajoy cannot afford for regional governments to fail,” said Michael Derks, chief strategist at FXPro Financial Services Ltd. in London. “What Rajoy may well need to do is to provide a limited guarantee on regional funding, on the proviso that those regions who take advantage of the guarantee sign up to fiscal reforms.”

The yield on 2020 bonds of Catalonia, the wealthiest region with an economy the size of Portugal’s, reached 9.738 percent today compared with 5.029 percent for similar maturity Spanish government debt.

Budget Minister Cristobal Montoro meets today at 7 p.m. in Madrid with the economy chiefs of the 11 regions governed by Rajoy’s People’s Party, as falling tax receipts in a country with an unemployment rate of 23 percent aggravate efforts to repay debt. A summit with all 17 regions is scheduled for later this month. Spain’s regions have more than 135 billion euros in borrowing, compared with 518 billion euros for the central government.

Valencia, with the highest debt-to-GDP ratio among the regions, saw its credit rating cut to non-investment grade by Moody’s Investors Services last month, and was forced to delay repayment of a 123 million euro loan to Deutsche Bank AG for a week.

Seeking Concessions
Catalonia has asked for a delay in handing tax payments to the central government. It also suggested Madrid guarantee regions’ debt sales to attract lenders.

Weeks before he was called to join Rajoy’s government in December, Economy Minister Luis de Guindos said that a “fiscal and liquidity pact” with Spain’s provinces was needed.

The regions’ sagging finances threaten Spain’s credit rating, which could further boost borrowing costs. Moody’s, Fitch Ratings and Standard & Poor’s all cited the regions in putting Spain’s ratings under review last month, signaling they were an obstacle to Spain’s efforts to reorder its finances and avoid becoming the fourth euro nation to seek aid.

The Treasury tomorrow sells as much as 5 billion euros of bonds, including a new three-year benchmark. Spain was forced to offer 5.187 percent to borrow till April 2015 on Dec. 1, compared with the 3.9 percent that Germany last paid to sell similar maturity debt.

Rescues Barred
Spanish law forbids the government from rescuing local governments in much the same way that the Maastricht Treaty prohibits bailouts of EU countries. Still, the EU managed to bend that ban in coming up with 256 billion euros in aid packages to avert the first euro area default.

The central government could try to convince banks to grant the regions loans, eventually offering an “informal” guarantee, said Angel de la Fuente, an economist at the National Research Council’s Institute of Economic Analysis who specializes in regional finances. “Informally, they can get banks to be a little bit softer,” he said.

Rajoy may be better positioned than his Socialist predecessor Jose Luis Rodriguez Zapatero to wrest concessions from the region’s as his People Party now controls 11 of the 17 regions. Shoring up the regions will be the only way for Rajoy to deliver on his pledge of cutting the budget gap by almost half to 4.4 percent of GDP this year.

Meeting that call will require an “unprecedented adjustment,” Moody’s said on Jan. 9, calculating that about 40 billion euros in deficit reductions would be needed, an amount equivalent to 3.7 percent of GDP. Newspaper Expansion reported today that the Rajoy’s government is considering cuts of about that amount.

“The new government is in a very difficult situation,” said Raj Badiani, an economist at Global Insight Inc. in London. “Given that several regions have missed their 2011 budget targets, they may not be allowed by the central government to issue new debt, adding to their liquidity and even solvency pressures.”

Rail Traffic Surge Shows Canada Economy May Beat Growth Forecasts: Freight

2012-01-12T07:41:00.002+08:00

A boom in traffic at Canadian National Railways Co. (CNR) and Canadian Pacific Railway Ltd. (CP), the country’s two largest rail companies, may mean Canada’s recovery will be buoyant even after economists and the Bank of Canada pared their outlook for growth this year.

Canadian freight volumes accelerated in the fourth quarter to their fastest pace in 2011 on a year-over-year basis, while commodity carloads were up 6.8 percent in December from November on a seasonally adjusted basis, according to data from the Association of American Railroads. Data from Statistics Canada showing stronger volumes in the August-October period also suggest future economic growth.

Rising rail shipments add to evidence that sales at Canadian producers such as chemicals maker Canexus Corp. (CUS) haven’t faltered in the face of the European debt crisis and a weak U.S. recovery. Bank of Canada Governor Mark Carney said last month risks to the global economy may lead to a “prolonged period of deficient demand.” Changes in rail carloads have predicted 63 percent of changes in monthly GDP three months into the future since 2000, according to Bloomberg calculations.

“One of the great challenges right now is there is an incredible skew among economic indicators,” said Eric Lascelles, chief economist at RBC Global Asset Management Inc. in Toronto, which oversees about C$250 billion ($246 billion), adding that he uses rail freight as part of a set of indicators to gauge Canada’s economic outlook. “Now is the sort of time when you want to look at unusual indicators because the traditional ones just aren’t giving a clear picture.”

Cutting Forecasts
Economists and policy makers have been reducing their forecasts for the Canadian economy on concerns that the country’s expansion will slow if the European crisis hampers confidence, slowing emerging economies curb demand for the country’s commodities, and debt-laden consumers spend less.

Canada’s S&P/TSX benchmark stock index (STINDU) lagged behind the U.S.’s S&P 500 in 2011 for the first year since 2003 as producers of raw materials and energy dropped. Canada’s expansion in 2012, projected at 2 percent, will trail U.S. growth for the first time in seven years, according to 21 economists surveyed by Bloomberg News. In May, economists had forecast 2012 Canadian growth of 2.8 percent.

Canada’s quarterly expansion is expected to average an annualized 1.9 percent over the 12 months ending September 2012, almost half the third quarter pace, according to the Bloomberg survey. That will lead Carney to keep the central bank’s policy interest rate at 1 percent through 2012, the survey found.

Mixed Data
Carloads of commodities such as chemicals for Canadian railways, including their U.S. operations, rose 5.3 percent in the fourth-quarter from a year earlier, the fastest pace in 2011, according to Association of American Railroads data. Intermodal carloads, which can move by rail, road and sea and which often move retail goods, increased at a 4.5 percent pace, also a 2011 quarterly high.

The rail data point to a more bullish outlook than some other economic data suggest. The value of building permits has declined in four of the past five months and home resales have slowed, suggesting a cooling housing market. The economy has generated only 7,400 jobs over the last six months, and the jobless rate has risen in each of the past three months, to 7.5 percent in December.

Still, manufacturing business conditions in Canada improved in December, according to purchasing managers indexes released this month by Royal Bank of Canada and the University of Western Ontario. A Bank of Canada survey of executives released Jan. 9 showed companies anticipate hiring more and increasing investment, even as they predict slower sales growth for the first time in almost three years.

‘Good Proxy’
Growth will “be higher than people are expecting,” said Denis Senecal, head of fixed income in Montreal at State Street Global Advisors, which manages about C$30 billion in Canadian assets. Freight volumes are a “good proxy” for the economy, he added.

Myles Zyblock, chief institutional strategist at Royal Bank in Toronto, raised his six- to nine-month view of Canadian equities to “above-benchmark” from “market-weight” in a Jan. 4 report to clients. Ed Sollbach of Desjardins Securities Inc. forecast in a report on the same day the Standard & Poor’s/TSX Composite Index would climb to 14,200, which would be a 19 percent increase from its Dec. 30 close.

Faster growth may benefit materials and industrial companies most closely tied to economic expansion, such as Calgary-based Canexus. Its stock has jumped 29 percent over the past three months.

Industrial Stocks
Canada’s S&P/TSX Industrials Index (STINDU) has advanced 13 percent over the past three months, compared with a 5.9 percent gain for the S&P/TSX Composite Index. (SPTSX) Aecon Group Inc. (ARE), a Toronto engineering business, led gainers with a 52 percent return. Canadian Pacific stock has increased 32 percent in three months, while shares of Canadian National are up 9.5 percent.

Growth may also fuel demand for Canadian corporate debt, said State Street’s Senecal.

The extra yield demanded by investors to own debt of Canadian industrial companies instead of federal government bonds has fallen to 181 basis points on Jan. 10 from 202 basis points at the beginning of the fourth quarter, according to Bank of America Merrill Lynch data. The so-called spread on a broad index of Canadian investment-grade companies narrowed to 179 basis points from 183 basis points in that interval.

Higher Traffic
Railway carloads measured in metric tons rose at an average year-over-year rate of 11.2 percent in the three months ending October, according to Statistics Canada, up from 4.8 percent average growth in the previous seven months and similar to the pace in 2010 when the economy was recovering from recession.

Canadian railroads moved 609,000 units in December, a record for the month and 3.3 percent above December 2007 levels, the last peak for the industry, according to Bloomberg Industries.

“Freight volumes for the Canadian rails ended the year on a strong note,” said Lee Klaskow, a Skillman, New Jersey-based analyst with Bloomberg Industries. “Strength was mostly across the board.”

The average weekly freight volume at Montreal-based Canadian National over the past month was up 9 percent from the period a year earlier, according to Bloomberg Industries data that includes the company’s U.S. operations. In December, CN motor vehicle shipments rose 17 percent, mineral volumes were up 3.6 percent and intermodal traffic climbed 15.8 percent, the data show.

The four-week moving average at Canadian Pacific showed a 10.1 percent volume increase from a year earlier, led by gains in automobile shipments, coal and minerals. Auto shipments at Calgary-based CP were up 48 percent in December and the railway recorded a 27 percent jump in mineral volumes, according to Bloomberg Industries.

“Overall, if those sort of numbers were to hold up on the carloadings, that could provide some indication” of robust goods-production growth, said Mark Chandler, head of fixed income strategy at Royal Bank of Canada’s capital markets unit in Toronto.

Economy Brightening in 2012 Initial Data From U.S. Belying Grim Investors

2012-01-07T23:02:00.011+08:00

The U.S. economy is beginning 2012 on a brighter note in a sign investors may be too pessimistic.

Payrolls rose 200,000 in December, double the gain in November, a Labor Department report showed yesterday. A weekly measure of consumer confidence ended 2011 at a five-month high. And manufacturers reported their business in December grew at the fastest pace in six months. The combination indicates the world’s largest economy has enough staying power to withstand a recession in Europe and a slowdown in China.

“Markets are absolutely preoccupied about the risks from Europe and the U.S. housing market,” said John Herrmann, senior fixed-income strategist at State Street Global Markets in Boston, and the second most-accurate U.S. economic forecaster based on data from the last two years compiled by Bloomberg. “Yet we’re finding the economy continues to hold together fairly resiliently. We’re getting a good handoff from the fourth quarter.”

Bob Doll, chief equity strategist at BlackRock Inc., the world’s biggest asset manager, sees U.S. stock prices rising and yields on Treasury securities climbing this year as investor concerns about the outlook abate.

“We don’t need Europe to solve all its problems in 2012,” he said in a Jan. 5 note to clients. “Since there is already such a significant ‘crisis premium’ baked into the markets, just avoiding disaster could be enough.”

Doll forecasts that U.S. stocks will return at least 10 percent in 2012, beating foreign markets for a third year, as the nation’s gross domestic product expands by as much as 2.5 percent. GDP grew 1.8 percent last year, according to the median forecast of economists surveyed by Bloomberg News last month.

Unemployment Rate

The December payrolls report capped four months of declines in the unemployment rate and six consecutive months of jobs gains of at least 100,000, indicating the labor market is gaining momentum heading into a presidential election campaign season that will be shaped largely by the state of the economy.

“We’re starting to rebound,” President Barack Obama said yesterday at the offices of the Consumer Financial Protection Bureau in Washington. He appealed to lawmakers to extend a payroll-tax cut through the rest of the year to ensure growth continues.

In the latest Gallup tracking poll conducted Jan 3-5, 36 percent of Americans said the economy is getting better versus 59 who said it is worsening. As recently as Dec. 1-3, 27 percent saw the economy improving versus 69 percent worsening.

Job Approval

Obama’s job approval also has been rising up in recent months. The Gallup tracking poll showed Obama with a job approval rating of 45 percent Jan. 3-5 versus monthly averages of 43 percent in December and November and a monthly average of 41 percent in each of the prior three months. The margin of error is plus or minus 3 percentage points.

Stocks and Treasury yields fell yesterday after William C. Dudley, president of the Federal Reserve Bank of New York, said the outlook for unemployment remains “unacceptably high,” even though the jobless rate dropped to 8.5 percent (USURTOT), an almost three- year low. The Standard & Poor’s 500 Index fell 0.3 percent to 1,277.81 at the close in New York. The yield on the benchmark 10-year Treasury note fell to 1.96 percent from 2 percent on Jan. 5.

At the close yesterday, the S&P index was valued at 13.5 times profits, about four points below the average price-to- earnings (SPX) ratio since 1980, according to data compiled by Bloomberg.

Investors last year favored bonds over stocks, as they sought refuge from the financial turmoil in Europe. U.S. Treasury securities returned 9.8 percent in 2011, their best annual performance since a 14 percent gain in 2008, Bank of America Merrill Lynch index data show. Investors bought the U.S. securities as a haven, with Europe’s debt crisis threatening to infect the region’s larger economies.

European Economy

The damage to the U.S. economy from the euro-zone crisis has so far been smaller than forecast, Dominic Wilson, chief market economist for New York-based Goldman Sachs Group Inc., said in a Jan. 4 report. Even so, he cautioned that it’s too soon to sound the “all clear.”

German factory orders dropped the most in almost three years in November, as the euro-region economy edged toward a recession and global demand weakened. Orders, adjusted for seasonal swings and inflation, slipped 4.8 percent from October, when they surged a revised 5 percent, the Economy Ministry in Berlin said in a statement on Jan. 6.

Export Orders

In the U.S., export orders rose in December to the highest level in three months, according to manufacturer reports compiled by the Institute for Supply Management in Tempe, Arizona. Production and overall orders were the best since April.

U.S. steel production reached 2.64 million metric tons in November, 19 percent more than a year earlier, according to the latest data from the Brussels-based World Steel Association. That’s the highest single-month output since September 2008, data compiled by Bloomberg show.

Steel inventories have remained low, “which suggests a realistic chance of an ongoing U.S. real and apparent demand-led recovery in 2012,” Credit Suisse Group AG analysts led by London-based Michael Shillaker wrote in a Jan. 5 report.

The price of North American hot-rolled coil steel, an industry benchmark, has advanced 9.4 percent to $700 a ton since the final week of November, according to Steel Business Briefing. That compares with a 2 percent decline in European import prices to 485 euros ($618) a ton.

Steel Production

U.S. Steel Corp. (X), the largest U.S. producer, will report net income of $367.5 million this year, compared with $24.7 million in 2011, according to the median of nine analyst estimates compiled by Bloomberg. Shares of the Pittsburgh-based company fell 55 percent last year, the worst performance since 2008. They will advance 10 percent to $31.39 in the next 12 months, based on the average of 14 analyst estimates.

Stepped-up consumption of steel is driven partly by improving car sales. Demand at Ford Motor Co. (F), General Motors Co. (GM) and Chrysler Group LLC exceeded analysts’ forecasts in December, according to data released Jan. 4. Ford’s U.S. sales climbed 10 percent from a year earlier, while purchases were up 37 percent for Chrysler and 4.5 percent for GM.

The increase is paced by improving employment, Don Johnson, GM vice president for U.S. sales, said on a conference call with analysts. “Consumers are more confident and other underpinnings of our economy are either stable or slowly improving,” he said on Jan. 4.

The Bloomberg Consumer Comfort Index climbed (COMFCOMF) to minus 44.8 in the week ended Dec. 31, the best reading since mid-July, from minus 47.5 the prior week.

Last Year

Companies added 1.64 million employees in 2011, the best year for the American worker since 2006, after a 940,000 increase in 2010. Even with the gains, little headway has been made in recovering the 8.75 million jobs lost as a result of the recession that ended in June 2009.

Employment will pick up this year, as the economy strengthens and productivity growth wanes, said Joseph LaVorgna, chief U.S. economist for Deutsche Bank Securities in New York. He forecasts that payrolls will rise 2.6 million.

The U.S. probably expanded at a 3.6 percent rate during the fourth quarter, according to Macroeconomic Advisers. That would be the fastest since the second quarter of 2010 and double the third quarter’s 1.8 percent. The St. Louis-based forecasting company sees growth slowing to 2 percent in the current quarter as a recession in the euro area begins to take a bigger toll on the U.S.

“The tide is beginning to come back in,” James Glassman, senior economist at JP Morgan Chase & Co. in New York, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “We’ve got a long way to go. This is all positive, though, that we’re actually moving forward, and that’s an important trend.”

Fed Policy Makers Urge More Housing Aid

2012-01-07T23:02:00.008+08:00

Three Federal Reserve policy makers said the U.S. government should try new ways to spur the housing market without agreeing about how much more the central bank needs to do to bring down interest rates.

New York Fed President William C. Dudley said in New Jersey yesterday that “additional housing policy interventions” can help boost growth, even as the Fed should consider further easing. Boston Fed President Eric Rosengren, speaking in Connecticut, took the more-aggressive position of supporting the purchase of mortgage-backed securities, while Fed Governor Elizabeth Duke said in Virginia that the central bank’s current monetary stance is “appropriate.”

The comments underscore concerns by Fed officials that they may be reaching the limits of their power to boost growth and lower unemployment through three years of near-zero interest rates and unconventional policy tools. Chairman Ben S. Bernanke this week urged lawmakers to do more to revive the housing market, calling it an impediment to the economic recovery. He delivered a 26-page staff report to Congress outlining possible solutions.

“Bernanke realizes that we need to boost housing and if housing does not recover, what the Fed does will be for naught,” said Sung Won Sohn, former chief economist at Wells Fargo & Co. who is now a professor at California State University-Channel Islands in Camarillo.

The chairman and his colleagues “are trying to jawbone” the Obama administration, Congress, Fannie Mae and Freddie Mac to support the housing recovery, Sohn said.

Jobless Rate Falls

Fed officials who spoke yesterday gave little indication that their monetary-policy views were swayed by yesterday’s Labor Department report showing that the jobless rate (USURTOT) fell to 8.5 percent in December, the lowest since February 2009. Payrolls rose by 200,000 workers, more than economists forecast.

The Standard and Poor’s 500 fell 0.3 percent to 1,277.81 in New York, while yields on 10-year Treasuries fell four basis points to 1.96 percent.

The central bank’s policy-setting Federal Open Market Committee meets Jan. 24-25 in Washington, where governors and regional-bank presidents will for the first time present projections for the benchmark federal funds rate. The Fed signaled this week in minutes of December’s session that it may alter language saying rates will probably stay near zero until at least mid-2013.

The central bank cut its main interest rate almost to zero in December 2008. Bernanke has said the Fed is considering additional actions, including a third round of large-scale asset purchases.

‘Frustratingly Slow’

Dudley, 59, a former Goldman Sachs Group Inc. (GS) economist who serves as FOMC vice chairman, said that while the housing market is “only one factor behind the frustratingly slow” recovery, it’s an “important one that deserves our attention.”

He detailed options designed to prevent foreclosures, ease refinancing of mortgages and get renters into lender-owned properties.

Even so, “because the outlook for unemployment is unacceptably high relative to our dual mandate and the outlook for inflation is moderate, I believe it is also appropriate to continue to evaluate whether we could provide additional accommodation in a manner that produces more benefits than costs, regardless of whether action in housing is undertaken or not,” Dudley said to a New Jersey Bankers Association economic forum in Iselin.

Rosengren, speaking in Hartford to the Connecticut Business & Industry Association and MetroHartford Alliance, said buying more MBS “would in my view help provide a more rapid recovery in housing, by reducing the costs of refinancing or purchasing new homes.”

More Effective

“Of course, these Fed actions would be even more effective if accompanied by fiscal policies designed to speed the recovery in housing,” said Rosengren, 54, who has previously supported additional action by the FOMC.

Duke, 59, said in Richmond that “forceful and effective housing policies have the potential to significantly influence the speed and strength of our economic recovery.”

Evidence including advertising and employer surveys “suggests that the job market is not poised for marked improvement,” Duke said. “While the trend in unemployment will be gradually lower, the path to get there might be choppy.” She didn’t voice support for additional monetary easing while reiterating the FOMC statement that policy makers “are prepared to employ our tools as appropriate to foster economic recovery in a context of price stability.”

‘Stubbornly High’

Fed Governor Sarah Bloom Raskin, the only official not to discuss housing in a speech yesterday, said the central bank is taking the right steps to lower borrowing costs and address “stubbornly high” unemployment.

“Although the pace of employment growth has picked up in recent months and the unemployment rate has fallen some, the labor market remains quite weak,” she said to bankers in Baltimore.

Raskin has a speech scheduled for tomorrow on the topic of mortgage servicing and foreclosure challenges, according to the Fed.

Home construction is running at about one-fourth of its peak last decade, and the number of mortgages becoming delinquent “remains very elevated” and rose in the third quarter, Dudley said. He cited data from the Mortgage Bankers Association of America showing that there were about 1.5 million first lien mortgages 90 or more days past due. Another 2 million were in “some stage of foreclosure,” Dudley said.

“There’s no question housing continues to be a very, very weak part of the economy,” said James Hamilton, an economics professor at the University of California, San Diego, and former Fed research adviser and visiting scholar. “The Fed is raising the possibility for Congress to consider legislation outside what monetary policy can do.”

Treasuries Decline as Reports Showing U.S. Economic Strength Damp Demand

2012-01-07T23:02:00.005+08:00

Treasuries fell (USGG10YR) in the first week of the year as reports showed gains in U.S. factory output and jobs, trimming the haven appeal of government securities even as rising yields on Italian and Spanish debt indicated concern Europe’s debt crisis may widen.

U.S. debt yields pared a weekly gain yesterday after Federal Reserve Bank of New York President William Dudley said more monetary accommodation to bolster the economy is appropriate, even after employers added 200,000 positions during December. A report on Jan. 12 is forecast to show retail sales rose and the U.S. will auction $66 billion in three, 10- and 30- year debt next week.

“The U.S. economy continues to show good signs,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “It will be important to see if yields stay around here, if that will entice people to take down that supply.”

The benchmark 10-year note yield (USGG10YR) rose eight basis points, or 0.08 percentage point for the week, to 1.96 percent in New York, according to Bloomberg Bond Trader prices. The 2 percent note due in November 2021 dropped 23/32, or $7.19 per $1,000 face amount, to 100 3/8. The yield dropped four basis points yesterday.

The 30-year yield added 12 basis points to 3.02 percent.

Debt Returns

U.S. government securities handed investors a 0.5 percent loss this month as of Jan. 5, after returning 9.8 percent last year, Bank of America Merrill Lynch data show.

Yields on 10-year debt traded in a 36-basis-point range since November, with a high of 2.16 percent and a low of 1.8 percent. The yield range was 210 basis points for all of 2011.

Hedge-fund managers and other large speculators reversed to a net-long position in 10-year note futures in the week ending Jan. 3, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 6,236 contracts on the Chicago Board of Trade. The previous week, traders were net-short 2,981 contracts.

The U.S. 10-year yield will increase to 2.66 percent by the end of 2012, according to the average forecast in a Bloomberg News survey of banks and securities companies, with the most recent projections given the heaviest weightings.

European Developments

U.S. yields ticked up even as the euro fell to a 15-month low against the dollar and Italy’s 10-year bond yields climbed above the 7 percent level that preceded bailouts for Greece, Ireland and Portugal from the European Union and the International Monetary Fund.

Spain’s 10-year yields posted their biggest weekly increase in almost 17 years, climbing by 62 basis points this week.

“The euro broke down to new lows, but there wasn’t any of that fear resonating throughout the market,” said Rogan of Guggenheim Partners. “Europe was at least somewhat quiet.”

Yields curbed weekly losses yesterday as Dudley called on the U.S. government to try new programs to revive the housing market while saying the central bank may still consider ways to cut interest rates.

“Implementing such policies would improve the economic outlook and make monetary accommodation more effective,” Dudley said in a speech to bankers in Iselin, New Jersey. At the same time, it’s “appropriate” for the Fed to consider steps to ease monetary policy, he said. The Federal Open Market Committee meets Jan. 24-25.

FOMC Preview

“Maybe Dudley’s comments are an early glimpse of what’s coming at the FOMC meeting,” said George Goncalves, head of interest-rate strategy at Nomura Holdings Inc., one of 21 primary dealers that trade Treasuries with the Fed. “The doves will try to dominate. They can try to talk the markets into believing they will be on hold for longer.”

Minutes released Jan. 3 of the Federal Reserve’s Dec. 13 policy meeting said policy makers for the first time will make public their own forecasts for the federal funds rate beginning at the Jan. 24-25 meeting. Fed officials will show investors their forecast for the benchmark interest rate in the fourth quarter of 2012 and the next few calendar years, the minutes said.

The central bank purchased $4.93 billion in Treasuries due in 2018 and 2019 this week and sold $8.7 billion of securities maturing in 2013. It also sold $1.35 billion of Treasury Inflation Protected Securities.

It will buy about $45 billion of Treasuries in January and sell about $44 billion as part of the program, known by traders as Operation Twist after a similar effort in the 1960s.

Jobs Update

A report yesterday showed gains in jobs last month after an increase of 100,000 positions the previous month, the Labor Department said in Washington. The median forecast of 81 economists in a Bloomberg News survey was for an increase of 155,000 jobs. The jobless rate fell to almost a three-year low 8.5 percent.

A report Jan. 3 showed manufacturing in the U.S. expanded in December at the fastest pace in six months. The Institute for Supply Management’s factory index climbed to 53.9 last month from 52.7 in November, the Tempe, Arizona-based group’s data showed. Fifty is the dividing line between growth and contraction, and economists surveyed by Bloomberg News forecast the gauge would rise to 53.5.

A report Jan. 12 is forecast to show retail sales rose by 0.3 percent, compared with 0.2 percent the previous month, according to the median forecast of 56 economists in a Bloomberg News survey.

The Treasury will sell $32 billion in three- year notes, $21 billion in 10-year securities and $13 billion in 30-year bonds in three consecutive days starting Jan. 10.

“It will be absorbed really well,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “There are tensions all over the globe right now. Everybody is still in a wait-and-see mode.”

Hildebrand Backed by Swiss President Widmer-Schlumpf to Stay SNB President

2012-01-07T23:02:00.002+08:00

Swiss central bank Chairman Philipp Hildebrand should stay in office as he hasn’t done anything illegal and helped stabilize the Swiss economy, President Eveline Widmer-Schlumpf said.

“There’s absolutely no reason for us not to trust Hildebrand,” Widmer-Schlumpf told the SF state broadcaster when asked whether Hildebrand should resign. The government took notice of two reports saying the chairman didn’t act against the law or any central bank regulations, Widmer-Schlumpf added.

Hildebrand said Jan. 5 he acted appropriately in his role after reports about improper currency trades in his family led to calls for his resignation. He expressed regret that he didn’t curb his wife’s currency trading.

Hildebrand played an important role in stabilizing the financial situation of Switzerland, Widmer-Schlumpf told SF yesterday. He “contributed to the relatively good situation which we have now in Switzerland despite the strong franc,” she said.

The Wall Street Journal yesterday reported that the right- wing Swiss People’s Party is isolated in its calls for Hildebrand to resign. Other parties, including the Social Democrats and the Green Liberal Party, have pledged to support him, the newspaper said on its website, citing lawmakers.

IEA ‘Prepared’ to React to Any Oil Supply Disruption, No Steps Planned Now

2012-01-07T23:01:00.011+08:00

The International Energy Agency, the adviser to U.S., Germany and Japan, isn’t planning an immediate release of emergency oil stockpiles (DOESCRUD) in response to the tension in the Middle East.

“We remain prepared to respond to any significant oil supply disruption, but as no specific supply disruption is under way, we are not actively considering any action at the present time,” the Paris-based adviser said on its website today.

Crude oil gained over the last three weeks, partly on concern that Iran may close the Strait of Hormuz at the mouth of the Persian Gulf. The waterway carries about 17 million barrels of oil a day, according to the U.S. Energy Department. That’s about 19 percent of global consumption.

The IEA’s last emergency release of government and industry stockpiles was in June, when about 60 million barrels of crude and oil products were made available in response to the slump in supply from Libya (OPCRLIBY). It also made supplies available during the 1991 Persian Gulf War and when Hurricane Katrina damaged oil rigs and refineries in the Gulf of Mexico in 2005.

The IEA prepared a plan this week to release as much as 14 million barrels a day if Iran were to close the Strait of Hormuz, Reuters reported yesterday. The IEA estimated its members could make about that volume of crude available to markets in a report dated Feb. 25 posted on its website.

Inventories of crude and refined products in industrialized nations fell below their five-year average for a fourth month in October, the IEA said last month. Stockpiles declined by 36.3 million barrels to 2.63 billion, according to a Dec. 13 report.

Crude oil for February delivery closed at $101.56 a barrel on the New York Mercantile Exchange yesterday, marking an advance of 2.8 percent this week and 8.6 percent since Dec. 16.

The IEA is an energy policy adviser to 28 industrialized nations.

Fed Nears Adoption of an Inflation Target as Bernanke Pushes Transparency

2012-01-07T23:01:00.008+08:00

Federal Reserve officials are nearing agreement on adopting an inflation goal as Chairman Ben S. Bernanke extends his push for improving transparency and communications with the public.

“We are very close to having inflation targeting in the U.S.,” James Bullard, president of the Federal Reserve Bank of St. Louis, said in a radio interview yesterday on Bloomberg Surveillance hosted by Tom Keene and Ken Prewitt. “We are getting closer to being able to make a committee-wide statement about these longer-term policy goal issues.”

An explicit numeric inflation objective would mark another step in Bernanke’s unprecedented campaign to open the Fed’s policy process to public view to boost accountability and effectiveness. The Fed chairman has also introduced regular press conferences and will publish the central bank’s own forecasts for the benchmark lending rate this month. At the same time, Bernanke is following a road already taken by central banks from Sweden to New Zealand.

“We’re in a situation where everyone is starting to appreciate the benefits of having the Fed be able to provide clear signals,” said Mark Gertler, a New York University economist and research co-author with Bernanke.

Deciding on the rate of inflation the Fed should shoot for is within reach, said Columbia University economist Frederic Mishkin, who helped shape the Fed’s approach to the question as a governor from 2006 to 2008.

More difficult will be agreeing on how to define full employment, which is also part of the Fed’s marching orders from Congress.

‘Sorted Out’

The inflation goal “has been sorted out” by the policy- setting Federal Open Market Committee, said Mishkin, who co- authored a 1999 book with Bernanke on inflation targeting. “The big problem is how you talk about the second part of the dual mandate. There are different views.”

Proponents of adopting an inflation target, such as Federal Reserve Bank of Philadelphia President Charles Plosser, point out that monetary policy directly influences prices. On the other hand, the rate of maximum employment the economy can sustain before wages and prices rise is dependent on other variables, such as the infusion of technology into the economy, which boosts productivity.

Mishkin said economists could argue that estimates for full employment today might range from a jobless rate of 4.5 percent to 7 percent. The unemployment rate unexpectedly fell to 8.5 percent in December, the lowest since February 2009, from 8.7 percent the month before, Labor Department figures showed today.

‘Unacceptably High’

William C. Dudley, president of the Federal Reserve Bank of New York, said in a speech today that the outlook for unemployment “is unacceptably high relative to our dual mandate and the outlook for inflation is moderate.”

As a result, he said, it’s “appropriate to continue to evaluate whether we could provide additional accommodation in a manner that produces more benefits than costs.”

The 58-year-old Bernanke was a leading advocate of inflation targeting as a Princeton University professor when he co-authored the book “Inflation Targeting: Lessons from the International Experience” with Mishkin, Bank of England Monetary Policy Committee member Adam Posen and economist Thomas Laubach. At his nomination hearing in November, 2005, he said a numeric inflation goal would be a step “toward greater transparency.”

Yellen Panel

A subcommittee created by Bernanke and headed by Fed Board Vice Chairman Janet Yellen has been looking at ways to improve Fed communications. Its working tool to broker consensus on the dual objective of stable prices and maximum employment is a statement of the committee’s “longer-run goals and policy strategy.”

The statement “would name a target but it would also reiterate things we have said over the years about how keeping inflation low and stable contributes to great economic performance over all,” Bullard said in yesterday’s interview.

Inflation will most likely be expressed in terms of changes to the personal consumption expenditures price index, Bullard said. The index rose 2.5 percent for the 12 months ending November. That’s above the Fed’s longer-run forecast which centers around 1.7 percent to 2 percent.

The presentation may even soften the notion of a target and simply describe a specific level of inflation that would help the Fed achieve its mandate of full employment over time, according to a person familiar with the discussions.

Tactical Tool

Gertler said a numeric inflation target would serve as both a tactical and transparency tool for the committee. Policy makers should communicate under what inflation conditions they’d start to withdraw their record stimulus, he said. The Fed has kept its key interest rate near zero since December 2008, and last month repeated a pledge to keep it there until at least mid-2013.

“One thing that’s probably worth clarifying is whether the Fed treats the target symmetrically, whether they view 2.5 percent inflation as worse than 1.5 percent inflation,” Gertler said. “As inflation gets to 2 percent, is the Fed going to aggressively tighten? As long as output is low, will they let it creep up?”

Policy makers’ speeches and statements haven’t made that clear, Gertler said. Fed Bank of Chicago President Charles Evans has advocated a promise to keep interest rates low until either unemployment falls below 7 percent or the medium-term inflation outlook rises above 3 percent. Plosser has pushed for an inflation objective of 2 percent.

Getting Consensus

“The chairman would like to get consensus on this one,” Mishkin said. “It is not easy to get everyone on board.”

FOMC participants “commented” on the draft statement in December, according to minutes of the meeting published this week. Bernanke “encouraged” the communications subcommittee to make refinements and present it to the FOMC again at the Jan. 24-25 meeting.

“Everybody on the committee is in favor of enhanced clarity, and exactly how you do it is the debate,” Gertler said. “They’re slowly making progress.”

IMF to Make ‘Substantial’ Cut in Global Economic Forecast, Blanchard Says

2012-01-07T23:01:00.005+08:00

The International Monetary Fund will make a “fairly substantial” cut to its forecast for global economic growth this year, Olivier Blanchard, the IMF’s chief economist, said today.

“I can’t give you a number,” Blanchard said in an interview on Bloomberg Television from a conference in Chicago. “It’s going to be substantial.”

In September, the Washington-based fund lowered its forecast for global growth to 4 percent in 2012 and warned of “severe” repercussions if Europe failed to contain its sovereign debt crisis.

Overall world growth will probably be “not very far” from 3 percent to 4 percent, he said, adding Europe is “very close to zero at this point” while the U.S. is in better shape than many other nations.

A government report today in Washington showed the unemployment rate in the U.S. declined in December to 8.5 percent, the lowest in almost three years.

Blanchard’s comments about revisions to the global outlook are stronger than those made today by his chief, IMF Managing Director Christine Lagarde, on a visit to Pretoria, South Africa.

The fund will publish revised forecasts on Jan. 24 or Jan. 25 that are “consistent with reality,” Lagarde told reporters. “We should all be prepared for a 2012 that will not be a walk in the park.”

Hungary’s Orban Embraces Central Bank Chief to Save IMF Deal

2012-01-07T23:01:00.002+08:00

Hungary’s Premier Viktor Orban retreated in his confrontation with central bank chief Andras Simor as he seeks to revive talks for an international bailout after a market rout this week. The currency and bonds gained even as the country received its third downgrade to junk.

“The president can count on the government’s support, including our backing for him personally,” Orban told reporters after meeting Simor today in Budapest. The government wants an IMF agreement “as soon as possible” and will do “everything” to support the central bank to stabilize the economy, he said.

The International Monetary Fund and the European Union broke off talks last month on Hungary’s bid for a bailout after Orban refused to withdraw a new central bank regulation the institutions said may undermine monetary-policy independence and Simor’s authority. The forint fell to a record against the euro yesterday as investors speculated an IMF accord may be delayed.

“It’s clear Orban is retreating, the question is whether it’s enough,” Peter Duronelly, who helps oversee $1.5 billion mostly in Hungarian government bonds as chief investment officer at Budapest Fund Management, said by phone today. “If EU leaders expect a total capitulation from Orban, then an agreement won’t be so simple or fast.”

The forint strengthened 0.9 percent against the euro to trade at 316.13 at 5:07 p.m. in Budapest from as low as 324.24 yesterday before Hungary’s chief negotiator, Tamas Fellegi, pledged to compromise with the IMF and the EU on a bailout.

Bonds Gain

The yield on the benchmark 10-year government bond declined to 10.1 percent from 10.4 percent yesterday. The yield rose to as high as 11.34 percent yesterday, according to generic prices compiled by Bloomberg.

The cost of insuring Hungarian bonds using credit-default swaps fell to 698 basis points today from 735 points, according to data provider CMA, which is owned by CME Group Inc. (CME) and compiles prices quoted by dealers. The benchmark BUX stock index dropped 0.7 percent to close at 16,107.72.

Hungary lost the investment grade on its foreign-currency debt at Fitch Ratings today, the third such downgrade in six weeks. The assessment was cut one step to BB+ from BBB-, the company said in a statement. It assigned a negative outlook.

Standard & Poor’s followed Moody’s Investors Service on Dec. 21 in cutting Hungary’s debt to junk, 15 years after the former communist country was awarded an investment-grade rating.

‘Unorthodox’ Policies

“The downgrade of Hungary’s ratings reflects further deterioration in the country’s fiscal and external financing environment and growth outlook, caused in part by further unorthodox economic policies which are undermining investor confidence and complicating the agreement of a new” agreement with the IMF and the EU, Matteo Napolitano, a director in Fitch’s sovereign group, said in a statement.

Talks for Hungary’s second bailout in four years broke down following the central bank law that takes away Simor’s right to name deputies, expands the rate-setting Monetary Council and adds a new vice president. A separate law makes it possible to demote the central bank president if the institution is combined with the financial regulator.

Government’s Plea

The central bank law, which came into effect on Jan. 1, is “fully compatible” with EU rules, Economy Minister Gyorgy Matolcsy said in a letter sent to European Central Bank President Mario Draghi yesterday. The Cabinet will continue to respect the Magyar Nemzeti Bank’s independence, Matolcsy wrote.

Orban shunned the IMF since taking office in 2010 to prevent interference in what he called his “unorthodox” measures. The steps included the effective nationalization of $13 billion of private pension-fund assets and extraordinary industry taxes to tame the budget deficit and forcing lenders to swallow exchange-rate losses on foreign-currency mortgages. The EU has criticized all those policies.

Orban’s government has also reduced the power of independent institutions and asserted its influence since winning elections, bucking objections from the EU, the IMF, the U.S. and the United Nations.

Ruling-party lawmakers ousted the chief justice of the Supreme Court, narrowed the jurisdiction of the Constitutional Court, wrote a new constitution, replaced an independent Fiscal Council with one dominated by the premier’s allies, created a media regulator led by ruling-party appointees and chose a party member to lead the State Audit Office.

‘Strong Policy Framework’

“What’s important to monitor is what conditions international organizations will impose and what the government’s reaction will be,” Levente Papa, a Budapest-based strategist at OTP Bank Nyrt., Hungary’s largest lender, said in an e-mail.

Hungary needs a “strong policy framework” and a “sound mix with strong ownership from authorities” for an international loan, Figyelo reported, citing an IMF staff report from an Article IV consultation and a post-program monitoring discussion dated Jan. 4.

“Such external support, which has been requested by the authorities, will only be available and effective to the degree it is based on a strong policy framework and a sound policy mix with strong ownership,” Figyelo said, citing the report.

The report’s recommendations include strengthening central bank independence, fiscal policy oversight, changing the tax regime, cutting extraordinary industry taxes and reorganizing public transport companies, Figyelo said. The report will form the basis of the IMF board’s discussion on Hungary on Jan. 18, according to the news magazine. The document has been sent to the Hungarian government, which may add to it.

‘Quick’ Agreement

“We have no comment on these reports or on leaked documents,” Iryna Ivaschenko, the IMF’s representative in Budapest, said in an e-mail today.

The Cabinet is ready to start negotiations on a standby loan agreement with the IMF and the European Union and wants an accord “quickly,” Fellegi, Hungary’s chief negotiator, told reporters in Budapest yesterday. The government seeks a precautionary loan to tap only if market conditions require it.

It’s in Hungary’s interest to obtain an IMF loan “as soon as possible,” Orban said after meeting Simor today. Hungary sees a “good chance” for swift talks with the IMF, Orban said.

Stability Sought

The government will consult with the central bank on a daily basis and will work together to ensure economic stability, Orban said today. The central bank, in a statement, said it will use “available tools” to ensure economic stability.

“The government seemingly now realizes that an IMF deal would bring benefits in terms of cheaper borrowing and financing costs,” Tim Ash, a London-based economist at Royal Bank of Scotland Group Plc, said in an e-mail today before Orban’s briefing. “It is still weighing this up against the likely political costs, and hence is trying still to ensure that it can sell cutting the deal with the Fund as a victory.”

While the start of talks with the IMF may bolster the forint, the move may “well be misplaced and reversed once the government’s foot dragging then restarts,” Peter Attard Montalto, a London-based economist at Nomura International Plc., said in a report yesterday.

‘First Base’

“We are still on first base,” Montalto said. “Investors are still underestimating the time it will take and the distance Orban will have to move on the policy front.”

After a stint as premier in 1998-2002, Orban rode a wave of discontent against the previous Socialist governments that implemented austerity measures starting in 2006 and needed a bailout in 2008.

The previous Socialist administration of Prime Minister Ferenc Gyurcsany angered Hungarians when it admitted to lying about the state of the economy to win the 2006 election, sparking demonstrations that included clashes between protesters and police in the country’s worst street violence in 50 years.

Orban swept to power in 2010, grabbing a two-thirds majority in parliament that allows him to unilaterally change the constitution. He pledged to end austerity, a promise he broke. He has been forced to raise some taxes, including the value-added tax, delay a personal flat tax plan, cut social spending and eliminate early retirement.

Nobel Winner Diamond Says Washington Must Fix Jobs Before Budget Deficit

2012-01-07T23:00:00.012+08:00

Nobel Prize-winning economist Peter Diamond said U.S. policy makers should focus on fighting long- term unemployment because workers who lose skills present a bigger challenge than the country’s budget deficit.

“We have an unemployment crisis and a debt problem, and Washington is behaving as if we have a debt crisis and an unemployment problem,” Diamond, a professor at the Massachusetts Institute of Technology since 1966, said during an interview today on Bloomberg Television.

Young people who are unemployed for long periods are forfeiting income not only today but “for years to come” because they are losing workplace experience, Diamond said. The government should take advantage of low borrowing costs to finance infrastructure projects and research and development that help put the unemployed to work, he said.

U.S. employers added more workers to payrolls than forecast in December and the jobless rate declined to an almost three- year low, a Labor Department report showed today. The 200,000 increase, which beat forecasts, followed a revised 100,000 gain in November that was smaller than first estimated, Labor Department figures showed. The jobless rate unexpectedly fell to 8.5 percent, while hours worked and earnings climbed.

Even so, the unemployment rate during the past three years has marked the worst stretch of joblessness since 1939 to 1941.

Best Option

Government spending is the best option for spurring employment and economic growth, Diamond said. The benchmark 10- year Treasury note yield has traded near 2 percent since September.

“Fiscal is the only big gun around,” he said. While there isn’t a risk of inflation, “fiscal tools right now are much powerful than the monetary tools.”

Diamond spoke from Chicago, where the annual meeting of the American Economic Association was taking place. He shared the 2010 Nobel Prize in Economic Sciences with Dale Mortensen and Christopher Pissarides for research into the difficulties of matching supply and demand, particularly in the labor market.

Consumer Finance Watchdog Spurred by Obama Targets Mortgages, Payday Loan

2012-01-07T23:00:00.009+08:00

Richard Cordray’s appointment as director of the U.S. Consumer Financial Protection Bureau moves the new agency nearer to fulfilling its intended role as a one- stop shop for borrower safeguards.

Unlike the historically patchwork oversight of consumer finance, the bureau centralizes the federal government’s authority and in some cases extends it. Consumers may benefit from its reach whenever they take out a payday loan, negotiate a mortgage rate, borrow money for school or pay a credit card fee. For those who think they’ve been wronged, there will be a complaint system to help them fight back.

Cordray, 52, who was seated by President Barack Obama on Jan. 4 over Republican objections, takes over a bureau created under the Dodd-Frank Act in response to complaints that existing regulators didn’t do enough to protect consumers before the 2008 credit crisis. The rules overhaul shifted consumer protection from regulators responsible for banks’ financial stability, removing a potential source of conflict.

“Consumers deserve to have someone who will stand on their side, who will protect them against fraud, and who will ensure they are treated fairly in the financial marketplace,” Cordray said yesterday in a Washington speech. “The new consumer bureau was created to make sure these things are achieved for all Americans.”

Obama lauded the agency today as the way “to make sure the rules of the road are enforced” on behalf of consumers. “You’ve finally got a great director who was tailor-made to lead this agency in Richard Cordray,” Obama said during a visit with bureau staff in Washington.

Elizabeth Warren

Elizabeth Warren, the Harvard Law School professor credited by Obama with conceiving the bureau, viewed it as a “cop on the beat” to protect Americans against unscrupulous lenders by -- among other things -- eliminating jargon-filled loan documents in favor of plain-English paperwork.

“It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house,” Warren wrote in the journal Democracy in 2007. “But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street -- and the mortgage won’t even carry a disclosure of that fact to the homeowner.”

The consumer bureau was envisioned as a bulwark against the kind of credit bubble that inflated from 1999 to 2007, when household debt tripled to more than $12 trillion, according to the agency.

Foreclosures

Warren said effective federal consumer protection might have kept banks from improperly foreclosing on homes after the collapse of the U.S. mortgage market. The 14 largest mortgage servicers entered a consent decree with the Office of the Comptroller of the Currency that cost JPMorgan Chase & Co. (JPM) $1.1 billion. Consumer protection rules might also have prevented the rise of so-called liar loans, mortgages that were given to borrowers without documented evidence of ability to repay, advocates for the bureau said.

The bureau’s creators also foresaw an agency that would replace inconsistent state regulation with more stringent federal rules on short-term, small-dollar lenders including payday firms, whose annual interest rates can top 400 percent.

Disclosure Form

The agency, which Warren shaped while serving as an Obama adviser, was churning out drafts of a model mortgage disclosure form as part of an initiative dubbed “Know Before You Owe” even before it officially began work on July 21. These forms are intended to help consumers understand the costs of a mortgage and shop around for the best deal.

Similar initiatives have been announced for credit cards and student loans, the other two leading types of consumer credit in the U.S.

The bureau’s direct supervision of mortgage servicers, payday lenders and private student-loan companies will give consumers a watchdog to protect their interests in dealings with nonbank firms “that often compete with banks but have largely escaped meaningful federal oversight,” Cordray said yesterday in a speech at the Brookings Institution in Washington.

“This is an important step forward for protecting consumers,” Cordray said in a statement on the bureau’s website. “Holding both banks and nonbanks accountable to consumer financial laws will help create a fairer, more transparent market.” The speech was Cordray’s first since Obama used a recess appointment to give him the top job.

Legality Questioned

Republican lawmakers are questioning the legality of the move. Senator Charles Grassley of Iowa, the top Republican on the Judiciary Committee, asked the Department of Justice for information on the appointment in a letter signed by seven other Senate members.

Representative Spencer Bachus of Alabama, the chairman of the House Financial Services Committee, has begun an inquiry into the appointment. He has requested from Attorney General Eric Holder any information on the Justice Department’s role, as well as its opinion on the legal basis for the decision.

“The rule of law and Congress’ constitutionally grounded authority to conduct oversight of the executive branch requires that the administration explain the basis for its actions,” Bachus wrote to Holder in a letter dated today.

‘Jeopardy’

Cordray, a Democrat who served as Ohio’s attorney general, was tapped by Warren to run the bureau’s enforcement arm a month after he lost a re-election bid in November 2010. Cordray had previously served as Ohio’s treasurer, a state representative and as a law clerk to the U.S. Supreme Court (1000L), and has personally argued seven cases before the high court, according to his official biography. He was also a five-time winner on the television quiz show “Jeopardy.”

Congressional Republicans opposed the creation of the consumer bureau during negotiations that led to enactment of Dodd-Frank in 2010. Senate Republicans last year vowed to block confirmation of any director nominee while seeking changes including replacing the top job with a five-member commission and subjecting the bureau’s budget to the congressional appropriations process.

Senator Richard Shelby of Alabama led a group of 45 Republicans who vowed to deny Obama the 60 votes needed to ensure confirmation by the 100-member Senate. He released a statement Jan. 4 faulting Obama for bypassing lawmakers with an “end run” to seat “an unaccountable bureaucrat who will have immense power over the economy.”

Needless Bureaucracy

Lobby groups representing financial firms including JPMorgan and Bank of America Corp. (BAC) fought against the creation of an independent consumer bureau, saying it would create needless bureaucracy. Payday lenders like Advance America Cash Advance Centers Inc. (AEA) won a rule preventing the agency from limiting interest rates, but couldn’t avoid being covered by its rules.

“It has been widely reported that we were against the creation of a Consumer Financial Protection Bureau (C (C).F.P.B.),” JPMorgan Chairman and Chief Executive Officer Jamie Dimon wrote in an April 4 letter to shareholders. “We were not -- we were against the creation of a standalone C.F.P.B., operating separately and apart from whatever regulatory agency already had oversight authority over banks.”

Complaint System

Consumers may benefit from the bureau’s complaint system, its coming regulations and the corps of examiners it is building to examine the books and practices of financial firms.

The bureau, which began taking complaints about credit cards on July 21, said it had fielded 5,074 inquiries as of Oct. 21. The bureau said it would make complaint information available -- without personal information -- to the public, bucking objections from credit card issuers.

“The complaint system has identified recurring scams and helped to obtain redress for defrauded consumers,” the bureau said in a Nov. 30 report.

Supervision of financial services firms could turn out to be a tactic for reducing the fees that consumers pay for overdrawing their checking account. A study by the Federal Deposit Insurance Corp. published in 2008 concluded that 9 percent of customers paid 84 percent of all overdraft fees.

Felt, Not Seen

Jo Ann Barefoot, a consultant with Treliant Risk Advisors in Washington, said the key tactic in reducing overdraft fees could be supervision, work that would be felt, but not seen, by consumers.

Traditionally, banking supervisors visit firms and examine their records, and prompt changes “every day of the week,” Barefoot said.

“Now for the first time, an agency is conducting examinations with a focus on harm to the consumer,” Barefoot said in an interview.

The existence of a new consumer bureau doesn’t mean that every mortgage will be refinanced, or every bad debt forgiven, Travis Plunkett, director of legislative affairs for the Consumer Federation of America, said in an interview.

“Americans have a right to expect that this new agency will start to address some of the financial problems that are affecting them,” Plunkett said. “That does not mean a startup agency can work miracles.”

The agency begins its work in earnest with a structure that will be largely invisible to the consumer.

Behind its website, consumerfinance.gov, lies the complaint system -- which can also be accessed by mail or telephone. Apart from the team that tends to that system, examiners will handle the day-to-day scrutiny of banks and other consumer finance companies.

Alleged lawbreakers will face its enforcement team, which Cordray set up over the past year. And a research and regulations team will both track industry developments, and write and revise the rules of the road for consumer finance.

Belgium Freezes $1.7 Billion of Spending After EU Warns of Deficit Overrun

2012-01-07T23:00:00.006+08:00

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Belgium froze 1.3 billion euros ($1.7 billion) in spending after the European Union warned that a weaker-than-projected economy would push the deficit above the new government’s targets.

“It’s a purely administrative suspension to give us time to conduct the budget review,” Budget Minister Olivier Chastel told L’Echo newspaper. He defended the government’s budget math, saying it will squeeze the deficit down to 2.8 percent of gross domestic product in 2012 as planned.

The EU’s prediction of a higher deficit weighed on Belgian bonds (GDBR10) yesterday, pushing the extra yield over German debt up by 6 basis points to 278 basis points, the most since a six-party government took office on Dec. 6 with a pledge to cut the budget.

Belgium, saddled with Europe’s fifth-highest debt, is battling to prevent a surge in borrowing costs amid domestic economic hardships and investors’ broader skepticism about the euro area’s response to the two-year-old debt crisis.

Belgium’s first-half economic prospects range from “very anemic growth” at best to a contraction of 0.5 percent at worst, said Luc Coene, head of the Belgian central bank. He called for budget cuts and steps to boost the nation’s “meager” employment level.

“It is very important to make this commitment to reassure the markets and reduce our interest burden,” Coene said in a joint interview with La Libre Belgique newspaper and RTBF radio.

Economic Management

Formed after 18 months of wrangling that led to speculation that Belgium might break apart, Prime Minister Elio Di Rupo’s government now faces an earlier-than-foreseen test of its economic management and fidelity to the EU.

EU Economic and Monetary Commissioner Olli Rehn said on Jan. 5 that, while immediate cuts of as much as 2 billion euros would be a “first-best solution,” he would let Belgium buy time with a spending freeze until a scheduled budget review in February.

Rehn’s letter, published by De Tijd newspaper on its website, set up Belgium as a test case of new rules that allow the EU to intervene in national taxing and spending. It estimated Belgium’s 2012 deficit at 3.25 percent of GDP, above the euro area’s 3 percent limit.

The EU gave Belgium until Jan. 9 (BEGDPQS) to respond and will issue its opinion on Jan. 11.

Di Rupo’s team responded quickly to previous international pressure. It took the six parties negotiating the new government less than 24 hours to reach a budget deal after Standard & Poor’s Ratings Services on Nov. 25 lowered Belgium’s credit rating one step to AA with a negative outlook.

Canada Jobless Rate Rose for Third Month in December to 7.5%

2012-01-07T23:00:00.003+08:00

Canada’s unemployment rate (CANLXEMR) rose for a third month in December, the longest advance in two years, as a gain in jobs trailed growth of the labor force.

The jobless rate increased to 7.5 percent from November’s 7.4 percent and the recent low of 7.1 percent in September, Statistics Canada said today in Ottawa. Employment (CANLNETJ) rose by 17,500, the first gain in three months. Over the past six months, the number of jobs has grown by 7,400, compared with a gain of 191,800 in the first half of 2011.

The labor market may stay stalled in 2012 with unemployment averaging 7.4 percent, according to a Bloomberg News survey of economists taken last month. Prime Minister Stephen Harper said “the news isn’t all good” in today’s report, speaking to reporters in Edmonton, Alberta.

“Job growth has cooled,” said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto, by telephone. “I wouldn’t at all be surprised if we are averaging 10,000 jobs a month, which won’t cut into the unemployment rate at all” over the next six months, he said.

The U.S. reported a 200,000 increase in payrolls for December, higher than the median economist forecast of 155,000, and the unemployment rate unexpectedly fell to 8.5 percent from 8.6 percent. Canada’s jobless rate has been below that of the U.S. since October 2008.

Bond Yields

Bond yields fell after the Canadian report. The yield on the two-year benchmark Canadian government bond declined 2 basis points to 0.94 percent at 2:47 p.m. Toronto time. The three- month overnight index swap rate, which measures what investors expect the central bank’s key policy rate will average over that period, was unchanged at 0.98 percent.

The Canadian dollar depreciated 0.7 percent to C$1.0267 per U.S. dollar. One Canadian dollar buys 97.40 U.S. cents.

Full-time jobs fell by 25,500 in December while part-time employment rose by 43,100, Statistics Canada said today. Self- employed workers increased by 31,100, while workers classified as employees fell by 13,600.

Private-sector employment increased by 3,800 and public- sector jobs fell by 17,300.

Employment in the federal government may be curbed by Finance Minister Jim Flaherty’s pledge to eliminate a budget deficit by the fiscal year starting April 2015, in part by cutting annual government operating expenses by at least C$4 billion ($3.9 billion).

Trimming Labor Costs

Some companies are also seeking to trim labor costs. Caterpillar Inc., the world’s largest maker of construction equipment, and Rio Tinto Group locked out workers at plants in Canada last weekend after labor talks broke down.

Cangene Corp. said today it’s firing about 120 workers, or 17 percent of its staff, because of reduced demand. The pharmaceutical company is based in Winnipeg, Manitoba.

“The jobless numbers continue to rise and this government is still sitting on its hands,” Claude Patry, a lawmaker with the opposition New Democratic Party, said in a statement.

Manufacturing employment rose by 30,400 in December, followed by a 16,100 gain for professional, scientific and technical service workers, Statistics Canada said.

Employment in finance, insurance real estate and leasing fell by 14,500 and construction jobs decreased by 12,800. In the second half of 2011, finance industry employment fell by 49,300 and construction employment was up by 4,800.

Economists surveyed by Bloomberg News had forecast an overall December job gain of 20,000 and a 7.4 percent jobless rate. The 17,500 gain in employment was smaller than the 23,600 monthly increase in the labor force.

‘Play It Safe’

“Canadian businesses continue to play it safe amid global risks,” said Jimmy Jean, a strategist in the fixed-income group at Desjardins Capital Markets in Montreal in a note to clients. “We expect them to continue doing so for a while.”

Canada added 199,200 jobs last year, following a 2010 advance of 298,100 and a 2009 decline of 198,300. The unemployment rate of 7.5 percent for December compares with 7.6 percent at the end of 2010 and 8.5 percent at the end of 2009.

Average hourly earnings (CAHEPERM) of permanent employees rose 2.4 percent in December from a year earlier. The Bank of Canada says that figure is a key indicator of inflation.

“We are quite exposed” to global weakness, said Mark Chandler, head of fixed income strategy at Royal Bank of Canada’s capital markets unit in Toronto, adding people shouldn’t expect an “extraordinary return in terms of jobs.”