Economic Calendar

Monday, December 21, 2009

Central Bank Forecasts Update

Special Reports | Written by | Dec 21 09 10:54 GMT |

In end-08, central banks worldwide reduce policy rates to stimulate economic growth, in hopes of combating the worst global recession since World War II. Apart from traditional easing measures, some central banks also implemented 'non-standard' policies such as quantitative easing. Now that a year has passed, global economic outlook has shown signs of improvement. Although the road to recovery is likely bumpy, policymakers need to slowly unwind the ultra-expansionary policies they adopted over the year.

Consensus Next meeting Current Jan-09 1Q10 2Q10 3Q10 First Rate Hike
FED 27-Jan 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 4Q10
ECB 14-Jan 1 1 1 1 1.25 3Q10
BOE 7-Jan 0.5 0.5 0.5 0.5 0.75 3Q10
SNB 11-Mar 0.25 0.25 0.25 0.25 0.25/0.5 uncertain
BOJ 26-Jan 0.1 0.1 0.1 0.1 0.1 uncertain
RBA 2-Feb 3.75 3.75 4 4.375 4.5 October 09
RBNZ 28-Jan 2.5 2.5 2.5/2.75 3 3 2Q10
BOC 19-Jan 0.25 0.25 0.25 0.25 0.75 3Q10

FED: The Fed brought the policy rate to record low level of 0-0.25% in December 2008. At the same time, policymakers decided to adopt QE through large scale asset purchases, including Treasury ($300B), MBS ($1.25T) and agency debts ($175B), as well as some other facilities such as Term Auction Facility (TAF) and Term Asset-Backed Securities Loan Facility (TALF). In order to promote a smooth transition in markets, the Fed is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the 1Q10.

According to the accompanying statement of December's FOMC meeting, most of the Fed's special liquidity facilities (including the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility) will expire on February 1, 2010, consistent with the Fed's announcement of June 25, 2009. The amounts provided under the TAF will continue to be scaled back in early 2010. The anticipated expiration dates for the TALF remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral.

The Fed's rate decision depends heavily on inflation and job market. Although CPI has emerged from deflationary level since November 2009, it stays below the central bank's long-term target. As stated several times after FOMC meetings, the Committee expected that inflation will remain 'subdued for some time' as 'substantial resource slack likely to continue to dampen cost pressures' and 'longer-term inflation expectations stays stable'.

Concerning employment condition, the jobless rate surged to 10.2%, a level not seen since 1983, in November, 2009. Although the rate slid to 10% in December with surprising payroll addition, it takes time to see if the drop in rate can sustain. Moreover, the Fed normally raise rate only after the jobless rate has fallen for several months. Therefore, it's unlikely to a rate hike until the second half of 2010.

Consensus forecast the Fed will adopt the first rate hike in 3Q10. Morgan Stanley anticipates the will exit with '2 stages'. 'In spring, the Fed will start draining excess liquidity, then, by mid-year, begin to raise the fed funds rate to 1.5% by year-end and 2.0% in 2011'. The 3 factors triggering the Fed to exit are 'bottoming in inflation and a forecast that it will rise; sustained, solid growth and a similar forecast; and ongoing improvement in financial conditions'.

Deutsche Bank expected the Fed funds rate will rise to 0.5% by 3Q10. 'The FOMC will likely begin the process of raising policy rates as soon as the unemployment has begun to decline noticeably and shows good promise of being on a sustained downward path'.

However, Goldman Sachs believes the Fed will maintain the target rate at the current level through end-2011, mainly due to its inflation and employment forecasts. Goldman forecasts unemployment rate will peak in mid-2011 at about 10.75% while headline inflation rising into 1Q10 and then declining through end-2011. Core inflation will be close to 0% in 2011. 'It is very hard to see an economic justification for tightening policy when inflation is 1% or less and the unemployment rate is 10% or more, as we expect for 2010-11. Also, tightening could potentially come from other channels, such as fiscal restraint or unwinding the Fed's balance sheet. Lastly, we believe the Fed would rather err on tightening too late rather than too early'.

ECB: During the course of crisis, the ECB has reduced the main refinancing by 325 bps to 1% which has been kept unchanged since May 2009. In accompaniment, the central bank also enhanced liquidity provision through fixed rate tender procedures with full allotment, outright purchase of euro-denominated covered bonds, widening of collateral pool, etc.

Recently, the ECB President Trichet, while continued stating current interest rate level as appropriate, signaled that market conditions are 'stable enough' for the central bank to withdraw some of the emergency measures. At December's meeting, the ECB announced that December's 12-month refinancing operation will be the last one while the rate will be fixed at the average minimum bid rate of the main refinancing operations over the life of this operation.

Concerning collateral for loans, the ECB is also considering reversion to the oil rules. Currently the ECB accepts bonds rated BBB- as collateral for loans. However, it may adhere to the old rule which requires minimum rating of collaterals to be A-.

We see mixed opinions on whether the ECB will raise it policy rate in 3Q10. However, most believe that by the end of 2010, the central bank should have begun the tightening cycle.

UBS views the ECB's December meeting as hawkish and believes that the ECB will be confident enough to raise rate (first hike to be in 3Q10) and continue to return to a more neutral policy stance sometime in H2 2010. 'Governor Trichet was very careful in repeatedly emphasizing that the initiation of the phasing out of unconventional measures and the decision to conduct the last 12-month LTRO at a variable rate should not be interpreted as a signal that policy rates are going up. But in our view, and as we have highlighted for some time, we expect the gradual phasing out of the unconventional measures to be followed with policy rates hikes, starting in Q3 2010'.

Goldman Sachs forecasts the first rate hike (+25 bps) to take place in 4Q10 and lifted the 16-nation region's GDP growth. 'The strongest growth will be reported in the centre of the Euro-zone, as well as in those places that have seen FX depreciations over the past 12-18 months. Several smaller Euro-zone members may continue to struggle, causing a divergence in intra-European growth performance over the next couple of years'.

Credit Suisse forecast the main refinancing will reach 2% by end-10. 'The ECB surprised markets with the form of the one-year unlimited fixed-rate refinancing operation, to take place on 16 December. By indexing the rate to the average MRO rate in the coming year, it's likely that the ECB hopes to limit the amount the tender is taken up. The ECB's forecasts for growth and inflation were fairly uncontroversial, with the key inflation forecast for 2011 at just 1.4%; there is no signal of an imminent change in the policy stance, in our view'.

BOE: The BOE started cutting interest rate in December 2007 but the pace accelerated in 4Q08. In the 5-month period from October 2008 to March 2009, the policy rate was reduced from 5% to 0.5%, which is expected to stay until late-2010.

Apart from lowering the policy rate, MPC members also announced a program by asset purchase of 75B pound in March 2009. Part of that sum was used to finance the BOE's program of private sector asset purchases through the Asset Purchase Facility. The amount was also used to buy medium- and long-maturity conventional gilts in the secondary market. In the first 3 months of the program, the majority of the overall purchases by value was of gilts.

In each of the meetings in May and August, the Committee announced to increase the size of the program by 50B pound (100b pound in total) to 175B pound while deciding to keep interest rate at 0.5%. However, economic growth remained dismal and unemployment rate continued to rise. The nation's GDP contracted -0.3% qoq in 3Q09. This was the 6th consecutive decline and left the UK the only advanced economy in recession. Therefore, in November, members raised the size of the asset purchase program further, by 25B pound, to 200B pound.

Other than buying assets, the central bank also considered other options of increasing liquidity such as reducing the remuneration rate of depositing money in the BOE. However, there's no decision yet.

In early December, Morgan Stanley pushed back the timing of BOE's first rate hike to 4Q10 from May 2010. Although the MPC will want to get back to 'a more normal' policy setting 'once there isevidence that the economy is on a firm, sustainable path to recovery', 'the election and likely fiscal policy tightening will contribute to uncertainty about this path'.

The MPC normally makes or announces important decisions at months with releases of quarterly Inflation Report. In 2010, the February Inflation Report will be affected to reversion of VAT to 17.5% from 15% while the May Inflation Report will coincide with the election. Therefore, Morgan Stanley expects 'even the independent Bank of England would probably baulk at taking such an important monetary policy step then' and 'unless we see either a dramatic upturn in inflationary expectations and/or a currency collapse, we expect no change in official rates until the political dust has settled '.

Barclays Capitals forecasts the MPC will stop QE in January 2010 and raise rates in August 2010.'Most recent data revisions suggest that the Q3 09 GDP number will be revised higher, thus, perhaps, giving the MPC more confidence that a recovery is close'.

However, the RBS anticipates the BOE will keep the rate at 0.5% throughout 2010 and will only start tightening in 1Q11 as economic outlook remains worrisome. 3Q09 GDP report 'revealed broad weakness across the economy'. Although 'government spending provided a lift, this was not enough to offset a decline in household spending and business investment'. 'Net exports' contributed most to the drag on UK growth. 'British exporters proved unable to capitalize on the return to growth in Britain's largest trade partners'

In 4Q09, economy will likely post modest growth as suggested by recent activity surveys (PMIs). However, 'balance sheet strains are likely to exert a drag on the recovery through 2010'.

BOJ: The Bank of Japan resumed the easing policy in October 2008 after keeping the policy rate at 0. 5% since February 2007. In December 2009, policymakers brought the rate to 0.1% which has been maintained until now.

Apart from lowering interest rates, the central bank also adopted other measures to combat deflation and stimulate economic growth. In January, the BOJ outlined the principles regarding outright purchases of corporate financing instruments, and decided on the specifics of outright purchases of CP as well as agreed to examine outright purchases of corporate bonds. The central bank also broadened the eligible collateral categories. In the guideline also issued in January, the central bank accepts 'bonds issued by real estate investment corporations, dematerialized commercial paper issued by real estate investment corporations, bills drawn by real estate investment corporations, commercial paper issued by real estate investment corporations, and loans on deeds to real estate investment corporations as eligible collateral for the Bank's provision of credit and to add dematerialized commercial paper issued by real estate investment corporations and commercial paper issued by real estate investment corporations to the list of CP purchased with repurchase agreements'.

However, economic expansion remained slow despite these measures while deflationary risk continued to linger. As urged by the Prime Minister, the central bank called for an urgent meeting in mid-December but the BOJ Governor Masaaki Shirakawa and his colleagues refrained from announcing more policy actions but sticking to a rate of 0.1% and a 10 trillion yen ($111 billion) lending program adopted in the previous meeting.

Analysts expect the BOJ will implement more expansionary policies though it may not lower rates further. Goldman Sachs believes 'protracted deflationary conditions call for more aggressive QE, such as expansion of long-dated JGB bond purchases' in 1Q2010. Concerning economic growth, Goldman forecasts 'evenly paced GDP growth for 2010-2011, at +1.5% for 2010 (fiscal year +1.3%) and +1.6% for 2011 (fiscal year: +1.7%)'. 'Consumer prices will continue declining through 2011, although the decline should ease as the supply/demand gap gradually narrows. The growth path will inevitably be substantially affected by the fiscal-policy stance, including the slowdown due to the partial suspension of the first supplementary budget for FY2009 and the implementation of the primary FY2010 budget'.

Morgan Stanley, apart from anticipating further rate cut to 0.05% in 2Q10, outlined several QE options for the BOJ. These include ' Increasing the current account balance, letting unsecured call rate guidance level drop temporarily, Repeated BoJ rollovers of JGBs, larger JGB purchases, clarification of commitment to policy duration, unsterilization of forex intervention funds and adoption of inflation targeting'.

SNB: During the period between October 2008 and March 2009, the SNB cut the 3-month LIBOR target rate from 2.75% to 0.25%. In March, the central bank also announced to increase liquidity substantially by engaging in additional repo operations, buying Swiss franc bonds issued by private sector borrowers and purchasing foreign currency on the foreign exchange markets. Since then, the EURCHF has rarely traded below 1.5.

After adopting the ultra expansionary measures for so many months, the SNB took a first step in exiting from these policies by announcing an end to the purchases of Swiss franc private sector bonds in December.

Moreover, there has been signs showing the SNB has worked less hard to intervene appreciation of Swiss Franc despite it retained the statement that 'the SNB will act decisively to prevent any excessive appreciation of the Swiss franc against the euro'. On December 18, The Swiss franc strengthened beyond 1.50 per euro for the first time since March. When asked, the SNB Spokesman declined to comment. However, we saw that EURCHF continued to decline afterwards, suggesting the central bank does not care about it as much as before.

UBS anticipates the first rate hike will occur in 3Q10 and the SNB has turned soft in intervening FX. According to USS, 'Despite largely unchanged Swiss economic forecasts by the SNB and accounting for the fact, that the SNB reiterated the possibility of FX interventions once again, we nevertheless do not expect the cross to move much higher from current levels. On the contrary: Having been prepared to counter any CHF appreciation vs. the EUR, the latest SNB statement suggests, that the 'SNB is to counter any decisive appreciation of the CHF vs. the EUR from here. We interpret the changed wording to the degree that the SNB is now prepared to accept a gradual lowering of the intervention levels in EURCHF, as a sort of monetary tightening going forward'.

Credit Suisse holds similar view that the first rate hike will take place in 3Q10 as the SNB's new inflation forecast remained 'practically unchanged' and the central bank still did 'not fully rule out any deflationary risk' . Concerning economic development, Credit Suisse believed the pace of recovery in Switzerland is faster than that in the Eurozone. 'Swiss employment has already exceeded its pre-crisis peak. The sharp acceleration in broad money growth to four-year highs suggests inflation risk for H2 2010. Ultra-low mortgage rates have pushed mortgage growth and Swiss property prices to historical highs. This implies an asset inflation risk if these trends continue. As such, we expect the SNB to begin its exit from intervention in 1Q10. Compressed yield differentials give Swiss investors little incentive to recycle Switzerland's current account surplus abroad'.

RBA: After reducing the cash by 450 bps to as low as 3%, increasing average maturity of repos, offering findings of 6 months and 12 months, etc, the Australian economy recovered more rapidly than its counterpart. Although GDP contract -0.9% qoq in 4Q09, it went back to the positive territory in the next quarter, technically preventing the economy from falling into recession. The number of payrolls has increased for 3 consecutive months since September while unemployment also seemed to have peaked at 5.8% in October.

These positive developments triggered the RBA to raise its policy rate, by 25 bps each month, in October, November and December. Being the first central bank to adopt aggressive rate hike after the deepest global recession since World War II, the RBA considered it has already made 'material adjustments' to the stance of monetary policy. The next meeting will be held in February and the economic developments in these 2 months should be crucial for the central bank's action.

There are diverse opinions about whether the RBA will pause or raise at February's meeting but most analysts forecast that the rate will reach 4% in 1Q10, suggesting a pause will either be in February or March.

Goldman Sachs said after December's RBA meeting that 'the risks of a near-term pause have clearly increased but at this stage we continue to expect a 25bp rate hike at each of the next three RBA rate meetings (February, March & April). Domestic data flow subsequent to the December meeting has continued to surprise on the upside. Our expectation is for growth momentum to continue to surprise the RBA's most recent forecasts over coming months'.

Deutsche Bank expects 'a very good 4Q09 CPI, scheduled for release on January 27, to reinforce the view that the RBA is well ahead of the curve and under no compulsion to accelerate its “gradual” pace of lessening stimulus. Despite this, the final decision in February is likely to come down to how strongly consumer spending and the retail sector perform over the critical holiday trading period'. Deutsche Bank anticipates the RBA 'hiking a further 25bps in Q1 but then sidelining itself during the middle of the year before resuming hiking in Q3, around the same time that the U.S. Fed begins its own rate hike cycle'.

RBNZ: The RBNZ lowered the OCR by 575 bps to 2.5% during the period of June 2008 and April 2009. At the same time, the central bank also facilitated liquidity through measures including Term Auction Facility, which enabled banks to borrow funds using bills, bonds and mortgage-backed securities as collateral.

Since April 2009, the RBNZ has mentioned in the post-meeting statement that there's no urgency to begin withdrawing monetary policy stimulus, and 'we expect to keep the OCR at the current level until the second half of 2010'. However, the tone has turned less dovish at December's meeting as policymakers said that 'if the economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010. Recent tightening in financial conditions, driven by a higher exchange rate, increased long-term interest rates and a wider gap between the OCR and bank funding costs, reduces the need for more immediate action'.

GDP contracted for 5 quarters before moving back to the positive territory in 2Q09. Housing prices have been picking and employment conditions have been recovering. According to the RBNZ governor, Alan Bollard more strength has been seen in the job market and 'in a couple of quarters there will be a turning point. We expect” the jobless rate “to peak at 6.8%'.

The market mixed opinions on whether the RBNZ will increase the OCR in 1Q10 but there's also a consensus that rate hikes will be well-in-place by 2Q10.

Barclays Capitals anticipates, although the RBNZ has been downplaying the possibility of tightening so as to avoid excessive currency appreciation, the OCR will reach 3% by 1Q10 due to upside surprise on inflation.

TD Bank expects New Zealand to return to trend growth in 2010 as 'a revival of the housing sector and the dairy sector are related to ongoing very low cash rates and favorable global demand lifting key commodity prices respectively, not via outsized assistance from the public sector'. 'Early in 2010 the RBNZ will pull the trigger and excess monetary stimulus will slowly be scaled back'. 'We were of the view that the RBNZ could start 2010 with a bang by lifting the OCR as soon as January, but ongoing dovish tones means this timetable has been pushed back to March 2010, three months earlier than the crowded consensus of June 2010'.

Deutsche Bank believes the RBNZ will begin lifting the OCR with a +50bp hike at the April 2010 review. While there's little risk that the RBNZ will begin the tightening cycle in March. There is a 'considerable risk that the cycle starts with either a smaller hike or a slightly later hike at the June 2010 meeting'. 'Developments in global sentiment (including that expressed by other central banks), retail spending, credit growth and inflation will be especially important to monitor over coming months'.

BOC: The Bank of Canada joined other central banks in the developed economy to aggressively reducing interest rates to unprecedentedly low levels. In fact, the BOC began the easing in December 2007 and in 17 months' time, the central bank's overnight rate has been lowered by 425 bps to 0.25%. Furthermore, in order to provide liquidity to the public, the central bank also adopted measures including Term Purchase and Resale and term loan facilities.

Although the economy exited from recession in 3Q09, the growth of +0.8% qoq disappointed the market. At the accompanying statement of December's meeting, the BOC said that 'the composition of aggregate demand is shifting towards final domestic demand and away from net exports'. However, 'the balance of these shifts resulted in weaker-than-projected GDP growth' in 3Q09.

The market basically expects better improvement will be seen in 2010 and the BOC may be rewinding its stimuli more aggressively then the Fed. Morgan Stanley believes domestic demand in Canada will be driven by consumer spending. 'The BOC remains concerned about a growth drag from net exports but the latest data and the recovery in global demand suggest that the negative impact may be less severe than initially expected'. Inflation rate will also return to normal faster than the BOC projected due to 'rebound in housing prices and wages and the run-up in energy prices'. Morgan Stanley forecast the BOC to raise rate in April, compared with consensus that the first rate hike will take place in 3Q10.

RBC expects the first rate increase to come next summer as the 'slow start to Canada's economic recovery suggests that the Bank of Canada will retain its commitment to a 0.25% overnight rate until mid-2010. Inflation rates remain below the Bank's 2% target and the unemployment rate is forecast to peak in early 2010, indicating that there is considerable slack in the economy'.


Mid-Day Report: Canadian Dollar Shines in Quiet Holiday Trading

Market Overview | Written by | Dec 21 09 14:36 GMT |

Canadian dollar surges sharply today and remains firm after a solid retail sales report which showed 0.8% mom growth in October with ex-auto sales up 0.2% mom. USD/CAD's failure to break 1.0748 resistance last week is followed by a break of 1.0570 support today which suggests that the choppy consolidation from 1.0851 is still in progress with another fall just started. EUR/CAD also dives through 1.5183 support as we anticipated in daily report today and is set to extend the rise towards 2008 low of 1.4716.

Swiss franc remains firm after SNB quarterly bulletin which said that "the inflation outlook has not changed since the September assessment," and "it confirms that the expansionary monetary policy cannot be maintained for the next three years because price stability will be compromised in the long term." The bank also warned of risk of swift correction in monetary policy which could trigger deflation. It's believe that at some point, SNB will intervene again to prevent excessive appreciation of the Swiss franc to avoid the deflation risk. However, the bank declined to comment on the possibility of intervention for the moment.

Released earlier, Japan recorded a trade surplus for the 10th straight month in November and widened slightly up to 0.49T JPY. Exports dropped -6.2% yoy and was the smallest decline in 14 month. On the month-to-month bases, exports rose 4.9%, which was the biggest rise since 2002. Imports dropped -16.8% yoy, also the slowest decline in 12 months. The data argues that demand, both domestic and international, is gradually improving and Japan might be able to avoid a double-dip recession as Asian economies recover further next year.

BoJ monthly report showed that the bank is slightly more cautious on outlook of exports and production, which are expected to moderate. The report said that "the uptrend in exports and production is expected to continue, reflecting continued improvement in overseas economic conditions, although the pace of the increase is likely to moderate gradually." The overall assessment was largely unchanged though as "Japan's economic conditions are likely to continue improving, although the pace of improvement is likely to remain moderate for the time being."

Looking at the dollar index, an short term top might be in place at 78.14 and some consolidation would be seen in near term. Pull back to 4 hours 55 EMA (now at 76.78) cannot be ruled out but downside should be contained by 76.60 support which is close to 38.2% retracement of 74.19 to 78.14) and bring rally resumption. The index should have made a medium term bottom at 74.10 already and we'd expect stronger rebound to 38.2% retracement of 89.62 to 74.19 at 80.08 in the least bullish scenario.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.0616; (P) 1.0671; (R1) 1.0714; More.

USD/CAD's failure to take out 1.0748 resistance and subsequent sharp fall and break of 1.0570 support today indicates that consolidations from 1.0851 is still in progress. Intraday bias is flipped back to the downside and deeper decline could now be seen to 1.0405 support and possibly below. Nevertheless, we'd expect downside to be contained above 1.0205 support to conclude the consolidations and bring rise resumption. On the upside, break of 1.0744/48 resistance zone will indicate that consolidation from 1.0851 has completed and rise from 1.0205 is resuming for 1.0851 resistance and 1.1101 resistance next.

In the bigger picture, a medium term bottom might be in place at 1.0205 with bullish convergence conditions in daily MACD. As noted before, fall from 1.3063 is viewed as a correction to long term rise from 0.9056. Such correction might have already completed with three waves down to 1.0205 already (1.0784, 1.1732, 1.0205). Break of 1.1101 resistance will confirm this case and target 61.8% retracement of 1.3063 to 1.0205 at 1.1971 at least. On the downside, break of 1.0205 will invalidate this view and bring down trend resumption to parity instead.

USD/CAD 4 Hours Chart

Economic Indicators Update

GMT Ccy Events Actual Consensus Previous Revised
23:50 JPY Trade Balance Total (JPY) Nov 0.49T 0.27T 0.42T
4:30 JPY All Industry Activity Index M/M Oct 1.20% 1.00% -0.60%
5:00 JPY BoJ Monthly Report
-- --
10:00 CHF SNB Quarterly Bulletin
-- --
13:30 CAD Retail Sales M/M Oct 0.80% 0.80% 1.00%
13:30 CAD Retail Sales Less Autos M/M Oct 0.2% 0.50% 1.10%


India Must Tighten Monetary Policy, Ex-Governor Says

By Kartik Goyal

Dec. 21 (Bloomberg) -- India’s central bank needs to drain cash from the economy to check speculation in commodities, former Governor Bimal Jalan said, after food price inflation climbed to an 11-year high this month.

“Reduction in availability of money may help in reducing the speculative pressure on retail prices,” Jalan, who headed the central bank between 1997 and 2003, said in an interview in New Delhi on Dec. 18. “Monetary policy could give a signal that it is worried about inflation.”

Reserve Bank of India Governor Duvvuri Subbarao said he discussed the country’s economic situation with Finance Minister Pranab Mukherjee on Dec. 18, fueling expectations he may tighten monetary policy soon. Bonds and stocks fell today, extending their decline from last week on concern the central bank may raise interest rates.

“The market has begun to price in a monetary policy action in the near term to anchor rapidly escalating inflation expectations,” said Shubhada M. Rao, chief economist at Yes Bank Ltd. in Mumbai.

The 10-year government bond yield, which rose 14 basis points last week, gained 2 basis points to 7.74 percent at 4:15 p.m. in Mumbai today. The key Sensitive stock index fell 0.7 percent to 16,601.20 on the Bombay Stock Exchange, sliding 3 percent since Dec. 14.

Surging Food Price

Food prices are rising after the June-to-September monsoon rains, the main source of irrigation in Asia’s third-largest economy, were the weakest this year since 1972, hurting output of rice, pulses and wheat.

Production of monsoon-sown rice may total 71.65 million metric tons this year, less than the 84.58 million tons reaped a year ago, according to government estimates. Sugar crop in India, the biggest grower after Brazil, fell 9.6 percent in the first two months of the season that started Oct. 1 to 1.7 million metric tons from a year ago.

An index of food articles compiled by the commerce ministry advanced 19.95 percent in the week ended Dec. 5, the highest since Dec. 1998. India’s key wholesale-price inflation accelerated to 4.78 percent in November from a year earlier, following a 1.34 percent gain in October, the ministry said.

“You don’t need a stark action because inflation is confined to food prices,” said Jalan. “According to one school of thought, some indicative monetary action is worth considering, a mild one.”

Tighter Policy

Even though the central bank’s next monetary policy statement is due on Jan. 29, Subbarao can make changes to interest rates before the scheduled date.

In his last policy announcement on Oct. 27, the governor ordered lenders to keep a higher proportion of their deposits in government bonds, taking the first step toward withdrawing monetary stimulus. Before the move, Subbarao had injected 5.85 trillion rupees ($125 billion) of cash since September 2008 to protect the economy from the global recession.

Subbarao has kept the key reverse repurchase rate unchanged at 3.25 percent since April.

Australia and Vietnam are the two countries in Asia Pacific that have already raised rates to rein in inflation.

The Organization for Economic Cooperation and Development said last month that India must tighten its monetary policy “fairly soon” to stem inflation.

Jalan, who served as a member of parliament until August this year after his stint at the central bank, said India must also step up import of food items that are in short supply.

Political Pressure

“In addition to the drought, what’s complicated the situation is that we didn’t make arrangements for import of rice,” Jalan said. “And, this could partly be because of overestimation of the likely output.”

Glencore International AG, Louis Dreyfus Corp. and Olam International were among companies that offered to sell rice to India last month.

Political pressure is mounting on Indian Prime Minister Manmohan Singh to arrest the price rise in a nation where two- thirds of the 1.2 billion people live on less than $2 a day.

A parliamentary panel on finance on Dec. 17 warned the Ministry of Finance for failing to act in a timely manner to curb inflation. A day earlier, opposition lawmakers accused the government of being ineffective in tackling prices and disrupted parliament proceedings.

The central bank may ask lenders to set aside more cash as reserves if food prices don’t decline in December, Chakravarthy Rangarajan, chairman of Prime Minister Singh’s economic advisory council, said in New Delhi today.

Inflation is gathering strength in India as its economy recovers from the global recession. The $1.2 trillion economy expanded 7.9 percent in the three months ended Sept. 30 from a year earlier, the quickest pace in six quarters. The growth lagged behind only China among the world’s major economies.

“With a strong growth in GDP and inflation accelerating at the same time, pressure is building on the Reserve Bank to partially retract the monetary stimulus,” said Rahul Bajoria, an economist at Barclays Capital in Singapore.

To contact the reporter on this story: Kartik Goyal in New Delhi at


Japan’s Exports Fall at Slowest Pace in 14 Months

By Keiko Ujikane

Dec. 21 (Bloomberg) -- Japan’s exports fell at the slowest pace in 14 months in November as demand from Asia supported the nation’s recovery from its worst postwar recession.

Shipments abroad slid 6.2 percent from a year earlier, the smallest drop since September 2008, the Finance Ministry said today in Tokyo. From a month earlier, exports rose a seasonally adjusted 4.9 percent, the biggest advance since November 2002.

Worldwide government spending has spurred demand for cars and electronics goods made by companies including Fuji Heavy Industries Ltd. and Elpida Memory Inc. The improvement in shipments may ease concern Japan’s economic recovery will stall after reports this month showed confidence among large manufacturers rose the least in three quarters and companies plan deeper spending cuts.

“Economic growth may slow in the months ahead as domestic demand remains weak,” said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo. “But exports are looking solid, so Japan should at least be able to avoid another recession.”

The improvement in exports is partly due to a favorable year-on-year comparison, economists including Shinke said. In November 2008, shipments abroad tumbled 26.8 percent as global trade froze following the collapse of Lehman Brothers Holdings Inc.

The median estimate of 17 economists surveyed by Bloomberg News was for exports to drop 6.8 percent from a year earlier.

Imports Decline

Imports slid 16.8 percent in November from a year earlier, the slowest decline in 12 months, the ministry said. Japan posted a trade surplus for a 10th straight month, totaling 373.9 billion yen ($4.1 billion).

Exports are mending even as the strengthening yen erodes the value of profits companies earn abroad and makes their products less competitive. Japan’s currency traded at 90.41 per dollar at 9:57 a.m. in Tokyo from 90.46 before the report. It has weakened since hitting a 14-year high of 84.83 on Nov. 27. The Nikkei 225 Stock Average rose 0.6 percent.

Fuji Heavy, the maker of Subaru cars, expects to boost sales in the U.S. and China next year by 15,000 vehicles in each market, Chief Executive Officer Ikuo Mori said in an interview on Dec. 16.

Elpida Memory, Japan’s largest computer-memory chipmaker, may return to profit for the first time in three years, thanks to higher demand, Chief Executive Officer Yukio Sakamoto said this month.

China Growth

Exports to China and Asia both rose for the first time since September 2008. Shipments to Asia advanced 4.7 percent from a year earlier, compared with a 15 percent drop in October. Exports to China, Japan’s biggest overseas customer, climbed 7.8 percent, compared with a 14.4 percent decline the previous month.

Asian economies are benefiting from a global trade rebound that’s being driven by interest-rate cuts and more than $2 trillion in government spending worldwide. Growth in China will accelerate to 9.4 percent next year, according to the median estimate of economists surveyed by Bloomberg News.

“Exports to Asia are strong so Japan will be able to avoid a double-dip recession even though a slowdown in domestic demand is unavoidable,” said Azusa Kato, an economist at BNP Paribas in Tokyo. “Demand in Asia is strong enough to offset the adverse impact of the yen’s gain.”

U.S. Sales

Sales to the U.S. fell 7.9 percent, easing from October’s 27.6 percent decrease and automobile shipments to the nation rose for the first time since April 2008, the Finance Ministry said. Exports to Europe slid 15.9 percent after declining 29 percent.

“Exports to the U.S. have hit bottom and are starting to gradually rise,” Dai-Ichi Life’s Shinke said. “Even though it’s not as strong as Asia, it’s positive for Japan’s economy.”

Some companies are coping with the rising currency by trimming costs. Toyota Motor Corp. may avoid an annual loss if the yen trades around 90 per dollar because the automaker will postpone investments and cut costs, the Asahi newspaper reported on Dec. 16.

Japanese policy makers are trying to sustain a recovery that’s under threat from the currency’s gains and deflation. Prime Minister Yukio Hatoyama unveiled a 7.2 trillion yen economic stimulus package on Dec. 8, a week after the Bank of Japan released a 10 trillion yen credit program. The central bank said last week that it “does not tolerate” falling prices.

Export Revival

The export revival has yet to spread to the domestic economy. Large companies plan to cut spending 13.8 percent in the year ending March 2010, the second-worst projection on record, the Bank of Japan’s Tankan survey showed last week. Economic growth slowed to an annualized 1.3 percent in the third quarter, about half the pace of the previous three months.

Household confidence fell in November for the first time this year and wages have slumped for 17 months.

“Even though exports are strong, domestic demand is weaker than people expected earlier this year as employment has worsened rapidly,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “That signals the recovery in external demand and the stimulus effects won’t be enough to sustain growth.”

To contact the reporter on this story: Keiko Ujikane in Tokyo at


OPEC Has Consensus on No Change in Output, Badri Says

By Ayesha Daya and Matthew Campbell

Dec. 21 (Bloomberg) -- The Organization of Petroleum Exporting Countries has a consensus on “no change” in oil production quotas for the bloc’s meeting tomorrow, its secretary-general said.

Abdalla Salem el-Badri doesn’t envisage any need for the producer group to raise the output ceiling from its current limit of 24.845 million barrels a day, he told reporters in Luanda, Angola, today. The group also doesn’t need to meet again before its next scheduled March 17 conference if market conditions stay the same, he said.

“There is a consensus that there is no change,” el-Badri said. “The price is very comfortable.”

OPEC’s 12 members, who supply about 40 percent of the world’s oil, are meeting in Luanda tomorrow amid expectations that crude demand could recover in 2010 as a two-year global economic slump ends.

El-Badri said he is “not happy” with members’ compliance with oil production targets, adding that overall compliance is about 60 percent. OPEC sets output levels for 11 of its members in an effort to guide prices. Iraq is exempt from quotas.

Oil Minister Ali al-Naimi of Saudi Arabia, the bloc’s biggest oil producer, said earlier this month that oil prices near $75 a barrel are “close to the target.” On Dec. 14, Qatari oil minister Abdullah bin Hamed al-Attiyah said “a price between $70 and $80 is suitable.”

Rally in 2009

Crude oil for January delivery traded 2 cents higher at $73.38 a barrel in electronic trading on the New York Mercantile exchange at 10:36 a.m. London time today. Oil futures have rallied 65 percent this year.

All 36 analysts in a survey by Bloomberg last week said they expected OPEC to maintain its formal production limit at the Angola meeting. International Energy Agency statistics show inventories in North America and Europe are still “well above” their five-year average.

OPEC should work to bring inventory levels down to a “reasonable level” of 52 days’ worth of supply, compared with about 59 days currently, el-Badri said today.

Separately, the OPEC President and Angolan oil minister Jose Maria Botelho de Vasconcelos told Angola’s Radio Nacionale that “everything indicates that we will maintain the present situation” after the group’s meeting.

The two most accurate crude forecasters of 2009 both predict a further rally through next year to about $88 a barrel in the final quarter of 2010. Out of 21 quarterly forecasts compiled by Bloomberg at the start of this year, those of Societe Generale SA’s Mike Wittner and Hannes Loacker at Raiffeisen Zentralbank Oesterreich AG, have proved to be the most accurate, according to Bloomberg calculations.

OPEC’s members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

To contact the reporters on this story: Ayesha Daya in Luanda via; Matthew Campbell in London at


Oil Climbing as Rebound Makes Most-Accurate Forecasters Bullish

By Grant Smith and Rachel Graham

Dec. 21 (Bloomberg) -- Oil’s biggest annual rally since 1999 is poised to continue with gains of 20 percent next year as the global economy recovers and OPEC curtails production, the most accurate crude forecasters say.

Societe Generale SA’s Mike Wittner and Hannes Loacker at Raiffeisen Zentralbank Oesterreich AG, whose predictions this year that were within 9 percent of market levels, now say oil will end 2010 near $88 a barrel, up from current prices of about $73 in New York. The median Wall Street estimate is for an increase to $83.

Oil is set to rise as China and India lead the world economy from its biggest economic shock since World War II, while the Organization of Petroleum Exporting Countries caps output, Wittner and Loacker said. Analysts say OPEC will keep supply targets unchanged at a meeting in Luanda, Angola, tomorrow, even as the International Energy Agency predicts fuel consumption will rise 1.7 percent next year.

“With global demand growing and OPEC holding production flat, stockpiles are going to come down, and that’s bullish for prices,” said Wittner, 48, the head of oil market research at Societe Generale in London. Commodities will also benefit from the weak dollar and U.S. interest rates close to zero percent, he said.

Oil futures jumped 5 percent last week, the first weekly gain in a month, after Iranian forces occupied an oil well in neighboring Iraq, raising concern tensions between the two OPEC nations would disrupt supplies. The Iranian troops left the field Dec. 19, Iraq’s deputy minister of oil Abdul Kareem al- Luaibi told reporters in Baghdad yesterday.

CIA Analysis

Wittner, an energy analyst at the U.S. Central Intelligence Agency during the 1980s and the IEA in Paris between 1997 and 2002, said purchases by hedge funds and investors seeking protection from inflation will support prices.

“In contrast to some other banks, we acknowledge quite openly, and believe, that non-fundamental factors do play a role in setting oil prices,” said Wittner, who also worked at Koch Supply and Trading Co. and the Credit Agricole SA brokerage, Calyon, before joining SocGen in October 2007.

Loacker, 33, said he expects OPEC to keep production at current levels “for a good portion of 2010,” supporting prices.

Oil futures have risen 64 percent this year because of OPEC’s output cut and economies recovering from the first global recession since World War II. The IEA’s forecast for increased consumption in 2010 would be the first in three years.

Higher oil prices will reward producers from Saudi Arabia to Exxon Mobil Corp., while hurting airlines that the International Air Transport Association forecast will lose $5.6 billion next year.

‘Getting Scarce’

“Resources are getting scarce, especially if we go out two to three years from now,” said Gordon Kwan, an analyst at Mirae Asset Securities in Hong Kong, who worked in Alaska as an engineer at BP Plc’s Prudhoe Bay, the biggest U.S. oil field.

Prudhoe Bay and its satellites pumped 357,360 barrels a day on Dec. 17, according to Alaska’s Department of Revenue. In the 1980s, daily production was 1.5 million barrels a day.

“Right now scarcity is not a popular word because there’s plenty of inventory in the tanks,” Kwan said. “But once we have a synchronized global economic recovery, maybe 2011 onward, then we’ll see the word scarce coming into the picture.”

Monthly oil contracts for late 2010 trade between $75 and $80, limiting the potential returns for investors. A 20 percent rally from current levels would lag behind the 57 percent gain in 2007 and 40 percent in 2005. Last year, oil started at $99.62 and rose as high as $147.27 before crashing and ending the year at $44.60 a barrel.

Commerzbank Forecast

The third most-accurate oil forecaster, Commerzbank AG senior analyst Eugen Weinberg, predicts oil will fall to $59 in the fourth quarter of 2010 because OPEC will increase supplies.

“Next year, I see risk from the downside,” Weinberg said. “OPEC discipline is receding, and I think this will continue.”

Until there’s evidence of improved demand in developed nations “and real discipline from OPEC, then prices have increased prematurely,” Weinberg said.

For the Bloomberg survey, analysts’ forecasts between December 2008 and January 2009 were compared with actual prices. The average total for the 21 analysts surveyed was off by 18 percent, with Economist Intelligence Unit, Natixis Bleichroeder Inc., JPMorgan Chase & Co. and Deutsche Bank AG farthest away.

Deutsche Bank predicts a decline of 18 percent to an average of $60 a barrel a year from now as the dollar strengthens.

‘Downward Pressure’

“In all likelihood the dollar will be putting downward pressure on the oil market, or at least take away a support,” said Deutsche Bank Chief Energy Economist Adam Sieminski in Washington.

OPEC will probably make no changes to output quotas when it meets tomorrow in Luanda, according to a Bloomberg News survey of 36 analysts last week. Last month the group pumped about 2 million barrels a day less than it did a year earlier as it works through a promised 4.2 million barrel-a-day supply cut.

The group will maintain output levels, Angolan Oil Minister and OPEC President Jose Maria Botelho de Vasconcelos told state radio station Radio Nacionale de Angola.

Members from Algeria, Kuwait, Libya and Qatar have also signaled no need to change quotas, while Iran and Nigeria said the group’s target is unlikely to be altered. Venezuela wants to keep prices above $70.

According to Loacker, who joined Raiffeisen seven years ago, an OPEC decision to hold supply little changed at a time of rising consumption will tighten supplies as output from countries outside the organization lags behind estimates.

“Some forecasts are too optimistic” on non-OPEC supply growth, he said. “There is potential for less good surprises in production.”

To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.netRachel Graham in London


Spending, Home Sales Probably Climbed: U.S. Economy

By Timothy R. Homan

Dec. 20 (Bloomberg) -- American consumers probably earned and spent more in November, giving retailers and real-estate agents reason to anticipate business will improve in 2010, economists said before reports this week.

Household purchases rose 0.7 percent for a second month and incomes climbed 0.5 percent, the most since May, according to the median estimate of 60 economists surveyed by Bloomberg News before a Commerce Department report Dec. 23. Combined sales of new and existing homes last month may have reached the highest level since May 2007, other figures may show.

Government efforts to push down interest rates and spur lending, combined with discounts by merchants such as Best Buy Co., may encourage consumers to keep buying in coming months. A jobless rate forecast to average 10 percent next year and mounting foreclosures will serve as reminders that the world’s largest economy is not free from all threats to the recovery.

“We’re still looking at consumer spending expanding, but obviously with a lot of constraints because of the weak job market and tight credit,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. “You’re not going to see a full recovery in the housing sector until the job market recovers.”

An increase in consumer spending for goods and services during November would be the sixth in the past seven months. Sales at U.S. retailers last month increased 1.3 percent after a 1.1 percent gain in October, the Commerce Department reported on Dec. 11.

More Discounting

Companies are luring shoppers by offering lower prices during the holiday season. Best Buy, the largest electronics retailer, was offering flat-screen TVs for $299.99 alongside discounted laptops. As a result, the Richfield, Minnesota-based company will see its gross margin decline by as much as 1 percentage point in the fourth quarter, Chief Executive Officer Brian Dunn said on a Dec. 15 conference call with analysts.

Americans are also buying more cars. Sales of cars and light trucks rose to a 10.9 million unit annual pace in November, up 4.5 percent from the previous month, according to industry data. The rate was the highest since 14.1 million in August, when the government’s “cash-for-clunkers” plan expired near the end of that month.

Auto sales probably contributed to a gain in orders at factories. Orders for durable goods, those meant to last at least three years, rose 0.5 percent in November after a 0.6 percent drop, according to the median estimate ahead of a Dec. 24 report from the Commerce Department.

Excluding demand for transportation equipment, which tends to be volatile, orders probably increased 1 percent, the survey median showed.

Consumer Confidence

A slowdown in the pace of job cuts and higher stock prices are boosting consumer sentiment. The Reuters/University of Michigan’s final gauge of December consumer confidence on Dec. 23 is projected to climb to 73.7, its highest level in almost two years, from 67.4 in November.

Payrolls fell by 11,000 last month, the fewest job cuts since the recession began in December 2007, Labor Department figures showed Dec. 4. The unemployment rate in November fell to 10 percent from a 26-year high of 10.2 percent.

The Standard & Poor’s 500 Index has risen 63 percent from a 12-year low in March, closing at a 14-month high on Dec. 14.

Lower interest rates, cheaper homes and a homebuyer tax credit are bolstering a housing market that contributed to the worst economic slump since the 1930s.

Home Sales

The National Association of Realtors is expected to report Dec. 22 that purchases of existing homes rose 2.5 percent in November to an annual pace of 6.25 million, the highest level since February 2007, according to the survey median.

The Commerce Department on Dec. 23 may report sales of new homes rose 1.9 percent to a 438,000 annual pace last month, the fastest since August 2008, according to the Bloomberg survey median.

Gains in the housing market may prove uneven as foreclosures mount. Some 306,627 properties received a default or auction notice or were seized by banks last month and a similar number is expected for December, according to Irvine, California-based RealtyTrac Inc.

The government’s final figure for third-quarter gross domestic product may show the economy expanded at a 2.8 percent annual rate, matching last month’s estimate, according to the survey median. The Commerce Department will report the data on Dec. 22.

                          Bloomberg Survey

Release Period Prior Median
Indicator Date Value Forecast
GDP Annual QOQ% 12/22 3Q F 2.8% 2.8%
Personal Consump. QOQ% 12/22 3Q F 2.9% 2.9%
GDP Prices QOQ% 12/22 3Q F 0.5% 0.5%
Core PCE Prices QOQ% 12/22 3Q F 1.3% 1.3%
Exist Homes Mlns 12/22 Nov. 6.10 6.25
Exist Homes MOM% 12/22 Nov. 10.1% 2.5%
FHFA HPI MOM% 12/22 Oct. 0.0% 0.2%
Richmond Fed Index 12/22 Dec. 1 4
ABC Conf Index 12/22 Dec. 21 -45 -44
MBA Mortgage Applications12/23 Dec. 19 0.3% n/a
Pers Inc MOM% 12/23 Nov. 0.2% 0.5%
Pers Spend MOM% 12/23 Nov. 0.7% 0.7%
PCE Deflator YOY% 12/23 Nov. 0.2% 1.6%
Core PCE Prices MOM% 12/23 Nov. 0.2% 0.1%
Core PCE Prices YOY% 12/23 Nov. 1.4% 1.5%
U of Mich Conf. Index 12/23 Dec. F 73.4 73.7
New Home Sales ,000’s 12/23 Nov. 430 438
New Home Sales MOM% 12/23 Nov. 6.2% 1.9%
Initial Claims ,000’s 12/24 19-Dec 480 470
Cont. Claims ,000’s 12/24 12-Dec 5186 5175
Durables Orders MOM% 12/24 Nov. -0.6% 0.5%
Durables Ex-Trans MOM% 12/24 Nov. -1.3% 1.0%

To contact the reporter on this story: Timothy R. Homan in Washington at


Dollar Strength Seen in Stocks 1st Since Lehman Died

By Matthew Brown and Ye Xie

Dec. 21 (Bloomberg) -- The dollar is rallying in tandem with stocks and commodities for the first time since before Lehman Brothers Holdings Inc.’s bankruptcy last year sparked the financial crisis, signaling the worst may be over for the greenback.

The currency, equities and raw materials are on pace for their first simultaneous two-month gain since 2008 as the U.S. Dollar Index rises the fastest in 10 months. The gauge has moved in the opposite direction of either the Standard & Poor’s 500 Index or the Reuters/Jefferies CRB Index of commodities for 15 months straight and diverged from both in all but four.

Correlated trading reflects growing confidence in the U.S. economy and increasing expectations that the Federal Reserve will start draining some of the $12 trillion used to battle the worst global recession since World War II. Until now, the dollar climbed when traders sought protection from turmoil created by the credit freeze that started in 2007. It weakened when they took advantage of record-low interest rates by selling the currency to finance holdings of higher-yielding overseas assets.

The market’s “tremendous dollar-negative sentiment” is “being corrected,” said Adnan Akant, who helps oversee $39 billion and reversed bets against the currency two weeks ago as head of foreign exchange in New York at Fischer Francis Trees & Watts. “The regime is changing, definitely.”

The Dollar Index -- which measures its performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona -- dropped 4.5 percent this year. Its tendency to fall when stocks rise and vice versa, which has prevailed since Lehman’s September 2008 collapse, is breaking down. Until Dec. 1, stocks and the Intercontinental Exchange Inc. currency gauge moved in opposite directions on seven of every 10 days this year. They’re in sync more than half the time this month.

Gaining Gauge

With eight trading days left in the year, the gauge has gained 1.8 percent since the end of October, while the S&P 500 and the CRB Index added 6.4 percent and 2.1 percent, respectively. The last time all rose in a two-month period was April and May of 2008. The three indexes, which haven’t all increased in the same quarter since 2005, also are up since Sept. 30.

Currency strategists are growing less bearish on America’s legal tender versus the euro, predicting it will fall 1.1 percent next year to $1.45, up from Nov. 30’s weaker $1.48 forecast, median estimates of as many as 47 in Bloomberg surveys show. It will rise 8.6 percent against the yen, the median of 42 estimates shows.

The Dollar Index rose 1.6 percent last week. Its 4.9 percent rise from this year’s Nov. 26 low is the steepest since a 17-day climb ending Feb. 2.

Dollar, Yen, Euro

Last week, the dollar gained 1.6 percent against Japan’s currency to 90.49 yen and 1.9 percent versus the euro to $1.4338. It traded at 90.52 yen and $1.4356 per euro as of 7:44 a.m. in New York. The greenback is little changed against the yen this year and up 6.4 percent from its 14-year low on Nov. 27. The dollar is still down 2.6 percent compared with the euro in 2009, though it strengthened 5.5 percent since Nov. 25.

Euro speculators reversed course after having more bets on dollar losses than gains for seven months, Commodity Futures Trading Commission data compiled by Bloomberg show. Wagers by hedge funds and other large speculators that the dollar will gain against the euro outnumbered bearish bets by 16,448 on Dec. 15. On Dec. 1, bearish dollar contracts were ahead by 22,151, a sentiment that had prevailed since April 28.

U.S. Economy

News that the U.S. unemployment rate had fallen the most in three years pushed the Dollar Index up 1.7 percent on Dec. 4 as traders increased bets that economic growth would spur the Federal Reserve to raise borrowing costs. That was the biggest gain since Jan. 20, when the U.K.’s second bank bailout in three months increased demand for the dollar’s perceived safety.

“We are witnessing a watershed shift in sentiment regarding the dollar,” wrote Dennis Gartman in the Gartman Letter, a daily global markets commentary he publishes from Suffolk, Virginia. “We do not use the term watershed often, but when we do we mean it,” said Gartman, who correctly predicted in June 2008 that commodities would tumble.

The Fed is already taking steps to begin withdrawing money from the financial system. Policymakers will end most emergency lending programs and debt purchases by March because of “improvements in the functioning of financial markets” and stabilizing labor markets, the Federal Open Market Committee said on Dec. 16. At the same time, the central bank reiterated that interest rates will stay “exceptionally low” for an “extended period.”

Fed Drains

The Fed began using Treasuries and agency debt in reverse repurchase agreements this month to test a mechanism for unwinding unprecedented monetary stimulus, removing a total of $990 million in cash from the banking system in five operations since Dec. 3, data from the Federal Reserve Bank of New York show.

“The forex market will anticipate the Fed tightening and price it into the dollar, leading the dollar to rally,” said Steven Englander, chief U.S. currency strategist in New York for Barclays Capital. “Because these programs are so unprecedented, you can already see a high degree of alarm in markets with respect to what the rates implications are going to be when they are withdrawn.”

The unit of London-based Barclays Plc raised its three- month forecast for the dollar against the euro on Dec. 10 to $1.45 from $1.52 and its six-month prediction to $1.40 from $1.45.

Higher Yields

Investors are being drawn to the dollar by U.S. assets that have higher yields than in Japan and Europe. Ten-year Treasuries yielded 40 basis points, or 0.40 percentage point, more than German bunds as of Dec. 18, within 1 basis point of the biggest gap since August 2007. Investment-grade corporate bonds in the U.S. yielded an average of about 4.67 percent, compared with 3.78 percent in Europe and 1 percent in Japan, Merrill Lynch & Co. indexes show.

“The U.S. will be able to attract more capital than its peers in the developed world” for the next couple years, said Mark Farrington who manages $5.8 billion as head of currencies at Principal Global Investors Europe Ltd. in London. “The dollar appreciation will accelerate,” he said, predicting $1.25 per euro in 18 months and 105 yen in 2010.

Thanos Papasavvas, who helps manage more than $5 billion in currencies at Investec Asset Management in London, said the dollar’s strength against the euro is likely to end amid speculation on the timing of interest-rate increases by the European Central Bank.

‘Sell Dollars’

“There is a risk that the ECB could tighten monetary policy before the Fed,” Papasavvas said, predicting the euro will drop no lower than $1.38 before rising back towards $1.50 in the second half of 2010. “Foreign-exchange managers will be looking for opportunities to sell dollars.”

The Fed will raise its near-zero target rate by more than half a percentage point to 0.75 percent next year, while the European Central Bank will increase its rate to 1.5 percent from 1 percent, according median economist forecasts compiled by Bloomberg. Japan’s rate will stay at 0.1 percent, the survey shows.

The cost of hedging against a dollar rise versus the euro increased to the most in more than a year Dec. 17, so-called three-month 25 delta risk reversals show, an indication that options traders are more certain that it will appreciate. The cost of the right to buy the greenback versus the euro exceeded that for options to sell it by 1.80 percentage points.


The PowerShares DB US Dollar Index Bullish Fund ran out of shares on Dec. 18, and trading was halted for the second time in two months. The fund suspended issuing the 200,000-share blocks it uses to match demand for the exchange-traded fund, which is designed to replicate ownership of the dollar versus currencies measured by ICE’s Dollar Index, according to a filing with the U.S. Securities and Exchange Commission.

The dollar is also appreciating against the euro as investors focus on Europe’s economy. Standard & Poor’s and Fitch Ratings downgraded Greece and warned that Spain and Portugal also may have their credit rankings cut. U.S. gross domestic product will expand 2.6 percent in 2010, twice as fast as in the European Union, U.K. and Japan, median economist estimates in Bloomberg surveys show.

“Everyone is on the short dollar trade,” said Ihab Salib, who oversees more than $3 billion as head of international fixed income at Federated Investments Inc. in Pittsburgh and was betting the dollar would decline from March until it hit $1.4950 per euro in October. “When this happens, a reversal of that trade is likely.”

To contact the reporters on this story: Matthew Brown in London at; Ye Xie in New York at


China Trims Steel Capacity Amid Glut, Minister Says

By Bloomberg News

Dec. 21 (Bloomberg) -- China, the world’s top steelmaker, closed 16.9 million metric tons of obsolete capacity this year as part of an effort to ease domestic oversupply, according to Li Yizhong, minister of industry and information technology.

The nation also shuttered 21.1 million tons of iron-making capacity; 800,000 tons of aluminum capacity; and 74 million tons of cement capacity, Li said today at a conference in remarks broadcast on the Internet. The figures beat targets set by the Ministry of Environmental Protection earlier this year.

China, also the world’s biggest producer of iron, cement and aluminum, is facing a severe oversupply of steel as mills expand faster than outdated plants are closed. The government is studying a “more feasible” plan to tackle steel overcapacity, Li’s ministry said on Dec. 3.

“The 2 percent cut in capacity by the Chinese steel industry is truly a spit in the ocean,” Michelle Applebaum, who runs a steel-research firm in Highland Park, Illinois, wrote in an e-mail. “Many of the country’s high-cost and polluting, older provincial mills continue to run for jobs rather than profitability,” said the analyst at Michelle Applebaum Research.

Steel capacity in China may have reached 700 million tons or more, Xiong Bilin, deputy director at the National Development and Reform Commission’s industry department, said on Dec. 3. The nation may need 549 million tons of the alloy this year, the China Iron and Steel Association said in November.

“Investment has risen too fast in some industries in recent years,” Minister Li said today in the Web cast. “There are blind expansions in steel and cement. A large amount of obsolete capacity needs to be closed.”

China had planned to shut 6 million tons of steel-making capacity and 10 million tons of iron-making capacity this year, the Ministry of Environmental Protection said on Jan. 13. The Ministry of Environmental Protection said on Nov. 13 that the government is planning measures to close plants in the steel, aluminum, coke, cement, paper and utility industries.

--Helen Yuan. Editors: Jake Lloyd-Smith, Richard Dobson

To contact the Bloomberg News Staff on this story: Helen Yuan in Shanghai at


Palm Oil Drops for First Day in Four on Demand Fall, Crude

By Jae Hur

Dec. 21 (Bloomberg) -- Palm oil declined for the first time in four days after Malaysian exports declined, crude oil’s advance stalled and investors booked profits ahead the Christmas and New Year break.

Prices fell as Malaysia’s palm oil exports dropped to 858,307 metric tons in the first 20 days of December from 930,133 tons in the same period in November, independent market surveyor Intertek said today. Crude fell as much as 0.6 percent before trading unchanged at $73.36 a barrel.

“We are now heading into the Christmas and year-end holidays, prompting investors to take profits,” Merlissa Paramitha Trisno, an analyst at PT Mandiri Sekuritas in Jakarta, said today by phone. The market was also under pressure from slowing exports from Malaysia and after crude oil fell, Trisno said.

March-delivery futures fell as much as 2.5 percent to 2,555 ringgit ($743) a ton on the Malaysia Derivatives Exchange and were at 2,563 ringgit by 12:30 p.m. local time break.

To contact the reporter on this story: Jae Hur in Tokyo at


U.S. Stock-Index Futures Rise as Analysts Boost Recommendations

By Lynn Thomasson and Maud van Gaal

Dec. 21 (Bloomberg) -- U.S. stock-index futures rose, indicating the Standard & Poor’s 500 Index may rebound from last week’s decline, as commodity prices gained and analysts recommended companies from Alcoa Inc. to Intel Corp.

Alcoa climbed 4.1 percent after Morgan Stanley lifted the largest U.S. aluminum producer to “overweight” on speculation prices of the metal will keep rallying. Intel Corp. added 1.8 percent as Barclays Plc analysts said shares of the world’s biggest computer-chip maker are cheap. Mosaic Co. and Potash Corp. of Saskatchewan Inc. climbed more than 2.8 percent following a recommendation from Goldman Sachs Group Inc. to buy the shares on the outlook for higher fertilizer prices.

Futures on the S&P 500 expiring in March added 0.5 percent to 1,103.3 at 8:42 a.m. in New York. Dow Jones Industrial Average Index futures gained 0.4 percent to 10,311. Nasdaq-100 Index futures increased 0.5 percent to 1,816.25. Stocks in Europe also rose, while Asian shares declined.

The S&P 500 has advanced 63 percent since reaching a 12- year low in March as the U.S. government lent, spent or guaranteed more than $11 trillion to end the recession. Reports scheduled for this week include existing home sales for November and third-quarter personal consumption and gross domestic product.

“We expect U.S. macro numbers scheduled for this week to confirm earlier reports that the economy is recovering,” said Dirk Pattyn, a Brussels-based fund manager at Bank Degroof, which manages the equivalent of $36 billion.

Weekly Loss

Stocks rose on Dec. 18, trimming a weekly loss for the S&P 500, after better-than-estimated profit at Oracle Corp. and Research In Motion Ltd. boosted technology companies.

Alcoa gained 4.1 percent to $15.17. Morgan Stanley said the shares may climb to $22 and predicted the rally in aluminum prices may continue in the first half of 2010.

Aluminum for delivery in three months climbed 0.9 percent on the London Metal Exchange today.

The dollar traded near a three-month high against the euro amid signs the economic recovery is accelerating and as concern some European nations may struggle to pay their debts bolstered demand for the U.S. currency. The Dollar Index fell for the first time in five days, losing 0.2 percent to 77.635.

Intel added 1.8 percent to $19.99. The stock was lifted to “overweight” from “equal weight” at Barclays, which cited “seemingly solid end market conditions, an upward bias to estimates and intriguing valuation” in a report to clients.

Potash Corp., the world’s biggest fertilizer producer, was added to the “conviction buy” list at Goldman Sachs, while Mosaic was upgraded to “buy.” Potash advanced 2.8 percent to $108. Mosaic, North America’s second-biggest fertilizer maker, soared 3.6 percent to $57.18.

‘Demand Recovery’

“Our view of a fundamental demand recovery in potash in 2010 remains unchanged,” Goldman Sachs analysts wrote in a report to clients dated Dec. 20. “We believe a near-worst-case scenario on 2010 potash pricing is now discounted in stocks.”

Barron’s said Mosaic may rise as much as 45 percent in the next two years as prices rebound and earnings increase.

Terex Corp., the third-largest maker of construction equipment, jumped 10 percent to $21.15 after agreeing to sell its mining business to Bucyrus International Inc. for $1.3 billion in cash. Bucyrus surged 8.5 percent to $55.14.

American companies are paying the biggest premiums on record in takeovers, a sign executives are growing more bullish about profits and stocks even after the biggest rally for the S&P 500 in 73 years. The average premium in mergers and acquisitions in which U.S. companies were the buyer and seller rose to 56 percent this year from 47 percent last year, data compiled by Bloomberg show.

To contact the reporters on this story: Lynn Thomasson in New York at; Maud van Gaal in Amsterdam at