Japan’s Topix Rises in Longest Streak in 4 Years; Honda Surges

By Masaki Kondo

July 30 (Bloomberg) -- Japan’s Topix index rose for a 10th day in its longest winning streak in four years after Mitsubishi Electric Corp. reported a narrower-than-expected quarterly loss and Honda Motor Co. boosted its annual profit target sevenfold.

Mitsubishi Electric, which made scoreboards for the Dallas Cowboys football stadium, surged 15 percent. Nissan Motor Co. jumped 10 percent after a first-quarter loss was narrower than analysts had estimated. Honda, Japan’s No. 2 automaker, soared 8.7 percent as cost reductions contributed to the higher earnings outlook. Sumitomo Metal Mining Co. sank 3.9 percent after first-quarter profit fell and oil and metals prices slid.

The Topix added 6.58, or 0.7 percent, to close at 936.94 in Tokyo, marking its longest stretch of gains since August 2004. The Nikkei 225 Stock Average added 51.97, or 0.5 percent, to 10,165.21, its highest close since Oct. 6. While both gauges advanced, about five stocks fell for four that rose.

“Positive earnings surprises are supporting the market,” said Hiroshi Morikawa, a senior strategist at Tokyo-based MU Investments Co., which manages the equivalent of $13 billion. “Cost cuts are rational actions for individual companies but they are reducing somebody’s revenue and diminishing demand, which will eventually lead to a deeper economic slump.”

Mitsubishi Electric surged 15 percent to 710 yen, posting the steepest jump on the MSCI World Index, followed by Nissan and Honda. The company today reported a first-quarter net loss that was less than half analyst estimates.

Nissan, Japan’s No. 3 automaker, gained 10 percent to 694 yen. It posted a first-quarter net loss that was less than a third of analysts’ projections.

Valuation Concerns

Honda, whose estimated price-to-earnings ratio reached 100, surged 8.7 percent to 3,010 yen and was the most actively traded stock by value in Tokyo. The company raised its operating profit forecast yesterday, after markets closed, to 70 billion yen ($737 million) for the year to March 2010, citing cost cuts. Nomura Holdings Inc. lifted its rating on the carmaker to “buy” from “neutral.”

Rising valuations have some investors questioning whether earnings prospects can justify current share prices. Fifteen percent of Nikkei-listed shares trade at more than 50 times estimated net income, compared with 5 percent for the S&P 500, according to Bloomberg data.

“The absolute level of profit is still low. Unless earnings continue to recover, current valuations can’t be justified,” for Honda said Mitsushige Akino who oversees the equivalent of $631 million at Ichiyoshi Investment Management Co. “With sales unlikely to grow, the success of cost cuts and business restructuring divide winners and losers.”

Sony Speculation

Sony Corp., maker of the PlayStation 3 game machine, soared 6.8 percent to 2,505 yen. After the close of Tokyo stock trading, the company reported a first-quarter net loss that’s less than half analysts’ projections.

“Earnings reports from automakers were seen as precursors for good results from electronics makers, including Sony, and prompted short-sellers to unwind their positions on those shares,” said Ayako Sera, a strategist at Sumitomo Trust & Banking Co. in Tokyo, which manages $266 billion in assets.

Sumitomo Metal, the nation’s No. 1 nickel producer, slid 3.9 percent to 1,392 yen. First-quarter net income plunged 78 percent as prices for copper and nickel fell. Nippon Oil Corp. lost 2.9 percent to 502 yen after cutting its full-year profit target. Nippon Mining Holdings Inc., its merger partner, sank 2.5 percent to 466 yen.

NEC Electronics Corp., Japan’s fourth-largest chipmaker, plummeted 5.3 percent to 967 yen, breaking a seven-day winning streak. A first-quarter net loss widened 16-fold from a year earlier, the company said yesterday after markets shut.

Nikkei futures expiring in September rose 0.9 percent to 10,200 in Osaka and added 1.7 percent to 10,205 in Singapore.

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.

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Akamai, CommScope, Hartford, RC2, Symantec: U.S. Equity Preview

By Lu Wang

July 30 (Bloomberg) -- Shares of the following companies may have unusual moves in U.S. trading. Stock symbols may have are in parentheses.

Akamai Technologies Inc. (AKAM US): The provider of software that makes Web sites load faster reported profit excluding some items of 40 cents a share in the second quarter, missing the average analyst estimate by 1.5 percent.

Amkor Technology Inc. (AMKR US): The provider of packaging and tests for semiconductors forecast earnings of at least 17 cents a share in the third quarter, exceeding the average analyst estimate of 6 cents in a Bloomberg survey.

CommScope Inc. (CTV US): The maker of communications equipment said it expects third-quarter sales of $800 million at most, trailing the average analyst estimate of $881 million.

Hartford Financial Services Group Inc. (HIG US): The insurer posted its smallest loss in a year and beat analysts’ estimates as a stock market rally eased the cost of protecting savers from asset declines.

RC2 Corp. (RCRC US): The maker of Bob the Builder and Thomas & Friends toys said it plans to sell 3 million shares and may use part of the money to pay back debt.

Symantec Corp. (SYMC US): The biggest maker of security software forecast profit and sales that missed analysts’ estimates after companies spent less to safeguard their information.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

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Countrywide Alumni Seek Profits From Mortgage Market’s Collapse

By Elizabeth Stanton

July 29 (Bloomberg) -- PennyMac Mortgage Investment Trust, which plans to raise $400 million in a stock offering today, is betting that the people who helped create the housing crisis will know how to profit from the cleanup.

Chief Executive Officer Stanford L. Kurland, 57, was president and chief operating officer of Countrywide Financial Corp., the loan originator whose co-founder, Angelo Mozilo, was sued by the Securities and Exchange Commission. Ten other senior officials also worked at Countrywide, whose subprime loans have suffered from a 39 percent delinquency rate, according to data compiled by Bloomberg. PennyMac hopes to make money buying mortgages from failed banks and redoing the terms.

“People who are critical of Wall Street will find with justification things to criticize here,” said Stanley Nabi, who oversees $7.5 billion as vice chairman of Silvercrest Asset Management Group in New York. “They’re going to say, ‘Look, these are the people who created this crisis, and now they’re buying this paper on the cheap.’”

PennyMac operates in a growing market. More than 1.5 million properties received a default notice or were seized in the U.S. during the first six months of 2009, a record, according to RealtyTrac Inc., which sells mortgage data. Backed by BlackRock Inc. and Highfields Capital Management LP, PennyMac plans to charge fees similar to those at hedge funds as it tries to rehabilitate loans.

SEC Lawsuit

Rising default rates at Countrywide drove its shares down 91 percent through March 2008, prompting a sale to Bank of America Corp., based in Charlotte, North Carolina. Mozilo, who co-founded Countrywide in 1969, was sued in June by the SEC for allegedly hiding the company’s deteriorating finances.

Kurland quit Countrywide in September 2006, ending a 27- year career with the largest U.S. mortgage lender. Once considered Mozilo’s likely successor, Kurland was replaced by David Sambol, one of two top Countrywide executives who the SEC sued along with Mozilo. No one at PennyMac was the target of the lawsuit.

Ray Johnson, a spokeswoman at PennyMac, declined to comment, citing regulatory restrictions prior to initial public offerings. The company cut the size of the deal, scheduled for completion after the close of trading today, from $750 million on July 16 when it announced plans to sell shares for $20 each. They will trade under the “PMT” stock symbol.

The real-estate investment trust says it will buy loans from lenders who failed as well as mortgage companies and insurers. In January, it purchased $558 million of mortgages that the Federal Deposit Insurance Corp. acquired last year after First National Bank of Nevada failed.

64 Bank Closures

The collapse of the U.S. mortgage market has caused more than $1.5 trillion in losses at financial institutions worldwide and prompted the FDIC to close 64 U.S. banks this year, the most since 1992.

PennyMac’s investments may return 15 percent to 25 percent a year, said Evan Gentry, the founder and chief executive officer of G8 Capital, a private buyer of distressed loans and real estate based in Ladera Ranch, California. Two of Gentry’s funds use a similar strategy.

“New mortgage REITs look more desirable than at any time I can remember,” said Dean Frankel, a money manager at Urdang Securities Management who met with PennyMac officials on July 22 to discuss the offering. Urdang, a unit of Bank of New York Mellon Corp. in Plymouth Meeting, Pennsylvania, manages $1.5 billion of real-estate investments. “While we don’t generally invest in mortgage REITs, we are taking a hard look,” he said.

Incentive Fees

PennyMac executives plan to charge a management fee equal to 1.5 percent of shareholders’ equity plus an incentive fee that’s one-fifth of profits above a certain level. It would be the first REIT since 2007 to succeed in charging an incentive fee, which are standard among hedge funds. While American Bethesda, Maryland-based Capital Agency Corp. and Cypress Sharpridge Investments Inc. of New York tried to, they scrapped those provisions prior to their IPOs in May 2008 and June 2009, respectively.

At least six other mortgage-related IPOs are pending, five of which also aim to collect incentive fees. New York-based Sutherland Asset Management Corp. amended its prospectus yesterday to remove one.

Investors may agree with PennyMac that its connection with Countrywide is an asset, said Matthew Howlett, who analyzes real-estate securities at Fox-Pitt Kelton Inc. in New York. PennyMac’s offices in Calabasas, California, are less than five miles from Countrywide’s.

‘Enormously Profitable’

“They understand the reasons a lot of these borrowers ended up defaulting,” he said. “They’re uniquely positioned to identify and correct them, and that can be enormously profitable in this environment given the prices.”

PennyMac’s strategy may rely too heavily on the assumption that investor appetite for mortgage-related assets will recover, said Terry Wakefield. He is a consultant to the residential loan industry who helped design Fannie Mae’s mortgage-backed securities business in 1981 and later traded the derivatives at Salomon Brothers Inc.

High default rates on restructured loans may also deter investors, Wakefield said. About 53 percent of mortgages modified in the first quarter of 2008 were 30 or more days delinquent after six months, and 63 percent were in default after a year, according to a June 30 report by the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

“The big issue in PennyMac’s world is: Where are they going to sell those loans, assuming they’ve been effectively modified?” Wakefield said. “I don’t know a lot of people standing in line to buy those assets.”

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

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Indonesia Needs to Gradually Build Reserves, IMF Says

By Arijit Ghosh

July 29 (Bloomberg) -- Indonesia, Asia’s third-fastest expanding major economy, needs to gradually build its foreign reserves and follow a “cautious” monetary policy stance to keep investor confidence, the International Monetary Fund said.

The Washington-based agency also recommended Indonesia boost spending in a statement today, saying the government has room for a bigger fiscal deficit.

Indonesia’s reserves fell to $57.58 billion in June from a record $60.56 billion in July 2008. Higher foreign reserves and attractive asset prices may keep investors from pulling money from the Southeast Asian nation should another global economic crisis arise, the IMF said.

“Although the economic outlook for 2009 remains positive, another round of global risk aversion could adversely affect external liquidity, demand, and growth prospects for Indonesia,” the IMF said. It’s “prudent” for the nation to build larger reserves, implement its stimulus plan and “strengthen monetary policy framework” to ensure macroeconomic and financial stability, it said.

Indonesia’s reserves are less than 3 percent of China’s $2.1 trillion of assets. The $433 billion economy may expand 3.5 percent, this year making it the fastest growing in Asia after India and China, according to IMF data. Growth may accelerate to 4.5 percent next year, the lender said.

IMF Rescue

Indonesia’s move to increase currency swap deals with Japan and China, and regional agreements to pool reserves may help Bank Indonesia boost its assets, said Thomas Rumbaugh, division chief at the IMF’s Asia & Pacific Department.

“There are a lot of contingency arrangements, swap lines being discussed bilaterally and within the region, and to the extent those are made effective it is a very inexpensive way to do it,” Rumbaugh said on a conference call today. “If there are delays on that side, they could build on their own reserves a little bit more.”

The IMF arranged a $25 billion package between 1997 and 2003 to help rescue Indonesia’s banking system and rehabilitate the economy by restructuring private and government debt. Indonesia paid the debt early.

Indonesia is nearing the end of its interest-rate reduction cycle, Rumbaugh said. The central bank cut its policy rate to 6.75 percent this month.

Economy ‘Saved’

Bank Indonesia has cut its benchmark interest rate for eight straight months to help boost growth as inflation slows. President Susilo Bambang Yudhoyono’s government has also planned stimulus measures valued at 71.3 trillion rupiah ($7 billion) to spur economic expansion.

“For boosting growth, a key issue now for Indonesia is getting fiscal policy to work,” said Helmi Arman, an economist at PT Bank Danamon Indonesia in Jakarta.

The government plans to announce another package to attract investors to the nation’s infrastructure projects, Vice President designate Boediono said yesterday. Southeast Asia’s largest economy expanded 6.1 percent last year and local consumption “saved” the economy this year, he said.

Indonesia needs to maintain its stimulus plan next year as it has “room” for a higher fiscal deficit, the IMF said. The government has targeted a budget shortfall of 2.4 percent of gross domestic product this year and forecasts a deficit of between 1.5 percent and 1.8 percent in 2010.

For Related News and Information: Top Stories: TOP Indonesia’s economic data: ECST ID For more economic stories: TNI INDO IDECO BN Economic forecasts: ECFC ID Rupiah forecasts: FXFC IDR Top economic news: TOP ECO

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Lithuania’s Chance to Avoid Bailout May Depend on Latvia, Banks

By Milda Seputyte

July 29 (Bloomberg) -- Lithuania’s need for an international bailout depends on neighboring Latvia’s economic performance and its own banking industry, not on its collapsing output, economists at Danske Bank and Capital Economics said.

The Baltic economy, which plunged a preliminary 22.4 percent last quarter, isn’t in “urgent” need yet of assistance from the International Monetary Fund, said Lars Christensen, head of emerging markets research at Danske Bank in Copenhagen.

The economies of Estonia, Latvia and Lithuania, which had the EU’s fastest growing economies from 2004-2006, are caving in after a real-estate bubble burst, cheap credit evaporated and slack foreign demand hurt exports. Economists and ratings companies including Standard and Poor’s have warned Lithuania may be forced to follow Latvia in accepting a bailout to turn around the steepest decline of all developing regions.

“There’s a little bit more room for waiting to go to the IMF,” Christensen said yesterday in a phone interview. “Lithuania is not in the same place as Latvia. I’m not sure it’s seen as different from Frankfurt or London but there’s a difference in degree of the crisis here.”

Eastern European nations, including Latvia, Romania and Hungary, have received more than $90 billion in international aid since September.

Latvia Key

The key for all three former Soviet republics is Latvia, which took an international bailout after its second-biggest bank needed a state rescue, said Neil Shearing, an economist at Capital Economics Ltd. in London said.

“The real surprise is that Lithuania hasn’t been forced to go already,” said Shearing. “For now at least, it depends on what’s happening in Latvia. We can get this contagion effect -- that means Lithuania would essentially have to devalue and probably end up restructuring debt and do that in the context of the IMF program.”

Latvia turned to a group led by the European Commission and the IMF for a 7.5 billion-euro ($10.6 billion) stabilization loan in December.

Latvia and the IMF reached a preliminary agreement on July 27, paving the way for the first loan payment from the Washington-based fund since December. That followed a 1.2 billion-euro transfer by the European Commission, helping quell concern about a devaluation in the lats that may have also destabilized the Lithuanian litai and the Estonian kroon.

Banking Industry

Unlike Latvia, Lithuanian and Estonian banks are mostly foreign-owned, helping stability, Shearing said.

Stockholm-based SEB AB, the largest bank in Lithuania, and Swedbank AB, the biggest bank in Estonia and Latvia, face soaring loan losses in the Baltic states. Swedbank and SEB reported net losses in the second quarter after loan losses jumped. They have both reduced lending in the Baltics.

Lithuania “has fallen into the same category as Latvia,” said Zsolt Papp, an emerging-markets economist at KBC Groep NV. “This means the government sooner or later will need to turn to the International Monetary Fund or the European Union.”

Speculation that Latvia may be forced to give up its fixed exchange-rate system, followed by Estonia and Lithuania, spread in June after Sweden’s Riksbank boosted its foreign currency reserves, a move interpreted by some as preparation for a fallout in the Baltics.

“This will bring up the question of devaluation again in the entire region,” Papp said. “The Baltic countries will have to seriously look at their currency regimes.”

‘Already History’

Lithuania’s government is paring spending and raising taxes to tackle faltering budget revenue. Lawmakers last week approved a second revision to the 2009 budget plan that includes lifting the value-added tax rate to 21 percent from 19 percent and cutting wages, after reducing spending by 7 percent of gross domestic product in the first six months.

The second quarter is “already history and the fact that the government managed to cope with public finances shows that additional budget cuts were well-timed,” said Vilija Tauraite, an economist at Vilnius-based SEB Bankas. No major collapses are expected in public finances that would push the country to ask for a loan from the IMF.

Still, Finance Minister Ingrida Simonyte said in an interview on July 16 that while she expected no bailout in the near term, she didn’t rule out aid in the future.

“We must always keep this option in mind,” Simonyte said. “I can’t say it’s for certain that we would never use it, that we would never need it. It would be stupid of me to rule this out.”

To contact the reporter on this story: Milda Seputyte in Vilnius at mseputyte@bloomberg.net

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RBA’s Stevens Signals Rates May Rise Before Jobs Peak

By Jacob Greber

July 29 (Bloomberg) -- Australia’s central bank Governor Glenn Stevens may not wait for signs that unemployment has peaked before raising borrowing costs from a half-century low.

“I’ve never seen written down or heard in discussion some rule of thumb that says we wait until unemployment is peaking before we lift the cash rate,” Stevens said in Sydney yesterday. “Hopefully” policy makers will find “a suitably timely way of returning to normal when the right time for that comes.”

Australian stocks and the currency rose after Stevens also said the economy may rebound faster than the central bank forecast six months ago as consumer and business confidence surges. Traders boosted bets on the size of future interest-rate increases.

Stevens “basically said he’s not going to wait for unemployment to peak before raising rates,” said Rory Robertson, an economist at Macquarie Group Ltd. in Sydney. “That’s a fairly controversial thing for him to say,” and reflects the fact “the world is a much brighter place than it was three months ago.”

In the past two decades policy makers have never lifted borrowing costs at a time of rising unemployment, Robertson said.

Investors forecast the overnight cash rate target will be 112 basis points higher in a year, a Credit Suisse Group AG index based on swaps trading showed at 10:16 a.m. in Sydney. Before Stevens’ speech, they tipped 98 basis points of gains. A basis point is 0.01 percentage point.

Currency, Stocks

The Australian dollar rose yesterday after the speech to 83.38 U.S. cents, the highest in ten months. The currency traded at 82.45 cents as of 10:23 a.m. in Sydney.

Australia’s benchmark S&P/ASX 200 Index of stocks rose 0.7 percent yesterday as shares of retailers including Billabong International Ltd. jumped following Stevens’ remarks. The world’s largest publicly traded surfwear maker advanced 5.5 percent and Harvey Norman Holdings Ltd., the nation’s biggest electronics retailer, gained 1.5 percent. The index was down 0.3 percent today.

It appears “that the downturn we are having may turn out not to be one of the more serious ones of the post-War era, in contrast to the experiences of so many other countries,” the Reserve Bank chief told a function organized by the Australian Business Economists.

“We can much more easily imagine upside risks to the outlook, to balance out the downside ones, than was the case six month ago.”

‘Not Beholden’

The government forecast in May that the jobless rate, which rose to 5.8 percent in June, will hit 8.5 percent in a year. The central bank, which also forecast in May that unemployment will climb without specifying a rate, is due to revise its economic predictions next month.

Stevens is saying “that he’s not going to be beholden to one particular variable if the weight of evidence is in the other direction,” said Joshua Williamson, a senior economist at Citigroup Inc. in Sydney.

“The downturn has been much less acute than feared, we’ve had a mountain of monetary and fiscal policy” and Stevens has “to make policy that’s relevant now and not based on some historical artifact.”

The governor left the benchmark overnight cash rate target at 3 percent on July 7 for a third month amid evidence a record 4.25 percentage points of cuts between September and April and A$12 billion ($9.9 billion) of government cash handouts to low and middle-income earners helped the nation skirt a recession.

‘Glass Half Full’

Signs of a rebound in Australia’s economy, which unexpectedly grew 0.4 percent in the first quarter after shrinking 0.6 percent in the fourth quarter, may prompt the central bank to revise its forecast for gross domestic product on Aug. 7.

In May, the bank predicted GDP would contract 1 percent this year before expanding 2 percent in 2010.

“It is becoming more common for Australians to see the glass as half full than as half empty,” Stevens said yesterday.

Stevens’ comment that there is no rule that the bank can’t raise rates before the unemployment rate peaks “makes us wary that he is preparing to break from convention,” said Felicity Emmett, an economist at Royal Bank of Scotland Group Plc in Sydney. “We have to be open to the Reserve Bank tightening.”

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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Economy Needs ‘First Amendment’ Curb, Columbia’s Bollinger Says

By Nancy Hass

July 29 (Bloomberg) -- The U.S. needs a “First Amendment for the economy” to check excesses in financial markets, said Columbia University President Lee Bollinger.

Bollinger, a constitutional scholar and one of three Federal Reserve Bank of New York directors representing the public, said in an interview yesterday that an independent regulator modeled on the judicial system should issue written rulings and “if it’s wrong, go back and change the precedent.”

Bollinger, 63, who has led New York-based Columbia since 2002 and served on the New York Fed’s board since 2006, called the economic crisis a “huge failure of public regulation.” He cautioned against relying on Congress or “the people who are engaged in the economic act to say, ‘Stop, we’re taking too much risk.’”

The Federal Reserve might be the right body to “stand outside the system” as an independent regulator, said Bollinger in the interview, in New York. In the same way the U.S. Constitution’s First Amendment protects free speech against censorship during wartime, a “First Amendment for the economy” could rein in financial excesses, he said.

President Barack Obama, as part of the overhaul of U.S. financial rules, last month proposed giving the Fed power to supervise all financial firms “whose failure could threaten the stability of the system.”

The credit system freeze that followed last year’s Lehman Brothers Holdings Inc.’s bankruptcy and Bear Stearns Cos. collapse ushered in the biggest financial crisis since the 1930s. The government since September has spent billions of dollars bailing out Citigroup Inc., Bank of America Corp., American International Group Inc., General Motors Corp. and housing finance companies Fannie Mae and Freddie Mac.

Lax Regulation

Global financial firms reported more than $1.47 trillion of writedowns and credit losses since 2007. Obama, elected in November, said during his campaign that lax government regulation helped lead to the crisis.

Bollinger criticized former Federal Reserve Chairman Alan Greenspan’s “mystique” and “lack of disclosure.” He praised the more open approach of current chairman Ben Bernanke, citing Bernanke’s July 27 speech at a public meeting in Kansas City, Missouri that was taped for broadcast on PBS television.

Bollinger was dean of the University of Michigan Law School in Ann Arbor from 1987 to 1994 and is on the Columbia Law School faculty in addition to being the university’s president.

Columbia’s endowment declined about 20 percent for the year ended June 30, less than Harvard University and Yale University, and the school will press ahead with a $6.2 billion campus expansion, Bollinger said.

Less Leverage

Columbia, with an endowment of $7.1 billion as of June 30, 2008, “used less leverage” than its peer universities, Bollinger said. Columbia relied less on its endowment for operating costs than Harvard, in Cambridge, Massachusetts, or Yale, in New Haven, Connecticut.

Columbia plans to break ground on its 17-acre Manhattanville campus before the end of the year, Bollinger said. Investment declines of about 25 percent at Yale and about 30 percent at Harvard have forced those schools to curb construction and slash spending. Columbia used its endowment for 13 percent of its operating budget in the fiscal year that ended June 30, while Harvard relied on its endowment for about 35 percent of its annual budget and Yale for about 44 percent, the schools have said.

The Manhattanville project “is unbelievably important to Columbia,” Bollinger said. While Harvard can wait for the economy to improve before resuming its expansion, “We can’t,” he said.

The project, in west Harlem adjacent to Columbia’s campus in the Morningside Heights section of Manhattan, will take more than two decades to complete and will include business, science and arts buildings, said Victoria Benitez, a school spokeswoman.

Columbia, founded in 1754, had 25,459 students including 4,247 undergraduates at Columbia College, during the last academic year, according to the university. Alumni include President Obama, Supreme Court Justice Ruth Bader Ginsburg, and the actress Maggie Gyllenhaal.

To contact the reporter on this story: Nancy Hass in New York at nhass1@bloomberg.net

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Japan Retail Sales Fall for 10th Month on Job Losses

By Toru Fujioka

July 29 (Bloomberg) -- Japan’s retail sales fell for a 10th month in June, extending the longest losing streak since 2003 as job losses and wage cuts forced households to trim spending.

Sales slid 3 percent from a year earlier, the Trade Ministry said today in Tokyo. Economists surveyed by Bloomberg News predicted a 2.5 percent drop.

The retail slump indicates consumers, whose spending accounts for more than half of the economy, are unlikely to contribute to a recovery as employment prospects worsen. Economists expect a report tomorrow will show that while industrial production climbed for a fourth month in June, output will still be more than 20 percent lower than last year.

“The worst is over but that doesn’t completely wipe out households’ concerns,” said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. “Japan’s recovery will be weak until a pickup in jobs and wages boosts consumer spending.”

The Topix Retail Trade Index fell 0.3 percent at the lunch break in Tokyo. The broader Topix index was little changed. The yen traded at 94.49 per dollar as of 11:20 a.m. in Tokyo from 94.38 before the report was published.

Sales at large retailers tumbled 6.7 percent from a year earlier, the report showed. Department-store sales fell 8.8 percent in June, capping the worst half-year performance on record, the Japan Department Stores Association said last week. Sales at convenience stores declined for the first time in 14 months in June, according to the Japan Franchise Association.

Seibu, Sogo

Millennium Retailing Inc. said last week that its Seibu and Sogo department stores will launch a cheaper lineup of house-brand products in September to attract a wider range of customers.

“Consumers are becoming very sensitive about prices,” Nagatoshi Nii, spokesman at Millennium, said in a telephone interview this week. “We want to satisfy them.”

Sales of general goods led last month’s declines, falling 6.6 percent from a year earlier, the ministry said. Car sales slipped 0.5 percent, clothing and fabrics dropped 5.7 percent and fuel declined 5.5 percent.

From a month earlier, retail sales unexpectedly fell 0.3 percent, the first decline since March. Economists had expected stimulus measures to help sales climb 0.4 percent on a month- on-month basis.

The government has given at least 12,000 yen ($130) to each resident, subsidies for the purchase of fuel-efficient cars, and incentives for buying environment-friendly air conditioners, washing machines and televisions.

The worsening job market is likely to prompt people to cut back even more once the lift from the stimulus measures fades, Norinchukin’s Minami said. The unemployment rate rose to a six- year high of 5.3 percent in June and job openings slumped to the scarcest on record, economists predict reports will show on July 31.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

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Bernanke May Have to Sacrifice Lending Powers or Independence

By Craig Torres

July 29 (Bloomberg) -- The financial-overhaul plan before Congress leaves the Federal Reserve in the business of lending to everyone from General Electric Co. to investors in student loans. That makes it harder for Chairman Ben S. Bernanke to keep Congress from second-guessing what he does.

Bernanke is trying to deflect a bill, co-sponsored by 276 members of the House of Representatives, that would require audits of central bank operations, including monetary policy decisions, by the Government Accountability Office. Audits wouldn’t be “consistent with independence,” Bernanke said at a Kansas City town hall meeting July 26. “I don’t think the American people want Congress running monetary policy.”

Unless the Fed retreats from unlimited lending, Bernanke can expect such a result, said Marvin Goodfriend, an economist at Carnegie Mellon University in Pittsburgh. The more the Fed invades the domain of Congress by supplying credit to businesses and markets outside the banking system, the more Congress will seek a hand in monetary policy, said Goodfriend, a former adviser to the Richmond Fed.

“Central bank independence is incompatible over time with all but limited, temporary last-resort lending” to banks, Goodfriend said in an interview. The Fed’s role in emergency lending “needs to be clarified before the next crisis,” he said.

Congress may demand more say over the Fed’s credit policies. Democratic Representative Paul Kanjorski of Pennsylvania is gathering signatures for a letter asking Bernanke to extend the Term Asset-Backed Securities Loan Facility.

Extending TALF

The TALF, an emergency program that lends to investors to purchase securities backed by consumer and business loans, is set to expire Dec. 31. Bernanke told the Senate Banking Committee July 22 that it would be “difficult” to justify extending the TALF if markets return to normal operations.

Such pressure to keep some lending programs going is likely to complicate future Fed efforts to keep a lid on inflation. Bernanke’s supporters say his actions have been consistent with the central bank’s traditional role as lender of last resort.

“The Fed is best suited to go in quickly if there is a fire,” said Mark Gertler, a New York University economist and research co-author with Bernanke. “But you would like an arrangement where if the assets are held for any period of time, the Treasury takes them over.”

The 88-page financial-overhaul plan the Obama administration submitted to Congress, written by the Treasury with input from the Fed, doesn’t limit whom the central bank can lend to or for how long, beyond the Fed’s own definition of “unusual and exigent circumstances.”

Emergency credit policies have helped more than double the Fed’s balance sheet over the past year to more than $2 trillion, including loans to support insurer American International Group Inc. and risky assets once owned by Bear Stearns Cos.

‘Vast Power’

“The Fed clearly cherishes its vast power to create and spend trillions of dollars,” Texas Republican Representative Ron Paul, who wrote the House bill on Fed audits, said on his Web site. “The only accountability the Federal Reserve has is ultimately to Congress.”

Bernanke told Paul at a House Financial Services Committee hearing last week that GAO audits, often initiated at the request of members of Congress, could be used as a club against the Fed.

“If we were to raise interest rates at a meeting and someone in the Congress didn’t like that and said ‘I want the GAO to audit that decision,’ wouldn’t that be viewed as an interference?” Bernanke asked. “Reviews or the threat of reviews in these areas could be seen as efforts to try to influence monetary policy decisions,” he said in testimony.

Risk Regulator

Congress has stepped up pressure on the Fed partly in reaction to proposals from the Obama administration to give the central bank more authority to regulate risk across the financial system. Lawmakers in both parties have expressed wariness about giving the Fed even more power.

“I understand your concern about the Fed’s independence, but you are the one that threw away the independence by acting as an arm of the Treasury and engaging in fiscal policy,” Kentucky Republican Senator Jim Bunning told Bernanke at a July 22 hearing. “Would you rather have an audit of the Fed or give up all of your non-monetary-policy functions?”

Bernanke told the Financial Services Committee that the Fed’s ability to repair the credit markets demonstrates the value of leaving the central bank with broad lending authority.

“We’ve been fairly successful,” he said.

Lehman Bankruptcy

Bernanke rushed to support credit markets in the wake of the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc. By mid- October, investors in top-rated 30-day asset-backed commercial paper demanded returns more than 3 percentage points above the benchmark lending rate, compared with 0.6 percentage point before the Lehman failure. The spread has since narrowed to about 0.4 percentage point.

As markets return to normal, the Fed should say “we are not going to finance these programs anymore and we are getting out of credit-allocation policies,” said Mickey Levy, chief economist at Bank of America Corp. in New York. “The fiscal role the Fed is playing is inconsistent with its longstanding mandate” to achieve stable prices and full employment.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.

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N.Z. May Leave Key Rate Steady on Signs of Recovery

By Tracy Withers

July 29 (Bloomberg) -- New Zealand central bank Governor Alan Bollard may keep the benchmark interest rate unchanged for a second month as a recovery in the housing market and business confidence signals an end to the recession.

The Reserve Bank of New Zealand will leave the official cash rate at a record-low 2.5 percent at 9 a.m. in Wellington tomorrow, according to all 10 economists surveyed by Bloomberg.

Bollard kept rates unchanged last month for the first time in a year, saying there were signs of stability in the global economy and prospects of “slow and fragile” growth in New Zealand by the end of 2009. The nation’s currency has surged the past three months, threatening the pace of the recovery and sparking calls by exporters for Bollard to cut rates further.

“The Reserve Bank is likely to stick to its assumption that the New Zealand dollar will weaken, meaning it is not yet prepared to deliver further rate cuts,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. “It will continue to hold and hope the exchange rate will depreciate.”

The currency has strengthened 15 percent against the U.S. dollar the past three months to be the second-best performing of 15 major currencies tracked by Bloomberg. The rising exchange rate erodes the local dollar value of meat, cheese and butter exports, which make up 30 percent of the economy.

The New Zealand dollar traded at 65.74 U.S. cents at 1:49 p.m. in Wellington from 65.78 cents yesterday. It touched 66.34 cents yesterday, the strongest since Oct. 3.

Higher Than Warranted

Finance Minister Bill English said this month the currency was “higher than fundamentals warrant” and may hamper his desire for the nation’s recovery to be based around exports and investment rather than consumption led by borrowing.

Exports fell 5.4 percent in the second quarter, according to a government report yesterday.

“We need to see the Reserve Bank indicate a commitment to lowering the currency,” John Walley, chief executive of the New Zealand Manufacturers & Exporters Association, said in an e-mailed statement. He wants Bollard to cut the cash rate tomorrow.

Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, has cut its estimated payment to New Zealand farmers by 12 percent, citing falling prices and the currency.

The local dollar needs to be “persistently weak” to ensure growth is driven by investment and exports, Bollard said in a July 14 speech. The risk to the recovery is that consumers, buoyed by rising house prices, spend more and increase their debt, he said.

Housing Recovery

New Zealand’s economy began contracting in the first quarter of last year and is probably in its seventh quarter of recession, according to government forecasts.

The housing market may lead a recovery after second- quarter home prices rose for the first time since late 2007. There were 40 percent more property sales in June than a year earlier, the Real Estate Institute said on July 9.

Consumers are less pessimistic and business confidence recovered in the second quarter, the New Zealand Institute of Economic Research Inc. said this month.

A net 25 percent of companies surveyed last quarter said the economy will worsen over the coming six months compared with 65 percent three months earlier, the Wellington-based institute reported on July 7.

“Borrow-and-Spend’

“With the prospect of recovery comes a growing concern than households could revert to their borrow-and-spend ways,” said Brendan O’Donovan, chief economist at Westpac Banking Corp. in Wellington. “Keeping interest rates too low for too long would obviously fuel that risk.”

Bollard in June said he was unlikely to raise rates until late 2010 and couldn’t rule out further reductions.

The governor will drop his reference to further rate cuts tomorrow while leaving the pledge to keep borrowing costs unchanged, O’Donovan said.

“The Reserve Bank’s focus is on supporting the economy through a period of weak activity, and with inflation pressures muted there’s no urgency to hike rates any time soon,” he said.

Traders see Bollard raising rates earlier, with 88 basis points priced in over the next year, according to a Credit Suisse index based on swaps trading.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.

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U.K. June Mortgage Approvals Rise to 14-Month High

By Jennifer Ryan

July 29 (Bloomberg) -- U.K. mortgage approvals climbed to a 14-month high in June, a sign the housing market is recovering as the recession eases and banks become more willing to lend.

Banks granted 47,584 home loans, compared with 44,169 in May, the Bank of England said today in London. Economists predicted 47,000, according to the median of 21 forecasts in a Bloomberg News survey.

House prices held their value for a third month in July, according to a survey of real-estate agents by Hometrack Ltd. Central bank policy maker Andrew Sentance said last week the bank may consider a pause in its 125 billion-pound ($207 billion) bond-purchase plan if economic forecasts published next month point to a recovery.

``We're expecting to see mortgage approvals rise as the banking crisis begins to ameliorate,'' said George Buckley, an economist at Deutsche Bank AG in London. ``The bank will be mildly encouraged by these figures. I don't see a change in the bond purchases or in rates.''

The pound was little changed after the report at $1.6370 as of 9:42 a.m. in London.

Net lending secured on dwellings rose to 343 million pounds from 331 million pounds in May, while net lending to consumers fell to 71 million pounds from 153 million pounds. Credit card lending rose by 167 million pounds.

The average house price in England and Wales held at 155,600 pounds this month, Hometrack Ltd., a London-based property research company, said July 27. The reading is still down an annual 7.7 percent.

`Watching' Stance

Sentance said last week there may be ``some evidence of positive growth in the second half of the year,'' and the bank may shift to a ``watching'' stance next month on their plan to ease credit strains in the economy.

The bank kept the key interest rate at a record low of 0.5 percent this month and voted for no change in the asset-purchase arrangements. Policy makers make their next decision on the key rate and so-called quantitative easing on Aug. 6.

M4, the broadest measure of U.K. money supply, fell 0.2 percent in June and was 13.8 percent higher than a year earlier. The annual rate of increase was revised from a previous estimate of 14.2 percent.

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

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Italy Business Confidence Rises to Eight-Month High

By Lorenzo Totaro

July 29 (Bloomberg) -- Italian business confidence rose to an eight-month high in July as manufacturers expect exports to pick up and help lead the economy out of its deepest recession since World War II.

The Isae Institute’s sentiment index climbed for a fourth month to 71.7 from a revised 69.8 in June, the Rome-based research center said today. The July reading topped the median forecast of 70 in a Bloomberg News survey of 17 economists.

“Italian industrialists have hope that the production cycle will gain some momentum in the coming quarters,” said Annalisa Piazza, an economist at Newedge Group in London. The reading “confirms that the bottom of the ongoing recession has been reached earlier this year.”

Industrial production, buoyed by government incentives to buy cars and home appliances, rebounded in April after 11 months of contraction and was unchanged in May. June output rose 0.5 percent, employers lobby Confindustria forecasts. Exports to European Union countries gained 0.4 percent in May on a monthly basis, compared with a fall of 4.2 percent in April.

Italian businesses “expect a recovery in new orders and an increased level of exports in the next few months,” today’s report said. “Companies perceive an improvement in their competitive position on the domestic and foreign markets.”

Reversal of Fortune

Today’s reading mirrors advances this month in consumer confidence, where optimism among Italian households rose to the highest in almost two years. In Germany, Europe’s largest economy, confidence increased for a third month. Rising exports will help Italy record in the three months through September its first quarterly growth since early last year, Isae forecast on July 23.

European car sales rose in June for the first time in 14 months as government-backed incentives boosted demand for producers such as Fiat SpA. The Italian carmaker recorded a 12 percent gain, selling 112,437 vehicles in the region.

Indesit Company SpA, Europe’s third-largest home-appliance maker, said this month it would continue production at a plant near Turin, after having announced in April that it would reduce output at the facility.

Europe’s worst recession since World War II has led to falling prices and record-low interest rates that lowered financing costs. Italy’s producer prices declined 0.2 percent in May, the 10th consecutive monthly fall, leaving manufacturers with more money to spend.

Isae conducted its latest survey of 4,000 companies between July 1 and July 20. The June figure was revised up from 69.3.

To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net

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Russia, Poland, Czech: Eastern Europe Bond, Currency Preview

By Zijing Wu and John Kohut

July 29 (Bloomberg) -- The following events and economic reports may influence trading in eastern European bonds and currencies today. Bond yields and exchange rates are from the previous day’s session.

Russia: The federal statistics office is scheduled to release data for consumer prices today. Inflation in the year through July 20 was 7.9 percent.

The government will sell up to 15 billion rubles ($482 million) of OFZ Federal Loan Bonds at 2 p.m. local time.

The ruble declined 0.9 percent to 30.9927 per dollar, and 0.2 percent to 44.0652 per euro. The movements left the ruble 0.9 percent lower at 36.8838 against the central bank’s target currency basket.

The yield on the 6.9 percent government bond due in February 2036 fell two basis points, or 0.02 percentage points, to 11.57 percent.

Poland: The central government is likely to leave its key interest rates unchanged at 3.50 percent, according a Bloomberg survey of economists.

The zloty weakened 0.6 percent to 4.1850 per euro.

The yield of Poland’s 5.5 percent bond due in October 2019 advanced one basis point to 6.19 percent.

Hungary: The unemployment rate was unchanged at 9.8 percent for the three months to June, according to the median estimate of seven economists surveyed by Bloomberg. The statistics office is due to publish the figure at 9 a.m.

The office also releases data on growth of producer prices, an early indicator of inflation, at 9 a.m. The annual figure rose to 6.8 percent in June from 6.2 percent in May, according to the median forecast of five economists surveyed by Bloomberg.

The forint declined 0.8 percent to 268.78 per euro.

The yield on Hungary’s 6.5 percent bond due in June 2019 dropped three basis points to 8.30 percent.

Czech Republic: Industrial output dropped for a ninth month in June, by an annual 17 percent, according to the median estimate of 10 economists surveyed by Bloomberg. The government is due to publish the figure between today and July 31. In May, output slumped by an annual 22 percent.

The koruna rose 0.3 percent to 25.527 per euro.

The yield on the country’s 4.6 percent bond due in August 2018 fell three basis points to 4.99 percent.

To contact the reporter on this story: Zijing Wu in London zwu17@bloomberg.net; John Kohut in London jkohut@bloomberg.net.

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Pound Closing Below $1.6368 Support Would Be Bearish, RBC Says

By Daniel Tilles

July 29 (Bloomberg) -- A pound close below $1.6368 may signal more declines for the U.K. currency, according to RBC Capital Markets.

The “pound sits right above major support at $1.6368,” Sue Trinh, a senior currency strategist at RBC in Sydney, wrote today in a report. “Pound-dollar has been able to hold above this 40-day moving average for the better part of two weeks, and a break would be bearish.”

Sterling dropped 0.3 percent to $1.6373 as of 8:13 a.m. in London, after falling to as low as $1.6354.

To contact the reporter on this story: Daniel Tilles in London at dtilles@bloomberg.net

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UniCredit Recommends Bet on Pound If It Weakens to Below $1.6350

By Justin Carrigan

July 29 (Bloomberg) -- Investors should back the pound against the dollar if the U.K. currency drops below $1.6350, according to UniCredit SpA.

“Encouraging U.S. data could offer sterling some cushion through the U.S. equity channel,” Roberto Mialich, a currency strategist in Milan at UniCredit Markets & Investment Banking, wrote in a note today. “Go long on a break through $1.6350.”

Britain’s currency fell to $1.6377 as of 7:53 a.m. in London, from $1.6428 yesterday.

To contact the reporter on this story: Justin Carrigan in London at jcarrigan@bloomberg.net

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Yen, Dollar Advance as Yield Demand Wanes, Equity Markets Fall

By Yasuhiko Seki and Matthew Brown

July 29 (Bloomberg) -- The yen and the dollar rose as stocks declined and economists said a report will show orders for U.S. durable goods fell last month, curbing demand for higher-yielding assets.

The Japanese currency also advanced amid speculation domestic investors are repatriating earnings. The Australian dollar fell from near its strongest level this year against the U.S. currency. South Korea’s won ended a two-day advance as Asian stocks declined, with the Shanghai Composite Index tumbling the most in eight months.

“With equities softer, risk currencies are coming off and the dollar and the yen are benefiting,” said Daragh Maher, deputy head of global foreign-exchange strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. “Anything that suggests expectations for growth in China are lower today than yesterday is going to hit the risk currencies.”

The yen strengthened to 133.67 per euro at 8:45 a.m. in London, from 133.95 yen yesterday in New York. It was at 94.33 per dollar from 94.55, extending its advance this month to 1.8 percent. The euro bought $1.4171, from $1.4167 yesterday. The 16-nation currency traded in July in a range of $1.3833 to yesterday’s high of $1.4304, the strongest level since June 3.

Australia’s currency fell to 82.04 U.S. cents, from 82.68 cents in New York yesterday, when it rose to 83.38 cents, the most since Sept. 29.

‘Painfully Slow’

The yen rose against all 16 most-traded currencies tracked by Bloomberg. Orders for durable goods in the U.S. fell 0.6 percent last month, the first retreat in three months, according to the median of 73 economists’ forecasts in a Bloomberg News survey. The Commerce Department releases the data at 8:30 a.m. in Washington today.

China’s Shanghai Stock Exchange Composite Index dropped 5 percent, the most since Nov. 18, as Jiangxi Copper Co. said first-half profit fell and China Cosco Holdings Co., the world’s largest operator of dry-bulk ships, forecast a loss. Retail sales in Japan slid 3.0 percent from a year earlier following a 2.8 percent drop in May, the Trade Ministry said today in Tokyo.

Federal Reserve Bank of San Francisco President Janet Yellen said the U.S. economy’s recovery is likely to be “painfully slow” as consumers spend less and save more. She also said the U.S. is showing the “first solid signs” of emerging from recession.

“A gradual recovery means that things won’t feel very good for some time to come,” Yellen said in a speech in Coeur d’Alene, Idaho.

Eurobond Redemptions

Demand for the yen also rose amid speculation Japanese investors will bring back funds from redemption payments on 18 billion euros ($25.5 billion) in European government bonds maturing tomorrow, according to RBC Capital Markets.

“Talk of sizeable Eurobond redemptions are weighing on the euro-yen,” said Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney.

The Japanese currency extended its advance against the 16- nation currency after a car bomb explosion in the Spanish city of Burgos. The blast hurt 36 people, according to a government official.

“This news strengthened risk-aversion briefly and added to the buying of the yen,” said Yuji Saito, head of the foreign- exchange group in Tokyo at Societe Generale, France’s third- largest bank.

The won fell 0.3 percent to 1,239.95 against the dollar as the MSCI Asia Pacific Index of shares snapped its longest winning streak in more than five years, falling 0.9 percent, after the U.S. Conference Board yesterday reported the consumer confidence index dropped for a second month in July.

The Conference Board’s confidence index fell to 46.6, following a reading of 49.3 in June, the New York-based research group said.

“It is negative for Asian exports and a surprise to the market,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong.

To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

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Bernanke May Have to Sacrifice Lending Powers or Independence

By Craig Torres

July 29 (Bloomberg) -- The financial-overhaul plan before Congress leaves the Federal Reserve in the business of lending to everyone from General Electric Co. to investors in student loans. That makes it harder for Chairman Ben S. Bernanke to keep Congress from second-guessing what he does.

Bernanke is trying to deflect a bill, co-sponsored by 276 members of the House of Representatives, that would require audits of central bank operations, including monetary policy decisions, by the Government Accountability Office. Audits wouldn’t be “consistent with independence,” Bernanke said at a Kansas City town hall meeting July 26. “I don’t think the American people want Congress running monetary policy.”

Unless the Fed retreats from unlimited lending, Bernanke can expect such a result, said Marvin Goodfriend, an economist at Carnegie Mellon University in Pittsburgh. The more the Fed invades the domain of Congress by supplying credit to businesses and markets outside the banking system, the more Congress will seek a hand in monetary policy, said Goodfriend, a former adviser to the Richmond Fed.

“Central bank independence is incompatible over time with all but limited, temporary last-resort lending” to banks, Goodfriend said in an interview. The Fed’s role in emergency lending “needs to be clarified before the next crisis,” he said.

Congress may demand more say over the Fed’s credit policies. Democratic Representative Paul Kanjorski of Pennsylvania is gathering signatures for a letter asking Bernanke to extend the Term Asset-Backed Securities Loan Facility.

Extending TALF

The TALF, an emergency program that lends to investors to purchase securities backed by consumer and business loans, is set to expire Dec. 31. Bernanke told the Senate Banking Committee July 22 that it would be “difficult” to justify extending the TALF if markets return to normal operations.

Such pressure to keep some lending programs going is likely to complicate future Fed efforts to keep a lid on inflation. Bernanke’s supporters say his actions have been consistent with the central bank’s traditional role as lender of last resort.

“The Fed is best suited to go in quickly if there is a fire,” said Mark Gertler, a New York University economist and research co-author with Bernanke. “But you would like an arrangement where if the assets are held for any period of time, the Treasury takes them over.”

The 88-page financial-overhaul plan the Obama administration submitted to Congress, written by the Treasury with input from the Fed, doesn’t limit whom the central bank can lend to or for how long, beyond the Fed’s own definition of “unusual and exigent circumstances.”

Emergency credit policies have helped more than double the Fed’s balance sheet over the past year to more than $2 trillion, including loans to support insurer American International Group Inc. and risky assets once owned by Bear Stearns Cos.

‘Vast Power’

“The Fed clearly cherishes its vast power to create and spend trillions of dollars,” Texas Republican Representative Ron Paul, who wrote the House bill on Fed audits, said on his Web site. “The only accountability the Federal Reserve has is ultimately to Congress.”

Bernanke told Paul at a House Financial Services Committee hearing last week that GAO audits, often initiated at the request of members of Congress, could be used as a club against the Fed.

“If we were to raise interest rates at a meeting and someone in the Congress didn’t like that and said ‘I want the GAO to audit that decision,’ wouldn’t that be viewed as an interference?” Bernanke asked. “Reviews or the threat of reviews in these areas could be seen as efforts to try to influence monetary policy decisions,” he said in testimony.

Risk Regulator

Congress has stepped up pressure on the Fed partly in reaction to proposals from the Obama administration to give the central bank more authority to regulate risk across the financial system. Lawmakers in both parties have expressed wariness about giving the Fed even more power.

“I understand your concern about the Fed’s independence, but you are the one that threw away the independence by acting as an arm of the Treasury and engaging in fiscal policy,” Kentucky Republican Senator Jim Bunning told Bernanke at a July 22 hearing. “Would you rather have an audit of the Fed or give up all of your non-monetary-policy functions?”

Bernanke told the Financial Services Committee that the Fed’s ability to repair the credit markets demonstrates the value of leaving the central bank with broad lending authority.

“We’ve been fairly successful,” he said.

Lehman Bankruptcy

Bernanke rushed to support credit markets in the wake of the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc. By mid- October, investors in top-rated 30-day asset-backed commercial paper demanded returns more than 3 percentage points above the benchmark lending rate, compared with 0.6 percentage point before the Lehman failure. The spread has since narrowed to about 0.4 percentage point.

As markets return to normal, the Fed should say “we are not going to finance these programs anymore and we are getting out of credit-allocation policies,” said Mickey Levy, chief economist at Bank of America Corp. in New York. “The fiscal role the Fed is playing is inconsistent with its longstanding mandate” to achieve stable prices and full employment.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.

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BHP, Rio Profits May Rise on Iron Ore Outlook, JPMorgan Says

By Rebecca Keenan

July 29 (Bloomberg) -- BHP Billiton Ltd. and Rio Tinto Group, the biggest and third-largest mining companies, had their profit estimates raised by as much as 40 percent by JPMorgan Chase & Co. because of rising iron ore prices.

Rio’s net income may be $6.7 billion next calendar year, up from JPMorgan’s earlier estimate of $4.8 billion, analyst David George said in a report dated yesterday. BHP may have net income of $8.3 billion in the year ending June 30, 2010, up 37 percent from George’s earlier estimate of $6.1 billion.

Iron ore for immediate delivery to China, the biggest buyer, is trading at the highest level this year thanks to strong demand from steelmakers, George said. The price is now 25 percent above the annual contract prices agreed in May by the two suppliers and steel mills in Japan and South Korea.

Mills in China still haven’t agreed on annual contract prices with London-based Rio and Melbourne-based BHP, the world’s second- and third-biggest suppliers. BHP’s profit for the year ended June 30, may be $10.1 billion and Rio’s profit this calendar year may be $4.4 billion, JPMorgan said. The two companies report half-yearly earnings next month.

The gains in the so-called spot price means annual contract prices may rise 10 percent for the year starting April 1, compared with JPMorgan’s earlier forecast of a 10 percent decline, George said.

JPMorgan increased its long-term price forecast for contract prices for iron ore fines, the benchmark grade, by 25 percent to $50 a metric ton. The bank also raised its price forecasts for industrial metals because of the prospects for a second-half rebound in demand driven by expanding worldwide factory output.

To contact the reporter on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net

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