U.K. Retail Sales Unexpectedly Fall Most in 11 Months

U.K. retail sales unexpectedly dropped in December by the most in 11 months as higher borrowing costs and falling house prices curbed consumer spending.

Sales declined 0.4 percent from November, when they rose by the same amount, the Office for National Statistics said today in London. Economists forecast a 0.2 percent increase, the median of 31 estimates in a Bloomberg News survey showed. On the year, sales climbed 2.7 percent, the least since September 2006.

The pound dropped after the report, which showed that an interest-rate cut in December failed to encourage Christmas spending amid the worst housing market slowdown since Britain's last recession in 1992. Kesa Electricals Plc, the owner of Comet electronics stores in Britain, said yesterday that sales growth slowed during the fourth quarter.

``The consumer is feeling the headwinds from the financial and housing sectors,'' Richard McGuire, an economist at Royal Bank of Canada in London, said in a Bloomberg Television interview. ``This will provide added support in favor of a widely expected rate cut in February.''

The pound fell as much as 0.6 percent against the dollar and 0.6 percent against the euro, after the report as investors increased bets on lower rates. The currency traded at $1.9580 and 74.67 pence per euro as of 10:07 a.m. today in London.

The Bank of England reduced its benchmark rate by a quarter point to 5.5 percent in December to help stem the fallout from the U.S. subprime mortgage market collapse, which has pushed up market borrowing costs.

Slowing Growth

A Bloomberg News survey of Jan. 4 showed most economists forecast the rate will fall to 4.75 percent by the end of 2008. The economy grew 0.5 percent in the fourth quarter, the weakest pace in two years, the National Institute of Economic and Social Research estimates.

Sales at non-specialized stores, the category which includes department stores, fell 4.3 percent on the month, the biggest drop since January 2007, the statistics office said. Overall non-food sales dropped 0.9 percent, outweighing a 0.1 percent increase for food retailers.

Jean-Noel Labroue, chief executive officer of Kesa, said yesterday that market conditions were ``difficult, particularly in the U.K.'' Retailers Tesco Plc and Marks & Spencer Plc this month called for interest-rate cuts to help consumers, who have 1.4 trillion pounds ($2.8 trillion) of debt.

Lower Spending

Falling property prices may also discourage shoppers. Real- estate professionals said December was the housing market's worst month since the aftermath of the last recession in 1992, the Royal Institution of Chartered Surveyors said on Jan. 16.

Consumers may still pare spending as banks curb loans and the economy starts to slow. ``While only a minority of households may be credit constrained, they are probably sufficient to depress household spending somewhat,'' Bank of England Deputy Governor John Gieve said yesterday.

Jobs growth was still the strongest in a decade in the quarter through November, and unemployment fell to the lowest since 1975 last month. HMV sold 45 percent more video games during the Christmas season as the overall U.K. market expanded 30 percent in unit terms, the company said yesterday.

Retailers also cut prices to attract shoppers. The implied deflator, which shows annual inflation in shops, was 1.2 percent lower than a year earlier, the biggest drop in three months.

Gieve said yesterday that policy makers face ``difficult judgments'' on interest rates as they weigh risks to growth against the threat of inflation, which exceeded the 2 percent target for the past three months.

Dollar Falls to Two-Year Low Versus Yen as Retail Sales Decline

he dollar fell to the lowest level since 2005 against the yen after U.S. retail sales dropped in December, bolstering speculation the economy is headed for recession.

Traders also pushed the dollar to the weakest ever versus the Swiss franc on speculation the Federal Reserve will cut its target interest rate as much as 0.75 percentage point this month to sustain economic growth. The yen rose against all of the 16 most-actively traded currencies on concern that dimming demand from the U.S., Japan's biggest export market, will reduce Japanese investors' appetite for overseas purchases.

``The dollar is in trouble,'' said David Mozina, a senior currency strategist at Lehman Brothers Holdings Inc. in New York. ``The continued implosion of interest-rate support is pressuring the dollar.''

The U.S. currency dropped to 106.84 yen at 4:02 p.m. in New York, from 108.16 yen yesterday, touching the lowest since June 2005. The yen advanced to 158.38 per euro from 160.84, reaching the strongest since September.

The euro fell to $1.4825 from $1.4869 yesterday, after earlier rising to within a cent of its record high of $1.4967 reached in November. Traders' buying of yen versus the euro pulled the euro lower versus the dollar as well, said John McCarthy, a director of currency trading at ING Financial Markets LLC in New York.

The British pound rebounded from a record low versus the euro after U.K. inflation held above the Bank of England's 2 percent target for a third month in December. The Swiss franc reached an all-time high of 1.0856 per dollar.

`Fueling Risk Aversion'

The dollar's decline began earlier as Citigroup Inc. posted a record quarterly loss of $9.83 billion, raising concern that financial companies' losses from home-loan defaults will mount.

Retail sales fell 0.4 percent last month, after increasing a revised 1 percent in November, the Commerce Department said in Washington. The median forecast in a Bloomberg survey was for sales to be flat. Producer prices increased 6.3 percent in December from a year earlier, after a 7.2 percent pace in November, the government said separately.

``The U.S. housing and financial crises are fueling risk aversion in the market and people are covering'' bets against the yen, said Carl Forcheski, vice president on the corporate currency sales desk at Societe Generale SA in New York. ``The Japanese economy has difficulties, but the yen is more affected by investment flows'' from Japanese investors.

Fed Versus ECB

The U.S. may already have entered a recession, or will do so shortly, former Fed chairman Alan Greenspan told the Wall Street Journal in an interview published today. He cited purchasing managers' and unemployment data, saying ``the symptoms are clearly there,'' the newspaper reported.

Fed funds futures contracts on the Chicago Board of Trade show a 100 percent likelihood the Fed will cut its target rate for overnight bank loans to at least 3.75 percent this month, from 4.25 percent now. The chance of a cut to 3.5 percent is 38 percent, compared with zero a week ago.

The Fed is next scheduled to announce a decision on rates on Jan. 30. The bank may lower rates before then, though Lehman's base case is for a half-point cut at the meeting, Mozina said.

European Central Bank President Jean-Claude Trichet kept the main refinancing rate at 4 percent on Jan. 10 and said the central bank will ``not tolerate'' an inflation spiral. The Fed's target hasn't been below the euro region's since 2004.

Rate Difference Narrows

At 3.69 percent, the benchmark U.S. 10-year Treasury yields 2.26 percentage points higher than similar-maturity Japanese government bonds, the smallest difference since 1994, according to data compiled by Bloomberg.

``A stronger yen is reflecting the declining expectations of global growth,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``The recession risk in the U.S. is higher now. The dollar-yen is the right trade.''

Japan's currency will trade at 107 per dollar by year-end, according to the median estimate of 47 strategists surveyed by Bloomberg. Deutsche Bank AG, the world's biggest currency trader, predicted the yen will advance to 100 by Dec. 31. Lehman Brothers Holdings Inc. is the most bullish, expecting 95 yen.

With either forecast, the yen would eclipse levels that led Japan to sell 14.8 trillion yen ($137 billion) in the first quarter of 2004, the last time it intervened in currency markets to support its export-led economy.

The most volatile exchange rates this decade are prompting traders to buy yen to repay loans in the Japanese currency that were then used to purchase higher-yielding assets. Japan's benchmark is 0.5 percent.

At 10.6 percent, volatility in major currencies is a third higher than its average over the past year, according to JPMorgan Chase & Co.'s G7 Volatility index. The measure reached 13.4 percent in August, the highest since 1999.

The pound rose 0.8 percent to 75.44 pence per euro, from 76.01 pence yesterday and a record low of 76.14 pence earlier.

Crude Oil Futures Fall on Retail Sales Decline, Saudi Comments

Crude oil fell to its lowest in more than three weeks in New York after a U.S. government report showed that retail sales declined unexpectedly last month and the Saudi oil minister said OPEC is ready to increase production.

``We are starting to see a lot of signs that the economy is going to be challenged,'' said Phil Flynn, a commodities trader for Chicago-based Alaron Trading. For oil, ``that means that the demand growth that we have taken for granted may be coming to an end.''

Sales dropped 0.4 percent, the first decline since June, following a revised 1 percent gain in November, the Commerce Department said today. December's fall capped the weakest year since 2002. Saudi Oil Minister Ali al-Naimi said the Organization of Petroleum Exporting Countries will raise supply if justified.

Crude oil for February delivery fell $2.42, or 2.6 percent, to $91.78 a barrel at 9:39 a.m. on the New York Mercantile Exchange, the lowest since Dec. 21. It rose $1.51, or 1.6 percent, to $94.20 yesterday, the first gain in four days.

Brent crude for February settlement, due to expire tomorrow, was at $91.15 a barrel, down $1.77, on London's ICE Futures Europe exchange.

U.S. Retail Sales Unexpectedly Declined in December

Sales at U.S. retailers unexpectedly fell in December, capping the weakest year since 2002.

Sales dropped 0.4 percent, the first decline since June, following a revised 1 percent gain in November, the Commerce Department said today in Washington. Purchases excluding automobiles also decreased 0.4 percent.

A sustained slump in consumer spending brought on by falling property values and rising unemployment would mean the end of the six-year expansion, economists say. The report underscores Federal Reserve Chairman Ben S. Bernanke's concern that risks to growth are intensifying.

``Growth stalled out at the end of the fourth quarter and into the new year,'' Joshua Feinman, chief U.S. economist at Deutsche Asset Management in New York, said before the report. ``The economy will narrowly be able to avoid recession.''

Economists forecast retail sales would be unchanged, according to the median of 74 estimates. Projections ranged from a decline of 0.8 percent to a gain of 0.5 percent.

Treasuries rallied and stock index futures fell after the report. Yields on benchmark 10-year notes dropped to 3.73 percent at 8:36 a.m. in New York, from 3.77 percent late yesterday. Futures contracts on the Standard & Poor's 500 stock index expiring in March declined 1.1 percent to 1,404.90.

Producer Prices

Producer prices in the U.S. also dropped in December, against economists' forecasts for an increase. Wholesale prices fell 0.1 percent after a 3.2 percent surge in November that was the biggest in 34 years, a Labor Department report showed.

For all of 2007, retailers posted a 4.2 percent sales increase, the smallest in five years. Purchases rose 5.9 percent in 2006.

Sales excluding automobiles were forecast to decrease 0.1 percent from the prior month, according to the survey median.

The drop in sales was led by a 2.9 percent decline at building-material stores, the biggest since February 2003, reflecting the slump in housing. Sales at clothing, electronics and sporting-goods stores were among those that also decreased.

Purchases at service stations dropped 1.7 percent, which economists said reflected lower gasoline prices. The price of a gallon of regular gasoline in December averaged $3.01, down from $3.07 the previous month, according to AAA, a group representing motorists. Excluding gas, retail sales fell 0.2 percent.

Auto dealers saw a 0.4 percent decline in sales.

Recovery in 2009

AutoNation Inc., the largest publicly traded U.S. car dealer, doesn't expect the nation's auto market to pull out of its slump until 2009, Chief Executive Officer Michael Jackson said from Fort Lauderdale, Florida.

The drop in housing and the slowing economy usually take ``30 to 40 months to work through,'' Jackson said in a Bloomberg Radio interview yesterday. ``So we've had declines in 2006, 2007 and 2008, but I'm feeling pretty good about 2009.''

Excluding autos, gasoline and building materials, the figures the government uses to calculate gross domestic product, sales increased 0.1 percent, following a 0.7 percent gain the month before. The government uses data from other sources to calculate the contribution from the three categories excluded.

Consumer spending, which accounts for more than two-thirds of the economy, is likely to cool rather than collapse in coming months as the housing slump worsens and hiring slows, according to the median estimate of economists surveyed by Bloomberg News earlier this month.

Spending Forecast

Spending will grow at an annual rate of 1.6 percent this quarter, down from an estimated 2.6 percent pace in the last three months of 2007, according to the median estimate of economists surveyed by Bloomberg News this month. Spending expanded at an average 3.5 percent pace per quarter over the past decade.

The continued gains, together with increasing exports, will help the economy avoid recession, economists said. Fed rate cuts will ensure a short downturn should one occur, they said.

Bernanke on Jan. 10 pledged ``substantive additional action'' to insure against ``downside risks'' to the economic expansion.

Investors are certain the Fed will lower the benchmark interest rate by at least a half percentage point following two days of meetings of Jan. 29-30.

Discount retailers are benefiting as Americans rein in spending. Wal-Mart Stores Inc., the world's largest retailer, said Jan. 10 that its December sales were within its forecast after it lured shoppers with price cuts on more holiday items.

Five-Year Low

Purchases at chain stores in November-December rose at the slowest pace in five years, according to the International Council of Shopping Centers.

An early Thanksgiving boosted holiday shopping in November at the expense of December sales, economists such as Peter Kretzmer of Bank of America Corp. said. Additionally, gift cards bought over the last two months won't be reflected in the sales figures until they're redeemed in January or later.

The biggest housing recession in 16 years is reverberating across the economy as access to credit tightens, consumer and corporate demand weaken and job growth slows. Unemployment rose to 5 percent in December, a 0.3 point jump from November and a highest in two years, according to Labor Department figures.

The magnitude of the gain from a recent 4.4 percent trough prompted economists including Jan Hatzius of Goldman Sachs Group Inc. to warn that the economy may have already entered a recession.

``Recession has now arrived, or will very shortly,'' Hatzius wrote in a note to clients last week.

Recession pain likely to linger

As recessions go, the most recent downturns have been relatively short and painless. But the recovery was what hurt.

And if the United States truly is in or near a recession, it's quite possible that the lingering pain will be the problem once more.

"I don't know if it (the recovery) will be painful, but I know it won't feel all that great," said Keith Hembre, chief economist for First American Funds.

The risk of recession has become a major focus of economists and Wall Street this week, after Friday's weak jobs report saw unemployment jump to 5 percent and retailers reported the weakest holiday sales in years.

On Thursday, Federal Reserve Chairman Ben Bernanke pledged that the central bank is ready to slash interest rates again to prevent housing and credit problems from plunging the country into a recession. The Fed has cut its key lending rate three times since September, for a total reduction of 1 percentage point.

But a growing number of top economists believe recession is already here, or is at the very least likely.

Most of those using the R word are still projecting relatively narrow declines. They generally see the unemployment rate rising to around 5.5 to 6 percent during the downturn. Some believe that if consumers cut back on spending, it will be only a modest decline.

Many of those economists caution that even if they're right about a mild recession, the pain won't end once the economy starts to grow again.

Paul Kasriel, chief economist at Northern Trust in Chicago, said that even though he sees a short recession, to many Americans, it'll be a long time before they feel like the economy is truly doing well.

Even when growth picks up, that won't be the end of the pain, he said.

"I think the technical recession will be over in 2008, but the trajectory of the recovery in the second half or fourth quarter will be nothing to write home about," he said.

It's typical that unemployment and job losses continue to climb even after the recession formally comes to an end, as businesses respond to the downturn by cutting future spending plans.

In the most recent recession, the eight-month period in 2001, the unemployment rate was under 5 percent for the first six months of the economic slump.

But it climbed to 5.5 percent by November, the last month of the downturn, according to the National Bureau of Economic Research (NBER), the body that puts the official start and stop dates on a recession. Spending by individuals actually grew in five of the eight months of the recession.

The Fed to the rescue

The recession of late 1990 and early 1991 was just as short and nearly as shallow. It saw unemployment climb from 5.5 to 6.8 percent, still relatively modest by historic standards.

But the year and a half that followed the recession seemed just as bad or worse to many Americans, as unemployment rose to 7.8 percent by mid-1992. That allowed Bill Clinton to defeat a sitting president, George H.W. Bush, as his campaign leadership kept reminding themselves "It's the economy, stupid."

Kasriel said the comparison to the 1990-91 recession is a good one, as the economy struggled to recover from the savings and loan crisis that preceded it, just like the 2008 economy will try to adjust to problems in the credit and financial markets sparked by last summer's subprime meltdown.

"Back then, we didn't get much traction from Fed rate cuts until the end of 1993. The reason for that was we had a financial system that was crippled," he said. "I think that's the environment we're going to be in for a couple of years."

First American Funds' Hembre also believes that we could be in for a slow, weak, painful recovery from the current problems.

Recession may already be here

"There are some longer-term rebalancings that need to occur," he said. "We're running at a savings rate of zero today. That is going to have to move higher."

Some recession proponents believe there could be a quick recovery. They cite the fact that the Fed was cutting rates ahead of the recession's start, and that there is talk of a short-term economic stimulus package from Washington, perhaps in the form of tax cuts.

Goldman Sachs' senior U.S. economist Jan Hatzius said he's counting on another 1.75 percentage points of Fed rate cuts and some form of tax relief to keep the recession a relatively mild one.

"If the data are every bit as bad as we're expecting and the Fed for some reason refuses to respond, you could see a more severe recession," Hatzius said. "But right now the chance we do get some stimulus package is a little more than 50-50."

But there are other economists who believe that the problems facing the U.S. economy are far more serious than being estimated, and that the downturn could be very severe - and very long.

Perhaps the one seeing the worst time ahead is Peter Schiff, president of Euro Pacific Capital, a brokerage firm specializing in overseas investments, who believes not only is the economy already in a recession, but that it risks falling into a depression as severe as the 1930's.

"I think it will last for years," he said. "It's difficult to know if it'll be as bad or worse than the Great Depression."

Schiff said the real estate surge of recent years is the greatest speculative bubble in world history, with Americans borrowing trillions of dollars they can't repay.

"What we're going to go through now is a dramatic reduction in our standard of living," he said.

But Schiff's view is not widely accepted. Most economists, even those who now see an recession in place, are looking for some level of growth in 2008.

The Blue Chip Economic Indicator survey of 52 economists has a consensus estimate of 2.2 percent growth this year, less than what is considered trend growth, but far from a recession. Even Goldman's forecast for the year is GDP growth of 0.8 percent in 2008.

But even if Schiff is wrong and the overall economy rebounds later this year, it doesn't mean that there won't be more problems ahead.

"You're going to have this gradual slowdown in consumer spending ... business capital spending is not likely to be robust," said Northern Trust's Kasriel.

While state and local government spending will slow down as tax collections decline, Kasriel doesn't think any economic sector - other than housing - will collapse.

"But this is going to be sort of lingering death," he said

Gold, Platinum Rise to Record on Declining Dollar; Silver Gains

Gold and platinum rose to records and silver extended its rally to the highest in 27 years as a declining dollar increased demand for precious metals as alternatives to stocks and bonds.

The dollar fell as traders increased bets that the Federal Reserve will lower U.S. interest rates to avoid a recession. Gold has gained 9 percent this year and the dollar has fallen more than 2 percent against the euro, to a seven-week low.

``We're in a falling rate environment. I think that works in gold's favor,'' Richard Urwin, London-based head of asset allocation at BlackRock Investment Management, said in an interview with Bloomberg Television. ``We're probably in an environment in which on average the dollar is going to depreciate. Gold is a good hedge against it.''

The metal for immediate delivery rose $12.31, or 1.4 percent, to $907.71 an ounce at 1:38 p.m. in London. It earlier reached $914.30.

Gold futures for February delivery rose $11.60, or 1.3 percent, to $909.30 an ounce at 8:38 a.m. on the Comex division of the New York Mercantile Exchange. The price earlier reached $915.90, the highest ever for a most-active contract.

Twenty-three of 29 traders, investors and analysts surveyed by Bloomberg from Mumbai to New York on Jan. 10 and Jan. 11 advised buying gold this week. Five said sell, and one was neutral.

``The market is still extremely bullish,'' said James Moore, an analyst at TheBullionDesk.com in London. ``With the U.S. potentially cutting interest rates while those in Europe stay firm, the dollar looks set to add additional upside momentum.''

Gold Bets

Hedge-fund managers and other large speculators increased bets on higher New York gold futures, to a record net 205,404 contracts on the Comex as of Jan. 8, figures from the U.S. Commodity Futures Trading Commission on Jan. 11 showed. Net long positions were up from 199,438 contracts from a week earlier.

Fed funds futures contracts on the Chicago Board of Trade show 100 percent odds the Fed will cut its 4.25 percent target rate for overnight bank loans to 3.75 percent at its Jan. 30 meeting. The odds have risen from 66 percent a week ago.

Demand for gold will be less affected by a global slowdown than silver, platinum and palladium, said Walter de Wet, head of commodity research in Johannesburg at Standard Bank Group Ltd., Africa's largest lender.

Industrial uses for gold, such as dentistry and electronics, made up 15 percent of total demand in 2006 compared with more than 50 percent for platinum and 47 percent for silver, according to estimates by London-based research company GFMS Ltd. Jewelry accounts for almost 60 percent of gold consumption.

ETF Gold

``The investment component of demand for all of these precious metals is dominating,'' De Wet said. ``We're likely to see an increase in all of these metals but gold is probably going to outpace.'' The gains may last until the second half of this year, he said.

Assets in the StreetTracks Gold Trust, the world's biggest exchange-traded fund backed by gold, are up 2.2 percent this year at a record 641.81 metric tons.

Gold also gained as equities declined. The Standard & Poor's 500 Index has fallen for three weeks, losing 4.6 percent, the worst start since 1982, according to Bloomberg data.

``People are looking at precious metals as principally a safe haven while they ride out a correction in equity markets,'' Peter McGuire, managing director at Commodity Warrants Australia Ltd., said by telephone from Sydney today.

The euro traded as high as $1.4915 today. It reached a record $1.4967 on Nov. 23.

Gold has had a correlation of 0.71 against the euro-dollar exchange rate in the past three months, compared with 0.67 in the previous three months. A reading of 1 would mean the two moved in lockstep.

Inflation-Adjusted Gold

Adjusted for inflation, gold is still below its all-time high. The metal is trading at $433.85 an ounce, adjusted for the U.S. urban consumers price index.

Silver for immediate delivery advanced 11.5 cents, or 0.7 percent, to $16.34 an ounce after earlier gaining to $16.60, the highest since November 1980.

Platinum for immediate delivery gained $13, or 0.8 percent, to $1,577.50 an ounce, after earlier touching a record $1,592. The precious metal is used in products such as jewelry and autocatalysts.

Macquarie Group Ltd. raised its forecast for the average platinum price this year by 16 percent to $1,475 an ounce. It also increased its 2009 and 2010 estimates by 15 percent.

Palladium for immediate delivery advanced $2, or 0.5 percent, to $380 an ounce.

Macquarie cut its 2008 palladium forecast by 12 percent to $350 and its 2009 estimate by 14 percent to $365.

The morning platinum ``fixing'' price used by some mining companies to sell their production gained $24 to $1,589 an ounce, the highest ever. The palladium fixing rose $6 to $382, the highest since May 17, 2006.

Following are technical gauges for gold:

20-day moving average 844 100-day moving average 778 200-day moving average 722

14-day relative strength index 77.49

Fibonacci Start End 50% 38.2%

Fed Signals More Aggressive Response to Faltering Expansion

Federal Reserve officials, including Chairman Ben S. Bernanke, are signaling a more aggressive response to the increasing risk of recession.

Bernanke testifies to Congress on Jan. 17, two days after a government report that economists predict will show retail sales stalled last month after a gain of 1.2 percent in November.

The Fed chief and Governor Frederic Mishkin unveiled the new strategy last week, when they said in speeches that they favor greater ``insurance'' against the prospect of an economic downturn. That's a break from basing policy on central bank forecasts, which anticipate a continued expansion.

``The crucial change in Bernanke's language last week was the reference to the need for insurance,'' Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, said in a note to clients. Until now, officials ``have tended to describe the Fed's rate cuts as being scaled to the size of the projected problem,'' he said.

Donald Kohn, the Fed's vice chairman, said in Jan. 5 speech that the officials decided to communicate more often with the public after the financial-market ``turmoil'' that began in August.

``We have tried to provide more information than usual to reduce uncertainty and clarify our intentions,'' Kohn said in a speech in New Orleans. The Wall Street Journal reported that Bernanke plans to speak more often and more forcefully.

The remarks by Bernanke, 54, and Mishkin, who have collaborated on academic research, led traders to increase bets the central bank will cut its main interest rate by half a percentage point this month. The Fed has reduced the benchmark rate by 1 percentage point since September.

Disappointing Investors

While the Fed cut the benchmark rate in September by a half-point, more than anticipated, officials have since disappointed some investors by refusing to commit to a series of reductions.

When lowering borrowing costs in October and December by a quarter-point each, policy makers refrained from saying that growth was a bigger concern than inflation.

``They underestimated the magnitude of the credit shock,'' said Brian Sack, senior economist at Macroeconomic Advisers LLC in Washington. ``Now they are catching up.''

Traders now anticipate at least a half-point reduction in the target rate for overnight loans between banks this month, according to contracts quoted on the Chicago Board of Trade.

Odds of 0.75 percentage point of reductions this month jumped to 34 percent, from zero on Jan. 10, futures show. That suggests some investors see the chance of a move before the Federal Open Market Committee meets Jan. 29-30, with an additional cut when it gathers.

`Very Different Direction'

``The Fed is moving in a very different direction,'' said former Fed governor Lyle Gramley, now a senior adviser at the Stanford Group in Washington. ``Risk-management is what they should be doing.''

Philadelphia Fed Bank President Charles Plosser, whom economists consider to be the toughest on inflation, said he's now most concerned about consumer spending.

Plosser said he's ``certainly'' open to more rate cuts, in an interview with PBS's Nightly Business Report on Jan. 11. By contrast, when he spoke Nov. 27, he warned that the Fed's rate cut the previous month posed a risk to inflation expectations.

``The thing we are most concerned about right now is consumer spending,'' Plosser said.

Boston Fed President Eric Rosengren said the same day in South Burlington, Vermont, that declining house prices are likely to damp consumer and business confidence.

`Gasoline on the Fire'

``Rosengren, Plosser and especially Mishkin arguably poured more gasoline on the fire,'' Ian Morris, chief economist at HSBC Securities USA Inc., said in a note to clients. ``The market is betting that the Fed may cut in an inter-meeting move,'' wrote Morris, who Jan. 10 doubled his rate-cut call for this month to a half-point.

Bernanke will have another opportunity to send signals on rates Jan. 17, when he testifies on the economic outlook before the House Budget Committee. He meets with House Speaker Nancy Pelosi today in Washington. Democrats in Congress are calling for fiscal measures to revive growth, while the Bush administration is considering measures of its own.

This week's shift may have been driven by the Labor Department's Jan. 4 report showing the jobless rate jumped to 5 percent in December, economists said. The figures also showed the first decline in private-sector employment since 2003.

``We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,'' the Fed chief said to the Women in Housing and Finance and Exchequer Club in Washington on Jan. 10. ``The committee must remain exceptionally alert and flexible.''

Dollar Falls to 7-Week Low on Bets Fed Rate to Drop Below ECB's

he dollar fell to a seven-week low against the euro as investors bet U.S. interest rates will fall below those of the 15 nations that share the euro for the first time in three years.

The dollar declined for a third week as Federal Reserve officials including Chairman Ben S. Bernanke signaled they favor greater ``insurance'' against an economic slowdown amid the slump in the housing market. European Central Bank council member Klaus Liebscher said he sees ``significant'' upside risks to inflation.

``In terms of the subprime crisis, the U.S. has been the centre of the storm and it will have to pay,'' said Bilal Hafeez, global head of currency strategy in London at Deutsche Bank AG, the world's largest foreign currency trader. ``The euro will continue going higher'' and may trade at $1.55 by the end of the first quarter.

The dollar fell to $1.4881 against the euro, the weakest since declining to a record low on Nov. 23, and was trading at $1.4894 at 10:21 a.m. in London, from $1.4776 on Jan. 11 in New York. The euro traded at 160.44 Japanese yen, from 160.79 late last week. Against the U.K. pound, it advanced 0.5 percent to 75.89 pence, after rising to a record 75.92 pence, from 75.52.

The euro climbed to a record against the currencies of the region's 24 biggest trading partners on Jan. 11. It advanced against all but three of the 16 most active currencies today.

Automatic Orders

The common European currency accelerated gains against the dollar after rising beyond $1.4825 and $1.4850, where orders to buy the currency were placed, said Lee Wai Tuck, a strategist at Forecast Pte Ltd. in Singapore. Traders sometimes place automatic instructions to limit losses in case bets go the wrong way. Trading volumes are below average because of a public holiday in Japan.

The dollar fell against 15 of the 16 most-active currencies before a Commerce Department report economists in a Bloomberg News survey say will show retail sales were unchanged in December. The currency dropped to $1.9628 against the pound from $1.9566, and was trading at 1.0907 against the Swiss franc from 1.1014. It also fell to the lowest since Nov. 27 against the yen and was recently trading at 107.72 yen.

The euro has risen 15 percent in the past 12 months against the dollar as the Fed cut borrowing costs three times since Sept. 18 to prevent the worst housing slump in 16 years from dragging the economy into recession.

`Growth a Concern'

``We're expecting continued U.S. dollar weakness,'' said Tobias Davis, senior foreign-exchange dealer at Custom House Global Foreign Exchange in Sydney, in an interview with Bloomberg television. ``It really is a concern that growth is grinding to a halt faster than some people expect.''

Fed funds futures contracts on the Chicago Board of Trade show 66 percent odds the Fed will cut its 4.25 percent target rate for overnight bank loans to 3.75 percent at its Jan. 30 meeting. The odds have risen from 6 percent a month ago. The odds of a decrease to 3.5 percent were 34 percent, compared with zero a week ago. The ECB kept its benchmark rate unchanged at 4 percent last week.

The yield spread between German two-year notes and same- maturity Treasuries was 1.13 percentage points, near the widest since November 2002.

The euro's gains may be limited amid speculation its advance will increase pressure on the ECB to keep interest rates unchanged even as inflation stays above its 2 percent ceiling.

European Officials

``We cannot live with a euro at this level with three other currencies which are weak,'' France's European Affairs Minister Jean-Pierre Jouyet said in a Jan. 12 interview in Malta, echoing views expressed by President Nicolas Sarkozy. Italian Prime Minister Romano Prodi said the day before ``everybody is concerned.'' The three other currencies Jouyet referred to were the yuan, the yen and the dollar.

ECB's Liebscher said in an interview with Austria's WirtschaftsBlatt newspaper published today he sees ``significant'' upside risks to inflation.

That ``reinforces the view that the ECB may, at least, not lower the rates,'' said Tetsuo Yoshikoshi, a market analyst in Singapore at Sumitomo Mitsui Banking Corp., Japan's third-biggest lender.

The Fed is ``ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,'' Bernanke told the Women in Housing and Finance and Exchequer Club in Washington on Jan. 10.

The dollar also fell against the yen as one-month implied volatility for yen options against the dollar rose to 13 percent from 12 percent late in New York on Jan. 11. Higher volatility may deter so-called carry trades funded in yen as it exposes the bets to greater exchange-rate fluctuation risks.

In carry trades, investors borrow in countries with lower interest rates and invest in those with higher rates, earning the spread between the two. The risk is that currency moves erase those profits.

Retail Sales Probably Stalled in December: U.S.

Sales at U.S. retailers probably stalled in December, capping the weakest holiday-shopping season in five years, economists said before reports this week.

Purchases were unchanged, following a 1.2 percent gain in November, according to the median estimate in a Bloomberg survey before the Commerce Department's Jan. 15 report. Other reports may show residential construction fell and inflation eased.

Consumer spending, which accounts for 70 percent of the economy, is forecast to cool rather than collapse as the housing slump deepens, helping sustain the expansion for a seventh year. Smaller price increases may ease concern over inflation, giving Federal Reserve policy makers more reason to lower the target interest rate again this month to prevent recession.

``As we begin 2008, significant headwinds are ever present for the consumer,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. ``We continue to believe the economy will escape an actual downturn.''

Retail sales excluding automobiles decreased 0.1 percent after a 1.8 percent rise in November that was the biggest in almost two years, according to the Bloomberg survey median.

Consumer spending is forecast to grow at an annual rate of 1.6 percent this quarter, down from an estimated 2.6 percent pace in the last three months of 2007, according to the median estimate of economists surveyed by Bloomberg News this month. Spending expanded at an average 3.5 percent pace per quarter over the past decade.

Sustained Expansion

Combined with exports, consumer spending will help the world's largest economy expand 2.1 percent in 2008, economists said.

Discounters are benefiting as Americans turn more frugal. Wal-Mart Stores Inc., the world's largest retailer, said Jan. 10 that its December sales were within its forecast after it lured shoppers with price cuts on more holiday items.

Purchases at chain stores in November-December rose at the slowest pace in five years, according to the International Council of Shopping Centers.

The real-estate recession is entering its third year as sales and property values continue to slide. The slump is likely to ripple through the economy as spending weakens and builders and financial firms fire more workers.

A Commerce Department report Jan. 17 may show housing starts in December fell to a 1.145 million unit annual pace, the lowest since 1993, from a 1.187 million rate in November, according to the survey median. Declines in construction will continue to hurt the economy after detracting from growth for the past eight quarters, economists said.

Mortgage `Problems'

``The demand for housing seems to have weakened further, in part reflecting ongoing problems in mortgage markets,'' Fed Chairman Ben S. Bernanke said Jan. 11.

Bernanke pledged ``substantive additional action'' to insure against ``downside risks'' to the expansion, prompting Lehman Brothers Holdings Inc. and other securities firms to boost their forecast for a Fed rate cut to half a percentage point from a quarter point at the next meeting this month.

Consumer prices rose 0.2 percent in December after a 0.8 percent gain in November that was the highest in more than two years, according to the median forecast ahead of the Labor Department's Jan. 16 report. Excluding food and energy, prices rose 0.2 percent, after a 0.3 percent gain.

Smaller increases in prices will give the Fed room to cut rates. Investors are certain the Fed will lower the benchmark interest rate by at least a half percentage point following two days of meetings on Jan. 29-30.

Other figures this week will show industrial production and consumer confidence weakened. Output at the nation's factories, mines and utilities dropped 0.2 percent last month, the Fed is projected to report Jan. 16.

The Reuters/University of Michigan preliminary index of consumer sentiment for this month, due Jan. 18, will fall to 74.5, a two-year low, from 75.5 at the end of December, according to the survey.

                        Bloomberg Survey

==============================================================
                       Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
==============================================================
PPI  MOM%                 1/15      Dec.      3.2%      0.2%
Core PPI MOM%             1/15      Dec.      0.4%      0.2%
PPI  YOY%                 1/15      Dec.      7.2%      7.1%
Core PPI YOY%             1/15      Dec.      2.0%      2.0%
Retail Sales MOM%         1/15      Dec.      1.2%      0.0%
Retail ex-autos MOM%      1/15      Dec.      1.8%     -0.1%
Empire Manu. Index        1/15      Jan.      10.3      10.0
Business Inv. MOM%        1/15      Nov.      0.1%      0.4%
CPI  MOM%                 1/16      Dec.      0.8%      0.2%
Core CPI MOM%             1/16      Dec.      0.3%      0.2%
CPI  YOY%                 1/16      Dec.      4.3%      4.1%
Core CPI YOY%             1/16      Dec.      2.3%      2.4%
Ind. Prod. MOM%           1/16      Dec.      0.3%     -0.2%
Cap. Util. %              1/16      Dec.     81.5%     81.2%
Housing Starts ,000's     1/17      Dec.      1187      1145
Building Permits ,000's   1/17      Dec.      1162      1135
Initial Claims ,000's     1/17    Jan. 13     322       334
Cont. Claims ,000's       1/17     Jan. 6     2702      2705
Philly Fed Index          1/17      Jan.      -1.6      -1.0
U of Mich Conf. Index     1/18     Jan. F     75.5      74.5
LEI  MOM%                 1/18      Dec.     -0.4%     -0.1%
==============================================================

Bernanke Signals Deeper Rate Cuts, Emphasizes Faltering Growth

Federal Reserve Chairman Ben S. Bernanke signaled he has resolved months of debate over the competing risks of slower growth and faster inflation, and is ready to make deeper interest-rate cuts.

Bernanke yesterday pledged ``substantive additional action'' to insure against ``downside risks'' to the six-year economic expansion. His remarks in a Washington speech led HSBC Securities USA Inc. and Morgan Stanley to predict the Fed will reduce its benchmark rate by half a percentage point this month, up from their previous forecast of a quarter point.

The central bank faces the most challenging moment of Bernanke's two years in office as both of the Fed's goals are under siege: unemployment is at a five-year high, while prices are also climbing. Until now, the deliberations produced non- committal statements from the Fed, which used ``uncertainty'' to describe the outlook in December.

``They have to save the economy and let inflation go,'' said Allen Sinai, chief economist at Decision Economics Inc. in New York. ``We are in a recession-like situation right now.''

The shift may have been driven by the Labor Department's Jan. 4 report showing the jobless rate jumped to 5 percent in December, economists said. The figures also showed a decline in private-sector employment.

The speech by Bernanke, 54, was unusual because he made few references to the ``committee,'' as he frequently does when discussing options before the Federal Open Market Committee. He said the forecast for 2008 ``has worsened'' and risks to growth are ``more pronounced,'' effectively rewriting the FOMC statement of Dec. 11.

Assuming Leadership

``Bernanke chose to finally assume the mantle of leadership,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. ``He has generally sought to avoid front-running the committee.''

Brian Sack, a senior economist at Macroeconomic Advisers LLC in Washington who used to work at the Fed, said the shift in Bernanke's language indicated he and his colleagues may have conferred after the Jan. 4 job figures.

``The fact that the policy message seemed to be shifted so aggressively suggests there was some committee-wide communication in recent days.'' Sack said.

The 14-page speech contained one paragraph on inflation. The Fed's preferred price measure, the personal consumption expenditures price index minus food and energy, rose at a 2.6 percent annualized rate for the three months ending November.

`Worrying Signs'

``We will see more worrying signs'' of inflation, Martin Feldstein, the Harvard University economist who is head of the National Bureau of Economic Research, told Bloomberg Television in an interview. ``It is a serious problem, but yet it isn't the primary problem, which is the weakness of the economy.''

The FOMC has cut the benchmark rate 1 percentage point to 4.25 percent since September to offset the drag from tighter lending conditions and prolonged housing slump.

Goldman Sachs Group Inc. economists predicted this week that the Fed will lower the rate to 2.5 percent by year-end. The bank also joined Merrill Lynch & Co. and Morgan Stanley in projecting a recession.

The weakening economy ``just makes it more difficult to maintain an active rhetorical or any other focus on inflation,'' said Edward McKelvey, senior U.S. economist at Goldman in New York.

Residential investment has declined for seven consecutive quarters, and Fed officials say it may take at least six more months before housing markets rebound. Delinquency rates on subprime mortgages climbed to 16.3 percent in the third quarter, the highest in at least a decade.

`Weakened Further'

``The demand for housing seems to have weakened further, in part reflecting ongoing problems in mortgage markets,'' Bernanke said.

Payrolls rose by 18,000 last month, with the first decline in private jobs since 2003. The unemployment rate rose to 5 percent, from 4.7 percent the previous month.

The more aggressive response signaled by Bernanke today may come too late to prevent a sharp slowdown, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. ``If we have a recession coming, then all this does is create a more conducive environment for the economy's convalescence.''

``Should the labor market deteriorate, the risks to consumer spending would rise,'' Bernanke said in his prepared remarks to the Women in Housing and Finance and Exchequer Club.

`Mindset Has Moved'

``This tells you the chairman's mindset has moved,'' said Credit Suisse Group Chief Economist Neal Soss, who changed his forecast yesterday to a half-point rate cut this month. ``He acknowledges inflation risk -- it's his job to do so -- but certainly that's not the primary focus.''

Inflation expectations measured by yield differences on 10- year Treasuries and government inflation-indexed bonds have remained between 2.2 percent and 2.4 percent over the past year, a sign that investors have confidence the central bank will maintain price stability in the long-term.

``Any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank's policy flexibility to counter shortfalls in growth in the future,'' Bernanke said.

U.K. Manufacturing Production Unexpectedly Declines

U.K. manufacturing unexpectedly contracted in November as production of televisions and radios fell to a five-year low, a sign economic growth is slowing.

Factory output fell 0.1 percent, compared with a 0.3 percent increase in October, the Office for National Statistics said in London today. Economists forecast a 0.1 percent gain, according to the median of 27 estimates in a Bloomberg News survey. On the year, factory production rose 0.1 percent.

The report adds to evidence that the economy is slowing as higher credit costs prompt banks to pare lending to companies and consumers. Speculation that the Bank of England will cut the benchmark interest rate further after a reduction last month pushed the pound to a record low against the euro today.

``It is signaling some moderation in economic activity and continues the idea that the U.K. is on a slowing trend,'' said Paul Donovan, deputy head of global economics at UBS AG in London. ``The bank will cut by a quarter point a quarter.''

Eight out of 13 categories of manufacturing fell on the month, led by electrical and optical equipment, as production of televisions and radios dropped to the lowest since 2002, the statistics office said.

Economic Growth

Manufacturing, which makes up 15 percent of the economy, would need to have increased 0.3 percent in December for factory production to show any gain for the whole of the fourth quarter, the statistics office said.

Avingtrans Plc, a U.K. maker of machinery parts, said on Dec. 18 that its full-year profit will be ``significantly'' below forecasts.

Britain's economy is slowing after contagion from the collapse of the market for U.S. subprime mortgages. U.K. banks now plan to make fewer loans to consumers and companies in the first quarter, threatening to squeeze spending and investment, a Bank of England survey showed on Jan. 3.

Overall industrial production fell 0.1 percent on the month, compared with a 0.5 percent increase in October, the statistics office said.

Growth in U.K. service industries from banks to airlines still unexpectedly accelerated in December, an index by the Chartered Institute of Purchasing and Supply showed on Jan. 4. Overall services account for three quarters of the economy.

British exporters, who make more than half of their sales in the euro area, may also benefit after the pound reached 75.85 pence against the euro today, making their products less expensive there. Demand for goods in the U.S. may increase after the U.K. currency fell to an eight-month low of $1.9501 against the dollar today.

The Bank of England kept the benchmark interest rate unchanged yesterday after cutting it by a quarter point in December to 5.5 percent, in the first unanimous decision for a rate reduction since the aftermath of the Sept. 11, 2001 terrorist attacks.

Policy makers will reduce the rate next month by a further quarter point, according to 35 out of 36 economists in a Bloomberg News survey.

Goldman Says Japan Recession Risk at `Danger Level'

Goldman Sachs Group said there's a 50 percent chance Japan will slip into recession and cut its 2008 growth estimate for the world's second-largest economy.

``We estimate the probability of a recession in Japan has risen to the `danger level,''' Tetsufumi Yamakawa, chief Japan economist at Goldman, said in a report to clients today. ``We project weaker-than-expected growth in Japan especially in the first half of 2008 owing to an inevitable, moderate slowdown among emerging economies.''

Bank of Japan Deputy Governor Toshiro Muto said today he expects the economy to keep slowing ``for the time being'' and the central bank will conduct policy ``with discretion.'' Goldman said yesterday the U.S. economy is falling into recession.

Yamakawa cut his 2008 growth estimate to 1 percent from 1.2 percent and said the central bank may have to forego raising rates this year.

Sluggish spending by consumers has left Japan more dependant on overseas markets, just as cooling U.S. demand threatens to spread to Asia, where Japan sells half its exports.

Stocks including Mitsubishi Estate Co. declined today after Credit Suisse Group said the defaults in U.S. subprime mortgages may prompt overseas investors to sell their property holdings in Japan.

Losing Momentum

The cycle of rising corporate profits feeding into wages and consumer spending is losing momentum, Muto said today.

``The greatest challenge for the Japanese economy, needless to say, is a recovery in personal consumption, which has remained in an extended slump,'' Goldman's Yamakawa said. ``Innumerable obstacles stand in the way.''

Falling wages, which have dropped about 10 percent in the last decade, and rising food and energy prices have sent consumer confidence to a near four-year low. Paychecks are unlikely to rise this year as rising oil prices crimp profits.

With domestic consumption flat, the economy is more dependent on foreign demand. Exports contributed almost of Japan's growth in the third quarter, as demand from Asia helped make up for slowing orders from the U.S.

The risk is that demand from Asia will also dry up.

``A U.S. slowdown affects Asia, beginning with China, and via that route it affects Japan,'' Ota said this week. ``The extent to which Japan is hurt depends on the severity of the U.S. slowdown.''

Yen Rises as Drop in Stocks Spurs Investors to Cut Carry Trades

The yen rose against 15 of the 16 most-actively traded currencies on speculation a decline in the nation's stocks spurred investors to cut holdings of higher- yielding assets funded with loans in Japan.

The Japanese currency gained versus the British pound and the Canadian dollar as investors cut so-called carry trades on concern the global economy will cool. The yen remained higher after Bank of Japan Deputy Governor Toshiro Muto said Japan's economy will keep slowing ``for the time being.''

``Japanese stocks look pretty weak,'' said Shinichi Takasaka, manager of foreign exchange and financial products trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly listed lender. ``There are still a lot of risks out there'' and ``some traders are buying the yen.''

The yen climbed to 109.66 against the U.S. currency as of 12:31 p.m. in Tokyo from 110.04 yesterday in New York. It traded at 161.02 per euro from 161.31. The euro bought $1.4682 from $1.4659. The MSCI Asia Pacific Index of regional shares fell 0.6 percent, snapping two days of gains, and the Nikkei 225 Stock Average dropped 0.8 percent.

The pound fell 0.4 percent to 214.77 yen, while the Canadian dollar declined 0.3 percent to 108.62 yen. The Australian dollar weakened 0.2 percent to 97.01 yen.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency moves erase those profits.

Bank of Japan

Goldman Sachs Group said there's a 50 percent chance Japan will slip into recession and cut its 2008 growth estimate for the world's second-largest economy. BOJ Deputy Governor Muto said the central bank has no preset schedule for adjusting interest rates, at 0.5 percent, and it may be hard for monetary authorities around the world to deal with the risk of slowing economic growth coupled with faster inflation.

``Muto mentioned downside risks for the global economy, the U.S. and Japanese economies,'' said Kenichiro Yoshida, a senior economist and currency analyst at Mizuho Research Institute in Tokyo, a unit of Japan's second-largest lender by assets. This ``prompted investors' to reduce risk and pared the yen carry trade.''

The yen may rise to as high as 105 per dollar this quarter, Yoshida said.

The euro was near the lowest in a week against the dollar on bets the European Central Bank will signal it is unlikely to raise interest rates this year because of a slowdown in economic growth.

Hawkish Trichet

Interest-rate futures yesterday showed traders pared bets the ECB will raise borrowing costs this year after reports showed German industrial production, exports and retail sales unexpectedly declined. The implied yield on the Euribor June futures contract fell 4 basis points yesterday to 4.34 percent.

Today's rate decision is scheduled at 1:45 p.m. Frankfurt time. Trichet will hold a press conference 45 minutes later.

``Worsening economic indicators are heightening a sense of uncertainty about the ECB's rate policy,'' said Seiichiro Muta, director of foreign exchange in Tokyo at UBS AG, the world's second-largest currency trader. ``Trichet cannot be hawkish on rate increases. The euro looks weak.''

Europe's single currency may decline to $1.4620 today, he said.

Losses in the dollar may be limited on speculation Federal Reserve Chairman Ben S. Bernanke will say the U.S. can avoid a recession in a speech in Washington today.

Bernanke Speech

St. Louis Fed Bank President William Poole said yesterday the dollar won't ``go way south'' and predicted economic growth will accelerate as the year progresses.

``The dollar should be stronger,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``Poole didn't think they were going into a recession. Bernanke won't be all doom and gloom and will say something like a recession isn't certain.''

The currency may gain to 111 yen and $1.46 per euro today, Morriss said.

Futures contracts traded on the Chicago Board of Trade show 76 percent odds the Fed will cut the benchmark interest rate a half-percentage point from 4.25 percent on Jan. 30. The chances for a quarter-point reduction are 24 percent, down from 66 percent a week earlier.

The British pound traded at 74.98 pence per euro, near a record low of 75.03 pence, as traders increased bets the Bank of England will cut interest rates today to prevent declining home prices from weighing on the economy.

The currency traded near a 10-month low against the dollar after a report yesterday showed U.K. consumer confidence dropped to the lowest in almost a year.

U.K. Rates

There's a 61 percent chance the BOE will lower its benchmark interest rate a quarter-percentage point from 5.5 percent today, according to a Credit Suisse index of probability derived from overnight indexed swap rates. The central bank releases its decision at noon today in London.

``The pound looks overvalued, and I expect it to fall,'' said Kengo Suzuki, currency strategist in Tokyo at Shinko Securities Co., Securities Co., which will merge in May with Mizuho Securities to create Japan's third-largest brokerage. ``We can't rule out a preemptive rate cut from the BOE today as the economic situation hasn't improved.''

The pound may fall to $1.95 in the next two days, he said. It bought $1.9577 from $1.9585 yesterday.

ShopperTrak Says Holiday Retail Sales Climbed 4.5%

Holiday sales in the U.S. climbed 4.5 percent, ahead of ShopperTrak RCT Corp.'s forecast, as retailers lured customers with discounts on clothing and electronics.

The gain exceeded the projection of a 3.6 percent increase, ShopperTrak said in a statement today. Customer visits dropped 2.7 percent during November and December from a year earlier, the firm said.

``This holiday traffic slide mirrors the trend seen throughout 2007 of consumers visiting retail locations less but spending more,'' the Chicago-based research firm said.

Sales were helped by a surge in spending the final weekend before the Christmas holiday, ShopperTrak said. Wal-Mart Stores Inc., Macy's Inc. and Kohl's Corp. offered last-minute promotions to attract cash-strapped shoppers in the face of the worst housing slump in 27 years and gasoline costs that exceeded $3 a gallon.

Other analysts and research firms have projected holiday sales may be the worst in at least five years. The National Retail Federation has forecast a 4 percent rise, the smallest since 2002.

The International Council of Shopping Centers said yesterday that sales at stores open at least a year climbed ``a little under'' its 2.5 percent forecast during the final two months of 2007.

Macy's, the second-largest department store chain, rose 85 cents, or 3.9 percent, to $22.67 at 4 p.m. in New York Stock Exchange composite trading. Wal-Mart increased 93 cents, or 2 percent, to $46.90. The Standard & Poor's Retailing Index rose less than 1 percent and has declined 8.5 percent this year.

Many retailers report December sales results tomorrow.

Target, Wal-Mart

Lauri Brunner, a retail analyst at Thrivent Investment Management in Minneapolis, said ShopperTrak's findings ``don't seem to foot'' with numbers she looks at. Target Corp. said last month that same-store sales for December may decline.

``Look at Wal-Mart and Target, two of the largest retailers out there, and look what they're going to do in December,'' said Brunner. Thrivent oversees $70.6 billion in assets.

Wal-Mart said Dec. 6 that same-store sales would rise between 1 percent to 3 percent during the month.

ShopperTrak measures foot traffic in shopping centers and malls using more than 50,000 video devices and derives its estimate for a total sales increase in part from past U.S. Commerce Department sales data.

The ICSC bases its forecast on surveys of as many as 60 retail chains and looks at same-store sales.

Same-Store Sales

Same-store sales results, which are smaller than overall revenue, are considered a key measure of a retailer's performance because they exclude locations that have recently opened or closed.

Specialty-apparel sales, which exclude most discounters and department stores, slowed in December from a year earlier after a decline in consumer purchases of women's clothing, MasterCard Advisors' SpendingPulse said.

Total sales of women's apparel fell 3.8 percent last month, Michael McNamara, vice president of research and analysis at MasterCard Advisors, said in an interview today.

``The economic environment is not as robust as it was a year ago,'' McNamara said.

Men's clothing sales climbed 1.6 percent in December and shoes rose 5.9 percent, according to MasterCard Advisors. Internet sales surged 32 percent.

Ahead Of Judgment Day

Yesterday, the US dollar slipped as a sharp drop in US stocks added concerns about a possible economic recession and raised prospects of a deeper rate cut by the Feds this month. Clearly, we can say there is a fair degree of sensitivity between currency markets and what's happening in stocks; however it's hard to distinguish any significant trends in the forex market right now.

Moving on to today, the US dollar was mixed against other major currencies midway through the morning secession. It's obvious now what's happening here, well at least in my prospect the currency market is trying to figure out which is the way to lean here in terms of how the US economy is going to pan out

Meanwhile, Traders are looking ahead to the European and UK central bank meetings and Fed chairman Ben Bernanke's speech tomorrow which may give clues about the direction of interest rates in their respective areas.

The ECB and BOE are expected to leave rates unchanged, though Mr. Trichet, president if the ECB is likely to suggest higher rates in the future to curb inflation. The Euro is now dropping against the US dollar pushing the pair to the downside to record a low of 1.4702 after recording a high of 1.4743.

The Bank of England is however under pressure to cut rates again particularly, after UK retailers reported their worse Christmas trading period since 2004. In early European deals today, the British Pound declined to fresh record low against the Euro and a new multi-month low against the dollar. The currency also weakened against other majors too. Against the US dollar, the Royal Pound declined pushing the pair to record a low of 1.9619 after recording a high of 1.9763.

No major releases were out today from the Japanese economy yet a report attributed yen's weakness to the market speculation that the bank of Japan is likely to keep rates on hold. The Japanese Yen showed weakness against its major counterparts during early deals today. Yet, the currency staged an attempt to bounce back in early European trading, but it lost ground again pushing the USD/JPY pair to the upside to record a high of 109.71 and a low of 108.83

In the end, all we could hope for is for the everlasting financial market turmoil to come to an end. Because currently, signs of slowing growth in the industrial world are already apparent and the consequent tightening of credit conditions had increased the downside risks to activity and inflation in the medium term.

Countrywide Says Foreclosures, Overdue Loans Rise

Countrywide Financial Corp., the biggest U.S. mortgage lender, fell in New York trading to the lowest since 1996 as foreclosures and late payments last month were the highest in more than five years.

Foreclosures doubled to 1.44 percent of unpaid principal in December from 0.7 percent a year earlier at the company's unit that handles billing and processing, Countrywide said in a statement today. Late payments advanced to 7.2 percent of unpaid balances from 4.6 percent.

Countrywide fell 7.7 percent today after losing more than a quarter of its market value yesterday, when the company denied speculation it will file for bankruptcy. Declining home sales and rising defaults pushed Countrywide down 79 percent last year, and Chief Executive Officer Angelo Mozilo has called the housing market the worst since the Great Depression.

``It appears that the housing trends in 2008 will look a lot like 2007, so Countrywide will remain under a lot of stress,'' said Tom Atteberry, a money manager in Los Angeles at First Pacific Advisors LLC, in an interview yesterday. ``What they are left with is a pretty low-margin business.''

Countrywide fell to $5.05 in 10:10 a.m. New York Stock Exchange composite trading. The stock fell 28 percent yesterday to $5.47, its biggest decline since Black Monday in October 1987. Washington Mutual Inc., the biggest U.S. savings and loan, dropped as much as 15 percent, and IndyMac Bancorp Inc., the second-biggest independent mortgage company, lost 11 percent.

Investors controlling 134.4 million Countrywide shares were betting on a decline as of Dec. 31, according to data compiled by Bloomberg. The so-called short interest is about 4.7 times the company's average daily trading volume and about 23 percent of the company's shares available to the public.

Bad Loans

Mortgages funded rose 1 percent from November, and fell 45 percent from year-earlier levels, according to the Countrywide statement. New loans in December totaled $24 billion.

The company charges fees to owners of the mortgages in its $1.5 trillion servicing portfolio for performing the administrative tasks. Borrowers aren't prepaying loans as quickly, the company said, which means a longer stream of earnings for Countrywide and an increase in the value of the servicing rights.

``Our fourth quarter ended with a number of positive operational trends,'' President David Sambol said today in the statement from the Calabasas, California-based company. ``Although average daily mortgage loan applications and the pipeline of mortgage loans-in-process decreased from November, this reflected a seasonal decline typically seen this time of year.''

Subprime Loans

Countrywide made $6 million in subprime loans in December, down from $3.7 billion a year earlier, reflecting its tighter standards for lending and the inability to sell so-called non- conforming loans to investors in the secondary market.

While the change ``has reduced balance sheet risk caused by its non-conforming originations, the dramatic decline in Countrywide's earnings power this transition has caused has kept CFC's creditors nervous about the company's liquidity,'' Lehman Brothers analyst Bruce Harting said in a report yesterday.

A telephone call to Countrywide's media office was not immediately returned. Mozilo said in October that the company expects to be profitable in the fourth quarter and in 2008.

Countrywide probably is seeking additional capital to shore up its credit ratings, Atteberry said.

Bank of America invested $2 billion in Countrywide in August, buying preferred shares that are convertible at $18 and pay a 7.25 percent dividend. If Bank of America converted all of the original stake to Countrywide's stock at the current price, the bank might face a loss of more than $1.3 billion, or about 70 percent, excluding dividends and the value of the conversion rights.

Countrywide's bank attracted a net $2.3 billion in deposits in December, ending the year at $61 billion. The bank is boosting interest rates to help attract deposits, while borrowing more than $50 billion from the Federal Home Loan Bank system.

U.S. Will Escape Recession, Economists Say in Survey

The U.S. will skirt recession as consumer spending slows without collapsing, a survey of economists showed.

Economic growth will average 1.5 percent in the first six months of 2008, matching the fourth quarter's pace, according to the median estimate of 62 economists surveyed by Bloomberg News from Jan. 3 to Jan. 8. The rate of expansion would be the weakest since the last nine months of 2001.

``It's soft economic activity that feels like a recession, but we probably won't have one,'' said Mickey Levy, chief economist at Bank of America Corp. in New York. ``The state of the consumer is clearly softening, but spending is not declining. That's very important.''

The Federal Reserve will cut interest rates more than previously anticipated, economists said, triggering a reacceleration in growth by the third quarter that will keep the economy from stalling.

Economists put the odds of a recession developing within the next year at 40 percent, according to the median estimate. Nine of the 47 economists responding to the question put the odds at about even and five said the economy would contract.

Goldman Sachs Group Inc. economists now predict a recession, joining their counterparts at Merrill Lynch & Co. and Morgan Stanley.

Bonds, Stocks

Treasury yields have fallen and stocks in the U.S. have dropped as the economic outlook deteriorated. Yields on benchmark 10-year notes yesterday reached 3.77 percent, the lowest since March 2004. They were at 3.81 percent at 7:56 a.m. in New York today. The Standard & Poor's 500 stock index yesterday fell to the lowest closing level since March.

Growth forecasts were lowered for every quarter of the year, even as the estimate for the last three months of 2007 was boosted. The world's largest economy will expand 2.1 percent in 2008, down from 2.3 percent forecast last month and the weakest since 2002.

``We're skating on the thin edge of a recession, but we'll narrowly miss one,'' said Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina. ``At the end of the day, it boils down to the consumer, who has remained relatively resilient.''

Gains in income will help ``prop up'' spending, which accounts for more than two-thirds of the economy, even after the job market softened in December, said Bryson.

Spending Growth

Spending grew at a 2.6 percent annual pace during the holidays last quarter, little changed from the previous three months and about a percentage point faster than predicted in December, according to the survey median. Economists pared estimates for the first six months of this year and boosted the forecast for the third quarter.

The Fed will reduce borrowing costs in both the first and second quarters, bringing the benchmark interest rate down to 3.5 percent by mid-year. Last month, economists forecast the Fed would reduce the rate just once more and hold it at 4 percent through 2008.

Interest-rate reductions will ``eventually stimulate demand,'' said Bank of America's Levy. Growth in the second half of the year will pick up to an average 2.5 percent pace, according to the latest estimates.

Rising exports and business investment will also help keep the economy's head above water. Still, growth concerns will trump some policy makers' unease about inflation as food and fuel prices climb, economists said.

Impact From Housing

The housing slump, now in its third year, will lead to more foreclosures that will further depress property values, making Americans feel less wealthy.

Employment, once a bright spot, may now become another headwind for consumers. The economy created just 18,000 jobs in December, capping the worst year for hiring since 2003, government data showed last week. The jobless rate jumped to a two-year high of 5 percent as builders, mortgage companies and manufacturers reduced payrolls.

The increase in unemployment convinced Harvard University economist Martin Feldstein, head of the National Bureau of Economic Research and member of the committee that determines when recessions begin and end, that a downturn was on the way.

``We are now talking about more likely than not,'' Feldstein said in a Jan. 5 interview. ``I have been saying about 50 percent. This now pushes it up a bit above that.''

`By Their Fingernails'

``Consumers are holding on by their fingernails,'' said Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta. ``We still have spending on absolute necessities while they're cutting back on discretionary purchases.''

December retail sales figures won't be available until the Commerce Department's Jan. 15 report, making forecasting even more difficult, economists said. Combined November-December purchases probably amounted to the weakest holiday season in five years, according to forecasts from industry groups including the International Council of Shopping Centers.

``The debate here is whether the economy is quite weak or whether it is falling into a recession,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``So far, I'm in the quite-weak camp.''