Poole Says Fed Should Raise Rates `Sooner,' Not Later

By Kathleen Hays and Timothy R. Homan

June 17 (Bloomberg) -- Former St. Louis Federal Reserve President William Poole urged U.S. central bankers to raise interest rates to head off an inflation spiral as energy costs soar.

``We should be moving sooner rather than later'' on increasing borrowing costs, Poole, who retired in March, said in an interview today with Bloomberg Television. ``I don't think you can interpret what's happening with energy as a temporary shock.''

Poole warned that the Fed must prevent higher inflation expectations from feeding through to a surge in wages. Fed officials have indicated this month that they're increasingly concerned with rising price pressures, spurring traders to bet they will lift their benchmark rate as soon as August.

Economists have been less aggressive, with the median projection in a monthly Bloomberg News survey indicating most analysts anticipate the Fed will wait until next year. JPMorgan Chase & Co. and Barclays Capital Inc. economists now forecast an increase in September.

``You want to keep wages behaving,'' Poole said today. Once public expectations of accelerating inflation start stoking demands for higher wages, ``the jig is up'' and consumer prices become harder to contain, he said.

Expected Rate

American consumers anticipate an annual inflation rate of 3.4 percent in the coming five years, matching the highest level since 1995, a Reuters/University of Michigan survey showed last week.

The Federal Open Market Committee next meets June 24-25, when investors expect it will keep the benchmark rate at 2 percent, after seven reductions since September. Futures contracts indicate a 55 percent chance of at least a quarter- point boost at the August meeting.

The Fed should act if reports show faster inflation, combined with ``less downbeat'' indications for economic growth, Poole said today. ``We do not yet see a real `in your face' bad inflation report.''

Poole, who turns 71 this week, led the St. Louis Fed bank for 10 years. He was previously chairman of the economics department at Brown University in Providence, Rhode Island.

``There's a lot of pain yet to come in the real estate sector,'' with house prices falling as much as 20 percent from current levels, Poole said. The Fed shouldn't be held ``hostage'' by a troubled industry that prevents it from raising interest rates, he said.

Prices Doubled

Oil prices have almost doubled in the past year, and reached a record of $139.89 a barrel yesterday. That's helped cause a 34 percent leap in gasoline, which this month surpassed $4 a gallon (3.79 liters) for the first time.

Former Fed Chairman Paul Volcker said last month that the current inflation situation is similar to the early 1970s, when price gains started picking up. The Fed at the time failed to contain the situation, allowing inflation to exceed 10 percent later in the decade.

``There is some resemblance to where we are now in the inflation picture to the early 1970s,'' Volcker said at a Joint Economic Committee hearing at Congress May 14.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

Last Updated: June 17, 2008 14:40 EDT


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BOJ Watching Rising Inflation Risks, Minutes Show (Update1)

By Mayumi Otsuma
Enlarge Image/Details

June 18 (Bloomberg) -- Bank of Japan policy makers agreed that global inflation risks have been ``heightening'' and the central bank must always watch prices as well as the overall economy, meeting minutes show.

``Inflation risks had been heightening worldwide given the high international commodity prices,'' the board said, according to minutes of the May 19-20 meeting released in Tokyo. A few members said the bank needs to examine how rising prices of daily necessities affect inflation expectations in Japan.

The central bank has kept interest rates at 0.5 percent since February 2007, and economists say an increase is unlikely this year as growth risks outweigh the threat from inflation. Governor Masaaki Shirakawa's board last week cut its evaluation of exports and profits as the global slowdown crimps demand and surging commodities costs squeeze margins.

``Business investment and consumer spending will keep weakening for the time being as incomes are being eroded,'' Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo, said before the minutes were published. ``There won't be any chance for a rate increase until the Bank of Japan can see signs that the domestic economy will start gathering momentum.''

The yen traded at 107.91 per dollar at 9:50 a.m. in Tokyo from 107.93 before the minutes. The yield on Japan's five-year note fell 7.5 basis points to 1.35 percent on speculation the bank will keep rates on hold this year as growth stagnates.

Costlier Raw Materials

The seven board members agreed that Japan's growth has been slowing because of rising energy and raw-materials prices and will probably keep decelerating for the time being. Shirakawa said last week that the bank must watch both the risks to growth in the world's second-largest economy as well as inflation.

Japan faces ``considerable downside risks'' because the outlook for overseas economies and global financial markets remains ``uncertain,'' the members said at the May meeting.

``Some members said that attention should be paid to the effects of the ongoing rise in the prices of daily necessities on consumers' inflation expectations and firms' price-setting behavior,'' the minutes showed.

Finance ministers from the Group of Eight nations last week singled out spiraling food and fuel prices as their chief concern for the global economy.

``Elevated commodity prices, especially of oil and food, pose a serious challenge,'' the officials said in a statement after their annual meeting in Osaka, Japan.

Faster Inflation

Inflation is accelerating worldwide and the price of oil reached an unprecedented $139.89 a barrel on June 16.

``Financial markets continue to focus on inflation and the chance for rate hikes,'' said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. ``But the risk of a global economic slowdown is definitely increasing.''

Japan's core consumer prices, which exclude fresh food, climbed 0.9 percent in April from a year earlier after rising 1.2 percent in March, the fastest pace since 1998.

A report due June 27 will probably show that core prices increased around 1.5 percent in May after a gasoline tax was reinstalled in the month, according to Daiwa SMBC's Iwashita.

Even at a decade high, inflation remains within the bank's zero to 2 percent definition of price stability and is lower than in the U.S. and Europe. Core prices in the U.S. rose 2.3 percent in May from a year earlier and European inflation surged 3.7 percent in the month, the fastest pace in 16 years.

Rising oil and commodities prices support Japan's exports to resource-rich economies as well as increase the cost of imports, some members said. Both factors need to be considered when assessing the effect of raw-materials prices on the economy, they said. Japan relies on imports for virtually all of its oil.

Some members said keeping rates low for a long time could cause economic swings, according to minutes of the April 30 meeting, also released today. The bank dropped its two-year call for raising rates in its semi-annual outlook published that day.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net
Last Updated: June 17, 2008 20:51 EDT
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Have the Gold ETF's "Tonnes in the Trust" Bottomed?

By Tim Iacono

After declining by 61 tonnes in late April, the number of "tonnes in the trust" at the SPDR Gold Shares ETF (GLD) has increased steadily over the last month.

Total inventory peaked in mid-March at 665 tonnes which would have put the world's largest gold ETF eighth in the the Gold Council's Official World Gold Holdings, between Japan at 765 tonnes and the Netherlands at 621 tonnes.

At the current level of 605 tonnes, the Gold ETF is again sneaking back up on the Dutch.

The United States ranks number one with 8134 tonnes (though no one's really sure how much is really there), followed by Germany at 3417 tonnes (it's all there) and the International Monetary Fund at 3217 tonnes (where economists seem desperate to unload some of the stuff).
Earlier this year, there was much discussion about what role the gold ETF was playing in a soaring gold price that rose from $650 per ounce last summer to over $1,000 in March.

With crude oil having risen from $70 to almost $140 during that same time, no one seems to be too concerned about the yellow metal anymore.

If yesterday's price movement is any indication, that may be changing

Taken From : http://seekingalpha.com
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U.S. Stocks Retreat, Led by Financials; Regional Banks Tumble

By Elizabeth Stanton

June 17 (Bloomberg) -- U.S. stocks fell for the first time in four days as Goldman Sachs Group Inc. predicted banks will have to raise $65 billion in new capital to cover losses and housing starts and industrial production trailed forecasts.

Zions Bancorporation tumbled the most in eight years after the Salt Lake City-based lender projected more losses from bad loans and Goldman said it remains ``cautious'' on regional banks. All 23 companies in the Standard & Poor's 500 Banks Index declined as the group slumped to its lowest level since 1996. Boeing Co. and Deere & Co. retreated on the unexpected drop in factory output, while Lennar Corp. led builders lower on a report showing new-home starts slumped to a 17-year low.

The S&P 500 lost 9.21 points, or 0.7 percent, to 1,350.93. The Dow Jones Industrial Average declined 108.78, or 0.9 percent, to 12,160.3. The Nasdaq Composite Index slid 17.05, or 0.7 percent, to 2,457.73. Two stocks decreased for each that advanced on the New York Stock Exchange.

``The growth in the market is going to be in companies that increase the supply of materials and commodities, and the area that's going to struggle is going to be financials because they're going to go through this long period of deleveraging,'' said Richard Campagna, portfolio manager at Provident Investment Counsel in Pasadena, California, which manages $3 billion. ``I don't see that changing for the next bunch of years.''

Stocks opened higher after better-than-estimated earnings at Goldman, the world's biggest securities firm, spurred speculation that the worst losses at financial companies are over. Today's retreat snapped a three day streak of gains for the S&P 500, its longest of the month.

Regional Banks Tumble

Zions, the lender with operations in 10 western U.S. states, tumbled 10 percent to $33.37 for the steepest decline in the S&P 500. Weakness in residential construction and land values in the Southwest will harm loans and is ``expected to persist into 2009,'' Zions said in a presentation attached to a regulatory filing today.

Goldman analysts led by New York-based Richard Ramsden said investors should sell regional banks such as Marshall & Ilsley Corp., which is on its ``conviction sell'' list, and buy trust banks such as Bank of New York Mellon Corp. and State Street Corp., on the firm's ``conviction buy'' list.

Marshall & Ilsley, Wisconsin's biggest bank, fell 5.2 percent to $18.21, a seven-year low.

$65 Billion More

Large lenders also declined. The Goldman analysts said U.S. banks may need to raise $65 billion in additional capital as losses and writedowns continue into the first quarter of 2009. Declining home prices, expected to continue falling through the year, are driving the deterioration in the credit markets, Goldman said.

Bank of America Corp. lost $1.08 to $29.24. JPMorgan Chase & Co. retreated 90 cents to $39.04. American International Group Inc., the world's largest insurer by assets, fell 5.1 percent to $32.38 for the biggest drop in the Dow average after saying it will take a $27 million pretax charge in the second quarter to cut jobs in a home-lending unit.

The S&P 500 Banks Index declined 4.2 percent, while the S&P 500 Financials Index fell 2.9 percent as 87 of its 90 companies retreated.

Boeing, the world's second-largest commercial airplane maker, lost 64 cents to $74.38. Deere, the biggest maker of tractors, slid $1.40 to $79.20.

Production in factories, mines and utilities declined 0.2 percent last month after dropping 0.7 percent in April, the Fed reported. Economists had forecast a gain of 0.1 percent. Capacity utilization, which measures the proportion of plants in use, fell to 79.4, the lowest since September 2005, when Hurricane Katrina disrupted manufacturing and oil production along the U.S. Gulf Coast.

Housing Slump

Lennar led declines in 13 of 15 homebuilders in S&P indexes. Housing starts fell 3.3 percent to a 975,000 pace from a revised 1.008 million in April, the Commerce Department said. The reading was below economists' forecasts and the lowest since March 1991. Building permits, a sign of future construction, fell 1.3 percent to a 969,000 rate.

Marathon Oil Corp. added 3.1 percent to $53.07, its seventh straight advance. The market is undervaluing the company's production operations, wrote Sanford C. Bernstein analyst Neil McMahon. The company ``could be on the radar screen as an acquisition target,'' Bernstein said.

Energy Rally

Thirty-six of 37 energy companies in the S&P 500 advanced, leading the group to a 1.7 percent gain, even as crude oil fell for a third straight day. Chevron Corp., the second-biggest U.S. oil company, rose the most in the Dow average. Energy is the best-performing group in the S&P 500 over the past 12 months as oil has almost doubled and natural gas has climbed more than 60 percent.

Crude oil for July delivery fell 0.5 percent to settle at $134.01 a barrel on the New York Mercantile Exchange, while natural gas added 0.2 percent to $12.952 per million British thermal units, the highest price since December 2005.

Goldman lost $2.65 to $179.44 after climbing as much as $3.80 earlier. Net income declined to $2.09 billion, or $4.58 a share, in the three months ended May 30 from $2.33 billion, or $4.93, a year earlier, the New York-based company said. The average estimate of 19 analysts surveyed by Bloomberg was for $3.42 a share.

``When any major financial reports you always worry about skeletons in the closet, and for the most part Goldman's seems pretty clean,'' said Robert Stimpson, portfolio manager at Oak Associates Ltd. in Akron, Ohio, which manages $1.4 billion, including Goldman shares. ``It's kind of a sigh of relief.''

CME, Monsanto

CME Group Inc. climbed 5.3 percent to $441.82 for the biggest gain in the S&P 500. The world's largest futures exchange received Department of Justice approval yesterday for its planned acquisition of the New York Mercantile Exchange. The $8.6 billion deal still requires shareholder and regulatory approval. Citigroup Inc. raised the shares to ``buy'' from ``hold.''

Monsanto Co., maker of Roundup weed killer, advanced 5 percent to a record $142.69, leading gains in materials companies. Syngenta AG of Switzerland, the world's biggest maker of agricultural chemicals, may raise pesticide prices 10 percent next year to offset rising oil prices, its chief executive said.

CF Industries Holdings Inc., operator of North America's two largest nitrogen-fertilized plants, and Mosaic Co., the world's biggest maker of phosphates for agriculture, also rallied to records.

Prices paid to U.S. producers rose 1.4 percent in May, the biggest increase since November, a Labor Department report showed. Food prices increased 0.8 percent and fuel advanced 4.9 percent. Excluding food and energy, prices climbed 0.2 percent, matching economists' forecasts.

Infinera Corp. fell 26 percent to $10.28, the biggest drop since its June 2007 initial public offering. The maker of high- speed network systems forecast 2008 revenue below its previous projection. Adjusted revenue for the year will rise 10 percent from fiscal 2007 invoiced shipments of $309.3 million, the company said. Infinera previously projected 25 percent growth on the same basis.

To contact the reporters on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.

Last Updated: June 17, 2008 16:27 EDT
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JPY Crosses Testing Resolve

00:22 GMT, Jun 18 2008

by Sean Lee from Sydney

Tags: aud/jpy, eur/jpy

The market is always right. The corollary to this is that I am usually wrong; especially when it comes to EUR/JPY. I though this cross would be back under 150.00 by now, after the G8 FX meeting of 4 months ago. I got that very wrong.

A break now above 167.70 will probably put some serious strain on any short positions left in the market. Additionally, AUD/JPY is now breaking above 102.00 technical resistance and that is one very expensive pair to be short.

There is also talk of large stops above 108.60 in USD/JPY and if they go off, it will be hard to pull the EUR/JPY up before 170.

Taken from : http://www.reutersfxhub.com
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