a-record-low

Treasury Two-Year Notes Post Second Weekly Drop as Greece’s Crisis Eases

by on March 13, 2010

By Susanne Walker and Cordell Eddings March 13 (Bloomberg) — Treasury two-year notes dropped for a second consecutive week as European Union officials said they would support Greece after it approved austerity measures. The yield advantage of 30-year bonds over 2-year notes fell from almost a record on reduced demand for the safety of shorter-term government debt. The 2-year note’s yield touched the highest level since January before next week’s Federal Reserve meeting as a report showed U.S. retail sales unexpectedly increased last month. “The crisis in Europe has gone down a bit,” said Ray Remy , head of fixed income in New York at Daiwa Securities Group Inc., one of 18 primary dealers that trade directly with the Fed. “Money is flowing toward more non-Treasury assets.” The yield on the two-year note rose 6 basis points, or 0.06 percentage point, to 0.96 percent this week, according to BGCantor Market Data. The price of the 0.875 percent security due in February 2012 dropped 3/32, or 94 cents per $1,000 face amount, to 99 27/32. The 30-year bond’s yield advantage over the two-year note fell yesterday to 3.66 percentage points, the narrowest level since January. It reached 3.80 percentage points earlier this week and 3.85 percentage points on Feb. 17, the widest since at least 1980, according to data compiled by Bloomberg. The two-year note’s yield reached 0.9961 percent yesterday, the highest level since Jan. 8. The 10-year note’s yield increased 2 basis points this week to 3.70 percent, while the 30-year bond yield dropped 2 basis points to 4.63 percent. Sarkozy on Greece French President Nicolas Sarkozy said on March 7 after a meeting with Greece’s Prime Minister George Papandreou that the euro region is ready to rescue Greece should the government struggle to fund its budget deficit. Germany’s Finance Minister Wolfgang Schaeuble indicated in an interview with the Welt am Sonntag newspaper published that day that his government is already thinking about how another crisis can be avoided, saying the euro region should consider creating an institution similar to the International Monetary Fund. European Central Bank President Jean-Claude Trichet said later this week the bank doesn’t reject the proposal of a fund, though it has not seen any details. Treasury two-year notes fell last week after the Labor Department reported on March 5 that the unemployment rate held at 9.7 percent in February and payrolls dropped less than economists had forecast. Retail sales in the U.S. advanced 0.3 percent last month after a revised 0.1 percent advance in January, the Commerce Department reported yesterday. The median estimate in a Bloomberg survey of analysts was for a decrease of 0.2 percent. Outlook for Rates Two-year note yields will increase to 1.91 percent by year- end, according to a Bloomberg News survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. “There has been somewhat of a leakage to the flight-to- quality trade this week,” said George Goncalves , head of interest-rate strategy in New York at Nomura Holdings Inc., a primary dealer. “Investors are reaching out the curve searching for yield.” Interest-rate futures on the CME Group Inc. exchange show a 49 percent chance U.S. policy makers will raise the target lending rate for overnight loans by at least a quarter- percentage point by September, compared with 43 percent odds a week ago. All of the 87 analysts in a Bloomberg News survey expect the central bank to hold the target lending at a record low range of zero to 0.25 percent on March 16. January Meeting Treasury two-year note yields rose on Jan. 27, when the Fed restated its intention to withdraw extraordinary stimulus measures put in place to lift the economy from recession. Kansas City Fed President Thomas Hoenig dissented from the decision to keep interest rates at a record low for an “extended” period. Traders added to bets that inflation will accelerate as economic growth picks up, the so-called breakeven rate indicates. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer-price gains, widened to 2.30 percentage points yesterday, the highest level since Feb. 19. It was 2.16 percentage points two weeks ago. Thirty-year bonds gained on March 11 as one of the biggest yield premiums over two-year notes bolstered demand at a $13 billion auction of the 2040 securities. Bids outnumbered the amount on offer by 2.89 times, the most since September. President Barack Obama has increased U.S. marketable debt to an unprecedented $7.41 trillion to fund a budget deficit the government predicts will swell to a record $1.6 trillion in the fiscal year ending Sept. 30. A failure by the U.S. to reduce its deficit may undermine investor confidence, New York Fed President William Dudley said in London on March 11. To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net ; Cordell Eddings in New York at ceddings@bloomberg.net

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Treasury Two-Year Notes Post Second Weekly Drop as Greece’s Crisis Eases

European Inflation Slows as Weakening Recovery, Job Cuts Curtail Spending

by on March 2, 2010

By Simone Meier March 2 (Bloomberg) — European inflation slowed in February after rising unemployment and a weakening recovery prompted households to scale back spending. Consumer prices in the 16-nation euro region rose an estimated 0.9 percent from a year earlier after increasing 1 percent in January, the European Union statistics office in Luxembourg said today. Producer prices fell 1 percent in January from a year earlier, the smallest decline in a year, the statistics office said in a separate report. European companies may find it difficult to pass on higher costs after unemployment held at an 11-year high in January and the economic recovery slowed to a near-halt in the fourth quarter. The European Commission said last week that the euro region may fail to gather strength for most of 2010 and the European Central Bank forecasts “subdued” price pressures . “We see very few inflation threats ahead,” said Juergen Michels , chief euro-area economist at Citigroup Inc. in London. “The euro region maintains its bumpy recovery. I don’t expect the ECB to start raising borrowing costs before early 2011.” The euro was little changed against the dollar after the data, trading at $1.3492 at 10:01 a.m. in London, down 0.5 percent on the day. The yield on the German 10-year benchmark bond rose 0.1 basis point to 3.11 percent. Today’s inflation report was in line with economists’ forecast in a Bloomberg News survey. Producer prices rose 0.7 percent from December, when they increased 0.1 percent. Costs of energy in the manufacturing sector fell 1.7 percent in the year. Current Quarter Inflation will probably average 0.8 percent in the current quarter before accelerating to 1.3 percent in the three months through June, the commission forecast on Feb. 25. Gross domestic product may rise just 0.2 percent in both quarters, it said. Europe’s economy may struggle to gain momentum after expanding just 0.1 percent in the fourth quarter as a doubling in oil prices over the past year leaves companies and consumers with less money to spend. Euro-area unemployment remained at 9.9 percent in January, the highest since November 1998. European economic confidence unexpectedly declined in February. Volkswagen AG, Europe’s largest carmaker, said on Feb. 26 that profit dropped 80 percent last year as the global recession eroded deliveries of the Audi luxury brand. Club Mediterranee SA, Europe’s largest resort company, said last month that first- quarter sales declined as travelers cut their holiday budgets. The ECB on March 4 will probably keep its benchmark interest rate at a record low of 1 percent, according to a Bloomberg survey. The Frankfurt-based central bank also will publish updated inflation and growth forecasts. The statistics office will release a breakdown of February inflation on March 16. To contact the reporter on this story: Simone Meier in Dublin at smeier@bloombert.net

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European Inflation Slows as Weakening Recovery, Job Cuts Curtail Spending

U.K. House Prices Decline for First Time in 10 Months, Nationwide Reports

February 26, 2010

By Zijing Wu Feb. 26 (Bloomberg) — U.K. house prices fell in February for the first time in 10 months as winter weather and higher taxes on transactions deterred buyers, Nationwide Building Society said. The average cost of a home dropped 1 percent from the previous month to 161,320 pounds ($246,000), the mortgage lender said in an e-mailed statement today. Prices are now 9.2 percent higher than a year earlier and down 13 percent from the peak in October 2007. Bank of England policy maker Kate Barker said this week the U.K. housing market may face further “adjustments” as banks curb mortgage lending. Property prices rebounded in the past year, supported by a shortage of homes, after losing about a fifth of their value from the peak as the economy emerged from the longest recession on record. “The market may have lost momentum in early 2010 as the stamp-duty holiday ended and house hunters were obstructed by the icy weather,” Martin Gahbauer , chief economist at Nationwide, said in the statement. Even without those factors, “it would have been surprising to see house prices maintain the very strong upward momentum seen for most of 2009.” Consumer confidence still rose for a second month in February as Britons’ expectations for economic growth increased, GfK NOP said in a separate report today. Economists say that the economy probably grew 0.2 percent in the fourth quarter, the median of 27 forecasts in a Bloomberg News survey shows. That would be an upward revision from the previous estimate of 0.1 percent that showed the recession had ended. The data will be released at 9:30 a.m. in London. Winter Damage The Nationwide data add to evidence of damage to the economy from winter weather. Retail sales dropped in January by twice as much as economists forecast as the longest cold snap since 1981 snarled traffic and kept shoppers at home. The government’s partial holiday on stamp duty, a tax on home purchases, expired this year. Chancellor of the Exchequer Alistair Darling suspended the levy on home purchases of less than 175,000 pounds in September 2008. “I was rather surprised by the strength of prices in the housing market through last year,” Barker told lawmakers on Feb. 23. “It’s possible some people were delaying decisions to move or to put houses on the market, and in some sense that can’t continue.” Nationwide said there has been an increasing number of borrowers taking variable-rate mortgages rather than fixed-rate loans since the middle of 2009. This may be because they expect the central bank to keep its benchmark interest rate low for a longer period, Gahbauer said. The bank’s interest rate is currently at a record low of 0.5 percent and its next monetary policy decision will be on March 4. To contact the reporter on this story: Zijing Wu in London at zwu17@bloomberg.net

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U.S. Stocks, Treasuries Gain as Dollar Declines on Bernanke’s Rate Remarks

February 24, 2010

By Michael P. Regan and Nikolaj Gammeltoft Feb. 24 (Bloomberg) — U.S. stocks rallied, halting a global retreat, and Treasuries gained after Federal Reserve Chairman Ben S. Bernanke said the central bank will keep interest rates low to ensure the economic recovery. The Standard & Poor’s 500 Index jumped 0.8 percent to 1,103.32 at 11:51 a.m. in New York. The MSCI World Index of stocks in 23 developed nations reversed a 0.5 percent retreat to gain 0.3 percent. The MSCI Emerging Markets Index fell 0.8 percent as political tension in Turkey and Greece rattled investors. The yield on the two-year Treasury note rose for the first time in four days, gaining 0.04 percentage point to 0.87 percent. The Dollar Index retreated from an eight-month high. Bernanke told Congress that while policy makers will need to tighten monetary policy at some point, the “nascent” economic rebound still requires low interest rates for an extended period. An unexpected drop in new U.S. home sales to a record low underscored the vulnerability of the recovery. Stocks extended gains as the Senate approved a $15 billion plan to give companies tax breaks for hiring the unemployed. “The market has been appeased by Bernanke’s comments, which broke no new ground,” said Michael Strauss , who helps oversee about $25 billion at Commonfund in Wilton, Connecticut. “The Fed is not ready to withdraw the extended-period phrase because they’re still worried about the fragile nature of the recovery.” The U.S. central bank has left the federal funds rate, the target for interest rates on overnight loans between banks, at a record low near zero for more than 14 months to bolster the economy. The Fed is wrestling with unwinding economic stimulus programs without worsening an unemployment rate that the Fed forecasts at 9.5 percent to 9.7 percent in the fourth quarter. Jobs Bill The jobs bill that passed 70-28 today in the Senate now goes to the House where Democratic leaders must decide whether to pass it without changes or to try to merge it with a $150 billion jobs plan the House approved in December. Nine of 10 industry groups in the S&P 500 advanced, led by a 1.5 percent rally in financial firms and a 1.2 percent gain in technology companies. JPMorgan Chase & Co. and Bank of America Corp. advanced more than 1.8 percent. Autodesk Inc., the biggest maker of engineering-design software, rallied 10 percent after results topped analyst estimates. Treasuries gained even as the U.S. is scheduled to sell $42 billion of five-year notes today. The Treasury plans to auction $32 billion of seven-year securities tomorrow, the last of four sales totaling an unprecedented $126 billion for a single week. Dollar Retreats The Dollar Index, which gauges the currency against six major U.S. trading partners, lost 0.3 percent to 80.617 after climbing to the highest level since June yesterday. Europe’s Dow Jones Stoxx 600 Index fluctuated. CSM, the world’s largest supplier of ingredients to bakeries, dropped 6.9 percent in Amsterdam after reporting earnings that missed analysts’ estimates. Bilfinger Berger AG lost 5.9 percent as Equinet AG cut its price forecast for the German construction company. Turkish stocks slumped the most in almost three weeks, with the ISE National 100 Index losing 3.4 percent to extend this week’s retreat to 6.9 percent. Turkey’s army, which has ousted four governments since 1960, called the detention of retired officers over an alleged coup plot a “serious situation” that deepened strains with Prime Minister Recep Tayyip Erdogan . Russia’s Micex Index dropped 1.4 percent, the most since Feb. 12, as trading resumed after a two-day holiday. Greek Bonds Greek bonds slumped, sending the premium investors demand to hold the nation’s 10-year debt instead of German government bonds to the widest level in two weeks. Greek two-year bond yields rose 22 basis points to 5.74 percent and the spread over German two-year debt increased 24 basis points to 476 basis points. The yield spread widened to an 11-year high of 564 basis points on Feb. 8. The 10-year spread climbed to 338 basis points. Greece’s unions are striking for a second day to protest measures designed to cut Europe’s biggest budget deficit. The cost of protecting against default on European government debt rose on concern Greece will have trouble financing its debt after the credit ratings of the nation’s biggest banks were downgraded by Fitch Ratings yesterday because of “weakening asset quality and profitability.” Credit-default swaps on Greece climbed 12 basis points to 382, according to CMA DataVision prices at 3:30 p.m. in London. Contracts on Portugal jumped 9 to 179, Spain increased 5.5 to 133.5 and Italy rose 4 to 130, CMA prices show. The MSCI Asia Pacific Index fell 1.1 percent. Nissan Motor Co., which gets 35 percent of revenue in North America, sank 3.4 percent in Tokyo. Hyundai Motor Co., South Korea’s biggest carmaker, declined 2.6 percent after announcing a recall. To contact the reporters on this story: Michael P. Regan in New York at mregan12@bloomberg.net ; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net .

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Stocks in U.S. Retreat as Commodity Producers Decline; Bank Shares Advance

February 22, 2010

By Nikolaj Gammeltoft Feb. 22 (Bloomberg) — U.S. stocks fluctuated as commodity producers fell amid declines in industrial metal prices, while banks gained on speculation the Federal Reserve will signal plans to leave its benchmark interest rate at a record low. Exxon Mobil Corp. and Newmont Mining Corp. declined as natural gas and copper prices fell at least 1.4 percent. Wells Fargo & Co. and Bank of America Corp. led financial shares higher. Smith International Inc. rallied 5.7 percent after Schlumberger Ltd. said it will pay $11 billion for the energy company. The Standard & Poor’s 500 Index slipped 0.3 percent to 1,106.39 at 10:01 a.m. in New York after gaining 0.3 percent earlier. Dow Jones Industrial Average lost 20.25 points, or 0.2 percent, to 10,382.1. Fed Chairman Ben S. Bernanke may tell Congress this week that an interest rate increase isn’t imminent amid a weak jobs market, said Ethan Harris , head of economics for North America at Bank of America Merrill Lynch. New York Fed President William Dudley said on Feb. 19 that policy makers need to focus on growth rather than inflation, citing a smaller-than-forecast increase in the consumer-price index for January, a day after the Fed raised its discount rate to 0.75 percent from 0.5 percent. Bernanke will deliver his semi-annual report on the economy and interest rates to House and Senate panels on Feb. 24-25. Fed Bank of San Francisco President Janet Yellen is scheduled to speak today on the U.S. economy in San Francisco. Economy Watch Reports this week may show improvements in the world’s largest economy, economists said. Sales of new U.S. homes rose 3.5 percent in January, following a 7.6 percent decline in December, according to the median forecast in a Bloomberg News survey of economists before the Commerce Department report on Feb. 24. Bookings for goods meant to last several years rose 1.5 percent last month, a separate survey showed before the data’s release on Feb. 25. U.S. stocks will probably fall this year from last year, and the government and central bank will act to spur growth in case of a decline beyond 20 percent, said Marc Faber , the publisher of the Gloom, Boom & Doom Report. Faber advised investors to buy U.S. stocks on March 9, 2009, when the S&P 500 reached its lowest level since 1996. The measure subsequently rallied as much as 70 percent. “I would look at the market to close probably a bit lower than it started the year in 2010,” Faber said today in an interview before a speech at the CLSA Japan Forum in Tokyo. “Equally, I don’t think we have a huge downside risk. If the Dow and the S&P dropped, say 15-20 percent, in other words the S&P towards 900, I think there would be more stimulus and more quantitative easing.” Smith International climbed 5.7 percent to $39.85. Schlumberger, the world’s largest oilfield-services provider, said the $11 billion purchase of Smith International will broaden service offerings and strengthen its competitive position as advances in drilling technology spur oil and natural gas production. The transaction would be the biggest U.S. merger this year and is Schlumberger’s biggest acquisition, according to Bloomberg data. Schlumberger fell 5.1 percent to $60.67. To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

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U.S. Stocks Fluctuate as Commodity Producers Drop, Financial Firms Advance

February 22, 2010

By Michael P. Regan Feb. 22 (Bloomberg) — U.S. stocks fluctuated as commodity producers fell amid declines in industrial metal prices, while banks gained on speculation the Federal Reserve will signal plans to leave its benchmark interest rate at a record low. The Standard & Poor’s 500 Index slipped 0.1 percent to 1,108.21 at 9:45 a.m. in New York after gaining as much as 0.3 percent. The Dow Jones Industrial Average lost 2.8 points, or less than 0.1 percent, to 10,399.55.

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Flaherty Moves to Tighten Canada Mortgage Industry Rules Amid Bubble Talk

February 16, 2010

By Alexandre Deslongchamps and Theophilos Argitis Feb. 16 (Bloomberg) — Canada’s Finance Minister Jim Flaherty tightened rules in the country’s mortgage industry to ensure buyers can afford their homes when interest rates rise. Under the changes for government-backed mortgages, which take effect April 19, buyers will have to meet standards for five-year, fixed-rate mortgages even if they opt for variable rates. Limits on refinancing will be stricter and people buying a home that they don’t occupy must make a down payment of 20 percent. Flaherty, who reiterated he doesn’t see a housing bubble in Canada, today said the three measures will “moderate” the housing market. Record home prices and sales prompted Stephen Jarislowsky , chairman of Montreal-based investment adviser Jarislowsky Fraser Ltd., to say last week he’s “convinced” there’s a bubble in Canada’s housing market fueled by government measures that encourage consumers to take on debt . Flaherty said the changes will prevent borrowers from building up “unsustainable debt levels” and “help Canadians prepare for higher interest rates in the future.” It’s the second time since taking office in 2006 that Flaherty has taken measures to limit the influx of buyers in the market. The Department of Finance in 2008 said the Canada Mortgage and Housing Corp. would limit amortizations to 35 years and offer loan insurance on 95 percent of the loan value, from 40 years and 100 percent previously. Too Tempting “The risk was becoming a bit too tempting for borrowers to take on mortgages they shouldn’t, when rates are at such exceptionally low levels,” said Avery Shenfeld , chief economist with CIBC World Markets in an interview in Toronto. “This is really addressing people who are coming into the market, often young families, and making sure they’re not taking on debt that they can’t afford.” Canadian home prices and resales will grow to records this year boosted by low interest rates , the Canadian Real Estate Association said in a report last week. The group said last month that sales increased in December to a record 46,805 units on a seasonally adjusted basis, up 72 percent from a year ago. “They have basically encouraged people to buy houses based on cheap mortgages,” Jarislowsky, 84, said in a Feb. 11 telephone interview from Montreal. “That has created the opposite effect of what was desirable.” Stress Tests Bank of Canada Governor Mark Carney said in December consumers and banks should be cautious about adding to household debts because a rise in record-low interest rates to “more normal” levels will leave some borrowers unable to pay. Citing a “stress-test” analysis the central bank did of household finances, Carney said that if interest rates rise faster than bond-market yields indicate, almost one in 10 Canadian households could devote at least 40 percent of their income to paying debts, making them “vulnerable.” The requirement for non-resident owners to make a 20 percent down payment will limit the potential for a bubble, said Marc Pinsonneault , an economist with National Bank Financial in Montreal. “It reassures me in the current context, even if I wasn’t predicting a housing bubble,” he said in a telephone interview from Montreal. “People may have convinced themselves that the best investment they could make would be to buy a duplex or a triplex to resell it shortly thereafter.” Pinsonneault said today’s announcement doesn’t change his view that the housing market will gradually slow in the second half of this year. Squeezing Out Borrowers Derek Holt , an economist with Scotia Capital Inc., said the change to force people to qualify for the 5-year, fixed mortgage, means homebuyers would need to qualify for an extra C$200 a month in payments on an average mortgage where a 5 percent down payment is made. “It’s going to sideline a significant proportion of the first-time homebuyer segment,” Holt said. “That change will squeeze out the marginal borrower, because it’s like a 110 basis point rise in the qualifying mortgage rate.” Canada’s average five-year mortgage rate was 5.39 percent on Feb. 10. In May, it was 5.25 percent, the lowest since 1951, according to Bank of Canada figures . Carney has pledged to keep his main interest rate at a record low 0.25 percent through June unless the inflation outlook shifts. “We’re very pleased in the sense that they responded prudently, responsibly and they haven’t overreacted,” said Jim Murphy, president and chief executive of the Canadian Association of Accredited Mortgage Professionals. “The impact overall may be minimal and is very much focused on groups that the minister has concerns about in terms of rising rates.” Murphy, whose group counts 12,000 members, said about 20 percent of new mortgages last year were based on a variable rate and the proportion was rising. Bank of Canada Adviser David Wolf said in a January speech that it’s “premature” to conclude there’s a bubble in the housing market, and that increasing interest rates to slow it would crimp the recovery as the economy emerges from recession. To contact the reporter on this story: Alexandre Deslongchamps in Ottawa at adeslongcham@bloomberg.net ; Theophilos Argitis in Ottawa at targitis@bloomberg.net

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Euro Tumbles to Lowest in a Year Versus Yen on Greek, Spanish Budget Woes

February 4, 2010

By Bo Nielsen and Inyoung Hwang Feb. 4 (Bloomberg)– The euro tumbled to an almost one-year low against the yen and the least versus the dollar since May on concern some European nations’ will be unable to reduce surging budget deficits. The shared currency fell as much as 3.8 percent against the yen even after European Central Bank President Jean-Claude Trichet said he’s confident Greece can get its budget deficit under control and signaled officials have no plans to raise their key interest rate from a record low of 1 percent. The yen gained against higher-yielding currencies on speculation investors will reduce carry trades, in which they buy riskier assets with amounts borrowed in nations with low interest rates. “If he said anything than he ‘is confident’ with Greece getting its budget under control, it would be a market disaster,” said John Hydeskov, a currency strategist at Danske Bank A/S in Copenhagen. “His job now is to avoid further turmoil.” The euro dropped 1 percent to $1.3759 at 1:43 p.m. in New York, from $1.3893 yesterday. It touched $1.3728, the least since May 21. The euro fell 3.1 percent to 122.52 yen from 126.42, after slumping as low as 121.59, the least since Feb. 24, 2009. The Japanese currency strengthened 2.2 percent to 89.05 per dollar, from 90.98. ‘Market Contagion’ The euro has lost 3.9 percent this year against the dollar on concern Greece and other so-called peripheral nations will face increasing difficulty in curbing budget deficits that are in excess of European Union limits. “If market contagion takes holds, a break of 1.37 brings 1.3000 to the fore rapidly,” Lauren Rosborough , a senior currency analyst at Westpac Banking Corp. in London, wrote in a note today. “We expect and we are confident that the Greek government will take all the decisions that will permit them to reach that goal,” Trichet said at a press conference in Frankfurt after the ECB left its main interest rate unchanged. Proposals announced this week on freezing wages and changing the pension system “are steps in the right direction.” Greece’s largest union is set to approve its second strike this month following Prime Minister George Papandreou ’s pledge this week to raise taxes and increase the retirement age. Greece, Portugal and Spain have suffered a “permanent” decline in competitiveness since joining the euro, European Monetary Affairs Commissioner Joaquin Almunia said yesterday. “I would want to stay away from the euro, the eurozone and some of the emerging European currencies,” Michael Gomez , co- head of emerging markets at Newport Beach, California-based Pacific Investment Management Co., said today at a conference in Moscow. “When you look at the state of balance sheets in Europe, when you look at the state of pegs and quasi-pegs across the region, that hinders the ability for adjustment.” Kiwi, Aussie The New Zealand dollar declined against all but the South African rand among its 16 most-traded peers tracked by Bloomberg, losing 4.1 percent versus the yen. The Australian dollar dropped versus 13 of 16. Australian retail sales fell 0.7 percent in December from November, the Bureau of Statistics said in Sydney. Economists had forecast a gain. New Zealand’s unemployment rate climbed to 7.3 percent last quarter from 6.5 percent in the previous three months, Statistics New Zealand said. The yen gained versus all of the 16 most-traded currencies as stocks declined, with the MSCI World Index falling 2.4 percent and the Standard & Poor’s 500 Index fell 2.6 percent. “All the equities are crashing and we’re taking the lead from there,” said David Bloom , global head of currency strategy at HSBC Holdings Plc. “The markets are worried that this liquidity injection that has revitalized us all is going to wear off. Everyone is responding by buying dollars and the yen.” Foreign Capital Japan’s currency tends to strengthen during times of economic and financial turmoil because a trade surplus makes the nation less reliant on foreign capital. The dollar benefits from its role as the world’s reserve currency. Implied volatility on one-month euro-dollar options rose to 11.46 percent, from 10.4 percent in New York yesterday. Wider fluctuations increase the risk for carry trades, in which money that investors borrow from countries with relatively low interest rates is used to buy higher-yielding assets elsewhere. The pound fell after the Bank of England said it will pause its asset-purchase program, while leaving open the door to buy more as the economy emerges from the recession. Policy makers also kept the key rate at a record low of 0.5 percent. Sterling fell 0.7 percent to $1.5786, from $1.5892 yesterday. It dropped as low as $1.5732 earlier, the weakest since Oct. 13. To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net ; Inyoung Hwang in New York at ihwang7@bloomberg.net .

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Mortgage Rates on 30-Year Loans Climb to 5.01% in First Rise in Five Weeks

February 4, 2010

By Brian Louis Feb. 4 (Bloomberg) — Mortgage rates in the U.S. rose for the first time in five weeks, threatening to slow the housing market’s recovery as government incentives near expiration. The rate for 30-year fixed U.S. home loans rose to 5.01 percent for the week ended today, from 4.98 percent, mortgage finance company Freddie Mac said in a statement today. The average 15-year rate was 4.40 percent, according to the McLean, Virginia-based company. Rising rates make it more expensive for consumers to buy homes. Sales of existing homes climbed 5 percent in 2009 after falling for three years. Demand rose as buyers took advantage of an $8,000 government tax incentive and low mortgage rates. The Federal Open Market Committee plans to end its $1.25 trillion mortgage-backed securities buying program at the end of March. The purchases are credited with helping reduce mortgage rates, which fell to a record low of 4.71 percent in December. Bond purchases from Fannie Mae , Freddie Mac and Ginnie Mae, which buy mortgages from lenders and package them into securities, brought down yields and allowed lenders to reduce mortgage rates while still selling the bonds at a profit. The Mortgage Bankers Association’s index of mortgage applications rose 21 percent in the week ended Jan. 29, led by a 26 percent increase in the refinancing gauge. The purchase measure rose 10 percent. To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net .

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Trichet Says ECB Confident Greek Deficit Can Be Cut; Keeps Key Rate at 1%

February 4, 2010

By Jana Randow Feb. 4 (Bloomberg) — The European Central Bank left its benchmark interest rate at 1 percent, a record low, and will probably hold off unwinding any more emergency lending measures as Greece’s budget deficit takes center stage. ECB President Jean-Claude Trichet holds a press conference at 2:30 p.m. in Frankfurt to explain today’s rate decision, which was predicted by all 55 economists in a Bloomberg News survey . Trichet has indicated he’ll wait for new growth and inflation forecasts in March before deciding when to step up the withdrawal of measures used to battle the financial crisis. “I imagine the Greek situation will be the main topic of discussion today,” said Nick Kounis , chief European economist at Fortis in Amsterdam. “They have to think about the consequences for the rest of the region, so they will continue to take a rather hard line on Greece.” Rising unemployment and concern that Greece’s fiscal problems could spread through the 16-nation euro area complicate the ECB’s efforts to return the economy to health. The Greek government is struggling to convince policy makers and investors that it can cut its deficit from 12.7 percent of gross domestic product last year to below the European Union’s 3 percent limit by 2012. Clear Message “Trichet’s message will be quite clear: Greece has to get its fiscal house in order,” said Ken Wattret , chief euro-area economist at BNP Paribas in London. “But if you consolidate in such a rush, you very likely generate a recession. Radical fiscal tightening doesn’t usually go hand in hand with robust growth.” The euro remained lower against the dollar after the rate decision, at $1.3850 as of 1:54 p.m. in Frankfurt from $1.3893 yesterday. The yield on the 10-year German bund fell 2 basis points to 3.2 percent. The Bank of England earlier kept its key rate at a record low of 0.5 percent and paused its bond-purchase program. Australia’s central bank this week unexpectedly paused in its rate-tightening cycle after last year’s increases drove up the nation’s currency, hurting exports. The Federal Reserve last week restated its intention to keep interest rates near zero for an “extended period,” saying the pace of economic recovery “is likely to be moderate for a time.” Unwinding Measures While the ECB isn’t forecast to raise borrowing costs before the fourth quarter, it has started to unwind its emergency lending programs. The central bank in December tightened the terms of its final tender of 12-month loans, one of its flagship measures during the crisis, and said it will discontinue its six-month loans after March. The ECB is still lending commercial banks as much money as they need at its benchmark rate, rather than having them bid for the cash, in an effort to get credit flowing through the economy. Council members Axel Weber and Yves Mersch have indicated the next step in the ECB’s exit strategy is likely to be a return to an auction procedure in some of its refinancing operations, which may be announced after the March policy meeting. “The ECB is on track for a complete normalization of its lending operations by the third quarter,” said Laurent Bilke , a former ECB economist now at Nomura International Plc in London. “That’s a prerequisite and will pave the way for the first rate hike” in November, he said. Economic Recovery The euro-area economy will grow 0.8 percent this year and 1.2 percent in 2011, according to the ECB’s December forecasts. It contracted 4 percent last year, the European Commission estimates. Fiscal belt-tightening across the region may damp the recovery as governments rein in spending to reduce budget shortfalls incurred during the recession. The euro has dropped 8.5 percent since Nov. 25, to $1.3840 today. EU Economic and Monetary Affairs Commissioner Joaquin Almunia yesterday backed Greece’s consolidation program while saying its implementation “is not easy.” Skepticism about Greece’s consolidation plans last week drove the premium that investors demand to hold Greek 10-year bonds instead of benchmark German bunds to almost 400 basis points, the highest since before the euro was launched in 1999. Spanish and Portuguese bond yields have also risen amid concern those nations are facing similar challenges. To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net .

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ECB May Keep Key Rate at Record Low as Greece’s Deficit Takes Center Stage

February 4, 2010

By Jana Randow Feb. 4 (Bloomberg) — The European Central Bank will probably keep interest rates at a record low and refrain from unwinding any more emergency lending measures as concern that Greece may fail to contain its deficit takes center stage. ECB officials meeting in Frankfurt will leave the benchmark interest rate at 1 percent, according to all 55 economists surveyed by Bloomberg News. President Jean-Claude Trichet has indicated he’ll wait for new growth and inflation forecasts in March before deciding when to step up the withdrawal of measures used to battle the financial crisis. Rising unemployment and concern that Greece’s fiscal problems could spread through the region complicate the ECB’s efforts to return the euro-area economy to health. The Greek government is struggling to convince policy makers and investors that it can cut the budget deficit from 12.7 percent of gross domestic product last year to below the European Union’s 3 percent limit by 2012. “There is a risk of contagion,” said Juergen Michels , chief euro-area economist at Citigroup Inc. in London. “Other euro-region countries could face similar problems to Greece if additional measures aren’t taken. That’s a concern for the ECB.” The ECB announces its rate decision at 1:45 p.m. and Trichet holds a press conference 45 minutes later. The Bank of England will probably keep its key rate at a record low of 0.5 percent and pause its bond-purchase program, another survey of economists shows. That decision is due at noon in London. Removing Stimulus Australia’s central bank this week unexpectedly paused in its rate-tightening cycle after last year’s increases drove up the nation’s currency, hurting exports. The Federal Reserve last week restated its intention to keep interest rates near zero for an “extended period,” saying the pace of economic recovery “is likely to be moderate for a time.” While the ECB isn’t expected to raise borrowing costs before the fourth quarter, it has started to unwind its emergency lending programs. The central bank in December tightened the terms of its final tender of 12-month loans, one of its flagship measures during the crisis, and said it will discontinue its six-month loans after March. The ECB is still lending commercial banks as much money as they need at its benchmark rate, rather than having them bid for the cash, in an effort to get credit flowing through the economy again. Next Step Council members Axel Weber and Yves Mersch have indicated the next step in the ECB’s exit strategy is likely to be a return to an auction procedure in some of its refinancing operations, which may be announced after the March policy meeting. “The ECB is on track for a complete normalization of its lending operations by the third quarter,” said Laurent Bilke , a former ECB economist now at Nomura International Plc in London. “That’s a prerequisite and will pave the way for the first rate hike” in November, he said. The economy of the 16 nations sharing the euro will grow 0.8 percent this year and 1.2 percent in 2011, according to the ECB’s December forecasts. It contracted 4 percent last year, the European Commission estimates. Fiscal belt-tightening across the region may damp the recovery as governments rein in spending to reduce budget shortfalls incurred during the recession. ‘Not Easy’ EU Economic and Monetary Affairs Commissioner Joaquin Almunia yesterday backed Greece’s consolidation program while saying its implementation “is not easy.” Skepticism about the plans last week drove the premium that investors demand to hold Greek 10-year bonds instead of benchmark German bunds to almost 400 basis points, the highest since before the euro was launched in 1999. Spanish and Portuguese bond yields have also risen amid concern those nations are facing similar challenges. The euro has dropped 8 percent since Nov. 25, to $1.40 yesterday. “Trichet’s message will be quite clear: Greece has to get its fiscal house in order,” said Ken Wattret , chief euro-area economist at BNP Paribas in London. “But if you consolidate in such a rush, you very likely generate a recession. Radical fiscal tightening doesn’t usually go hand in hand with robust growth.” To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net .

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Treasury Two-Year Notes Post Weekly Decline as Economic Growth Accelerates

January 30, 2010

By Susanne Walker and Cordell Eddings Jan. 30 (Bloomberg) — Treasury two-year notes fell for the first time this month after a government report showed the U.S. economy grew at the fastest pace in six years and the Federal Reserve upgraded its outlook on the recovery. Yields on the securities, more sensitive to changes in expectations for in monetary policy than longer-maturity debt, increased as Kansas City Fed President Thomas Hoenig dissented from the central bank’s decision to keep interest rates at a record low for an “extended” period on Jan. 27. A Labor Department report on Feb. 5 is forecast to show that U.S. job losses slowed to 13,000 positions in January. “We are obviously coming out of a hole,” said William Larkin , a fixed-income portfolio manager in Salem, Massachusetts, at Cabot Money Management, which manages $500 million. “There are clear signs the extreme event has ended. From here we need to see it sustained. I would expect that one dissent to grow over time outside of any economic hiccups.” The yield on the 2-year note rose 2 basis points to 0.81 percent on the week and is down 32 basis points in January, according to BGCantor Market Data. The yield climbed as much as 12 basis points on Jan. 27, the largest one-day increase since Dec. 31. The 10-year note yield fell 2 basis points this week to 3.58 percent. For January, the yield has dropped 25 basis points, the biggest monthly decline since March. ‘An Anomaly?’ The Commerce Department said yesterday that gross domestic product expanded at a 5.7 percent annual pace from October through December, more than the 4.7 percent pace predicted in a Bloomberg survey. Consumer spending, which comprises about 70 percent of the economy, rose at a 2 percent pace, more than anticipated following a 2.8 percent increase in the previous three months. “The question from here: is the growth sustainable or was this number an anomaly?” said Martin Mitchell , head government bond trader at the Baltimore unit of Stifel Nicolaus & Co., a St. Louis-based brokerage firm. Kansas City Fed President Hoenig in his dissent from the Federal Open Market Committee’s pledge on Jan. 27 to keep interest rates at a record low for an “extended” period, said he favored a quicker adjustment. The target rate for overnight loans between banks has been at a range of zero to 0.25 percent since December 2008 as policy makers seek to spur economic growth after the collapse of global credit markets that year. ‘Uncharted Waters’ Traders saw 53 percent odds that the Fed will leave its target for overnight lending between banks unchanged through June, according to futures on the Chicago Board of Trade yesterday. That compares with 55 percent a week ago. “We are in uncharted waters for monetary policy and the financial markets,” Fed Vice Chairman Donald Kohn said yesterday to a symposium in Arlington, Virginia. “The response of interest rates across the maturity spectrum to an actual or expected tightening of monetary policy is always hard to predict, but is especially so in current circumstances.” Treasuries returned 1.3 percent in January through two days ago after posting a 2.6 percent loss in December, according to Bank of America Corp.’s Merrill Lynch bond indexes. U.S. government securities rallied this month as unemployment remained at 10 percent, China acted to reduce lending to slow growth and Greece’s budget deficit swelled to the largest in the European Union, increasing the refuge appeal of the most easily traded debt. Fed policy makers also said they’ll cease buying mortgage-backed securities in March and wind down other liquidity programs. Treasury Debt Sales “People still don’t want to be short Treasuries given the uncertainty in what’s going on in the overseas markets,” said Larry Milstein , managing director of government and agency debt trading in New York at RW Pressprich & Co., a fixed-income broker and dealer for institutional investors. The Treasury sold $118 billion in notes this week, including $44 billion in two-year securities on Jan. 26 at a yield of 0.88 percent, the second-lowest cost to the government on record. The U.S. also sold $42 billion in five-year debt on Jan. 27 and $32 billion in seven-year notes the next day. One-month bill rates turned negative for the first time since March. The rate on the four-week security dropped to negative 0.015 percent on Jan. 27, equaling the record low reached on March 26. President Barack Obama said the government also must tackle the federal budget deficit, forecast to be $1.35 trillion this year. It totaled a record $1.4 trillion in the last fiscal year. “People are clearly going to be looking toward employment next week where we will need to see an improvement there,” said Milstein. “Confidence isn’t going to come until the job environment picks up.” To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net ; Cordell Eddings in New York at ceddings@bloomberg.net

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Weber Says ECB Could Take Further Steps to Exit Stimulus in the First Half

January 27, 2010

By Francine Lacqua and Simone Meier Jan. 27 (Bloomberg) — European Central Bank council member Axel Weber said the bank may take further steps in the first half of this year to withdraw liquidity from the banking system as the economy gathers strength. “As the economy improves, we’ll take some of the exceptional measures back,” Weber said in an interview with Bloomberg Television at the World Economic Forum in Davos, Switzerland, today. “Not all measures are needed to the same degree, so I don’t rule out that we take some additional steps even before the second half.” One of the cornerstones of the ECB’s strategy to fight the financial crisis has been to lend banks as much money as they want at its benchmark interest rate of 1 percent, a record low. The central bank has already started to scale back its emergency longer-term lending as the economy shakes off its worst recession since World War II. Weber said the ECB will have to discuss a return to a normal auction procedure in its refinancing operations, though this would not be reintroduced to all tenders at once. The 16-nation euro region will have a “protracted” economic recovery, he said, adding it may take two to three years to return to pre-crisis conditions. The euro rose against the dollar after Weber spoke to $1.4059 from $1.4043. To contact the reporters on this story: Simone Meier in Dublin at smeier@bloombert.net ;

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Vietnam May Pay Full Point More Than Indonesia in International Debt Sale

January 19, 2010

By Lilian Karunungan and David Yong Jan. 20 (Bloomberg) — Vietnam may have to pay at least a percentage point more than the Philippines and Indonesia to sell international bonds as a weakening local currency and surge in developing-nation sales spur investors to seek a higher premium. The government aims to issue $1 billion of 10-year bonds as long as the interest rate doesn’t exceed 7 percent per year, the central bank said in a statement yesterday. The Philippines sold debt due 2020 at 5.67 percent on Jan. 7 and Indonesia offered similar notes at 6 percent last week. Both countries carry lower debt ratings than Vietnam from Standard & Poor’s. Vietnam is planning its second sale of dollar debt as the dong trades near a record low, inflation accelerates and the trade deficit widens. AllianceBernstein L.P. and Western Asset Management Co. say they are becoming more selective after developing nations sold more than $13 billion in overseas bonds this year, the busiest start for emerging-market foreign borrowing in at least a decade. Indonesia scaled back its offer to $2 billion and canceled a planned 30-year note sale. “The Vietnamese authorities have at present a difficult task in addressing mounting inflationary pressures and external balances,” said Dennis Shen , an analyst in New York at AllianceBernstein, which oversees $496 billion globally and is an affiliate of French insurer Axa SA. “With the risks inherent, we would likely consider participation only should yields come in around the 7 percent to 7.25 percent range.” Growth Policies Vietnam’s government is struggling to balance policies that spur growth with efforts to ensure its economy remains stable, Moody’s Investors Service said Jan. 15. The nation is rated Ba3 by Moody’s, three levels below investment grade, with a negative outlook. The ranking is on par with the Philippines and one grade weaker than Indonesia. S&P rates Vietnam BB, one level higher than the BB- ranking for Indonesia and the Philippines. Vietnam sold $750 million of 10-year bonds to yield 7.125 percent at its first global bond sale in October 2005, a premium of 2.56 percentage points over similar-maturity Treasuries. The January 2016 notes yielded 6.158 percent yesterday, for a spread of about 3.3 percentage points, according to data compiled by Bloomberg. With a 7 percent yield on the new 10-year debt, Vietnam would be offering about the same level of premium. Barclays Capital Plc, Citigroup Inc. and Deutsche Bank AG are managing the sale and have already held marketing lunches in Hong Kong and London. The central bank’s release on its Web site was later revised to remove references to the possible yield. The Finance Ministry plans meetings with fund managers in Boston on Jan. 20 and New York the following day. ‘Scarcity Value’ Sergey Dergachev , who helps oversee $250 billion including $6 billion in emerging-market debt, at Frankfurt-based Union Investments, said he will add more Vietnam bonds because the nation doesn’t borrow overseas often, limiting supply for investors in higher-yielding bonds. Investors added almost $3 billion into equity and bond funds in developing nations in the week to Jan. 13, following record inflows last year, Cambridge, Massachusetts-based fund tracker EPFR Global said Jan. 15. “It’s the scarcity value these upcoming Vietnamese bonds offer,” Dergachev said. “The new issue should have an absolute yield of around 6.85 percent to 7 percent.” Vietnam’s dollar debt is in limited supply and it’s difficult to buy local-currency bonds, Dergachev said. Because they may be difficult to sell quickly, the bonds need to offer a “liquidity premium,” he said. “In the case of Vietnam, many investors got burned in the past when they got into local-currency debt and couldn’t get out,” said Mark Dow , who helps manage $3 billion at Pharo Management LLC in New York. “That may be a factor.” Pharo Management will consider buying the debt if it prices attractively, he said. ‘More Careful’ A surge in debt sales by emerging-market nations and the shrinking yield advantage may add to Vietnam’s difficulty in attracting investors, according to Rajeev de Mello , Singapore- based head of Asian investment who helps manage $506 billion globally at Western Asset. Albania is planning to sell its first international bonds, after the Philippines, Mexico, Poland, Turkey, Indonesia and Slovenia issued debt this year. Investors demanded a 2.97 percentage point premium to own developing-nation debt on Jan. 19, according to the EMBI Global Composite Index , down from 4.14 percentage points six months ago. “Investors have a fairly large choice now of issues,” De Mello said. “They are bit concerned the spreads to Treasuries are too low and are going to be a bit more careful.” Currency Weakness Vietnam’s dollar-denominated bonds returned 25 percent in the past year, beating the 21 percent gain for the Philippines, according to indexes compiled by JPMorgan Chase & Co. They trailed the 56 percent rally in Indonesian notes and the 29 percent for the EMBI Global index, which tracks the debt of 37 developing nations. Credit default swaps for Vietnam cost 236 basis points, 40 percent more than for the Philippines and 24 percent more than for Indonesia. They are contracts used to protect against or speculate on default, paying the buyer face value if a borrower fails to adhere to debt agreements. The central bank devalued the dong by 5.4 percent last year as the trade balance recorded a $12.25 billion deficit for all of 2009 after a first-quarter surplus. The dong is trading at 18,474 per dollar, near a record low of 18,500 reached in November. Consumer-price gains quickened to 6.52 percent in December from a year earlier, compared with 4.35 percent in November. Without a successful bond sale, Vietnam will have to rely on international donors to fund energy and infrastructure projects, said John T. Sullivan , founder of Washington-based consultancy Kerry Emerging Global Opportunities LLC. That may hamper growth in exports, investment and the economy, he said. “Vietnam can be a dynamic economy if the proper infrastructure is put into place,” he said. To contact the reporters for this story: Lilian Karunungan in Singapore at at lkarunungan@bloomberg.net ; David Yong in Singapore at dyong@bloomberg.net .

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Mortgage Rates on 30-Year U.S. Loans Fall to 5.06%, Second Week of Decline

January 15, 2010

By Brian Louis Jan. 14 (Bloomberg) — Mortgage rates in the U.S. fell for the second consecutive week, lowering borrowing costs for consumers and making homes more affordable. The rate for 30-year fixed U.S. home loans dropped to 5.06 percent for the week ended today from 5.09 percent, mortgage finance company Freddie Mac said in a statement today. Rates reached a record low of 4.71 percent last month. This week’s average 15-year rate was 4.45 percent, the McLean, Virginia- based company said. Falling mortgage rates may help the nation’s housing market as it becomes less expensive for consumers to borrow. A Federal Reserve program to purchase as much as $1.25 trillion in securities backed by home loans helped cut mortgage rates last year. The program is set to end this quarter. Other government plans to stimulate demand and support the home market, including a tax credit for first-time homebuyers, have also boosted housing. “What they’ve achieved is a housing market going sideways,” Donald Rissmiller , chief economist at New York-based Strategas Research Partners LLC, said of the government programs. “Sideways is certainly better than straight down.” The purchases from Fannie Mae , Freddie Mac and Ginnie Mae, which buy mortgages from lenders and package them into bonds, brought down yields on the securities and allowed lenders to reduce mortgage rates while still selling the bonds at a profit. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a mortgage rose 14 percent for the week ended Jan. 8, led by the refinancing gauge, which rose 22 percent. To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net .

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Bernanke Calls For Regulation To Fight Against Bubbles

January 3, 2010

WASHINGTON — Stronger regulation should be the first line of defense against excessive speculation that could send the economy into a new crisis, Federal Reserve Chairman Ben Bernanke said Sunday. But he didn’t rule out higher interest rates to stop that from happening. The Fed chief’s remarks were his most extensive on the subject since the housing market’s tumble led to the gravest financial crisis since World War II – and perhaps the worst in modern history, in his view. Critics blame the Fed for feeding that speculative boom in housing by holding interest rates too low for too long after the 2001 recession. But Bernanke, in a speech to the American Economic Association’s annual meeting in Atlanta, defended the central bank’s actions. Extra-low rates were needed to get the economy and job creation back to full throttle after the Sept. 11 attacks and accounting scandals that rocked Wall Street, he said. Bernanke said the direct links were weak between super-low interest rates and the rapid rise in house prices that occurred at roughly the same time. The stance of interest rates during that period “does not appear to have been inappropriate,” he said. Still, the enormous economic damage from the housing bust – the longest and deepest recession since the 1930s and double-digit unemployment – shows how importance it is to guard against a repeat, Bernanke said. “All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs,” he said. “However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool,” he added. Speculative excesses are not easy to pinpoint in their early stages, he said, and using higher interest rates to combat them can hurt the economy. For instance, rate increases in 2003 and 2004 to constrain the housing bubble could have “seriously weakened” the economy just when a recovery from the 2001 recession was starting, he said. To help the country emerge from that recession, the Fed under then-Chairman Alan Greenspan cut its key bank lending rate from 6.5 percent in late 2000 to 1 percent in June 2003. It held rates at what was then a record low for a year. It’s this action that critics blame for feeding the housing speculation. Bernanke, however, said the expansion of complex mortgage products and the belief that housing prices would keep rising were the keys to inflating the housing bubble. As a result, lenders made home loans to people to finance houses they couldn’t afford. The Fed in 2005 did crack down on dubious mortgage practices and the type of mortgages blamed for the crisis. Bernanke acknowledged that these efforts “came too late or were insufficient to stop the decline in underwriting standards and effectively constrain the housing bubble.” Still, Bernanke said the lessons learned from the crisis isn’t that regulation is ineffective but that regulation “must be better and smarter.”

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Treasuries Set for Worst Year Since 1978 on Record Sales, Recovery Signs

December 29, 2009

By Theresa Barraclough Dec. 30 (Bloomberg) — Treasuries headed for the worst year since at least 1978, as the U.S. stepped up debt sales to help spur growth in an economy recovering from its deepest recession in six decades. U.S. bonds were little changed on the day before today’s sale of $32 billion in seven-year debt, the last of three auctions this week totaling $118 billion. The Treasury sold a record-tying $42 billion of five-year securities yesterday and $44 billion in two-year notes on Dec. 28. U.S. government securities have fallen 3.6 percent this year, according to Bank of America Merrill Lynch indexes, the worst annual performance since at least 1978, when Merrill began collecting the data. “This is the largest expansion of fiscal deficit in a single year other than in wartime and depression,” prompting the large loss in Treasuries, said Christian Carrillo , a senior interest-rate strategist at Societe Generale SA in Tokyo. “There is genuine expectation of economic recovery and eventual monetary tightening priced in. It could have been a lot worse.” The yield on the benchmark 10-year note rose one basis point, or 0.01 percentage point, to 3.82 percent as of 10:05 a.m. in Tokyo, according to BGCantor Market Data. The yield has increased 1.6 percentage points this year. The 3.375 percent debt due in November 2019 fell 3/32, or 94 cents per $1,000 face amount, to 96 13/32. President Barack Obama is borrowing unprecedented amounts for spending programs. U.S. marketable debt increased to a record $7.17 trillion in November from $5.80 trillion at the end of last year. Record-Tying Sales The last sale of seven-year notes, in November, drew a high yield of 2.835 percent and attracted bids for 2.76 times the amount on offer, compared with 2.65 times at the October offering. The seven-year security to be sold today yielded 3.35 percent in pre-auction trading. “There’s some attraction in yields, so it’ll be another so-so auction,” said Kazuaki Oh’e , a bond salesman in Tokyo at Canadian Imperial Bank of Commerce, the nation’s No. 5 lender. “Investors are looking for more safety and less risk. It’s easier to be safe going into the new year.” Yesterday’s record-tying $42 billion five-year note sale drew a yield of 2.665 percent, compared with the forecast of 2.678 percent in a Bloomberg News survey. The bid-to-cover ratio was 2.59, compared with an average ratio of 2.36 times at the last 10 auctions. The two-year auction on Dec. 28 was weaker, drawing a yield of 1.089 percent, against a forecast of 1.059 in a Bloomberg survey. The bid-to-cover ratio was 2.91, the lowest since August. ‘Grind Lower’ “With two auctions out of the way and the magic seven ahead of us, we believe that supply fears, which helped to get bonds into attractive levels, will fade for now and the next few days should be a steady grind lower in rates,” said George Goncalves , chief fixed-income rates strategist at Cantor Fitzgerald LP, one of 18 primary dealers that trade directly with the central bank. Holders of U.S. debt have made a return of 81 percent over the past decade, according to the Bank of America Merrill Lynch indexes. That compares with an 8 percent loss for the Standard & Poor’s 500 Total Return Index . The Treasury yield curve, a barometer of the health of the U.S. economy, widened to a record earlier this month as investors bet an accelerating recovery will fuel inflation and hurt demand for the unprecedented sales of government debt. Recovery Signs The gap between 2-year and 10-year yields widened to a record 2.88 percentage points on Dec. 22, from 1.45 percentage points at the beginning of the year. The spread was at 2.71 percentage points today. An index of home prices in 20 U.S. cities rose in October for a fifth consecutive month. The S&P/Case-Shiller home-price index increased 0.4 percent from the prior month on a seasonally adjusted basis, after a 0.2 percent rise in September. The gauge was down 7.3 percent from October 2008, the smallest year-over-year decline since October 2007. Confidence among U.S. consumers rose in December for a second month. The New York-based Conference Board’s consumer confidence index rose to 52.9 this month from 50.6 in November. The measure reached a record low 25.3 in February. Fed Chairman Ben S. Bernanke has cited a tame inflation outlook for keeping the target interest rate for overnight loans between banks at a record low range of zero to 0.25 percent. Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, show the improving economy may change sentiment and spark further bond declines. The gap between yields on Treasuries and TIPS due in 10 years, a measure of the outlook for consumer prices, expanded to 2.43 percentage points yesterday, the widest since July 2008. It held at 2.39 percentage points today. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net

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Thirty-Year Fixed Rate Mortgage Climbs to 5.05%, Highest in Three Months

December 27, 2009

By Brian Louis Dec. 24 (Bloomberg) — Mortgage rates for fixed 30-year U.S. home loans increased for a third consecutive week to the highest in three months, reducing affordability for buyers and owners who wish to refinance. The rate for the week ended today increased to 5.05 percent from 4.94 percent. It set a record low 4.71 percent in the week ended Dec. 3. The average 15-year rate was 4.45 percent, the McLean, Virginia-based company said today in a statement. Mortgage rates are rising along with yields on the benchmark 10-year Treasury note. Yields on Fannie Mae and Freddie Mac mortgage securities climbed to the highest in four months this week, signaling interest rates on new home loans may continue climbing. “The housing market’s in recovery,” Brian Bethune , chief financial economist at IHS Global Insight in Lexington, Massachusetts, said. A Federal Reserve program to buy as much as $1.25 trillion in securities backed by home loans has helped reduce mortgage rates this year. The program is scheduled to end the first quarter of next year. The bond purchases from Fannie Mae , Freddie Mac and Ginnie Mae, which buy mortgages from lenders and package them into bonds, brought yields on the securities down this year and allowed lenders to reduce mortgage rates while still selling the securities at a profit. New-home sales unexpectedly fell 11 percent in November to an annual pace of 355,000, lower than the lowest estimate of economists surveyed by Bloomberg News. The median sales price fell 1.9 percent to $217,400 from a year earlier. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a mortgage fell 11 percent in the week ended Dec. 18. The purchase index fell 12 percent and the refinancing gauge slumped 10 percent. To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net .

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Brazil Sees 2010 Inflation Above Target as GDP Growth to Quicken to 5.8%

December 22, 2009

By Andre Soliani and Iuri Dantas Dec. 22 (Bloomberg) — Brazil’s inflation rate will rise above the country’s target by the end of 2010 as growing domestic demand fuels the fastest economic expansion in three years, according to a central bank report. Consumer prices will increase 4.6 percent in 2010 and 2011 from 4.3 percent this year, the central bank said in a quarterly report posted on its Web site today. At the same time, economic growth will accelerate to 5.8 percent next year, up from a revised 0.2 percent expansion this year, the report said. Inflation in Latin America’s largest economy will stay below the target of 4.5 percent in the second and third quarters, suggesting policymakers won’t need to raise the benchmark interest rate in the next few months, according to Roberto Padovani , chief economist at Banco WestLB Brasil in Sao Paulo. Yields on interest rate futures contracts fell across the board today as traders, who are expecting rate increases as early as March, pared their bets. “The inflation report shows that, while the risks for inflation are increasing, in the short term inflation will remain tame,” Padovani said in a telephone interview. “The report reinforces our call that the central bank will start increasing rates in April.” The yield on future rate contracts due January 2011, the most traded on the Sao Paulo stock exchange, fell one basis point to 10.33 percent at 6:54 a.m. New York time. Domestic Demand Banco Central do Brasil will increase the benchmark interest rate to 10.75 percent by the end of next year from a record low of 8.75 percent, according to a weekly central bank survey of about 100 analysts published yesterday. The central bank kept the so-called Selic rate unchanged at its past three meetings, saying the rate was adequate to fuel a “non-inflationary” economic rebound. “From the point of view of the balance of risks related to the inflation outlook, the major risk comes from the intensity of the domestic economic activity recovery, which will still be influenced by significant economic policy stimulus,” the central bank report said. “The key factor sustaining economic activity will continue to be domestic demand.” Policy makers target inflation of 4.5 percent, plus or minus 2 percentage points. Company Investments Domestic demand helped pull Latin America’s biggest economy out of a recession in the second quarter of this year. Economic growth quickened to 1.3 percent in the third quarter from the previous three-month period and from 1.1 percent in the second quarter. The expanding economy is prompting companies to increase investments. Wal-Mart Stores Inc . has chosen Brazil as its top investment destination outside the U.S. next year, planning to spend as much as 2.2 billion reais, the president of the company’s Brazilian unit, Hector Nunez, said yesterday. David Neeleman , founder of JetBlue Airways Corp. , said this month his Brazilian carrier Azul Linhas Aereas Brasileiras plans to hire about 2,500 people next year and focus on middle and low-income clients. To contact the reporter on this story: Andre Soliani Costa in Brasilia at asoliani@bloomberg.net

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U.K. Economy Shrank 0.2% in Third Quarter, Less Than Previously Estimated

December 22, 2009

By Jennifer Ryan Dec. 22 (Bloomberg) — The U.K. economy shrank less than previously estimated in the third quarter as a jump in construction and fixed investment brought the longest recession on record closer to ending. Gross domestic product fell 0.2 percent from the second quarter, compared with a previous measurement of a 0.3 percent drop, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 24 economists was for a 0.1 percent contraction. The Confederation of British Industry yesterday raised its 2010 economic growth forecast and said the Bank of England may pause its bond-purchase plan in February. Policy makers have pledged to print 200 billion pounds of new money to stoke spending and shake off Britain’s longest recession on record. “It looks like the fourth quarter will be in positive territory and pick up pace next year,” Nick Kounis, chief European economist at Fortis Bank Nederland NV in Amsterdam and a former U.K. Treasury official, said before the report. “The bank could start to become uncomfortable with the extremely loose monetary policy.” The pound was little changed at $1.6042, down 0.2 percent on the day as of 9:33 a.m. in London. The yield on the two-year government bond was up 1 basis point today at 1.198 percent. Recession Damage The recession has now shaved 6 percent off gross domestic product, the statistics office said. The economy contracted 5.1 percent from a year earlier, more than the 4.9 percent median forecast in a Bloomberg News survey of 21 economists. The U.S. economy probably grew an annualized 2.8 percent in the third quarter, according to the median forecast of 62 economists. The Commerce Department will publish that data at 8:30 a.m. in Washington. Construction jumped 1.9 percent, compared with a previous estimate of a 1.1 percent drop, the statistics office said. That offset bigger contractions in services and industrial production. Travis Perkins Plc, the U.K. building-materials supplier that owns the Wickes home-improvement chain, said Dec. 17 it expects earnings for 2009 to be “at the upper end” of analyst estimates as spending on do-it-yourself projects aided sales. Fixed investment increased 2.2 percent, instead of the 0.3 percent drop previously measured. Government spending rose 0.3 percent and consumer spending increased 0.1 percent, the statistics office said. Election Looming Prime Minister Gordon Brown is trying to revive the economy and rebuild support in time for an election which he must call by June. In an Ipsos-Mori poll published in the Observer on Dec. 20, the opposition Conservatives had support of 43 percent of voters, a 17 percentage point lead over Brown’s ruling Labour Party. The economy may already be expanding again. Bank of England policy maker Kate Barker said in an interview last week that economic growth probably resumed in the fourth quarter. Unemployment unexpectedly fell in November for the first time since February 2008. The Royal Institution of Chartered Surveyors today forecast house prices will rise as much as 2 percent in 2010. The CBI yesterday raised its 2010 growth forecast to 1.2 percent from a previous prediction of 0.9 percent. The group said the central bank will start raising the key interest rate from a record low of 0.5 percent in the second quarter. Barker, speaking on Dec. 15, said that the economic pickup may still lapse in 2010. ‘Bumpy’ Recovery “I’ve always been one of the people who thought that the path of this recovery was likely to be quite bumpy and uneven,” she said. “I wouldn’t rule out the possibility that we’d see another quarter of negative growth.” The household savings ratio, which measures the proportion of income hoarded by consumers, rose to 8.6 percent in the third quarter, the most since the first quarter of 1998, the statistics office said. The central bank kept its bond purchase plan unchanged and held the benchmark interest rate at a record low of 0.5 percent. Minutes showing how Barker and her colleagues voted will be released tomorrow. The current account gap widened to 4.7 billion pounds in the third quarter, or 1.3 percent of GDP, from 4.4 billion pounds in the previous three months, the statistics office said in a separate report today. To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

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U.K. November Retail Sales Unexpectedly Fall 0.3% in First Drop Since May

December 17, 2009

By Scott Hamilton Dec. 17 (Bloomberg) — U.K. retail sales unexpectedly fell in November for the first time in six months as the recession prompted consumers to spend less at clothing and department stores in the approach to Christmas. Sales dropped 0.3 percent on the month after rising 0.6 percent in October, the Office for National Statistics said today in London. The median forecast was for a 0.5 percent gain, according to a Bloomberg News survey of 28 economists. The U.K. faces a “bumpy and uneven” path out of recession as unemployment keeps increasing, Bank of England policy maker Kate Barker said in an interview this week. The central bank has kept its benchmark interest rate at a record low and pledged to spend as much as 200 billion pounds ($327 billion) on bonds to aid the economy. “The accommodation that’s been dished out, such as the cuts in interest rates, is a boost that’s fading,” Alan Clarke, an economist at BNP Paribas in London, said before the announcement. “People are cautious.” The pound fell as much as 0.4 percent after the release of the data and traded at $1.6167 as of 9:32 a.m. in London. The yield on the two-year gilt fell as much as 3 basis points and traded at 1.217 percent. Non-food sales fell 0.9 percent in November, outweighing a 0.4 percent increase in food sales, the statistics office said. Clothing and department stores led the drop. On the year, sales rose 3.1 percent after gaining 3.7 percent in October. ‘Cautious’ on Christmas JJB Sports Plc , the unprofitable sporting goods retailer, said today that it was “cautious” about its performance over Christmas and the New Year and trading will “remain difficult.” Tesco Plc , the world’s third-largest retailer, on Dec. 8 reported slowing sales growth that missed analysts’ estimates. The economy has lost more than 600,000 jobs since the recession began, with the ax falling hardest on people under the age of 24. The effects of the slump will also be felt with more increases in unemployment that may continue to rise for several more quarters, Barker said. The weakness of the job market is making it harder for Prime Minister Gordon Brown to resuscitate his popularity in time for an election which he must call by June. Barker said on Dec. 15 that it is possible the economy may see another quarter of contraction and that pressures on inflation are mainly “downward.” Policy makers are trying to prevent inflation from undershooting the 2 percent target in the medium term. Inflation accelerated to 1.9 percent in November and will pick up before then dipping below the goal, the central bank’s forecasts show. The retail price deflator, a measure of cost changes, showed a 0.5 percent annual drop in November, the statistics office said today. To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net .

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Fed Interest Rates Held Flat, To Remain Ultra Low For An "Extended Period"

December 16, 2009

WASHINGTON — The Federal Reserve pledged Wednesday to hold interest rates at a record low to drive down double-digit unemployment and sustain the economic recovery. The Fed noted that the economy is growing, however slowly. And turning more upbeat, it pointed to a slowing pace of layoffs. Still, Fed Chairman Ben Bernanke and his colleagues gave no signal that they’re considering raising rates anytime soon. They noted that consumer spending remains sluggish, the job market weak, wage growth slight and credit tight. Companies are still wary of hiring, they said. Against that backdrop, the Fed kept its target range for its bank lending rate at zero to 0.25 percent, where it’s stood since last December. And it repeated its pledge, first made in March, to keep rates at “exceptionally low levels” for an “extended period.” In response, commercial banks’ prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will remain about 3.25 percent. That’s its lowest point in decades. Super-low interest rates are good for borrowers who can get a loan and are willing to take on more debt. But those same low rates hurt savers. They’re especially hard on people living on fixed incomes who are earning measly returns on savings accounts and certificates of deposit. Michael Darda, chief economist at MKM Partners, predicted that rates would stay where they are for most of next year. “We believe the Fed is essentially out of the picture until late 2010 or early 2011,” Darda said. The Fed’s “optimism was constrained by a long list of caveats,” he added. Noting the stabilized financial markets, the Fed said it expects to wind down several emergency lending programs when they are set to expire next year. That seemed to strike a confident note that the Fed thinks it can gradually lift supports it provided at the height of the financial crisis. The central bank made no major changes to a program, set to expire in March, to help further drive down mortgage rates. The Fed in on track to buy a total of $1.25 trillion in mortgage securities from Fannie Mae and Freddie Mac by the end of March. It has bought $845 billion so far. It’s also on pace to buy $175 billion in debt from those groups under the same deadline. So far, the Fed has bought nearly $156 billion. Its efforts to lower mortgage rates are paying off. Rates on 30-year loans averaged 4.81 percent, Freddie Mac reported last week. That’s down from 5.47 percent last year. The Fed said it has leeway to hold rates at super-low level because it expects that inflation will remain “subdued for some time.” Fed policymakers repeated their belief that slack in the economy – meaning plants operating below capacity and the weak employment market – will keep inflation under wraps. A government report out Wednesday showed that inflation is in check despite a burst in energy prices. Energy prices, however, are already in retreat. Bernanke, who’s seeking a second term as Fed chief, has made clear his No. 1 task is sustaining the recovery. Last week, he and other Fed officials signaled they are in no rush to start raising rates. At the same time, Bernanke has sought to assure skeptical lawmakers and investors that when the time is right, he’s prepared to sop up all the money. Some worry that the Fed’s cheap-money policies will stoke inflation. Some encouraging signs for the economy have emerged lately. The economy finally returned to growth in the third quarter, after four straight losing quarters. And all signs suggest it picked up speed in the current final quarter of this year. The nation’s unemployment rate dipped to 10 percent in November, from 10.2 percent in October. And layoffs have slowed. Employers cut just 11,000 jobs last month, the best showing since the recession started two years ago. Still, the Fed predicts unemployment will remain high because companies won’t ramp up hiring until they feel confident the recovery will last. Consumers did show a greater appetite to spend in October and November. But high unemployment and hard-to-get credit are likely to restrain shoppers during the rest of the holiday season and into next year.

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Stocks in U.S. Pare Advance After FOMC’s Decision on Interest-Rate Policy

December 16, 2009

By Nick Baker Dec. 16 (Bloomberg) — U.S. stocks pared gains, wiping out the advance spurred by the Federal Reserve’s decision to keep interest rates at a record low. The Standard & Poor’s 500 Index rose 0.4 percent to 1,112.09 at 2:25 p.m. in New York after advancing as much as 0.8 percent following the Fed’s statement.

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Stocks, U.S. Futures, Oil Rally on Speculation Fed to Hold Interest Rates

December 16, 2009

By Will Kennedy Dec. 16 (Bloomberg) — European stocks and U.S. index futures rose on speculation the Federal Reserve will hold its benchmark interest rate at a record low to help sustain the global economic recovery. Oil and metals rallied. The Dow Jones Stoxx 600 Index of European equities gained for a fifth day, climbing as much as 1 percent at 10:20 a.m. London time. U.S. Standard & Poor’s Index futures added as much as 0.6 percent. Oil advanced for a second day, climbing above $71 a barrel in New York as copper rose to a one-week high. Russia’s Micex Index climbed 2 percent, the steepest climb among world equity gauges. Fed Chairman Ben S. Bernanke and his Federal Open Market Committee colleagues, meeting in Washington today, may say U.S. growth is accelerating while repeating a pledge to keep the target rate for overnight bank loans near zero for an “extended period.” In Europe, services and manufacturing expanded at the fastest pace in more than two years in December, while U.K. unemployment declined for the first time since February 2008. “The Fed is likely to hint that interest rates will remain at current low levels for the next few quarters,” said Jesper Dannesboe , a commodity strategist at Societe Generale SA in London. “Another year of low interest rates is good for all growth-sensitive assets.” U.K. Homebuilders Gain The MSCI World Index of 23 developed nations’ stocks advanced 0.5 percent. U.K. homebuilders rallied in London after Citigroup Inc. advised buying shares of Barratt Developments Plc, Taylor Wimpey Plc and Redrow Plc. Japanese stocks climbed after the Nikkei newspaper said banks will be given 10 to 20 years to meet tougher capital rules; the Financial Services Agency said no agreement has been reached. Mizuho Financial Group Inc., Japan’s third-biggest lender, surged 15 percent. The gain in U.S. futures indicated the S&P 500 may pare yesterday’s 0.6 percent decline. Builders in November probably broke ground on more U.S. homes, and gains in consumer prices were within the Fed’s long-term forecasts, economists said reports set for release at 8:30 a.m. in Washington may show. The MSCI Emerging Markets Index slipped 0.2 percent as Chinese banks declined on a regulatory official’s warning that bad loans pose a long-term risk. Russia’s Micex climbed for a third day, its longest winning streak in two months, as rising oil and metals boosted the earnings outlook for commodity companies. Oil producer OAO Tatneft advanced 1.9 percent after profit jumped 55 percent in the first nine months of the year. Oil, Metals Climb Oil and industrial metals gained on optimism the recovery will boost raw material demand. Copper for delivery in three months rose 1.3 percent on the London Metal Exchange. Crude for January delivery gained as much as 0.9 percent to $71.35 a barrel in New York. Gold for immediate delivery rallied 0.6 percent in London, to $1,132.25 an ounce. Greece’s bonds snapped two days of declines, with the 10- year yield falling 4 basis points to 5.68 percent after the country sold 2 billion euros ($2.9 billion) of floating-rates privately to banks yesterday as it sought to plug a budget deficit that’s the highest in the European Union. U.S. Treasuries advanced, with the 10-yeear note yield dropping 2 basis points to 3.57 percent. The German bund yield was little changed at 3.23 percent. The Australian dollar fell against all 16 most-traded currencies tracked by Bloomberg after central bank deputy Governor Ric Battellino said monetary policy is back in “the normal range,” damping expectations for higher interest rates. Yields on government two-year notes fell 14 basis points to 4.30 percent, the biggest decline since Oct. 29. The pound rose, strengthening 0.2 percent versus the dollar, after the U.K. Office for National Statistics said jobless claims unexpectedly fell in November. To contact the reporters on this story:

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German Investor Confidence Falls as Recovery Weakens, Greece Roils Markets

December 15, 2009

By Gabi Thesing Dec. 15 (Bloomberg) — German investor confidence declined for a third month in December after the economic recovery in Europe’s largest economy weakened and concern over Greece’s widening deficit roiled markets. The ZEW Center for European Economic Research index of investor and analyst expectations, which aims to predict developments six months ahead, slipped to 50.4 from 51.1 in November. Economists expected a drop to 50, according to the median of 33 forecasts in a Bloomberg News survey . European stocks dropped last week after Fitch Ratings downgraded Greece’s debt, renewing concern about the fiscal health of some euro-region members. In Germany, the economy probably won’t be able to maintain the 0.7 percent growth rate recorded in the third quarter , when expansion was boosted by government stimulus, the Bundesbank said yesterday. “There was a serious expectations boost earlier in the year and that is running out of steam a bit,” said Nick Matthews , an economist at Royal Bank of Scotland Group Plc in London. “The recovery is still fairly fragile and last week’s events surrounding Greece also weakened investors’ confidence.” The ZEW conducted the survey between Nov. 30 and Dec. 14. The institute’s gauge of the current economic situation rose to minus 60.6 from minus 65.6 in November. Economists forecast that it would increase to minus 60.1, according to the survey. ‘Stable’ The euro extended its decline after the report, dropping to as low as $1.4525. It was at $1.4537 as of 11:09 a.m. in Frankfurt, from $1.4656 yesterday. Separately, the European Central Bank will today call for bids in its last tender of 12-month loans. It has tightened the terms of the loans by indexing the interest rate to its benchmark rather than allotting funds at a fixed 1 percent. The ECB, which has cut its key rate to a record low of 1 percent and flooded markets with cheap cash to stem the crisis, is scaling back its emergency measures “as conditions are now stable enough” to begin the removal, President Jean-Claude Trichet said on Dec. 10. It will announce the results of the tender tomorrow. Recent data from Germany, which emerged from the worst recession since World War II in the second quarter, have painted a mixed economic picture. While factory orders and industrial production fell in October, exports rose more than economists forecast. Manufacturing expanded for a second month in November. Record Profit Deutsche Bank AG , Germany’s biggest bank, said yesterday that pretax profit may reach a record 10 billion euros ($14.7 billion) in 2011 as it boosts earnings at the corporate and investment bank and expands in Asia. BASF SE chief executive officer Juergen Hambrecht said on Dec. 5 that the company will post better-than-expected fourth-quarter results. Sales in October and November were “pleasing,” Hambrecht said. The Bundesbank this month raised its outlook for the economy, forecasting growth of 1.6 percent in 2010 and 1.2 percent in 2011. Still, it said yesterday that the “strength and nature” of the financial crisis has damaged Germany’s growth potential. A strengthening euro may hurt export competitiveness and curb growth. The euro has gained about 17 percent against the dollar since mid-February and reached a 15 month high last month. “A strong euro is certainly a headwind for Germany and may put a brake on the recovery,” said Laurent Bilke , an economist at Nomura International in London. “However, the global rebound will boost demand for German goods, so it’s not going to derail it.” To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net

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Pimco Says `Fear Not,’ Weaker Dollar Will Spur Growth, Keep Reserve Status

December 8, 2009

By Wes Goodman and Garfield Reynolds Dec. 9 (Bloomberg) — Pacific Investment Management Co., which runs the world’s biggest bond fund, said the dollar is poised to fall and the decline may help spur the U.S. economy. “Fear not the falling dollar,” Scott Mather , head of global portfolio management at Pimco, wrote in an article on the company’s Web site . “A gradually weakening dollar may help heal the U.S. economy” by encouraging demand for the nation’s exports, he wrote. The Dollar Index , which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners including the euro and yen, has declined 6.3 percent this year. The currency is sliding as the Federal Reserve keeps U.S. interest rates at a record low, encouraging investors to seek higher yields outside the U.S. The greenback will maintain its role as the world’s reserve currency, and investors shouldn’t worry that a decline will add to inflation, the report said. “There are few viable alternatives,” Mather wrote. “No other currency offers the size and liquidity — not to mention the political and legal stability — necessary to match the dollar as reserve currency of choice.” ‘Inflationary Impulse’ A 10 percent devaluation in the currency may result in an “inflationary impulse” of 1/4 percent to 1/2 percent in the overall U.S. cost of living, the report said. “Deflation is therefore a bigger near-term threat than inflation,” he wrote. Deflation is a general decline in costs in the economy. The Fed cut its target for overnight bank lending to a range of zero to 0.25 percent in December of last year to help the economy snap the steepest recession since the 1930s. The dollar traded at $1.4706 per euro today, and it was as strong as $1.4668, the highest level in a month, after Fitch Ratings cut Greece’s debt ranking. Mather’s comments echo those of Bill Gross , Pimco’s co- chief investment officer, who told CNBC on Oct. 28 that the dollar is an over-owned currency and likely to fall to an all- time low against its major counterparts. Pimco, in Newport Beach, California, is a unit of Munich-based insurer Allianz SE. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net ; Garfield Reynolds in Sydney at greynolds1@bloomberg.net .

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Thirty-Year Mortgage Rates in U.S. Dropped to Record-Low 4.71% Last Week

December 3, 2009

By Brian Louis Dec. 3 (Bloomberg) — Mortgage rates for fixed 30-year loans dropped to a record low amid signs that the housing market is beginning to emerge from the worst slump since the 1930s. The rate fell to 4.71 percent for the week ended today, the lowest since Freddie Mac began compiling the data in 1971. The average 15-year rate was 4.27 percent, mortgage buyer Freddie Mac of McLean, Virginia, said today in a statement. Low mortgage costs and a tax credit for first-time homebuyers are helping increase demand for property as the number of contracts to buy previously owned homes rose in October and mortgage applications gained last week. The jobless rate at a 26-year high and mounting foreclosures represent challenges for the housing industry. The number of contracts to buy an existing home in the U.S. gained in October as consumers rushed to take advantage of the tax credit that had been scheduled to expire. The index of signed purchase agreements, or pending home sales, climbed 3.7 percent to 114.1 after rising 6 percent in September, the National Association of Realtors said on Dec. 1. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a mortgage rose 2.1 percent in the week ended Nov. 27. The purchase index gained 4.1 percent and the refinancing gauge increased 1.7 percent. A Federal Reserve program to buy up to $1.25 trillion in securities backed by home loans has helped reduce mortgage rates this year. The program is scheduled to end the first quarter of next year. Bond Purchases The bond purchases from Fannie Mae , Freddie Mac and Ginnie Mae, which buy mortgages from lenders and package them into bonds, brought yields on the securities down this year and allowed lenders to reduce mortgage rates while still selling the securities at a profit. President Barack Obama signed legislation last month to extend and expand a homebuying tax credit, which may further boost property sales. The tax credit for first-time buyers was set to expire Nov. 30 and may have sparked an increase in existing home sales in October. Purchases of existing homes rose 10.1 percent to the highest level since February 2007. To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net .

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Thirty-Year Mortgage Rates in U.S. Dropped to Record-Low 4.71% Last Week

December 3, 2009

By Brian Louis Dec. 3 (Bloomberg) — Mortgage rates for fixed 30-year loans dropped to a record low amid signs that the housing market is beginning to emerge from the worst slump since the 1930s. The rate fell to 4.71 percent for the week ended today, the lowest since Freddie Mac began compiling the data in 1971. The average 15-year rate was 4.27 percent, mortgage buyer Freddie Mac of McLean, Virginia, said today in a statement. Low mortgage costs and a tax credit for first-time homebuyers are helping increase demand for property as the number of contracts to buy previously owned homes rose in October and mortgage applications gained last week. The jobless rate at a 26-year high and mounting foreclosures represent challenges for the housing industry. The number of contracts to buy an existing home in the U.S. gained in October as consumers rushed to take advantage of the tax credit that had been scheduled to expire. The index of signed purchase agreements, or pending home sales, climbed 3.7 percent to 114.1 after rising 6 percent in September, the National Association of Realtors said on Dec. 1. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a mortgage rose 2.1 percent in the week ended Nov. 27. The purchase index gained 4.1 percent and the refinancing gauge increased 1.7 percent. A Federal Reserve program to buy up to $1.25 trillion in securities backed by home loans has helped reduce mortgage rates this year. The program is scheduled to end the first quarter of next year. Bond Purchases The bond purchases from Fannie Mae , Freddie Mac and Ginnie Mae, which buy mortgages from lenders and package them into bonds, brought yields on the securities down this year and allowed lenders to reduce mortgage rates while still selling the securities at a profit. President Barack Obama signed legislation last month to extend and expand a homebuying tax credit, which may further boost property sales. The tax credit for first-time buyers was set to expire Nov. 30 and may have sparked an increase in existing home sales in October. Purchases of existing homes rose 10.1 percent to the highest level since February 2007. To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net .

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30-year-loan rates match record low (Washington Post)

November 27, 2009

Average rates for 30-year, fixed-rate mortgages fell this week, matching a record low set last spring. Rates are more than a full percentage point below what they were a year ago, Freddie Mac said Wednesday.

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Dong Declines to Record Low, Stocks Slump After Vietnam Devalues Currency

November 25, 2009

By Van Nguyen Nov. 26 (Bloomberg) — Vietnam’s dong plunged to a record low after the central bank devalued the currency to curb quickening inflation and a widening trade deficit. The State Bank of Vietnam yesterday set the reference rate for today’s trading 5.2 percent lower at 17,961 against the dollar, after the difference between the spot and black-market rates widened to the most in a decade. The dong has fallen 5.8 percent this year, heading for a second annual decline. “The central bank is trying to regain control of the foreign-exchange market by stepping up with an aggressive approach to stop the drift in the unofficial market rate,” said Fiachra MacCana , managing director and head of research at Ho Chi Minh City Securities Co. The dong’s 3.4 percent drop today was the biggest in more than 11 years, according to data compiled by Bloomberg. It traded as weak as 18,500 against the dollar, and was at 18,499 as of 8:58 a.m. in Hanoi. The central bank yesterday also narrowed the daily trading band to 3 percent from 5 percent to limit fluctuations. The currency strengthened to 19,450 and 19,650 dong per dollar at money changers in Ho Chi Minh City as of 8:49 a.m., compared with 19,600 to 19,890 yesterday, according to a state- run telephone directory information service. Vietnam yesterday raised the benchmark rate one percentage point to 8 percent, the first nation in Asia to raise borrowing costs. The Southeast Asian nation is trying to sustain economic growth in 2010, lower credit growth and meet economic targets, the central bank said yesterday. “The increase in the prime rate is reasonable, but by itself it’s not going to calm down the currency market,” MacCana said. “The movement in the reference rate is kind of chasing after the black-market rate, but is not enough to catch up.” To contact the reporter on this story: Van Nguyen in Ho Chi Minh City at vnguyen23@bloomberg.net

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U.K. Inflation Rate Increases for the First Time in Eight Months to 1.5%

November 17, 2009

By Jennifer Ryan Nov. 17 (Bloomberg) — The U.K. inflation rate rose more than economists forecast in October, climbing for the first time in eight months as fuel costs and air fares climbed. Consumer prices gained 1.5 percent from a year earlier, compared with 1.1 percent the previous month, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 30 economists was 1.4 percent. On the month, prices rose 0.2 percent. Bank of England policy maker Andrew Sentance said in an interview yesterday that there may be “volatility” in inflation, which risks exceeding the 2 percent target after two years. He said it is still too soon to consider tightening policy after the central bank expanded its bond-purchase plan to 200 billion pounds ($337 billion) to combat deflation. “From a policy perspective, a jump up in inflation isn’t going to be material,” said Amit Kara , an economist at UBS AG and a former official at the Bank of England. “The bank really needs to kick-start the economy. They may do a bit more asset purchases, and there won’t be any rate hikes until the third quarter.” The pound rose 0.2 percent to $1.6867 after the release. The yield on the two-year government bond was little changed at 1.317 percent. The inflation rate increased as prices of fuels and lubricants fell less this year than they did in the same month a year earlier, the statistics office said. The cost of second- hand cars increased by a record on the month because of a shortage of stock, while air fares climbed this year compared with a drop in 2008. Fuel Costs EasyJet Plc, Europe’s second-biggest discount airline, said today that full-year profit fell 14 percent as rising fuel costs more than offset growth in passenger numbers. The Bank of England published new quarterly growth and inflation forecasts Nov. 11 showing the inflation rate won’t return to the 2 percent target until 2012, though will rise above the goal around the turn of the year as a temporary cut in value-added tax expires. “In the short term, inflation is likely to be below target, though we’re also likely to see a bit of volatility,” Sentance said in an interview with Bloomberg Television. “As the recovery develops, there will be some upward pressures on inflation.” Policy makers decided this month to increase their program to buy bonds with newly created money by 25 billion pounds as they left they key interest rate at a record low of 0.5 percent. Bank of England Governor Mervyn King said last week that he has an “open mind” on whether to expand it further. To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net

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U.S. Mortgage Rates for 30-Year Fixed Home Loans Decline for Second Week

November 12, 2009

By Brian Louis Nov. 12 (Bloomberg) — Mortgage rates for 30-year fixed U.S. home loans fell to the lowest in five weeks, providing a boost to potential buyers and those who want to refinance. The average 30-year rate declined to 4.91 percent from 4.98 percent. The 15-year rate was 4.36 percent, mortgage buyer Freddie Mac of McLean, Virginia, said today in a statement. Falling mortgage rates, a tax credit for first-time homebuyers and signs the recession may be abating have helped increase demand for U.S. homes. Sales rose 11 percent to a two- year high in the third quarter, the National Association of Realtors said this week. “You’re probably not going to see upward pressure on mortgage rates anytime soon,” said Scott Brown , chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. “You’re not going to see a full recovery in the housing sector until you see a recovery beginning in the labor market.” The unemployment rate in the U.S. jumped to 10.2 percent in October, the highest level since 1983. Payrolls fell by 190,000 last month, more than forecast by economists, a Labor Department report showed Nov. 7. The jobless rate rose from 9.8 percent in September. Unemployment is extending a housing recession that started with mortgage defaults on loans to subprime borrowers and has spread to prime borrowers as the economy weakened. Central Bank Plan Federal Reserve bond purchases from Fannie Mae , Freddie Mac and Ginnie Mae, which package home loans into securities, brought down yields on the bonds this year, allowing lenders to reduce rates on new loans while still selling the securities backed by them at a profit. The central bank pledged to buy up to $1.25 trillion in mortgage-backed securities bonds, helping drive mortgage rates to a record low 4.78 percent in April. The central bank’s purchasing program is scheduled to end in the first quarter of next year, the Federal Open Market Committee said on Sept. 23. It reiterated those plans last week. To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net .

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BOE Won’t Increase Interest Rates in Next Year, Ex-Chancellor Clarke Says

November 11, 2009

By Svenja O’Donnell and Robert Hutton Nov. 11 (Bloomberg) — Former U.K. finance minister Kenneth Clarke said Bank of England Governor Mervyn King is unlikely to seek interest-rate increases in the next year as the longest recession on record keeps inflation in check. “The governor of the bank is going to face an absolutely crucial decision,” Clarke told reporters at a lunch in London yesterday. “I don’t think he’s likely to want to put up interest rates in the next 12 months.” The Bank of England will today publish economic growth and inflation forecasts as policy makers seek to gauge the impact of their decision last week to expand their bond-purchase program to 200 billion pounds ($335 billion). The bank has kept the benchmark interest rate at a record low of 0.5 percent since March to combat the slump. “Sooner or later you’re going to have to reverse” the asset-buying program , said Clarke, who served as chancellor of the exchequer in the last Conservative government, from 1993 to 1997. “All the disinflationary influences are so strong” that inflationary pressures probably won’t materialize in the next year or two, he said. The Bank of England said last week it predicted “a slow recovery” in the U.K. economy. The bank said in its previous forecast round in August that inflation , currently at 1.1 percent, would miss the 2 percent target in three years. “On balance we believe the committee will raise its projection significantly closer to the 2 percent target, assisted by the effects of the further extension in quantitative easing and a flat rate profile,” David Tinsley , an economist at National Australia Bank in London and a former central bank official, said in a note yesterday. ‘Unchartered Waters’ Clarke said that the effects of the bank’s bond-purchase program are hard to gauge. “Nobody knows really what quantitative easing is going to turn out to do to the British economy and nobody knows really what happens when you stop,” said Clarke, who is now the Conservative lawmaker who speaks on business policy. “We’re in uncharted waters.” Prime Minister Gordon Brown is trying to revive the economy to shore up his popularity in time for the next election, due by June 2010 at the latest. A Populus poll for the Times showed yesterday that the Labour Party trails the opposition Conservatives by 10 percentage points. The number of people claiming jobless benefit, which is already at the highest since 1997, probably rose by 20,000 in October, according to the median forecast of 28 economists surveyed by Bloomberg News. The Office for National Statistics will publish the report at 9:30 a.m. today. Clarke said that the Conservatives need to “work like mad” to avoid the prospect of a government which doesn’t win a majority of seats in Parliament after Britain’s next general election. “At a time of national crisis, a hung Parliament would be one of the biggest disasters we could suffer,” Clarke said. “You’re going to need a strong government capable of doing unpopular things.” To contact the reporters on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net ; Robert Hutton in London at rhutton1@bloomberg.net .

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German Investor Confidence Declines in November on Weaker Economic Outlook

November 10, 2009

By Jana Randow Nov. 10 (Bloomberg) — German investor confidence declined for a second month in November as the prospect of expiring government stimulus programs and rising unemployment tempered expectations for economic growth. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict developments six months ahead, dropped to 51.1 from 56 in October. The median forecast in a Bloomberg News survey of 39 economists was for a decline to 55. The benchmark DAX share index has eased 3.5 percent in the past month amid concern the recovery will slow next year when government stimulus measures peter out and higher joblessness constrains consumer spending. Exports may also falter if a rebound in global trade runs out of steam and the euro continues to appreciate, making European goods more expensive abroad. “Earlier enthusiasm is now gradually giving way to realism,” said Carsten Brzeski , senior economist at ING Belgium SA in Brussels. “However, this is no reason to worry. The outlook still looks good, even though the German economy is about to enter calmer waters.” ZEW’s gauge of the current economic situation rose to minus 65.6 from minus 72.2 in October. The DAX index and the euro fell after the report and the yield on German 10-year government bonds slipped 3 basis to 3.27 percent. ‘Small Steps’ “Investors are signaling that they don’t expect a strong growth push next year,” ZEW President Wolfgang Franz said in a statement. “The recovery is going to progress in small steps.” Germany emerged from its worst recession since World War II in the second quarter. The government, which is spending 85 billion euros ($127 billion) to stimulate growth, last month raised its outlook for the economy, forecasting expansion of about 1.2 percent in 2010 after a 5 percent contraction this year. German exports and industrial production increased more than economists forecast in September, reports showed yesterday. Business confidence rose to a 13-month high in October and the country’s manufacturing industry grew for the first time in 15 months. The recovery has helped push the DAX up 52 percent from its March trough, a trend matched across Europe’s stock markets. Jobless Risk “Industrial production is recovering and foreign demand is picking up, but the economy won’t take off,” said Jens Kramer , an economist at Norddeutsche Landesbank in Hanover. “The consequences of the recession for the labor market are yet to come and that puts private consumption at risk.” Metro AG, Germany’s largest retailer, said on Nov. 3 that third-quarter profit declined 61 percent as rising joblessness eroded consumer spending across Europe, and forecast no improvement for the rest of the year. Euro-area unemployment will surge to 10.9 percent in 2011 from 9.7 percent currently, according to the European Commission. That may encourage the European Central Bank to leave its benchmark interest rate at a record low of 1 percent until the second half of next year. The euro’s 20 percent gain against the dollar since mid- February to $1.50 may also dull export growth, a key driver of economic expansion. “The recovery of the German economy depends strongly on a pickup of foreign demand,” said Stefan Bielmeier , an economist at Deutsche Bank AG in Frankfurt. “The question is whether that recovery is sustainable yet. I’d be careful.” To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net

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Mortgage rates dip below 5 percent (Fort Worth Star-Telegram)

November 5, 2009

Rates for 30-year home loans dipped below 5 percent this week after rising for three straight weeks. The average rate fell to 4.98 percent from 5.03 percent a week earlier, mortgage company Freddie Mac said Thursday. Rates had hovered below 5 percent for nearly a month until inching upward two weeks ago. They hit a record low of 4.78 percent in the spring but are still attractive for people …

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U.S. Stock Futures Extend Advance After Jobless Claims, Productivity Data

November 5, 2009

By Sapna Maheshwari Nov. 5 (Bloomberg) — U.S. stock futures rose, signaling the Standard & Poor’s 500 Index may climb for a fourth day, as jobless claims and worker productivity beat forecasts and Cisco Systems Inc. said a global economic recovery spurred a rebound in sales. Cisco, the biggest maker of networking equipment, gained 3.8 percent after earnings topped analysts’ estimates and the company expanded its stock buyback plan by $10 billion. Research In Motion Ltd. rose after saying it will repurchase as much as $1.2 billion in shares. Futures climbed to their highest levels of the day as government data showed initial claims for unemployment benefits dropped to 512,000 last week and worker productivity surged at the fastest pace in six years. Futures on the Standard & Poor’s 500 Index expiring in December added 0.4 percent to 1,050.7 at 8:59 a.m. in New York. Dow Jones Industrial Average Index futures increased 43 points, or 0.4 percent, to 9,828 and Nasdaq-100 Index futures rose 0.6 percent to 1,696.5. “We’ve actually seen more good news than bad across a broad spectrum of economic data,” said Art Hogan , the chief market analyst at New York-based Jefferies & Co. “We look at the initial jobless claims as another piece of economic data we’re pretty happy with. That said, we certainly can’t call this a victory until we start getting into an initial jobless claims that’s half of this.” The S&P 500 has climbed 55 percent from a 12-year low in March after $11.6 trillion in government spending, lending and guarantees returned the economy to growth following four straight quarters of contraction. The index is trading at more than 21 times earnings, according to weekly data compiled by Bloomberg. That’s near the highest level since July 2002. Federal Reserve U.S. stocks yesterday erased most of a 156-point rally in the Dow average after a House bill to curb credit-card rates spurred concern about bank earnings, outweighing the Federal Reserve’s plan to keep interest rates at a record low. European stocks dropped today after profits at Zurich Financial Services AG and Munich Re missed analysts’ estimates. Asian shares declined as South Korea said it’s “unclear” whether the economic rebound will be sustained. The Bank of England slowed the pace of bond purchases as signs of an economic recovery give policy makers scope to wind down their money-printing program next year. The European Central Bank may signal it’s moving closer to withdrawing emergency stimulus measures after leaving its benchmark interest rate at a record low today. Cisco Rallies Cisco added 3.8 percent to $24.17. The company’s net income fell 19 percent to $1.79 billion, or 30 cents a share, in the first quarter, which ended Oct. 24. Excluding stock compensation and some other costs, profit was 36 cents, beating the 31-cent average estimate in a survey of analysts. Cisco Chairman and Chief Executive Officer John Chambers , one of the first technology leaders to herald the recession two years ago, said he now sees a global economic recovery, fueling a rebound in his company’s sales this quarter. “Cisco is talking about a recovery around the world, Chambers is being very optimistic and people listen to him,” said William Dwyer , chief investment officer at Baltimore-based MTB Investment Advisors, which oversees $13 billion. “People are a little cautious, they like what they’re seeing, but there’s an awful lot built into the market.” Earnings have exceeded the average analyst estimate at 81 percent of S&P 500 companies that have reported results, according to data compiled by Bloomberg. That would mark the highest full-quarter proportion in data going back to 1993. Research In Motion, the maker of the BlackBerry phone, added 2.7 percent to $59.19. Whole Foods Market Inc. slid 9.9 percent to $28.90. The natural-food grocer forecast full-year earnings of as little as $1.05 a share, trailing the average estimate of $1.11 from analysts in a Bloomberg survey. Crude oil declined as much as 1 percent to $79.58 a barrel in New York, snapping three days of gains. To contact the reporter on this story: Sapna Maheshwari in New York at smaheshwar11@bloomberg.net .

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Trichet May Signal ECB Is Moving Closer to Exit as Officials Debate Timing

November 5, 2009

By Jana Randow Nov. 5 (Bloomberg) — The European Central Bank may today signal it’s moving closer to withdrawing emergency stimulus measures without giving details as policy makers debate an exit strategy, economists said. ECB officials meeting in Frankfurt will keep the benchmark interest rate at a record low of 1 percent, according to all 56 economists in a Bloomberg News survey. Economists and investors will listen to President Jean-Claude Trichet for clues on when the ECB will start scaling back lending to banks and whether it will charge them more for 12-month money. “Trichet will probably indicate the ECB is thinking about a change of strategy and announce more in December,” said Karsten Junius , a senior economist at Dekabank in Frankurt. “Some smart people are putting a lot of thought into withdrawing stimulus, but it’s unclear whether they’ve managed to reach a consensus on an exit strategy.” Council member Axel Weber said last week commercial banks need to prepare for a “gradual withdrawal” of the ECB’s liquidity, and signaled its 12-month loans in December may be the last. Other policy makers have expressed concern that the economy remains too fragile to remove stimulus measures, and may want more evidence of a recovery before committing to action. The euro’s 18 percent gain against the dollar since mid-February is undermining exports and threatening to damp growth next year. The ECB announces its rate decision at 1:45 p.m. and Trichet will hold a press conference 45 minutes later. Bank of England, Fed The Bank of England will probably leave its key rate at 0.5 percent and expand its asset-purchase program by 50 billion pounds ($83 billion) to 225 billion pounds, a survey of economists shows. That decision is due at 12 p.m. in London. The Federal Reserve yesterday left its benchmark rate between zero and 0.25 percent and restated its intention to keep interest rates “exceptionally low” for “an extended period,” even as it acknowledged the U.S. economy is picking up. The 16-nation euro area probably returned to growth in the third quarter, ending its worst recession since World War II. The region’s service and manufacturing industries grew for a third month in October and business confidence rose to the highest level in more than a year. The economy will expand 0.7 percent in 2010, the European Commission said Nov. 3, revising its forecast from a 0.1 percent contraction. ‘Better Than Stabilizing’ “The economy is doing better than just stabilizing,” said Laurent Bilke , senior economist at Nomura International in London. Still, Trichet won’t want to sound too optimistic about the economic outlook because that could fuel expectations of a credit tightening and drive up demand for the ECB’s 12-month loans, he said. The ECB will offer banks unlimited funds for a year for the third time on Dec. 15. Banks drew 75 billion euros ($111 billion) at the last offering in September, down from 442 billion euros in the first tender in June. Trichet has kept open the option of charging a higher interest rate on the December loans. “Some of the new instruments will be needed longer than others,” Weber, who heads Germany’s Bundesbank, said on Oct. 29. “From today’s perspective, the unlimited allotment in our main refinancing operations will have to be maintained for a longer period of time than the guarantee of very long-term liquidity.” The same day, Belgium’s ECB council member, Guy Quaden , signaled he doesn’t expect the bank to change its policy stance anytime soon. ‘Very Weak’ “It’s probable that in the coming months inflation will remain very weak and the economic recovery fragile,” Quaden said. “Conclusions to draw for the monetary policy stance seem very obvious.” Both Weber and Quaden spoke during the so-called purdah period, the week before a rate decision when ECB officials are supposed to refrain from commenting on monetary policy. “Council members are becoming vociferous again and Trichet is probably not really comfortable with that,” said Colin Ellis , an economist at Daiwa Securities in London. “Trichet is working very hard behind the scenes at the moment to build a consensus. He’ll do his utmost to avoid a showdown, but clearly there will be a vigorous debate.” To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net .

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Bank of England Should End Bond Purchase Plan at $328 Billion, Julius Says

November 3, 2009

By Brian Swint and David Tweed Nov. 3 (Bloomberg) — The Bank of England should cap its bond purchase plan at 200 billion pounds ($328 billion) this week in a signal that it will stop buying assets in the next quarter, former policy maker DeAnne Julius said. “I would, at this meeting, ask for a small extension, say 25 billion, just to have in our back pocket in case we need to use it,” Julius said in a Bloomberg Television interview in London yesterday. “But I’d be aiming to use it at a diminishing rate and looking at February to pause completely.” While the program has failed to help the economy return to growth, shutting it down right away would shock investors, Julius said. The U.K. central bank will expand the program to 225 billion pounds from the current 175 billion pounds on Nov. 5, according to the median estimate of 48 economists in a Bloomberg News survey . “It’s hard to say quantitative easing is being that effective,” Julius said. “It’s very important that the Bank of England not create its own shocks for this economy. The patient is fragile.” Policy makers, led by Governor Mervyn King , extended the program by 50 billion pounds for a second time in August after starting the program in March with a 75 billion-pound target. The benchmark interest rate has been at a record low 0.5 percent for eight months. Record Recession U.K. gross domestic product fell 0.4 percent in the third quarter, the statistics office reported Oct. 23. That’s the sixth consecutive contraction, the longest streak since records began in 1955. “There is definitely a global recovery under way,” Julius said. “In the U.K., it doesn’t seem to be as prevalent as elsewhere, if we believe the latest evidence on GDP estimates. But we’re certainly seeing it here too.” While the central bank’s bond-purchases have helped bring down yields on government bonds, they haven’t done much to bolster the economy, Julius said. Lower interest rates and the depreciation of the pound will be enough to put the economy back on track, she said. “We’ve got to phase it out very gradually,” Julius said. “We have to be careful about just how we do that because there’s so much uncertainty.” To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net ; David Tweed in London at dtweed@bloomberg.net .

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Japan Jobless Rate Unexpectedly Falls a Second Month to 5.3% Amid Recovery

October 29, 2009

By Toru Fujioka Oct. 30 (Bloomberg) — Japan’s jobless rate unexpectedly dropped for a second month in September, adding to signs that a recovery in the world’s second-largest economy is spreading to consumers. The unemployment rate declined to 5.3 percent from 5.5 percent in August, the statistics bureau said today in Tokyo. The median estimate of 29 economists surveyed by Bloomberg was for the rate to increase to 5.6 percent. A global recovery fueled by more than $2 trillion in stimulus measures is bolstering business at companies from Honda Motor Co. to Hitachi Construction Machinery Co. Consumers are also more confident that the worst is over — household sentiment rose to a 23-month high in September and retail sales fell at the slowest pace in 10 months. “There are some signs of an improvement in the labor market,” said Takeshi Minami , chief economist at Norinchukin Research Institute in Tokyo. A separate report showed the job-to-applicant ratio , a leading indicator of employment trends, improved for the first time in more than two years. The ratio rose to 0.43 last month from a record low of 0.42 in August, meaning there are 43 jobs for 100 job seekers. Household spending rose 1 percent from a year earlier, the statistics bureau said today. Manufacturers increased production for a seventh month in September, extending the longest stretch of gains in 12 years, a report showed yesterday. Honda, Japan’s second-largest carmaker, almost tripled its full-year profit forecast as government stimulus measures boosted demand, the company said this week. Record Unemployment Still, economists expect the unemployment rate to reach a record high of 6 percent next year. Nomura Holdings Inc., Mitsubishi UFJ Financial Group Inc. and their biggest rivals plan to cut hiring of university graduates in Japan by almost half, according to the companies. Even though the nation is recovering, “I don’t think the unemployment rate will go down quickly, given the very low level of the economy,” Norinchukin’s Minami said. To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

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U.S. 30-Year Fixed Mortgage Rates Climb to 5% in Second Weekly Increase

October 22, 2009

By Brian Louis Oct. 22 (Bloomberg) — Mortgage rates for 30-year fixed U.S. home loans rose for a second consecutive week, making borrowing more expensive and threatening signs of stabilization in the housing market. The average 30-year rate climbed to 5 percent from 4.92 percent last week. The 15-year rate was 4.43 percent, mortgage buyer Freddie Mac of McLean, Virginia, said today in a statement. Rising borrowing costs reduced mortgage applications last week. The Mortgage Bankers Association’s index of applications to purchase a home or refinance fell 14 percent. Homebuilders broke ground on fewer homes than anticipated in September as a government tax credit for first-time homebuyers is set to expire at the end of November. The Federal Reserve set out last year to encourage lower mortgage rates by pledging to buy bonds backed by home loans. It increased the size of the program to $1.25 trillion in March. The bond purchases from Fannie Mae , Freddie Mac and Ginnie Mae brought down yields on mortgage-backed securities and allowed lenders to reduce rates on new loans while still selling the securities backed by them at a profit. The plan helped drive mortgage rates to a record low of 4.78 percent twice in April. The central bank plans to slow the pace of buying. The program is scheduled to end in the first quarter next year, the Federal Open Market Committee said in a statement Sept. 23. Mortgage applications to buy a home fell 7.6 percent in the week ended Oct. 16 and refinancings decreased 17 percent, according to the Mortgage Bankers Association. Housing starts rose 0.5 percent to an annual rate of 590,000 in August. That was lower than previously estimated, figures from the Commerce Department showed yesterday. Permits, a sign of future construction, fell for the second time in the past three months. To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net .

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HSBC’s King Says Pound Crisis is Always a Risk After BOE `Benign Neglect’

October 15, 2009

By Jennifer Ryan Oct. 16 (Bloomberg) — Britain faces the danger of a currency crisis after policy makers allowed the pound to become “seriously undermined,” HSBC Holdings Plc Chief Economist Stephen King said. “There’s always a risk of a sterling crisis, particularly about where we are currently,” King said in an interview at an HSBC conference in London yesterday. “It clearly is already a currency that’s been seriously undermined.” Since the start of 2008, Britain’s swelling government debt has prompted drops of about 18 percent against the dollar and 20 percent slump against the euro. The U.K. currency touched a four-month low against the dollar in September after Bank of England Governor Mervyn King said that the currency’s decline was “helpful” in rebalancing the economy. The pound is “extremely weak,” HSBC’s King said. “Part of this is the benign neglect on behalf of policy makers who were quite happy in a sense to see sterling falling. The problem with admitting that you’re happy about it is that a small fall can turn into a very large fall, so yeah, there’s definitely a danger there.” Paul Fisher , the bank’s markets director and its former head of foreign exchange, said in an interview published in the Financial Times yesterday that the bank’s comments on sterling have been backward looking, and policy makers try not to comment on future currency movements. Currency Forecasts HSBC’s King said the pound and the dollar may stay “weak” for the next 12 months. “Investors are becoming more and more concerned about the fact that these countries have big budget deficits , have rapidly rising government debt-to-GDP ratios, have extremely loose monetary policy,” he said. “The risk for the next year or so is that the dollar and sterling remain extremely weak and possibly get even weaker, particularly against the emerging currencies but possibly also the yen and the euro.” The bank said at its October decision it would finish spending all 175 billion pounds ($284 billion) allotted to its bond purchase program by its next meeting, and kept the key interest rate at a record low of 0.5 percent. HSBC’s King said the central bank should signal at its next policy meeting in November an intention to continue its bond- purchase program, even if it doesn’t announce an increase in the program’s size. An announcement to end the purchases could spark a “panic” among investors, he said. ‘Panic’ Risk “If you’re in a situation whereby you ended the process and stopped doing any more and the market started to panic as a result of that, you could get a sort of unintended adverse consequence whether it would be a spike up in bond yields or whatever that might undermine the performance of the economy more broadly,” he said. “I personally would like them to have a signal that policy remains loose for quite a long time.” The bank’s previous signals that it may consider ending the program sparked losses in government bond markets. The yield on the 10-year gilt rose to the highest level in almost six weeks July 23 after Bank of England policy maker Andrew Sentance said the bank may pause the bond program if necessary. Monetary policy may stay looser “than would otherwise be the case” if the U.K. government opts to tighten fiscal policy, King said. “Monetary and fiscal policy in a sense have become one and the same thing,” King said. “The distinction that one used to have doesn’t really exist any more because they are sort of combined together. The sequencing of how you exit from the current position is very, very important and I personally prefer more action on fiscal policy on monetary policy.” To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net

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U.S. 30-Year Mortgage Rates Climb to 4.92% in First Increase Since August

October 15, 2009

By Brian Louis Oct. 15 (Bloomberg) — Mortgage rates for 30-year fixed U.S. home loans rose for the first time since August, ending a streak that helped boost home-loan applications and demand for housing. The average 30-year rate climbed to 4.92 percent from 4.87 percent last week. The 15-year rate was 4.37 percent, mortgage buyer Freddie Mac of McLean, Virginia, said today in a statement. “It’s still a small move,” said Donald Rissmiller , chief economist at New York-based Strategas Research Partners LLC. “If you’re a policymaker, you’re still satisfied with rates in this area.” Rising borrowing costs reduced mortgage applications last week from the highest in four months. The Mortgage Bankers Association’s index of applications to purchase a home or refinance fell 1.8 percent. Rising rates make it more expensive to buy a home and may threaten the signs of stabilization in the housing market. The Federal Reserve set out last year to encourage lower mortgage rates by pledging to buy bonds backed by home loans. It increased the size of the program to $1.25 trillion in March. The bond purchases from Fannie Mae , Freddie Mac and Ginnie Mae brought down yields on mortgage-backed securities and allowed lenders to reduce rates on new loans while still selling the securities backed by them at a profit. The plan helped drive mortgage rates to a record low of 4.78 percent twice in April. Mortgage applications to buy a home fell 5 percent in the week ended Oct. 9 and the refinancing gauge decreased 0.1 percent, according to the Mortgage Bankers Association. To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net .

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Bank of Korea Keeps Benchmark Rate at Record Low 2%, Signals It’s On Hold

October 8, 2009

By Seyoon Kim Oct. 9 (Bloomberg) — South Korea’s central bank kept its benchmark interest rate unchanged at a record low and signaled it may keep borrowing costs on hold as home loans slow and it gauges the strength of the economic recovery. Governor Lee Seong Tae left the seven-day repurchase rate at 2 percent in Seoul today and said the Bank of Korea “will maintain an accommodative policy stance for the time being and do what is needed to bring about the continuation of the recent improving pattern of economic movements and financial market stabilization.” South Korea’s economy expanded 2.6 percent in the second quarter, the fastest pace in almost six years, and the benchmark Kospi stock index has risen more than 40 percent this year. Lee said the central bank’s earlier concern about rising property prices and mortgage lending had eased as borrowing slowed. “This statement suggests that the Bank of Korea is putting some faith in the ability of the authorities to cool down the real estate market without hiking overall rates,” Frederic Neumann , senior Asia economist at HSBC Holdings Plc in Hong Kong, said in a note. “The official statement, surprisingly, appears more dovish than the previous one.” South Korea’s financial regulator said yesterday it plans to further tighten regulations on non-banking finance companies’ lending to households starting Oct. 12. The loan-to-value ratio in mortgages will be lowered to 50 percent from 60 percent in parts of Seoul, the Financial Supervisory Service said. Low interest rates have spurred consumer borrowing, with bank lending to households expanding for a seventh straight month in August before falling in September. Loans to households climbed 3 trillion won ($2.6 billion) to 405.1 trillion won in August and fell 1 trillion won in September, the Bank of Korea said. Currency, Bonds The currency reached the strongest level in a year today on speculation the central bank would signal plans to raise rates. The won was little changed after the decision. Korean bonds rose, bringing the yield on the benchmark three-year note down by 9 basis points to 4.4 percent, according to the Korea Stock Exchange. Finance Minister Yoon Jeung Hyun earlier this week warned that unwinding economic stimulus policies too soon would “impede” the recovery. The central bank cut the benchmark interest rate by 3.25 percentage points from October to February, the most aggressive easing since the bank began setting a policy rate a decade ago, to cushion the economy from the global recession. The government also increased spending this year to support demand. ‘Improving Trend’ “The recent improving trend in real economic activities has been maintained,” the central bank said in a statement today. “In the coming months, the Korean economy is likely to maintain its positive growth,” helped by the improvement in the world economic environment and as companies rebuild inventories, it said, adding that “a number of uncertainties surround the actual pace.” The Bank of Korea’s decision came as other central banks begin to indicate a willingness to raise rates. Federal Reserve Chairman Ben S. Bernanke said yesterday the central bank will be prepared to tighten monetary policy when the outlook for the U.S. economy “has improved sufficiently.” To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net

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Japan’s Machinery Orders Increase 0.5%, Rebounding From July’s Record Low

October 8, 2009

By Jason Clenfield and Tatsuo Ito Oct. 9 (Bloomberg) — Japanese machinery orders rose less than estimated in August, barely rebounding from a record low as depressed capital spending by companies inhibits the economy’s recovery from its worst postwar recession. Orders , an indicator of business investment in three to six months, climbed 0.5 percent from July, when they fell 9.3 percent, the Cabinet Office said today in Tokyo. Bookings in July dropped to the lowest level since the government began the survey in 1987. Economists forecast a 2.1 percent gain. While emergency spending by governments worldwide has revived demand for Japanese exports, manufacturers like Toshiba Corp. and Toyota Motor Corp. are still closing plants and slashing costs to return to profit. Firms surveyed last month by the Bank of Japan said they plan to cut investment at a record pace even amid signs demand from abroad is improving. “These numbers are still weak; they don’t suggest that capital spending is starting to bottom out,” said Masamichi Adachi , senior economist at JPMorgan Chase & Co. in Tokyo. “Companies still have too much capacity, and the economic recovery is likely to be slow.” The yen traded at 88.96 per dollar at 10:38 a.m. in Tokyo from 88.65 before the report. The currency climbed to an eight- month high of 88.01 this week, threatening to erode exporters’ repatriated profits. The Nikkei 225 Stock Average rose 1.1 percent, led by trading companies as commodity prices gained. Machinery orders slid 26.5 percent from a year earlier, today’s report showed. Tankan Survey The central bank’s Tankan survey of business sentiment released last week showed large firms plan to cut capital spending by 10.8 percent this year. The reduction plan for September was the deepest pullback in at least 26 years and it was also worse than estimates made by companies three months ago as the nation was emerging from recession. “Very simply, that shows that companies are not getting more optimistic,” said Martin Schulz , senior economist at Fujitsu Research Institute in Tokyo. “Demand hasn’t come back on a broad basis and the inventory rebuild that’s driven exports until now has just about run its course.” Toyota, which has benefited from government programs to encourage spending on energy-efficient cars, last month announced it will hire 1,600 temporary workers in Japan to meet increased demand for its Prius hybrid. Even after raising its production targets, Toyota estimates a third of its factory capacity will go unused this year. The company in August reiterated its plan to cut capital spending by 36 percent. Growth Driver Business investment accounted for about 15 percent of last year’s gross domestic product and capital spending was a key driver of growth during the nation’s longest postwar expansion in 2002-2007. Nevertheless, there are also signs that the economy is improving. Factory output rose for a sixth month in August; overseas shipments increased 6.1 percent in volume terms; and sentiment among both businesses and consumers is improving. “There’s no question that things are getting better,” said Hiroshi Shiraishi , an economist at BNP Paribas in Tokyo. “But with this kind of excess capacity, there’s little hope for a strong recovery.” To contact the reporters on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net ; Tatsuo Ito in Tokyo at tito@bloomberg.net .

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Japan Machine Orders Increased 0.5% in August, Rebounding From Record Low

October 8, 2009

By Jason Clenfield and Tatsuo Ito Oct. 9 (Bloomberg) — Japanese machinery orders rose less than estimated in August, barely rebounding from a record low as depressed capital spending by companies inhibits the economy’s recovery from its worst postwar recession. Orders , an indicator of business investment in three to six months, climbed 0.5 percent from July, when they fell 9.3 percent, the Cabinet Office said today in Tokyo. Bookings in July dropped to the lowest level since the government began the survey in 1987. Economists forecast a 2.1 percent gain. While emergency spending by governments worldwide has revived demand for Japanese exports, manufacturers like Toshiba Corp. and Toyota Motor Corp. are still closing plants and slashing costs to return to profit. Firms surveyed last month by the Bank of Japan said they plan to cut investment at a record pace even amid signs demand from abroad is improving. “These numbers are still weak; they don’t suggest that capital spending is starting to bottom out,” said Masamichi Adachi , senior economist at JPMorgan Chase & Co. in Tokyo. “Companies still have too much capacity, and the economic recovery is likely to be slow.” The yen traded at 88.96 per dollar at 10:38 a.m. in Tokyo from 88.65 before the report. The currency climbed to an eight- month high of 88.01 this week, threatening to erode exporters’ repatriated profits. The Nikkei 225 Stock Average rose 1.1 percent, led by trading companies as commodity prices gained. Machinery orders slid 26.5 percent from a year earlier, today’s report showed. Tankan Survey The central bank’s Tankan survey of business sentiment released last week showed large firms plan to cut capital spending by 10.8 percent this year. The reduction plan for September was the deepest pullback in at least 26 years and it was also worse than estimates made by companies three months ago as the nation was emerging from recession. “Very simply, that shows that companies are not getting more optimistic,” said Martin Schulz , senior economist at Fujitsu Research Institute in Tokyo. “Demand hasn’t come back on a broad basis and the inventory rebuild that’s driven exports until now has just about run its course.” Toyota, which has benefited from government programs to encourage spending on energy-efficient cars, last month announced it will hire 1,600 temporary workers in Japan to meet increased demand for its Prius hybrid. Even after raising its production targets, Toyota estimates a third of its factory capacity will go unused this year. The company in August reiterated its plan to cut capital spending by 36 percent. Growth Driver Business investment accounted for about 15 percent of last year’s gross domestic product and capital spending was a key driver of growth during the nation’s longest postwar expansion in 2002-2007. Nevertheless, there are also signs that the economy is improving. Factory output rose for a sixth month in August; overseas shipments increased 6.1 percent in volume terms; and sentiment among both businesses and consumers is improving. “There’s no question that things are getting better,” said Hiroshi Shiraishi , an economist at BNP Paribas in Tokyo. “But with this kind of excess capacity, there’s little hope for a strong recovery.” To contact the reporters on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net ; Tatsuo Ito in Tokyo at tito@bloomberg.net .

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Thirty-Year Mortgage Rates in U.S. Drop to Near-Record 4.87%, Freddie Says

October 8, 2009

By Brian Louis Oct. 8 (Bloomberg) — Mortgage rates for 30-year fixed U.S. home loans fell for the second consecutive week, pushing borrowing costs to near record lows. The average U.S. 30-year rate dropped to 4.87 percent from 4.94 percent last week. The 15-year rate was 4.33 percent, mortgage buyer Freddie Mac of McLean, Virginia, said today in a statement. Falling rates helped boost home-loan applications last week to the highest level since May. The Mortgage Bankers Association’s index of applications to purchase a home or refinance rose 16 percent. Rates around 5 percent, slumping home prices and a government tax credit for first-time homebuyers are bolstering demand for housing. “We’re not expecting the housing market to come roaring back to anything close to what it was during the boom,” said Scott Brown , chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. “It’s going to be a long, gradual recovery.” The Federal Reserve set out last year to encourage lower mortgage rates by pledging to buy bonds backed by home loans. It increased the size of the program to $1.25 trillion in March. The purchases from Fannie Mae , Freddie Mac and Ginnie Mae brought down yields on mortgage-backed securities and allowed lenders to reduce rates on new loans while still selling the securities backed by them at a profit. The plan helped drive home loan rates to a record low of 4.78 percent twice in April. Applications Rise Mortgage applications to buy a home climbed 13 percent in the week ended Oct. 2 and the refinancing gauge surged 18 percent. Recent data indicate the housing industry is emerging from its worst recession since the 1930s. The index of signed purchase agreements, or pending home sales, jumped 6.4 percent in August, a seventh consecutive gain, the National Association of Realtors said on Oct. 1. To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net .

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European Economy Shrinks More Than Estimated on Weaker Exports, Investment

October 7, 2009

By Simone Meier Oct. 7 (Bloomberg) — Europe’s economy contracted more than estimated in the second quarter as consumer spending , investment and exports were weaker than earlier reported. Gross domestic product in the 16-nation euro region fell 0.2 percent from the first quarter, when it dropped 2.5 percent, the European Union’s statistics office in Luxembourg said today in publishing final figures on second-quarter GDP. The decline was sharper than the 0.1 percent decline estimated on Sept. 2. While the euro-area economy is gathering strength after governments injected billions of euros through tax cuts and spending incentives to fight the worst recession since World War II, the International Monetary Fund projected last week that Europe’s recovery will be “slow and fragile.” Confidence in the economic outlook rose to a one-year high in September and investors also grew more optimistic . “This report is slightly negative but adds nothing to the big picture,” said Nick Kounis , chief European economist at Fortis Bank Nederland NV in Amsterdam. “The economy very likely returned to growth in the third quarter and a rather moderate recovery is likely to follow in the coming quarters.” From a year earlier, GDP decreased 4.8 percent in the second quarter, also sharper than the 4.7 percent drop estimated earlier. The economy may expand 0.2 percent in the third quarter and 0.1 percent in the three months through December, the European Commission forecast on Sept. 14. 10-Year Bund European government bonds rose and the euro declined against the dollar after the GDP report. The euro was at $1.4717 at 10:52 a.m. in London, having earlier risen as high as $1.4737. The yield on the 10-year bund slipped 1 basis point to 3.15 percent. Investment declined 1.5 percent in the second quarter, compared with the 1.3 percent drop estimated earlier, today’s report showed. Consumer spending rose 0.1 percent, half the increase estimated last month. Exports shrank 1.5 percent in the latest quarter, a sharper drop than the 1.1 percent decline estimated last month. Imports fell 2.9 percent, compared with the 2.8 percent drop estimated earlier. The world economy is emerging from the deepest slump in more than six decades following interest-rate cuts and $2 trillion of government spending, tax breaks and infrastructure projects. The European Central Bank tomorrow may keep its key interest rate at a record low of 1 percent, according to a Bloomberg News survey of economists. Monetary Policy The IMF said on Oct. 3 that monetary policy will “need to remain supportive for the time being” across Europe to bolster an economic recovery. The euro-area economy may shrink 4.4 percent this year before expanding 0.9 percent in 2010, the Washington-based lender forecast. The ECB will announce its rate decision at 1:45 p.m. in Venice tomorrow. ECB President Jean-Claude Trichet will hold a press conference 45 minutes later. To contact the reporter on this story: Simone Meier in Dublin at smeier@bloombert.net

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Australia’s RBA Unexpectedly Raises Interest Rates, Signals More to Come

October 5, 2009

By Jacob Greber Oct. 6 (Bloomberg) — Australia’s central bank unexpectedly raised its benchmark interest rate by a quarter percentage point from a 49-year low amid signs the economy is strengthening. Reserve Bank Governor Glenn Stevens increased the overnight cash rate target to 3.25 percent from 3 percent in Sydney today. Only one of 20 economists surveyed by Bloomberg News forecast today’s decision. The rest predicted no change. The local currency jumped as Australia became the first Group of 20 nation to raise borrowing costs since the start of the global financial crisis more than a year ago. Rising job vacancies, retail sales and house prices, plus surging business and consumer confidence support Stevens’ view that the “basis for such a low interest rate setting has now passed.” “It makes sense for the Reserve Bank to start the tightening cycle at the earliest opportunity,” said Stephen Walters , chief economist at JPMorgan Chase & Co. in Sydney who forecast the increase. There has recently been “a near uninterrupted stream of healthy economic data.” The Australian dollar rose to 88.34 U.S. cents at 2:41 p.m. in Sydney from 87.62 cents just before the decision was announced. The two-year government bond yield gained 1 basis point to 4.36 percent. A basis point is 0.01 percentage point. Governor Stevens, who cut the benchmark lending rate by a record 4.25 percentage points between September 2008 and April to cushion Australia against fallout from the global credit squeeze, said today that the economy is likely to expand “close to trend over the year ahead,” and inflation will remain close to the bank’s target range of between 2 percent and 3 percent. ‘Risk Has Passed’ “The risk of serious economic contraction in Australia now having passed, the board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy,” Stevens said in a statement. “This will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.” Today’s increase means households with an average-sized mortgage of A$250,000 will pay an extra A$40 a month in repayments. Jane Counsel, a spokeswoman for Westpac Banking Corp., Steve Batten , a spokesman for Commonwealth Bank of Australia, and Luisa Ford, a spokeswoman for National Australia Bank Ltd., said the banks are currently reviewing their interest-rate settings. A spokesman for Australia and New Zealand Banking Group Ltd. was unable to comment immediately. Speculation that Stevens would move faster than policy makers in the U.S., Europe and Japan to raise borrowing costs has helped stoke this year’s 25 percent gain in the nation’s currency to a 13-month high. Global Rates Indonesia’s central bank kept interest rates unchanged for a second month yesterday and the European Central Bank will leave its benchmark rate at a record low of 1 percent on Oct. 8, according to analysts surveyed by Bloomberg. The U.S. Federal Reserve left the rate for overnight loans between banks at a record low of between zero and 0.25 percent on Sept. 24. Investors had a 44 percent expectation Stevens would raise the overnight cash rate target by a quarter percentage today, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange. They also tipped a 100 percent chance of an increase on Nov. 3, the index showed at 6:32 a.m. Reports published last week showed retail sales, approvals to build private homes, bank mortgage lending and property prices all jumped in August, adding to signs the economy will strengthen this quarter. Advertisements for job vacancies rose in September for a second straight month, gaining 4.4 percent. A report on Oct. 8 will show the unemployment rate rose to 6 percent last month from 5.8 percent, according to the median estimate of 20 economists surveyed by Bloomberg. By contrast, Europe’s jobless rate climbed in August to a 10-year high of 9.6 percent, and reached 9.7 percent in the U.S., the highest level since 1983. Cash Handouts Australia’s jobless rate “has remained stubbornly low for the past six months,” Brian Redican , an economist at Macquarie Group Ltd. in Sydney, said ahead of today’s decision. “That surprising strength in domestic economic data made it highly likely the official cash rate would rise before year end.” Consumer spending, stoked by A$20 billion ($17.5 billion) in government cash handouts to households, helped fuel a 1 percent expansion in Australia’s gross domestic product in the first half of this year. The government is also boosting domestic demand by spending an extra A$22 billion on roads, railways, ports and schools. There are increasing signs the stimulus is starting to drive up asset prices. The nation’s benchmark S&P/ASX 200 index of stocks has surged more than 20 percent this year, and a report published on Sept. 30 by property monitoring company RP Data-Rismark showed house prices climbed 7.9 percent in the first eight months of this year. Economic Outlook “We are in a situation where we would not want to see very strong growth in housing prices — that would be unhelpful from a social perspective,” Anthony Richards , the head of the central bank’s economics department, said on Sept. 29, adding that it’s “not reasonable to expect that interest rates will stay at the current low levels indefinitely.” The Reserve Bank scrapped its forecast in August for the economy to contract this year, instead predicting GDP will rise 0.5 percent. The bank expects growth will accelerate to 2.25 percent in 2010 and 3.75 percent in 2011. “We remain unconvinced of the need for an ‘urgent’ withdrawal of monetary policy,” Annette Beacher , an economist at TD Securities Ltd. in Singapore, said ahead of today’s decision. “Easing in April and tightening in October could prove to be too much of a shock to an economy still highly leveraged to government assistance.” To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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Japan’s Tankan Shows Companies Plan Deeper Spending Cuts as Profits Slump

October 1, 2009

By Jason Clenfield Oct. 1 (Bloomberg) — Japanese companies plan to deepen investment cuts as profits slump, inhibiting the recovery from the nation’s worst postwar recession, the central bank’s Tankan survey showed. Large businesses aim to cut spending 10.8 percent this year, more than the 9.4 percent planned three months ago, the central bank said in Tokyo today. Confidence at big manufacturers rose for a second quarter after plunging to a record low in March. Stocks fell, heading for their lowest close in two months, on concern demand will weaken once governments worldwide exhaust more than $2 trillion in stimulus spending. The yen’s 8 percent gain in the past three months is another blow to exporters such as Toshiba Corp. and Toyota Motor Corp., whose cost cutting has squeezed incomes and driven the jobless rate to a record high. “It’s going to take much longer for capex and consumer spending to rebound,” said Seiji Shiraishi , chief economist at HSBC Securities Japan Ltd. in Tokyo. “In a normal recovery, capital spending and private consumption come back after a time lag. What’s different this time is that the level of economic activity is just so low.” The Nikkei 225 Stock Average fell 1.4 percent to 9,990.03 at the lunch break in Tokyo. The yen traded at 89.84 per dollar from 89.89 before the report. The yield on Japan’s 10-year bond fell one basis point to 1.285 percent. Less Pessimistic The index of sentiment among large makers of cars, electronics and other goods climbed to minus 33 from minus 48 in June and a record low of minus 58 in March, the Bank of Japan said. A negative number means pessimists outnumber optimists. The improvement matched economists’ predictions and only brought the index on par with the level during the 2001 recession. Confidence among large service companies rose for a second straight quarter to minus 24 from minus 29. “An improvement in sentiment is nice, but as long as it doesn’t lead to more investment, it’s not useful for saying anything about the economy,” said Martin Schulz , senior economist at Fujitsu Research Institute in Tokyo. The capital spending plans are the worst for a September survey in at least 26 years. Large companies see profits falling 22 percent this fiscal year, the Tankan showed. “The figures are showing some improvement but there’s no change to my view that the economy is still severe,” said Hirofumi Hirano , chief spokesman of the Democratic Party of Japan-led government that came into power last month pledging to support households. Yen’s Gain The yen rose to an eight-month high of 88.24 earlier this week, making exporters’ products more expensive abroad and eroding the value of their repatriated profits. The gains prompted Finance Minister Hirohisa Fujii to backtrack on remarks that indicated he supported a stronger Japanese currency. The “current level around 90 yen is a bit painful,” Toyota Executive Vice President Yukitoshi Funo said on Sept. 25. “I think the yen should be a little weaker.” Large manufacturers expect the yen to trade at 94.50 per dollar in the year ending March 31, today’s report showed. Toyota, which has benefited from government programs to encourage spending on energy-efficient cars, yesterday said it will hire 1,600 temporary workers in Japan to meet increased demand for its Prius hybrid. Even after raising its production targets, Toyota estimates a third of its factory capacity will go unused this year. The company in August reiterated its plan to cut capital spending by 36 percent. ‘Still Worried’ “Companies are still worried whether demand overseas will reliably recover,” said Junko Nishioka , chief economist at RBS Securities Japan Ltd. in Tokyo. “Because of that uncertainty, the recent gains haven’t led to a boost in capital spending.” The effects of cost cuts are ricocheting through the economy. Reduced investment by electronics makers is taking a toll on companies such as Ishii Hyoki Co., a Hiroshima-based producer of equipment used to make circuit boards. The company, which had forecast earnings of 579 million yen ($6.5 million), said last month it’s now expecting a 393 million yen loss. Workers’ wages have fallen for 15 months, darkening the outlook for retailers including Seven & I Holdings Co. The Tokyo-based company may close about 30 of its Ito-Yokado Co. stores by February 2013, Nikkei English News said today. Japan’s retail sales fell 1.8 percent in August from a year earlier, the 12th straight decline, the Trade Ministry said today. Analysts forecast a report tomorrow will show the unemployment rate climbed to a record 5.8 percent in August. Companies are at least finding it easier to get access to funds. The Bank of Japan may decide as early as this month to let its emergency corporate-debt purchasing programs expire, according to people with direct knowledge of the discussions. Today’s Tankan surveyed 10,235 companies between Aug. 26 and Sept. 30. To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net

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Europe Confidence in Economic Outlook Rose to a 12-Month High in September

September 29, 2009

By Simone Meier Sept. 29 (Bloomberg) — European confidence in the economic outlook increased to the highest in 12 months in September as the economy showed signs of rebounding from the worst recession in more than six decades. An index of executive and consumer sentiment in the 16- nation euro region rose to 82.8, the highest since September 2008, from 80.8 in August, the European Commission in Brussels said today. That was the sixth straight monthly gain. Economists had projected an increase to 82.7, according to the median of 23 estimates in a Bloomberg News survey. European companies including Germany’s ThyssenKrupp AG and Paris-based L’Oreal SA have beaten analysts’ earnings estimates, suggesting government stimulus programs are feeding into the economy. Manufacturing and service industries expanded for a second month in September and German business confidence climbed to a 12-month high. Rising unemployment may prompt consumers to rein in spending, curbing the recovery. “There’s still a lot of steam in the pipeline,” said Christoph Weil , a senior economist at Commerzbank AG in Frankfurt. “Sentiment indicators are backing our estimates that the economy will probably expand at a stronger-than-expected pace in the second half .” The world economy is emerging from the deepest slump since the 1930s following $2 trillion of government spending, tax breaks and infrastructure projects. The European Central Bank earlier this month kept its key interest rate at a record low of 1 percent, with ECB President Jean-Claude Trichet saying the economy is past the worst and will show a “gradual recovery.” Largest Economies The euro-area economy may expand 0.2 percent in the current quarter and 0.1 percent in the three months through December, the commission said on Sept. 14. In the second quarter, the economy contracted just 0.1 percent as Germany and France, the region’s two largest economies, returned to growth. Ryanair Holdings Plc Chief Executive Officer Michael O’Leary said on Sept. 24 that he anticipates earnings will rise “significantly” this year. Dublin-based Ryanair, Europe’s largest low-cost airline, is cutting the “cost base and gearing the company up for a period of renewed growth over the coming years,” O’Leary said. “We do see light at the end of the tunnel; there are more and more signs that the economy is improving,” HeidelbergCement AG Chief Executive Officer Bernd Scheifele said in an interview on Sept. 22. Germany’s biggest cement supplier will benefit “noticeably” from the government’s stimulus programs, he said. The Dow Jones Stoxx 600 Index has risen 20 percent this year while Germany’s benchmark DAX Index has jumped 8 percent in the past two months, bringing gains to 17 percent in 2009. Biggest Steelmaker L’Oreal , the world’s largest cosmetics maker, on Aug. 28 posted a smaller-than-projected earnings decline and forecast a gradual recovery through the second half of 2009. ThyssenKrupp , Germany’s biggest steelmaker, last month posted a smaller-than- forecast third-quarter loss. “The recent jump in economic expectations exceeds our own projections,” ThyssenKrupp Chief Executive Officer Ekkehard Schulz said on Sept. 4 in Dusseldorf. “We’re seeing the first signs of bottoming out and rising orders in the steel area.” European companies are starting to ramp up output to meet reviving global demand. European industrial orders rose for a second month in July, led by durable consumer goods, and exports increased 4.1 percent from June. The euro-area services industry index showed a return to expansion in September. Rising Unemployment ECB policy makers including Trichet have warned the recovery may face obstacles such as rising unemployment . European retail sales fell for a 16th month in September, Markit Economics said today, citing a survey of more than 1,000 executives. Europe’s jobless rate probably rose to 9.6 percent in August, according to a Bloomberg survey. That would be a 10- year high. The European Union’s statistics office in Luxembourg will release the report on Oct. 1. The commission noted in today’s report that the September increase in sentiment was “the smallest since the upturn started in April.” The August index reading was revised to 80.8 from the 80.6 reported on Aug. 28. European households anticipate prices will decline more, today’s report showed. A gauge of consumers’ price expectations over the next 12 months held near a record low, rising to minus 14 in September from minus 16 in August, which was the lowest since the data were first compiled in 1990. The ECB said earlier this month that it projects euro- region consumer prices will rise about 0.4 percent this year and around 1 percent in 2010. In September, consumer prices probably dropped 0.2 percent from a year ago, a Bloomberg survey shows. The ECB aims to keep inflation just below 2 percent. Cutting Costs With companies still cutting costs and the economy struggling to gather steam, ECB officials have signaled they are ready to maintain the bank’s unconventional measures for a while. The ECB has offered banks unlimited cash over 12 months and purchased covered bonds to encourage lending. “ The ECB won’t be in any rush over the next six months, but we see a rate hike towards the end of 2010,” said Laurent Bilke , a senior economist at Nomura in London. “They probably have the tools to negotiate a gradual exit.” To contact the reporter on this story: Simone Meier in Dublin at smeier@bloombert.net

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