U.S. Michigan Consumer Sentiment Index Rose in March

By Shobhana Chandra

March 13 (Bloomberg) -- Confidence among U.S. consumers in March held near a 28-year low, reflecting mounting job losses and a deepening recession.

The Reuters/University of Michigan preliminary index of consumer sentiment climbed to 56.6 from 56.3 in February. The gauge reached a 28-year low of 55.3 in November.

The highest rate of unemployment in 25 years and the biggest drop in wealth on record as home and stock values plunge have shaken Americans, raising the risk spending will again tumble after stabilizing the last couple of months. The figures indicate the Obama administration’s plans to cut taxes, boost spending and stem foreclosures have yet to soothe household anxiety.

“Historically, readings at this level suggest a great deal of distress,” said Christopher Low, chief economist at FTN Financial in New York, in an interview with Bloomberg Television. “Things are very, very fragile, especially for consumers. Now we sit back and wait for the stimulus to kick in.”

The confidence index was forecast to fall to 55, according to the median projection of 62 economists surveyed by Bloomberg News. Estimates ranged from 45 to 57. The measure averaged 63.8 in 2008.

A report from the Commerce Department today showed the trade deficit narrowed in January to $36 billion, the smallest since October 2002, on tumbling American demand for everything from OPEC oil to Japanese automobiles. Imports fell faster than exports.

Cheaper Imports

Prices of goods imported into the U.S. fell in February for a seventh straight month as slumping consumer demand prevented foreign companies from charging more, a Labor Department report showed today.

The University of Michigan’s index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, increased to 53 from 50.5.

A gauge of current conditions, which reflects Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars, dropped to 62.3 from 65.5.

Consumers in the survey said they expect an inflation rate of 2.2 percent over the next 12 months, up from 1.9 percent in the February survey.

Over the next five years, the figures tracked by Federal Reserve policy makers, Americans expected a 2.8 percent rate of inflation, down from 3.1 percent last month.

Preliminary Reading

The preliminary Reuters/University of Michigan consumer confidence report reflects about 300 responses compared with 500 households for the final survey.

Regular unleaded gasoline prices were $1.92 a gallon at the pump yesterday, little changed from the average for February, according to AAA.

Sales at retailers in February fell 0.1 percent, led by a slump in demand for cars, according to a Commerce Department report yesterday. Excluding automobiles, purchases unexpectedly climbed 0.7 percent.

The outlook for the year “is going to continue to be tough,” Stephen Sadove, chief executive officer of luxury retailer Saks Inc., told analysts yesterday in New York. “We are not looking at a major turnaround in the business” in 2009.

Household wealth fell by a record in the last three months of 2008, and home prices are still plunging, other reports show.

The job market continued to worsen this month after the economy lost 651,000 jobs in February and the unemployment rate jumped to a 25-year high level of 8.1 percent. Labor Department figures yesterday showed more than 600,000 workers filed claims for jobless benefits last week for the sixth straight time, the worst performance since 1982.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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Goldman Cuts Global Growth Forecast to 1% Contraction

By Jennifer Ryan

March 13 (Bloomberg) -- Goldman Sachs Group Inc. cut its forecast for the global economy for the second time in eight days after predicting a deeper recession in Europe.

“Following the reduction of our Euroland growth forecast to minus 3.6 percent in 2009, the world economy is now likely to contract by 1 percent this year,” said London-based Goldman economist Binit Patel. On March 5, Goldman lowered its 2009 outlook for world gross domestic product to a drop of 0.6 percent from a 0.2 percent decline.

Finance ministers from around the world are meeting near London today and tomorrow to find a way to battle the worst world recession since World War II. Governments have already pumped billions of dollars into financial systems to prop up banks and other industries after the worldwide credit squeeze stifled growth. Goldman expects the U.S. economy to shrink 3.2 percent this year and the U.K. economy to contract 2.5 percent.

With export demand slumping, industrial output has collapsed across Europe. Production in Germany, the region’s largest economy, dropped 7.5 percent in January from December, the biggest decline since data for a reunified Germany began in 1991. German factory orders plunged 38 percent from a year earlier.

Goldman predicts Germany’s economy will contract 5.2 percent this year, twice as much as its previous forecast. France’s economy will shrink by 2.9 percent and Spain’s by 3.6 percent, Goldman economists wrote in a research note. They expect unemployment in the 16-nation euro region to rise to 10 percent from 8.2 percent today.

Downside Risks

“The risks to these forecasts are on the downside,” the Goldman economists wrote. “The financial and global nature of the crisis make unexpected, harmful interactions more likely and could also mute the recovery. In addition, further waves of falling demand and output may bring the risk of deflation into focus.”

The European Central Bank on March 5 cut its key interest rate to 1.5 percent, the lowest in its history. President Jean- Claude Trichet indicated the benchmark may fall further as the bank expects inflation to stay “well below” its 2 percent ceiling this year and next.

“We see the ECB cutting interest rates to 0.5 percent by the end of the summer and engaging in unconventional, quantitative easing in the coming months,” the Goldman economists said.

Fed, BoE

The Federal Reserve has reduced its key rate to a range of zero to 0.25 percent and the Bank of England has cut its benchmark to 0.5 percent, the lowest since it was founded in 1694. Both are now using unconventional measures to boost their economies.

The World Bank said last week the global economy may contract for the first time since World War II this year, and trade will decline by the most in 80 years.

The Institute of International Finance predicts the world economy will shrink “close to” 2 percent in 2009. The IIF, which represents 380 financial institutions worldwide, today urged governments to pass stimulus measures that will have an “immediate effect” and said further rate cuts may be necessary.

“The uncertainties are very big,” ECB Governing Council member Nout Wellink told reporters at an event in Amsterdam today. “We will have a pretty bad first quarter for the whole world, just like we had a bad last quarter last year.”

Finance officials from the Group of 20 nations are meeting to discuss approaches to solving the financial crisis as a rift develops between Europe and the U.S.

European ministers are calling for a focus on tighter regulation, while President Barack Obama is looking for governments to boost spending.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net

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G-20 Shifts Regulation Focus as Economy Struggles

By Simon Kennedy

March 13 (Bloomberg) -- The guardians of the world economy are finding their efforts to revamp the global financial system overwhelmed by the deepening recession and banking crisis.

U.S. Treasury Secretary Timothy Geithner, Bank of England Governor Mervyn King and their Group of 20 counterparts meet near London today having originally intended to push along plans to tighten market regulation. Distracting them is a global economy in freefall, pressuring them to instead focus on ways to revive growth and tackle toxic bank assets.

“It’s like a patient battling for life in an emergency room,” said Nouriel Roubini, a professor at New York University. “That’s not the time to advise about the benefits of exercise and healthy diet. You have to first make sure the patient survives.”

The prognosis is worsening and failure to find a cure may disappoint investors as G-20 leaders prepare for their own summit in three weeks. The International Monetary Fund expects the first global contraction in six decades and equity investors are $3 trillion poorer than a quarter ago.

The cost of borrowing dollars is rising, Citigroup Inc. fell below $1 and companies from Deere & Co. to Volkswagen AG are axing jobs or investment. Goldman Sachs Group Inc. today cut its forecast for the world economy for the second time in eight days and now expects a contraction of 1 percent this year.

Divided

The G-20 remains divided as European governments rebut U.S. overtures to bolster spending, while President Barack Obama’s administration takes heat for lacking the staff to work on an international remedy. That risks an impasse when officials convene tonight and tomorrow at a luxury countryside retreat near Horsham, southern England, that counts Winston Churchill among its former guests.

“The Europeans want to use this as a forum to discuss global coordination of regulation, and the Americans are more interested in global coordination of firefighting,” said Randal Quarles, a former U.S. Treasury undersecretary and now a managing director at the Carlyle Group in Washington.

The conflagration of the 19-month crisis is putting policy makers under “enormous pressure” to take more action and head off further deterioration, said Marco Annunziata, chief economist at UniCredit MIB in London.

The U.S. has yet to implement its plan to remove tainted assets from banks and the Federal Reserve’s $1 trillion initiative to prop up the market for consumer and business loans won’t start until later this month. The European Central Bank has lagged behind the Fed in cutting interest rates and the region’s governments have been slow to cut taxes.

Debt Burden

China, the U.S. government’s largest creditor, in turn chose to draw attention to America’s debt burden on the eve of the G-20, with Premier Wen Jiabao saying in Beijing he’s “worried” about the value of China’s Treasury holdings.

Failure by the G-20 to step up efforts to rid banks of damaged securities may delay the recovery beyond 2010, says IMF Managing Director Dominique Strauss-Kahn.

“The stimulus will not work without a healthy financial sector,” Strauss-Kahn said in an interview March 9. U.K. Chancellor of the Exchequer Alistair Darling argues the crisis needs to be fought with “far greater urgency” and said late yesterday the G-20 must agree on measures that will curb excessive leverage at banks.

The London interbank offered rate, or Libor, that banks say they charge each other for three-month funds has climbed back to the highest since Jan. 8 as financial companies stung by almost $1.2 trillion of writedowns and losses hoard money.

Under Pressure

Policy makers are also under pressure to coordinate their efforts more or risk diluting their individual moves. Japanese Prime Minister Taro Aso today ordered a third spending plan and in total governments and central banks have provided more than $495 billion in aid for financial companies and cut rates to record lows.

Still, their efforts have been uneven. The IMF estimates that only Saudi Arabia, Australia, China, Spain and the U.S. will introduce budget boosts worth 2 percent of gross domestic product this year -- a benchmark Geithner endorses as “reasonable.”

The refusal of some governments to be as generous undermines those efforts and the Fund calculates the U.S. receives twice the boost of higher government spending if it’s matched elsewhere.

European ministers argue their social safety nets are bigger than elsewhere and blowing up budgets would create future problems.

“We don’t exactly have the same priorities at the same moment,” French Finance Minister Christine Lagarde said on LCI television today. Lagarde and Germany’s Peer Steinbrueck instead want the G-20 to focus more on cracking down on bankers’ bonuses, hedge funds, tax havens and credit ratings companies.

Froth

“All that is froth,” said Richard Portes, a professor at London Business School. “The accelerating decline in economic activity has to be dealt with first.”

One previous participant says the G-20 doesn’t need to decide between fighting the current crisis and unveiling a long-term solution to rewire the system.

“It’s quite possible and desirable for the G-20 to pursue both goals,” said Daniel Price, President George W. Bush’s G-20 negotiator and now senior partner for global issues at Sidley Austin LLP in Washington.

An overhaul of the financial system may nevertheless exceed the group’s reach in the immediate future.

Obama has yet to outline a detailed program for regulation, lacks key Treasury advisers and would have to work with Congress. Nor has the European Union formed a plan to improve the rules governing its own 27 members.

Principles

The most likely outcome is that the G-20 agrees to principles on regulatory reform, said Jim O’Neill, chief economist at Goldman Sachs Group Inc.

That could include an agreement that banks put away money during good times so they have a buffer to fall back on during hard times, he says. Other areas of agreement may include boosting IMF resources and warning against protectionism.

G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union. Officials from Spain and the Netherlands will also be present.

To contact the reporter on this story: Simon Kennedy in Paris at Skennedy4@bloomberg.net

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Fed Program to Spur Loans May Start With Few Deals

By Scott Lanman and Sarah Mulholland

March 13 (Bloomberg) -- The Federal Reserve’s program to revive the market for securities backed by consumer loans may start with just a handful of deals, according to participants in the preparations, delaying its prospects of easing the credit crunch.

Today, the Fed delayed by two days the March 17 deadline for submissions of proposed packages of debt that investors can buy with Fed financing. No agreements have been announced yet for proposed securities. Brokers and investors have had difficulty agreeing over contract terms for the Term Asset-Backed Securities Loan Facility, the people said.

“The stakes are quite large,” and it will be critical that the start of the program “gives reason for hope” that investors will ramp up demand in subsequent operations, said former Fed governor Lyle Gramley. “If they were to dilly-dally not just for weeks, but for months, it would be a black eye.”

Treasury Secretary Timothy Geithner is counting on the so- called TALF, a joint program with the Fed, to expand to as much as $1 trillion to unfreeze credit markets. Any sign of failure of the effort may leave lenders less willing to boost lending for everything from car purchases to farming equipment.

The TALF’s $200 billion first phase would finance AAA rated securities containing loans for autos, education, credit cards and small businesses. Officials eventually plan to finance other assets, including commercial mortgage-backed securities.

First Round

Fed Chairman Ben S. Bernanke and fellow policy makers may be watching the results of the TALF’s first round as they meet March 17-18 in Washington. The Federal Open Market Committee’s last statement, on Jan. 28, said officials will continue to “assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity.”

The New York Fed bank is administering the program, which was announced in November. The bank said in a statement today on its Web site that the two-day extension “was requested by market participants in order to allow more time for borrowers to complete the documentation associated with the initiation of the program.”

“We’ll see a slow ramp-up in this process as people get more comfortable with their obligations,” said Reed Auerbach, co-chief executive officer of law firm McKee Nelson LLP in New York, who is working with issuers and underwriters on the TALF. “I don’t think this month will be indicative of the level of activity going forward.”

Original Plan

The Fed originally planned to start the TALF in February, then delayed the start to ensure “all our legal and procedural steps had been taken,” Bernanke said in congressional testimony Feb. 25. On March 3, the Fed and Treasury said applications for the first deals would be due on March 17, with loans disbursed on March 25.

The program has been complicated by the number and variety of interested parties, including underwriters, issuers, dealers and investors.

Under the TALF, investors such as hedge funds would borrow $84 to $95 from the Fed for every $100 in ABS posted as collateral, meaning they will put up $5 to $16 of their own capital, depending on the type of security.

Initial interest rates on the Fed’s three-year loans will vary from about 1 percent to 3 percent, also depending on the collateral. Investor returns will stem from the pricing of the securities.

Treasury is providing $20 billion in capital from the Troubled Asset Relief Program to protect the Fed from losses. Geithner plans to increase the contribution to $100 billion, allowing the Fed to expand the TALF to $1 trillion and add other assets such as commercial mortgage-backed securities.

Cornerstone of Plans

President Barack Obama has characterized the TALF as a cornerstone of his plans to reverse a self-reinforcing cycle of shrinking credit and economic contraction.

“This administration is moving swiftly and aggressively to break this destructive cycle, to restore confidence and restart lending,” Obama said to a joint session of Congress on Feb. 24, without mentioning the program by name.

Geithner told lawmakers yesterday that the TALF is “a very powerful program to help jumpstart lending to small businesses, student loan markets, consumer credit markets, auto finance markets.” He said at a Senate Budget Committee hearing that the effort “goes around the banking system to try to get the securities markets working again.”

The Managed Funds Association, the main trade group for hedge funds, circulated a “fact sheet” on March 11 outlining 15 concerns of its members with a customer agreement provided by primary dealers, the 16 brokers who trade with the New York Fed’s markets desk and help the central bank implement monetary policy.

Signed Off

Attorneys for the dealers revised the contract, though many investors hadn’t signed off on the terms, one participant said on condition of anonymity.

The primary dealers include securities units of Goldman Sachs Group Inc., Morgan Stanley and UBS AG.

Each round of debt offerings after the first will be due to the Fed on the first Tuesday of every month through December, the current end of the program’s authorization by the Fed’s Board of Governors.

The April round will add further types of securities, including ABS backed by vehicle-fleet leases and loans for business, construction and farm equipment.

“This is for restarting a credit market that has been frozen,” said John Ryding, founder of RDQ Economics LLC and a former Fed economist. “That’s a process that’s going to take time.” Eventually, “it’s going to work and it’s going to work very significantly over time,” he said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Sarah Mulholland in New York at smulholland3@bloomberg.net.

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U.S. Economy: Imports, Exports Slide as Global Trade Collapses

By Timothy R. Homan

March 13 (Bloomberg) -- U.S. imports and exports both slumped for a sixth straight month in January in what may be the biggest collapse of world trade since the 1930s, raising the threat of protectionist measures to shield domestic industries.

The U.S. trade deficit narrowed in January to $36 billion, the lowest level in six years, on tumbling American demand for everything from OPEC oil to Japanese automobiles, Commerce Department figures showed today in Washington. The Labor Department said prices of imported goods dropped for a seventh month in February, another byproduct of the global recession.

American exports have slumped at a 44 percent annual pace in the most recent six months of data, with imports shrinking 51 percent, probably the most since the Great Depression, according to Morgan Stanley analysts. The figures may add to pressure on the Obama administration to rework international agreements and include protections for U.S. workers and the environment.

“The global volume of trade has collapsed,” said Christopher Low, chief economist at FTN Financial in New York in an interview with Bloomberg Television. “When you add protectionism on top of that, that further reduces both the volume of trade and also efficiencies. It tends to hurt both sides.”

The U.S. trade deficit has narrowed as imports fall faster than exports. American consumers are reining in spending as the unemployment rate surges and household wealth evaporates at a record pace. Consumer confidence remained near a 28-year low in March, a private report showed today.

Consumer Sentiment

The Reuters/University of Michigan preliminary index of consumer sentiment was at 56.6 in March, compared with 56.3 in February. The gauge reached 55.3 in November, the lowest level since 1980.

The trade gap with China increased to $20.6 billion from $19.9 billion in the prior month as U.S. exports to the nation dropped faster than imports. China has used some of the dollars it gets from trade surpluses with the U.S. to buy American government debt, making it the largest owner of Treasuries.

Treasuries dropped today after Chinese Premier Wen Jiabao said he is “worried” about the country’s holdings of the securities and wants assurances that the investment is safe. Benchmark 10-year note yields rose to 2.89 percent at 10:51 a.m. in New York from 2.86 percent late yesterday.

Finance ministers and central bankers from the Group of 20 industrial and emerging nations meet today in the U.K., where they may reiterate a commitment to avoid protectionism. Still, a decision by Switzerland’s central bank yesterday to drive down the value of its currency drew reminders of the competitive devaluations of the 1930s that worsened the Great Depression.

Protectionist Concern

“It is troubling that a country with a current surplus larger than 10 percent of GDP feels compelled to depreciate its currency,” Marc Chandler, a currency strategist at Brown Brothers Harriman & Co. in New York, wrote in a note.

Excluding petroleum, the U.S. trade deficit was little changed at $21.3 billion in January, the Commerce Department said.

The trade gap was projected to narrow to $38 billion from December’s $39.9 billion, according to the median forecast in a Bloomberg News survey of 72 economists. Projections ranged from $31 billion to $44.5 billion.

The global economy is likely to shrink this year for the first time since World War II, and trade will decline by the most in 80 years, the World Bank said this week without providing a specific estimate.

GDP Impact

The narrower gap is not good news for the U.S. economy because it mainly reflected the drop in petroleum prices. The numbers used to calculate gross domestic product, which eliminate the influence of prices, showed the trade deficit widened to $44 billion, the most since October.

Imports slumped 6.7 percent to $160.9 billion, the fewest since March 2005, paced by a $4.3 billion plunge in purchases of crude oil. Demand for foreign automobiles fell by $3.3 billion.

The deficit with OPEC dropped to $3.9 billion, the smallest since November 2003, and the gap with Japan shrank to the lowest level since January 1998, as U.S. imports fell to an almost 16- year low.

An even bigger concern for the U.S. economy is the slump in foreign demand for American-made goods. Exports decreased 5.7 percent to $124.9 billion, the lowest level since September 2006, as sales of automobiles, semiconductors, telecommunications gear and drilling equipment dropped, today’s report showed.

Technology Workers

National Semiconductor Corp., the maker of chips for the five largest mobile-phone makers, said it plans to cut more than 1,700 jobs, or about 25 percent of its workforce.

“The worldwide recession has impacted National’s business as demand has fallen considerably,” Chief Executive Officer Brian Halla said in a March 11 statement. “The actions we announced today will help us remain competitive.”

Boeing Co., the world’s second-largest commercial jet-maker, said it delivered 19 aircraft to buyers abroad in January, down from 27 the previous month.

U.S. gross domestic product is forecast to contract again this quarter after shrinking at a 6.2 percent annual pace from October to December, the most since 1982. A collapse in U.S. exports led to a widening in the trade gap that subtracted a half percentage point from growth last quarter.

The trade gap with Canada, the U.S.’s biggest trading partner, narrowed to the lowest level since May 1999, and the deficit with Mexico was the smallest since January 2002. The shortfall with the European Union was cut in half from $7 billion in December to $3.5 billion the following month.

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

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Daily Market Commentary - Fundamental Outlook

Daily Forex Fundamentals | Written by GCI Financial | Mar 13 09 15:47 GMT |

€ The euro depreciated marginally vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2865 level and was capped around the $1.2955 level. There is a sense of cautious optimism among some economists that the U.S. economic problems may slowly be improving given recent economic data and other factors. First, Citigroup indicated it may not need any additional capital injections from the U.S. government. Second, General Electric said its ratings downgrade yesterday will not impact its business activities. Third, Citigroup, JPMorgan Chase, and Bank of America indicated January and February were profitable for the banks. Data released in the U.S. today saw the mid-March consumer sentiment index improve to 56.6 from 56.3 at the end of February. Also, the January U.S. trade deficit narrowed 9.7% to -US$ 36.0 billion, datum that reflects the significant pullback in global trade. Notably, the U.S. trade deficit was -US$ 59.16 billion in January 2008. The February import price index fell 0.2% m/m and a record 12.8% y/y. In eurozone news, German Finance Minister Steinbrueck reported the current global fiscal stimuli programs could result in a "very big" inflation problem in the medium term. Data released in the eurozone today saw EMU-15 Q4 2008 labour costs ease to +3.8% y/y from 4.2% in Q3 2008. Also, EMU-16 January retail sales were up 0.1% m/m and off 2.2% y/y. Euro bids are cited around the US$ 1.2385 level. ¥/ CNY The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥98.65 level and was supported around the ¥97.15 level. Traders are talking about Switzerland's interest rate cut yesterday and announcement that it will pursue quantitative easing measures including currency intervention to try and shore up the Swiss economy. Some dealers believe this will pave the way for Japanese monetary authorities to conduct yen-selling intervention while others believe Japan will be less inclined to weaken its currency. Data released in Japan today saw the February consumer sentiment index print at 26.7, up from 26.4 in January. Also, January revised industrial output was off 10.2% m/m. The Nikkei 225 stock index climbed 5.15% to close at ¥7,569.28. U.S. dollar offers are cited around the ¥104.15 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥127.65 level and was supported around the ¥125.40 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥138.35 level while the Swiss franc moved lower vis-à-vis the yen and tested offers around the ¥83.15 level. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8380 in the over-the-counter market, down from CNY 6.8383. Chinese Premier Wen Jiabao reported China will announce a new fiscal stimulus package if and when it is needed. He also indicated China is "worried" about its holdings of U.S. Treasuries given the U.S.'s declining financial position. ₤ The British pound moved higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.4070 level and was supported around the $1.3860 level. Representatives from leading finance ministries and central banks are convening near Brighton this weekend to plan for the Group of Twenty meeting on 2 April. One theme that is emerging ahead of the G20 meeting is that there appears to be a lack of consensus about how to tackle the global economic recession. The Obama administration is said to be pressuring the European Union to boost the already-announced €200 billion fiscal stimulus it plans to provide member states. On the domestic front, Bank of England Monetary Policy Committee member Barker reported "While the scale and timing of these various impacts is uncertain, quantitative easing should bring about a pick-up from the present weakness in nominal spending, supporting economic activity...So on balance, the economic outlook has deteriorated further over the past month." Cable bids are cited around the US$ 1.3740 level. The euro moved lower vis-à-vis the British pound as the single currency tested bids around the ₤0.9165 level and was capped around the ₤0.9295 level. CHF The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.1935 level and was supported around the CHF 1.1835 level. Swiss National Bank yesterday reduced interest rates to historic lows, taking the target rate for three-month Swiss franc Libor to 0.25% from 0.50%. At the same time, SNB announced it will intervene in the exchange rate market to stop the Swiss franc's appreciation. Foreign investors also purchased a Swiss franc bond issue and this led to increased selling pressure on the franc. SNB is clearly trying to contend with the Swiss domestic economic slowdown by making its exports cheaper to the European Union, particularly Germany. Critics suggest this amounts to a "beggar-thy-neighbour" policy that could precipitate inflationary pressures in Switzerland. Data released in Switzerland today saw February producer and import pritces fall 0.6% m/m and 1.8% y/y. U.S. dollar offers are cited around the CHF 1.1585 level. The euro and British pound moved higher vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5400 and CHF 1.6735 levels, respectively. GCI Financial http://www.gcitrading.com DISCLAIMER : GCI's Daily Market Commentary is provided for informational purposes only. The information contained in these reports is gathered from reputable news sources and is not intended to be used as investment advice. GCI assumes no responsibility or liability from gains or losses incurred by the information herein contained.

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Jobless Rate Above 10% Defines Recession as Bernanke Predicted

By Peter Robison

March 13 (Bloomberg) -- Sergio Barreto landed his first job out of college during the recession that began in 1990, as a mechanic for United Airlines. He survived the next one a decade later, selling semiconductor materials. This time, he may be out of luck.

Barreto, who has an engineering degree from San Jose State University and 12 years experience in the chip industry, has been out of work since he was laid off in December with a month’s severance pay from closely held CoorsTek Inc.’s sales office in Fremont, California.

“I was very surprised because I was one of the top sellers,” said Barreto, 46, whose wife gave birth to their second child in October. “I’m in survival mode.”

At least 4.4 million jobs have been claimed by the U.S. recession that began in December 2007, cutting across the country and the economy. Positions have been eliminated by employers as diverse as Microsoft Corp., KB Toys Inc., Dartmouth College and the nonprofit organization that produces “Sesame Street.”

“This recession is incredibly broad-based,” said Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina. “Parts of the country that have traditionally weathered recessions fairly well are being impacted.”

Contractions are usually centered in one sector or region, such as manufacturing in the Midwest in 1982, he said. This one, propelled by a credit crisis spawned by a real-estate slump, is simultaneously rooted in housing, financial services and auto manufacturing, he said.

Highest Since 1984

Unemployment climbed in January in every U.S. state except Louisiana, and the decline there, to 5.1 percent from 5.5 percent in December, was due to rebuilding from Hurricane Katrina, the Labor Department said.

The jobless rate topped 10 percent in four states, led by Michigan, where at 11.6 percent it was the highest since May 1984, according to data compiled by Bloomberg.

South Carolina, at 10.4 percent, and California, with 10.1 percent, also saw their steepest rates in a quarter-century. Unemployment in Rhode Island was 10.3 percent, greater than since at least 1976, according to the data.

Wyoming’s was the lowest in January at 3.7 percent.

An average unemployment rate of 10 percent for a period of time is “certainly well within the realm of possibility,” Federal Reserve Chairman Ben S. Bernanke said during congressional testimony on March 10.

‘Like a Cancer’

While that outcome isn’t the “central tendency” of Fed forecasters, the central bank is using that level in an adverse scenario model that will determine whether banks need more capital, Bernanke said.

Workers bearing the brunt span economic, social and regional lines, according to interviews conducted around the country. They include Mimi Bardet, who is losing a six-figure job this month after 23 years at Time Warner Inc.’s Warner Brothers in Burbank, California, and Tanya Jones, who moved back to subsidized housing in Trenton, New Jersey, and gave up her 2002 Ford Explorer after she lost a $1,500-a-week nursing-home job in November.

“It’s like cancer -- there are so many people who know somebody going through this,” said Lynne Bee, 52, of Lawrenceville, Georgia, who was fired as a dental office manager in January.

California, which led the nation in mortgage foreclosures last month, had the most job losses, with 79,300. Next were Michigan and Ohio, battered by the auto industry collapse, with 60,800 and 59,600, respectively.

‘More Discouraging’

Southern states where the population is rapidly growing through immigration or migration have also been hard hit as their shrinking economies can no longer absorb the labor force, Vitner said. Georgia and Florida each had an 8.6 percent unemployment rate in January, and neither state topped 6 percent in 2001, according to data compiled by Bloomberg.

“I’ve tried to shift around to different professions and change my work status, but it just keeps hitting different markets,” said Mark Risetter, 54, a Dallas machinist laid off six weeks ago from Atco Rubber Products Inc., which makes insulated ducts for homes.

For Risetter, who has leukemia that is in remission, it was the third job loss since 1982. “It’s more discouraging now than it’s been in the past,” he said.

At the height of the Depression in 1933, 24.9 percent of the workforce was unemployed and shantytowns of crates and abandoned cars sprang up, according to the Franklin D. Roosevelt Presidential Library in Hyde Park, New York.

‘Shocked’

In Sacramento, there’s an echo in the dirt along the American River, where more than 300 people have pitched tents. Fewer than a dozen tents were at the site a year ago, said Joan Burke, director of advocacy at Sacramento Loaves & Fishes, which provides food and medical services.

“These are people that haven’t been homeless before and are shocked to find themselves in this situation,” she said.

At Ministry of Caring in Wilmington, Delaware, 10.4 percent more meals were served last year than in 2007, some to people who once had steady jobs, said Brother Ronald Giannone, a Capuchin Franciscan friar and the nonprofit’s executive director.

“We’re seeing what I call the ‘new poor,’” he said. “The last thing in the world these people ever expected to do was to have to rely on our facilities to eat, but when it comes down to paying the utilities or buying food, they are opting to keep the lights on.”

One Exception

Delaware’s 6.7 percent unemployment rate is already higher than the 5.8 percent at which it peaked in the 2001 recession, said John Stapleford, a senior economist at Moody’s Economy.com who monitors mid-Atlantic states.

Nationally, the jobless rate moved to a 25-year high of 8.1 percent in February.

The rate will reach 9.4 percent this year and remain above last month’s rate through at least 2011, threatening the nation’s longer-term growth potential, according to the median forecast of economists surveyed by Bloomberg News.

One exception to the grim data is in Washington, D.C., and neighboring Maryland and Virginia. The Obama administration may create 100,000 jobs to help administer the $787 billion economic stimulus package, said Max Stier, who runs the Partnership for Public Service, a non-profit group that monitors government employment.

15,000 People

With federal spending in the metro area increasing in 2009, as it has every year since 1983, that is trickling into the local economy, according to the Center for Regional Analysis at George Mason University in Fairfax, Virginia.

Sales at Morton’s steakhouse in downtown Washington are up almost 3 percent from the same time a year ago, said Dan Festa, 41, the general manager. The restaurant has hired nine servers since December, he said.

Business at Washington’s Ritz-Carlton hotel is comparable to two years ago, before the recession hit, said Elizabeth Mullins, who oversees four of the chain’s hotels.

“So far, touch wood, we’re lucky to be in DC!” Mullins said. “I don’t want to rub it in, but I’m so glad to be here.”

In Atlanta, more than 15,000 people attended a job fair at the Georgia World Congress Center this week, three times the number at a similar event three years ago, said State Labor Commissioner Michael Thurmond. A workshop called “Stimulus 101: What’s in it for you?” drew the most people, he said.

“There is a tremendous amount of anxiety and fear,” Thurmond said. “It is a Great Recession, no question about it.”

To contact the reporter on this story: Peter Robison in Seattle at robison@bloomberg.net

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China’s Premier Wen ‘Worried’ on Safety of Treasuries

By Belinda Cao and Judy Chen

March 13 (Bloomberg) -- China, the U.S. government’s largest creditor, is “worried” about its holdings of Treasuries and wants assurances that the investment is safe, Premier Wen Jiabao said.

“We have lent a huge amount of money to the United States,” Wen said at a press briefing in Beijing today after the annual meeting of the legislature. “I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

U.S. President Barack Obama is relying on China to sustain buying of Treasuries as his administration sells record amounts of debt to fund a $787 billion economic-stimulus package. Chinese investors have lost money on the securities so far this year, after increasing their holdings 46 percent to $696 billion in 2008, according to Treasury Department data.

“China’s purchases of American debt have been one of the few bolts keeping the wheels on the global economy,” said Phil Deans, a professor of international affairs at Temple University in Tokyo. “If China stops buying where does Obama’s borrowing to fund his stimulus come from?”

Treasuries declined, causing the yield on the 10-year U.S. note to rise six basis points to 2.92 percent at 4:51 p.m. in Hong Kong, according to BGCantor Market Data. The securities handed investors a loss of 2.7 percent in yuan terms this year, according to Merrill Lynch & Co.’s U.S. Treasury Master index. The dollar fell 0.2 percent to $1.2938 per euro.

“Of course we are concerned about the safety of our assets,” said Wen. “To be honest, I am a little bit worried.”

Risky Alternatives

China should seek to “fend off risks” as it diversifies its $1.95 trillion in foreign-exchange reserves, Wen said. Yu Yongding, a former adviser to the central bank, said in an interview on Feb. 10 that the nation should seek guarantees that its Treasury holdings won’t be eroded by “reckless policies.”

Demand for the relative safety of Treasuries has been supported in the past two years as finance companies reported $1.2 trillion in credit losses. China boosted holdings of government debt as it lost of more than $5 billion from investing $10.5 billion of its reserves in New York-based Blackstone Group LP, Morgan Stanley and TPG Inc. since mid-2007.

Currency market moves have been more favorable to holding U.S. bonds this year. Chinese investors who bought Japanese government bonds would have lost 7.7 percent so far this year in yuan terms, compared with a 7.3 percent loss for holders of German bunds, according to the Merrill Lynch indexes.

Shooting Itself

“China won’t sell the U.S. debt now as that will only drive down Treasury prices, hurting not only the U.S. but also the value of its own investments,” said Shen Jianguang, a Hong Kong-based economist at China International Capital Corp., an investment bank partly owned by Morgan Stanley.

U.S. Treasury Secretary Timothy Geithner will defend his spending plans at the Group of 20 meeting near London this weekend. French Finance Minister Christine Lagarde and Germany’s Peer Steinbrueck of Germany want the summit to focus on improving regulation and restraints on the finance industry.

The U.S. trade deficit and the government’s “nearly unrestricted” borrowing led to excess liquidity worldwide and “sowed the seeds” of the financial crisis, the People’s Bank of China said in a report today. The dollar has dropped 17 percent against the yuan since China ended a fixed exchange rate in July 2005. It was little changed at 6.8384 yuan today.

Printing Money

“China is worried that the U.S. may solve its problems by printing money, which will stoke inflation,” said Zhao Qingming, a Beijing-based analyst at China Construction Bank Corp., the country’s second-biggest lender. “If the U.S. can make sure this won’t happen, then China will continue to invest.”

U.S. Secretary of State Hillary Clinton urged China, while visiting officials in Beijing on Feb. 22, to continue buying U.S. debt, which she called a “safe investment.” She didn’t press China on its foreign-exchange policy, backing away from January comments by Geithner that the Chinese government manipulates its currency to boost exports.

China will maintain its policy of seeking a stable yuan, even as gains against the euro and Asian currencies hurt the nation’s exporters, Premier Wen said.

While the yuan has weakened 0.2 percent against the dollar this year, there has been a “drastic depreciation” in the euro and Asian currencies that has put a lot of pressure on Chinese exporters, Wen said. The currency has gained 8.6 percent against the euro this year and 6 percent against the Philippine peso.

Stimulus Plans

“Our goal is to maintain a basically stable yuan at a balanced and reasonable level,” Wen said on the final day of the meeting of the National People’s Congress. “At the end of the day, it is our own decision and any other countries can’t press us to depreciate or appreciate our currency.”

Collapsing exports have dragged the economy to its weakest growth in seven years and eliminated the jobs of millions of migrant workers. Wen reaffirmed China’s target of an 8 percent expansion in 2009 as economies from the U.S. to Japan contract, saying the goal was “difficult but possible” to achieve.

China can add “at any time” to 4 trillion yuan ($585 billion) of stimulus measures to revive the world’s third- biggest economy, Wen said. Gross domestic product expanded 6.8 percent in the fourth quarter, compared with 9 percent for all of last year and 13 percent for 2007.

“We have reserved adequate ammunition,” Wen said, adding that the fiscal deficit is under control and the debt level still safe. “At any time, we can introduce new stimulus.”

Delegates of China’s legislative advisory body suggested that the government diversify away from Treasuries into more risky assets. Jesse Wang, executive vice president of China Investment Corp., said on March 4 that the nation’s $200 billion sovereign wealth fund may invest in “undervalued” commodities.

The Reuters/Jefferies CRB Index that tracks 19 commodities dropped 55 percent from a record high of 473.97 reached in July. Oil prices fell 68 percent from July’s all-time peak of $147.27 a barrel.

To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.netJudy Chen in Shanghai at xchen45@bloomberg.net

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Natural Gas Falls on Forecast for Mild Weather in Midwest, East

By Reg Curren

March 13 (Bloomberg) -- Natural gas dropped in New York as above-normal temperatures forecast for the Midwest and Northeast in the coming days will limit demand for the heating fuel at a time when inventories are higher than average.

Highs will reach 56 degrees Fahrenheit (13 Celsius) in Chicago by March 16, about 10 degrees above normal, according to MDA Federal Inc.’s EarthSat Energy of Rockville, Maryland. Almost three quarters of Midwest households rely on gas for heating.

“The weather isn’t a factor and we’ve got ample supplies,” said Michael Rose, a director of trading at Angus Jackson Inc. in Fort Lauderdale, Florida.

Natural gas for April delivery fell 1.8 cents, or 0.5 percent, to $3.977 per million British thermal units at 10:57 a.m. on the New York Mercantile Exchange. Gas futures have declined 29 percent this year. The heating and industrial fuel advanced 5.2 percent yesterday, the biggest increase in almost 10 weeks.

Inventories in storage last week were 13 percent higher than the five-year average, an Energy Department report yesterday showed. Supplies were 14 percent higher the previous week.

Stockpiles dropped 112 billion cubic feet in the week ended March 6 to 1.681 trillion cubic feet, the Energy Department said.

Prices also fell as some traders sold contracts after yesterday’s move higher, said Rose.

“There’s absolutely going to be some sort of pullback,” Rose said. “These one-day huge moves to the upside lead to, somewhere down the road, big moves to the downside. A steady climb is good.”

Heating Fuel

The approaching end of the cold-weather season in the U.S., combined with slack industrial demand for gas, suggests prices will have a difficult time staying above $4 per million Btu, said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois.

“The weather forecasts I’m seeing in the six-to-15-day time period aren’t stretched too far from normal,” he said. “For all practical purposes, the normal forecast out to March 28 virtually brings an end to weather as a factor in this market.”

Stockpiles will probably finish the end of the withdrawal season this month around 1.65 trillion cubic feet, Ritterbusch said. The average over the past five years is 1.36 trillion, according to the Energy Department.

The recession has cut demand for energy as companies closed plants in response to slowing sales of their products.

Industrial gas consumption in November was 4.3 percent less than the same month in 2007, and in December demand was down 10 percent from a year earlier, the department said on Feb. 26. Manufacturers account for 29 percent of gas consumption.

To contact the reporter on this story: Reg Curren in Calgary at rcurren@bloomberg.net.

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China Needs Another $2 Trillion of Treasuries: William Pesek

Commentary by William Pesek

March 13 (Bloomberg) -- A record plunge in Chinese exports may be great news for the U.S. Treasury.

It’s simple mathematics. The U.S. economy is more than four times the size of China’s. Growth in China is wildly lopsided toward exports, many of those goods packed on ships bound for America. So, if China wants to stay afloat, it should spend less money building roads, bridges and dams and more on U.S. debt. That would give the U.S. and its consumers the access to easy credit to reignite spending, much of it on Chinese-made goods.

OK, so that’s not about to happen. China is already spooked about its $696 billion of Treasuries. Their value is subject to the whims of Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke.

You still have to wonder if domestic stimulus is the best way for China to go. It’s only a matter of time before China adds to the 4 trillion-yuan ($585 billion) spending plan unveiled in November. As global demand slides, China’s stimulus needs will grow exponentially. There are few signs it will be enough to ensure China’s projected growth of 8 percent in light of the 26 percent plunge in exports in February.

China, it’s often said, can spend its way out of this crisis. Throwing lots of money at the problem will soften the blow, yet it won’t be enough with the world slump intensifying. The key to China getting back to the all-important 8 percent growth level is a global recovery. Basically, that means the U.S.

$14 Trillion Gorilla

That’s why buying more U.S. debt makes sense. I’m not saying this because I’m American. This isn’t about economic nationalism. It’s just that the sheer size of the U.S. economy makes it a $14 trillion gorilla when officials in Beijing, Tokyo or Singapore grapple with safeguarding growth.

Malaysia, for example, plans to spend 60 billion ringgit ($16 billion) to support its export-dependent economy. Expect fiscal-stimulus packages of similar magnitude to sweep across Asia in the months ahead. Southeast Asia is experiencing this global crisis in slow motion. Even though most economies are still growing, the worst is yet to come.

Savings-rich Asia could almost fund a U.S. budget deficit that is sure to reach previously unthinkable levels over the next two years. And, really, it could be in the region’s best interest to do so.

Hillary Clinton’s visit to China last month dramatized the point. She didn’t exactly arrive with her hat in her hand, yet it was surreal to see the U.S. secretary of State hawking bonds.

China’s Interest

“Our economies are so intertwined,” Clinton told Dragon Television in Beijing. “It would not be in China’s interest” if the U.S. were unable to finance deficit spending to stimulate its stalled economy.

Clinton was referring to the Group of Two, an entity that has eclipsed the Group of Seven nations. The G-7 has been useless in this crisis. The G-2 is the key to restoring global demand.

Japan’s economy may be the second-biggest at $4.4 trillion, but it has its own problems. Germany’s economy is roughly the same size as China’s and it, too, might benefit more from a U.S. snapback than domestic stimulus.

President Barack Obama and Geithner need to get real about the magnitude of U.S. stimulus needs. Getting the U.S. off life- support may require another $2 trillion. Making that case to a disillusioned public and Republican leaders arguing for less public spending won’t be easy. They should begin laying the groundwork immediately.

Paying for It

The next step, of course, is paying for it. That’s where Asia comes in. Rebalancing the global economy will require Americans to become a bit more Asian -- consuming less and saving more -- and for Asians to become a bit more American. It’s not an easy transition, and in the meantime, expect U.S. officials to unleash a massive buy-bonds campaign.

Admittedly, this whole argument is politically incorrect. Asia lending the U.S. even more money would be highly unpopular. The U.S., Asians often point out, was slow to help this region during its 1997 crisis. And why bail out a country that is so successfully exporting its own crisis?

The answer is that Asia is heading into a highly turbulent environment. Governments can spend all they want on stimulus efforts, and they may help at the margin. For better or worse, though, restoring global growth is more of a U.S.-centric exercise than many in Asia and Europe might like to admit.

That inconvenient fact makes it pointless for China to suddenly dump its Treasuries. It’s just not an option for the world’s third-largest economy.

U.S. officials used to fret about the Japanese doing that. Concerns increased after Prime Minister Ryutaro Hashimoto said in June 1997 that “several times in the past, we have been tempted to sell large lots of U.S. Treasuries.” It never happened. The reason: It can’t, and especially now.

China would cannibalize its outlook by curtailing its U.S. debt purchases. It may have more to gain from doing the opposite.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

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CFTC Should Have Acted Sooner on Oil Fund Trades, Chilton Says

By Alexander Kwiatkowski and Chanyaporn Chanjaroen

March 13 (Bloomberg) -- The Commodity Futures Trading Commission should have acted sooner to investigate trades done to profit at the expense of the U.S. Oil Fund, the world’s largest exchange-traded fund, Commissioner Bart Chilton said.

The CFTC is investigating “multiple market participants,” including the U.S. Oil Fund, which is managed by Alameda, California-based U.S. Commodity Funds LLC. The review, part of the CFTC’s national oil market probe announced last year, is focused on an increase in the price difference between March and April futures contracts on the New York Mercantile Exchange on Feb. 6.

“I am not so sure that regulators shouldn’t have taken a more pre-emptive action earlier on,” Chilton, a Democrat serving as one of the regulator’s five commissioners, said in a March 10 phone interview. “I was disappointed that we hadn’t worked with Nymex earlier to try and provide greater caution.”

The U.S. Oil Fund holds West Texas Intermediate crude, the grade traded on Nymex since 1983. Last month it owned more than 20 percent of all March contracts, according to data from the exchange and the fund’s Web site.

To maintain its position, the fund sells, or “rolls” its front-month contracts starting from two weeks before they expire and buys second-month futures on specific days. Until this month, the fund rolled its position in one day. It now spreads the transactions over four days.

When the fund was rolling its March holdings on Feb. 6, the contract on Nymex fell as much as 6.2 percent, outpacing the April price, which fell as much as 4.8 percent. March futures closed that day down 2.4 percent, in contrast to the second- month contract, which rose 0.9 percent.

‘Raised Concerns’

“We are looking at all the trades surrounding the roll” on Feb. 6, Chilton said. “There was a spike we saw that day. It raised concerns for us as to what was going on in the market.”

John Hyland, chief investment officer of U.S. Commodity Funds, confirmed the CFTC has inquired about trades surrounding the oil fund’s roll as part of its investigation. The fund is “fully cooperating,” he said.

“The CFTC has not informed the fund or its manager that either were responsible for any wrongdoing,” he said in an e- mailed statement. “The fund’s trading activities are, by design, transparent, and the fund and its manager are unaware of their violation of law or regulations in connection with the roll or its other trading activities.”

The CFTC’s Chilton said he is “not suggesting there was a direct, causal relationship” between the actions of the fund and the movement in prices. “But it is certainly something that is anomalous and curious, and enough for us to want to take a good hard look at what was going on.”

Position Limits

“It raises the question to me whether or not we do need some hard position limits on commodities like oil,” he said. “I think we do.”

The House Agriculture Committee approved legislation last month that would place limits on positions a trader can hold in commodity markets as the government seeks more control over derivatives. Such limits on speculative positions exist now only in agricultural products.

The bill, which would also enhance the CFTC oversight of credit-default swaps, now goes for vetting by other panels. Chilton said he expects it to become law this year, he said.

“There is not a commodity that I can think of right now that we shouldn’t consider putting a hard and fast position limit on,” Chilton said. “I want to make sure regulators have flexibility to assure markets are functioning properly, and that means any hard and fast position limits that we set have to make sense to that market.”

For Related News and Information:

To contact the reporters on this story: Alexander Kwiatkowski in London at akwiatkowsk2@bloomberg.netChanyaporn Chanjaroen in London at cchanjaroen@bloomberg.net

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Exxon Brazil Find May Hold 8 Billion Barrels of Oil

By Joe Carroll

March 13 (Bloomberg) -- Exxon Mobil Corp.’s oil discovery off the coast of Brazil may hold enough crude to rival the nearby Tupi prospect as the Western Hemisphere’s largest find in three decades.

Exxon Mobil’s Azulao-1 well tapped a reservoir that could contain 8 billion barrels of recoverable oil, said Luiz Lemos, a partner at TozziniFreire Advogados, a Brazilian law firm that represents foreign energy companies with projects in the South American nation.

The size of the discovery will intensify interest in Brazil’s offshore region among U.S., European and Chinese producers amid a dwindling supply of untapped oil basins outside the Persian Gulf and Russia, said Lemos, a former general counsel for a unit of Brazil’s state oil company, Petroleo Brasileiro SA.

“This is very huge,” Lemos said yesterday in a telephone interview from Rio de Janeiro. His firm’s clients include Irving, Texas-based Exxon Mobil, Norway’s StatoilHydro ASA and Devon Energy Corp. of Oklahoma City.

Exxon Mobil, which pumps more crude than every member of OPEC except Saudi Arabia and Iran, in January announced the discovery of petroleum in the Azulao-1 well in an offshore region designated BM-S-22. The company operates the project on behalf of partners Petroleo Brasileiro, known as Petrobras, and Hess Corp.

Petrobras triggered a flood of interest in Brazil’s offshore crude deposits with the November 2007 announcement that Tupi may hold the equivalent of 8 billion barrels of recoverable oil. That would make it the largest find in the Americas since Mexico’s Cantarell field was discovered in 1976.

Drilling Guarani

A floating drilling rig began boring a second well, called Guarani, into the reservoir in BM-S-22 earlier this week, said Patrick McGinn, a Houston-based spokesman for Exxon Mobil.

“We have no idea how big it is,” McGinn said yesterday in a telephone interview. “We’re nowhere near that yet. It’s premature to speculate until all of the appraisal work has been done.”

Jon Pepper, a spokesman for New York-based Hess, referred inquiries to the field’s operator, Exxon Mobil. Rio de Janeiro- based Petroleo Brasileiro’s investor relations department didn’t respond to an e-mailed message seeking comment. Exxon and Hess each own 40 percent stakes in the field and Petrobras owns the other 20 percent.

Exxon Mobil Chief Executive Officer Rex Tillerson last week said oil from Brazilian fields in the area around Tupi probably won’t begin flowing onto world markets for years because of technical challenges and harsh operating conditions.

‘Huge Potential Resource’

In a March 5 presentation to investors and analysts in New York, Tillerson described his company’s discovery as “a huge potential resource.” He declined to go into more detail, saying too little is known about the geology and characteristics of the formation to make estimates.

Tapping Brazil’s new discoveries will be more challenging than extracting crude from giant onshore fields such as Saudi Arabia’s Ghawar, the world’s biggest, Tillerson told analysts last week.

At current energy prices, 8 billion barrels of oil is worth about $380 billion, which exceeds the economic output of Taiwan, South Africa and Ireland.

The Brazilian prospects cover an area the size of the U.S. state of Florida about 170 miles (274 kilometers) offshore under more than 16,000 feet of water, rock and salt, Lemos said. The region will require $500 billion in investments over the next few decades for pipelines, production platforms, gas-processing plants and other infrastructure, he said.

Tillerson, entering his fourth year as the head of the world’s largest oil company, expects to boost production by 2 percent this year to the equivalent of 4 million barrels of crude a day.

Searching for Oil

Exxon Mobil is spending $79 million a day this year to search for oil fields, construct platforms and renovate refineries. The company had $45.2 billion in profit last year, the highest in U.S. corporate history.

Tillerson, a 56-year-old University of Texas-trained engineer, is expanding the search for untapped reserves after production tumbled last year to the lowest since Exxon Corp.’s 1999 purchase of Mobil Corp.

Exxon Mobil fell 2 cents to $67.13 as of 10:42 a.m. in New York Stock Exchange composite trading. The stock has dropped 16 percent this year.

Hess, the best performer in the 13-company Amex Oil Index this year, rose $1.83, or 3.1 percent, to $60.85. Petrobras rose 1.2 percent to 27.88 reais in Sao Paulo.

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

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