Asia Stocks Drop as U.S. Jobs Data Dims Recovery Outlook

By Yoshiaki Nohara - Apr 9, 2012 3:49 PM GMT+0700

Asian stocks fell for a fourth day, the longest losing streak on the regional benchmark since November, as a weaker-than-expected U.S. jobs report cast doubt on the strength of the recovery in the world’s biggest economy and China’s inflation accelerated.

Toyota Motor Corp. (7203) fell 2.4 percent in Tokyo after U.S. payrolls grew at the slowest pace in five months and the yen rose against the dollar, damping the outlook for export earnings. China Vanke Co. led mainland developers lower after faster-than- estimated inflation damped bets policy makers will cut lending curbs. HTC Corp. dropped 6.8 percent in Taiwan after the smartphone maker posted its biggest drop in profit since listing.

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Samsung Electronics Co. slid 1.5 percent after U.S. payrolls grew in March at the slowest pace in five months. Photographer: SeongJoon Cho/Bloomberg

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April 9 (Bloomberg) -- Kelvin Tay, chief investment strategist at UBS Wealth Management in Singapore, talks about Asian stock markets. He also discusses the U.S. economy and Federal Reserve monetary policy. He speaks with Susan Li on Bloomberg Television's "First Look." (Source: Bloomberg)

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April 9 (Bloomberg) -- Kenji Abe, an equity strategist at Citigroup Global Markets Japan Inc., talks about the nation's financial markets and economy. Japan swung to a current-account surplus in February after a record deficit in January, lending support to a currency that officials have sought to weaken to spur the recovery of the world’s third-biggest economy. Abe speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

The MSCI Asia Pacific Index dropped 0.6 percent to 124.16 as of 5:11 p.m. in Tokyo, with about seven stocks falling for each that rose. The measure lost 1.3 percent last week, the biggest weekly decline since the period ended Dec. 16. Volume on Japan’s Nikkei 225 Stock Average was 30 percent below the 30-day intraday average, as markets were shut for holidays in Hong Kong, Australia, New Zealand, Thailand and the Philippines.

“We’re seeing markets correct pretty quickly,” said Shintaro Takeuchi, a Tokyo-based portfolio manager at Tokio Marine & Nichido Fire Insurance Co., which oversees about $106 billion. “Companies aren’t willing to boost capital investment, leading to a sluggish rebound in employment. That means companies aren’t confident in a full-scale recovery.”

Rally Slows

The MSCI Asia Pacific Index rose 10 percent this year through last week on signs the U.S. economy is recovering. Gains slowed last month after China cut its target for economic growth, seeking to cool its property market and become less reliant on exports. The Standard & Poor’s 500 Index (SPXL1) advanced 11 percent since Dec. 30. The Stoxx Europe 600 Index gained 5.9 percent.

Japan’s Nikkei 225 fell 1.5 percent today after the yen strengthened to a one-month high against the dollar. A gauge of volatility on the measure rose 2.5 percent to 20.44, indicating traders expect a swing of about 5.9 percent over the next 30 days.

South Korea’s Kospi Index slid 1.6 percent amid heightened tension on the Korean peninsula. North Korea appears to be readying a nuclear weapons test after a long-range rocket launch scheduled for as early as this week, according to a report by South Korean intelligence officials. A gauge of volatility among core stocks on the Kospi rose 6.5 percent.

China Inflation

The Shanghai Composite Index, which tracks the bigger of China’s two main stock exchanges, slipped 0.9 percent. The Taiwan Taiex Index lost 1.4 percent, while Singapore’s Straits Times Index declined 1 percent. The BSE India Sensitive Index dropped 1.2 percent.

Futures on the S&P 500 Index sank 1 percent today amid signs a recovery in the U.S. jobs market may be losing steam. American employers last month added the fewest jobs since October, the Labor Department said on April 6, a market holiday in the U.S.

Japanese exporters fell after the yen reached 81.20 against the dollar today, the strongest since March 8. The yen’s appreciation damps the value of some overseas income for Japanese companies.

A strengthening currency also puts more pressure on the Bank of Japan to do more to stimulate the economy. Governor Masaaki Shirakawa and his colleagues may expand the bank’s asset purchases at a meeting on April 27 when inflation data becomes available, according to Morgan Stanley MUFG Securities Co., Mizuho Securities Co. and SMBC Nikko Securities Inc. The central bank concludes a meeting on interest-rate policy tomorrow.

Toyota, Canon

Toyota, Asia’s biggest automaker, fell 2.4 percent to 3,310 yen today. Canon Inc. (7751), a Japanese camera maker that gets more than 80 percent of its revenue abroad, dropped 1.7 percent to 3,780 yen.

Stocks fell in China after the government report on inflation suggested the central bank may have less room to ease monetary policy. Consumer prices gained 3.6 percent in March, exceeding the median economist estimate of 3.4 percent, amid rising wages and higher fuel prices, the National Bureau of Statistics said today.

China Vanke, the biggest mainland developer, slid 1.9 percent to 8.22 yuan. Gemdale Corp., the fourth largest, fell 2 percent to 5.96 yuan.

China Citic Bank Corp., the banking unit of the nation’s largest investment company, declined 2.3 percent to 4.19 yuan.

“Rebounding inflation will weigh on investor sentiment,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “Some of the expected monetary easing such as a reserve ratio cut may be delayed.”

HTC Falls

HTC, Asia’s second-largest smartphone maker, declined 6.8 percent to NT$545 after it said profit plunged 70 percent from a year earlier amid competition from Apple and Samsung.

Stocks on the MSCI Asia Pacific Index are valued at 1.4 times book value, compared with 2.3 times for the S&P 500 and 1.4 times for the Stoxx 600, according to Bloomberg data. A number below 1 means companies can be bought for less than value of their assets.

Defense contractors advanced in Seoul after satellite photographs of a nuclear test site near North Korea’s border with Russia and China show excavation consistent with preparations for previous tests in 2006 and 2009, according to a report obtained by Bloomberg News.

Speco Co., which makes parts for naval ships, rallied 15 percent to 3,895 won. Shares of the company have surged 65 percent since North Korea on March 16 said it planned to test a long-range rocket between April 12 and 16 to carry a satellite into orbit.

Victek Co., a maker of military communications equipment, jumped 15 percent to 3,260 won today. Huneed Technologies, which makes radio frequency walkie-talkies for military use, added 15 percent to 4,600 won.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net.

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China Consumer Prices Rise Faster-Than-Estimated 3.6%

By Bloomberg News - Apr 9, 2012 4:14 PM GMT+0700

China’s inflation accelerated more than forecast in March on a pickup in food prices, signaling that policy makers may exercise caution in adding stimulus to boost growth.

Consumer prices rose 3.6 percent from a year earlier, the National Bureau of Statistics said today. That was more than the median 3.4 percent estimate in a Bloomberg News survey of 33 economists. Food-related costs gained 7.5 percent.

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Vendors await customers at a shopping complex in Beijing, China. Photographer: Nelson Ching/Bloomberg

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April 9 (Bloomberg) -- Patrick Chovanec, an associate professor at Tsinghua University's School of Economics and Management in Beijing, talks about China's economy. China's consumer prices probably gained less than the government’s 4 percent annual target for a second month, rising 3.4 percent in March from a year earlier, according to the median forecast of 33 economists surveyed by Bloomberg News for a report due today. Chovanec speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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April 9 (Bloomberg) -- William Hess, a director at PRC Macro Advisors, talks about China's economy and the government's economic policies. China’s inflation accelerated more than forecast in March amid rising wages and a fuel-price increase, signaling that policy makers may exercise caution in adding stimulus to boost growth. Hess speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

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April 9 (Bloomberg) -- Ben Simpfendorfer, managing director of Silk Road Associates, talks about China's economy. China’s inflation accelerated more than forecast in March on a pickup in food prices, signaling that policy makers may exercise caution in adding stimulus to boost growth. Simpfendorfer also discusses the U.S. economy and the price of oil. He speaks with John Dawson, Susan Li, Robyn Meredith and Mia Saini on Bloomberg Television's "Asia Edge." (Source: Bloomberg)

Premier Wen Jiabao’s officials may need to remain alert to the risk of inflation bouncing back even after price increases stayed below the government’s 4 percent target for a second month. China’s economy may have expanded last quarter at the slowest pace in almost three years, showing the limits of the nation’s contribution to global growth as U.S. job growth weakens and concern mounts about Europe’s sovereign-debt crisis.

“The upside surprise in today’s CPI reading is likely to raise concerns about a possible rebound in inflationary pressures among policy makers,” said Song Yu, a Beijing-based economist with Goldman Sachs Group Inc. “The data could limit the magnitude of the policy loosening that likely started in March,” Song said, citing Goldman’s observations on the increasing supply of loans and news reports on the government easing restrictions on banks’ lending capacity.

The Shanghai Composite Index fell 0.9 percent, the most since March 29, while the yuan was little changed at 6.3085 against the dollar.

Song said that “underlying inflationary pressures remain modest” and Goldman Sachs expects price gains to “trend down in the coming months.”

Prevent Inflation Rebound

Authorities will seek to “prevent a rebound” in consumer prices and manage inflationary expectations, Wen said during a visit to southern China from April 1 to 3.

China’s producer price index, a leading indicator for consumer inflation, fell 0.3 in March from a year earlier after showing no change in February, the statistics bureau said. That was the first decline since November 2009 and matched the median forecast in a Bloomberg News survey of 29 economists.

Estimates for the CPI ranged from 2.7 percent to 3.6 percent. The gauge rose 3.2 percent in February, while food prices rose 6.2 percent.

Yao Wei, a Hong Kong-based economist with Societe Generale SA, said the data will complicate the timing of monetary-policy actions as economic growth slows. Inflation may decelerate this quarter because of higher bases of comparison with the same months in 2011, Yao said. She wouldn’t rule out a reserve-ratio cut for April, while an interest-rate reduction is “extremely unlikely.”

Real Savings Rate

The data pushed China’s so-called real savings rate, which excludes inflation, back to being negative after turning positive in February for the first time in two years. The benchmark one-year deposit rate has been 3.5 percent since July.

Tao Dong, chief regional economist at Credit Suisse AG in Hong Kong, said even with the inflation pickup, CPI is “decisively falling” below 4 percent, which “allows more policy flexibility.”

Today’s report showed vegetable prices surged 20.5 percent in March from a year earlier after a 6.5 percent increase in February, while meat and egg prices climbed 11.3 percent last month. The acceleration is “most likely temporary” and the result of bad weather in a couple of vegetable-planting provinces, said Ren Xianfang, a Beijing-based economist with IHS Global Insight.

Prices for clothing and shoes rose 3.8 percent in March, a sign of underlying wage pressures, said Paul Cavey, a Hong Kong- based economist with Macquarie Securities Ltd. That compares with a 0.8 percent rise in March 2011.

Slower Expansion

The economy may have expanded about 8.4 percent in the first quarter from a year earlier, Zhang Xiaoqiang, vice chairman of the National Development and Reform Commission, said April 3, citing initial estimates from “relevant China research institutes.” The statistics bureau is scheduled to release the data on April 13. In the fourth quarter, growth was 8.9 percent.

Elsewhere in Asia, Japan swung to a current-account surplus of 1.18 trillion yen ($14.5 billion) in February after a record deficit in January, the Ministry of Finance said in Tokyo today.

South Korean producer price inflation eased in March to 2.8 percent, the slowest pace in two years, after a decline in agricultural product prices, a Bank of Korea report showed. Taiwan’s exports shrank 3.2 percent in March from a year earlier, a smaller drop than the 4.5 percent median of nine estimates in a Bloomberg News survey.

Russia Interest Rate

Russia’s central bank refrained from cutting interest rates today after signaling that “medium-term” inflation risks are increasing. Bank Rossii left the refinancing rate at 8 percent, as predicted by 21 of 22 economists in a Bloomberg News survey. Greece will report inflation and industrial production data.

In Mexico, a report today may show inflation eased to 3.76 percent in March, according to the median of nine estimates in a Bloomberg News survey. Chile will release trade data for the same month.

China, the world’s largest oil consumer after the U.S., increased gasoline and diesel prices for the second time in less than six weeks on March 20 after crude had its biggest monthly gain in a year, adding to pressure for consumer prices to rise.

China Petroleum & Chemical Corp., Asia’s biggest refiner, said last month it will ramp up crude production and develop natural gas fields to counter losses from selling diesel and gasoline at state-mandated prices. Sinopec, as the Beijing-based company is known, said fourth-quarter profit dropped 23 percent, missing estimates.

Minimum Wages

Shanghai joined Beijing and Shenzhen in raising minimum wages this year as policy makers seek to spur consumer spending and a shrinking labor surplus pushes up salaries. The nation’s financial hub and most affluent city said in February it will raise the figure by 13 percent to 1,450 yuan ($230) a month starting in April.

The People’s Bank of China cut lenders’ reserve requirements effective Feb. 24 for the second time in three months to pump more liquidity into the banking system.

Analysts in a Bloomberg News survey last month unanimously said banks’ reserve requirements will fall this year, while nine of 20 predicted lower benchmark borrowing costs.

Wen said last month the government aims to keep consumer- price gains within about 4 percent for 2012, taking into account risks from imported inflation and rising costs of land, labor and capital.

People’s Bank of China Governor Zhou Xiaochuan said on April 3 that the policy goal shared by China and other emerging nations is to “gradually bring inflation down” to help achieve a so-called soft landing. He didn’t elaborate.

--Victoria Ruan. With assistance from Ailing Tan in Singapore. Editors: Scott Lanman, Stephanie Phang

To contact Bloomberg News staff on this story: Victoria Ruan in Beijing at vruan1@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at ppanckhurst@bloomberg.net

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Mazda Asset Sales Loom for Japan Unprofitable Automaker

By Masatsugu Horie - Apr 9, 2012 5:00 AM GMT+0700

Should Mazda Motor Corp. (7261) dump the Hiroshima Carp?

Two weeks after selling $1.8 billion in new stock to replenish its depleted capital, Japan’s only unprofitable automaker said last month it will sponsor the All-Star baseball game in July. Mazda is the only Japanese carmaker to own control of a team in the league and also has a professional soccer club, a hospital and more than $5 billion in land.

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Members of the Hiroshima Toyo Carp celebrate after winning a game at the Mazda Zoom-Zoom Studium in Hiroshima, Japan on April 13, 2012. Source: Kyodo News

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Takashi Yamanouchi, chief executive officer of Mazda Motor Corp. Photographer: Haruyoshi Yamaguchi/Bloomberg

The diversity of Mazda’s assets illustrates why scrutiny may intensify on President Takashi Yamanouchi’s plans to revive a company that’s forecasting its biggest annual loss in 11 years. Hiroshima-based Mazda, the nation’s most export-reliant carmaker, has struggled under Yamanouchi after he defied the appreciating yen by keeping production in Japan and as Mazda’s 30-year partnership with Ford Motor Co. (F) crumbled.

“This comes at the worst time,” said Kazuyuki Terao, chief investment officer at Allianz unit RCM Japan. “People might think if they don’t cut spending on baseball, they may also not worry about other expenses.”

Investors have reason to be concerned. Though all of the nation’s major carmakers saw their shares drop last year following natural disasters in Japan and Thailand, Mazda’s 42 percent fall was the steepest because of its vulnerability to the yen. The company produces almost 70 percent of its cars in Japan, of which 80 percent are shipped overseas, the highest ratio in the industry.

Under Performer

Revenue probably fell 12 percent to 2.05 trillion yen ($25 billion) in the year ended March 31, worse than the 2.3 percent drop at Toyota Motor Corp. (7203) and 10 percent decline at Honda Motor Co. (7267), according to the average of analysts’ estimates compiled by Bloomberg.

The stock is extending the under-performance this year, gaining 2.2 percent in 2012, compared with the 15 percent advance by the benchmark Nikkei 225 Stock Average. The cost of insuring against default on Mazda’s bonds using credit-default swaps is at the highest in almost three years.

Last March, Mazda sold 151.2 billion yen of new stock -- a record for the company -- as four years of losses drained away so much capital it faced a debt-rating downgrade, which would raise borrowing costs for the industry’s most indebted carmaker. When unprofitable companies sell stock via public offerings to boost capital in the balance sheet, they also dilute the value of existing shares. In Mazda’s case, the number of outstanding shares rose by about 70 percent.

Ties to Hiroshima

Mazda’s investments reflect the deep ties the carmaker, Hiroshima’s biggest company, has with the city where it was founded 92 years ago, spokeswoman Kozue Nitta said. The company said after the atomic bomb devastated the city in 1945, it lent its headquarters to the Hiroshima government for about a year.

“We started to run the hospital and investing in baseball, soccer teams to make contributions to the local community,” Nitta said. “We have many reasons to hold on to each asset.”

Mazda owns 34 percent of the Carp baseball team -- a three- time winner of the Japan Series -- and 22 percent of the Sanfrecce Hiroshima soccer club, according to the company last year. The unprofitable carmaker also owns welfare facilities, including a hospital and dormitories, worth 20.5 billion yen and 432.3 billion yen in real estate.

By comparison, Mitsubishi Motors Corp. (7211) shut an employee hospital in Okayama during 2009 after its recall crisis forced the company to sell 780 billion yen of new stock. Daiei Inc. (8263) sold the Hawks baseball team in 2005 to mobile-phone operator Softbank Corp. (9984) after the supermarket operator needed a government bailout.

Rotary Engine

Mazda’s finances are a contrast to four years ago, when the developer of the rotary engine and the RX-7 sports car was coming off record profits. Then the collapse of Lehman Brothers Holdings Inc. (LEHMQ) sparked a global recession and the yen appreciated more than any major currency for two straight years.

The company is scaling back spending as Mazda plans to reduce new hires of college graduates by 71 percent this fiscal year and offered buyouts to U.S. employees. The Nikkei newspaper reported March 24 that Mazda plans to halt manufacture of commercial vehicles, although spokesman Toyota Tanaka declined to confirm the report.

The carmaker may have further room to cut costs. Selling, general and administrative expenses accounted for about 19 percent of revenue in the year ended March 2011, the third highest spending ratio in the industry after Honda and Suzuki Motor Corp. (7269), according to data compiled by Bloomberg.

‘Fanatical’ Fans

Mazda is also increasingly turning to Sumitomo Corp. (8053) and Sumitomo Mitsui Financial Group Inc. (8316) for financial aid after Ford Motor Co. cut its stake in Mazda to 3.5 percent in 2010 from 33 percent in 2008, dismantling an alliance spanning three decades. Mazda said in June it plans to stop making sedans at a Michigan plant shared with Ford since 1992.

“It will take time for Mazda to expand overseas because Ford has taken care of such tasks for a long time,” said Takeshi Miyao, an analyst at a research firm Carnorama Japan. “I doubt Mazda really means to stay in Japan. Foreign production may increase gradually after a few years.”

The company’s reliance on the yen may decline starting next fiscal year, when a factory in Mexico is scheduled to begin production. The company is also counting on fuel-efficient models such as the CX-5 sport-utility vehicle that went on sale in February, the first vehicle to be fully fitted with its so- called “SkyActiv” technology. The technology is enough to keep Mazda competitive for the next 5 to 10 years, Kurt Sanger, an analyst at Deutsche Bank AG (DBK), wrote in a report late last year.

While the yen may be reversing gains -- it’s the worst performing major currency this year -- Mazda should give investors a better indication that management is spending the company’s money wisely, said Tokyo-based Tachibana Securities Co. (TSCLZ) strategist Kenichi Hirano.

“Given the situation, Mazda may need to consider selling the Carp and weather the backlash from the team’s fanatical fans,” Hirano said. “They should be reviewing what assets they can sell, but I can’t see them having made an effort.”

To contact the reporter on this story: Masatsugu Horie in Osaka at mhorie3@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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Iran Agrees to Restart Nuclear Talks With U.S., Allies

By James G. Neuger and Ladane Nasseri - Apr 9, 2012 5:28 AM GMT+0700

The U.S. and its European allies will press Iran for tangible action to curb its nuclear program when talks with the government in Tehran restart later this week after a 15-month hiatus.

Nuclear negotiations between Iran and the five permanent United Nations Security Council members plus Germany will take place starting April 14 in Istanbul, European Union spokesman Michael Mann said yesterday. In Washington, State Department spokeswoman Laura Seal confirmed the plans.

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April 3 (Bloomberg) -- Former New Mexico Governor Bill Richardson talks about Iran and North Korea's nuclear ambitions. Richardson, also former U.S. energy secretary, talks about China's energy diversification, and the price of crude oil and its effect on the global economy. He speaks with Bloomberg's Stephen Engle at the Boao Forum for Asia. (Source: Bloomberg)

“We have agreed to launch talks in Istanbul on April 14,” Mann said. “We hope that this first round will produce a conducive environment for concrete progress. We are of course aiming at a sustained process.”

The U.S. and its allies are seeking to avoid a repeat of the previous meeting in January 2011, also in Istanbul, when talks broke down after Iran demanded a lifting of UN sanctions as a condition for discussing the nuclear program. Iran is under increasing economic pressure from trade, financial and energy sanctions, including U.S. and EU measures to cut oil purchases from Iran.

In a joint statement March 8, the U.S. and its five partners in the talks -- China, France, Germany, Russia and the U.K. -- said they wanted sustained discussions with Iran and for the Persian gulf nation to allow UN inspectors into its secret Parchin military installation.

Israeli Defense Minister Ehud Barak said the six powers should demand that Iran stop enriching uranium to 20 percent and give up any material already processed to that level. Iran also must shut down the Fordo underground enrichment facility near Qom, Barak said in an interview broadcast yesterday on CNN’s “Fareed Zakaria GPS” program.

Enriching Uranium

The U.S. and its allies say their concern is that Iran can use enrichment, which can be used to generate energy, to further process uranium to 90 percent for weapons-grade material.

Demands to give up a stockpile of material that Iran considers strategic raise the question of what the U.S. would be willing to offer in return, such as easing of sanctions, said Trita Parsi, the founder and president of the National Iranian American Council.

“If there are no concessions given, I find it very unlikely that the Iranians would agree to those demands, however justifiable those demands would be,” said Parsi, the author of “A Single Roll of the Dice: Obama’s Diplomacy with Iran.” “It doesn’t just seem very likely that the Iranians would agree to give up a strategic asset and still wait for oil sanctions to kick in.”

‘Maximalist Demands’

Both sides in the negotiations have shown a repeated pattern of pushing the other to “maximalist demands,” said Parsi, whose Washington-based group advocates diplomacy with Iran.

“Every time, that has ended up being a miscalculation,” he said. “Neither side is going to capitulate.”

Iran denies Western suspicions that it is pursuing a weapons capability, saying it wants nuclear power to provide energy for a growing population and to conduct medical research.

Iranian President Mahmoud Ahmadinejad said yesterday that Iran, a signatory to the nuclear Non-Proliferation Treaty, will retain its right to scientific progress in its atomic program. He also attacked Israel and its allies for having nuclear weapons and threatening his country.

“Certain countries in the region not only possess nuclear technology but also have the atomic bomb,” Ahmadinejad said in an address to industry officials on the occasion of Iran’s nuclear technology day. “However there is no mention of them and no one is bothering them.”

Nuclear Israel

Iranian officials often have condemned what they see as a double standard because none of the three nuclear-weapons powers in the region -- Israel, Pakistan, and India -- has signed the nuclear Non-Proliferation Treaty. Israel hasn’t acknowledged having nuclear weapons.

The U.S. has sought to bring Russia and China on board with international efforts pressing the Iranians to curb uranium enrichment. Russian Deputy Foreign Minister Sergei Ryabkov said March 30 that Iran is breaching UN resolutions and “expanding” the scale of its nuclear program.

Earlier this month, Iranian officials said Turkey wouldn’t be a suitable location for nuclear talks in light of its sympathies for the opposition movement in Syria, an Iranian ally.

Iranian Foreign Minister Ali Akbar Salehi had suggested China and Iraq as potential venues. The secretary of Iran’s Expediency Council, named Baghdad, Damascus or Beirut as more suitable locations than Istanbul.

Turkish Response

Turkish Prime Minister Recep Tayyip Erdogan rebuked Iranian official as being “dishonest,” saying they were proposing alternative locations they knew the U.S. and its European allies wouldn’t find acceptable.

The Turkish government once blamed officials in Washington for the continuing U.S.-Iran conflict, thinking leaders in Tehran hadn’t been approached properly, said Karim Sadjadpour, an associate at the Carnegie Endowment for International Peace, a policy research group in Washington.

Turkey was soon frustrated with its own efforts to find agreement with the Iranian regime over the nuclear issue and on Syria, Sadjadpour said yesterday in an e-mail. The result is that Iran risks isolating itself with few allies other than North Korea, Cuba, Venezuela and the regime of President Bashar al-Assad in Syria, he said.

“There are increasingly few locales in the world today which both the U.S. and Iran consider neutral diplomatic terrain,” he said.

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Ladane Nasseri in Dubai at lnasseri@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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Stock Futures Plunge Following Weak Jobs Report

By Lu Wang - Apr 9, 2012 5:10 AM GMT+0700

U.S. stock futures fell, signaling more Standard & Poor’s 500 Index losses following the biggest weekly retreat of the year, after American employers added fewer jobs than forecast in March.

S&P 500 (SPX) futures expiring in June slumped 1.3 percent to 1,372.70 at 7:07 a.m. Tokyo time following the benchmark index’s 0.7 percent weekly loss. Dow Jones Industrial Average futures dropped 143 points, or 1.1 percent, to 12,835. Nasdaq-100 Index futures retreated 1.2 percent to 2,721.50. U.S. stock exchanges were shut for Good Friday on April 6, when the employment report was released.

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The S&P 500 fell 0.7 percent last week to close at 1,398.08 on April 5, after reaching the highest level since May 2008 on April 2. Photographer: Scott Eells/Bloomberg

Equities slumped last week after the Federal Reserve signaled it will refrain from further monetary stimulus and concern about Europe intensified. The U.S. Labor Department said April 6 that employers added 120,000 jobs, the fewest in five months and less than the median economist forecast of 205,000 in a Bloomberg survey. The amount had exceeded 200,000 for three straight months.

“This is a real shock,” Donald Selkin, the New York-based chief market strategist at National Securities Corp., which manages about $3 billion, said in a telephone interview. “Everybody is so hung up on the 200,000 increase.”

The S&P 500 fell 0.7 percent last week to close at 1,398.08 on April 5, after reaching the highest level since May 2008 on April 2. The Dow Jones Industrial Average lost 151.90 points, or 1.2 percent, to 13,060.14 last week.

Alpha Natural, Apple

Nine out of 10 S&P 500 industries retreated during the holiday-shortened week. Energy companies fell the most as Alpha Natural Resources Inc. (ANR) slumped 6.6 percent, leading the group to a 1.8 percent drop. SanDisk Corp. and Constellation Brands Inc. tumbled at least 8.4 percent after providing disappointing forecasts. Apple Inc. jumped 5.7 percent, helping drive technology companies in the benchmark index to the longest string of weekly gains since at least 1989.

Equities failed to build on the S&P 500’s best first- quarter rally since 1998. Minutes from the March 13 meeting of the Federal Open Market Committee showed that the central bank will refrain from increasing monetary accommodation unless economic expansion falters or prices rise at a rate slower than its 2 percent target. Concern about Europe’s debt crisis intensified as Spain sold 2.59 billion euros ($3.4 billion) of bonds at an auction, less than the maximum target of 3.5 billion euros.

The U.S. jobless rate fell to 8.2 percent, the lowest since January 2009, from 8.3 percent, the Labor Department said. Faster employment growth that leads to bigger wage gains is needed to propel consumer spending that accounts for about 70 percent of the economy. Americans worked fewer hours and earned less on average, helping explain why the Fed says interest rates may need to stay low at least through late 2014.

Pace of Recovery

“What it calls into question and what the debate will be about is, once again, what is the pace of the recovery?” Mark Freeman, who oversees about $13 billion as chief investment officer at Westwood Holdings Group Inc. in Dallas, said in a telephone interview.

Fed Chairman Ben S. Bernanke has kept rates near zero since 2008 and expanded the central bank’s balance sheet with two rounds of asset purchases totaling $2.3 trillion. S&P 500 rallies during the first quarter of 2010 and 2011 stalled in April both years, with the index sinking as much as 16 percent and 19 percent, respectively, amid concern the Fed would stop stimulating the economy.

The S&P 500 surged 12 percent from January through March of this year as data on manufacturing, real estate and the labor market boosted optimism about the world’s largest economy. Reports last week showed manufacturing in the U.S. expanded at a faster pace than forecast while jobless claims dropped to the lowest level in four years.

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

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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China Consumer Prices Rise Faster-Than-Estimated 3.6%

By Bloomberg News - Apr 9, 2012 10:04 AM GMT+0700

China’s inflation accelerated more than forecast in March on a pickup in food prices, signaling that policy makers may exercise caution in adding stimulus to boost growth.

Consumer prices rose 3.6 percent from a year earlier, the National Bureau of Statistics said today. That was more than the median 3.4 percent estimate in a Bloomberg News survey of 33 economists. Food-related costs gained 7.5 percent.

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Vendors await customers at a shopping complex in Beijing, China. Photographer: Nelson Ching/Bloomberg

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April 9 (Bloomberg) -- Patrick Chovanec, an associate professor at Tsinghua University's School of Economics and Management in Beijing, talks about China's economy. China's consumer prices probably gained less than the government’s 4 percent annual target for a second month, rising 3.4 percent in March from a year earlier, according to the median forecast of 33 economists surveyed by Bloomberg News for a report due today. Chovanec speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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April 9 (Bloomberg) -- William Hess, a director at PRC Macro Advisors, talks about China's economy and the government's economic policies. China’s inflation accelerated more than forecast in March amid rising wages and a fuel-price increase, signaling that policy makers may exercise caution in adding stimulus to boost growth. Hess speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

Today’s data show Premier Wen Jiabao’s officials may need to remain alert to the risk of inflation bouncing back even after price increases stayed below the government’s 4 percent target for a second month. China’s economy may have expanded last quarter at the slowest pace in almost three years, showing the limits of the nation’s contribution to global growth as U.S. job growth weakens and concern mounts about Europe’s sovereign- debt crisis.

“We expect inflationary pressures to rise going forward as growth momentum has picked up and structural inflationary pressures remain large,” said Liu Li-Gang, Hong Kong-based head of Greater China Economics at Australia & New Zealand Banking Group Ltd. The central bank “will remain cautious in its policy outlook,” he said.

The Shanghai Composite Index fell 0.2 percent at 10:44 a.m. local time after dropping as much as 0.9 percent following the report. China’s interest-rate swaps advanced to a two-week high and the yuan strengthened for a second day.

Reducing Urgency

The report “reduces the urgency” to lower the reserve requirement ratio in the near term, and a cut could be postponed until May or June, Liu said.

Authorities will seek to “prevent a rebound” in consumer prices and manage inflationary expectations, Wen said during a visit to southern China from April 1 to 3.

China’s producer price index, a leading indicator for consumer inflation, fell 0.3 in March from a year earlier after showing no change in February, the statistics bureau said. That was the first decline since November 2009 and matched the median forecast in a Bloomberg News survey of 29 economists.

Estimates for the CPI ranged from 2.7 percent to 3.6 percent. The gauge rose 3.2 percent in February, while food prices rose 6.2 percent.

Yao Wei, a Hong Kong-based economist with Societe Generale SA, said the data will complicate the timing of monetary-policy actions as economic growth slows. Inflation may decelerate this quarter because of higher bases of comparison with the same months in 2011, Yao said. She wouldn’t rule out a reserve-ratio cut for April, while an interest-rate reduction is “extremely unlikely.”

Vegetable Costs

Today’s report showed vegetable prices surged 20.5 percent in March from a year earlier after a 6.5 percent increase in February, while meat and egg prices climbed 11.3 percent last month. The acceleration is “most likely temporary” and the result of bad weather in a couple of vegetable-planting provinces, said Ren Xianfang, a Beijing-based economist with IHS Global Insight.

Prices for clothing and shoes rose 3.8 percent in March, a sign of underlying wage pressures, said Paul Cavey, a Hong Kong- based economist with Macquarie Securities Ltd. That compares with a 0.8 percent rise in March 2011.

The economy may have expanded about 8.4 percent in the first quarter from a year earlier, Zhang Xiaoqiang, vice chairman of the National Development and Reform Commission, said April 3, citing initial estimates from “relevant China research institutes.” The statistics bureau is scheduled to release the data on April 13. In the fourth quarter, growth was 8.9 percent.

Fuel Prices

China, the world’s largest oil consumer after the U.S., increased gasoline and diesel prices for the second time in less than six weeks on March 20 after crude had its biggest monthly gain in a year, adding to pressure for consumer prices to rise.

China Petroleum & Chemical Corp., Asia’s biggest refiner, said last month it will ramp up crude production and develop natural gas fields to counter losses from selling diesel and gasoline at state-mandated prices. Sinopec, as the Beijing-based company is known, said fourth-quarter profit dropped 23 percent, missing estimates.

Shanghai joined Beijing and Shenzhen in raising minimum wages this year as policy makers seek to spur consumer spending and a shrinking labor surplus pushes up salaries. The nation’s financial hub and most affluent city said in February it will raise the figure by 13 percent to 1,450 yuan ($230) a month starting in April.

Reserve-Ratio Cut

The People’s Bank of China cut lenders’ reserve requirements effective Feb. 24 for the second time in three months to pump more liquidity into the banking system.

Analysts in a Bloomberg News survey last month unanimously said banks’ reserve requirements will fall this year, while nine of 20 predicted lower benchmark borrowing costs.

Liu at ANZ said he’s skeptical that the People’s Bank of China will cut interest rates and that a reserve-ratio reduction will be determined in part by the amount of maturing central bank bills each week.

Growth may recover to 8.9 percent to 9 percent in the second quarter as the economy responds to previous monetary easing and demand from the U.S. and Europe recovers, he said.

Wen said last month the government aims to keep consumer- price gains within about 4 percent for 2012, taking into account risks from imported inflation and rising costs of land, labor and capital. He also pledged to change the way the price of resources including electricity and fuel are set to better reflect their costs.

People’s Bank of China Governor Zhou Xiaochuan said on April 3 that the policy goal shared by China and other emerging nations is to “gradually bring inflation down” to help achieve a so-called soft landing. He didn’t elaborate.

--Victoria Ruan. With assistance from Ailing Tan in Singapore. Editors: Scott Lanman, Nerys Avery

To contact Bloomberg News staff on this story: Victoria Ruan in Beijing at vruan1@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at ppanckhurst@bloomberg.net

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Wallace, Hard-Charging ‘60 Minutes’ Reporter, Dies at 93

By Kathryn Harris - Apr 9, 2012 12:35 AM GMT+0700

Mike Wallace, the hard-charging correspondent who was billed by CBS as “America’s toughest interviewer” on the long-running “60 Minutes” newsmagazine, has died. He was 93.

Wallace died last night, surrounded by family members, at Waveny Care Center in New Canaan, Connecticut, CBS News said in an e-mailed statement today. The cause of death was complications from old age, CBS spokesman Kevin Tedesco said.

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CBS newsman Mike Wallace arrives at the "CBS At 75" celebration at the Hammerstein Ballroom in New York on Nov. 2, 2003. Wallace, who was a correspondent on the long-running “60 Minutes” newsmagazine, has died, CBS News reported. He was 93. Photographer: Matthew Peyton/Getty Images

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CBS newsman Mike Wallace signs his book at the 2005 Book Expo at the Javits Center in New York on June 4, 2005. Wallace, who was a correspondent on the long-running “60 Minutes” newsmagazine, has died, CBS News reported. He was 93. Photographer: Michael Nagle/Getty Images

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CBS newsman Mike Wallace, attends The Paris Review Foundation Presents Fall Revel Honoring William Styron at Cipriani in New York City on Nov. 10, 2004. Wallace, who was a correspondent on the long-running “60 Minutes” newsmagazine, has died, CBS News reported. He was 93. Photographer: Evan Agostini/Getty Images

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CBS News correspondents Mike Wallace, left, and Andy Rooney attend the screening of "Enron: The Smartest Guys in the Room" at the MGM screening room in New York on April 13, 2005. Wallace, who was a correspondent on the long-running “60 Minutes” newsmagazine, has died, CBS News reported. He was 93. Photographer: Paul Hawthorne/Getty Images

Wallace was deemed so vital to the success of “60 Minutes” that CBS waived a mandatory retirement rule in his case as the newsman approached 65. He was a regular contributor for another 22 years, until he retired in May 2006 at age 88.

“It is with tremendous sadness that we mark the passing of Mike Wallace,” Leslie Moonves, chief executive officer and president of CBS, said in the statement. “His extraordinary contribution as a broadcaster is immeasurable and he has been a force within the television industry throughout its existence.” CBS said it will air a special program dedicated to Wallace on the April 15 “60 Minutes” episode.

Named “correspondent emeritus,” Wallace kept an office at CBS and remained on call to its news division.

‘The Lone Ranger’

His broadcast career spanned 65 years, beginning in 1939 as a jack-of-all-trades at a radio station in Grand Rapids, Michigan. Wallace narrated “The Lone Ranger” radio scripts, pitched Parliament cigarettes on television, hosted quiz shows and even worked as an actor. He found his calling as a tough-guy interrogator on “Night Beat,” an interview program that aired on a local New York television station in 1956.

At 44 -- considered old for a correspondent -- Wallace landed a job with CBS News in 1963. Five years later, producer Don Hewitt invited Wallace to join “60 Minutes” in its debut season.

Wallace quickly became known for his muckraking stories, ambush interviews and sit-downs with celebrities and heads of state. His suntanned, leathery face became the public image of “60 Minutes” as the newsmagazine climbed in the Nielsen ratings and had an extraordinary 23-year run as a Top 10 show.

‘A Tiger’

“Everything good that happened to us happened because Mike was here from the beginning,” Hewitt told Broadcasting magazine in 1992, as the program celebrated its 25th year on the air.

In his 2001 memoir, Hewitt described Wallace as “a tiger, the kind of journalist who comes along once in a lifetime, and he hasn’t lost a step along the way.” Hewitt, the creator of “60 Minutes” and its executive producer for 35 years, died in August 2009.

Wallace’s work ethic was legend, and the pace took a toll on his personal life. He was thrice-divorced by 1985. Nonetheless, his two sons wanted to become journalists. The elder son, Peter, died at 19. Chris Wallace became a star correspondent for NBC and ABC, then host of the Sunday morning public-affairs program, “FOX News Sunday.”

Wallace’s aggressive pursuit of stories stirred controversy.

General William Westmoreland sued CBS after Wallace narrated a 90-minute documentary in 1982 that accused the general of deliberately undercounting enemy troop strength in Vietnam. Although Westmoreland ultimately withdrew the $120 million libel suit, Wallace sought treatment for clinical depression after listening to five months of courtroom testimony.

Bouts of Depression

In later years, Wallace spoke publicly about his bouts with depression “for the reason that it can be helpful for other people to say, ‘Well look, here’s a guy who was at the bottom of the heap, miserable, and look, he has it back. He is surviving,’” he told the Washington-based Academy of Achievement in 2002.

Despite his tough-guy persona, Wallace was thin-skinned about his Hollywood portrayal in “The Insider,” a 1999 movie that suggested that he lost -- before recovering -- his moral compass on a 1995 story featuring tobacco industry whistle- blower Jeffrey Wigand.

Hewitt blocked airing Wallace’s interview with Wigand on the advice of a CBS lawyer but permitted Wallace to report that decision, along with a small portion of the interview.

Massachusetts Native

Myron Leon Wallace was born in Brookline, Massachusetts, on May 9, 1918, to Russian-Jewish immigrants Frank Wallace, a grocer and insurance broker, and the former Zina Sharfman. An immigration official had changed his father’s name from Friedan Wallak upon his arrival in the U.S. at age 16, according to Wallace.

Wallace said he was “never an A student.” He played the violin and served as concertmaster in the Brookline High School orchestra and became captain of the tennis team.

Severe acne plagued Wallace in high school, “leaving scars that, in later years, would inspire TV critics to observe that Wallace’s ‘pockmarked, prizefighter’s face’ served to enhance the abrasive tone of his interview,” Gary Paul Gates wrote in “Close Encounters,” a memoir he co-wrote with Wallace in 1984.

Wallace enrolled at the University of Michigan in 1935, and discovered the student-run radio operation in his sophomore year. “All I wanted to be was a radio announcer,” Wallace later recalled. “I read a hell of a commercial.”

First Job

At his first radio job in Grand Rapids, he read the news, provided sports commentary and presented quiz shows.

Wallace moved to Detroit, where he was teamed with Douglas Edwards -- later to become the first CBS television news anchor -- as the two “Cunningham News Aces” on WXYZ. Wallace also served as an announcer and narrator for “The Green Hornet” and “The Lone Ranger,” two popular dramas. He married Norma Kaphan, whom he had dated when both were undergraduates at Michigan. The marriage, which produced sons Peter and Christopher, ended in divorce in 1948.

A member of the U.S. Naval Reserve, Wallace was trained as a communications officer and served two years in the Pacific on a submarine tender during World War II.

In Chicago after the war, Wallace worked for “The Air Edition of the Chicago Sun,” for which he was encouraged to report and write, not just read the news. As the interviewer for WGN radio’s “Famous Names,” he met actress Buff Cobb, who became his second wife in 1949.

‘Mike and Buff’

The two became co-hosts of a Chicago radio interview show that attracted the attention of CBS television executives in 1951. At 33, Wallace moved with his wife to New York to host an afternoon television program for CBS called “Mike and Buff.” The talk show ended in 1954, along with the marriage.

Wallace had done some television acting in Chicago, and he auditioned for and won a role in the Broadway production of “Reclining Figure.” He declared the experience too repetitious for his liking.

Wallace landed a local news-anchor job at Channel 5 in New York. He also met and married artist Lorraine Perigord, in a union that would last 30 years before ending in divorce. Wallace assumed responsibility for her two children, Pauline and Anthony, from a previous marriage.

Ted Yates, then Channel 5 news director, dreamed up the idea of “Night Beat,” the hard-hitting nightly interview program that debuted in 1956 with Wallace as the cigarette- smoking interrogator on a dark set. Interviewees were subjected to klieg lights and tight camera angles along with Wallace’s well-researched questions. Newsmakers flocked to the show to prove their mettle. ABC lured Wallace and Yates in 1957 and renamed the show “The Mike Wallace Interview.”

Cigarette Commercials

In 1959, Wallace returned to local news in New York -- this time at Channel 13 -- and appeared in television commercials for Philip Morris (PM)’s Parliament filter cigarettes. In 1961, he became a co-host on the upbeat “PM East” talk show produced by Westinghouse.

Tragedy struck in 1962, when Wallace’s older son died in a hiking accident in Greece. Peter Wallace had completed two years at Yale and had expressed interest in journalism.

To honor his son, Wallace ended his work in commercials and quiz shows and sought jobs as a newsman at the three major networks. CBS hired him in 1963, to the displeasure of some news veterans who frowned on his background as an entertainer. He was soon tapped to host the “CBS Morning News” and held that post for three years.

Turned Down Nixon

From 1966 to 1968, Wallace worked as a correspondent and covered the early stages of Richard Nixon’s presidential campaign. Wallace turned down a job offer from Nixon and agreed to become the co-host and co-editor of “60 Minutes,” which made its debut on Sept. 24, 1968.

Wallace accepted the “60 Minutes” job partly because he liked the idea of teaming with the low-key, personable Harry Reasoner. “Good guy, bad guy. The guy you love, the guy who makes you quake,” Hewitt put it in his memoir.

During the first two years of the show, Reasoner’s quirky stories and wry delivery helped set “60 Minutes” apart from other documentary programs. Reasoner was regarded as the “top banana” because of his talent and his role as substitute anchor for Walter Cronkite on the “CBS Evening News.”

Wallace ascended in the public eye after Reasoner departed in 1970 for the top anchor job at ABC. Other strong journalists joined the program -- including Dan Rather for six years before he became “CBS Evening News” anchor -- but Wallace remained the dominant force and sought the most-controversial stories.

He said frequent travel harmed his third marriage, which ended in divorce in 1985. The following year he married Mary Yates, the widow of his former associate Ted Yates, who had died in Jerusalem while covering the Six-Day War in 1967.

To contact the reporter on this story: Kathryn Harris at kathrynh@bloomberg.net

To contact the editor responsible for this story: Chuck Stevens at cstevens@bloomberg.net

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U.S. Employment Growth Seen Rebounding From Slump

By Timothy R. Homan and Carlos Torres - Apr 9, 2012 6:01 AM GMT+0700

The March setback in hiring will prove temporary as the U.S. economy, in its third year of expansion, now is better equipped to overcome a slowdown in Europe and rising fuel costs, economists said.

Growing sales and profits may give business leaders the confidence to take on staff at a faster clip than last month’s 120,000 gain in payrolls, according to analysts at JPMorgan Chase & Co. and Deutsche Bank Securities Inc. They say the data don’t signal a repeat of 2010 and 2011 -- when hiring was derailed after promising starts by concern about government debt, energy costs and natural disasters -- even though the total was weaker than all the estimates from 80 economists surveyed by Bloomberg News.

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Job seekers wait for the opening of the Job USA fair in Robstown, Texas, U.S. Photographer: Eddie Seal/Bloomberg

That sentiment isn’t universal, with economists at Bank of America Corp. among those projecting employment will slump in the second half of the year as the government prepares to put the brakes on spending to tame the budget deficit. Joseph LaVorgna and Carl Riccadonna at Deutsche Bank counter that income gains will unleash increases in household spending and hiring that will boost job creation by an average of at least 200,000 a month for all of 2012.

“While the economy is going to do OK, we think jobs are going to be doing better than OK,” Bruce Kasman, chief economist at JPMorgan in New York, said in an April 6 conference call following the Labor Department’s employment report. “We don’t think today’s number represents the trend,” he said, affirming a forecast that payrolls will rise by 200,000 workers on average for the rest of the year.

‘Modest’ Wage Increases

The main reason Kasman, a former researcher at the Federal Reserve Bank of New York, remains optimistic is that gains in revenue will outstrip what may be “modest” increases in wages, meaning companies have incentive to boost employment as sales improve. Additionally, a slowdown in productivity following a surge during the recession means companies may not be able to squeeze more output from current workers, he said.

“It’s much more attractive to hire people right now, to invest in human capital,” said Kasman.

SCVNGR Inc. is among small businesses looking to make such an investment. The developer of applications for smart phones plans to add 17 to 30 employees this year to the 120 already on staff, after hiring 30 at the end of January.

“Our sales have been really great,” Nick Herbold, the company’s head of recruiting, said in a telephone interview last week. The Boston-based company was founded in 2008 and is backed by investors including Google Ventures.

Increasing Confidence

“Confidence is increasing” among many clients and customers of Adecco Group North America, according to Janette Marx, a senior vice president at the Melville, New York-based division of Adecco SA (ADEN) in Glattbrugg, Switzerland, the world’s largest provider of temporary employees.

“We’re seeing a lot of people convert from temp positions to full-time positions across a lot of industries,” she said in a telephone interview. “The acceleration really stepped up in the second half of the first quarter.”

The jobless rate unexpectedly dropped to 8.2 percent in March, a three-year low, last week’s Labor Department report showed, as people left the labor force. The participation rate, the share of working-age men and women with jobs or seeking employment, fell to 63.8 percent from 63.9 percent in February.

The smaller-than-forecast payroll figures reinforce Federal Reserve Chairman Ben S. Bernanke’s repeated cautions that gains might slow as companies adjust their staffs for a period of moderate growth. The central bank has pledged to keep its benchmark interest rate near zero until late 2014 to stimulate expansion.

Obama’s Economic Record

The report also broke a pattern that was giving U.S. voters a growing sense of security and boosting President Barack Obama as Republican Mitt Romney attacks his economic record.

“Millions of Americans are paying a high price” for Obama’s policies, and “more and more people are growing so discouraged that they are dropping out of the labor force altogether,” the former Massachusetts governor said in a April 6 statement released by his campaign that criticized the president for creating a “stagnant” employment market.

Obama said “we welcome” the added jobs and decline in the unemployment rate, during an April 6 forum on women and the economy at the White House. “But, it’s clear to every American that there will still be ups and downs along the way and that we’ve got a lot more work to do.”

Fiscal Tightening

Economists at Bank of America are among those concerned that government-mandated spending cuts and tax increases will cause the economy to slump later this year. Ethan Harris, co- head of global economic research for the bank estimates the U.S. faces a “Greek-sized” fiscal tightening in December amounting to about $580 billion, or 3.9 percent of gross domestic product, he wrote in a Jan. 26 note.

Businesses and households will grow increasingly uncertain about the outlook, pondering questions like how long it will take for a lame-duck session of Congress to act, he said.

“As we get toward the end of the year and growth slows, you will probably see job growth slow and consumer spending soften,” Neil Dutta, a Bank of America economist in New York, said in an April 6 interview after the employment data were released. Beginning in the third quarter, employment gains probably will average closer to 100,000 a month from about 175,000 in the first six months of 2012, he said.

Less Pessimistic

Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, is less pessimistic.

“The report was mildly disappointing, but I wouldn’t be that concerned,” said Hoffman, the second most-accurate payrolls forecaster for the two years through February, according to Bloomberg Rankings. “You have to average these things out,” he added, noting that nonfarm payrolls averaged about 211,000 each month in the first quarter.

“It’s not a straight line; it ebbs and it flows,” agreed Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “The job market and the economy are steadily improving.”

Hourly earnings climbed 0.2 percent on average in March after a revised 0.3 percent gain the prior month that was larger than previously estimated, according to government figures. Aggregate incomes, which take into account hours worked and changes in payrolls, probably grew by about 5.6 percent in the first three months of the year, based on calculations by Deutsche Bank senior economist Riccadonna.

“Income growth is positive; that will support consumer spending” and will be “the linchpin of an improving, positive economic-feedback loop,” as rising sales prompt companies to hire, leading to gains in wages that will spur demand further, Riccadonna said in an April 6 interview after the jobs report.

Reluctant Employers

In 2010, the emergence of sovereign-debt concerns in Europe weighed on the U.S. economic outlook. Those same fears resurfaced in 2011, in addition to rising gasoline prices, an earthquake and tsunami in Japan and a budget impasse in Washington. All contributed to a slowdown in hiring in mid-year as employers were reluctant to bring on new workers.

After rising at an average 261,000 pace from February through April of 2011, private payrolls, which exclude government agencies, climbed by an average of 109,000 in the next four months, according to data from the Labor Department.

This year, the economy is rebounding, with growth at 2.2 percent according to the median estimate of 70 economists surveyed by Bloomberg from March 9 to March 13, compared with 1.7 percent last year. The improvement means Fed policy makers can sit back and wait for the monetary stimulus already in train to work, without having to do another round of asset purchases, known as quantitative easing, Kasman said.

‘Very Patient’

“The Fed will be very patient here,” he said. With 12.7 million Americans still unemployed, the competition for available jobs will probably rein in wage gains, which “allows the Fed to believe there is a lot of slack that can be eaten up in this recovery,” and policy makers can “let the economy run” by keeping interest rates low.

“I’m not setting off the alarm bells yet,” Zandi said. “I had expected to be disappointed at some point this spring. I just thought it would be in April, not in March. It’s mostly weather-related. It’s not a fundamental change.”

To contact the reporters on this story: Timothy Homan in Washington at thoman1@bloomberg.net; Carlos Torres in Washington at ctorres2@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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JPMorgan Trader Iksil Fuels Prop-Trading Debate With Bets

By Shannon D. Harrington, Bradley Keoun and Christine Harper - Apr 9, 2012 7:04 AM GMT+0700

JPMorgan Chase & Co. (JPM) trader Bruno Iksil’s outsized bets in credit derivatives are drawing attention to a little-known division that invests the company’s reserves and fueling a debate over whether banks are taking excessive risks with federally insured and subsidized money.

Iksil’s influence in the market has spurred some counterparts to dub him Voldemort, after the Harry Potter villain. He works in London in the bank’s chief investment office, which has assembled traders from across Wall Street to its staff of 400 who help oversee $350 billion in investments. While the firm describes the unit’s main task as hedging risks and investing excess cash, four hedge-fund managers and dealers say the trades are big enough to move indexes and resemble proprietary bets, or wagers made with the bank’s own money.

The trades, first reported by Bloomberg News April 5, stirred debate among U.S. policy makers over the Easter-holiday weekend as they wrangle over this year’s implementation of the so-called Volcker rule, the portion of the Dodd-Frank Act that sets limits on risk-taking by banks with government backing. The law passed after the collapse of the subprime mortgage market triggered the worst financial crisis since the Great Depression. (INDU)

“I wouldn’t be surprised if the pro-Volcker folks used this as a test case,” said Douglas Landy, a partner at law firm Allen & Overy LLP who is representing Canadian banks in opposing a current draft of the rule.

Merkley, Miller

Senator Jeff Merkley criticized the transactions in a statement that called for the rule’s prompt implementation, while Representative Brad Miller said they show why related U.S. laws should apply internationally.

Joe Evangelisti, a spokesman for New York-based JPMorgan, declined to comment on Iksil’s specific transactions, and Iksil didn’t respond to phone messages and e-mails seeking comment. Neither Iksil nor JPMorgan have been accused of wrongdoing, and the full extent of his trading and the bank’s total risk of loss, or total gain, on his investments isn’t known.

Authorities will need more information from JPMorgan, the biggest U.S. bank by assets, to discern the precise purpose of Iksil’s transactions, said Clifford Rossi, an executive-in- residence at the University of Maryland’s Robert H. Smith School of Business.

“It clearly calls attention to the Volcker issue,” said Rossi, who previously was a managing director at Citigroup Inc.

Dimon’s Letter

Chief Executive Officer Jamie Dimon, 56, sent a 38-page letter to shareholders last week, saying he agrees with the Volcker rule’s intent to eliminate “pure” proprietary trading and ensure market-making won’t jeopardize banks. Still, as with derivatives laws, the rule must be written so that it doesn’t put U.S. banks at an international disadvantage, he said.

“We cannot and should not be in a position where the rule affects U.S. banks outside the United States but not our foreign competition,” he wrote.

Iksil drew attention from market professionals in recent months as trading accelerated in a group of credit-default-swap indexes created before and during the 2008 financial crisis. Until then, transactions had been dwindling as Wall Street banks stopped creating structured debt that the indexes were used to hedge against. Investors use credit-default swaps to shield themselves from losses on corporate debt or to speculate on a firm’s creditworthiness.

‘London Whale’

The trader became such a big client of credit-derivatives dealers that some started calling him Voldemort, the Harry Potter book-series villain so powerful he simply was referred to as “He Who Must Not Be Named,” said one fund manager, who asked not to be identified because his firm does business with JPMorgan. Iksil also has been dubbed the “London whale,” another trader said.

Iksil joined JPMorgan in 2005, according to his career- history record with the U.K. Financial Services Authority. He worked at the French investment bank Natixis (KN) from 1999 to 2003, according to data compiled by Bloomberg. Public records showing Iksil’s date of birth couldn’t be located. One person who has done business with Iksil said he’s in his late 30s.

When a group of hedge-fund traders last year bet that a cluster of companies in one of the indexes wouldn’t default before contracts expired in December, Iksil was taking the opposite view, according to four market participants at hedge funds and banks, who spoke on condition of anonymity because they aren’t authorized to discuss the transactions.

AMR Bankruptcy

Iksil’s bet won out, and the hedge funds faced losses of 25 percent, when American Airlines parent AMR Corp. filed for bankruptcy less than a month before the insurance-like swaps matured, the market participants said. The trades were made in so-called tranches of the index, which take concentrated risks on the member companies.

This year, Iksil has been betting on an index of 121 companies that all had investment-grade ratings when the benchmark was created in September 2007, the market participants said. Trading in that index surged 61 percent the past three months, according to data from Depository Trust & Clearing Corp.

The net amount of wagers on the index, which is tied to the creditworthiness of companies such as Wal-Mart Stores Inc. and now-junk-rated bond insurer MBIA Insurance Corp., soared to almost $145 billion at the end of March from $90 billion three months earlier, according to DTCC, which runs a central registry for credit-default swaps and reports weekly aggregate volumes.

Widening Gaps

Iksil’s trades have been so large that they’re widening gaps between the relative value of the indexes and the average price of contracts tied to companies in those indexes, according to the market participants. That has frustrated some hedge funds that had bet the gaps would close, the people said.

Iksil has been selling default-protection on the index using swaps that expire in December 2017, meaning he would cover the counterparty’s losses if a company in the index fails, the market participants said. The price of the index falls as more insurance is sold against it. The index declined 38 basis points in the first three months of 2012, the biggest quarterly drop since 2009. A basis point is 0.01 percentage point.

The positions, by the bank’s calculations, amount to tens of billions of dollars and were built with the knowledge of Iksil’s superiors, a person familiar with the firm’s view said.

Iksil may have built a position totaling as much as $100 billion in contracts in one index, according to the market participants, who said they based their estimates on the trades and price movements they witnessed as well as their understanding of the size and structure of the markets.

‘Pure Speculation’

The trade on the index, known as the Markit CDX North America Investment Grade Series 9 (IBOXUG09), probably isn’t a one-way bet, the people said. Iksil may be offsetting the trade by buying protection on the same index with contracts that expire about eight months from now, the people said. That strategy would pay JPMorgan the difference between the long-dated contracts and the short-dated ones, about 47 basis points as of April 6, and the trade would gain when the gap narrows. The hedge would end in December unless another trade is made to replace it.

“Someone in that position at JPMorgan would typically not be doing pure speculation but would be involved in strategic risk management for the firm,” Darrell Duffie, a professor at Stanford University’s graduate school of business, said in a telephone interview.

JPMorgan profited from a similar strategy as the credit crisis erupted in 2008 by buying protection on short-dated contracts linked to high-yield indexes while selling protection on longer-dated contracts, a bet that a spike in corporate defaults would happen sooner than markets were pricing in, according to a February letter to regulators from Barry Zubrow, the bank’s head of corporate and regulatory affairs.

Losses Reduced

“This strategy resulted in the firm recognizing some gains as near-term default risks increased,” Zubrow wrote. “The gains recognized on these derivatives strategies offset in part the losses that occurred on credit assets held by the firm.”

Zubrow said the trade, which was booked in the bank’s market risk capital trading account, was a hedge that may have been banned under the Volcker rule.

The chief investment office’s revenue swelled following the financial crisis as federal regulators pushed banks to keep more of their funds in liquid investments, and as deposits flooded in because of JPMorgan’s reputation as one of the industry’s strongest banks. Total securities holdings in the corporate segment, which includes the chief investment office and treasury, more than quadrupled to $340.2 billion in 2009 from $76.5 billion in 2007.

Bigger Pool

The extra liquidity meant a bigger pool of money for the chief investment office to manage -- and more revenue. The bank’s annual report for 2009 showed $6.63 billion of revenue for the corporate segment, up from $4.42 billion in 2007. It cited “the chief investment office’s significant purchases of mortgage-backed securities guaranteed by U.S. government agencies, corporate debt securities, U.S. Treasury and government agency securities and other asset-backed securities.”

Revenue in the corporate segment climbed again in 2010, to $7.42 billion, reflecting a “repositioning of the portfolio in response to changes in the interest-rate environment and to rebalance exposure,” JPMorgan said in a regulatory filing. The bank rewarded Chief Investment Officer Ina Drew with a $15 million pay package for 2010, saying in a shareholder letter that she “was instrumental in setting the course and directing the firm’s repositioning of the balance sheet.”

Last year, revenue tumbled 44 percent to $4.14 billion in the corporate segment, “driven by repositioning of the investment securities portfolio and lower funding benefits from financing the portfolio,” according to an annual filing. Drew, 55, got a 6.8 percent pay cut to $14 million, the bank said in a regulatory filing last week. Her pay for the past two years was higher than that of Chief Financial Officer Doug Braunstein. Drew referred a request for comment to Evangelisti.

Control Market Risks

The chief investment office is affiliated with the bank’s treasury, helping to control market risks and investing excess funds, according to the lender’s annual report.

“The chief investment office is responsible for managing and hedging the firm’s foreign-exchange, interest-rate and other structural risks,” Evangelisti said. It’s “focused on managing the long-term structural assets and liabilities of the firm and is not focused on short-term profits.”

Some people hired by the group have come with risk-taking pedigrees. Irene Tse, 42, a former portfolio manager at Stanley Druckenmiller’s now-closed hedge fund, Duquesne Capital Management, joined last year as the group’s head in North America, reporting to Drew. Achilles Macris, 51, a former co- head of capital markets at German bank Dresdner Kleinwort Wasserstein, runs the group in Europe and Asia.

Experience, Connections

A search through profiles on the LinkedIn professional- networking website shows current and former executives in the chief investment office citing their proprietary-trading experience and connections.

One executive who worked as a portfolio manager in JPMorgan’s chief investment office said he ran what he called a proprietary macro and relative-value trading book that produced a 12 percent return on capital. An executive director wrote that before he worked in fixed-income trading in the office, he was a vice president in proprietary trading at JPMorgan.

A technology specialist who worked in the chief investment office in New York in 2009 and 2010 wrote that he led New York development and business analysis for a proprietary-trading risk-management system.

The Volcker rule is supposed to take effect in July, though regulators are still determining how it will make exceptions for instances where firms are hedging to curtail risk in their lending and trading businesses.

‘Illuminate the Risk’

Iksil’s “big bets illuminate the risk inherent in hedge fund-style trading,” said Senator Merkley of Oregon, who added the Volcker rule to Dodd-Frank along with fellow Senator Carl Levin, a fellow Democrat from Michigan. If the trades collapse, Merkley said, “you want the resulting meltdown to happen outside of the banks we depend on for loans to families and businesses.”

After the Republican-controlled U.S. House of Representatives returns from a spring recess, members are set to vote on a bill that would limit Dodd-Frank clearing, trading and collateral regulations from applying to trades between foreign- based affiliates of U.S. banks and their overseas clients.

The JPMorgan trades are an example of why such exceptions are misguided, said Representative Miller, a North Carolina Democrat who sits on the Financial Services Committee.

Regulatory Scrutiny

“Even if these trades are done in London and even if they are done by a foreign affiliate, there’s no doubt that JPMorgan would be liable and that any solvency issue would be visited upon the U.S. and the U.S. economy and the U.S. taxpayer,” said Miller, who voted against the bill at a preliminary stage in the committee.

Even without regulatory scrutiny, reports that Iksil’s trades were so large that they moved market prices are likely to concern JPMorgan, Stanford University’s Duffie said.

“If the trades were indeed part of a risk management strategy, then the intent wouldn’t be to move markets,” Duffie said. “The most obvious remedy is to reduce the extent to which they put on such large trading positions in the future.”

To contact the reporters on this story: Shannon D. Harrington at sharrington6@bloomberg.net Bradley Keoun in New York at bkeoun@bloomberg.net; Christine Harper in New York at charper@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net;

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