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Thursday, November 27, 2008

BoE's Blanchflower-Bank should have cut rates sooner

Policymakers should have started cutting interest rates much sooner to help prevent an economic crisis in Britain, Bank of England policymaker David Blanchflower was quoted as saying on Thursday.

"This is not someting I wanted to get right," Blanchflower told the
Guardian in an interview. "That's why I warned that this was going to happen unless we acted -- I wanted to prevent the crisis. I'm not saying everything would have been wonderful, but at least if we'd acted earlier we would be ahead of events and not reacting to them."

The BoE slashed interest rates by 1.5 percentage points this month to
shore up the economy against a deep recession. Blanchflower, who has voted to cut interest rates every month since last October, said the bank was now "doing the things we should be doing". "All hands are to the pump and I get the sense that people have absolutely got it right.

Swiss employment growth slows in Q3

Employment growth in Switzerland slowed in the third quarter and is likely to continue to weaken as the economy cools, data showed on Thursday.

Switzerland's non-farm payrolls rose 2.0 percent year-on-year in the
third quarter to 3.956 million compared with growth of 2.4 percent in the
previous three months, the Federal Statistics Office said. The statistics office said the forward-looking indices pointed to a further slowing of employment growth as the outlook index fell 2.7 percent to 1.04 points, while the index of vacancies rose 0.5 percent to 207.3 points.

The survey among manufacturers for the Swiss Purchasing Managers' Index
in October showed that firms cut back staff for the first time since 2005, while the unadjusted Swiss unemployment rate inched up in the month to 2.5 percent. Switzerland is in the middle of a severe economic crisis and will see negative growth next year, Swiss National Bank board member Philipp Hildebrand was quoted on Wednesday as saying.

The SNB slashed rates last Thursday by a surprise full percentage point
and analysts expect the SNB to cut again, possibly as early as next month.
Jan-Egbert Sturm, head of the KOF Swiss Economic Institute that produces
the leading growth barometer, said the bank could cut by another 25 basis points in December.

"In theory there is still room to cut. A further central bank interest
rate step downwards is therefore not unlikely, perhaps there will be a rate cut still this year," Sturm told the Basler Zeitung daily in an interview.
The November KOF indicator, which points to the economy's likely
performance in six months' time, is due out on Friday.

ECB has room to cut interest rates

The European Central Bank has room to cut interest rates because inflation is falling and the euro zone economy is contracting, Governing Council member Ewald Nowotny was quoted on Thursday as saying.

"We have to assume that there will be another downward revision" of the
ECB staff growth forecasts, and also that inflation would fall below 2 percent,
he was quoted as saying in a statement by Austria's Chamber of Commerce.

"This also means that the ECB has room again to cut interest rates," he
was quoted as saying in the statement, which was issued after a meeting of the Chamber at which Nowotny spoke.

Trichet says ECB can cut rates on inflation relief

European Central Bank President Jean-Claude Trichet said on Wednesday the bank could cut its main interest rate next week as long as there is evidence that inflation pressures have eased. "We will have a lot of new information and we did not exclude to decrease rates again if the upside risk to prices alleviate," Trichet said at a news conference.

When asked if fourth quarter economic data would be worse than the third
quarter data that confirmed the euro zone was in recession, Trichet said: "Next week we will have a lot of new information, we will have our own projections... "we will see when we have the figures."

Following China's 108 basis point interest rate cut Trichet said: "I am
sure what has been done by my colleagues in China has done is appropriate for the Chinese economy." "We are all striving for maintaining price stability which is a prerequisite for financial stability," he added.

Aussie dollar slips as growth concerns dominate

* Australian dollar slipped below 65 U.S. cents on Wednesday, retreating further from recent two-week highs, as waning risk appetite and a gloomy outlook for the global economy kept investors away from commodity-linked currencies.

* Regional stocks were lower, hurt by a fresh batch of weak data from the world's largest economy. Data showed the U.S. economy shrank at its fastest pace in seven years in the third quarter as consumer spending plunged to a 28-year low. Another
report also showed U.S. home prices plunged in September.

* The U.S. Federal Reserve announced plans to buy up to $100 billion of debt issued by government-sponsored mortgage enterprises, and a $200-billion program to help consumer finance, but scepticism remained about these measures with interbank
lending rates creeping up, suggesting credit conditions were tightening again.

* Shortly after midday, the Aussie was at $0.6480 against the U.S. dollar, up from $0.6436 late here on Tuesday, but well below a near two-week high of $0.6618 struck in offshore trade.

* The Aussie eased against the yen, falling to 61.57 yen. It pulled away from a one-week high of 63.70 yen struck on Tuesday as investors turned risk averse and unwound leveraged carry trades.

* Gold prices retreated further from a six-week high in Asian trade. The CRB index fell 2.4 percent on Tuesday as prices of oil, precious and base metals fell on worries of a dour economic outlook. BHP Billiton's decision to dump its $66
billion bid for rival Rio Tinto also weighed down.

* Australian bond futures were firmer, aided by safe-haven inflows, but eased from highs as investors booked some profits. Three-year Australian bond futures were indicated 0.03 points higher at 96.405, while the 10-year contract added
0.06 points to 95.375.

ECB's Nowotny says more room for rate cut

Receding worries about inflation have made room for another interest rate cut by the European Central Bank, Governing Council member Ewald Nowotny told Japan's Nikkei newspaper. Europe is facing major difficulties and the euro zone economy could
contract next year due to the impact of the financial turmoil, Nowotny was quoted as saying in the paper's Wednesday morning edition. Inflation expectations, on the other hand, are receding, making room for another ECB rate cut, said Nowotny, who is also governor of the Austrian central bank.

On the euro's recent weakening against the dollar, Nowotny said the dollar's current rises were unsustainable and that rapid currency moves should be avoided. Two quick-fire 50 basis point cuts since October have brought benchmark euro zone interest rates to 3.25 percent. Analysts think they could fall to 2 percent or lower next year if the region's recession evolves into a major long-term slump. The ECB next meets on Dec. 4.

BOJ Mizuno Voted Against 20,25 bps Cuts

All but one Bank of Japan board member agreed that the central bank should lower interest rates to help the economy and stabilize money markets, but they disagreed over the appropriate size of the rate cut at their Oct. 31 policy board meeting, minutes released by the central bank showed Thursday.

"In reducing the policy interest rate, even a difference of five basis points
(has) an effect that can be ignored," one board member said. The BOJ board split 4-4 at the Oct. 31 meeting on a proposal to cut rates by 20 basis points to 0.30%. BOJ Gov. Masaaki Shirakawa ultimately cast the tiebreaking vote to cut rates. Three members favored an alternate proposal to cut rates by 25 basis points. Board member Atsushi Mizuno both opposed both rate cut proposals, the minutes showed.

BOJ Oct 31 minutes: Mizuno called for steady rates

Bank of Japan board member Atsushi Mizuno opposed cutting rates at the Oct. 31 policy meeting, saying it was unclear how the effect of such a move would spread to the economy when financial market functions were decreasing, minutes released on Thursday showed.

Board members Hidetoshi Kamezaki, Seiji Nakamura and Miyako Suda proposed cutting rates to 0.25 percent instead of to 0.3 percent, which was turned down by a 5-3 vote, the minutes showed. At the meeting, the Bank of Japan cut interest rates for the first time
in seven years, to 0.3 percent from 0.5 percent, joining global efforts to contain the financial crisis. The decision was made by a split vote, with board members Mizuno,
Kamezaki, Nakamura and Suda dissenting. The central bank kept rates on hold at

Dollar gains on fresh evidence of economic woes

The dollar rose against most other major currencies Wednesday as weak reports on housing, employment and manufacturing added to worries about the economy. The 15-nation euro dropped to $1.2899 from $1.3022 late Tuesday, while the
British pound fell to $1.5350 from $1.5440. The dollar edged up to 95.73 Japanese yen from 95.65 yen. The Labor Department said new claims for jobless benefits fell to 529,000 last week from a 16-year high of 543,000 the previous week. The four-week
average for initial claims, however, rose to 518,000, its highest point since
January 1983. Meanwhile, the Commerce Department said consumer spending fell by 1 percent in October. Spending by consumers makes up two-thirds of the country's economic activity, and the monthly decline was the biggest since 2001. The government also released grim reports on housing and manufacturing. Sales of new homes plunged 5.3 percent in October to their lowest point in nearly 18 years, while the median price of a home fell to 2004 lows. Factory orders for durable goods dropped 6.2 percent in October, with heavy declines in auto and airplane demand. Stocks started lower after three days of gains before recovering as President-elect Barack Obama named former Federal Reserve Chairman Paul Volcker as a senior adviser and hammered home his message that help is coming for the economy. The Dow Jones industrials rose nearly 250 points Wednesday to cap the index's first four-day advance since last spring.

"The dollar is coming off lows," said Meg Browne, senior currency strategist
at Brown Brothers Harriman in New York. "There's been some shift in trading,
(but) it doesn't mean that this period of consolidation for the dollar is over.
There's risk for the dollar weakening further next week." The dollar was also helped, she said, by investors' relief over policy responses from government officials in the U.S. and abroad. On Tuesday, the Fed said it would spend $800 billion to help bolster the consumer lending and mortgage markets. On Wednesday, the European Commission
called on the 27 European Union governments to spend 200 billion euros ($257 billion) over two years to prompt economic recovery. In other New York trading, the dollar gained to 1.2035 Swiss francs from 1.1878 late Tuesday, but slipped to 1.2271 Canadian dollars from 1.2282.

Wednesday, November 26, 2008

Dollar Appears Safe For Now

The Federal Reserve's campaign to pump additional billions into ailing credit
markets is unlikely to hobble the U.S. dollar, at least not yet.
Faced with a struggling economy and a dysfunctional financial system, the Fed
has vastly expanded its own balance sheet, essentially creating money to fund a
variety of new programs. That includes the ones announced Tuesday, which will
lend money to support securities backed by credit-card and auto loans and also
buy debt issued by mortgage giants Fannie Mae and Freddie Mac.
The risk is that massive injections of cash by the Fed eventually could cause
rampant inflation, something that is bad for the dollar because it erodes a
currency's value. But some investors say the Fed will curtail liquidity -- by
raising interest rates, among other things -- well before that happens. And in
instances of similar policy moves to push money into the system, like in Japan
earlier this decade, the impact on the currency was ambiguous.
Tuesday the dollar weakened against the euro, the Japanese yen and the British
pound amid choppy trading for stocks. Late in New York, one euro bought $1.3067,
up from $1.2902 a day earlier. One dollar fetched 95.47 yen, down from 96.98 yen
on Monday. Selling the dollar on inflation fears is "premature," says David Gilmore of Foreign Exchange Analytics, a Connecticut research firm. "People will have to
determine that [Fed policy] is generating inflation before the currency is
attacked." Indeed, one of the major risks the Fed is trying to avert is a deflation
scenario -- a vicious cycle of falling prices and contracting credit.
The Fed's moves toward less-conventional measures to stimulate the economy are
partly because it doesn't have much room left to maneuver on interest rates. It
has already lowered the federal-funds rate to 1% and, although more cuts are
likely, zero is fast approaching.

For many observers, the Fed's approach now resembles Japan-style policy
earlier this decade, when Tokyo was pouring money into its economy to combat
stagnant growth and falling consumer prices. This strategy can involve a variety of tools, but is generally referred to as "quantitative easing," because it tackles the quantity of money in the financial system rather than its cost -- in other words, the interest rate. Japan officially adopted this approach in early 2001, pushing money into the system through a number of measures, including direct purchases of Japanese
bonds, asset-backed securities and even stocks, according to a recent report by
BNP Paribas. Japan also sold yen to weaken the currency. Despite those efforts, the yen actually strengthened against a basket of currencies from early 2002 until early 2005, noted Derek Halpenny, a senior currency strategist at the Bank of Tokyo-Mitsubishi UFJ. In the following two years, however, the yen weakened significantly as capital exited Japan in search of better opportunities in an environment of robust global growth. Mr. Halpenny expects something similar to unfold in the U.S. and doesn't anticipate a weaker dollar over the next six months. "There are inflation risks, but that's the later story," he says. "We don't even know the depths of the current downturn."

The global context also will be critical to the buck's fortunes. With the
world economy heading toward recession, other central banks may end up following
the Fed's lead in bolstering their own malfunctioning financial systems. If
other countries also adopt measures akin to quantitative easing, then there is
much less reason for the dollar to weaken against those currencies.
In the end, say investors, the question of whether the Fed moves are negative
for the dollar will depend on your view of inflation over the medium term.
"As long as officials continue to emphasize that they will wind down the extra
liquidity as soon as feasible when markets start to normalize," the expansion of
the Fed's balance sheet is unlikely to cause runaway inflation problem, wrote
strategists at UBS on Tuesday. "Demand for [a] safe, liquid store of wealth will
support the U.S. bond market and keep the U.S. dollar afloat."
By late afternoon in New York, the U.K. pound rose to $1.5496 from $1.5148 a
day earlier, while the Swiss franc fell to $1.1853 from $1.1967.

US Economy Weaker In 3Q Than First Thought

The U.S. economy was a little softer during the third quarter than first believed, according to government data Tuesday showing weaker consumer spending and overseas sales. Gross domestic product dropped at a seasonally adjusted 0.5% annual rate July through September, the Commerce Department said in a new, revised estimate of third-quarter GDP. It was the weakest performance since a 1.4% decrease in third-quarter 2001 GDP. Originally, the government had estimated third-quarter 2008 GDP fell 0.3%. Second-quarter 2008 GDP climbed 2.8%.

Corporate profits kept retreating in the third quarter. Profits after taxes fell by 3.0% to $1.302 trillion, after sliding 0.4% in the second quarter and 7.7% during the first quarter. Year over year, profits were down 9.9%. Price inflation gauges were lowered in the government's revisions to the economic data. GDP is a measure of all goods and services produced in the economy. Wall Street expected a slightly bigger adjustment; economists surveyed by Dow Jones Newswires had called for a 0.6% decrease in revised third-quarter GDP. The data revisions showed third-quarter spending by consumers dropped 3.7%. That was down from a previously reported 3.1% decrease; it was also below the second quarter's 1.2% increase. Consumer spending accounts for about 70% of economic activity. The 3.7% decrease took 2.69 percentage points from GDP in the third quarter; the original estimate was a reduction of 2.25 percentage points. Purchases of durable goods tumbled 15.2% in July through September, below the previously reported 14.1% drop and below the decrease of 2.8% in the second quarter. Durable goods are expensive items designed to last at least three years, such as cars.

Third-quarter non-durables spending fell by 6.9%. Services spending was flat.

Trade gave less to the economy than first estimated. Imports dropped 3.2% instead of the originally reported 1.9% decrease. Exports were revised down, rising 3.4% instead of rising 5.9%. Trade boosted GDP by 1.07 percentage points in the third quarter. Originally, trade was seen contributing 1.13 percentage points to GDP.

Businesses decreased spending more than previously thought. Outlays fell by 1.5% July through September, which was bigger than the originally estimated 1.0% decrease. Business spending rose 2.5% in the second quarter. Third-quarter investment in structures increased 6.6%; equipment and software fell 5.7%. Residential fixed investment, which includes spending on housing, plunged by 17.6% in the third quarter, a tumble less than the originally estimated 19.1% plunge. Second-quarter spending fell by 13.3%. The report showed businesses lowered inventories in the third quarter, a drop of $29.1 billion. Originally, Commerce estimated a $38.5 billion decrease. Companies had liquidated stocks by $50.6 billion in the second quarter. The smaller drawdown of goods in the third quarter elevated GDP during that period by 0.89 percentage point. In its original report on third-quarter GDP, Commerce said inventories added 0.56 percentage point to GDP. Real final sales of domestic product, which is GDP less the change in private inventories, declined 1.4%, revised down from an earlier estimated 0.8% decrease. Second-quarter sales rose 4.4%. Federal government spending increased by 13.6%, revised down from an initially estimated 13.8% increase. Second-quarter spending climbed 6.6%. State and local government outlays rose 0.8%.

As for inflation gauges within the report, the government's price index for personal consumption increased 5.2%, below the previously estimated 5.4% increase but above the second quarter's 4.3% increase. The PCE price gauge excluding food and energy climbed 2.6%, below the previously estimated 2.9% increase but higher than the second quarter's 2.2% increase. The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 4.7%, below the previously estimated 4.8% climb but above the second quarter's 4.2% increase.

Thursday, November 20, 2008

Rates May Be Slashed to 50-Year Lows, Fed Minutes Show

In its Oct 28-29 meeting the Federal Reserve made it clear that it could invoke a near zero interest rate policy (ZIRP) if the economic perspective continued to worsen. Rates below the current 1.0% have not been seen in 50 years.

The U.S. economy contracted -0.3% in the third quarter and may force Fed governors ⦥uro;œto further lower its target for the federal funds rate in the future⦥uro;? if output continues to plunge. ⦥uro;œSome suggested that additional policy easing could well be appropriate at future meetings,⦥uro;? according to Fed minutes from the latest meeting.

In the three weeks leading up to the meeting, the bank slashed rates 100bp. Despite such aggressive action, FOMC board members thought ⦥uro;œsubstantial downside risks⦥uro;? would remain. In June the reserve had forecast 2009 GDP growth to range between 2.0% and 2.8%. Developments over the last two months have led them to again cut their outlook for the following year. GDP growth is to range between -0.2% and 1.1% in the upcoming year, according to their estimates. As if that wasn⦥uro;™t enough, the contraction is expected to last through at least mid-2009.

Labor markets are also expected to continue deteriorating. Fed estimates call for a year-end unemployment rate of between 6.3% and 6.5%, an increase from the previous forecast of 5.5% and 5.7%

On inflation the Fed remained optimistic, stating that the rate of price increases would ⦥uro;œdiminish materially in coming quarters⦥uro;? to ⦥uro;œlevels consistent with price stability.⦥uro;? Wednesday⦥uro;™s Consumer Price Index release lent credence to their position as the metric shrank by -1.0%. Excluding food and energy from the mix, the metric shrank -0.1%, bringing the yearly core inflation rate to 2.2%. The rate of expected inflation declination is of some concern, however. ⦥uro;œSome saw a risk that over time inflation could fall below low levels consistent with the Federal Reserve⦥uro;™s dual mandate of price stability and maximum employment,⦥uro;? minutes showed.

UK retail sales fall less than expected in Oct

British retail sales fell less than expected in October and the public finances showed their first deficit for the month since 1994, official data showed on Thursday. The Office for National Statistics said sales fell 0.1 prcent last
month, leaving them 1.9 percent higher on the year. That compared to analysts' forecasts for a fall of 0.9 percent on the month and a rise of 1.4 percent on a year ago.

Separately, the ONS said the public sector posted a net cash repayment
of 4.906 billion pounds last month. However, the government's preferred
accruals-based measure showed its first deficit for an October since 1994, with public sector net debt coming in at 1.382 billion pounds.

Dollar falls against the euro, pound and yen

The dollar fell against the euro, pound and yen Wednesday as consumer prices continued to drop, paving the way for more interest-rate cuts at home. Meanwhile, European bankers suggested more rate cuts were in the works as well, and stocks sank.
The 15-nation euro inched up to $1.2602 in late New York trading Wednesday from $1.2579 late Tuesday, coming off an overnight high of $1.2814 as U.S. stocks recoiled. The Dow Jones industrials fell below the 8,000 mark for the first time since 2003.

The British pound rose to $1.5025 from $1.4916, while the dollar slipped to 96.37 Japanese yen from 96.46. The U.S. Labor Department said Wednesday that its index of consumer prices fell by 1 percent in October, the largest one-month drop since 1947, when record-keeping began. On Tuesday, the government released its producer price index. Wholesale prices in October fell 2.8 percent, a record drop. Falling prices give the Federal Reserve room to cut interest rates as worries about inflation subside. Cutting interest rates can spark economic activity but currencies often suffer as investors move their money in search of better returns.

"This week's CPI and PPI data keeps the door wide open for further Fed rate
cuts over the next several meetings," said Michael Woolfolk, senior currency
strategist at Bank of New York Mellon Corp. in New York. Speaking in London Tuesday evening, European Central Bank President Jean-Claude Trichet said he wouldn't exclude decreasing interest rates further as long as the bank has confirmation that risks to price stability are easing. Meanwhile, the Bank of England on Wednesday released minutes from its meeting earlier in November, at which it cut its benchmark rate by 1.5 percentage points to a 53-year low of 3 percent, that hinted at more rate cuts in the future as Britain grapples with recession. In other New York trading, the dollar edged up to 1.2483 Canadian dollars from 1.2375 late Tuesday, and traded up to 1.2102 Swiss francs from 1.2043 francs late Tuesday.

Euro Fall VS Dollar On Drop In US Stocks

The euro was whipsawed Wednesday and finished the New York trading session down against the dollar, overcome by a drop in U.S. stocks. The Dow Jones Industrial Average declined more than 400 points late Wednesday, encouraging investors to escape positions back into the major funding currency, the dollar.

The euro fell to an intraday low of $1.2520. The same flight-to-safety flows supported the yen against higher-yielding rivals. The dollar fell to an intraday low of Y95.70, and the euro dropped to Y119.92. "Investors want to hold cash, U.S. dollars and Treasurys in lieu of equities. What we're seeing is a shift of capital. It's literally tracking equities tick for tick," said Greg Salvaggio, vice president of capital markets at Tempus Consulting in Washington.

The release of the Federal Open Market Committee meeting minutes in the afternoon did nothing to help sentiment. Federal Reserve officials said they were ready to slash interest rates to levels not seen in half a century if the economic picture keeps worsening. "The minutes just continue to drive home the message that this is going to be a prolonged recession," Salvaggio said, and that is a supportive message for the buck. Wednesday afternoon in New York, the euro was at $1.2537 from $1.2626 late Tuesday, while the dollar was at Y95.94 from Y97.00, according to EBS. The euro
was at Y120.27 from Y122.49. The U.K. pound was at $1.4974 from $1.4947, and the
dollar was at CHF1.2132 from CHF1.2014 late Tuesday.

The euro actually rallied against the dollar and yen early in the session,
scoring intraweek highs of $1.2815 and Y124.30, after a raft of disappointing
U.S. data and on a technical move following range-bound trading since Monday.
The rally may have been cut short by bargain hunters, in addition to the
action in equities. "We would continue to view dollar weakness - such as today - primarily as buying opportunities," said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank.

At first, the euro gained on a knee-jerk reaction to October U.S. consumer
prices, which took the biggest plunge in 61 years. The consumer price index
dropped 1.0% on a seasonally adjusted basis compared to the previous month, the
Labor Department said. It was the largest drop since February 1947 - a sign that
"nobody's spending money," said Salvaggio. In other data, home construction took its fourth tumble in a row in October, falling to a new record low. Housing starts decreased 4.5% to a seasonally adjusted 791,000 annual rate, after falling 3.0% in September, the Commerce Department said.

The euro then advanced more as it breached certain levels above $1.27.
But analysts said the rally was technical and didn't reflect any material
change in the global economic outlook. Therefore, the rise wasn't sustained.
"We're in a world where currency liquidity is extremely thin, even in euro
versus dollar," said Michael Klawitter, a currency analyst at Dresdner Kleinwort
in Frankfurt. He said his trading screens show a very small number of trades with relatively small volumes, yet these transactions are affecting foreign exchange prices "in a meaningful way." Consequently, the rationale behind the surge in the euro, "does not necessarily link to fundamental data," Klawitter said.

Wednesday, November 19, 2008

US banks help cut losses on locked hedge funds

The same Wall Street dealers that offered sophisticated derivatives that allowed investors to magnify their risks are now pitching elaborate instruments designed to reduce exposure to cratering hedge funds. Dealers say they are seeing strong demand for these derivatives as hedge funds make it harder for investors to withdraw funds. But some investors are skeptical. "It looks great on paper but we are not willing to stick our necks out with a new product," said Steve Braverman, president of investment advisory services at Harris myCFO, a unit of BMO Financial Group that manages money for wealthy families.

These products, offered by banks, including BNP Paribas SA and Nomura
Holdings Inc, are based on mathematical models of expected hedge fund returns. That could make it difficult to win over investors in a credit crunch that was largely created by faulty assumptions fed into flawed models. "I don't think it will be an easy sell," said Frank Partnoy, professor of law at the University of San Diego. "But it does show that Wall Street, even on its death bed, will keep kicking as long as it's alive."

Bankers say there is demand as the $1.2 trillion hedge fund industry
experiences its worst investment losses on record, having fallen more than 20 percent this year. As investors clamor to bail out of the funds, many funds have refused to hand client money back, arguing that redemptions will force them to sell assets at depressed prices.

That is where banks come in, offering derivatives known as swaps that are
meant to offer investors the opposite of returns in hedge funds: if the funds
fall 10 percent in value, these swaps should rise 10 percent. And while banks have been pitching these derivatives for some time, it was not until indexes showed the hedge fund sector nosediving 5 percent in September alone that investor interest picked up. "Nobody was really interested in these products September triggered the need," said Fabrice Hugon, head of fund derivatives sales at BNP Paribas in New York. "Now every day we are having conversations about this with clients." BNP Paribas has sold about $350 million of these structures since mid September and Hugon thinks this could double by year end.

Japan Sept all-industries index -0.1 pct mth/mth

Japan's all-industries index, which covers a broad range of economic activity including the tertiary activity index, dipped 0.1 percent in September from the previous month, matching a consensus forecast, government data showed on Wednesday.
A new index for final demand components in all industries decreased 0.9 percent from the previous month. The all-industries index adds data from the primary sector --
comprising fishing, farming, forestry and mining -- and the secondary or manufacturing sector to data from the tertiary sector.

The services sector employs more than half of Japan's work force and spending on services such as retailing, dining and travel is closely tied to changes in income and consumer confidence.

Tuesday, November 18, 2008

FOMC may need to set reserves target

The Federal Reserve, with little room to cut interest rates further, has shifted to a policy of intentionally flooding the banking system with reserves and should consider setting an explicit reserves target, a top Fed economist said. That, in turn, could force a change to the way the Fed relays its actions to the market, Glenn Rudebusch, the San Francisco Fed's associate director of research, said in the FedViews newsletter posted on Monday on the bank's website. "It may be that going forward the post-Federal Open Market Committee meeting statement may have to be recast to contain a discussion of reserve quantities," Rudebusch said. The Fed has slashed its benchmark federal funds rate to 1 percent from 5.25 percent since September 2007. Some Fed officials, most recently Philadelphia Fed President Charles
Plosser last week, have cited difficulties in cutting the overnight interbank
target lending rate further.

However, "it is not the case that the Fed is necessarily 'on hold.' Indeed, the Fed has already started to employ alternative means," Rudebusch said. Quantitative easing, a strategy of aggressively expanding the size of the Fed's balance sheet to boost the level of reserves in the banking system and induce banks to make more loans, was started in September, he said. Rudebusch said the FOMC, which traditionally has deliberated about monetary policy mostly in terms of interest rates, needs to rethink that strategy. "It may be appropriate to shift to a reserves quantity target in addition to or in place of the interest rate target, both in the policy discussion and in the operational directive" made to the New York Fed's trading desk, he said.

The jury is out on whether another tactic adopted by the Fed, altering
the composition of its balance sheet by selling Treasuries and buying private
debt such as commercial paper, is helping to boost the economy, Rudebusch said.
The Fed economist said a third key strategy at a time short-term rates
are pinned near zero would be for the Fed to project "a credible public
commitment to keep the funds rate low for a sustained period of time."
Rudebusch noted that the 10-year U.S. Treasury note yield is still
relatively high, near 3.67 percent. "When the Bank of Japan promised in 2001 to keep its policy rate near zero as long as consumer prices fell, it was able to help push the rate on 10-year government securities down below 1 percent," he said.
Some Fed policy-makers have taken the opposite approach, though,
stressing the need for the Fed to start raising rates once the economy turns up.

Rudebusch forecast that the U.S. economy would bottom out in the fourth
quarter of 2008, with a decline in gross domestic product of more than 3
percent, followed by smaller declines in the first two quarters of 2009.
The U.S. jobless rate will likely peak at about 7.5 percent in mid-2009,
he said. A retrenchment in the outlook for global growth opens the door to far
lower inflation, he said. San Francisco Fed economists now see headline inflation falling from above 4 percent to below 1 percent by the middle of 2009. Core inflation, stripped of food and energy costs, could fall to about 1.5 percent by the end of 2009.

Aussie Dollar battles sliding stocks, recession fears

The Australian dollar was battling to hold its ground on Tuesday as a late slide in U.S. stocks and persistent concerns of global recession hurt riskier investments
to the benefit of sovereign bonds.

* Australian dollar holding around around $0.6490, having bounced from $0.6350/60 support on Monday to reach as high as $0.6597 before running out of steam.
* Aussie was initially aided by poor economic news from the United States which dragged on the U.S. dollar, but began to tire late in New York session as stocks turned lower once more.
* A New York Fed gauge of manufacturing showed activity in the region fell to a record low, while Citigroup intends to cut up to 50,000 jobs, or 15 percent of its work force.
* The late drop in U.S. equities added to risk aversion and benefited the safe-haven Japanese yen. The Aussie dipped back to 62.55 yen, from a 64.11 peak.
* The same focus on safety boosted bonds, with short-term futures reaching record highs and bill futures almost fully priced for a 100 basis-point rate cuts from the Reserve Bank of Australia (RBA) next month.
* The RBA will release the minutes of its November meeting at 11:30 a.m. (0030 GMT) and may explain why it chose to cut rates by a surprisingly large 75 basis points to 5.25 percent.
* Three-year bond futures firmed 0.035 to 96.245, having touched an all-time high of 96.305 earlier. The 10-year contract added 0.045 points to 95.070.
* Commodities were mostly weaker. Oil lost $1.94 to
$55.10, while the CRB index shed 1.51 percent to 243.84.

Dollar climbs against euro, falls versus the pound

The dollar was mixed against major currencies Monday after a summit of world leaders in Washington failed to provide specific guidelines to ease the global financial crisis, while a reading of industrial production showed a bigger-than-expected rebound.

The 15-nation euro fell to $1.2677 in late New York trading, compared with
$1.2797 it bought late Friday. Meanwhile, the British pound, which hit a 6 1/2
year low against the dollar and a record low against the euro last week, rose to
$1.5023 on Monday from $1.4949. The dollar drifted lower to 96.90 Japanese yen from 97.57 yen. Leaders from 21 nations, including China, and four international
organizations attended the emergency two-day summit over the weekend intended to
address the financial crisis sweeping the globe. Summit participants vowed at the conclusion of the conference to cooperate more closely, keep a sharper eye out for potential problems and give bigger roles to fast-rising nations. But they avoided many of the harder details, leaving them to be worked out before their next summit, after U.S. President George W. Bush is gone and President-elect Barack Obama is in the White House. "There has been a negative reaction to the G20 statement, which really did not provide any material or immediate measures to help resolve the global
imbalances problem and general financial crisis," said Michael Woolfolk, senior
currency strategist at the Bank of New York Mellon Corp.

Meanwhile, the Federal Reserve said Monday that industrial output rose 1.3
percent last month, after plunging in September by the largest amount in over 60
years. The increase was bigger than the 0.2 percent rise that economists
expected. Woolfolk said the dollar is expected to remain well-supported by safe-haven
flows this week as crude oil and equity prices continue to slide. On Monday, oil
prices fell below $56 and gasoline futures plunged to a new 52-week low.
The Dow Jones industrials fell as much as 340 points Monday as Citigroup
Inc. said it will cut another 53,000 jobs in the coming quarters, a signal that
banks are still struggling from massive losses tied to bad mortgage debt.
Investors were also nervously waiting to see whether the nation's troubled
automakers would get a bailout. In other trading late Monday, the dollar advanced to 1.2225 Canadian dollars from 1.2186 it bought late Friday, and rose to 1.1982 Swiss francs from 1.1852.

Monday, November 17, 2008

Currency Trading: Support Seen For Dollar, Yen

The statement issued Saturday by the Group of 20 developed and
emerging-market nations is unlikely to assuage fears of currency investors
plagued by the financial and economic crises. G-20 officials vowed bold action in various areas in the statement released during the group's weekend summit in Washington. The group's statement was more
elaborate than the one released by the Group of Seven leading industrialized
nations in October. But currency strategists said the G-20 statement focuses on future plans and lacks specificity on action items. The absence of a "wow" factor may disappoint investors who had high hopes for the summit's outcome, they said.

As a result, investors are likely to keep seeking safety in low-yielding
currencies such as the U.S. dollar and the yen at the cost of other currencies
amid worries about recession, especially in countries with relatively bleaker
economic outlooks and in weaker fiscal health, such as the U.K. Turkey and South Africa. "On this statement alone the dollar will get support as will the yen as it includes nothing specific," said Jim O'Neill, head of global economic research at Goldman Sachs Group Inc. in London. Mr. O'Neill said there is a large "to do" list for the G-20 and that if they achieve much of it by March, "the world will be a better place. Then risky assets will be performing better. The dollar and yen will be lower."But in the near term, the situation remains grim, with the continuing financial crisis and the rising risk of a prolonged and deep global recession. Adding to the poor sentiment is the continued trend of a reduction in the use of borrowed money to
magnify returns, as investors world-wide shy away from risk. That may gain
momentum as the year-end approaches.

Strategists said that the G-20 statement may quickly fade into memory as
investors turn their attention to macroeconomic data and headlines about banks, auto makers and hedge funds. The performance of global stock markets, which have become an indicator of investors' appetite for risk, likely will continue to be among the forces driving the currency market.
Commodity-linked currencies, ranging from the Australian, New Zealand and
Canadian dollars to the Norwegian krone, may suffer further declines if
crude-oil prices continue to fall. Late Friday in New York, the euro was at $1.2691 from $1.2853 late Thursday, while the dollar was at 97.10 yen from 97.82 yen. The euro was at 123.90 yen from 125.73 yen. The dollar was at 1.1920 Swiss francs from 1.1834 francs Thursday, while the U.K. pound was at $1.4795 from $1.4888.

Analysts expect the euro to trade this week in a wide range between $1.23 and $1.2950, with a risk that it drops below that range. Meanwhile, the dollar could trade between 91.50 yen and 98.50 yen. The U.K. pound was one of the biggest losers last week, dropping below $1.50 for the first time since 2002. The pound tumbled to a record low versus the euro as the British economy slid into recession.

"The pound is vulnerable," said Boris Schlossberg, director of currency
research at GFT Forex in New York. "There is concern that the U.K. may be the next Iceland." There is no regular measure of daily trading volumes across foreign-exchange markets, but analysts and traders in various banking institutions confirm that low liquidity has contributed to high levels of currency-market volatility. This culminated in late October, when one-month at-the-money euro-dollar implied volatility rose near 30.0%, while dollar-yen volatility rose above 40.0% and euro-yen volatility rose to 54.0%. These levels have since eased, but they remain elevated.
Many traders believe the worst volatility, and low liquidity, is over. Thanos
Papasavvas, head of currency management at Investec Asset Management, said his team has put on more risk this month compared with the past six months, and is looking for opportunities to take positions.

Japan Economy Shrinks For 2nd Straight Quarter in July - Sept

Japan's economy shrank 0.1 percent in the third quarter, sending the world's second-biggest economy into recession and lagging market expectations for anaemic growth of 0.1 percent. The contraction confirmed that the global financial crisis has sabotaged growth in yet another major economy, with the euro zone already in recession, using the most common definition of two consecutive quarters of contraction. Japan's gross domestic product figure translated into an annualised fall of 0.4 percent, lagging a consensus market forecast for a 0.3 percent expansion, government data showed on Monday.

The euro zone is already in recession, using the most common definition
of two straight quarters of contraction, and analysts say much of the developed world will follow. The quarterly figure translated into an annualised growth of zero percent growth, lagging a consensus market forecast for a 0.3 percent expansion, government data showed on Monday.
In April-June this year, the Japanese economy shrank a revised 0.9
percent from the previous quarter.

The financial crisis continues to wreak havoc on the world's major
economies. The 15-nation euro zone economy shrank 0.2 percent for the second straight quarter and most economists say the United States is probably already in recession, although official data showing that will not come until January.

Sunday, November 16, 2008

UK faces sharp downturn, big rise in jobless-CBI

Britain will suffer its sharpest economic contraction in almost two decades next year and the number of people out of work could rise to nearly 3 million by 2010, the Confederation of British Industry said on Monday.

It said it expects the British economy to contract by 1.7 percent in 2009
and blamed the fallout from global financial turmoil for the massive revision to the 0.3 percent growth forecast it had issued in September. The global economy is suffering its worst financial crisis in 80 years, with governments around the world injecting trillions of dollars into the banking system to keep it afloat. "What is clear is that the short and shallow recession we had hoped for a matter of months ago is now likely to be deeper and longer lasting," said John Cridland, CBI deputy director-general.

"The banking system has come under immense strain, sending consumer and business confidence plummeting in its wake." The CBI said it expected unemployment to reach 2 million by the end of this year and rise to 2.88 million, or 9 percent of the workforce, in 2010 -- the year by which the ruling Labour Party must call a general election. That would be the highest jobless total since the last quarter of 1993. Official figures released last week showed British unemployment rose to its highest since 1997 in the three months to September, with 1.825 million people out of work.

The CBI said a deteriorating labour market and weak consumer confidence
would weigh on household spending. It predicted household consumption would contract by 1.8 percent in 2009. "This latest forecast shows that 2009 is going to be a very tough year for business, with the sharpest fall in GDP since 1991," said Ian McCafferty, the CBI's chief economic adviser. Reduced spending and falling commodity prices will ease price pressures,
the CBI said, predicting the inflation rate would fall to 1.7 percent by the end
of next year from 4.2 percent last quarter.

According to its forecasts, inflation could drop as low as 1.1 percent in
2010, well below the Bank of England's 2 percent target. That will give the
central bank room to reduce interest rates further, possibly to as low as 1.5
percent, the CBI said.

The Bank of England this month slashed interest rates by an unexpected
1.5 percentage points, taking them to 3 percent. The CBI predicted fixed investment would fall by 3.8 percent in 2008 and by 10.5 percent in 2009 as firms would be hit hard by slowing demand and difficulties in obtaining credit.

Japan's Yosano says economy in recession

Japanese Economics Minister Kaoru Yosano said on Monday the nation's economy was in recession. "As for the outlook, the downtrend in the economy will continue.

Yosano told a news conference after government data showed that Japan's economy shrank 0.1 percent in the third quarter to mark the second straight quarter of contraction.

JPMorgan plans to ramp up job cuts

JPMorgan Chase & Co. will likely cut thousands of jobs worldwide next year, Britain's Sunday Telegraph newspaper reported. The report, which cited people close to JPMorgan, said the bank has begun consulting on job cuts, and the cutbacks will likely be on a comparable scale to those of JPMorgan's rivals. Citigroup and Goldman Sachs have cut about 10 percent of their work forces, a proportion that if applied to JPMorgan would mean more than 3,000 jobs cut, the Telegraph reported.

A JPMorgan Chase spokesman declined to comment on the report. The bank has already been eliminating some jobs due to big profit hits from the financial crisis, and redundancies following the buyouts of failed thrift
bank Washington Mutual Inc. and investment bank Bear Stearns Cos.

U.S. auto bailout support battle heats up

A key Republican Senator said on Sunday it was "pretty clear" a $25 billion bailout proposal for U.S. automakers will fail in the U.S. Senate, while Democrats argued saving the industry was critical to the U.S. economy.

The Senate is slated on Monday to begin debating emergency legislation to
General Motors Corp, Ford Motor Co, and Chrysler LLC in a special post-election session to deal with the economic crisis.

The leading Democratic plan would authorize up to $25 billion in loans
from the Treasury Department's $700 billion corporate rescue program to help Detroit survive its financial crisis. In return, the government would take
equity stakes in the companies and impose limits on executive compensation.

On television news shows Sunday, Republican critics argued the government
should not be in the business of choosing which companies survive and which
fail, while Democrats said an auto industry collapse would hurt millions of
workers beyond the auto industry and undermine the U.S. manufacturing base. Arizona Republican Sen. Jon Kyl told "Fox New Sunday" the Democrats
appeared to be trying to score political points by pushing the bill now "since
it's pretty clear that it's not going to pass." He said they should wait until
next year.

"The people who would be paying the bill for this, the average worker in
the United States, I don't think should be burdened with bailing out the auto
companies that have been sick for a long time," he said. Kyl is the second
ranking Republican in the Senate. Democratic Sen. Byron Dorgan of North Dakota conceded it "might be the
case" that Congress would only be able to pass a more modest plan to expand unemployment benefits during the lame duck session before the new Congress is seated on Jan. 6.

"We're going to try to do more," he told Fox News and repeated his
party's argument that millions of jobs were at risk and that a fraction of the
$700 billion was a small price to pay to maintain U.S. manufacturing viability. "This is not just about an industry or three companies. This is about
jobs -- 350,000 direct, probably as much as three to five million jobs in
total," he said. "I don't think you long remain a strong economic power in this world unless you have a manufacturing base," added Dorgan.

Michigan Democratic Sen. Carl Levin, co-chairman of the Senate Auto
Caucus, said he saw bipartisan backing for helping the car sector survive the
economic crisis, which he argued was "a different issue from the need to
restructure the auto industry." Levin told NBC's "Meet the Press" he would support calls for a shake-up in the auto industry management in order to get the bailout bill passed. Critics say management is to blame for Detroit's troubles. "I'd be happy to tell Rick Wagoner that he ought to consider resigning if that is the difference between getting this kind of support and not," he said. Wagoner is GM's CEO.

U.S banks all cashed up, nowhere to lend

The latest U.S. effort to get more money flowing to consumers assumes that there are plenty of credit-worthy households eager to borrow and spend.
That may not be the case. Rising unemployment and foreclosures are driving more people out of the "prime" credit category, in which banks are still fairly willing to lend. At the same time, consumer confidence has fallen so far that even wealthier people with little trouble getting credit are cutting their spending.

U.S. Treasury Secretary Henry Paulson announced last week that he was
redirecting a $700 billion rescue package to focus on consumer loans in an
effort to spur lending and get the economy going again. It was the third incarnation of a program launched last month that was initially touted as a way for the government to buy bad assets from banks and unclog credit channels. Instead, it has been used primarily to buy stakes in banks in the hope that the capital cushion would encourage lending.

So far, there is little sign that banks are loosening their grip on cash,
much to the frustration of the U.S. government and countries around the world that rely on a healthy U.S. consumer to drive economic growth.
That will no doubt be a major topic this week as investors brace for
another round of grim economic data from many advanced economies and leaders in Washington consider whether even more spending is needed to stave off a deep recession.

Charles Dallara, managing director of the bank lobby group Institute of
International Finance, said that just because banks have billions of taxpayer
dollars in hand, it was unrealistic to expect normal lending to resume
immediately. "Capital does not automatically create credit-worthy borrowers," he said. "In an environment where banks are already recovering from serious losses on
earlier lending, it's not only natural -- it's inevitable that there is a
substantial degree of caution built in to lending activities."