Real GDP in Q4: Weaker than Meets the Eye

Daily Forex Fundamentals | Written by Wachovia Corporation | Jan 30 09 14:40 GMT |

Real GDP declined at an annualized rate of 3.8 percent in the fourth quarter, which was not as bad as the consensus forecast had anticipated. However, the economy is weaker than it appears. Indeed, the rise in inventories in the fourth quarter suggests that the economy will contract at a faster pace in the current quarter. GDP Head Fake in the Fourth Quarter U.S. real GDP declined at an annualized rate of 3.8 percent in the fourth quarter (see top chart). Although the decline in GDP was the largest contraction since the first quarter of 1982, the outturn was not nearly as bad as the 5.5 percent plunge that the market consensus forecast had anticipated. Is it time to break out the champagne and start celebrating the incipient economic recovery? Hardly. The real surprise in today's report was the unexpected increase in real inventories, which rose $6.2 billion in the fourth quarter following a $30 billion drawdown in the third quarter (see middle chart). Inventories made a positive contribution to GDP growth equal to 1.3 percentage points in the fourth quarter. Without the build in stocks, overall GDP growth in the fourth quarter would have been much weaker. Indeed, final sales to domestic purchasers, which include personal consumption expenditures (PCE), fixed investment, and government spending, plunged 4.9 percent in the fourth quarter (see bottom chart). Real PCE tumbled 3.5 percent and fixed investment spending cratered, down 20 percent. Within fixed investment spending, purchases of equipment and software plunged nearly 28 percent – the sharpest quarterly decline in fifty years - and residential construction continued its freefall, down another 24 percent. As if to rub salt in the wound, gross exports plunged nearly 20 percent, a by-product of recession in most foreign countries. However, gross imports also tanked (down nearly 16 percent), so there was little overall effect on GDP from net exports. The only bright spot in domestic spending was the 1.9 percent rise in government consumption expenditures. A modest decline in state and local spending was offset by an increase in federal government spending. As the Obama stimulus package hits the economy in the quarters ahead, government spending will continue to rise. Inventory Rise in Fourth Quarter Should Be Reversed in First Quarter In sum, today's GDP report is no cause for celebration - the economy is even weaker than the "headline" growth number would suggest. In addition, the apparent inventory build-up in the fourth quarter sets up a big drawdown of stocks in the first quarter that will weigh significantly on GDP growth. Prior to today's report, we had thought that the weakest quarter in the current cycle would be the fourth quarter of 2008. However, with mounting job losses weighing on consumer spending, businesses axing their capex plans and a big decline in inventories looming, an even sharper contraction in the economy seems to be shaping up in the first quarter. 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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US GDP Contracts in Q4 By Most in Over 26 Years, Slightly Better Than Forecasts

Daily Forex Fundamentals | Written by DailyFX | Jan 30 09 14:25 GMT |

According to advanced reports, the US economy contracted in Q4 by the most since Q1 1982 at a rate of 3.8 percent, marking the second consecutive quarter of contraction. This was actually a bit better than forecasts, as a Bloomberg News poll shows that economists had expected a decline of 5.5 percent. All told, US real GDP for 2008 slowed to a 1.3 percent pace of growth, the lowest since 2001. This helps to explain the mixed reactions from the markets, as US stock market futures surged at 8:30 ET, immediately pulled back, and then slowly climbed into positive territory by 9:00 ET. The same goes for the USD/JPY, and the impact of this report on risk sentiment will be crucial to where the forex markets go next. As it stands, USD/JPY seems more likely to fall toward the bottom of its recent range at 89.00, suggesting other "risky" assets could decline as well. Source: FXTrek Intellicharts Focusing back on the data, the decline in GDP could be attributed to a variety of factors, including a 3.5 percent drop in personal consumption, a 12.3 percent decline in gross private investment, and a 19.7 percent plunge in exports. We already know that the US has been in recession since December 2007, per the National Bureau of Economic Research (NBER), but one of the bigger questions now is how long the recession will last for. It will be important to watch gauges of employment and business activity for the early months of 2009, as the latest trends suggest that GDP could continue to fall sharply in Q1 and Q2. Also worth keeping in mind that today's GDP report is simply the advanced reading, and with two more revisions due out on February 27 (preliminary) and March 26 (final), these figures could ultimately change dramatically. DailyFX Disclaimer Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

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Mid-Day Report: Dollar Pares Gains as GDP Contraction Not as Worse as Expected

Market Overview | Written by ActionForex.com | Jan 30 09 14:35 GMT |

Dollar pares gains in early US session after release of GDP report that showed the contraction of US economy was not as worse as expected. Advanced GDP report showed -3.8% annualized contraction against expectation of -5.4%, following -0.5% contraction in Q3. But after all, it's still the worst reading since 1982. Personal consumption dropped by -3.5%, slightly better than -3.8% in Q3. Another surprise was in the price index which dropped -0.3% versus expectation of 0.5%. Q4 employment cost index rose 0.5%, below expectation of 0.7%. From Canada, GDP in Dec dropped -0.7%, worse than consensus of -0.4%. Aussie is leading the markets today, dropping over 2% against dollar and yen. In particular, the break of 0.6419 confirms down trend resumption in AUD/USD. USD/CAD's break of 1.2330 also clears out the picture and revive original bullish outlook for 1.3005/15. EUR/GBP stabilizes a bit after the sharp fall to 0.8943. Dollar Index's rise is still in force to 86.81 resistance first. Eurozone's CPI eased to 1.1% yoy in January, much lower than market expectation of 1.4% and 1.6% in December. This was also the lowest reading since Jul 1999. On the other hand, unemployment rate rose to 2-year high of 8% in December from a revised 7.9% in the previous month. Euro remains generally pressured, in particular against Sterling which is supported by unexpected rise in UK mortgage approvals from 27k to 31k. Released in earlier today, Japan manufacturing PMI fell to 29.6, the lowest level since 2001 and the 11th consecutive month below 50, in January from 30.8 in December as the country's export was greatly affected by economic slowdown. January unemployment rate increased to 4.4%, above consensus of 4.2% and December's 3.9%. At the same time, household spending contracted -4.6% yoy, worse than market expectation of -3.8% decline and -0.5% drop in the previous month. Japan's national CPI rose 0.4% yoy in December following a 1% gain in November while core inflation adding 0.2% yoy, the lowest reading since October 2007, after a 1% annual increase in the previous month. As a leading indicated to the nationwide index, Tokyo core CPI in January eased to 0.5% after rising 0.8% in the previous month. Tokyo's overall inflation also came in at 0.5% yoy in December. Japan's industrial production slid severely by a record -9.6% mom in December, worse than consensus of -9% and -8.5% in November. On yearly basis, the gauge plunged -20.6% from -16.6% a month ago. Although better than consensus of -8%, Japan's housing starts plunged for the first time in 6 months by -5.8% in December. Construction orders also fell -27.3% in December after dropping -12.5% a month ago. UK Gfk consumer confidence dropped to -37 in January, the lowest in 6 month, after falling to -33 in December. USD/CAD Mid-Day Outlook Daily Pivots: (S1) 1.2145; (P) 1.2205; (R1) 1.2321; More. USD/CAD's break of 1.2330 minor resistance clears out the near picture and indicates that fall from 1.2765, though deeper than expected, has completed at 1.2024 as correction to rise from 1.1761. Intraday bias is flipped back to the upside for 1.2765 first and break will bring retest of 1.3005/15 resistance zone. On the downside, however, below 1.2211 minor support will mix up the outlook again. In the bigger picture, there is no confirmation of completion of medium term up trend from 0.9056 yet. Such rise is expected to be developing into a five wave sequence (1.0378, 0.9823, 1.3015, ......). Consolidation from 1.3015 is treated as the fourth wave consolidation. Failure below 1.3005 suggests that such consolidation is still in progress and a test of 1.1464 support could be seen before completion. On the upside, note that decisive break of 1.3005/15 will confirm medium term up trend resumption and should then target 61.8% retracement of 1.6196 to 0.9056 at 1.3469.

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U.S. Fourth Quarter Advance GDP: Statistical Summary

By Kristy Scheuble

Jan. 30 (Bloomberg) -- Following is a summary of Gross Domestic Product from the Commerce Department.

===============================================================================
-Annualized               4Q      3Q      2Q      1Q      4Q      3Q      2Q
    Quarterly Change-   2008    2008    2008    2008    2007    2007    2007
===============================================================================
Real GDP                  -3.8%   -0.5%    2.8%    0.9%   -0.2%    4.8%    4.8%
 YOY percent             -0.2%    0.7%    2.1%    2.5%    2.3%    2.8%    1.8%
Personal consumption      -3.5%   -3.8%    1.2%    0.9%    1.0%    2.0%    2.0%
Durable goods           -22.4%  -14.8%   -2.8%   -4.3%    0.4%    2.3%    5.0%
Nondurable goods         -7.1%   -7.1%    3.9%   -0.4%    0.3%    1.2%    1.9%
Services                  1.7%   -0.1%    0.7%    2.4%    1.4%    2.4%    1.4%
Gross private investment -12.3%    0.4%  -11.5%   -5.8%  -11.9%    3.5%    6.2%
Fixed investment        -20.1%   -5.3%   -1.7%   -5.6%   -6.2%   -0.9%    3.0%
 Nonresidential         -19.1%   -1.7%    2.5%    2.4%    3.4%    8.7%   10.3%
  Structures             -1.8%    9.7%   18.5%    8.6%    8.5%   20.5%   18.3%
  Equipment & software  -27.8%   -7.5%   -5.0%   -0.6%    1.0%    3.6%    6.9%
 Residential            -23.6%  -16.0%  -13.3%  -25.1%  -27.0%  -20.6%  -11.5%
===============================================================================
                         4Q      3Q      2Q      1Q      4Q      3Q      2Q
                        2008    2008    2008    2008    2007    2007    2007
===============================================================================
Exports                  -19.7%    3.0%   12.3%    5.1%    4.4%   23.0%    8.8%
 Goods                  -27.7%    3.7%   16.3%    4.5%    5.1%   21.8%    6.9%
 Services                 0.6%    1.4%    3.8%    6.4%    2.7%   25.9%   13.3%
Imports                  -15.7%   -3.5%   -7.3%   -0.8%   -2.3%    3.0%   -3.7%
 Goods                  -18.8%   -4.7%   -7.1%   -2.0%   -2.6%    2.4%   -4.0%
 Services                 0.9%    3.3%   -8.0%    5.5%   -0.9%    6.3%   -2.0%
Government consumption     1.9%    5.8%    3.9%    1.9%    0.8%    3.8%    3.9%
Federal                   5.8%   13.8%    6.6%    5.8%   -0.5%    7.2%    6.7%
 National defense         2.1%   18.0%    7.3%    7.3%   -0.9%   10.2%    8.5%
 Nondefense              14.5%    5.1%    5.0%    2.9%    0.4%    1.2%    3.1%
State and local          -0.5%    1.3%    2.5%   -0.3%    1.6%    1.9%    2.4%
                        --------------------Other Measures--------------------
Change in inventories $B   $6.2  -$29.6  -$50.6  -$10.2   -$8.1   $16.0   -$2.8
Net exports $B          -$356.4 -$353.1 -$381.3 -$462.0 -$484.5 -$511.8 -$571.2
Real final sales          -5.1%   -1.3%    4.4%    0.9%    0.8%    4.0%    4.3%
Gross domestic purchases  -3.7%   -1.5%   -0.1%    0.1%   -1.0%    2.6%    2.9%
Final sales to dom purch  -4.9%   -2.3%    1.3%    0.1%   -0.1%    1.9%    2.5%
===============================================================================
                         4Q      3Q      2Q      1Q      4Q      3Q      2Q
                        2008    2008    2008    2008    2007    2007    2007
===============================================================================
                        ------------Contribution to Change in GDP-------------
Real GDP                  -3.8%   -0.5%    2.8%    0.9%   -0.2%    4.8%    4.8%
Personal consumption     -2.47%  -2.75%   0.87%   0.61%   0.67%   1.44%   1.42%
Durables                -1.71%  -1.16%  -0.21%  -0.33%   0.03%   0.19%   0.40%
 Motor Vehicle          -1.15%  -0.83%  -0.64%  -0.35%  -0.03%  -0.22%   0.05%
Nondurables             -1.49%  -1.57%   0.80%  -0.08%   0.05%   0.25%   0.40%
Services                 0.74%  -0.03%   0.28%   1.02%   0.59%   1.00%   0.62%
 Housing                 0.02%   0.08%   0.18%   0.05%   0.12%   0.08%   0.09%
Gross pvt dom invest     -1.80%   0.06%  -1.74%  -0.89%  -1.93%   0.54%   0.94%
Fixed investment        -3.12%  -0.79%  -0.25%  -0.86%  -0.97%  -0.15%   0.47%
 Nonresidential         -2.26%  -0.19%   0.27%   0.26%   0.36%   0.91%   1.07%
  Structures            -0.07%   0.36%   0.64%   0.30%   0.29%   0.65%   0.57%
  Equipment & software  -2.19%  -0.55%  -0.37%  -0.04%   0.07%   0.26%   0.50%
   Info processing      -0.76%  -0.16%   0.30%   0.27%   0.37%   0.31%   0.41%
    Computers           -0.21%  -0.16%   0.08%   0.10%   0.12%   0.12%   0.09%
    Software            -0.15%  -0.08%   0.04%   0.16%   0.16%   0.10%   0.22%
 Residential            -0.85%  -0.60%  -0.52%  -1.12%  -1.33%  -1.06%  -0.60%
===============================================================================
                         4Q      3Q      2Q      1Q      4Q      3Q      2Q
                        2008    2008    2008    2008    2007    2007    2007
===============================================================================
Change in inventories    1.32%   0.84%  -1.50%  -0.02%  -0.96%   0.69%   0.47%
 Nonfarm                 1.33%   0.83%  -1.36%   0.15%  -1.43%   0.77%   0.33%
Net exports               0.09%   1.05%   2.93%   0.77%   0.94%   2.03%   1.66%
Exports                 -2.84%   0.40%   1.54%   0.63%   0.53%   2.54%   1.01%
 Goods                  -2.87%   0.34%   1.39%   0.39%   0.43%   1.66%   0.55%
 Services                0.03%   0.06%   0.15%   0.24%   0.10%   0.88%   0.46%
Imports                  2.93%   0.65%   1.39%   0.14%   0.40%  -0.51%   0.65%
 Goods                   2.95%   0.74%   1.14%   0.29%   0.38%  -0.34%   0.59%
 Services               -0.03%  -0.09%   0.25%  -0.15%   0.02%  -0.17%   0.06%
Govt. consumption         0.38%   1.14%   0.78%   0.38%   0.16%   0.75%   0.77%
Federal                  0.44%   0.97%   0.47%   0.41%  -0.04%   0.51%   0.47%
 National defense        0.11%   0.85%   0.36%   0.34%  -0.04%   0.48%   0.40%
 Nondefense              0.33%   0.12%   0.11%   0.06%   0.01%   0.03%   0.07%
State and local         -0.06%   0.17%   0.31%  -0.03%   0.19%   0.24%   0.30%
                        ---------------Implicit Price Deflators---------------
GDP                       -0.3%    3.9%    1.3%    2.6%    2.5%    1.5%    2.0%
Gross domestic purchases  -4.8%    4.4%    4.4%    3.4%    3.7%    2.2%    3.3%
===============================================================================
                         4Q      3Q      2Q      1Q      4Q      3Q      2Q
                        2008    2008    2008    2008    2007    2007    2007
===============================================================================
                        --------------------Price Indexes---------------------
GDP                       -0.1%    3.9%    1.1%    2.6%    2.8%    1.5%    2.0%
 YOY percent              1.9%    2.6%    2.0%    2.3%    2.6%    2.5%    2.8%
Personal consumption      -5.5%    5.0%    4.3%    3.6%    4.3%    2.5%    3.6%
 YOY percent              1.7%    4.3%    3.7%    3.5%    3.5%    2.2%    2.4%
ex food and energy        0.6%    2.4%    2.2%    2.3%    2.5%    2.1%    1.8%
Real final sales          -0.1%    4.0%    1.2%    2.7%    2.8%    1.5%    2.0%
Gross domestic purchases  -4.6%    4.5%    4.2%    3.5%    4.0%    2.2%    3.3%
 
SOURCE: U.S. Commerce Department  http://www.bea.gov.

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

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U.S. GDP Shrank 3.8% Last Quarter, Most Since 1982

By Timothy R. Homan

Jan. 30 (Bloomberg) -- The U.S. economy shrank the most since 1982 in the fourth quarter of last year as consumer spending recorded the worst slide in the postwar era, a trajectory that’s likely to continue in coming months.

The 3.8 percent annual pace of contraction in the final three months of last year was less than forecast, with a buildup of unsold goods cushioning the blow. Without the jump in inventories, the contraction would have been 5.1 percent, the Commerce Department said today in Washington.

“It looks like the economy carried a lot of negative momentum into the first quarter,” former Fed Governor Laurence Meyer, said in an interview with Bloomberg Television.

The economy is likely to contract further after retailers and manufacturers from Starbucks Corp. to Boeing Co. this week announced plans to slash payrolls and cut production to get rid of unwanted goods. Today’s report will maintain the pressure on President Barack Obama to win quick congressional approval of a fiscal stimulus package in excess of $800 billion.

“Without the stimulus plan, the economy would be flat to declining in the second half of the year,” Meyer said. With the recovery package, the unemployment rate may peak at 8 percent instead of 9.5 percent or higher, he added.

Stocks, Treasuries

Stock-index futures headed higher after the report as some investors were encouraged by the smaller drop in gross domestic product than forecast. Contracts on the Standard & Poor’s 500 Stock Index rose 0.2 percent to 844.10 at 8:52 a.m. in New York. Treasuries advanced, sending benchmark 10-year note yields to 2.80 percent from 2.86 percent late yesterday.

GDP was forecast to contract at a 5.5 percent annual pace last quarter, according to the median estimate of 79 economists surveyed by Bloomberg News. Projections ranged from declines of 3 percent to 7 percent.

Consumer spending, which accounts for more than two-thirds of the U.S. economy, dropped at a 3.5 percent annual rate last quarter following a 3.8 percent drop the previous three months. It’s the first time purchases declined by more than 3 percent in consecutive quarters since records began in 1947.

The world’s largest economy shrank at a 0.5 percent annual rate from July through September. The back-to-back contraction is the first since 1991.

2008 Performance

For all of 2008, the economy expanded 1.3 percent as a boost from exports and government tax rebates in the first half of the year helped offset the deepening spending slump.

Congress is considering a two-year fiscal stimulus package supported by Obama. House lawmakers this week passed the $819 billion measure.

The GDP price gauge dropped at a 0.1 percent annual pace in the fourth quarter, the most since 1954, reflecting the slump in commodity prices. The Federal Reserve’s preferred measure, linked to consumer spending and excluding food and fuel, rose at a 0.6 percent pace, the least since 1962.

Unadjusted for inflation, GDP shrank at a 4.1 percent pace, the most since the first three months of 1958. The drop in so- called nominal growth explains why corporate profits slumped as the year ended.

“This is a severe, steep, broadly based recession” with “no quick fix,” Stephen Roach, chairman of Morgan Stanley Asia Ltd., said in a Bloomberg Television interview from Davos, Switzerland today.

Unemployment Climbs

Americans may pull back further as employers slash payrolls. Companies cut 524,000 workers in December, bringing total job cuts for last year to almost 2.6 million. The unemployment rate last month was 7.2 percent, up from 4.9 percent a year before.

More cutbacks are on the way. Eastman Kodak Co., Target Corp. and Texas Instruments Inc. are among U.S. companies that announced thousands of layoffs this week.

Target, the second-biggest U.S. discount retailer, said this week it will slash 600 existing jobs and 400 open positions, mainly in its hometown of Minneapolis. It also said it will close a distribution center in Little Rock, Arkansas, later this year that employs 500 workers.

“We are clearly operating in an unprecedented economic environment that requires us to make some extremely difficult decisions,” Chief Executive Officer Gregg Steinhafel said in a Jan. 27 statement.

Business Investment

The economic slump intensified last quarter as companies also retrenched. Business investment dropped at a 19 percent pace, the most since 1975. Purchases of equipment and software dropped at a 28 percent pace, the most in a half century.

The slump in home construction also accelerated, contracting at a 24 percent pace last quarter after a 16 percent drop in the previous three months.

PPG Industries Inc., the world’s second-biggest paint maker, said this week that it may cut as many as 4,500 employees, or 10 percent of its workforce, because of weak global demand from automakers and homebuilders.

“We are probably looking at the sharpest downturn that anyone working at our company has seen,” Chief Executive Officer Charles E. Bunch said in an interview Jan. 27. “The regions outside of North America, which had been really helping PPG in the first three quarters of last year, have sort of caught the disease that started here in the U.S. with the credit crisis.”

The slowdown in global demand indicates American exports are unlikely to contribute less to growth in early 2009. World growth will be 0.5 percent this year, the weakest postwar pace, the International Monetary Fund said Jan. 28.

Inventories Climb

Inventories grew at a $6.2 billion pace in the fourth quarter, the first gain in more than a year. Its contribution to growth was the biggest since the fourth quarter of 2005.

The Fed this week said it’s prepared to purchase Treasury securities to shore up lending and warned inflation may recede too rapidly. Fed policy makers voted to leave the benchmark interest rate as low as zero.

The GDP report is the first for the quarter and will be revised in February and March as more information becomes available.

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

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EU Carbon Will Fall; ‘Only Real Price Floor Is Zero,’ UBS Says

By Mathew Carr

Jan. 30 (Bloomberg) -- European Union emission permits may fall to record lows, with little to stop them temporarily dropping near zero during potential oversupplies as factories and power stations sell for cash, according to a UBS AG analyst.

“The only real price floor is zero,” Per Lekander, Paris- based UBS managing director and utilities analyst, said by phone today. That, along with potential regulatory changes by governments that created the market, means there are better opportunities for traders in the power, natural-gas and oil markets, he said this week in a conference presentation in London e-mailed to Bloomberg.

Benchmark EU emission prices have plunged more than 60 percent from a peak in July, as factory output dropped because of the recession, slashing demand. Prices may temporarily drop a further 58 percent as Poland issues allowances next week, boosting supplies, or as nations issue 2009 permits next month, Lekander said.

Prices may fall to 9.50 euros ($12.23) a metric ton from 11.93 euros today, Lekander said. They should be bolstered because post-2012 prices will be higher as the European Commission crimps the supply of allowances, he said. That forecast implies a minimum price of 20 euros in 2013 and a 20 percent cost of carry because of the risks in the multiyear trade, he added.

EU carbon dioxide allowances for December rose 5 cents, or 0.4 percent, to 11.93 euros a metric ton on the European Climate Exchange in London at 8:15 a.m. local time. They closed at 11.50 euros on Jan. 21, a record low for any phase-two contract. The phase runs for the five years starting last year.

Prices could drop as low as 5 euros in the next few months, before utilities including RWE AG of Germany step up purchasing, according to the UBS analyst.

Factories and power stations can use their allowances from 2008 in the third phase, the eight years through 2020. “Had there been no phase three, I would have forecast it would fall to zero,” Lekander said.

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

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U.K. Oil, Power Workers Strike as Foreign Staff Protest Spreads

By Paul Dobson and Ben Farey

Jan. 30 (Bloomberg) -- Workers at U.K. oil refineries and power plants walked out as a three-day protest against the employment of foreign staff at a Total SA plant expanded.

The strike spread to BP Plc’s Forties Pipeline System and Royal Dutch Shell Plc’s St. Fergus gas plant in Scotland. Contract workers walked out at Scottish & Southern Plc’s Fiddler’s Ferry power station in Cheshire and RWE AG’s Aberthaw plant in Wales.

Protestors gathered outside Total’s Lindsey plant in northeast England today to demand government action to protect jobs after the recession increased unemployment claims to a 9- year high. About 600 contractors at the 200,000 barrel-a-day refinery remain on strike, Total said. Foreign workers at the plant were told to stay at home today.

“I understand people’s anxieties about their jobs,” Prime Minister Gordon Brown said today in Davos. “The action we’ve taken to help people in work to stay in work, to help people who lose their jobs to get new jobs, to help young people to get skills, it’s the right way to deal with that.”

Contract workers at the Ineos Group Holding Plc’s plant in Scotland stopped work today, spokesman Richard Longden said. Workers at ConocoPhillip’s Humber refinery, Scottish Power Plc’s Longannet plant, and BP’s Dimlington gas terminal walked out yesterday.

Meetings were taking place to end the dispute and production at the Lindsey remained unaffected, spokesman Iain Hutchison said by phone. The strike started after Italian and Portuguese workers were brought in to work on the construction of a hydro-desulfurization unit.

‘Demanding Right’

“There is sufficient unemployed skilled labor wanting the right to work on that site and they are demanding the right to work on that site,” Bernard McAuley, regional officer for the Unite union said in an interview with the British Broadcasting Corp. today.

BP said the action in Scotland followed similar protests at its Dimlington gas plant and Saltend chemical site in northeast England yesterday.

National Grid Plc data showed flows at the Dimlington terminal dropped to about 1 million cubic meters a day from about 7 million earlier this week. BP said operations at all its sites were unaffected by the walkout.

At Aberthaw, 50 contractors staged a protest, RWE npower spokeswoman Jennifer Crawford said by phone. The plant is running normally and no other plants are affected, she said.

Scottish & Southern Plc spokeswoman Jennifer McGregor said production at the Fiddler’s Ferry coal-fired plant was unaffected by the contractor walk out.

Steel Plant

Protests also spread to Corus Plc’s Redcar steel plant and a chemical plant at Wilton in northeast England, the BBC said. As many as 300 stopped work at Grangemouth, it said.

Scottish Power, the U.K. unit of Iberdrola SA, said labor protests at its Longannet and Cockenzie coal-fired plants aren’t disrupting output.

The company will be holding talks with contractors and unions to resolve the dispute, spokesman Simon McMillan said today in a telephone interview.

At Longannet, the contractors were working on technology to reduce emissions of poisonous gases from the plant. The impact will be “negligible,” because it’s a three-year project, he said. At Cockenzie, Scottish Power has its own staff to cover for the absent contractors, who were working on general maintenance.

In September 2007, Prime Minister Gordon Brown promised “British jobs for British workers,” referring to job creation, rather than job protection. The economy was growing at the time. This week, in the face of recession, he made a speech warning against protectionism, a message he said he’d take to the World Economic Forum in Davos, where he’s speaking today and tomorrow.

To contact the reporter on this story: Alexander Kwiatkowski in London at akwiatkowsk2@bloomberg.net; Ben Farey in London at bfarey@bloomberg.net.

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EDF Beats GDF Suez to Build New Reactor in France

By Tara Patel

Jan. 30 (Bloomberg) -- Electricite de France SA, Europe’s biggest power producer, beat off competition from GDF Suez SA to win French government approval to spearhead development of a second new-generation atomic reactor.

The Evolutionary Power Reactor, or EPR, will be built at an existing nuclear site at Penly, northern France, starting in 2012, President Nicolas Sarkozy said in a statement. Paris-based EDF will have majority control over a company created to oversee the project. GDF Suez “will be associated” with the venture.

The decision ends months of speculation over which utility would pilot the project and where it would be located. EDF is already building a 1,650-megawatt, Areva SA-designed EPR at Flamanville in Normandy at an estimated cost of 4 billion euros ($5.2 billion). It plans similar models in the U.K. and the U.S., and has started developing reactors in China.

“EDF will have to put cash down to invest,” Chicuong Dang, an analyst at Richelieu Finance in Paris, said today by telephone. “Earnings will come over the longer term. Costs of building the EPR have risen while French power rates remain low.”

Construction of a second EPR, targeted for completion in 2017, has been condemned by some environmental groups as unnecessary.

‘No Justification’

“It has no justification other than to provide a massive contract to the state-owned nuclear industry,” Greenpeace said in a statement. “No other options such as energy efficiency or renewable-energy potential have been considered.”

EDF dropped as much as 65 cents, or 1.7 percent, to 38.31 euros in Paris trading, and was at 38.38 euros as of 1:42 p.m. local time. GDF Suez lost 2.5 percent to 30.07 euros, taking its decline this year to 15 percent.

EDF, which operates 58 atomic plants in France, will join with other investors in the project, “in particular GDF Suez,” the state-controlled utility said today in a separate e-mailed statement. The government left open the possibility of a third new-generation reactor, saying it “acknowledges the willingness of GDF Suez to lead, develop and operate the next EPR.”

GDF Suez and Total SA, Europe’s third-biggest oil company, have said they will collaborate on the Penly reactor. Their commitment to cooperate on the project follows their existing partnership with Areva to develop a plant in Abu Dhabi.

Third EPR

GDF Suez will be “a candidate” to pilot a third EPR in France, Vice Chairman Jean-Francois Cirelli said today in an interview on France24.

The utility operates seven reactors in Belgium through its Electrabel SA unit. The European Commission has put pressure on the French government to increase competition on the national power market, now dominated by former monopoly holder EDF.

EDF signed a deal with Enel SpA in 2007, giving Italy’s largest utility a 12.5 percent stake in the Flamanville generator and an option to invest in five more plants in France. EDF has said it’s keen to expand nuclear operations in Italy, China, the U.K. and the U.S.

GDF Suez has agreements to use power from two of EDF’s French reactors, at Tricastin and Chooz. GDF Suez Chief Executive Officer Gerard Mestrallet has said he wants to operate EPRs by 2020 and that France is “obviously a priority.”

French power exports exceeded imports by 46.6 terawatt-hours last year, 15 percent less than in 2007, according to Reseau de Transport d’Electricite, EDF’s wholly owned grid operator. The utility has to rely on imports to meet peak demand during hot or cold spells.

To contact the reporter on this story: Tara Patel in Paris at tpatel2@bloomberg.net

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OPEC’s El-Badri Says $70-90 Is ‘Reasonable’ Oil Price

By Francine Lacqua and Grant Smith

Jan. 30 (Bloomberg) -- Abdalla el-Badri, OPEC secretary- general, said $70 to $90 a barrel is a “reasonable” oil price to support investment in new production.

“It’s a reasonable price where we can invest and that’s the most important thing for the world,” el-Badri said in a television interview at the World Economic Forum in Davos today. “We control 75 to 80 percent of the world reserves, we need to develop that reserve so we can have more supply to the world.”

The Organization of Petroleum Exporting Countries, responsible for 40 percent of the world’s oil supply, announced a record production cut last month to support plunging prices. Crude oil futures have declined more than $100 a barrel from a record $147.27 a barrel in July to trade around $40 on the New York Mercantile Exchange this week.

The group is next due to meet on March 15. OPEC won’t hesitate to cut output further to keep prices from falling, el- Badri said earlier this week.

El-Badri reiterated his call for curbs on speculators to reduce oil price volatility.

To contact the reporter on this story: Francine Lacqua in Davos at flacqua@bloomberg.net; Grant Smith in London at gsmith52@bloomberg.net

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Chevron’s Fourth-Quarter Net Income Rises on One-Time Gain

By Joe Carroll

Jan. 30 (Bloomberg) -- Chevron Corp., the second-biggest U.S. oil company, said fourth-quarter profit rose less than 1 percent as one-time gains made up for the largest plunge in crude prices on record.

Net income climbed to $4.9 billion, or $2.44 a share, from $4.88 billion, or $2.32, a year earlier, San Ramon, California- based Chevron said today in a Business Wire statement. The results included a $600 million gain on an asset exchange.

Stung by a $100 drop in oil prices, producers are cutting budgets and reassessing projects conceived when U.S. crude futures were heading toward an all-time high above $147 a barrel reached in July. For Chevron, the collapse in prices coincided with a ninth straight quarter of declining output.

“Chevron’s production volumes have been disappointing,” said Brian Youngberg, an analyst at Edward Jones & Co. in Des Peres, Missouri, who rates the company’s shares “buy” and doesn’t own any. “They’re growth- and reserves-challenged.”

The statement was released before the opening of regular U.S. stock trading. Chevron fell $3.17 to $70.62 yesterday in New York Stock Exchange composite trading. The stock dropped 21 percent last year, Chevron’s biggest decline since 2002.

Worldwide oil demand will increase 0.5 percent this year after shrinking in 2008 for the first time since 1983, the International Energy Agency said last month. The 2009 forecast is less than one-fourth the average rate of growth in 2004-2007.

Prices Decline

Oil futures on the New York Mercantile Exchange fell 56 percent in the fourth quarter, and natural-gas futures slid 24 percent. Gas has continued to tumble since the end of 2008, falling 20 percent as new wells in Louisiana, Texas and Arkansas create a surfeit.

Chevron may sell some refineries because of shrinking profit margins on gasoline and diesel, John Watson, executive vice president for strategy and development, said last month at an energy conference in New York. The company’s refining profit slumped 59 percent in the first three quarters of 2008 as fuel prices failed to keep pace with oil costs.

Chevron, which triggered the Saudi energy boom with the 1938 discovery of oil in the kingdom, wants to focus on higher- profit ventures such as gas production off the coast of Australia and oil projects in West Africa and the Gulf of Mexico, Watson told investors and analysts at the conference.

Irving, Texas-based Exxon Mobil Corp., the world’s largest oil company, said today that its fourth-quarter net income fell the most in six years, sliding 33 percent to $7.82 billion, or $1.55 a share.

Royal Dutch Shell Plc, Europe’s largest oil company, yesterday reported its first loss in a decade, at $2.81 billion. Houston-based ConocoPhillips, the third-biggest U.S. oil company, this week posted the largest loss in its history, at $31.8 billion, on costs recorded to reflect a plunge in the value of acquired assets.

To contact the reporter on this story: Joe Carroll in Houston at jcarroll8@bloomberg.net.

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Suzlon Reports Unexpected Loss on Replacement Costs

By Sumit Sharma and Gaurav Singh

Jan. 30 (Bloomberg) -- Suzlon Energy Ltd., India’s biggest maker of wind-turbine generators, unexpectedly reported a loss in the third-quarter after making payments to replace faulty equipment and the value of orders declined.

The net loss, including that of units, was 589.7 million rupees ($12 million) in the three months ended Dec. 31 compared with a profit of 1.52 billion rupees a year earlier, the Ahmedabad-based company said in a statement on its Web site. The median estimate of five analysts compiled by Bloomberg was for a profit of 2.45 billion rupees.

Suzlon may face a slowdown in orders as falling oil prices make alternative energy sources less attractive and access to credit tightens due to the global recession. The company’s shares dropped 84 percent last year on concern that its equipment was faulty as some U.S. customers canceled orders after Suzlon’s blades cracked.

“Suzlon doesn’t seem to have got any big orders from June,” said Chintan Mewar, an analyst at Mumbai-based Finquest Securities Pvt.

Orders, excluding those of units, were valued at 103.87 billion rupees. That compares with 140.5 billion rupees the company reported on Oct. 31 and 171.1 billion rupees a year earlier.

Group revenue more than doubled to 68.93 billion rupees in the third quarter from 31.69 billion rupees. Suzlon expects sales growth to halve to 10 to 15 percent in the year starting April and plans to counter the decline by entering new markets.

New Markets

“Our strategy is to go to the bigger markets,” Chief Operating Officer Sumant Sinha told reporters in Mumbai. “We’re exploring markets in the Middle East, the Mediterranean and South America.”

The turbine maker has orders for 1,916 megawatts and is in “negotiations” for more than 2,000 megawatts in the U.S., Europe, China and Australia, the company said in an e-mailed statement. Suzlon got orders for 195 megawatts in the quarter and expects $1 billion of sales in the U.S. in the year to March, Sinha said.

“Things look very good in the second half, especially as the company says they are pursuing orders,” said Mewar. “We maintain our buy on Suzlon.”

Suzlon gained 5.6 percent, the most since Jan. 19, to 47.25 rupees at the close in Mumbai trading, after falling as much as 7 percent. The stock has declined 24 percent this month.

Fixing Blades

The company spent 2.33 billion rupees in the quarter on replacing and fixing faulty blades compared with 187.4 million rupees a year earlier. It provided an additional 1.71 billion rupees for the retrofit plan, which it expects to complete by June, after previously setting aside 5.9 billion rupees for possible payments to clients who may have incurred output losses due to defective blades.

Mark-to-market losses on foreign exchange contracts were 1.24 billion rupees for the group, Suzlon said.

Morgan Stanley cut its price target yesterday for Suzlon to 46.5 rupees from 52.45 rupees, saying the company may struggle to repay loans because of lower margins and fewer new orders.

Suzlon raised 5 billion rupees by selling a 10 percent stake in unit Hansen Transmissions International NV to London-based investment company Ecofin Ltd. Suzlon has an interest of 61.28 percent in Hansen after the sale.

The stake was sold after Suzlon scrapped a $368 million rights offer, citing bad market conditions. The rights offer was aimed at raising funds to buy more shares in another unit.

Overseas Share Sale

Suzlon plans to sell shares overseas instead of the rights offer, the government said in a statement today. Overseas investment in the company may be increased to 25.25 percent from the current 20.76 percent, according to the statement.

Suzlon plans to complete the purchase of additional shares in Hamburg-based unit Repower Systems AG from Portugal’s Martifer SGPS SA in May. Martifer was paid 65 million euros ($84 million) in December for some of its 22.4 percent stake in Repower. Another 30 million euros will be paid in April and 175 million euros in May, increasing Suzlon’s stake in Repower to 91 percent.

The Indian company plans to use its own funds and overseas debt to buy the stake in Repower, Sinha said. “All options” are being considered with regard to selling shares, he said.

To contact the reporters on this story: Sumit Sharma in Mumbai at sumitsharma@bloomberg.net; Gaurav Singh in New Delhi at gsingh31@bloomberg.net.

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Oil Rises as OPEC Cuts Supply, U.S. Slows Less Than Forecast

By Grant Smith

Jan. 30 (Bloomberg) -- Crude oil rose as OPEC implemented supply cuts announced last month while signaling it may make more, and after a reported showed the U.S. economy contracted less than forecast in the fourth quarter.

Gross domestic product in the U.S., the world’s biggest energy user, shrank at a 3.8 percent annual pace, the Commerce Department said today in Washington, less than an expected 5.5 percent. The Organization of Petroleum Exporting Countries won’t hesitate to cut output further if prices keep falling, Secretary General Abdalla el-Badri said at the World Economic Forum yesterday.

“Over the short term, the next month or two, we see crude oil prices pushing to the $50-$55 level,” said Edward Meir, an analyst at MF Global in Connecticut. “The markets seem to be giving OPEC the benefit of the doubt, which explains why prices have been holding above the $40 mark.”

Crude oil for March delivery rose as much as 85 cents, or 2.1 percent, to $42.29 a barrel on the New York Mercantile Exchange and traded at $42.23 at 1:45 p.m. London time. Prices are heading for a 10 percent decline this week and are down 7.2 percent in January, the seventh straight monthly decline.

“There’s been so much weak economic data, demand is probably going to weaken further,” said Helen Henton, head of commodity research at Standard Chartered Plc in London. “At the same time there’s a recognition OPEC has stepped up and done what it needs to do.”

Labor Unrest

Brent crude oil for March settlement was at $46.62 a barrel, up $1.22, on London’s ICE Futures Europe exchange at 1:42 p.m. London time. It yesterday rose 50 cents, or 1.1 percent, to end the session at $45.40 a barrel.

Labor unrest in the refining industry has also bolstered prices in the past day. The United Steelworkers union may reject the third contract offer from Royal Dutch Shell Plc covering workers at U.S. refineries with almost two-thirds of the country’s capacity. The current agreement expires Feb. 1.

In the U.K., workers at Ineos Group Holdings Plc’s Grangemouth refinery in Scotland walked out as protests against foreign employees at Total SA’s Lindsey refinery spread, the BBC reported today. As many as 300 people took part in the Grangemouth action, the report said.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net

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Exxon Mobil Profit Falls 33%, Less Than Estimated

By Joe Carroll

Jan. 30 (Bloomberg) -- Exxon Mobil Corp., the world’s largest company by market value, posted a smaller decline in profit than analysts estimated as increased refining earnings cushioned the impact of a record drop in oil prices.

Fourth-quarter net income tumbled 33 percent to $7.82 billion, or $1.55 a share, from $11.7 billion, or $2.13, a year earlier, the Irving, Texas-based company said today in a statement. Per-share profit was 8 cents higher than the average of 12 analyst estimates compiled by Bloomberg.

Refining profit climbed more than 6 percent to $2.41 billion as widening margins in overseas markets made up for a loss from U.S. plants. Chief Executive Officer Rex Tillerson plans to boost capital spending by as much as $5 billion this year to expand operations, including the world’s largest collection of refineries, while rivals retrench.

“Exxon is unique in that it is able to take advantage of the current environment when crude prices are falling,” said Gianna Bern, president of Brookshire Advisory & Research Inc. in Flossmoor, Illinois. “Exxon has the deepest pockets of all the oil companies, so that will allow them to keep investing in exploration as crude prices collapse.”

Exxon Mobil rose $1.56, or 2 percent, to $78.56 at 8:57 a.m. New York time in trading before U.S. exchanges opened. The stock has 11 buy and 6 hold ratings from analysts.

Prices Drop

Crude futures in New York plunged 56 percent in the quarter, the biggest decline since the contracts began trading in 1983, as economies slumped in the U.S., Europe and Japan.

Fourth-quarter revenue dropped 27 percent to $84.7 billion, Exxon Mobil said. Oil and natural-gas production fell 3.3 percent to the equivalent of 4.1 million barrels of crude a day, the fourth straight decline in quarterly output.

Royal Dutch Shell Plc, Europe’s largest oil company, yesterday reported its first loss in a decade, at $2.81 billion. Los Angeles-based Occidental Petroleum Corp. said yesterday that its fourth-quarter profit slid to $443 million, a five-year low.

Houston-based ConocoPhillips, the third-biggest U.S. oil company, this week posted the largest loss in its history, at $31.8 billion, on costs recorded to reflect a drop in the value of acquired assets. Chevron Corp., the second-largest U.S. oil company, said today that its profit rose less than 1 percent to $4.9 billion on a one-time gain from an asset exchange.

Spending Plans

Tillerson, who is starting his fourth year leading Exxon Mobil, said last month that he may increase capital spending this year to $30 billion in his costliest-ever push to add crude reserves, lift petroleum output and boost fuel and chemicals output.

Exxon Mobil said it plans to repurchase $7 billion in shares during the current quarter after spending $32 billion on buybacks in 2008.

The company, which traces its roots to the 19th century and John D. Rockefeller’s Standard Oil Trust, found oil in an offshore Brazilian prospect adjacent to the Western Hemisphere’s largest petroleum discovery since 1976, the South American country’s petroleum regulator said last week.

Exxon Mobil, which owns 40 percent of the field and operates it on behalf of partners Petroleo Brasileiro SA and Hess Corp., is drilling deeper into the subsea formation to search for more oil-soaked layers of sand and stone, company spokesman Patrick McGinn said on Jan. 20.

Exxon Mobil’s cost to discover and develop new fields is less than half the average the world’s 10 largest oil companies, according to data compiled by Bloomberg. Exxon Mobil spends $9.21 to find and extract each barrel of oil equivalent, compared with an average of $26.77 for its peers.

To contact the reporter on this story: Joe Carroll in Houston at jcarroll8@bloomberg.net.

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Pound Set for Record Monthly Gain Versus Euro as Mortgages Rise

By Gavin Finch

Jan. 30 (Bloomberg) -- The pound climbed against the euro, set for a record monthly advance, after a government report showed U.K. mortgage approvals unexpectedly rose in December.

The pound advanced to the highest level in almost two weeks versus the single European currency as the nation’s FTSE 350 Banks Index gained 2.5 percent. Lenders granted 31,000 loans for house purchases, compared with 27,000 in November, the Bank of England said today. Economists predicted a drop to 26,000, according to a Bloomberg survey.

“The pound has been doing pretty well lately,” said Paul Robson, a currency strategist in London at Royal Bank of Scotland Group Plc. “The pound was looking very oversold on concern about the financial sector, and got a boost from better- performing bank stocks this week. The outlook for the pound remains challenging, however.”

The pound strengthened to 89.80 pence by 11:39 a.m. in London, the highest level since Jan. 19. It advanced 6.6 percent this month. Against the dollar, the U.K. currency advanced to $1.4308, paring its drop in January to 2 percent. That’s a seventh monthly decline, the longest run of losses since at least 1984.

The value of mortgage approvals fell to 8.7 billion pounds ($12.4 billion) in December, the lowest level since 1999, the Bank of England said today. Net lending secured on dwellings still doubled from November to 1.9 billion pounds.

Consumer Confidence

The pound tumbled against the dollar earlier after a report showed U.K. consumer confidence dropped to near a record low in January. GfK NOP said its index of sentiment fell to minus 37. It was minus 39 in July, the lowest level since the data began in 1974.

“The pound is clearly going to move lower versus the dollar and the euro,” said Michael Klawitter, a Frankfurt-based strategist at Dresdner Kleinwort who forecast the currency will fall to $1.20 and test parity against the euro within the next six months. “Sterling risks remain substantial. The U.K. economy is facing a complex set of downside” pressures.

The International Monetary Fund said Jan. 28 Britain’s economy will contract 2.8 percent this year, more than any other Group of Seven industrialized nation. Global growth will almost halt as more than $2 trillion of bad assets in the U.S. sinks economies worldwide, the IMF said.

Prime Minister Gordon Brown said this week in Parliament the U.K. is entering a “deep recession” and the government will act to soften the effect, suggesting he may be considering a further fiscal stimulus.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

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Russia Vows to Defend Ruble as Speculators Push to Break Target

By Emma O’Brien

Jan. 30 (Bloomberg) -- The ruble tumbled to the brink of breaching Russia’s target trading band, as the central bank pledged to defend its six-day-old target after the biggest monthly depreciation in more than a decade.

The ruble slid as much as 1.4 percent to 35.5900 per dollar, just 1.1 percent away from breaking through Russia’s 36 per dollar limit, before paring declines. Chairman Sergey Ignatiev said today Bank Rossii will intervene in the market, limit the amount of refinancing offered to banks and adjust interest rates to keep the ruble from breaking the new trading band.

“The market is testing whether the authorities see this band as something permanent or something that will move,” said Lars Rassmussen, an emerging markets analyst at Danske Bank A/S, which ranks itself among the five biggest traders of the ruble through Finnish subsidiary Sampo Bank Plc. “Our view is that they’ll move it because it’s not worth wasting the reserves for a band that is obviously not wide enough.”

Bank Rossii expanded its trading range for the ruble 20 times since mid-November before policy makers switched last week to let “market” forces help determine the exchange rate within a widened limit. The central bank drained more than a third of its foreign-currency reserves, the world’s third-largest, since August to stem the ruble’s 34 percent slide against the dollar.

Investors are betting against the ruble as a 69 percent slump in oil prices in the past six months weakens the economy, triggering Russia’s worst financial crisis since 1998. Some $290 billion left the country since August, according to BNP Paribas SA.

Putin Pledge

Prime Minister Vladimir Putin said in a Jan. 25 interview with Bloomberg Television that Russia had set itself apart from other countries by using reserves so as not to “crush the national currency overnight,” avoiding a repeat of the crisis a decade ago when the ruble plunged as much as 29 percent in a day.

The currency depreciated 21 percent against the dollar since the start of this year, the worst month since 1998. The government expects the ruble to decline to 36 per dollar, First Deputy Prime Minister Igor Shuvalov told the State Duma today.

Ignatiev said Jan. 22 the band would only be widened again should Urals crude prices slide to $30 a barrel and stay there for a long period of time. Urals added 0.8 percent to $43.72 today, still below the $70 average required to balance Russia’s current 2009 budget. Budget revenue may tumble by 4.4 trillion rubles ($124.6 billion) this year as the slump in oil prices reduces economic growth to zero, Finance Minister Alexei Kudrin said today.

Reinstating Curbs

The central bank reinstated curbs on speculators today, with a 5 billion-ruble restriction ($141 million) on so-called currency swaps, after imposing no limit yesterday. The agreements allow traders to bet on an exchange rate without having to sell currency upfront, and Bank Rossii has been limiting them since Oct. 20 to reduce speculative pressure on the ruble.

This means banks “don’t have the capacity to increase their ruble shorting,” said Alexei Moisseev, head of fixed-income research at Moscow investment bank Renaissance Capital. “It’s about trying to regulate speculators.”

Moisseev estimates the central bank will defend the ruble’s trading band for a month “for credibility” before widening the targets. Bank Rossii may seek to limit bets against the ruble by reducing the amount of money offered in unsecured loan auctions, which were introduced last year to help bolster liquidity in the banking sector.

The ruble is likely to fall below the central bank’s target level “in a couple of trading days,” according to Danske’s Rasmussen. Investors short a currency when they want to bet that it is going to depreciate.

Defending Target

Bank Rossii is defending the level of 41 rubles against its target basket of dollars and euros by offering foreign currency at 40.25 today, said Evgeny Nadorshin, senior economist at Trust Investment Bank, citing the firm’s traders.

The central bank sold $3.2 billion yesterday and $800 million on Jan. 28, according to MDM Bank estimates. It wasn’t present in the market from Jan. 23 to 27, the first three days after widening the exchange-rate band, according to Trust.

Russia manages its currency against a basket of 55 percent dollars and 45 percent euros to protect exporters.

The ruble was 1 percent weaker at 35.4500 per dollar by 2:49 p.m. in Moscow, after dropping to the lowest in at least 11 years. It fell 0.1 percent to 45.5235 per euro, near the lowest since the European currency’s introduction in 1999. Against the basket, the ruble depreciated 0.7 percent to 40.0505, after touching as low as 40.1971.

The new target will be “very quickly” breached without heavy intervention by the central bank to support the currency, according to Societe Generale SA.

Investors Bet

Investors are betting the ruble will breach the 36 per dollar target, with non-deliverable forwards putting it 8.1 percent weaker at 38.62 per dollar in three months time. In a year, NDFs show the currency 19 percent lower at 43.99. The agreements gauge expectations of a currency’s movements by fixing an exchange rate at a particular level in the future.

Bank Rossii will defend the new target because the government wants to prevent panic among a population that gauges the strength of the economy on the fate of the dollar-ruble rate, said Stanislav Ponomarenko, chief economist in Moscow at ING Groep NV. Though the ruble is the only legal tender, many mortgages, loans and rental payments are still denominated in dollars.

The ruble’s decline is “not rational” based on what is actually happening in the Russian economy, Arkady Dvorkovich, President Dmitry Medvedev’s economic adviser, said in an interview yesterday. “We do not believe that under the current conditions in the commodity markets and overall macroeconomic conditions that we will have to defend the ruble at 41,” he said.

Some Benefit

Oil and gas companies are the main beneficiaries of the ruble’s decline, said Douglas Polunin, who helps manage about $170 million in emerging markets assets, including Russian stocks, at Polunin Capital Partners in London.

Ruble devaluation reduces costs for companies with revenue in dollars and “is positive, as long as it doesn’t get out of hand,” said Polunin, who is buying energy stocks including OAO Lukoil, Russia’s largest independent oil producer, and OAO Surgutneftegaz, the country’s fourth-biggest.

A level of 35 per ruble is the “right base” for TNK-BP, the Russian oil venture of BP Plc, said billionaire Viktor Vekselberg, who also has a stake in the company. A “slightly” weaker ruble would give support to Russian business, he said in a Bloomberg Television interview from the World Economic Forum in Davos, Switzerland.

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

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Colombia’s Peso Falls for a Fourth Day; Chile’s Peso Declines

By Drew Benson

Jan. 30 (Bloomberg) -- Colombia’s peso declined for a fourth day as U.S. stock-index futures dropped, undermining investor demand for riskier emerging-market assets.

The currency slid 1.2 percent to a three-month low of 2,422 per dollar at 8:36 a.m. New York time from 2,393 yesterday, according to the Colombian foreign-exchange electronic transactions system, known as SET-FX.

The yield on Colombia’s 11 percent bonds due in July 2020 was unchanged at 9.74 percent, according to Colombia’s stock exchange.

Chile’s peso slid 0.7 percent to 617.52 per U.S. dollar, from 612.95 yesterday. The yield for a basket of five-year peso bonds in inflation-linked currency units, known as unidades de fomento, dropped two basis points to 2.7 percent, its lowest since July, according to Bloomberg composite prices.

To contact the reporter on this story: Drew Benson in Buenos Aires at Abenson9@bloomberg.net

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Dollar, Yen Rise Versus Euro as Slump Fuels Demand for Haven

By Ye Xie and Lukanyo Mnyanda

Jan. 30 (Bloomberg) -- The dollar and yen rose versus the euro, heading for their biggest monthly gains since October as mounting evidence of a global slowdown increased the appeal of the currencies as havens from the financial crisis.

The euro declined for a second day on the slowest inflation in the 16-nation region since 1999 and an increase in the unemployment rate to a two-year high. The dollar and yen pared their gains versus the euro as a government report showed the U.S. economy contracted in the fourth quarter less than economists forecast.

“Safe-haven currencies remain the way forward, and that’s benefiting the yen and the dollar,” said Jeremy Stretch, a senior currency strategist in London at Rabobank International. “The underlying data continues to be biased to the downside, and investors are not buying into the recovery story.”

The dollar advanced 0.9 percent to $1.2835 per euro at 8:34 a.m. in New York, from $1.2954 yesterday. The yen gained 1.1 percent to 115.27 versus the euro from 116.60. The dollar fell 0.3 percent to 89.79 yen from 90.03. Japan’s currency may strengthen to 87 per dollar and 110 against the euro in the next five weeks, Stretch said.

The U.S. currency gained 8.5 percent versus the euro this month after a 4.4 percent rally in 2008. The yen advanced 10 percent in January after appreciating 29 percent last year. The greenback dropped 1.1 percent versus the yen this month after a 19 percent decline in 2008.

The pound rose 1.1 percent to 89.61 pence per euro from 90.56 yesterday, extending its gain since Dec. 31 to 6.8 percent, the biggest monthly advance since the euro’s debut in 1999. Sterling was little changed at $1.4311, heading for a monthly loss of 1.9 percent.

Soros on Euro

The euro weakened against the dollar and yen a day after billionaire investor George Soros told Austria’s Der Standard newspaper Europe’s currency may not “survive” unless the European Union pushes for a global plan to deal with toxic debt.

Soros, who made $1 billion breaking the Bank of England’s defense of the pound in 1992, told reporters this week at the World Economic Forum in Davos, Switzerland, that he exited bets against sterling after it dropped to $1.40.

Europe’s inflation rate dropped to 1.1 percent in January, the lowest since July 1999, and the unemployment rate rose to 8 percent in December, the highest in two years.

The yen rose 2.3 percent to 57.37 versus the Australian dollar and 2.1 percent to 8.83 against the rand today. Japan’s current-account surplus makes the yen attractive to investors in times of financial turmoil because it makes the country less reliant on capital markets.

Honda’s Profit

Honda Motor Co., Japan’s second-largest automaker, slashed its full-year profit forecast 57 percent today as vehicle demand in the U.S. plunged and the yen gained against the dollar, eroding the value of exports. The Nikkei 225 Stock Average slid 3.1 percent today and the MSCI World Index lost 0.8 percent.

U.S. gross domestic product contracted at a 3.8 percent annual rate from October through December after a 0.5 percent decline in the previous quarter, the Commerce Department reported today. The median forecast of 79 economists surveyed by Bloomberg News was for a 5.5 percent decline.

The ICE’s Dollar Index, which tracks the greenback versus the euro, the yen, the pound, the Canadian dollar, the Swedish krona and the Swiss franc, increased for a third day, rising 0.9 percent to 86.023. The index rose 5.8 percent this month, following a 6 percent advance last year.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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Corn, Soybeans Head for Weekly Drop as Rain May Improve Crops

By Madelene Pearson

Jan. 30 (Bloomberg) -- Corn and soybeans headed for a weekly loss amid speculation that rain will revive crops hurt by dry weather in Argentina and Brazil, the world’s biggest exporters of the commodities after the U.S.

Some Argentine fields may get as much as 1 inch (2.5 centimeters) of rain from two storms in the next week, boosting moisture, Allen Motew, a meteorologist for QT Information Systems in Chicago said yesterday. Parts of Brazil will receive three times the normal amount of rain in the next seven days.

“It’s all South American weather driven at the moment,” Michael Pitts, director of commodity sales, National Australia Bank Ltd., said from Sydney. “Depending on whether that rainfall eventuates or not, that will really drive the market going forward.”

Brazil and Argentina have faced a drought just as farmers need water for a critical growth period.

Corn for March delivery fell 0.7 percent to $3.79 a bushel on the Chicago Board of Trade in after-hours electronic trading at midday in London. Prices are down 2.9 percent this week after falling the previous three weeks.

Soybeans for March delivery rose 0.1 percent to $9.715 a bushel. Prices are down 3.7 percent this week and dropped the previous two weeks.

Wheat for March delivery fell 0.2 percent to $5.77 a bushel after falling 2.9 percent yesterday. The grain has fallen 57 percent from a record $13.495 on Feb. 27.

“There’s not a lot of positive news out there,” Doug Whitehead, agricultural commodity strategist at Australia and New Zealand Banking Group Ltd. said by phone from Melbourne.

To contact the reporter on this story: Madelene Pearson in Melbourne on mpearson1@bloomberg.net

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