Fundamental News

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

2008-01-18T04:33:00.000-08:00

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

2008-01-15T14:00:00.001-08:00

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

2008-01-15T07:16:00.000-08:00

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

2008-01-15T05:53:00.000-08:00

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

2008-01-14T07:26:00.001-08:00

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

2008-01-14T05:57:00.001-08:00

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

2008-01-14T03:19:00.000-08:00

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

2008-01-14T03:17:00.000-08:00

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.

2008-01-13T16:02:00.000-08:00

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

2008-01-11T02:27:00.001-08:00

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

2008-01-11T02:25:00.000-08:00

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'

2008-01-09T20:57:00.000-08:00

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

2008-01-09T20:55:00.001-08:00

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%

2008-01-09T14:28:00.000-08:00

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

2008-01-09T08:13:00.000-08:00

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

2008-01-09T08:12:00.000-08:00

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

2008-01-09T08:11:00.001-08:00

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.''

U.S. November Existing-Home Sales Probably Matched Record Low

2007-12-31T00:32:00.000-08:00

Sales of existing homes in the U.S. matched a record low in November, a sign the housing recession will continue to weigh on the economy in 2008, economists said before a report today.

Purchases were unchanged at a 4.97 million annual pace for a second month, according to the median forecast of 53 economists surveyed by Bloomberg News. That's down 31 percent from their September 2005 peak.

``Demand for housing will remain weak,'' said Brian Bethune, an economist at Global Insight Inc., a Lexington, Massachusetts forecasting firm. ``We don't expect any major change in the overall trend in housing.''

Mortgage loans have become harder to get since banks tightened lending guidelines after the collapse in the subprime market, suggesting sales will keep falling. Rising foreclosures are adding to the glut of unsold homes, pulling down home prices and posing a threat to consumer spending, economists said.

The report from the National Association of Realtors is due at 10 a.m. in Washington. Economists' forecasts ranged from 4.7 million to 5.15 million.

Declines in home construction have detracted from growth for the last seven quarters and are likely to keep weighing on the expansion, according to Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York.

``The housing pain looks likely to continue through 2009,'' Harris wrote in a Dec. 20 note to clients. He predicted ``sales and starts to fall through the middle of 2008, gradually rising in 2009.''

Prices Decline

Home prices in 20 metropolitan areas fell 6.1 percent in October from a year earlier, the biggest decline in at least six years, according to the S&P/Case-Shiller home price index issued last week. Lehman Brothers is forecasting prices will fall at least 15 percent from peak to trough.

Falling prices leave owners feeling poorer and less likely to borrow against home equity to finance purchases. Consumer spending, which accounts for more than two-thirds of the economy, may grow at a 1.5 percent pace in the fourth quarter, almost half the rate of the previous three months, economists surveyed by Bloomberg forecast.

The odds of a recession in the next 12 months rose to 39 percent in December from 33.6 percent the prior month, according to the median forecast of economists surveyed by Blue Chip Economic Indicators. The last recession was in 2001, when the economy grew 0.8 percent.

Sales Slump

Sales of new homes, which make up about 15 percent of the market, fell 9 percent in November to a 12-year low, the government said Dec. 28. Purchases were down 53 percent in November from their July 2005 peak. Existing homes make up the remainder of the market.

Sellers are cutting prices and builders are scaling back projects to trim a glut of inventories of unsold homes. At the current sales pace, it would take 10.8 months to sell all the existing homes on the market in October.

``Once we are through absorbing the excess inventory, the supply that's in the marketplace, we will go back to doing good business,'' Robert Toll, chief executive officer of Toll Brothers Inc., the largest luxury-home builder, said on a conference call earlier this month. ``This downturn may be our toughest yet,'' said Toll.

                        Bloomberg Survey

==============================================
                        Exist Home Exist Home
                            Sales    Sales
                         Millions     MOM%
==============================================

Date of Release              12/31    12/31
Observation Period            Nov.     Oct.
----------------------------------------------
Median                        4.97      0.0
Average                       4.96     -0.1
High Forecast                 5.15      3.6
Low Forecast                  4.70     -5.4
Number of Participants          53       53
Previous                      4.97     -1.2
----------------------------------------------
4CAST Ltd.                    5.05      1.6
Action Economics              5.03      1.2
Analytical Synthesis          4.70     -5.4
Argus Research Corp.          5.00      0.6
Banc of America Securitie     5.02      1.0
Bank of Tokyo- Mitsubishi     4.95     -0.4
Barclays Capital              5.00      0.6
BMO Capital Markets           5.00      0.6
BNP Paribas                   5.15      3.6
Briefing.com                  5.00      0.6
Calyon                        4.90     -1.4
CIBC World Markets            4.97      0.0
Citi                          5.02      1.0
ClearView Economics           4.80     -3.4
Commerzbank AG                4.90     -1.4
Credit Suisse                 4.95     -0.4
Daiwa Securities America      4.90     -1.4
Desjardins Group              4.80     -3.4
Deutsche Bank Securities      4.95     -0.4
Dresdner Kleinwort            5.00      0.6
First Trust Advisors          5.07      2.0
Global Insight Inc.           4.96     -0.2
Helaba                        4.93     -0.8
HSBC Markets                  5.05      1.6
IDEAglobal                    4.90     -1.4
Informa Global Markets        5.00      0.6
Insight Economics             4.85     -2.4
Intesa-SanPaulo               5.00      0.6
J.P. Morgan Chase             5.00      0.6
Janney Montgomery Scott L     4.93     -0.8
JPMorgan Private Client       4.94     -0.6
Landesbank Berlin             5.00      0.6
Maria Fiorini Ramirez Inc     5.00      0.6
Merrill Lynch                 4.95     -0.4
Moody's Economy.com           4.89     -1.6
Morgan Stanley & Co.          4.95     -0.4
National City Bank            5.05      1.6
Natixis                       4.90     -1.4
Nomura Securities Intl.       4.95     -0.4
PNC Bank                      4.80     -3.4
RBS Greenwich Capital         4.97      0.0
Ried, Thunberg & Co.          5.00      0.6
Scotia Capital                5.00      0.6
Societe Generale              5.00      0.6
Stone & McCarthy Research     4.96     -0.2
Thomson Financial/IFR         4.97      0.0
UBS Securities LLC            5.02      1.0
University of Maryland        5.04      1.4
Wachovia Corp.                4.95     -0.4
Wells Fargo & Co.             5.03      1.2
WestLB AG                     4.95     -0.4
Westpac Banking Co.           4.97      0.0
Wrightson Associates          5.00      0.6
==============================================

Dollar Heads for Annual Decline Versus Euro, Yen on Economy

2007-12-30T17:10:00.001-08:00

The dollar headed for the second straight annual decline against the euro and snapped two years of gains versus the yen as traders increased bets the Federal Reserve will cut rates again to halt an economic slowdown.

The dollar has declined against 14 of the 16 most active currencies this year as the Fed lowered borrowing costs three times because of a slumping housing market. A report today will probably show sales of existing homes in November stayed at the lowest level since the National Association of Realtors began keeping the records in 1999.

``The U.S. economy is still slowing,'' said Lee Wai Tuck, a currency strategist at Forecast Singapore Ltd. ``The Fed is likely to cut rates in January. It puts the dollar under downward pressure.''

The dollar was at $1.4734 per euro at 9:27 a.m. in Tokyo, down 11 percent this year. It reached $1.4967 on Nov. 23, the lowest since the euro begun trading in 1999. The U.S. currency lost 5.7 percent this year to 112.27 yen and reached a two-week low of 112.25 yen. Japan's currency traded at 165.43 per euro, having declined 5.3 percent to head for an eighth straight annual loss.

The dollar may decline to $1.4780 per euro and 112.10 yen today, Lee forecast. Currency trading will be less than 50 percent of normal levels today because of the holiday in Japan, Indonesia, Thailand and the Philippines, Lee said.

Odds the Fed will cut its target rate for overnight bank loans a quarter-percentage point from 4.25 percent at its Jan. 30 meeting increased to 90 percent from 80 percent a week earlier, according to futures on the Chicago Board of Trade.

The level of existing home sales in November was probably 4.97 million, unchanged from the month before, according to the National Association of Realtors which will release the report at 10 a.m. in Washington. A report on Dec. 28 showed sales of new homes in the U.S. fell to a 12-year low.

Oil Rises as Iran Plans Reactor Start, Australian Fields Close

2007-12-30T17:09:00.001-08:00

Crude oil rose in New York as Iran plans to start a nuclear reactor next year, raising concern the move will heighten a confrontation with the U.S.

Oil also gained after some fields off Australia shut down because of a cyclone.

Crude oil for February delivery climbed as much as 45 cents, or 0.5 percent, to $96.45 a barrel in electronic trading on the New York Mercantile Exchange. It was at $96.42 at 8:20 a.m. Singapore time. Oil has risen 58 percent this year, heading for its biggest annual gain in eight years.

U.S. Holiday Internet Sales Rise at Slowest Pace Ever

2007-12-30T17:08:00.000-08:00

Internet sales by U.S. retailers rose at the slowest pace on record as $3-a-gallon gasoline and rising mortgage defaults weighed on holiday spending.

Online spending from Nov. 1 through Dec. 27 increased 19 percent to almost $28 billion, from $24 billion a year earlier, Reston, Virginia-based ComScore Inc. said today in a statement. Sales growth trailed last year's 26 percent.

Discounts by Wal-Mart Stores Inc., the world's largest retailer, and Best Buy Co., the biggest U.S. consumer electronics chain, weren't enough to get consumers to loosen their purse strings. The Reuters/University of Michigan final index of consumer sentiment for December dropped to 75.5, the lowest since October 2005.

``Uppermost on the mind of consumers was the price tag,'' Kurt Barnard, president of Barnard's Retail Forecasting in Nutley, New Jersey, said in an interview. ``This made for a very difficult holiday season.''

Shoppers waited for discounts as online sales the day after Christmas totaled $545 million, more than double revenue on the same day in 2006. Consumers ``were willing, and able, to take advantage of late-season promotions and price discounts,'' ComStore Chairman Gian Fulgoni said in the statement.

ComScore hasn't recorded online sales growth of less than 20 percent since it began reporting the figures in 2002. Wal-Mart, Best Buy and Circuit City Stores Inc. offered discounts of 50 percent or more and promoted savings for in-store pickup of products purchased online to attract shoppers.

Internet Shopping

Spending through Web sites, which makes up more than 3 percent of all retail sales, may climb to $29.5 billion in November and December, ComScore estimated. That's less than the 26 percent growth in online sales during the holidays in 2006.

The slower growth mirrors the patterns in traditional retail sales. The 2007 holiday shopping season's sales may increase at the slowest pace in five years as consumers tightened household budgets because of record high oil and declines in home prices. Spending in November and December may rise 4 percent this year, according to National Retail Federation estimates.

Customer visits at U.S. stores declined for the fourth- straight week in the seven days through Dec. 22, the latest period reported on by Chicago-based ShopperTrak RCT Corp. Shoppers curtailed trips to malls in reaction to higher gasoline costs. Consumer traffic to retail locations fell 11 percent that week, the research firm said.

Retailers typically count on November and December for ringing up a fifth of their annual sales.

Unemployment May Rise, Factories Slow: U.S. Economy Preview

2007-12-30T07:41:00.000-08:00

Employers in the U.S. hired fewer workers in December and the unemployment rate rose, signaling one of the few remaining bright spots in the economy dimmed heading into 2008, economists said before reports this week.

Payrolls rose by 70,000 after increasing 94,000 in November, according to the median forecast in a Bloomberg survey of economists before a Jan. 4 government report. The jobless rate probably rose to 4.8 percent, the highest level in more than a year.

The figures may raise concern that wage gains, which have kept American consumers afloat, will weaken in coming months. Other reports this week are likely to show existing-home sales matched a record low in November and manufacturing almost stalled this month, suggesting the housing recession was spreading throughout the economy heading into the new year.

``In a slow-motion fashion, we're beginning to see more spillover,'' from the real-estate slump, said Edward McKelvey, senior U.S. economist at Goldman, Sachs & Co. in New York. ``It will be the dominant issue of '08.''

The December gain would put the total payroll increase for 2007 at 1.4 million, the fewest in four years. The jobless rate stood at 4.5 percent at the end of 2006.

The hiring slowdown became more pronounced as the year progressed and the housing slump deepened. An average 147,000 jobs a month were created from January through May, compared with 94,000 in the six months to November.

Housing's Influence

Residential construction has fallen for seven consecutive quarters, weakening job growth as builders, mortgage companies and manufacturers reduce staff.

The collapse of the subprime mortgage market in August hastened firings at financial companies. Seattle-based Washington Mutual Inc., the largest U.S. savings and loan, said earlier this month it will eliminate 3,150 jobs as mortgage losses increased.

Manufacturers are also cutting back as sales of building materials, appliances and furniture weaken, reflecting the slump in home sales.

Factory payrolls shrank by 15,000 workers this month, economists said the jobs report may show. That would cap an almost 200,000 drop in manufacturing employment for the year.

The Institute for Supply Management's factory index fell to 50.5 this month, an 11-month low, from 50.8 in November, the Tempe, Arizona-based group may report Jan. 2, according to economists surveyed. A reading of 50 is the dividing line between expansion and contraction.

Services to Slow

ISM's index of service industries that make up the nearly 90 percent of the economy may have dropped to the lowest level since March. The non-manufacturing gauge fell to 53.5 in December from 54.1 the prior month, according to a Bloomberg survey. The report is due Jan. 4.

The world's largest economy will grow at a 1 percent pace in the fourth quarter after expanding at a 4.9 percent rate the previous three months that was the strongest since 2003, according to the median estimate of economists surveyed earlier this month. Growth for all 2008 is projected at 2.3 percent.

A report tomorrow from the National Association of Realtors may show existing home sales in November were unchanged at an annual rate of 4.97 million units for a second month, according to the survey median. That's the lowest since the Realtors began keeping records in 1999 and 31 percent down from a September 2005 peak.

Risk to Spending

The weaker housing market is forecast to undermine consumer spending, which makes up two thirds of the economy, as falling property values leave owners feeling less wealthy and with less equity to tap for extra cash.

Retailers have placed fewer orders with Black & Decker Corp. this quarter because consumers are buying fewer tools for home remodeling projects as the housing slump enters its third year.

``We are seeing the U.S. economy slowing,'' said Alexander M. Cutler, chief executive officer at Eaton Corp., the world's second-largest maker of hydraulic equipment, in a Dec. 21 interview.

So far, income gains have helped prevent a collapse in consumer spending. The Labor Department is forecast to report hourly wages grew 0.3 percent on average in December after rising 0.5 percent the prior month. Year-over-year, average hourly wages probably rose 3.6 percent after a 3.8 percent gain in the prior 12-month period, economists said.

Investors project the Federal Reserve will lower its benchmark rate a quarter point at the end of January, its fourth consecutive rate decline since September, as it seeks to head off recession.

Minutes of the Fed's Dec. 11 meeting, when policy makers lowered the target rate to 4.25 percent, will be issued on Jan. 2. At the time, some investors were disappointed the central bank didn't drop the rate even more.

                        Bloomberg Survey

===========================================================
                       Release    Period    Prior Median
Indicator                 Date               Value Forecast
===========================================================
Exist Home Sales Million 12/31      Nov.      4.97    4.97
ISM Manu Index            1/2       Dec.      50.8    50.5
Construct Spending MOM%   1/2       Nov.     -0.8%   -0.4%
Initial Claims ,000's     1/3     Dec. 30     349      345
Factory Orders MOM%       1/3       Nov.      0.5%    0.5%
Nonfarm Payrolls ,000's   1/4       Dec.       94       70
Unemploy Rate %           1/4       Dec.      4.7%    4.8%
Manu Payrolls ,000's      1/4       Dec.      -11      -15
Hourly Earnings MOM%      1/4       Dec.      0.5%    0.3%
Hourly Earnings YOY%      1/4       Dec.      3.8%    3.6%
ISM NonManu Index         1/4       Dec.      54.1    53.5
==========================================================

U.S. Stocks Decline, Poised for Worst Fourth Quarter Since 2000

2007-12-29T18:56:00.000-08:00

U.S. stocks fell and were poised for their first fourth-quarter decline since 2000 after government reports on durable goods and unemployment reinforced speculation the housing-market collapse will push the economy into recession.

Citigroup Inc., JPMorgan Chase & Co. and Merrill Lynch & Co. dropped after Goldman Sachs Group Inc. analyst William Tanona predicted the firms may write down an additional $34 billion of assets linked to subprime mortgages. KB Home and Macy's Inc. led builders and retailers lower after falling home prices and sales heightened concern that sinking property values will slow consumer spending.

Lower-than-forecast orders for durable goods in November and an unexpected rise in jobless claims last week added to evidence that the housing slump is spreading to the broader economy. The Standard & Poor's 500 Index has declined 3.2 percent since the end of September, paring its 2007 advance to 4.2 percent.

``It's a struggle right now,'' said Edward Hemmelgarn, who oversees about $350 million as president of Shaker Investments Inc. in Cleveland. ``If you look at the economic news, most of it is more negative.''

The S&P 500 dropped 0.4 percent to 1,478.49 this week. The Dow Jones Industrial Average slipped 0.6 percent to 13,365.87. The Nasdaq Composite Index lost 0.7 percent to 2,674.46.

The declines left the S&P 500 5.5 percent below its all-time closing high of 1,565.15 on Oct. 9. The index has rebounded 5.1 percent in a month as traders boosted bets the Federal Reserve will reduce interest rates next year to stoke the economy.

Cars, Aircraft

The Commerce Department said two days ago that orders for cars, aircraft and other items made to last several years increased 0.1 percent last month, less than the 2 percent median economist estimate in a Bloomberg survey. The number of Americans filing first-time claims for unemployment insurance increased by 1,000 to 349,000, the Labor Department reported. Economists forecast initial claims would fall to 340,000.

Citigroup, the biggest U.S. bank by assets, dropped 3.1 percent to a five-year low of $29.29. JPMorgan, the third-biggest lender, declined 1.9 percent to $43.26. Merrill, the world's largest brokerage, lost 4.6 percent to $52.97.

Citigroup may reduce the value of its holdings by $18.7 billion in the fourth quarter and cut its dividend 40 percent to preserve capital, Goldman's Tanona said in a Dec. 26 report. JPMorgan may write off $3.4 billion, while Merrill may reduce its holdings by $11.5 billion, the analyst wrote.

Homebuilders Drop

Losses and writedowns at the world's biggest banks and securities firms total $97 billion this year, according to data compiled by Bloomberg. Financial shares in the S&P 500 dropped 1.4 percent this week, bringing their 2007 decline to 21 percent. That's the biggest annual plunge since 24 percent in 1990.

KB Home, the fifth-biggest U.S. homebuilder by sales, lost 7.8 percent to $21.08. Home prices in 20 U.S. metropolitan areas fell 6.1 percent in October, the most in at least six years, according to the S&P/Case-Shiller home-price index. Sales of new homes in the U.S. fell 9 percent, more than estimated, to a 12- year low in November, the Commerce Department said.

Home prices may keep falling as record foreclosures put even more properties on the market while stricter lending rules make it more difficult to get financing. Declining values pose a risk to consumer spending by making it harder for owners to tap home equity for extra cash.

Macy's, owner of the namesake chain and Bloomingdale's, lost 4 percent to $25.48. The company said yesterday it is closing nine stores with inadequate sales and eliminating 899 jobs.

Look Ahead

Reports next week on job growth, existing home sales and manufacturing will give investors further clues on the outlook for growth and borrowing costs. Odds that the central bank will cut its benchmark lending rate by a quarter-point increased to 90 percent from 80 percent a week ago, based on Fed funds futures.

Employers in the U.S. probably added 70,000 jobs in December, while the unemployment rate increased to 4.8 percent, according to the median economist forecasts in a Bloomberg survey. Manufacturing this month probably grew at the slowest pace since January, while sales of previously owned homes in November held steady after eight months of declines, economists said.

``We're approaching coin-toss status on whether we go into a recession or not,'' said Michael Mullaney, who helps oversee $10 billion at Fiduciary Trust Co. in Boston. ``We have some reservations about the strength of the market.''

Treasury yields fell for a second straight week. The benchmark 10-year note's yield dropped 0.10 percentage point to 4.07 percent.

Dollar Posts Biggest Decline Versus Euro Since 2006 on Housing

2007-12-29T18:54:00.000-08:00

The dollar posted its biggest weekly drop against the euro since April 2006 as a slumping housing market and upheaval in Pakistan made U.S. financial assets less attractive to international investors.

The U.S. currency fell against all 16 most-actively traded currencies except Mexico's peso this week as traders raised bets that the Federal Reserve will cut borrowing costs in January. The dollar has lost 10.4 percent against the euro and 5.7 percent versus the yen in 2007, and the European currency is up 5.2 percent versus the yen, its eighth annual increase.

``The dollar is like a sore thumb getting hit by a hammer,'' said Brian Dolan, chief currency strategist at Forex.com, a unit of the online currency trading firm Gain Capital in Bedminster, New Jersey. ``U.S. housing data shows no signs of any bottom in sight.''

The U.S. currency fell 2.4 percent this week to $1.4723 per euro, 1.5 percent to 112.28 yen and 2.5 percent to 1.1263 Swiss francs. The dollar touched $1.4728 per euro, 112.28 yen and 1.1259 Swiss francs, the lowest levels since mid-December.

Sweden's krona and Norway's krone led gains against the dollar this week, rising more than 2.8 percent. The Australian currency advanced 0.5 percent, the pound strengthened about 1 percent and the New Zealand currency increased 1 percent.

The U.S. currency weakened yesterday after the Commerce Department reported that sales of new homes in the U.S. fell to a 12-year low last month. Purchases dropped 9 percent to an annual rate of 647,000, and October sales were revised down to a 711,000 pace.

Home Prices

Home prices in 20 U.S. metropolitan areas decreased 6.1 percent in October, the S&P/Case-Shiller home-price index showed Dec. 26. The decrease was the biggest since the group started keeping year-over-year records in 2001.

Investors also sold the dollar after former Prime Minister Benazir Bhutto died of injuries sustained in a Dec. 27 attack on an election rally in Pakistan. She was buried yesterday in her ancestral village, and troops were deployed to quell riots in several cities. The government said al-Qaeda may be behind Bhutto's killing and ordered a judicial inquiry.

``The combination of soft U.S. data and geopolitical risks led to dollar weakness,'' said Richard Franulovich, a senior currency strategist in New York at Westpac Banking Corp. ``Data from the U.S. continued to show weakness.''

The pound fell to a record low of 73.89 pence per euro yesterday after a U.K. report showing falling house prices increased speculation that the Bank of England will cut interest rates from 5.5 percent. The pound lost 1.8 percent against the euro this week, the most since September.

Swiss Franc

The Swiss franc increased against 14 of the 16 most actively traded currencies this week, and the yen rose against the dollar, pound and currencies in Brazil, New Zealand and Australia on speculation the upheaval in Pakistan will lead to a reduction of carry trades funded in Switzerland and Japan.

In a carry trade, investors borrow in countries with low interest rates and convert the proceeds into currencies they can lend out for a higher return. They earn the spread between the borrowing and lending rates, incurring the risk that currency fluctuations may erase their profits.

Japan's benchmark lending rate is 0.5 percent and Switzerland's is 2.75 percent, the lowest among major economies.

``The Swiss franc is traditionally considered a safe-haven currency, and geopolitical risks pushed people to cut carry trades,'' said Nick Bennenbroek, head of currency strategy in New York at Wells Fargo & Co.

For the year, the dollar has declined against 14 of the 16 most actively traded currencies as the Fed cut the target rate for overnight lending between banks three times to 4.25 percent.

Payroll Report

A Labor Department report on Jan. 4 will show U.S. employers added 70,000 jobs this month, down from 94,000 in November, according to the median forecast of 58 economists surveyed by Bloomberg News. The unemployment rate is expected to rise to 4.8 percent in December from 4.7 percent.

Interest-rate futures on the Chicago Board of Trade yesterday indicated 94 percent odds that the Fed will reduce its benchmark interest rate a quarter-percentage point at its Jan. 30 meeting, compared with a 76 percent chance a day earlier and 80 percent a week ago.

``In the near term, the dollar probably remains on the weak side,'' said Doug Smith, chief Americas economist in New York at Standard Chartered Bank.

The dollar's share of global foreign-exchange reserves fell to 63.8 percent last quarter, the lowest level since records began in 1999, as international demand for U.S. assets slumped after the subprime-mortgage market collapsed, the International Monetary Fund said yesterday in Washington.

The U.S. currency will rebound to $1.39 per euro by the end of 2008, according to the median forecast of 42 economists surveyed by Bloomberg News. The yen will trade at 110 per dollar, according to the survey.

Treasuries Gain for a Second Week on Signs Economy Is Slowing

2007-12-29T18:52:00.000-08:00

reasuries rose for a second week and headed for the best annual returns since 2002 after government reports showed sales of new homes in the U.S. fell to a 12-year low last month and more people were out of work.

Treasuries have returned 8.1 percent this year as traders anticipate the Federal Reserve will extend interest-rate cuts next month. A report next week is forecast to show the unemployment rate in the U.S. touched the highest in 17 months.

``People are leaning toward a little more weakness in the job report, which will keep a solid bid in Treasuries until that notion is disproven,'' said William O'Donnell, head of U.S. government bond strategy in Stamford, Connecticut, at UBS Securities LLC, one of the 20 primary securities dealers that trade with the Fed.

The yield on the benchmark 10-year note decreased 9 basis points this week to 4.08 percent, according to bond broker Cantor Fitzgerald LP. The price of the 4 1/4 percent security due in November 2017 rose 3/4, or $7.50 per $1,000 face amount, to 101 3/8. Two-year yields also declined 9 basis points this week to 3.10 percent.

The median estimate of 58 economists surveyed by Bloomberg News is that the economy added 70,000 jobs in December, the fewest since September. The unemployment rate may rise to 4.8 percent, which would be the highest since July 2006. The Labor Department reports the statistics on Jan. 4.

`Wrong Place'

Fed funds futures contracts on the Chicago Board of Trade indicate a 90 percent chance the Fed will reduce its target rate for overnight bank loans a quarter-percentage point from 4.25 percent at its Jan. 30 meeting, up from 80 percent odds on Dec. 21.

``The fed funds rate is in the wrong place,'' Paul McCulley, a money manager at Pacific Investment Management Co. in Newport Beach, California, said in an interview on Bloomberg Television yesterday. ``Recessions are always about tipping points. That's what I worry about.''

McCulley said in a note on Dec. 27 the Fed will cut rates at each upcoming meeting to at least 3 percent.

Sales of new homes fell 9 percent to an annual pace of 647,000, and October sales were revised down to a 711,000 rate, the Commerce Department in Washington said yesterday. The median forecast of economists surveyed by Bloomberg was for a 1.6 percent decline.

`A Potential Recession'

``The argument for a potential recession has been fortified,'' said Andrew Harding, chief investment officer for fixed income in Cleveland at Allegiant Asset Management, which manages $18 billion. ``We'll see low rates for some period of time.''

Treasuries also gained on Dec. 27 after government reports showed a weaker-than-forecast gain in durable goods orders and jobless claims reached a two-year high. Riots in Pakistan after the assassination of former Prime Minister Benazir Bhutto added to investors' desire for the safety of government debt.

``Global uncertainty and unrest are usually good for Treasuries,'' said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee.

The Securities Industry and Financial Markets Association recommended trading of Treasuries close at 2 p.m. New York time on Dec. 31 and stay shut on Jan. 1 in Japan, the U.K. and the U.S. for New Year's Day.

Returns this year were the best since gaining 11.6 percent in 2002, according to indexes complied by Merrill Lynch & Co.

Libor Rate

Market rates for inter-bank loans have declined since the Fed, European Central Bank and three other central banks announced a combined effort on Dec. 12 to revive that market. The rates remain above the levels of July, before the collapse of the U.S. subprime-mortgage market caused banks to stop lending to all but the safest borrowers.

The rate banks charge to lend each other dollars fell, indicating they are less concerned about having funding at year- end. The three-month London interbank offered rate, or Libor, fell 13 basis points this week to a 22-month low of 4.73 percent, the British Bankers' Association said yesterday.

The gap between the Libor and overnight index swap rate, viewed as an indirect measure of the availability of funds in the money market, fell to 66 basis points yesterday, from as much as 106 basis points on Dec. 4, which was the widest since at least December 2001, as far back as Bloomberg compiles the data.

The gap averaged 11 basis points between 2001 and when credit market concern began mounting in August.

``Banks typically want to keep cash to themselves,'' Ajay Rajadhyaksha, head of fixed-income strategy in New York at primary dealer Barclays Capital Inc., said in an interview on Bloomberg Television. ``It's the fear of what may happen.''

The ``TED'' spread, the difference between what banks and the U.S. government pay for three-month loans, narrowed to 1.58 percentage points yesterday from 1.89 percentage points on Dec. 21.

U.S. Economy: New-Home Sales Tumble to 12-Year Low

2007-12-29T18:51:00.000-08:00

Sales of new homes in the U.S. fell to a 12-year low in November, pointing to bigger declines in construction that will hinder economic growth in 2008.

Purchases dropped 9 percent to an annual pace of 647,000 and October sales were revised lower, the Commerce Department said today in Washington. Last month's sales were weaker than the lowest forecast in a Bloomberg News survey of economists.

Treasury notes extended their rally and traders added to bets that the Federal Reserve will cut interest rates again in January to prevent a recession. New-home sales are down 25.4 percent so far this year, heading for the biggest annual decline since at least 1963.

``This gives a dire picture,'' said Dana Saporta, an economist at Dresdner Kleinwort in New York. ``The weak data raise the risk of the economy slowing faster than Fed officials would like.''

A separate report showed the National Association of Purchasing Management-Chicago's index of American business activity rose this month as new orders increased. The group's index climbed to 56.6, from 52.9 the previous month.

The deepest housing recession in 16 years will worsen as discounts fail to lure buyers and mounting foreclosures swell the glut of unsold properties, economists said. Falling property values may cause consumer spending to cool, increasing the odds the expansion will falter in 2008.

``The most important implication of this is it's going to drive down construction outlays and that's a direct effect on GDP,'' said Neal Soss, chief economist at Credit Suisse Group in New York.

Yields Retreat

Treasuries rose. The yield on the benchmark 10-year note fell 12 basis points to 4.08 percent at 4:18 p.m. in New York. The dollar weakened against the euro and stocks ended the day little changed. Standard & Poor's Supercomposite Homebuilding Index, which includes KB Home, Pulte Homes Inc. and D.R. Horton Inc., declined 2.5 percent to 307.2.

A Bloomberg survey of 68 economists forecast sales would fall to an annual pace of 717,000 from a previously reported 728,000 rate in October, according to the median estimate. Economists' forecasts ranged from a low of 685,000 to a high of 750,000. Government records only go back to 1963.

Sales of new homes were down 34 percent from the same time last year, the biggest 12-month drop since January 1991. The median price fell 0.4 percent from November 2006 to $239,100.

Inventories Swell

The number of homes for sale at the end of November decreased 1.8 percent to 505,000, the fewest in two years. Still, because sales dropped even more, the inventory of unsold homes at the current sales pace jumped to 9.3 months from 8.8 months in October.

Purchases fell in three of four regions, led by a 28 percent plunge in the Midwest. Sales dropped 19 percent in the Northeast and 6.4 percent in the South. They rose 4 percent in the West.

The housing recession has deepened since the August turmoil in subprime mortgages led to a worldwide credit shortage. Stricter borrowing standards and a freeze on lending to borrowers with poor credit put mortgages out of reach for more potential buyers. That's driving home prices lower, weakening sales as people hold out for even bigger reductions.

Sales of new houses will probably tumble 8.9 percent in 2008 after a 25 percent drop this year, according to a Dec. 13 forecast from Fannie Mae, the largest mortgage buyer. Sales of new homes in November were 53 percent down from their July 2005 peak.

Prices Decline

Home prices in 20 metropolitan areas fell 6.1 percent in the 12 months to October, the most in at least six years, according to a report this week by S&P/Case-Shiller. The decline raises the risk that more Americans will walk away from properties that are worth less than they owe, economists said.

Lehman Brothers Holdings Inc. is forecasting prices will fall at least 15 percent from peak to trough. By that measure, the S&P/Case-Shiller index is down 6.6 percent so far.

With sales and prices falling, foreclosures rose 68 percent in November from a year earlier. They may continue surging in 2008 as mortgages for some subprime borrowers with adjustable rates reset.

As foreclosures throw more homes onto the market, homebuilders such as Hovnanian Enterprises Inc., New Jersey's largest, are scaling back.

`Difficult Year'

Hovnanian plans to ``pare down our inventories in virtually all our markets,'' Chief Executive Officer Ara Hovnanian said on a conference call Dec. 19. ``It will be a difficult year.''

Housing starts are near a 14-year low and have fallen 48 percent since their January 2006 peak. Declining home construction has subtracted from economic growth for the last seven quarters, and economists are expecting the drag to continue in 2008.

The weaker housing market is also forecast to undermine consumer spending, which makes up two thirds of the economy, as falling property values leave owners feeling less wealthy and with less equity to tap for extra cash.

The odds of recession have increased since the credit markets froze as a result of the subprime crisis. The economy will expand at a 1 percent annual pace in the fourth quarter after growing at a 4.9 percent rate from July through September, according to the median forecast of economists surveyed this month by Bloomberg News.

``The probability of recession is 50 percent for next year at some point,'' Martin Feldstein, head of the National Bureau of Economic Research, which determines when contractions start and end, said in a Dec. 14 interview. ``We could see a downturn starting sometime in the spring or the second quarter of next year.''

Bank of England Cuts Rates, Says Inflation Will Slow

2007-12-06T05:56:00.000-08:00

The Bank of England cut its benchmark interest rate for the first time in two years, saying inflation is likely to slow as higher credit costs hurt economic growth.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, reduced the bank rate by a quarter-point to 5.5 percent. Economists were the most split about today's decision in three years, with 28 of the 62 economists surveyed by Bloomberg News forecasting the central bank would lower rates.

``Conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead,'' the bank said in a statement accompanying its decision in London today.

The slowest services growth in four years and surging money market rates led Bank of England policy makers to set aside concerns about faster inflation expressed just last week by King. With consumer confidence at its lowest since 2004, banks including Morgan Stanley say house prices may decline next year.

``This is likely to be the first of several rate cuts,'' said James Knightley, an economist at ING Financial Markets, who changed his forecast yesterday and predicted a reduction.

Market Reaction

The pound fell to near a 2 1/2-month low against the dollar after the decision. It touched $2.0277 by 1:35 p.m. in London, compared with $2.0266 yesterday. The U.K. currency also traded at 71.91 pence per euro, from 72.11 pence yesterday, when it was the least since May 2003. Bonds fell, pushing up the yield on two- year gilts by 5 basis points to 4.511 percent.

Royal Bank of Scotland Plc lowered its forecast for rates in the U.K., predicting the bank rate will touch 5 percent by May.

``We continue to expect sizeable easing in the year ahead,'' said Michael Saunders, an economist at Citigroup Inc. ``Our base case is for rates to fall by a further 50 basis points. But the outlook is exceptionally fluid, and risks are on the side of greater easing over time.''

The U.K.'s benchmark is still the highest among the Group of Seven industrialized nations. The European Central Bank kept its key rate at 4 percent in Frankfurt today. The U.S. Federal Reserve twice has trimmed its key rate, now at 4.5 percent.

King's Signal

King signaled the bank was planning rate reductions last month when he forecast the economy would slow ``sharply'' in 2008 after expanding more than 3 percent this year.

``Although upside risks to inflation remain, which the committee will continue to monitor carefully, slowing demand growth should ease the pressures on supply capacity, bringing inflation back to target in the medium term,'' the bank said in its statement.

Slower growth adds to the woes faced by Prime Minister Gordon Brown as he attempts to revive the Labour government's popularity, which touched a 19-year low last month, according to pollster ComRes.

Opposition lawmakers have criticized Brown, who served as finance minister for a decade before taking over from Tony Blair in June, for encouraging consumers to rack up a record debt burden, which fueled a tripling of house prices since 1997. Brown signaled his backing for the bank's decision.

``As chancellor and as prime minister, he is always being prepared to back whatever decisions the MPC thinks it is appropriate to make but those are decisions for them,'' Brown's spokesman, Michael Ellam, said at his daily briefing shortly before the decision was announced.

Impact on Homeowners

For homeowners, each quarter-point cut in the central bank's benchmark rate shaves about 2.4 percent off monthly repayments on a standard mortgage of 200,000 pounds ($405,000), according to the Council of Mortgage Lenders. The payment would drop by 30.84 pounds per month to 1,275 pounds.

``A reduction in interest rates is exactly what the market needs and will benefit consumers,'' CML Director General Michael Coogan said. ``This will reduce the risk of payment shock for the 1.4 million borrowers coming off fixed rates in the next year.''

The impact of the subprime collapse, which caused lending between banks to seize up, is intensifying as institutions hoard cash to ensure they meet end-of-year funding requirements. The three-month Libor rate, a measure of borrowing costs for banks, was 6.64 percent today, near the highest since Sept. 18.

Auction Today

The Bank of England loaned 10 billion pounds for five weeks as it provided commercial banks with extra cash to help fund them until January. It allocated 16.1 percent of the total 62.2 billion pounds in bids after the rate decision. It also loaned 8.7 billion pounds in a one-week money-market auction.

``The credit squeeze has intensified,'' said Philip Shaw, an economist at Investec Securities in London, before today's rate decision. ``It's going to take longer for the money markets to return to normal than people thought a month ago.''

Higher money market rates sparked a run on Northern Rock Plc in September, the first on a U.K. bank in more than a century. The Financial Services Authority, the regulator overseeing the possible sale of the mortgage lender, said on Dec. 5 that mortgage lenders should brace for tighter credit conditions.

While two policy makers voted for a cut last month, King, Rachel Lomax, Charles Bean and Andrew Sentance expressed concern about inflation in the past month after crude oil reached a record $99.29 on Nov. 21 and food prices rose.

Inflation Concern

Consumers anticipate the inflation rate to rise to 2.8 percent, a survey by YouGov Plc showed last month, the most since the poll was first conducted two years ago. The Bank of England's inflation target is 2 percent.

``No doubt there will be some ritual bleating about the MPC cutting rates at a time when inflation is above target and set to rise further, but monetary policy is supposed to be pre- emptive,'' said Ian Kernohan, an economist at Royal London Asset Management. ``There is more than enough tightening already in the system to bring inflation down later next year.''

Barclays Capital and nine other banks and research groups changed their forecasts yesterday to predict a rate cut after evidence that higher lending rates are starting to affect the wider economy.

Service industries from banks to airlines grew at the slowest pace since May 2003, according to a survey of purchasing managers by the Chartered Institute of Purchasing and Supply. The figures cover two-fifths of the economy.

Mortgage rates are also rising even though the bank's benchmark rate has been unchanged for the past five months. HBOS Plc said house prices fell for a third month in November, the worst streak for property values since 1995, suggesting the decade-long housing boom is coming to an end.

``This cut should make it cheaper for people taking out a new mortgage or coming off existing fixed rate terms, and provide some support to the housing market,'' said Adrian Coles, director of the Building Societies Association. ``Activity in the housing market was already beginning to slow as a result of the previous increases in interest rates, and this is likely to continue.''

U.S. Productivity Increases More Than Forecast (Update3)

2007-12-05T08:03:00.001-08:00

Worker productivity in the U.S. accelerated more than forecast in the third quarter, causing labor costs to drop by the most in four years.

Productivity, a measure of employee efficiency, rose at an annual rate of 6.3 percent, the most since 2003 and up from a 2.2 percent pace in the second quarter, the Labor Department said today in Washington. Labor expenses dropped at a 2 percent pace, also the most since 2003.

Greater efficiency eases pressure for companies to raise prices to counter rising energy costs, diminishing the threat of inflation. Lower labor costs will give Federal Reserve policy makers leeway to reduce interest rates to prevent the economy from slipping into a slowdown that will erode productivity.

``No question that the third quarter went out with a big roar in terms of both growth and productivity,'' said Brian Bethune, director of financial economics at Global Insight Inc. in Lexington, Massachusetts, who correctly forecast the gain. ``Inflation is a diminished threat.''

A separate report from ADP Employer Services said companies added 189,000 jobs in November, more than triple the amount economists had anticipated. The figures pushed Treasury notes lower, while the dollar extended its advance.

Economists forecast productivity would accelerate to a 5.9 percent pace, according to the median of 68 projections in a Bloomberg News survey. Projections ranged from increases of 4.9 percent to 6.3 percent. A preliminary estimate last month showed productivity grew at a 4.9 percent rate.

Price of Labor

Unit labor costs were expected to drop at a 1.2 percent rate, according to the Bloomberg News survey. Projections for unit labor costs ranged from declines of 0.2 percent to 2.4 percent.

Compensation for each hour worked increased at an annual rate of 4.2 percent in the third quarter, compared with a 1 percent rate in the prior three months.

Productivity at non-financial corporations, a measure watched by former Fed Chairman Alan Greenspan, climbed at a 4.2 percent rate in the third quarter, compared with 2.1 percent the previous three months.

Among manufacturers, productivity increased at a 5 percent pace in the last quarter, compared with a gain of 2.4 percent.

The third-quarter increase in productivity reflected the pickup in economic growth. The economy expanded at a 4.9 percent rate last quarter, the most in four years, according to a Commerce Department report last week.

That pace will not be sustained in the current quarter as consumer spending slows, most economists say. Peter Kretzmer, senior economist at Bank of America Corp., is forecasting growth of 0.1 percent in the fourth quarter. That is also likely to pull productivity down.

Rate Cut

Weaker growth and slowing inflation give the Fed room to keep lowering rates. Market futures signal the Fed will cut its benchmark lending rate at its Dec. 11 meeting, its third consecutive decline since September.

Fed Chairman Ben S. Bernanke last week signaled ``renewed turbulence'' in markets may have shifted risks between growth and inflation, cementing speculation the central bank will cut interest rates.

``Uncertainty surrounding the outlook'' is ``even greater than usual,'' requiring the Fed to be ``exceptionally alert and flexible,'' Bernanke said last week.

The Fed on Nov. 20 lowered forecasts for growth next year, in part reflecting the deepening recession in the housing market. Policy makers now expect U.S. gross domestic product to increase between 1.8 percent and 2.5 percent in 2008, ``notably below'' the 2.5 percent to 2.75 percent they predicted in July.

Rebound in Efficiency

Today's report may ease concern that the productivity surge that began in 1996 was waning. Efficiency gains have slowed every year since reaching a peak of 4.1 percent in 2002. Last year, productivity rose just 1 percent, the smallest increase since 1995.

Over the past 12 months, productivity increased 2.7 percent, the most since the second quarter of 2004. Unit labor costs increased 3 percent compared with the third quarter of last year, down from a 4.2 percent year-over-year gain in the previous quarter.

In the late 1990s, Greenspan was one of the first to recognize that productivity was accelerating, and that the improvement could help contain inflation even as the economy strengthened and unemployment stayed low. The realization allowed the Fed to keep interest rates little changed from 1996 to 1999.

Job Losses

Some companies including Citigroup Inc. are cutting staff or slowing the pace of hiring to boost productivity. The Labor Department may report Dec. 7 that 70,000 new jobs were created in November, down from 166,000 in October, according to a Bloomberg survey.

Citigroup, the largest U.S. bank, is reviewing ways to cut costs as it grapples with mortgage writedowns that may lead to the first quarterly loss since at least 1998, spokeswoman Christina Pretto said Nov. 26.

Executives at the bank ``are planning ways in which we can be more efficient and cost-effective to position our businesses in line with economic realities,'' said Pretto.

U.S. ISM Services Index Declined More Than Forecast (Update2)

2007-12-05T08:02:00.000-08:00

U.S. service industries expanded in November at a slower pace as an index of new orders dropped, raising the risk the deepening housing recession will stall the economy.

The Institute for Supply Management's index of non- manufacturing businesses, which make up almost 90 percent of the economy, fell more than forecast to 54.1, the lowest level since March, from 55.8 the prior month, the Tempe, Arizona-based ISM said. Readings above 50 signal growth.

Declining home construction and defaults on subprime mortgages are taking a toll on retailers, wholesalers and financial firms. The Federal Reserve will cut interest rates again at a policy meeting next week to avert a broader decline, trading in federal funds futures suggests.

``This reflects slowing demand for services,'' said David Sloan, senior economist at 4Cast Inc. in New York, who had forecast a decline in the main index. The drop in the new orders index ``suggests there's a more significant slowing in activity and employment coming down the pipeline, even though it's holding up now.''

The index was projected to slip to 55, the median forecast in a Bloomberg News survey of 71 economists. Estimates ranged from 51.5 to 56.4. The index has averaged 57.7 since its inception in July 1997.

Payroll Report

Earlier today, a private report based on payroll data showed companies in the U.S. added 189,000 jobs in November, more than economists had forecast. The increase followed a revised estimate of 119,000 new jobs in October, more than previously calculated, ADP Employer Services said today.

Worker productivity in the U.S. accelerated in the third quarter, causing labor costs to drop, the Labor Department reported. Productivity rose at an annual rate of 6.3 percent, the most since 2003, while labor costs declined at a 2 percent pace. Greater efficiency eases pressure for companies to raise prices to counter rising energy costs, diminishing the threat of inflation.

The institute's index of new orders for non-manufacturing industries fell to 51.1, the lowest since April 2003, from 55.7 the prior month.

An index of employment dropped to 50.8 from 51.8, and a gauge of inventories rose to 50.5 from 49.5. An index of backlogs increased to 48.5 from 43.5 the prior month, today's figures showed.

Costs Jump

A measure of prices paid jumped to 76.5, the highest since September 2005, from 63.5.

The economy also is getting less help from manufacturing, which grew in November at the slowest pace in 10 months, according to a Dec. 3 report from the supply-management group.

Economists and the Fed have scaled back growth forecasts as banks shrink lending and the housing slump lingers. San Francisco Fed President Janet Yellen this week said financial conditions and consumer spending have deteriorated more than she expected in the past month, signaling she supports cutting interest rates next week.

The economy faces a risk ``that the problems in the housing market could spill over to personal consumption expenditures in a bigger way than has thus far been evident,'' Yellen said in a speech in Seattle on Dec. 3.

Consumer Spending

Consumers, whose spending accounts for more than two-thirds of the economy, are becoming more frugal in the face of falling home values, rising gasoline bills, and dimmer prospects for jobs and earnings growth. Commerce Department figures showed that consumer spending and incomes rose less than economists forecast in October.

Sears Holdings Corp., the biggest U.S. department-store chain, said last week it doesn't expect ``any significant near- term improvement'' in the retail business, while American Woodmark Corp., the supplier of kitchen and bath cabinets to home centers and builders, cut its 2008 profit and sales forecast.

``The continuing impact of tighter credit conditions and falling real-estate prices will cause the remodeling and new- construction markets to remain subdued,'' American Woodmark said in a statement last week.

Rising fuel costs and weak freight demand also led FedEx Corp., the second-largest U.S. package shipping company, to cut its fiscal 2008 profit forecast in November for a second time.

Not all service providers are hurting. Burger King Holdings Inc., the second-largest U.S. hamburger chain, said in November that first-quarter profit rose more than analysts estimated, helped by extended hours and new menu items.

Fed May Couple Cut With Measures to Increase Credit (Update1)

2007-12-05T08:01:00.000-08:00

Federal Reserve officials, who are forecast to lower their main interest rate next week, are signaling that they are looking for additional ways to increase credit to companies and consumers.

The Fed may lower the discount rate -- what it charges banks for short-term direct loans -- by a quarter-point more than the benchmark rate after Vice Chairman Donald Kohn and San Francisco Fed President Janet Yellen publicly expressed frustration that previous rate cuts haven't encouraged banks to lend to one another.

Such a move would narrow the gap between the two rates -- normally 1 percentage point -- to a quarter-point. Economists said that may spur lending by easing the stigma of borrowing at the discount rate, letting firms claim they are taking advantage of a better deal.

``The Fed has to re-liquefy the markets to reduce the risk of a financial accident,'' said Lou Crandall, who used to work at the New York Fed and is now chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm that focuses on government debt.

Policy makers are struggling to contain a crisis of confidence among banks that sent the cost of three-month loans between lenders to the highest in seven years. Failure to head off a credit crunch may send the economy into its first recession since 2001, economists said.

Crandall predicted the Fed will lower the discount rate by half a point, to 4.5 percent, and the main federal funds rate target by a quarter-point to 4.25 percent when it meets Dec. 11.

Futures prices indicate a 64 percent chance of a quarter- point move in the federal funds rate next week and a 36 percent chance of a half-point reduction. That compares with about a 50- 50 probability yesterday, before today's ADP Employer Services report showed companies added more than triple the number of jobs economists had forecast for November.

`Frustrated' Fed

``The Fed is frustrated they can't get anyone to come to the discount window,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc., and a former head of domestic economic research at the New York Fed. ``If the Fed lowers the discount rate closer to the funds rate, banks can represent their decision as merely borrowing at the best place to get money, rather than an act of desperation.''

The Fed has other options to ease the funding crunch besides reducing the penalty for discount-window borrowing.

One possibility is tripling the length of discount-window financing to 90 days from 30, said Stephen Cecchetti, a former research director at the New York Fed. The central bank, in its Aug. 17 decision to lower the discount rate a half-point to 5.75 percent, also extended the terms to allow 30-day financing instead of just overnight loans.

``Lengthening the term of the lending would really be more important,'' said Cecchetti, now a professor at Brandeis University in Waltham, Massachusetts.

Year-End Crush

Demand for cash typically rises at the end of the year as banks conserve funds to buttress balance sheets before closing their books. This year, that has combined with concerns about mounting losses on securities linked to mortgages at risk of default to cause borrowing costs to climb.

One gauge watched by the Fed shows rates at their highest relative to the Fed's benchmark since 2000.

The three-month dollar London Interbank Offered Rate, a benchmark for corporate borrowing, climbed to 65 basis points more than the Fed's target federal-funds rate yesterday. Excluding Sept. 18, when the Fed lowered its rate by half a point, that's the widest spread since May 2000, a period that includes the last U.S. recession in 2001.

Policy makers first addressed the August credit collapse by injecting funds into money markets, then lowering the discount rate. The Federal Open Market Committee followed up the next two months by cutting both rates by 0.75 percentage point.

Rate Gap

Officials sought to enhance the attractiveness of the discount window by reducing the gap with the federal funds rate and widening the collateral accepted for loans. While borrowing rose to $2.9 billion in the week ended Sept. 12, the highest since 2001, it has since fallen back, to $7 million last week.

The ``discount window has not been as used, or been as helpful at addressing liquidity issues, as I would have hoped,'' San Francisco Fed President Janet Yellen said Dec. 3 in Seattle. Along with other officials, she noted a ``stigma'' about banks tapping the loans.

Yellen, a former Fed governor and chairman of President Bill Clinton's Council of Economic Advisers, added that she's ``open to constructive suggestions'' on enhancing liquidity.

Kohn said in New York on Nov. 28 that the Fed needs ``to give some thought'' to how ``liquidity facilities can remain effective when financial markets are under stress.''

The Fed could draw on its 1999 template, when it addressed potential money shortages during the 2000 computer-system changeover, Cecchetti said. The Fed sold options on almost $500 billion of repurchase agreements for standby financing. None were exercised.

Also, officials at the Fed's Board of Governors and regional banks prepared a paper in 2000 identifying ``alternative instruments'' for policy. One possibility is to lend to ``strong financial institutions'' at a rate equal to the federal funds rate, the document says.

Unemployment May Rise, Manufacturing Slow: U.S. Economy Preview

2007-12-02T15:28:00.000-08:00

Employers in the U.S. hired fewer workers in November and the unemployment rate rose to a 16-month high, reflecting a loss of confidence in the economic expansion, economists said before a report this week.

The economy created 75,000 jobs, less than half October's 166,000 gain, according to the median forecast in a Bloomberg News survey of economists before the Labor Department's Dec. 7 report. The jobless rate rose to 4.8 percent from 4.7 percent, based on the survey.

Companies are curbing expenses as the economy is forecast to nearly stall this quarter under the weight of the worsening housing slump. Federal Reserve Chairman Ben S. Bernanke last week said consumers face ``headwinds,'' and the labor market was ``important'' for sustaining growth.

``The labor market is adding to the list of reasons the consumer is in trouble,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``If employment growth is weakening, then so will spending.''

There is already evidence Americans are scaling back.

Consumer spending rose less than forecast in October and incomes increased at the slowest pace in six months, figures last week from the Commerce Department showed. Spending stalled when adjusted for inflation, the figure used in calculating economic growth.

Auto sales in November were probably the third weakest of the year, according to analysts surveyed by Bloomberg News. General Motors Corp., Ford Motor Co. and Chrysler LLC probably all posted declines compared with November 2006. Automakers will release November results tomorrow.

Manufacturing Slows

Also tomorrow, the Institute for Supply Management may report manufacturing expanded in November at the slowest pace in 10 months, adding to evidence the housing slump and rising energy costs are reverberating though the economy.

The Tempe, Arizona-based group's factory index probably fell to 50.7 from 50.9 in October, according to the survey median. A reading of 50 is the dividing line between expansion and contraction.

A report on Dec. 5 from the Commerce Department may show factory orders were unchanged in October after a 0.2 percent gain in September, the Bloomberg survey showed.

Service industries have so far fared better than manufacturers this quarter, economists said.

Services Little Changed

A separate report from the Institute for Supply Management due Dec. 5 may show banks, builders, retailers and other non- manufacturers expanded last month at about the same pace as in October. The gauge fell to 55 from 55.8, based on the median of economists' forecasts.

Energy prices, the weakening labor market and the persistent housing slump raise the odds that retailers and other service providers will soon feel the brunt of the economic slowdown, economists said.

Bear Stearns Cos., the biggest underwriter of U.S. mortgage bonds, said last week it will eliminate 650 jobs in the firm's fourth round of cuts this year.

Citigroup Inc., the largest U.S. bank, said it is reviewing ways to cut expenses as it seeks a new chief executive officer and grapples with mortgage writedowns. Former CEO Charles O. ``Chuck'' Prince III, who was forced to resign last month, had pledged to eliminate 17,000 jobs and trim costs by $4.6 billion.

Fed policy makers have signaled mounting concern over the outlook.

Consumer `Headwinds'

``The combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead,'' Bernanke said in a Nov. 29 speech.

Federal funds futures show traders see a 100 percent chance of a reduction in the benchmark rate this month, with a 40 percent probability of a half-point move. The Fed has cut rates by 0.75 percentage point over the past two meetings.

Policy makers said Nov. 20 that they expect U.S. gross domestic product to increase between 1.8 percent and 2.5 percent in 2008, ``notably below'' the 2.5 percent to 2.75 percent they predicted in July.

In other reports this week, a Labor Department report on Dec. 5 may show worker productivity in the third quarter rose, while labor costs fell. Two days later, a preliminary estimate from the University of Michigan may show consumer sentiment fell to a two-year low in December.

Economic Data Release Calendar 02-07 Dec

2007-12-02T05:24:00.000-08:00

Here you can download Economic Data Release Calendar 02-07 Dec

Commodities 11/30/2007

2007-12-01T19:17:00.001-08:00

Crude Oil Falls Below $90 on Concern Economic Growth Will Slow

2007-12-01T02:48:00.000-08:00

Crude oil fell below $90 a barrel in the biggest weekly loss in two and a half years on concern slowing economic growth will cut energy demand, and as Saudi Oil Minister Ali al-Naimi said supplies in the market are ``ample.''

Consumer spending in the U.S., the world's biggest oil user, rose less than forecast in October and incomes increased at the slowest pace in six months, the Commerce Department said in Washington today. Al-Naimi, speaking in Doha, said oil prices don't reflect actual production and consumption trends.

``The market is simply becoming more concerned about a possible recession that could reduce petroleum demand,'' said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. ``We have been seeing evidence for some time of a weakening economy and weakening oil demand.''

Crude oil for January delivery fell $2.30, or 2.5 percent, to settle at $88.71 a barrel at 2:45 p.m. on the New York Mercantile Exchange. Futures touched $88.45 a barrel, the lowest since Oct. 25. Oil has dropped 9.7 percent this week, the biggest weekly loss since April 2005. Prices climbed to a record $99.29 a barrel on Nov. 21.

Average U.S. consumption of oil products, such as gasoline and diesel, over the four weeks ended last week was 0.5 percent lower than a year ago, according to U.S. Energy Department data.

The U.S. dollar recorded its largest weekly gain against the euro since August, pressuring oil prices which rose earlier in the month on the currency's weakness. The dollar strengthened after Federal Reserve Chairman Ben S. Bernanke yesterday signaled he may lower interest rates to bolster growth. The yen had its biggest weekly drop in almost three years.

Oil surged above $95 a barrel yesterday after an Enbridge Inc. crude oil pipeline in Minnesota exploded on Nov. 28. Enbridge said operations will return to normal within three days.

Lower Prices

The pipeline blast seems to be ``just a near-term support,'' said Eric Wittenauer, an analyst at A.G. Edwards & Sons Inc. in St. Louis. ``As the details and extent of the damage and timeline for recovery came to light, it ended up pushing prices lower.''

The Enbridge pipeline blast killed two workers and cut shipments that average 1.5 million barrels a day. The pipelines transport oil to U.S. refiners, including BP Plc's plant in Whiting, Indiana, and facilities along the Gulf Coast. The U.S. imported 10.3 million barrels a day last week.

Brent crude oil for January settlement fell $1.96, or 2.2 percent, to $88.26 a barrel, the lowest since Oct. 30, on the ICE Futures Europe exchange in London.

Thirteen of 27 analysts surveyed by Bloomberg News, or 48 percent, said oil will drop through Dec. 7. Nine, or 33 percent, said prices will rise and five forecast little change. Last week, 43 percent of respondents said oil would fall.

January Options

Bets that January crude oil will fall below $85 a barrel were the most actively traded options contracts on the Nymex today. The put contracts, which represent the right to sell oil at that price, rose 55 cents to $1.13, or $1,130 per contract, according to data compiled by Bloomberg as of 4 p.m. New York time. One options contract is for 1,000 barrels of oil.

OPEC raised shipments 2 percent to 24.53 million barrels a day in the four weeks to Dec. 15, according to consulting company Oil Movements.

Saudi Arabia, OPEC's biggest producer, is adding 500,000 barrels of spare capacity in December to ensure that consumers are adequately supplied. The country is producing 9 million barrels a day, al-Naimi has said.

"They will probably give us a token production increase and, by that time, it will be well discounted,'' Ritterbusch said.