Global finance blog - news, jokes, life…

The U.S. recovery may be slow to develop as a gauge of business activity dropped unexpectedly and a private report showed employers cut more jobs than forecast in September.

The Institute for Supply Management-Chicago Inc. said today its business barometer decreased to 46.1, lower than the most pessimistic forecast, from 50 in August. Readings below 50 signal a contraction. Companies cut payrolls by 254,000 jobs in September, according to ADP Employer Services.

Stocks fell on concern a rebound may be uneven as the government winds down incentives such as the “cash-for- clunkers” program that lifted sales at automakers including Detroit-based General Motors Co. With excess capacity close to a record, companies have little reason to hire new workers or ramp up production until they see stronger gains in demand.

“The pace of improvement will probably slow,” said Rob Carnell, chief international economist at ING Financial Markets in London, whose forecast for a reading of 49.5 for the Chicago index was the lowest among 61 economists surveyed. “You strip away a lot of the stimulus and we’re not seeing a whole lot of improvement in the U.S. economy.”

The Standard & Poor’s 500 Index lost 0.4 percent to 1,056.51 at 12:42 p.m. in New York. The Dow Jones Industrial Average fell 44.58 points, 0.5 percent, to 9,697.62. More than two stocks fell for each that rose on the New York Stock Exchange.

Gross on Growth

The economic recovery will be characterized by “new normal” annual growth rates of 1 percent to 2 percent and very little inflation, Bill Gross, manager of Pacific Investment Management Co., the world’s biggest bond fund, said in an interview yesterday with Bloomberg Radio.

Gross said he’s been buying longer-maturity Treasuries in recent weeks as protection against deflation, or a broad decline in prices, and that total returns on equities will average about 5 percent annually.

Economists forecast the Chicago gauge would rise to 52, according to the median of 61 projections in a Bloomberg News survey. Estimates ranged from 49.5 to 55. The ADP report was forecast to show a decline of 200,000 jobs, according to the median of 33 estimates.

A report from the Commerce Department showed the worst U.S. recession since the 1930s eased more than anticipated in the second quarter. The world’s largest economy shrank at a 0.7 percent annual rate from April through June, the best performance in more than a year, according to revised figures. Gross domestic product contracted at a 6.4 percent pace in the first three months of 2009.

National Manufacturing

Economists watch the Chicago index for an early reading on the outlook for overall U.S. manufacturing, which makes up about 12 percent of the economy.

The national Institute for Supply Management, which is not affiliated with the Chicago group, is scheduled to release its September factory report tomorrow. According to a Bloomberg survey, that measure will show manufacturing expanded at the fastest rate in more than three years.

U.S. auto sales in September probably fell to the second- lowest pace this year after the federal government ended its $3 billion incentive to trade in gas-guzzlers for more fuel- efficient vehicles. Automakers report September sales tomorrow.

Smaller inventories may contribute to a rebound in output this quarter and next as companies restock shelves. Stockpiles dropped at a record $160.2 billion annual rate in the second quarter, the Commerce Department’s GDP report showed. Automakers General Motors and Ford Motor Co. are among firms boosting production in coming months.

Unemployment Forecast

The ADP employment report comes two days before a Labor Department release forecast to show the unemployment rate rose to 9.8 percent in September, the highest since 1983, while employers cut 180,000 jobs.

ADP includes only private employment and doesn’t take into account hiring by government agencies. Macroeconomic Advisers LLC in St. Louis produces the report jointly with ADP.

The economy has lost 6.9 million jobs since the recession began in December 2007, the most of any economic slump since the Great Depression.

The drop in GDP, the sum of all goods and services produced, was less than the 1.2 percent median forecast in a Bloomberg survey of 78 economists. The government previously calculated the pace of contraction for last quarter at 1 percent.

Worst Recession

The world’s largest economy shrank 3.8 percent since last year’s second quarter, making this the deepest recession since the 1930s.

Consumer spending, which accounts for about 70 percent of the economy, fell at a 0.9 percent pace last quarter, less than the government previously estimated. The median forecast of economists surveyed projected spending would be unrevised at a 1 percent drop.

The economic recovery is “slow but certain,” FedEx Corp. Chief Executive Officer Fred Smith said this week, adding he has “guarded confidence” about an improving global outlook.

“Recovery is not a straight line up, but a zig-zag with a few steps forward and backward,” Smith, the founder of the second-largest U.S. package-shipping company, said at FedEx’s annual meeting in its hometown of Memphis, Tennessee.

Source

European confidence in the economic outlook increased to the highest in 12 months in September as the economy showed signs of rebounding from the worst recession in more than six decades.

An index of executive and consumer sentiment in the 16- nation euro region rose to 82.8, the highest since September 2008, from 80.8 in August, the European Commission in Brussels said today. That was the sixth straight monthly gain. Economists had projected an increase to 82.7, a Bloomberg survey showed.

European companies including Germany’s ThyssenKrupp AG and Paris-based L’Oreal SA have beaten analysts’ earnings estimates, suggesting government stimulus programs are feeding into the economy. Manufacturing and service industries expanded for a second month in September and German business confidence climbed to a 12-month high. Rising unemployment may prompt consumers to rein in spending, curbing the recovery.

“The figures show that we can expect a further recovery with quarterly growth rates of 0.5 percent in the third and fourth quarters,” said Juergen Michels, chief euro-region economist at Citigroup in London. “However, it will take a long time until the loss of economic activity during the crisis is compensated.”

The world economy is emerging from the deepest slump since the 1930s following $2 trillion of government spending, tax breaks and infrastructure projects. The European Central Bank earlier this month kept its key interest rate at a record low of 1 percent, with ECB President Jean-Claude Trichet saying the economy is past the worst and will show a “gradual recovery.”

Current Quarter

The euro-area economy may expand 0.2 percent in the current quarter and 0.1 percent in the three months through December, the commission said on Sept. 14. In the second quarter, the economy contracted just 0.1 percent as Germany and France, the region’s two largest economies, returned to growth.

Ryanair Holdings Plc Chief Executive Officer Michael O’Leary said on Sept. 24 that he anticipates earnings will rise “significantly” this year. Dublin-based Ryanair, Europe’s largest low-cost airline, is cutting the “cost base and gearing the company up for a period of renewed growth over the coming years,” O’Leary said.

“We do see light at the end of the tunnel; there are more and more signs that the economy is improving,” HeidelbergCement AG Chief Executive Officer Bernd Scheifele said in an interview on Sept. 22. Germany’s biggest cement supplier will benefit “noticeably” from the government’s stimulus programs, he said.

DAX Index

The Dow Jones Stoxx 600 Index has risen 20 percent this year while Germany’s benchmark DAX Index has jumped 8 percent in the past two months, bringing gains to 17 percent in 2009.

L’Oreal, the world’s largest cosmetics maker, on Aug. 28 posted a smaller-than-projected earnings decline and forecast a gradual recovery through the second half of 2009. ThyssenKrupp, Germany’s biggest steelmaker, last month posted a smaller-than- forecast third-quarter loss.

“The recent jump in economic expectations exceeds our own projections,” ThyssenKrupp Chief Executive Officer Ekkehard Schulz said on Sept. 4 in Dusseldorf. “We’re seeing the first signs of bottoming out and rising orders in the steel area.”

European companies are starting to ramp up output to meet reviving global demand. European industrial orders rose for a second month in July, led by durable consumer goods, and exports increased 4.1 percent from June. The euro-area services industry index showed a return to expansion in September.

Jobless Rate

ECB policy makers including Trichet have warned the recovery may face obstacles such as rising unemployment. European retail sales fell for a 16th month in September, Markit Economics said today, citing a survey of more than 1,000 executives. Europe’s jobless rate probably rose to 9.6 percent in August, according to a Bloomberg survey. That would be a 10- year high. The European Union’s statistics office in Luxembourg will release the report on Oct. 1.

The commission noted in today’s report that the September increase in sentiment was “the smallest since the upturn started in April.” The August index reading was revised to 80.8 from the 80.6 reported on Aug. 28.

European households anticipate prices will decline more, today’s report showed. A gauge of consumers’ price expectations over the next 12 months held near a record low, rising to minus 14 in September from minus 16 in August, which was the lowest since the data were first compiled in 1990.

Consumer Prices

The ECB said earlier this month that it projects euro- region consumer prices will rise about 0.4 percent this year and around 1 percent in 2010. In September, consumer prices probably dropped 0.2 percent from a year ago, a Bloomberg survey shows. The ECB aims to keep inflation just below 2 percent.

With companies still cutting costs and the economy struggling to gather steam, ECB officials have signaled they are ready to maintain the bank’s unconventional measures for a while. The ECB has offered banks unlimited cash over 12 months and purchased covered bonds to encourage lending.

“The ECB won’t be in any rush over the next six months, but we see a rate hike towards the end of 2010,” said Laurent Bilke, a senior economist at Nomura in London. “They probably have the tools to negotiate a gradual exit.”

Source

President Barack Obama and fellow Group of 20 leaders are trying to end what Obama adviser Lawrence Summers has called the “financial balance of terror.”

World leaders, meeting in Pittsburgh last week, adopted a framework for more durable economic growth as they sought to prevent a replay of the worst crisis since the Great Depression. They also acknowledged the growing clout of China and other emerging economies by giving them a bigger voice in decision- making.

The aim is to reduce U.S. dependence on overseas capital to finance consumption, while cutting the reliance of China and other creditor nations on American consumers to buy their goods. Summers, head of Obama’s National Economic Council, has singled out the current arrangement as a risk to prosperity since it leaves each major economy a hostage of the other’s policies.    “Because our global economy is now fundamentally interconnected, we need to act together to make sure our recovery creates new jobs and industries,” Obama told reporters in Pittsburgh Sept. 25 after hosting his first economic summit.

To help ensure that happens, G-20 countries agreed to give the 186-member International Monetary Fund a role assessing their efforts. The oversight function will be among the topics discussed by policy makers as they head this week to Istanbul for the annual meetings of the IMF and World Bank.

Slower Growth

After expanding at a 4.6 percent annual pace in the five years through 2008, the world economy might be in for a spell of slower growth unless G-20 countries follow complementary policies, said Edwin Truman, a senior fellow at the Peterson Institute for International Economics in Washington.

The U.S. is counting on the crisis and its aftermath to convince countries like China that it’s in their own interest to shift away from exports toward domestic demand as Americans save more and spend less, Truman said. The U.S. savings rate rose to a 14-year high of 6 percent in May before falling to 4.2 percent in July.

“U.S. consumption is all but certain to be very stagnant for the next few years,” said Desmond Lachman, a former IMF official who’s now at the American Enterprise Institute in Washington. “You’ve got to find other sources of demand.”

In the meantime, G-20 leaders acknowledged the recovery remains dependent on emergency government measures, and they pledged to avoid pulling back until the time is right. “We will avoid any premature withdrawal of stimulus,” their communiqué said.

Stocks Decline

That promise may encourage investors to take on more risk after signs of economic weakness prompted the biggest weekly declines in European and U.S. stocks since July, said Sophia Drossos, co-head for global foreign exchange strategy at Morgan Stanley in New York.

“The G-20 outcome could lead to a reversal of the selloff,” she said.

Demand for U.S. durable goods unexpectedly fell in August and loans to households and companies in Europe grew at the slowest pace on record, reports showed last week.

The Standard & Poor’s 500 Index has dropped 2.2 percent since Sept. 18, and Europe’s Dow Jones Stoxx 600 Index slipped 2.4 percent in the same period.

Developing-nation equities suffered their steepest weekly decline in more than two months last week, with the MSCI Emerging Markets Index ending 1.2 percent lower.

Lopsided Trade Flows

G-20 leaders pledged to correct the lopsided flows of trade and investment blamed for contributing to the crisis: U.S. consumers borrowed money to finance purchases of Asian-made cars and flat-screen TVs. Asian exporters, meanwhile, invested their surplus cash in U.S. Treasury notes, pushing down borrowing costs and further fueling the credit binge.

Some economists cast doubt on the pledges by the G-20, since no sanctions will be used to enforce them and a similar push in 2006 by the IMF petered out.

“Unless the major surplus and deficit economies actually decide that they really want to go down this route, it’s hard to imagine anything will happen,” said Kenneth Rogoff, a former IMF chief economist who now teaches at Harvard University.

Obama, Chinese President Hu Jintao and European leaders including German Chancellor Angela Merkel face plenty of hurdles as they seek to place the world economy on a more stable footing.

The U.S. must cut a $1.6 trillion federal budget deficit, while China contends with a record $2.1 trillion in foreign exchange reserves representing years of accumulated trade surpluses.

Central Bankers

Central bankers, who did not attend the summit, may be wary of any suggestion that they sacrifice their independence in the name of worldwide coordination. And global institutions such as the IMF and the Basel, Switzerland-based Financial Stability Board may lack the horsepower to carry out the added responsibilities they’re being given.      Chinese officials said they recognize that the country must shift its economic priorities.

“China also understands that its economic-growth model has some flaws,” Ma Xin, director-general of international cooperation at the National Development and Reform Commission, China’s top planning agency, said in Pittsburgh.

Change may take time, Ma suggested. He said that his nation’s “low” consumer spending is something that has “accumulated over many years and it is a structural problem.”

Treasury Secretary Timothy Geithner pointed to the increase in the U.S. savings rate as an “encouraging sign.”

‘Measured Optimism’

After “a long period of time living beyond our means, you see people already changing behavior,” the Treasury chief said in Pittsburgh. “That’s one reason why we can stand here today and express some measured optimism about our capacity to put in place a more sustainable recovery.”

There are other signs that imbalances are shrinking. The U.S. current-account deficit narrowed in the second quarter to $98.8 billion, the least since 2001. Credit Suisse AG predicts Chinese imports may rise 30 percent to $313 billion in the fourth quarter as the government’s stimulus program spurs domestic demand.

“While the global rebalancing to date has been significant and broad-based, it remains to be seen whether this process will continue,” said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York.

Giving emerging markets such as China, India and Brazil a greater stake in global decision-making may ensure that it does.

Supplants G-8

The broader G-20 will supplant the Group of 8, a club of the most highly developed nations plus Russia, as the guardian of the global economy after last week’s summit. The G-20 accounts for about 85 percent of global gross domestic product.      The risk is that the larger group will find it more difficult to make decisions, said Tim Adams, who served as the U.S. Treasury’s top international official in the administration of George W. Bush.

“The bigger the grouping, the harder it is to get consensus,” said Adams, managing director of the Lindsey Group, a Washington-based economic advisory firm. “You can’t have the agenda taken over by the favorite hobby horses of each country.”

The third summit of G-20 leaders in the past year also plotted a road map for revamping the banking industry after the two previous meetings, in Washington and London, focused on fighting market turmoil and reversing the spiral into recession.

Deferred Bonuses

Leaders agreed that banks must avoid “multiyear guaranteed bonuses” and that a “significant portion of variable compensation” must be deferred, paid in stock, tied to performance and subjected to clawbacks if earnings flop. They stopped short of endorsing a French proposal to introduce specific caps on pay.

Awards must also be curbed if they are “inconsistent with the maintenance of a sound capital base,” the G-20 said. Regulators should be allowed to modify the compensation practices of key firms. Banks will also have to increase the quality and quantity of capital they hold by the end of 2012.    The regulatory overhaul is “for real, but there will be plenty of argument over the detail of how it’s done,” Leon Brittan, vice chairman of UBS Investment Bank and former European Union trade commissioner, told Bloomberg Television.

Source

Group of 20 leaders built on the common front they forged in fighting the financial crisis to chart a shared path toward a more stable banking system and a stronger global economy.

President Barack Obama and his counterparts ended their Pittsburgh meeting yesterday promising to “raise standards together” to ensure banks restrain pay and build up capital buffers. They also established a peer-review process to monitor individual efforts to rebalance economies and to hand emerging nations a greater say in managing world growth.

“There is much more work to be done, but we leave here today more confident and more united in the common effort of advancing security and prosperity for all of our people,” Obama told reporters after hosting his first summit.

Enacting the proposals may prove difficult. Banks buoyed by rising stock prices may resist or find a way around the new regulations; countries may ignore policy advice from others and the G-20 itself may be too unwieldy to deliver on its goals.

“The G-20 has to prove itself,” said Simon Johnson, a former chief economist of the International Monetary Fund. “They need to establish legitimacy and get things done.”

A lot is at stake. While the international economy is showing signs of recovering from its worst recession since World War II, pockets of weakness remain, especially in the U.S. and other industrial countries. Demand for U.S. durable goods unexpectedly fell in August and loans to households and companies in Europe grew at the slowest pace on record, data showed yesterday. European and U.S. stocks posted their biggest weekly declines since July.

‘Slow Going’

The Standard & Poor’s 500 Index has dropped 2 percent since Sept. 18 and Europe’s Dow Jones Stoxx 600 Index has slipped 2.4 percent in the same period.

“It’s going to be slow going,” said former U.S. Treasury Secretary Paul O’Neill, who once ran Alcoa Inc., the largest U.S. producer of aluminum, from Pittsburgh and still lives in the city. “We’re getting a recovery but it won’t be fast.”

The third summit of G-20 leaders in the past year plotted a roadmap for revamping the banking industry after the two previous meetings, in Washington and London, focused on fighting market turmoil and reversing the spiral into recession.

“Given this is the third meeting of these people in 10 months, the fact that they’ve gotten as much substantively done as they have is quite impressive,” said Edwin Truman, a former adviser to Obama’s Treasury and a senior fellow at the Peterson Institute for International Economics in Washington.

Bonus Rules

After recording $1.6 trillion in losses and writedowns, banks were told to avoid “multi-year guaranteed bonuses” and a “significant portion of variable compensation” must be deferred, paid in stock, tied to performance and subjected to clawbacks if earnings flop. The G-20 stopped short of endorsing a French proposal to introduce specific caps on pay.

Awards must also be curbed if they are “inconsistent with the maintenance of a sound capital base.” Regulators should be allowed to modify the compensation practices of key firms. Banks will also have to increase the quality and quantity of capital they hold by the end of 2012.

“There is no going back to systems of bonuses that were based simply on short-term speculation and not on the long-term success of companies,” U.K. Prime Minister Gordon Brown said.

The growing influence of emerging economies such as China and Brazil was marked by the agreement that the G-20 would supplant the G-8 as the guardian of the world economy.

G-20’s Rise

The G-20’s new-found status reflects how the recent slump was sparked by the developed economies and the rebound is being powered outside their ranks. That’s a reversal from previous international crises when the G-8, whose genesis lies in the oil shock of the early 1970s, drove the recovery no fax cash advance.

The smaller group will continue to play a role in security and foreign-policy issues. China and other “underrepresented” economies will also gain greater sway at the IMF and World Bank through higher voting rights.

As the G-20 becomes the primary arena for politicians to forge pacts on the economy, officials agreed to establish a “framework for strong sustainable and balanced growth.”

Countries with significant deficits in their trade accounts promised to save more, while those with surpluses will strengthen domestic demand. The IMF will help them assess each others’ attempts to meet those objectives.

China-U.S.

The initiative could see China relying less on exports and more on its own spending, the U.S. cutting back expenditure and Europe increasing investment to even out lopsided flows of trade and investment that contributed to the credit boom and subsequent bust.

Some economists cast doubt on the pledges given no sanctions will be levied to enforce them and a similar push in 2006 by the IMF petered out.

“The jury is still out on the implementation side of this framework,” said Stephen Roach, chairman of Morgan Stanley Asia. “It boils down to whether sovereign nations are willing to abdicate national policy to the world’s collective interests.”

Another test for the G-20’s credibility may be whether regulators can enforce the new rules as the rebound in growth and stock markets since March helps banks regain lobbying strength.

If they can, the profits and share price of banks from Goldman Sachs Group Inc. to Barclays Plc will fall with their scope to invest and trade, said former Bank of England policy maker Charles Goodhart.

Declining Returns

“Regulation almost certainly means the size of the banking industry will contract and its rates of return will go down,” said Goodhart, professor emeritus of banking and finance at the London School of Economics.

The regulatory overhaul is “for real, but there will be plenty of argument over the detail of how it’s done,” Leon Brittan, vice chairman of UBS Investment Bank and former European Union trade commissioner, told Bloomberg Television.

The mixed economic environment and rising unemployment are leaving governments with no option but to keep up their support of banks and fiscal stimulus, which totals more than $2 trillion, even as their debt mounts. They promised to develop a plan for withdrawing the aid when expansion is secured.

Research In Motion Ltd., the Canadian BlackBerry maker, yesterday forecast third-quarter sales that fell short of analysts’ projections, while UBS AG’s Chief Executive Officer Oswald Gruebel said it will take “some time” for Switzerland’s biggest bank by assets to return to profitability.

Canada, Korea

Originally established in the 1990s as a forum for finance chiefs, the G-20’s leaders met for the first time in Washington last November and then in April in London. Canada will hold the next summit in June followed by South Korea in November and France in 2011.

The leaders agreed to phase out subsidies for fossil fuels in the “medium term,” without setting a deadline. They also plan to intensify their monitoring of tax havens from next month to ensure economies follow through on promises to comply with global standards.

The G-20 accounts for about 85 percent of global gross domestic product. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.

Source

German business confidence rose to a 12-month high in September, indicating Europe’s largest economy will gather strength after exiting its worst recession since World War II.

The Ifo institute in Munich said today its business climate index, based on a survey of 7,000 executives, rose to 91.3 from 90.5 in August. That’s the highest reading since September last year. Economists expected a gain to 92, the median of 40 forecasts in a Bloomberg News survey showed. The index reached a 26-year low of 82.2 in March.

“There are more positive impulses for the economy,” said Stefan Muetze, an economist at Helaba in Frankfurt. “Inventory rebuilding has started and, combined with investment and improving exports, that will drive things in the third and fourth quarters.”

The confidence report comes as Chancellor Angela Merkel enters the final leg of her re-election campaign. The government’s “cash-for-clunkers” program and improving global trade helped the economy expand 0.3 percent in the second quarter from the first. While the Bundesbank predicts a “strong pickup” in the third quarter, the recovery could falter when stimulus measures expire and as unemployment rises.

Election Looms

Merkel, who leads opinion polls for the Sept. 27 election, has approved spending of about 85 billion euros ($126 billion) to rekindle growth. The measures include tax breaks, infrastructure investment, and a 2,500-euro payment to people who scrap an old car and buy a new one. The car-scrappage fund ran dry earlier this month.

Ifo’s gauge of the current situation rose to 87 from 86.2, while an index of executives’ expectations advanced to 95.7 from 95, the institute said.

“Expectations have run so far ahead of current conditions that it makes me pause for thought as to whether this is sustainable,” said David Milleker, chief economist at Union Investment in Frankfurt. “Germany is very dependent on exports to euro-area countries, and there are structural problems in Spain and elsewhere.”

The Spanish and Irish economies will contract 0.9 percent and 1.5 percent respectively in 2010, according to the Organization for Economic Cooperation and Development.

By contrast, Germany’s will grow 1.5 percent next year after contracting about 4.5 percent in 2009, the IW economic institute in Cologne forecast on Sept. 21.

German investor confidence rose to the highest level in more than three years in September, and the benchmark DAX share index has rebounded more than 50 percent from its March trough.

“We do see light at the end of the tunnel, there are more and more signs that the economy is improving,” HeidelbergCement AG Chief Executive Officer Bernd Scheifele said in an interview on Sept. 22. The cement maker, which this week raised 2.25 billion euros selling new shares, will benefit “noticeably” from the government’s stimulus programs, Scheifele added.

Source

The Federal Reserve has started talks with bond dealers about withdrawing the unprecedented amount of cash injected into the financial system the last two years, according to people with knowledge of the discussions.

Central bank officials are discussing plans to use so- called reverse repurchase agreements to drain some of the $1 trillion they pumped into the economy, said the people, who declined to be identified because the talks are private. That’s where the Fed sells securities to its 18 primary dealers for a specific period, temporarily decreasing the amount of money available in the banking system.

There’s no sense that policy makers intend to withdraw funds anytime soon, said the people. The central bank’s challenge is to decrease the cash without stunting the economy’s recovery and before it sparks inflation. Fed Chairman Ben S. Bernanke said in a July Wall Street Journal opinion article that reverse repos are one tool to accomplish that goal without raising interest rates.

“One thing the Fed has to figure out is if they can launch pilot programs without spooking the market and creating the perception that they are about to tighten,” said Louis Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm that specializes in government finance. “They are discussing things like accounting issues, and updating the governing documents to the volume of reverse repos the dealer community could absorb.”

Fed Balance Sheet

Deborah Kilroe, a spokeswoman for the Federal Reserve Bank of New York, declined to comment about meetings with dealers. Total assets on the Fed’s balance sheet stand at $2.14 trillion, up more than a $1 trillion since the collapse of the subprime mortgage market in August 2007 triggered the worst global financial crisis since the Great Depression.

The Federal Open Market Committee, at the conclusion tomorrow of a two-day policy meeting, will probably maintain its assessment that “tight” bank credit is impeding growth, said economists including former Fed Governor Lyle Gramley.

The Fed will keep its target rate for overnight loans at a range of zero to 0.25 percent at the conclusion of the FOMC meeting, all 91 economists surveyed by Bloomberg News said.

Minutes from FOMC’s Aug. 11-12 meeting showed that among the exit strategy options discussed were reverse repurchase agreements as well as setting up a term deposit facility to reduce the supply of banks’ excess reserves.

Repo Sizes

At maturity of a reverse repo, the securities the Fed sold to the dealers are returned to the central bank, and the cash goes back to the companies. The reverse repurchase agreements contemplated by the Fed would need to be for a longer period and larger size than has been typical in previous open market operations, according to strategists.

“To be effective, the Fed would have to drain several hundred billion dollars worth of funds through these reverse repos, between about $400 and $600 billion,” said Joseph Abate, a money market strategist in New York at Barclays Plc, a primary dealer. “You may have a dislocation in the repo markets due to the supply effect of the Fed injecting such a large amount of extra collateral into the marketplace.”

Steps taken by the Fed since March 2008 to combat the seizure in credit markets included expanding emergency lending to banks, supporting the commercial-paper market and bailing out New York-based insurer American International Group Inc.

“The timing is not now for the exit strategies to begin,” said Tony Crescenzi, a market strategist and portfolio manager at Newport Beach, California-based Pacific Investment Management Co., manager of the world’s biggest bond fund. Talk of exit strategies “will all seem very preliminary and conditional upon evidence that the economy is moving toward a self-sustaining and self-reinforcing condition. The proof of that will be some improvement in the labor market picture,” he said.

More Participants

The jobless rate reached 9.7 percent in August, the highest in a quarter-century. Employers have eliminated almost 7 million jobs since the recession started, the biggest drop in any post- World War II economic decline.

Bernanke said in the opinion piece that reverse repos could be done with counterparties beyond the Fed’s primary dealers, which serve as counterparties in open market operations and are required to bid on Treasury auctions.

More trading partners may be needed since primary dealers have been shrinking their balance sheets the past two years, and likely can’t absorb an additional $500 billion of securities, according to Abate at Barclays.

Banks worldwide have recorded more than $1.6 trillion of losses and writedowns since the start of 2007, according to data compiled by Bloomberg.

General Collateral Rate

Securities dealers use repos to finance holdings and increase leverage. Bonds that can be borrowed at interest rates close to the Fed’s target rate for overnight loans between banks are called general collateral. Those in highest demand have lower rates and are called “special.”

As the supply of Treasuries increases, which occurs when reverse repos take place, repurchase agreement rates are typically pushed higher. The rate on collateralized loans in the more than $5-trillion-a-day repurchase agreement market, where Treasuries are borrowed and lent, is already higher than the amount changed for unsecured borrowing of federal funds.

The overnight general collateral repurchase rate, which is typically a few basis points below the fed funds rate, opened at 0.20 percent today, compared with fed funds at 0.17 percent, according to GovPX Inc., a unit of ICAP Plc. A basis point is 0.01 percentage point. Wrightson is also part of ICAP.

When the Fed does begin, “it will use reverse repos in tandem with other draining operations,” said George Goncalves, chief fixed-income rates strategist in New York at Cantor Fitzgerald LP, a primary dealer. “The Fed won’t want to totally disrupt the repo markets and the short-term financing of Treasuries given how much debt is coming to market.”

Source

The index of U.S. leading economic indicators rose for the fifth straight month, capping the longest stretch of gains since 2004 and signaling a recovery is under way.

The Conference Board’s gauge of the economic outlook for the next three to six months rose 0.6 percent in August, in line with forecasts, after a 0.9 percent increase in July that was larger than previously estimated, according to data that the New York-based group released today.

The gains in stock prices, consumer confidence and homebuilding that are buoying the leading index bolster Federal Reserve Chairman Ben S. Bernanke’s view that the worst recession since the Great Depression has probably ended. At the same time, rising unemployment and tight credit are a reminder that a rebound will be slow and gradual.

The report “is another signal that economic growth is turning sharply positive this quarter,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “All of the elements for a robust recovery are falling into place. As we look ahead, job losses will end and the unemployment rate will stop rising, but we’re not there yet.”

The index was projected to rise 0.7 percent, according to the median forecast of 58 economists in a Bloomberg News survey, after an originally reported increase of 0.6 percent in July. Estimates ranged from unchanged to a gain of 1 percent.

Stocks Fell

U.S. stocks fell on speculation a six-month rally has outpaced prospects for profit growth. The Standard & Poor’s 500 Index was down 0.9 percent to 1,058.82 as of 10:43 a.m. in New York. Treasuries rose, pushing the yield on the 10-year benchmark note to 3.42 percent from 3.47 percent on Sept. 18.

Seven of the 10 indicators for the leading index are known ahead of time: stock prices, jobless claims, building permits, consumer expectations, the yield curve, factory hours and supplier delivery times.

The Conference Board estimates new orders for consumer goods, bookings for capital goods, and the money supply adjusted for inflation.

The Conference Board’s index of coincident indicators, a gauge of current economic activity, was unchanged in August after increasing 0.1 percent the prior month. The index tracks payrolls, incomes, sales and production.

Lagging Indicators

The gauge of lagging indicators fell 0.1 percent following a 0.5 percent drop in the prior month. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.

Five of the 10 indicators in today’s report added to the leading indicators index, led by a gauge of supplier deliveries, interest-rate spreads and the stock market.

The Standard & Poor’s 500 Index has soared 57 percent since March 9, when it hit a 12-year low, as optimism grew that the U allstate insurance.S. was pulling out of the downturn. A jump during August in the S&P 500 average from July’s average added 0.3 point to the leading indicators gauge.

Building permits, a sign of future construction, and a gauge of consumer expectations also contributed.

Permits rose 2.7 percent to a 579,000 annual rate in August, the Commerce Department said on Sept. 17. The Reuters/University of Michigan index of consumer expectations six months from now, considered a proxy for future spending, rose to 65 in August and this month climbed to 69.2, according to a preliminary reading.

‘Improving Trends’

Officials at some companies are already seeing a pickup in demand. Best Buy Co., the world’s largest electronics retailer, raised its full- year earnings forecast last week even while reporting a drop in second-quarter profit, citing “improving trends” for sales.

“Customer traffic patterns have started to indicate signs of stability,” Jim Muehlbauer, chief financial officer for Richfield, Minnesota-based Best Buy, said in a Sept. 15 statement.

Money supply adjusted for inflation, which has the biggest weighting in the leading index and subtracted the most of any measure in the August report, took away 0.3 point.

The average number of weekly applications for unemployment benefits rose in August from the prior month, subtracting 0.09 point from the leading index and a reminder that consumer spending is unlikely to lead the recovery.

Jobless Rate

Economists predict claims will subside gradually. Claims dropped by 12,000 to 545,000 in the week ended Sept. 12, according to Labor Department data, while the total number of people collecting benefits rose.

The economic expansion projected to start this quarter won’t be enough to keep the unemployment rate from reaching 10 percent by the end of the year for the first time since 1983, according to a Bloomberg survey of economists this month. The rate rose to 9.7 percent in August, from 9.4 percent in July.

Unemployment rose in 27 U.S. states in August, with California, Nevada and Rhode Island reaching record levels of joblessness, the Labor Department reported Sept. 18 in Washington. California’s unemployment rate reached 12.2 percent and Nevada’s climbed to 13.2 percent.

“There’s still a fair amount of weakness in some of the larger states,” said Steven Cochrane, director of regional economics at Moody’s Economy.com in West Chester, Pennsylvania. “State finances are probably going to be among the last of all the various components of the broad economy to turn around.”

Source

Home sales and orders for long- lasting goods probably rose in August, extending gains that have signaled the U.S. is emerging from the worst recession since the 1930s, economists said before reports this week.

Purchases of new and existing houses climbed to a combined 5.79 million annual pace last month, the most in almost two years, according to the median forecast of economists surveyed by Bloomberg News. Bookings for durable goods likely rose 0.4 percent, the fourth advance in five months, the survey showed.

Housing and manufacturing, two areas that deepened the slump, are stabilizing as stimulus measures such as credits to first-time homebuyers and “cash for clunkers” revive demand. While acknowledging the economy is healing, analysts project Ben S. Bernanke and his colleagues at the Federal Reserve will commit to keeping interest rates low when they meet this week.

“We are coming out of recession and we are in the early stage of a very fragile recovery,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh. “It’s an infant recovery that needs a lot of care and nurturing, and that means no rate hikes from the Fed.”

Bernanke, the Fed’s chairman, last week said the recession “is very likely over.” The central bank will maintain the benchmark interest rate near zero at least through the middle of next year, according to the median estimate of economists surveyed earlier this month. The policy-making Federal Open Market Committee’s announcement is due Sept. 23.

Fifth Gain

Existing-home sales, which make up more than 90 percent of the market, probably rose 2.1 percent to a 5.35 million unit pace, a fifth consecutive gain, economists forecast before the Sept. 24 report from the National Association of Realtors. As of July, purchases were down 28 percent from the record reached in September 2005.

Data on new houses, due the following day from the Commerce Department, will probably show sales rose 1.6 percent to a 440,000 rate, according to the survey median. They reached a record-low rate of 329,000 in January instant payday loan.

The Obama administration’s $8,000 tax credit for first- time buyers, combined with the plunge in prices as foreclosures climbed, have helped lift sales this year, prompting builders such as Toll Brothers Inc. to get back to work.

Housing starts rose to a nine-month high in August, the Commerce Department reported last week, indicating residential constriction may soon add to growth after subtracting from gross domestic product since 2006.

Builder Shares

The Standard & Poor’s Homebuilder Supercomposite is up 40 percent so far this year, compared with an 18 percent gain for the broader S&P 500. The S&P 500 rose 2.6 percent last week, the best weekly performance in almost two months.

Just as the first-time buyer credit is boosting home demand, the government’s $3 billion cash-for-clunkers incentive to trade in gas-guzzlers for more fuel-efficient vehicles boosted auto sales and production last month.

The projected gain in orders for goods meant to last several years would follow a 5.1 percent surge in July that was the biggest gain in two years. Excluding transportation equipment such as cars and aircraft, orders probably rose 1 percent, economists forecast the Commerce Department will report on Sept. 25.

Carmakers including General Motors Co. and Ford Motor Co. are planning to keep boosting output through the second half of 2009 to rebuild depleted inventories.

More Production

Dealers are “looking for us to take up production,” Mark LaNeve, chief of North America sales at GM, said on a conference call Sept. 1. “We’re continuing to look for ways to squeeze out some more production.”

In another sign the economy is recovering, the index of leading economic indicators probably rose in August for a fifth consecutive month, economists forecast the Conference Board will report tomorrow. The increases mark the gauge’s best performance since 2004.

Source

Global leaders meeting at the Group of 20 summit in Pittsburgh next week are moving toward a compromise on compensation rules that fall short of the political rhetoric branding banker pay a worldwide disgrace.

Pay caps, once pushed by French President Nicolas Sarkozy, were excluded from recommendations made by finance officials this month. European leaders now may be willing to endorse linking bonuses to a bank’s capital level, moving closer to a U.S. position that avoids specific limits.

“It’s a way of getting both sides to the same place,” said Morris Goldstein, a senior fellow at the Peterson Institute for International Economics in Washington and former International Monetary Fund economist. “The Germans and French are taking a firm stance that we need concrete steps. The U.S. wants higher capital levels, and if this is necessary to get higher capital, they can sign onto it.”

Europe’s leaders have been assailing bankers and their pay while President Barack Obama says setting a specific limit is impractical. Sarkozy, who vowed last month to block banks from state business unless pay is capped, may be open to compromise, a French official said yesterday. European Union leaders Sept. 17 agreed to tie bonuses to bank performance and said guaranteed pay should be avoided. French Finance Minister Christine Lagarde in July called such bonuses an “absolute disgrace.”

Obama, Sarkozy, U.K. Prime Minister Gordon Brown and Chinese President Hu Jintao, meeting in Pittsburgh Sept. 24-25, will discuss proposals for banks to retain more assets in economic expansions and satisfy a leverage ratio, which measures equity as a proportion of total assets. They will consider how to sustain the recovery, avoid protectionism and improve accounting rules.

‘Excessive Risk-Taking’

“There is consensus on a set of principles for compensation that discourage excessive risk-taking and tie compensation to a firm’s long-term performance,” said Daniel Price, who organized a G-20 summit in Washington in November for President George W. Bush and is now a partner at law firm Sidley Austin LLP in Washington.

The principles include paying a higher percentage of compensation in stock, requiring that bonuses are paid over time and be subject to so-called clawbacks if a company’s performance worsens, and eliminating multiyear pay guarantees, Price said.

With a concentration of financial firms in New York and London, the U.S. and U.K. “don’t want to do anything that would make firms migrate out,” Goldstein said.

Executive pay came under scrutiny after the U.S. bailed out financial institutions amid the global crisis last year. Lawmaker outrage over pay reignited in July when New York-based Goldman Sachs Group Inc. set aside a record $11.4 billion for compensation and benefits in the first half of this year.

‘Set of Rules’

“It’s hard for the U.S. to say we don’t agree with what you’re trying to do because I think politically that would look bad,” said Mark Borges, a principal at Compensia Inc., a Corte Madera, California-based compensation consultant. “The U.S. might say they’re willing to sign on to the principles the G-20 is trying to establish, but when it comes to implementing those principles we have our own set of rules.”

U.S. bank employees at 28 of the largest holding companies may face curbs on their pay under proposals being considered by the Federal Reserve. The plan is at the core of the Obama administration plan to let the Fed monitor risks to the financial system, according to people familiar with the matter.

European leaders have been outspoken on pay remedies since the onset of the financial crisis.

‘Bubble Burst’

“The bonus bubble burst tonight,” Swedish Prime Minister Fredrik Reinfeldt said Sept. 17 after the European Union agreed that the G-20 should adopt binding rules on bonuses backed by the threat of sanctions.

Linking bonuses to bank capital might be the way to curb compensation, said Sarkozy, who has softened his rhetoric as the summit approaches.

“The idea of raising capital requirements in proportion with speculative activities, which are generating these so- shocking bonuses, seems a more efficient capping method,” he said after the EU meeting.

Mario Draghi, chairman of the Financial Stability Board, a group of bank regulators asked by the G-20 for proposals before the summit, said Sept. 14 that regulators are within their rights to limit banker bonuses and salaries.

“It used to be they were told it was a private contract,” said Draghi, governor of the Bank of Italy. “It’s now quite clear that when compensation is not aligned with risk-taking incentives, regulators have the right to have their say.”

U.S. officials, including Obama, advocate policies that focus on practices rather than setting specific pay ceilings.

‘Best Check’

Shareholders are the “best check” on pay practices, and government shouldn’t dictate standards when firms avoid taking taxpayer funding, Obama told Bloomberg News on Sept. 14. “You have to start asking yourself: ‘Well, why is it that we’re going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or NFL football players?’”

The rhetoric reflects “a philosophical difference between the way Europe considers markets and how the U.S. considers markets,” said Paul Hodgson, a senior research associate on compensation at the Corporate Library in Portland, Maine.

The summit presents an opportunity to push through changes that may become increasingly difficult to make, Hodgson said. “As the economy begins to recover and banks start to make money, the strength of the position that things need to change weakens,” he said.

Kenneth Feinberg, Obama’s “special master” on executive pay, is to rule this year on pay proposals from New York-based Citigroup Inc., Bank of America Corp. in Charlotte, North Carolina, and five other companies that received U.S. aid more than once in the past year.

The House in July passed a bill letting regulators ban Wall Street incentive pay that encourages excessive risk-taking. The bill authorizes bank agencies and the Securities and Exchange Commission to bar practices that threaten the sustainability of financial companies and “could have serious adverse effects on economic conditions.” The bill may fail in the Senate, which has been reluctant to expand government’s role on compensation.

Source

Bank of Japan Deputy Governor Hirohide Yamaguchi said maintaining emergency credit programs for “a long time” might hamper a recovery in the financial industry even as he expressed doubt about the economic outlook.

“We need to make a judgment at an appropriate time, according to the improvement” of credit, Yamaguchi said today in Tokyo, referring to the withdrawal of stimulus steps. “We also need to be mindful that keeping the temporary measures for a long time may hurt an autonomous recovery of market functions and invite the distortion of the allocation of resources.”

Yamaguchi’s remarks contrast with new Financial Services Minister Shizuka Kamei, who said this week that banks should delay seeking repayment of loans to small companies. Policy makers around the world are debating the timing of withdrawing stimulus measures as economies begin to recover from the worst global recession since the Great Depression.

“Given the most recent comments from Kamei, the BOJ may not be able to end the corporate fund-raising supportive measures” when they expire on Dec. 31, Akio Yoshino, chief economist at Societe Generale in Tokyo, said yesterday.

The deputy governor spoke a day after the central bank maintained its programs of buying corporate debt from lenders and providing them with unlimited loans in exchange for collateral, having extended them until the end of the year in July. Governor Masaaki Shirakawa said the fate of the measures depends on developments in financial markets and funding conditions for companies, and stopped short of warning about the risks of keeping them in place.

Loan Moratorium

Kamei said today he wants to discuss as soon as possible the potential for a moratorium on loan repayments for some small companies. Prime Minister Yukio Hatoyama this week appointed Kamei, who is the leader of the new government’s junior coalition partner the People’s New Party.

Finance Minister Hirohisa Fujii today indicated his reluctance to implement a freeze on loan repayments, saying the nation took similar action more than 80 years ago and he’s not sure the economy and financial system are in as bad shape as they were then guaranteed fast personal loans.

“I’m not sure we face that kind of situation now,” he said at a news conference.

The central bank said yesterday borrowing conditions for companies “are increasingly showing signs of improvement.” Bank of Japan board member Miyako Suda said earlier this month that companies are finding it easier to get access to funds, reducing the need for the central bank’s credit-easing steps.

‘Inclined to Unwind’

“Yamaguchi’s comments signal that the central bank is inclined to unwind the extra measures, though it’s still unclear whether they want to terminate all of the programs or scale them down,” said Mari Iwashita, chief market economist at Daiwa SMBC Securities Co. in Tokyo. “I don’t think they’ll announce a decision next month, but they’re clearly moving toward ending the programs.”

Yamaguchi said the economic outlook is clouded by a “significant level of uncertainty,” while reiterating that a recovery is likely to take hold later this year. “We will keep paying close attention to a variety of risks,” he said in today’s speech.

Central bank policy makers kept the overnight lending rate at 0.1 percent at yesterday’s meeting, and said they remain concerned about the strength of the economy even as it shows “signs of recovery.” Shirakawa said he isn’t confident demand will hold up once global stimulus fades and companies finish replenishing inventories.

Yamaguchi said the central bank is seeing a “positive mechanism” in the world’s second-largest economy as exports and production benefit from improvements in the global economy.

Source