Non-Farm Payrolls Drop -533k, More Losses to Come

Daily Forex Fundamentals | Written by GFT | Dec 05 08 14:47 GMT |

Non-farm payrolls dropped 533k last month with the unemployment rate soaring to 6.7%, the highest level since 1993. September and October job losses were also revised to worse numbers. There is no capitulation bottom when it comes to the labor market which means that negative non-farm payrolls will continue. This number spells big trouble for the next retail sales reports and will pressure the Federal Reserve to make the tough decision of cutting interest rates by 75bp on December 16 to 0.25%. The weak labor market number will mean two things - more weakness for US equities and the possibility of the Federal Reserve taking interest rates to zero. By extension, it will lead to weakness in USD/JPY, EUR/USD, GBP/USD and all of the Japanese Yen Crosses. Here are my thoughts on why large job losses will continue beyond number - fade any bounces in non-farm payrolls in the coming months Large Job Losses to Continue Beyond November Don't expect the job losses to end in November either. More layoffs have been announced this past week by companies like JPMorgan and AT&T. The current recession is the closest to the 1980s recession, when job losses continued for 17 consecutive months. Even the recession in 2001, which was shallower than the current recession had 15 consecutive months of job losses. Therefore non-farm payrolls should continue to remain negative into the first half of 2009. Furthermore, a large drop in non-farm payrolls does not mean that we have hit a bottom. In analyzing non-farm payrolls data during past recessions, we see that at the beginning of an official recession, as defined by the National Bureau of Economic Research, non-farm payrolls start to decline rapidly. However after falling between 200k and 300k, job cuts stall and then pick up once again. We saw this trend in the 1981 to 1982 recession, the 1990 to 1991 recession and during the 2001 recession. It should happen again in 2009. The following chart illustrates the double dip trend of non-farm payrolls during the 2001 and recession. Here are the charts for 1991 and 1981 Kathy Lien http://www.gftforex.com DISCLAIMER: GFT refers to Global Futures & Forex, Ltd. and all of its divisions, branches and subsidiaries, including Global Forex Trading and GFT Global Markets UK Limited. GFT Global Markets UK Limited is authorized and regulated by the United Kingdom Financial Services Authority. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful. Trading of foreign exchange contracts, contracts for differences, derivatives and other investment products which are leveraged, can carry a high level of risk, and may not be suitable for all investors. It is possible to lose more than the initial investment. In Australia, GFT means Global Futures & Forex, Ltd. ARBN 103 508 461, AFS Licence 226625. A Product Disclosure Statement (PDS) is available at www.gft.com.au. You should read and consider the PDS before making any decision to deal in GFT products. © 2008 Global Futures & Forex, Ltd. All rights reserved.

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Employment: Teeth of the Recession Continue to Grind

Daily Forex Fundamentals | Written by Wachovia Corporation | Dec 05 08 14:43 GMT |

Nonfarm employment fell 533,000 with declines in manufacturing, construction, retail & business services and finance. Meanwhile, the unemployment rate rose to 6.7 percent with the diffusion index down to just 40 percent. Aggregate hours declined for the eighth month in a row, signaling a drop of five percent in fourth quarter GDP. Employment Declines Signal Broad Consumer Weakness Job declines were widespread with losses in manufacturing, construction and retail, financial and business services. The only bright spots remaining are health care and education. Over the last year, the breadth of industries adding jobs has dropped sharply suggesting broad weakness in consumer spending and dismal consumer confidence. Unemployment Up, Output Down Rising unemployment rates have been driven by a loss of jobs and are consistent with weakness in consumer spending and the drop in consumer sentiment. Unemployment rates remain significantly different by education cohort. Hours worked have declined, and this drop is consistent with negative five percent growth in fourth quarter GDP. Wachovia Corporation http://www.wachovia.com Disclaimer: The information and opinions herein are for general information use only. Wachovia Corporation and its affiliates, including Wachovia Bank, N.A., do not guarantee their accuracy or completeness, nor does Wachovia Corporation or any of its affiliates, including Wachovia Bank, N.A., assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or any foreign exchange transaction, or as personalized investment advice. Securities and foreign exchange transactions are not FDIC-insured, are not bank-guaranteed, and may lose value.

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Canada's Job Bonanza Comes to an Abrupt Halt

Daily Forex Fundamentals | Written by RBC Financial Group | Dec 05 08 14:18 GMT |

Employment dropped by 70,600 in November, a much steeper decline than market expectations of a 25,000 dip. Some of the weakness reflected anticipated job cuts associated with the temporary hiring of workers for October's federal election. StatsCan reported that 27,000 public administration jobs were cut in November. The unemployment rate edged up to 6.3% from 6.2% in October marking a two-year high. The decline in public sector jobs was almost matched with a similar number of private sector job cuts. There were cuts to both full-time (-32,400) and part-time (-38,000) employment. The goods sector saw the number of employed fall by 32,800, while service sector jobs were reduced by 37,800. There were large job losses in agriculture (-10,100) and manufacturing (-38,300) on the goods side with trade (-8,900), transportation and warehousing (-26,000) and educational services (-15,600) supplementing the job cuts in public administration on the services side of the economy. Tempering these declines somewhat were increases in the scientific services, health care, food and accommodation services and cultural industries. Ontario bore the brunt of job losses in the month, with 66,000 workers cut from payrolls, 42,000 of which were in manufacturing positions. Ontario's unemployment rate jumped to 7.1% from 6.5% in October. The key wage measure in the report, average hourly wages for permanent workers, rose 0.5% in November with the year-over-year rate picking up pace to 4.7% from 4.2% in October. The sharper-than-expected cut to November payrolls and the steady increase in the unemployment rate from its recent low of 5.8% in February are consistent with an economy that is gearing down after a modest acceleration in growth in the third quarter. The deepening recession in the United States and persistent financial market turmoil are negatively affecting Canada's growth outlook and we expect they will weigh on the labour market going forward. Our forecast is that the unemployment rate will continue to drift higher into next year as weak demand for Canadian exports and slower consumer and business spending lead to more job losses. Today's data is the one of the final reports before the Bank of Canada's meeting next week. We expect the Bank to lower the overnight rate by 50 basis points to 1.75% as policymakers try to cushion the economy from the impact of these downward pressures. RBC Financial Group http://www.rbc.com The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

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Canada's Job Bonanza Comes to an Abrupt Halt

Daily Forex Fundamentals | Written by RBC Financial Group | Dec 05 08 14:18 GMT |

Employment dropped by 70,600 in November, a much steeper decline than market expectations of a 25,000 dip. Some of the weakness reflected anticipated job cuts associated with the temporary hiring of workers for October's federal election. StatsCan reported that 27,000 public administration jobs were cut in November. The unemployment rate edged up to 6.3% from 6.2% in October marking a two-year high. The decline in public sector jobs was almost matched with a similar number of private sector job cuts. There were cuts to both full-time (-32,400) and part-time (-38,000) employment. The goods sector saw the number of employed fall by 32,800, while service sector jobs were reduced by 37,800. There were large job losses in agriculture (-10,100) and manufacturing (-38,300) on the goods side with trade (-8,900), transportation and warehousing (-26,000) and educational services (-15,600) supplementing the job cuts in public administration on the services side of the economy. Tempering these declines somewhat were increases in the scientific services, health care, food and accommodation services and cultural industries. Ontario bore the brunt of job losses in the month, with 66,000 workers cut from payrolls, 42,000 of which were in manufacturing positions. Ontario's unemployment rate jumped to 7.1% from 6.5% in October. The key wage measure in the report, average hourly wages for permanent workers, rose 0.5% in November with the year-over-year rate picking up pace to 4.7% from 4.2% in October. The sharper-than-expected cut to November payrolls and the steady increase in the unemployment rate from its recent low of 5.8% in February are consistent with an economy that is gearing down after a modest acceleration in growth in the third quarter. The deepening recession in the United States and persistent financial market turmoil are negatively affecting Canada's growth outlook and we expect they will weigh on the labour market going forward. Our forecast is that the unemployment rate will continue to drift higher into next year as weak demand for Canadian exports and slower consumer and business spending lead to more job losses. Today's data is the one of the final reports before the Bank of Canada's meeting next week. We expect the Bank to lower the overnight rate by 50 basis points to 1.75% as policymakers try to cushion the economy from the impact of these downward pressures. RBC Financial Group http://www.rbc.com The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

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U.S. Payrolls Plunge

Daily Forex Fundamentals | Written by RBC Financial Group | Dec 05 08 14:19 GMT |

Today's labour force report was very weak, with payrolls dropping by a breathtaking 533,000 in November. Revisions to the data for October and September were also to the downside, with October's job losses revised up to 320,000 from 240,000 and September's decline revised to 403,000 from 284,000. The household survey indicated that the unemployment jumped 0.2% to 6.7% in November to stand at its highest level since October 1993. The weakness was broad-based; only government employment rose (by a paltry 7,000) of the major industry categories. Goods producers cut payrolls by 163,000, while service-providers trimmed a whopping 370,000 from their payrolls. Manufacturers cut another 85,000 positions, while the construction industry reduced employment by 82,000. Wholesalers (-23,000) and retailers (-91,000) also continued to pare back their workforce. Transportations companies lost 147,000 and financial firms trimmed 32,000 jobs. The average workweek slipped to 33.5 hours and hours worked in the manufacturing sector fell 40.3 hours, down from 41 as recently as July. Overtime hours continued to slide and came in at 3.3 hours. The index of aggregate weekly hours, which reflects the combined effect of hours and employment, fell 0.9% in November, building on October's 0.4% dip. In October/November, this index contracted at an annualized 5% compared to the third-quarter average. The monthly pace of wage gains, which slowed to a 0.2% rate in recent months, picked up to 0.4% in November and the year-over-year rate of the key wage measure in the report picked up to 3.7% from 3.6% in October. The U.S. economy has shed 1.9 million jobs so far in 2008, the fastest 11-month decline since the period ending January 2002, with the unemployment rate rising two percentage points in the past 12 months. With the number of unemployed growing rapidly, a financial market crisis that has yet to let up and a housing market still in recession, U.S. consumers are likely to continue to retrench and we expect another significant contraction in spending in the fourth quarter. Earlier reported data for November present an equally bleak picture and we forecast that the U.S. economy will contract at a 3.5% annualized pace in the quarter, which would mark the largest one-quarter slump since the early 1980s. This round of bleak economic news sets up for the Fed to lower the funds target again when they meet later this month and we anticipate a 50 basis-point rate cut to be announced. While there are some tentative signs that interbank funding rates and mortgage rates have eased up a bit in recent weeks, there's still a ways to go before credit market conditions will provide support to the economy, which means that the Fed will work to keep rates low and be vigilant in supporting areas of the market that come under duress. RBC Financial Group http://www.rbc.com The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

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Bini Says ECB Cut ‘Adequate,’ Must Now Be Passed on

By Lorenzo Totaro and Flavia Krause-Jackson

Dec. 5 (Bloomberg) -- The European Central Bank did an “adequate” move yesterday as it lowered the benchmark interest rate by three-quarters of a percentage point to 2.5 percent, executive board member Lorenzo Bini Smaghi said.

“I think this was an adequate move,” Bini Smaghi said in a radio interview with Italy’s RAI broadcaster. “It is now necessary that this cut is passed on to consumers with a mortgage and companies.”

The European Central Bank’s rate reduction yesterday was the biggest in its history. Policy makers are battling to restore the flow of credit in the world’s industrialized economies after the financial crisis intensified in the wake of Lehman Brothers Holdings Inc.’s bankruptcy in September.

“There was a moment of panic after the collapse of Lehman Brothers,” Bini Smaghi said. “Citizens were wondering if their savings were safe. But this panic has subsided thanks to the strong reaction of the system, of governments and of the central bank.”

Bini Smaghi said that investors in financial markets are now showing “a lot prudence.”

“People are investing in very liquid financial tools such as deposits and government bonds,” he said. “This limits the economic recovery and the normal activity of intermediation, but we avoided and overcame the panic.”

The European Central Bank predicts a “modest” economic recovery in 2009, Bini Smaghi said.

To contact the reporters on this story: Lorenzo Totaro at in Rome or ltotaro@bloomberg.netFlavia Krause-Jackson in Rome at fjackson@bloomberg.net;

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U.S. November Employment Situation: Statistical Summary (Table)

By Kristy Scheuble

Dec. 5 (Bloomberg) -- Following is a summary of the November employment situation from the Labor Department.

==============================================================================
                       Nov.    Oct.    Sept.   Aug.    July    June   3-month
                       2008    2008    2008    2008    2008    2008   Average
==============================================================================
Unemployment rate         6.7%    6.5%    6.1%    6.1%    5.7%    5.5%    6.4%
Rate (3 decimals)      6.682%  6.502%  6.125%  6.055%  5.682%  5.505%  6.436%
Avg. hourly earnings      0.4%    0.3%    0.2%    0.4%    0.3%    0.3%    0.3%
Avg. weekly hours         33.5    33.6    33.6    33.7    33.7    33.7    33.6
------------------------------------------------------------------------------
Nonfarm employment        -533    -320    -403    -127     -67    -100    -419
Previous estimate        n/a     -240    -284    -127     -67    -100    n/a
Net Revision             -199
Manufacturing              -85    -104     -69     -61     -40     -44     -86
Previous estimate        n/a      -90     -56     -61     -40     -44    n/a
Household employment      -673    -297    -222    -342     -72    -155    -397
------------------------------------------------------------------------------
==============================================================================
                       Nov.    Oct.    Sept.   Aug.    July    June   3-month
                       2008    2008    2008    2008    2008    2008   Average
==============================================================================
                        ------------Monthly Change in Employment------------
Nonfarm employment        -533    -320    -403    -127     -67    -100    -419
Total private             -540    -362    -384    -139    -106    -110    -429
Goods-producing          -163    -167    -117     -70     -54     -86    -149
Construction              -82     -64     -55     -20     -23     -50     -67
Manufacturing             -85    -104     -69     -61     -40     -44     -86
Service providing         -370    -153    -286     -57     -13     -14    -270
Trade, transport         -147    -101    -121     -47     -38     -20    -123
 Retail trade             -91     -62     -76     -28     -22      -8     -76
Information               -19      -6      -6      -4      -9      -5     -10
Financial                 -32     -31     -23     -10      -7     -13     -29
Business services        -136     -63     -65     -50     -23     -55     -88
 Temporary help           -78     -45     -45     -38     -24     -36     -56
Education, health          52      28      -4      62      44      71      25
Leisure, hospitality      -76     -25     -52     -16     -24       0     -51
Government                  7      42     -19      12      39      10      10
------------------------------------------------------------------------------
==============================================================================
                       Nov.    Oct.    Sept.   Aug.    July    June   3-month
                       2008    2008    2008    2008    2008    2008   Average
==============================================================================
                       ----------------------Earnings-----------------------
Avg. hourly earnings    $18.30  $18.23  $18.17  $18.14  $18.06  $18.00  $18.23
MOM% change              0.4%    0.3%    0.2%    0.4%    0.3%    0.3%    0.3%
YOY% change              3.7%    3.6%    3.4%    3.6%    3.4%    3.4%    3.6%
Avg. weekly earnings   $613.05 $612.53 $610.51 $611.32 $608.62 $606.60 $612.03
MOM% change              0.1%    0.3%   -0.1%    0.4%    0.3%    0.3%    0.1%
YOY% change              2.8%    3.0%    2.8%    3.3%    3.1%    2.8%    2.9%
                       --------------------Hours of Work--------------------
Total private             33.5    33.6    33.6    33.7    33.7    33.7    33.6
MOM% change             -0.3%    0.0%   -0.3%    0.0%    0.0%    0.0%   -0.2%
Manufacturing             40.3    40.5    40.5    40.9    41.0    41.0    40.4
MOM% change             -0.5%    0.0%   -1.0%   -0.2%    0.0%    0.0%   -0.5%
 Overtime                 3.3     3.5     3.5     3.7     3.8     3.8     3.4
                       --------------------Aggregate Hours--------------------
Aggregate hours index    104.7   105.7   106.1   106.8   106.9   107.0   105.5
3-month annualized      -5.1%   -3.0%   -2.2%   -1.8%   -1.7%   -0.9%    n/a
MOM% change             -0.9%   -0.4%   -0.7%   -0.1%   -0.1%   -0.1%   -0.7%
==============================================================================
                       Nov.    Oct.    Sept.   Aug.    July    June   3-month
                       2008    2008    2008    2008    2008    2008   Average
==============================================================================
                       -----------Labor Force Status (thousands)-------------
Pool available labor    15,695  15,046  14,544  14,172  13,781  13,387  15,095
Level change              649     502     372     391     394     134     508
Augmented Unemp. Rate     9.8%    9.4%    9.1%    8.9%    8.6%    8.4%    9.4%
Civilian labor force   154,616 155,038 154,732 154,853 154,603 154,390 154,795
Level change             -422     306    -121     250     213    -144     -79
Participation rate      65.8%   66.1%   66.0%   66.1%   66.1%   66.1%   66.0%
Employment            144,285 144,958 145,255 145,477 145,819 145,891 144,833
 Level change            -673    -297    -222    -342     -72    -155    -397
Employment ratio        61.4%   61.8%   62.0%   62.1%   62.4%   62.4%   61.7%
Unemployment           10,331  10,080   9,477   9,376   8,784   8,499   9,963
 Level change             251     603     101     592     285      12     318
Avg. duration (wks)      18.8    19.7    18.4    17.4    17.1    17.5    19.0
Median duration          10.0    10.6    10.2     9.2     9.7    10.0    10.3
Not in labor force      80,212  79,575  79,628  79,253  79,261  79,237  79,805
Level change              637     -53     375      -8      24     366     320
Job leavers               9.0%    9.3%   10.2%   10.7%    9.8%    9.9%    9.5%
==============================================================================
                       Nov.    Oct.    Sept.   Aug.    July    June   3-month
                       2008    2008    2008    2008    2008    2008   Average
==============================================================================
                       --------------------Diffusion Index--------------------
Private nonfarm          27.6    37.8    35.9    46.2    38.3    42.3     33.8
3-mo. average           33.8    40.0    40.1    42.3    42.3    44.8     n/a
Manufacturing            21.4    26.8    25.0    37.5    26.8    30.4     24.4
3-mo. average           24.4    29.8    29.8    31.6    33.9    36.7     n/a
==============================================================================
NOTE: All figures seasonally adjusted. Employment figures in thousands.
The augmented unemployment rate is the number of job wanters plus the number
unemployed divided by the labor force plus the number of job wanters.

To contact the reporter on this story: Kristy Scheuble in Washington at kmckeaney@bloomberg.net

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German Factory Orders Drop; European Demand Collapses

By Joshua Gallu and Gabi Thesing

Dec. 5 (Bloomberg) -- Manufacturing orders in Germany slumped more than economists expected in October as European demand for plant and machinery collapsed.

Orders, adjusted for seasonal swings and inflation, fell 6.1 percent from September, when they dropped 8.3 percent, the Economy Ministry in Berlin said today. Economists expected a decline of 0.5 percent, the median of 39 forecasts in a Bloomberg News survey showed. It’s the tenth decline in the past 11 months. Bonds rose and the euro dropped.

Manufacturers are cutting output and spending as financial market turmoil pushes up borrowing costs and stalling global growth erodes demand. Europe, Germany’s biggest export market, falls deeper into recession, companies like truck maker MAN AG and chemical maker BASF SE are reining in production. The Bundesbank today forecast the deepest German recession in 16 years for 2009.

“Germany’s industry is drowning,” said Carsten Brzeski, an economist at ING Group in Brussels. “November is unlikely to be any better because no matter how good German products are, if people don’t want to buy, they don’t want to buy. It’s not going to get better any time soon.”

From a year earlier, orders fell 17.3 percent. Foreign demand declined 6.2 percent in the month, today’s report showed, while domestic orders slid 6.1 percent. Euro-area orders slid 7.4 percent, led by an 11.2 percent drop for plant and machinery.

Global Action

Governments and central banks around the world are boosting spending and lowering borrowing costs as the biggest economies slide into the first simultaneous recession since the Second World War. The U.S. economy, the world’s largest, entered a recession a year ago, the panel that dates American business cycles said on Dec. 1, already making the contraction the longest since 1982.

Audi AG, the luxury-car brand of Volkswagen AG, said on Dec. 2 that U.S. sales fell 25 percent last month as the shrinking economy discouraged consumers from making big purchases.

The European Central Bank yesterday delivered the biggest rate cut in its 10-year history, reducing the benchmark rate by 75 basis points to 2.5 percent. That’s the lowest rate since May 2006. The Bank of England cut its key rate by a 100 basis points to 2 percent, after lopping 150 points off that rate last month. The U.K. is the third largest destination for German exports.

“Global and euro-area demand are likely to be damped for a protracted period of time,” ECB President Trichet said at a press conference in Brussels yesterday.

European Contraction

The economy of the 15 euro nations, which buy over 40 percent of Germany’s exports, will probably shrink 0.5 percent next year after growing percent in 2008, ECB staff forecasts showed.

“Leading indicators for German trading partners are in a free fall,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “The biggest problems may still be ahead. We’ve seen orders weakening, and if they don’t pick up, the downturn will either sharpen or last longer.”

The 3.75 percent bond due January 2019 rose 0.53, or 5.3 euros per 1,000-euro ($1,271) face amount, to 106.13 by 11:08 a.m. in London. The euro extended its decline to as low as $1.2708 from $1.2763 before German orders figures were released.

European manufacturing contracted by the most on record last month and German business confidence fell to the lowest level in almost 16 years.

ECB Efforts

The ECB’s rate cut “probably won’t help much in the short term, but may lead to a stabilization in the medium term,” said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt. “Basic goods and consumer goods are still developing weakly” and the outlook for the auto industry has deteriorated.

MAN, Europe’s third-largest truck maker, will cut production of commercial vehicles next year and shut plants for as many as 50 working days during the first half of next year. The Munich-based company said Dec. 3 it is bracing for a “very difficult” 2009.

Still, European governments are coordinating a spending plan to cushion their 27-nation economy from the effects of the global recession. German lawmakers today backed a stimulus plan that aims to unlock 50 billion euros ($64 billion) of investment.

Even so, “the continuing adverse factors going into next year are to be rated as severe,” causing the economy to contract 0.8 percent next year, the most since 1993, the Bundesbank said today.

To contact the reporter on this story: Joshua Gallu in Zurich jgallu@bloomberg.net

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German Bundesbank Sees Deepest Recession in 16 Years

By Gabi Thesing and Christian Vits

Dec. 5 (Bloomberg) -- The German economy, Europe’s largest, will shrink the most in 16 years in 2009 as the global recession hits exports, the Bundesbank predicted.

The economy will contract 0.8 percent next year after expanding 1.6 percent in 2008, the Frankfurt-based central bank said in its semi-annual macroeconomic projections published today. That would be the worst economic performance since 1993, when the economy also slumped by 0.8 percent. Exports will decline 0.5 percent in 2009 after expanding 4.4 percent this year, the projections show.

Germany’s economy is already in a recession as the global financial crisis curbs demand and prompts companies to scale back production. The International Monetary Fund forecasts that advanced economies will contract simultaneously next year for the first time since World War II. Central banks around the world have cut interest rates in an attempt to limit the slump.

Germany’s economy is likely to shrink for a third successive quarter in the final three months of this year and “will therefore be going into next year from an already depressed level and with considerable existing strains in terms of general sentiment,” the Bundesbank said. “The German economy is not expected to pick up again until the projected global economic upturn in 2010.”

‘Massive Cooling’

The Bundesbank forecasts growth of 1.2 percent in 2010.

“A lower exchange rate, the sharp decline in the cost of oil and easing price pressures” are “positive factors for the economy as a whole,” it said. “To a large extent, however, this development reflects the massive cooling of the global economy.”

German business confidence slumped to the lowest level in almost 16 years in November as the global slowdown sapped demand for exports. Manufacturing orders tumbled 6.1 percent in October from the previous month, the government said today.

Germany’s unemployment rate will rise to 8.1 percent next year and 8.5 percent in 2010 from 7.8 percent this year, the Bundesbank forecast. Private consumption is seen growing just 0.1 percent in 2009 after contracting 0.4 percent this year.

“Negative confidence effects as well as gloomier sales prospects are likely to induce households and enterprises to be generally more cautious in their spending.”

Germany’s inflation rate may fall to less 0.5 percent in the middle of 2009 “or even become negative,” the bank said. Still, “deflationary effects, as feared by some, are not likely as things currently stand.”

Inflation in Germany peaked at 3.5 percent in July. It will average 0.8 percent next year and 1.4 percent in 2010, according to the Bundesbank.

The European Central Bank lowered its key rate by three- quarters of a percentage point to 2.5 percent yesterday to cushion the economic slowdown, the biggest cut in its 10-year history.

To contact the reporter on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net

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Kashkari Says TARP Working, Banks Obligated to Lend

By John Brinsley

Dec. 5 (Bloomberg) -- The U.S. Treasury’s $700 billion financial-rescue plan will benefit consumers and businesses because banks have an obligation to lend money they receive from the government, the head of the program said.

“We are confident we are pursuing the right strategy to stabilize the financial system and support the flow of credit to our economy,” Neel Kashkari, the Treasury’s interim assistant secretary in charge of the Troubled Asset Relief Program, said in a speech today in Washington. “As confidence returns, we expect to see more credit extended.”

The comments come as members of Congress heighten their criticism of Treasury Secretary Henry Paulson’s management of the program. Two top Democratic lawmakers yesterday warned that Paulson, who has used all but $20 billion of the first half of the funds, may not get the remaining $350 billion.

Kashkari said the banking system is “more stable” now than in October, when Congress passed the legislation. Firms that have taken money from the program should increase their lending, “particularly in this time of economic disruption,” he told a Mortgage Bankers Association conference.

Banks “have an obligation to continue making credit available to creditworthy borrowers and an obligation to work with borrowers who are struggling to avoid preventable foreclosures,” he said. “This lending won’t materialize as fast as any of us would like, but it will happen much faster as a result of using the TARP.”

‘Healthy Banks’

Kashkari said the narrowing of credit-default swap spreads for the nation’s eight largest banks shows the program is working.

Paulson is under fire for dropping plans to buy toxic mortgage assets, as originally intended, and instead directly injecting capital into banks. Republican lawmakers this week sent a letter to the Treasury chief saying they would block a request for the second half of the funds without more details on how the money is being used.

Senate Banking Committee Chairman Christopher Dodd, Democrat of Connecticut, yesterday said he would be “a very hard person to convince that this crowd deserves to have their hands on the next $350 billion.”

Another Democratic leader, House Financial Services Committee Chairman Barney Frank of Massachusetts, yesterday said The Treasury has ignored the “clear congressional intent” of the TARP to reduce home foreclosures.

Kashkari said the Treasury is working to determine the impact of the capital injections, a point raised by a report this week from the Government Accountability Office, which called on the department to bolster its supervision of the plan.

“Tracking where individual dollars flow through an organization is also difficult,” Kashkari said.

To contact the reporters on this story: John Brinsley in Washington at jbrinsley@bloomberg.net;

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Canada Lost 70,600 Jobs, Most Since ‘82, on Factories

By Greg Quinn

Dec. 5 (Bloomberg) -- Canadian employment fell by the most since 1982 in November, led by manufacturing, a sign the world’s eighth-largest economy is falling victim to a global recession.

Employers shed a net 70,600 workers, almost three times as many as economists anticipated, after a gain of 9,500 in October. The unemployment rate rose to a two-year high of 6.3 percent from 6.2 percent the month before.

The figures come a day after Prime Minister Stephen Harper suspended Parliament to prevent being toppled by opposition parties who say he hasn’t done enough to help an economy that may have already slipped into recession. Bank of Canada Governor Mark Carney will probably cut interest rates by half a point to 1.75 percent on Dec. 9, the lowest in more than 50 years, according to economists surveyed by Bloomberg.

“It makes a stronger case for the Bank of Canada to move 50 basis points” next week, said Millan Mulraine, an economics strategist at TD Securities Inc. in Toronto. “A case could be made they might do a bit more. Our official call is for 50, but central bankers have shown a willingness to do more.”

Factory owners slashed payrolls by 38,300 workers in November, the most since January 2006, and another 26,000 jobs were lost in transportation and warehousing. Employment in public administration fell by 26,700, after hiring in that sector jumped by 39,800 in October as Canada geared up for national elections on Oct. 14.

Currency Fell

The Canadian dollar weakened 1.5 percent to C$1.2950 per U.S. dollar at 9:28 a.m. in Toronto from C$1.2757 late yesterday.

The economy is suffering from weak demand in the U.S. and slumping prices for commodities such as oil and wheat, which generate about half the country’s export revenue. Automakers and forestry companies have been among the hardest hit.

Ontario, Canada’s manufacturing hub, fared the worst among provinces in November with a 66,000 net job loss. Ontario’s unemployment rate jumped to 7.1 percent from 6.5 percent in October, matching neighboring Quebec for the first time in more than three decades, Statistics Canada said.

Magna International Inc., North America’s largest auto- parts supplier, said Nov. 26 it will close two plants employing 850 workers in Ontario because of “difficult economic conditions” that have sapped vehicle production and demand.

Ontario Woes

Ontario’s job losses continued today, with Canadian Press reporting that General Motors Corp. plans to temporarily eliminate a 700-worker shift at an Oshawa plant in February. General Motors, Chrysler LLC and Ford Motor Co. are seeking government loans to stay afloat and their plants in Ontario are among Canada’s biggest private employers.

Carney and Deputy Governor Pierre Duguay said in speeches last month that policy makers will likely need to cut the bank’s benchmark interest rate because risks to the economy “appear to have shifted to the downside.”

Gross domestic product in Canada will contract 1 percent in the current quarter and 0.4 percent in the first quarter of 2009, meeting the technical definition of a recession, according to government forecasts. Consumer spending is slowing and exports will probably decline next year on commodity prices and as U.S. and global demand wane.

The Organization for Economic Cooperation and Development on Nov. 13 said there will be recessions in the U.S., Japan and the 15-nation euro zone economy next year.

U.S. Jobs

U.S. employers cut 533,000 jobs in November, the fastest pace in 34 years, the Labor Department said today in Washington. The jobless rate rose to 6.7 percent, leaving it above Canada’s for a second month. That hasn’t happened for two straight months since 1981.

Harper yesterday “prorogued” or shut down the country’s legislature for more than seven weeks in a bid to stave off a challenge from opposition parties seeking to bring down his government. Harper, re-elected in October, said Governor General Michaelle Jean, who acts as the country’s head of state, agreed to his request to close Parliament until Jan. 26.

The government’s first order of business will be a budget scheduled for Jan. 27, Harper said, calling on the opposition to work with his administration on a “stimulus” package for the ailing economy.

The political crisis was sparked Nov. 27 when Finance Minister Jim Flaherty presented a fiscal update that included cuts to funding for political parties, limited civil servants’ right to strike and failed to offer a stimulus package to spur economic growth. Three opposition parties said they would oppose the plan and banded together.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

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U.S. Payrolls Decline by 533,000, Most Since 1974

By Bob Willis

Dec. 5 (Bloomberg) -- U.S. companies slashed payrolls at the fastest pace in 34 years as the economy headed for its deepest and longest recession since World War II.

Employers cut 533,000 jobs last month, bringing losses so far this year to 1.91 million, the Labor Department said today in Washington. November’s drop exceeded all 73 forecasts in a Bloomberg News survey. The unemployment rate rose to 6.7 percent, the highest level since 1993.

“It’s unbelievable,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts. “We’re well on our way to the worst recession of the postwar period.”

Payrolls are likely to keep sliding into next year as the collapse in credit and slump in spending hurt companies from General Motors Corp. to Citigroup Inc. and AT&T Inc. President- elect Barack Obama, confronting what he called a “crisis of historic proportions,” announced a plan last week to save or create 2.5 million jobs over two years.

Stock futures sank. Contracts on the Standard & Poor’s 500 index lost 2.1 percent to 829.90 at 8:34 a.m. in New York.

Payrolls were forecast to drop by 335,000, according to the median estimate in the Bloomberg survey. The jobless rate was projected to rise to 6.8 percent. Revisions for September and October increased job losses by 199,000. November was the 11th consecutive drop in payrolls.

‘Very Fearful’

“You are seeing the impact of the lack of credit feeding through to a lot of companies, who are very fearful,” said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, and a former congressional staff economist. “Consumer confidence is going to be bad. Personal income numbers will be awful. It is going to be a difficult winter for a lot of people.”

Factory payrolls fell 85,000 after decreasing 104,000 in October. The return of 27,000 striking machinists at Boeing Co. last month helped limit the drop.

Economists had forecast a decline of 100,000 manufacturing jobs. The decrease included a loss of 13,100 jobs in auto manufacturing and parts industries.

Today’s report also reflected the housing slump and the worst credit crisis in seven decades. Payrolls at builders dropped 82,000 after decreasing 64,000. Financial firms decreased payrolls by 32,000, after a loss of 31,000 jobs the prior month.

More to Come

“We don’t get the job losses stopping until 2010,” Kurt Karl, chief U.S. economist at Swiss Re in New York, said in a Bloomberg Television interview.

Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 370,000 workers after declining 153,000 in the previous month. Professional and business services, a category that includes temporary workers, eliminated 136,000 jobs. Retail payrolls decreased by 91,300 after a decline of 62,200.

Education and health services industries added 52,000 jobs and government payrolls increased by 7,000.

The employment slump was a key factor in determining the start of the recession. The National Bureau of Economic Research, the arbiter of U.S. business cycles, announced this week that a contraction began in December 2007, the month payrolls peaked.

At 12 months, the recession is already the longest since the 16-month slump that ended in November 1982.

Stimulus Package

The employment report, the second issued since Obama was elected president on Nov. 4, is likely to add to pressures on policy makers to craft additional stimulus measures. Obama named a team that includes New York Federal Reserve Bank President Timothy Geithner as Treasury Secretary-designate and former Fed Chairman Paul Volcker as head of a new White House panel aimed at reviving the economy.

“It’s time to not just address the immediate economic threats but to start laying the groundwork for long-term prosperity,” Obama, 47, said Dec. 3 as he announced former energy secretary Bill Richardson as his nominee for Commerce Secretary. “The most significant issue that we are facing right now is how do we put people back to work.”

The average work week shortened to 33.5 hours, the lowest since records started in 1964, from 33.6 hours, today’s report showed. Average weekly hours worked by production workers dropped to 40.3 hours from 40.5 hours, while overtime decreased to 3.3 hours from 3.5 hours.

Wages Rise

Workers’ average hourly wages rose 7 cents from the prior month, or 0.4 percent, to $18.30. Hourly earnings were 3.7 percent higher than in November 2007. Economists surveyed by Bloomberg had forecast a 0.2 percent increase from October and a 3.4 percent gain for the 12-month period.

U.S. automakers have been particularly hard hit as sales last month dropped to the lowest level in 26 years. The top executives of General Motors, Ford Motor Co. and Chrysler LLC this week appealed to Congress for as much as $34 billion in government assistance.

The Ann Arbor, Michigan-based Center for Automotive Research projects that a collapse of GM would lead to job losses totaling 2.5 million, including 1.4 million people in industries not directly tied to manufacturing. Chrysler yesterday announced it had cut 5,000 jobs last week.

Service companies are also slashing staff. AT&T, the largest U.S. phone company, will cut 12,000 jobs, striving to trim expenses as the U.S. economy falters, the Dallas-based company said in a statement yesterday. Citigroup said last month it plans to eliminate 52,000 jobs.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

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EU Carbon Output Below Cap Until 2012, Deutsche Says

By Mathew Carr

Dec. 5 (Bloomberg) -- Deutsche Bank AG forecast carbon dioxide output from factories and power stations in the European Union emissions-trading program, the world’s biggest, will be on average below the group’s limit in the five years through 2012.

Emissions in the period will be 2.076 billion metric tons a year, compared with a cap of 2.083 billion tons, Paris-based Deutsche Bank analyst Mark Lewis said today by phone.

Lewis slashed his forecast for 2009 emissions by 5.9 percent yesterday to 2.02 billion tons, which is 10 percent below 2007 levels. “This is quite a dramatic cut,” reflecting a likely severe recession, he said.

Allowances in the EU program last year became near worthless because the European Commission, regulator of the market, allowed governments in the region to hand out too many to factories and power stations.

Permits for the five years starting this year will “not crash to zero” because they can be used in later years, unlike those issued in the three years through 2007, Lewis said. Prices for the second phase through 2012 may fall near their 11.80 euro-a-metric-ton record low in the next few months, especially if crude oil prices drop further, he said.

Prices for this month today fell 0.9 percent to 14.68 euros a ton on the European Climate Exchange in London, which would be their lowest close in almost 21 months.

Traders should consider a likely shortage of permits through 2020 when buying and selling, Lewis said. He cut his forecast for emission cuts needed by all installations in the program on average for the 13 years through 2020 to 50 million tons a year from 86 million tons.

Lewis maintained his price forecast for EU allowances of 30 euros and said prices should rise to more than 45 euros by 2020.

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net

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Enel to Sell Up to 40% of Renewable-Energy Unit

By Jerrold Colten and Armorel Kenna

Dec. 5 (Bloomberg) -- Enel SpA, Italy’s biggest utility, plans to sell as much as 40 percent of its renewable-energy unit for 2.5 billion euros ($3.2 billion).

The sale will be completed by the end of next year, according to a company official who declined to be identified in line with policy.

Chief Executive Officer Fulvio Conti said Nov. 11 that the Rome-based utility may sell a minority stake in Enel Green Power if market conditions remain unfavorable for selling shares.

Earlier this year, Enel announced plans to take advantage of government incentives for renewable energy by selling a part of its green business and separating it from the company’s traditional operations of generating power from coal, gas and fuel oil sources.

The utility will spend 6.8 billion euros in the five years through 2012 on technologies such as wind farms, solar power, and carbon capture and storage, according to a March presentation.

Enel slipped as much as 2.9 percent today after Deutsche Bank AG lowered its recommendation on the stock to “sell” from “buy,” citing a deteriorating financial outlook. The bank expressed concerns that the company’s plan to sell as much as 5 billion euros of assets next year could be achieved.

“The successful implementation of those disposals is doubtful,” Madrid-based Deutsche Bank analyst Virginia Sanz De Madrid wrote in a note yesterday. The bank cut its price estimate on the stock 44 percent to 4 euros.

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Utilities to Bid for Struggling Renewables Companies, KPMG Says

By Mathew Carr

Dec. 5 (Bloomberg) -- Power utilities may bid for renewable- energy companies, which will be strapped for cash because of the credit crisis, according to a specialist in mergers and acquisitions at advisory firm KPMG.

Developers of wind farms and other non-fossil-fuel power projects “are likely to find access to capital more and more difficult,” Andy Cox, global head of energy and utilities for KMPG’s transaction services unit, said in an interview. “This may create excellent buying opportunities for utilities with cash that do not already have a long renewable pipeline,” London- based Cox said.

Carbon dioxide allowance prices in the European Union have fallen by more than half in the past five months, following a decline in energy prices, making traditional fossil-fuel-based plants more competitive. Deutsche Bank AG yesterday slashed a forecast for EU emissions saved from renewable energy in the five years through 2012 by 18 percent to 167 million tons of carbon dioxide, according to Paris-based analyst Mark Lewis.

“People are going to be able to run their coal stations for longer,” Lewis said today by telephone. He said he may further cut his estimates for savings from alternative energy through 2020, depending on how the economic recession bites.

Renewable-energy developers “will need to be realistic on pricing for deals to be consummated,” Cox said. “Projects may inevitably become delayed in the absence of financing.”

Enel SpA, Italy’s biggest utility with more than 51.4 billion euros ($65.2 billion) of debt as of Sept. 30, confirmed today it plans to sell a minority stake in its renewables unit to raise cash. The sale will be completed by the end of next year, according to an Enel official, who declined to be identified in line with company policy.

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net

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Global LNG Ship Orders Slump to Lowest Since 1998

By Dinakar Sethuraman

Dec. 5 (Bloomberg) -- The world’s biggest shipyards led by Samsung Heavy Industries Co. and Hyundai Heavy Industries Co. will record the lowest liquefied natural gas tanker orders in a decade as charter rates halve, a consultant said.

“This year saw the lowest ordering since 1998 when there were no new orders at all,” Navin Thakur, LNG shipping analyst for Drewry Maritime Services Ltd., said in a phone interview from Gurgaon, near New Delhi. Charter rates for ships transporting spot shipments have almost halved to about $42,000 a day.

Growth in LNG trade may slow to 2 percent this year after expanding 7.3 percent last year because of the delayed commissioning of ventures in Qatar, Russia and Yemen. The global recession has cut LNG demand and reduced financing for new ships. Banks which lent 90 percent of the cost of a ship are now funding less than half while borrowing costs rise, Divay Goel, director of Drewry Maritime Services Ltd., said today in Singapore.

“There are delays in LNG projects and new vessels are lying idle,” said Goel. “The vessels were delivered on time while projects did not materialize.”

LNG producers ordered six vessels of 981,000 cubic meters in total capacity this year compared with 23 in 2007 and 35 in 2006 with a combined volume of 11.34 million, he said.

Global ship orders tumbled 90 percent in October as shipowners booked a total of 37 container ships, tankers and other vessels compared with 378 a year earlier, according to Lloyd’s Registers Group.

Shares Decline

Shares of South Korea’s three shipbuilders, Hyundai Heavy, Samsung Heavy and Daewoo Shipbuilding & Marine Engineering Co., have declined more than 47 percent this year compared with a 45 percent drop in the benchmark Kospi index. Their shares rose today in line with regional stock markets after lower oil prices spurred optimism that costs will fall. Samsung Heavy rose 2.5 percent to 20,250 won, Daewoo climbed 4.4 percent and Hyundai Heavy was up 2 percent.

Charterers may have paid as much as $75,000 a day last winter for some tankers to transport the fuel while the rates since March this year have stayed below $50,000, Thakur said.

The Baltic Dry Index, a measure of commodity-shipping costs, surged to a record in May, having more than tripled in three years, and has since tumbled about 93 percent, to near six-year lows.

Shipyards delivered 39 tankers this year compared with 33 last year, and are scheduled to deliver 43 in 2009, 18 in 2010, 10 in 2011 and 4 in 2012, he said. Samsung and Daewoo account for 67 percent of the orders.

Second-Half Hopes

“The inactivity may be high in the first half of next year,” Thakur said, as these projects including Qatar, Sakhalin LNG, Tangguh LNG and Yemen LNG will ramp up shipments only in the second half.

Qatar, the world’s biggest LNG producer, has ordered 45 LNG tankers from three South Korean shipyards, each vessel capable of carrying more than 200,000 cubic meters, while the ventures producing the fuel have been delayed by a year.

Norway’s Snohvit LNG project, a new production line at Trinidad’s Atlantic LNG and Nigeria’s new train at the Bonny LNG plant are facing slower-than-expected increases in output, while Qatar’s new lines are delayed.

Only one project was approved this year at the port city of Arzew in Algeria, said Andy Flower, an industry consultant and a former executive at BP Plc’s LNG business, on Dec. 3 compared with a project each in Angola and Australia in 2007. Fewer approvals dampen orders for ships.

Most of the LNG carriers are chartered at $60,000 to $70,000 a day on a term basis for between 15 years and 25 years, Thakur said. Companies rarely order ships dedicated to spot trades unless they have access to supplies.

LNG is natural gas that has been reduced to one-six- hundredth of its original volume at minus 161 degrees Celsius (minus 259 Fahrenheit) for transportation by ship to destinations not connected by pipeline. On arrival, it is turned back into gas for distribution to power plants, factories and households.

To contact the reporter on this story: Dinakar Sethuraman in Singapore at dinakar@bloomberg.net.

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Shell, DCMR Start Investigation Into Pernis Oil Refinery Fire

By Eduard Gismatullin

Dec. 5 (Bloomberg) -- Royal Dutch Shell Plc and the DCMR Environmental Protection Agency began an investigation into a fire that broke out yesterday at Shell Pernis in Rotterdam, Europe’s largest refinery.

The facility “as a whole” is operating, Wim van de Wiel, a spokesman for Europe’s biggest oil company, said by phone from The Hague today.

Van de Wiel wouldn’t say whether some units were shut down following the incident, citing the company policy not to update media on refineries’ day-to-day operations. He also declined to estimate when the damaged pipeline that started the fire yesterday would be repaired.

The fire broke out at the refinery near Rotterdam at 1:20 p.m. local time yesterday. No injuries were reported.

Pernis has a capacity of 416,000 barrels a day.

To contact the reporter on this story: Eduard Gismatullin in London at egismatullin@bloomberg.net

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Gazprom, Taqa Agree to Build Dutch Gas Storage Site

By Lucian Kim

Dec. 5 (Bloomberg) -- OAO Gazprom agreed with Abu Dhabi National Energy Co. to jointly build the Bergermeer natural-gas storage site in the Netherlands.

The companies signed a memorandum of understanding today, the Abu Dhabi-based company said in an e-mailed statement. The start of construction is planned for the second quarter of 2009, with commercial operations due to begin four years later.

Gazprom and Taqa, as the Persian Gulf producer is known, plan to complete negotiations “in the following months” and reach a final investment decision by April, according to the statement.

Gazprom, which supplies a quarter of Europe’s gas, is seeking to expand into distribution and sales of the fuel. The state-run company agreed to take a 50 percent stake in OMV AG’s central European gas hub in Baumgarten, Austria, in January.

Taqa, which aims to become a global energy producer, bought BP Plc’s Dutch production and storage facilities last year. The company is the operator of the Bergermeer facility.

To contact the reporter on this story: Lucian Kim in Moscow at lkim3@bloomberg.net

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Pound Poised for Record Weekly Drop Against Euro After Rate Cut

By Anchalee Worrachate

Dec. 5 (Bloomberg) -- The pound was set for a record weekly drop against the euro and 10-year government bonds gained by the most in a decade after the Bank of England cut its key interest rate yesterday to the lowest level since 1951.

The pound, which strengthened today versus the euro, slid to a record low against the currency yesterday, and weakened against all but one of its 16 most-actively traded peers this week. Policy makers lowered their main rate by 1 percentage point to 2 percent as the global financial crisis pushed the British economy deeper into a recession.

“The path of least resistance is for the pound to fall further,” said Russell Jones, London-based head of global fixed income and currencies at RBC Capital Markets. “It’s most likely that policy makers will need to do more. Interest rates may need to go to zero.” Jones said he favors the dollar and the Japanese yen to sterling.

The pound strengthened to 86.61 pence per euro as of 1:58 p.m. in London, trimming its weekly drop to 4.8 percent. It earlier lost 5.5 percent in the five days, the most since the debut of the European common currency in 1999. Against the dollar, the pound was at $1.4612, from $1.4680, for a weekly drop of 5 percent, the most since the period ended Nov. 14.

U.K. government bonds rose, with 10-year gilts headed for the biggest weekly gain since Oct. 2, 1998. The yield on the 10-year gilt fell eight basis points to 3.38 percent, extending the five- day decline to 39 basis points. The 5 percent security due March 2018 rose 0.70 or 7 pounds per 1,000-pound ($1,460) face amount, to 112.80.

Jobs Report

Bonds were bolstered after a report showed U.S. employers cut jobs in November at the fastest pace in 34 years and the unemployment rate jumped as the yearlong recession in the world’s largest economy worsened. Payrolls shrank by 533,000 workers last month, the most since December 1974, after falling a revised 320,000 the prior month, the Labor Department said today.

The two-year yield dropped six basis points on the day and 45 basis points from last week to 1.76 percent. Yields move inversely to bond prices.

U.K. gross domestic product shrank by 0.5 percent in the third quarter, the first drop in 16 years. The economy may contract 1.1 percent next year, the most since 1991, the Organization for Economic Cooperation and Development said Nov. 25. Home values declined 2.6 percent in November, the biggest drop since 1992, and 16.1 percent from a year earlier, HBOS Plc, Britain’s biggest mortgage lender, said this week.

Pimco’s View

Further declines by the pound may be limited, according to money managers. Pacific Investment Management Co., which said as recently as September the pound was “overvalued,” and Millennium Asset Management have exited or cut bets the currency will weaken after a series of rate cuts by the Bank of England.

“If you were shorting the pound, now is the time to reduce those positions,” said Myles Bradshaw, a money manager in London at Pimco, manager of the world’s largest bond fund. “The arguments to be underweight are not as strong anymore.”

Policy makers said after cutting interest rates yesterday that the slide in the pound “raised the profile” of inflation.

The yield gap between two- and 10-year notes widened to 161 basis points from 156 basis points last week. The so-called steeper yield curve suggested investors raised bets that the economy will worsen and that the central bank will reduce borrowing costs further.

The Bank of England will cut its key interest rate to 1.25 percent by September, according to economists in a Bloomberg survey.

Gilts outperformed U.S. Treasuries and European bonds this quarter. U.K. government bonds handed investors an almost 8 percent return since the end of September, compared with a gain of 7.4 percent from Treasuries and 7.30 percent from German bonds, according to Merrill Lynch & Co.’s U.K. Gilts, U.S. Treasury Master and German Federal Government indexes.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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Russia Weakens Ruble Defense After Record Drop in Crude to $39

By Emma O’Brien

Dec. 5 (Bloomberg) -- Russia weakened its defense of the ruble for a fourth time in a month, pushing the currency near a three-year low against the dollar, as the price of the nation’s crude oil fell by a record this week to less than $40 a barrel.

The currency slid as much as 1.4 percent to 28.1768 per dollar and dropped 1 percent to 31.5777 against the central bank’s target basket of euros and dollars. “The corridor has been widened,” a Bank Rossii official who declined to be identified said in a phone interview from Moscow today.

“The gradual approach feeds expectations of further devaluation,” said Tatiana Orlova, an economist in Moscow for ING Groep NV, which forecasts a 20 percent drop by the end of next year. The depreciations are prompting people and companies “convert all extra rubles into foreign exchange,” she said.

Russia, the world’s largest energy producer, raised interest rates twice last month and drained $143 billion from its foreign-currency reserves to arrest a 17 percent drop in the ruble since August as oil plunged. Urals crude, Russia’s main export blend, slumped 20 percent this week to $39.82 a barrel, below the $70 average needed to balance Russia’s 2009 budget.

“Given oil is already below $40 a barrel we can’t rule out more depreciation,” said Evgeny Gavrilenkov, chief economist at Troika Dialog in Moscow, Russia’s oldest investment bank. “Any further devaluation depends on oil.”

Russia is facing its worst financial crisis since the government defaulted on $40 billion of debt a decade ago, prompting a 71 percent ruble devaluation against the dollar that eroded bank deposits.

Concern about the currency’s decline spurred Russians in October to withdraw 355 billion rubles ($13 billion) from their deposits, the most in two years, according to central bank data. Foreign-currency deposits rose 11 percent.

Putin’s Pledge

Bank Rossii has expanded the trading band against the basket by 1 percent either side four times since Nov. 11, allowing a 3.9 percent depreciation against the mechanism in that period. The basket is made up of 55 percent dollars and the rest euros, and is intended to mitigate the effect of currency swings on Russian exporters.

Prime Minister Vladimir Putin said yesterday that Russia will avoid “sharp” swings in the ruble by using its $454.9 billion of reserves to support the currency. The nation’s cash pool rose last week for the first time in two months, the central bank said yesterday.

“We will see more gradual devaluations of around 1 percent at a time,” said Elisabeth Andreew, chief currency strategist at Nordea AB in Copenhagen, Scandinavia’s biggest bank. “We could see the ruble 15 percent weaker against the basket in six months and 20 percent weaker in 12 months.”

‘Perfect Storm’

Goldman Sachs Group Inc. economist Rory MacFarquhar in Moscow predicted this week a 25 percent decline against the basket next year as the central bank seeks to preserve its cash reserves as oil prices continue to fall.

Any further slide in Urals prices toward a $30-a-barrel average next year may trigger a depreciation of as much as 35 percent versus the basket, said Troika’s Gavrilenkov. Merrill Lynch & Co. chief investment officer Gary Dugan forecast last week that Russia may be headed for a recession should oil average $30 next year.

“Russia is now facing a perfect storm of falling commodity prices, weaker external demand, tighter credit conditions and slower real incomes growth for which no amount of currency adjustment can compensate,” Neil Shearing, an emerging-markets economist at Capital Economics Ltd. in London, said in a research note today.

Curbing Speculators

Bank Rossii sold $2 billion to support the ruble yesterday, taking sales this week to as much as $11.5 billion, according to estimates by Moscow-based MDM Bank. That compares with about $4.4 billion sold last week and $7 billion the week before, MDM said.

As well as selling dollars and raising interest rates, Bank Rossii has been limiting the amount of currency swaps, agreements allow traders use to bet on the exchange rate without having to sell currency upfront. The limit was set at 5 billion rubles ($178 million) for the past three days. The bank also warned banks not to increase bets on foreign currencies.

“They’re getting closer and closer to what they think is a fair level for the ruble,” said Matthew Vogel, head of emerging-markets research in London for Barclays Capital Group. “It shows they’re committed to allowing an orderly decline in the ruble.”

Default Swaps

OAO Lukoil, Russia’s biggest independent oil producer, and OAO Rosneft, the largest oil company, led a 1.9 percent slump in the Micex index of 30 stocks today. Lukoil dropped 3.4 percent to 800 rubles, and Rosneft declined 2 percent to 94.30 rubles.

The currency traded as low as 35.9480 per euro today, the lowest since Oct. 2, and was at its weakest against the dollar since February 2006.

Russia’s benchmark 30-year government bond slid for a fifth straight day, pushing the yield 3 basis points higher to 11.27 percent.

The cost of protecting Russian debt from default jumped 6 basis points to 776 points today. Credit-default swaps protect bondholders against default by paying the buyer face value in exchange for the underlying securities or cash equivalent should the borrower fail to adhere to debt agreements.

To contact the reporter on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net

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Brazil’s Real Falls to Over Three-Year Low on Commodity Slump

By Adriana Brasileiro

Dec. 5 (Bloomberg) -- Brazil’s real fell to the lowest in more than three years as a slump in commodity prices and the worldwide economic slowdown hurts demand for the country’s export products and financial assets.

The currency declined for a fifth day, dropping 1.7 percent to 2.5459 per dollar at 8:59 a.m. New York time, from 2.5035 yesterday. It touched 2.5717, the lowest since April 2005. The real has depreciated 9.6 percent this week.

Brazil’s central bank offered to buy reais in the foreign- exchange market in an effort to prop up the currency. The bank paid 2.5355 per dollar in the auction.

Yields on local bonds and interest-rate futures contracts fell after Brazilian inflation unexpectedly slowed in November.

Inflation, as measured by the benchmark IPCA index, slowed to 0.36 percent, lower than estimates by all 40 economists in a Bloomberg survey. The annual inflation rate fell to 6.39 percent from 6.41 percent a month earlier, the upper end of the central bank’s target of 2.5 percent to 6.5 percent.

The yield on the zero-coupon note due in January 2010 decreased 28 basis points, or 0.28 percentage point, to 13.53 percent, according to Banco Votorantim.

The yield on Brazil’s overnight futures contract for January 2010 delivery dropped 28 basis points to 13.42 percent.

To contact the reporter on this story: Adriana Brasileiro in Rio de Janeiro at abrasileiro@bloomberg.net

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Dollar Falls to Six-Week Low Against Yen as U.S. Loses Jobs

By Jamie McGee and Ye Xie

Dec. 5 (Bloomberg) -- The dollar fell to a six-week low against the yen after a government report showed U.S. employers eliminated jobs last month at the fastest pace in 34 years, indicating a deepening recession.

The greenback was headed for a fifth weekly drop, its longest stretch of losses since December 2004, as traders increased speculation that the Federal Reserve will cut borrowing costs to near zero this month.

“The trend has been one-way for the dollar against the yen, which is down,” said Stephen Malyon, co-head of currency strategy at Scotia Capital Inc. in Toronto. “The number speaks for itself. It’s very bleak.”

The dollar dropped 0.5 percent to 91.78 yen at 8:50 a.m. in New York, from 92.23 yesterday. It touched 91.60, the lowest level since Oct. 24. The U.S. currency advanced 0.9 percent to $1.2662 per euro from $1.2777. The euro decreased 1.4 percent to 116.17 yen from 117.85.

U.S. payrolls dropped by 533,000 last month, after declining by 320,000 in October, the Labor Department said today in Washington. The median forecast of 73 economists surveyed by Bloomberg News was for a reduction of 335,000. The unemployment rate rose to 6.7 percent.

A larger-than-forecast 4.09 million fired workers received government unemployment checks in the week ended Nov. 22, the most since December 1982, the Labor Department said yesterday.

Futures contracts on the Chicago Board of Trade showed 76 percent odds the Fed will lower its 1 percent target rate to 0.25 percent by its next meeting on Dec. 16, compared with a 64 percent chance yesterday.

ECB Rate

The European Central Bank delivered the biggest interest- rate cut yesterday in its 10-year history after the economic slump deepened and the inflation rate plunged. ECB policy makers lowered the main refinancing rate by 0.75 percentage point to 2.5 percent.

Some people are buying the yen because they view it as a relatively safe currency, Japanese Economic and Fiscal Policy Minister Kaoru Yosano told reporters at a briefing today. The currency has gained 21 percent against the dollar and 39 percent versus the euro this year.

The ruble dropped to near the lowest in three years against the dollar after Russia’s central bank widened the currency’s trading band as the price of Urals crude, the country’s main export, fell below $40 a barrel. Russia’s currency slid as much as 1.4 percent to 28.2031 per dollar today, the weakest level since February 2006. It dropped to 35.9480 per euro, the lowest since Oct. 2.

Russia’s central bank buys and sells foreign currency to keep the ruble within a target trading band, which is managed against a basket of dollars and euros. Policy makers have widened the corridor four times since Nov. 11.

To contact the reporters on this story: Jamie McGee in New York at jmcgee8@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net

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