N.Z. Dollar May Slide 20% to Record Low on Rate Cuts, RBC Says

By Candice Zachariahs

Feb. 2 (Bloomberg) -- The New Zealand dollar may plunge more than 20 percent to a record low as the central bank cuts interest rates and the global slowdown saps investor appetite for riskier assets, RBC Capital Markets said.

The currency may weaken to an all-time low of 38.98 cents in coming months, said Sue Trinh, a senior currency strategist at RBC Capital Markets, a unit of Royal Bank of Canada. Reserve Bank of New Zealand Governor Alan Bollard lowered the official cash rate to 3.5 percent last week, the lowest ever, and said there is room for further reductions to steer the economy out of a deepening recession.

“A move to all-time lows of 38.98 cents in coming months can no longer be ruled out,” Sydney-based Trinh said, confirming the contents of a research note today. “The New Zealand dollar is most vulnerable to dwindling appetite from offshore investors and the risk of persistent capital outflow in the coming year will likely see our 43-cent target by mid-2009 achieved earlier.”

New Zealand’s dollar fell 0.1 percent to 50.85 U.S. cents as of 1:10 p.m. in Wellington, from late in New York last week. The currency traded at 39 cents in October 2000, the lowest since at least 1971, according to Bloomberg News records.

The central bank’s 4.75 percentage points of rate cuts since July has lowered the extra yield offered by the nation’s three-year bonds over similar-maturity Japanese debt to 2.85 percent last week, the narrowest since 1994.

The currency will extend January’s 12 percent loss against the U.S. currency as NZ$15 billion ($7.63 billion) of New Zealand dollar bonds issued in Japan and through global issues, so-called uridashi and eurokiwis, mature this year, Trinh wrote in the note. “We anticipate the largest net negative issuance in history.”

‘Bearish Impact”

International investors hold 73.6 percent of the New Zealand government bond market, according to RBC Capital. “For every 0.1 percentage point decline in foreign ownership, there will be a disproportionately bearish impact on the New Zealand dollar,” Trinh wrote.

Standard & Poor’s lowered its foreign-currency credit- rating outlook for the nation on Jan. 13, citing concern the nation’s current-account deficit and overseas debt will curb growth and investment.

Interest rates in New Zealand will fall to a low of 2.5 percent by the second quarter, RBC Capital said. The benchmark rate is 0.1 percent in Japan and as low as zero percent in the U.S., a record low.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.

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Gold May Rise for Third Week on Demand for Cash Alternative

By Pham-Duy Nguyen

Feb. 2 (Bloomberg) -- Gold may rise for a third straight week on speculation that demand for an alterative to cash will spark purchases of the precious metal.

Twenty-two of 31 traders, investors and analysts surveyed from Mumbai to Chicago on Jan. 29 and Jan. 30 advised buying gold, which rose 3.4 percent last week to $928.40 an ounce in New York. Eight said to sell, and one was neutral.

Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, reached a record 843.6 metric tons on Jan. 29. The metal gained 5 percent in January.

Traders surveyed on Jan. 22 and Jan. 23 anticipated gold’s advance last week. The survey has forecast prices accurately in 147 of 247 weeks, or 60 percent of the time.

Last week’s survey results: Bullish: 22 Bearish: 8 Neutral: 1

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.

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Crude Oil Rises on OPEC Output Concern, U.S. Stimulus Program

By Gavin Evans

Feb. 2 (Bloomberg) -- Crude oil rose a second day in New York on speculation output cuts and government stimulus plans will slow rising oil and fuel stockpiles.

Venezuela, the sixth-largest producer in OPEC, would support further output cuts by the group to prevent a glut in an already over-supplied market, Energy Minister Rafael Ramirez said yesterday. The U.S. economy, the world’s largest oil user, is “in for a tough several months” before a recovery takes hold, President Barack Obama told NBC yesterday.

“It’s all about expectations,” said Toby Hassall, research analyst at Commodity Warrants Australia Pty in Sydney. “There is some expectation that the Obama stimulus package will kick-start things in the U.S., and that will help the global economy.”

Crude oil for March delivery rose as much as 63 cents, or 1.5 percent, to $42.31 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $41.94 at 8:52 a.m. in Singapore.

The contract gained 0.6 percent to $41.68 on Jan. 30 as the threat of refinery strikes in the U.S. helped push gasoline futures to an 11-week high and the Commerce Department reported a smaller-than-expected contraction in the U.S. economy in the fourth quarter.

Brent crude oil for March settlement rose 32 cents, or 0.7 percent, to $46.20 a barrel on London’s ICE Futures Europe exchange. It gained 1.1 percent to $45.88 a barrel on Jan. 30.

New York futures fell 10 percent last week and are down 72 percent from the record $147.27 a barrel reached July 11. Prices reached $32.40 on Dec. 19, a four-year low for the front-month contract.

OPEC Cuts

The Organization of Petroleum Exporting Countries accounts for about 40 percent of global oil supplies and last month agreed to reduce output by 2.46 million barrels a day, or 9 percent, starting Jan. 1 to stem the slide in prices.

Members are complying “100 percent” with the new quota which is starting to bring stability to the market, Ramirez told reporters in Caracas. Still, demand has continued to contract since the new ceiling was set and Venezuela would support any additional output cuts sought, he said.

Gasoline for March delivery was barely changed at $1.2690 a gallon on Nymex after earlier falling as much as 0.12 cent. It gained 2 percent to $1.2687 on Jan. 30.

Talks to prevent a strike at 86 U.S. refineries were extended by 24 hours yesterday after unions reported “sufficient progress” to continue negotiations.

Heating oil for March delivery fell 1 percent to $1.44 a gallon. The contract rose 1.8 percent on Jan. 30.

Cold temperatures mid-week will push New York heating demand 8 percent above average this week, Meteorlogix LLC said in a forecast yesterday.

The global slump has overshadowed the usual seasonal demand influence of the northern hemisphere winter, Commodity Warrants’ Hassall said.

To contact the reporter on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net

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‘Grimmest’ Davos Ever Brings Anger, Finger-Pointing at Bankers

By James Hertling and Simon Kennedy

Feb. 2 (Bloomberg) -- The theme of the World Economic Forum’s annual meeting was “Shaping the Post-Crisis World.” Unfortunately, the assembled executives, policy makers and do- gooders were stuck in the here and now.

The search for scapegoats and the worst economic prospects since World War II resulted in a gathering marked by fear, anger and bitterness, a far cry from the usual search for consensus.

Turkish Prime Minister Recep Tayyip Erdogan stormed out of a panel discussion and Russian Prime Minister Vladimir Putin hectored the U.S. as the font of the world’s economic woes. Almost everyone blamed the few bankers who showed up for the near-collapse of the financial system.

Attendees were “less reluctant to criticize, and sometimes very vocally criticize, the U.S. and its capitalist system because of the problems we’re having,” said David Rubenstein, co-founder of the Carlyle Group, who first came to Davos a decade ago. “Maybe that’s deserved, but it’s a big change.”

“Everyone I spoke to says it’s the grimmest Davos they’ve ever been to,” said Kenneth Rogoff, professor of economics at Harvard University and a World Economic Forum regular since 2002. “The mood has been very depressed. It’s a low-burn depression.”

Another big change was the virtual absence of Wall Street figures among the 2,500 delegates at the conference, which ended yesterday.

‘Stupid Things’

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon was the only U.S. banking chief who showed up. He made a concession to the mood of this year’s event by accepting some blame for the collapse that has led to more than $1 trillion of writedowns. He deflected the rest at regulators.

“God knows, some really stupid things were done by American banks and by American investment banks,” Dimon said. “To policy makers, I say: ‘Where were they?’”

That attitude was tough for some to swallow. At one session, a call for curbs on bankers’ bonuses was met with applause by sections of the audience.

“We should not trust these bankers,” said Nassim Nicholas Taleb, author of the best-selling book “The Black Swan.” “Look at their track record. The only way to stop the process is for the government to own those banks.”

With the world’s elite nursing a collective hangover after the greatest era of global prosperity came to an end, there was enough bile to go around.

Erdogan’s Walkout

Erdogan stunned a packed house on Jan. 29 by walking out on a debate on last month’s war in the Gaza Strip. He claimed that the session’s moderator didn’t give him equal time with Israeli President Shimon Peres and vowed never to return to Davos. By the time he met the press an hour later, he promised to reconsider.

Anyone who thought Barack Obama’s election as president would temper criticism of U.S. policies would have been disappointed. Economists questioned his $819 billion stimulus plan, urged him to deliver another rescue package for banks and fretted about soaring national debt.

“People are looking for the solution but don’t yet have the question formulated,” Arif Naqvi, chief executive officer of Abraaj Capital Ltd., which manages $7.5 billion, said.

The need for action wasn’t in debate. Away from the slopes, U.S. stocks capped their worst ever January, the International Monetary Fund forecast the weakest global growth in 60 years and companies from Starbucks Corp. to Caterpillar Inc. cut jobs.

Deepening Recession

That led many attendees to predict they’ll still be in a funk when they return in 2010.

“We’re in a multi-multi year problem,” Howard Lutnick, chief executive officer of Cantor Fitzgerald LP., said. “We’ve weathered horrible times before. That’s what lies ahead of us now.”

Delegates also took turns bashing America’s policies and its role in the world.

Chinese Premier Wen Jiabao and Putin cited the U.S. for leading the world into recession in back-to-back speeches on the opening day.

“Just a year ago, American delegates speaking from this rostrum emphasized the U.S. economy’s fundamental stability and its cloudless prospects,” Putin said.

To cap it off, Putin dismissed a query from audience member Michael Dell, head of personal-computer maker Dell Inc., about what the technology community could do to assist Russia.

“We don’t need any help. We are not invalids,” Putin said.

Balanced Tone?

The spats gave this year’s conference a more balanced tone, said Bahraini banker Khalid Abdulla-Janahi, who remembers then- Vice President Dick Cheney “hammering the Russians, the Iranians and many others” during his 2004 visit.

“This time, it was a two-way street,” said the chairman of Ithmaar Bank BSC. “We heard Putin hammering the West and Erdogan standing up to Peres. That’s how it should be.”

Those who made it to the five-day Alpine retreat insisted that they weren’t wasting their time or their money --and they really didn’t mind the muted tone of the event’s party circuit.

“People are conscious about throwing parties or even smiling this year,” said Martin Sorrell, chief executive of WPP Group Plc. “It’s become a little too big, but it’s never been more relevant.”

To contact the reporter on the story: James Hertling in Davos at jhertling@bloomberg.net; Simon Kennedy in Davos at skennedy4@bloomberg.net

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China’s World-Beating Stocks Keep BlackRock Bullish on Economy

By Chen Shiyin and Michael Patterson

Feb. 2 (Bloomberg) -- The world’s largest money managers say China’s steepest monthly stock gain in more than a year shows the fastest-growing major economy will avert a recession.

The Shanghai Composite Index, the broadest measure of shares traded on the mainland, opens after a weeklong celebration of the Lunar New Year and a 9.3 percent gain in January, the best among the world’s 10 biggest markets. Last year, the index fell 65 percent, the worst since at least 1996, according to data compiled by Bloomberg.

Chinese shares rebounded after the central bank lowered interest rates five times since September and the government announced a $585 billion stimulus plan. China’s economy is expected to grow near 8 percent this year even after expanding 6.8 percent in the fourth quarter, the slowest pace since December 2001, according to fund managers Richard Urwin at BlackRock Inc. and Barclays Plc’s Russ Koesterich, who together help manage more than $3 trillion in assets.

“China is going to do what it has to do to keep the economy humming,” Koesterich, the San Francisco-based head of investment strategy at Barclays Global Investors, said in a Bloomberg Television interview Jan. 26. “They can enjoy faster growth than the rest of the world in 2009 and in 2010 as well.”

The Shanghai Composite of 895 stocks fell 0.7 percent to 1990.66 when it last traded on Jan. 23. That pared its third straight weekly gain to 1.9 percent.

China Stimulus

China pressured state-owned banks to increase lending, unveiled the 4 trillion yuan stimulus package, reduced export taxes and agreed to provide support for 10 industries, through tax cuts and subsidies for steel and autos.

The central bank dropped quotas limiting annual lending by banks in the fourth quarter. The government has also urged banks, most of which are state-owned, to lend more to small and medium-sized companies. Money supply and lending surged in December, according to the statistics bureau.

“The Chinese have a pretty strong pro-growth agenda at the moment and they tend to do whatever it takes to stabilize the growth slowdown,” said Urwin, the head of asset allocation at BlackRock in London.

Stephen Roach, chairman of Morgan Stanley Asia Ltd., said it’s a “myth” that China will lead the world out of a recession, especially as the U.S., China’s biggest export market after the European Union, imports less.

‘Going South’

“Most of the juice in the Chinese growth results in the last five or six years have been export-led,” Roach said in a Bloomberg Television interview from Zurich. “How can an export- led economy lead the world out if its export markets are going south?”

The U.S. economy shrank the most since 1982 in the fourth quarter as consumer spending slid. U.S. Treasury Secretary Timothy Geithner said on Jan. 22 that President Barack Obama believes China is “manipulating its currency,” suggesting that the new administration may take a tougher line on China’s exchange-rate regime.

Geithner also said last month that China should focus on “more aggressive” efforts to boost its own economic growth, in concert with the coming U.S. stimulus package. The U.S. House of Representatives on Jan. 29 passed Obama’s $819 billion stimulus plan, aimed at lifting the economy out of recession through tax cuts and new spending.

China’s gross domestic product will expand 6.3 percent this quarter from a year earlier, the median estimate of nine economists surveyed by Bloomberg News showed.

Difficult Year

Chinese Premier Wen Jiabao said on Jan. 28 it will be a “tall order” meeting the nation’s 8 percent growth target. New York University Professor Nouriel Roubini predicts economic growth in China will slow to less than 5 percent.

“This year will be a difficult one for stocks,” said Howard Wang, who oversees $10 billion at JF Asset Management Ltd. in Hong Kong. Government stimulus measures are unlikely to offset a contraction in private real estate investment and capital investment for exporters, Wang said.

Demand for property has sagged in China, with home prices across 70 cities dropping for the first time on record in December.

Chinese stocks are trading at less than one-third of their peak valuations in January 2008. Before the Lunar New Year holiday break, the Shanghai Composite Index was valued at 15.5 times reported earnings, down from a six-year high of 50 times a year ago. That’s still the highest among benchmark indexes in Asia.

Easing Restrictions

Beijing North Star Co., a real estate arm of the municipal government, is among China stocks traded in Hong Kong that gained last week while the mainland market was closed.

The official Xinhua News Agency reported on Jan. 24 that Beijing removed restrictions on the purchase of real estate by foreigners in an effort to create more demand. The city has also eased financing for some buyers and granted developers a delay in payment, UBS AG said in a Jan. 30 report.

Beijing North Star climbed 8.1 percent in Hong Kong trading last week. The Shanghai-traded stock has gained 8.5 percent this year after tumbling 80 percent in 2008.

China Vanke Co., the nation’s largest publicly traded developer and not listed in Hong Kong, has risen 9.2 percent in Shenzhen. It dropped 64 percent last year.

Industrial & Commercial Bank of China Ltd., China’s largest lender, rose 3.4 percent in Hong Kong trading last week, while the so-called H shares of China Construction Bank, the second- biggest, rose 4.3 percent. The shares have gained 3.4 percent and 4.4 percent respectively in Shanghai trading this year.

“China is still a market we continue to be overweight in because it has the best potential for effective policy stimulus,” said Mark Tan, who helps oversee about $3 billion in Asian equities at UOB Asset Management Ltd., a unit of Singapore’s second-largest bank.

To contact the reporters on this story: Chen Shiyin in Singapore at schen37@bloomberg.net; Michael Patterson in London at mpatterson10@bloomberg.net.

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Obama Says U.S. Economy Facing Several ‘Tough’ Months

By Roger Runningen

Feb. 1 (Bloomberg) -- President Barack Obama said the U.S. economy is “in for a tough several months” before a recovery takes hold.

“It’s going to take a number of months before we stop falling and then a little bit longer for us to get back on track,” Obama said today in an interview with NBC.

The president said once his economic stimulus plan has made it through Congress, his administration will be unveiling a more extensive plan to deal with financial-market regulation. Both are part of his plan to help pull the U.S. out of a recession.

The world’s largest economy shrank at an annual pace of 3.8 percent in the fourth quarter, the most since 1982, the Commerce Department reported last week. U.S. job losses hit 2.6 million in 2008, the most since 1945. Plunging demand and frozen credit are causing companies from Caterpillar Inc. to General Motors Corp. to pare jobs and output to prevent unsold goods from piling up.

The unemployment rate likely climbed to 7.5 percent in January from 7.2 percent in December, according to the median estimate in a Bloomberg News survey ahead of Labor Department figures Feb. 6. Other reports may show manufacturing, services and housing shrank further, signaling more firings ahead.

“We’re going to have to straighten out the credit markets,” Obama said.

Hurdle Cleared

Obama’s economic recovery plan cleared the first hurdle last week when the House passed a $819 billion package of tax cuts and spending. Senate Republicans now are pushing for revisions.

Arizona Republican Senator Jon Kyl said earlier today that support for Obama’s plan is “eroding” among his colleagues.

“There would be major structural changes that would have to occur,” for Republicans to support it, Kyl said on “Fox News Sunday.” Kyl, the second-ranking Republican in the Senate, said the measure is too expensive, ineffective and would require “huge amendments” to win over members of his party.

Obama, who met with lawmakers of both parties at the Capitol to lobby for their support, said today that Republicans “have some good ideas, and I want to make sure those ideas are incorporated.” He offered no details.

The House legislation passed without a single Republican vote. The president declined to predict the number of Republican votes the Senate package would get.

Iraq Troops

Obama also said many of the U.S. troops in Iraq can expect to be out of that country by this time next year as the Iraqis take more responsibility for their own security. Obama ran his campaign on a pledge to withdraw U.S. combat forces in 16 months.

“We are in a position to put more responsibilities on the Iraqis” following elections yesterday in that country, Obama said.

The president said his family is adjusting to life in the White House. Daughters Malia and Sasha have “already joined some clubs” at school and Sasha has joined a basketball team.

“What more could I want?” he said. “I’m seeing them now more than anytime in the last two years, and that’s been great for the whole family.”

Obama granted an interview, broadcast live from the White House, to NBC before the kickoff of Super Sunday XLIII in Tampa, Florida. It was part of the network’s six-hour pre-game show leading up to the National Football League’s championship game between the Pittsburgh Steelers and the Arizona Cardinals.

Sports Allegiances

Obama’s allegiance is to the Chicago Bears, who didn’t make the cut this year, so he’s backing the Pittsburgh Steelers. The decision may not have been difficult: the president got election support from Steelers team owner Dan Rooney and former Steelers running back Franco Harris. Obama also carried Pennsylvania in the election. Arizona voters backed for home state candidate Senator John McCain.

The president maintained his bipartisan outreach program by inviting 15 members of Congress to the White House for the event, though there’s a distinct tilt toward the Steelers.

Among guests, five are from Pennsylvania’s congressional delegation, including both of the state’s senators, Democrat Bob Casey and Republican Arlen Specter. Rooting for Arizona will be Democratic Representative Raul Grijalva and Republican Representative Trent Franks.

To contact the reporter on this story: Roger Runningen in Springfield, Virginia at rrunningen@bloomberg.net

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Asian Stocks Fall on Deepening Recession Concern; BHP Declines

By Masaki Kondo

Feb. 2 (Bloomberg) -- Asian stocks dropped, led by commodity and technology companies, as shrinking factory output in Australia and declining corporate profits fueled concerns that the global recession is deepening.

BHP Billiton Ltd., the world’s biggest mining company, fell 2.8 percent in Sydney after Australian manufacturing contracted for an eighth month and metal prices declined in London. Hitachi Ltd., the world’s third-largest maker of hard-disk drives, fell 6.7 percent after projecting a record loss. Mizuho Financial Group Inc., Japan’s second-largest listed bank, declined 5.3 percent after posting its second quarterly loss in a row.

“We’ll likely continue to see a series of downward earnings revisions from companies and analysts,” Tomochika Kitaoka, a Tokyo-based strategist at Mizuho Securities Co., said in an interview with Bloomberg Television. “With more companies cutting dividends, domestic investors will likely shy away from the equity market.”

The MSCI Asia-Pacific Index lost 1.8 percent to 81.59 as of 9:54 a.m. in Tokyo. Four stocks declined for each that advanced on the gauge, which has lost 8.4 percent this year amid signs the global recession is eroding company profit growth.

Japan’s Nikkei 225 Stock Average dropped 2.4 percent to 7,806. Australia’s S&P/ASX 200 Index fell 1.4 percent. All markets open for trading declined.

In New York, the Standard & Poor’s 500 Index slid 2.3 percent on Jan. 30, capping a fourth weekly drop.

BHP lost 2.8 percent to A$29.61. Australia’s manufacturing index was 36.6 in January, the Australian Industry Group and PricewaterhouseCoopers said in a report today. A reading below 50 signals factory output is shrinking. Manufacturing accounts for a tenth of the nation’s gross domestic product.

Hitachi, Panasonic

Separately, a measure of six metals traded in London dropped for a second day on Jan. 30, losing 1.9 percent.

Hitachi lost 6.7 percent to 294 yen. The company reversed its profit forecast on Jan. 30 to a record net loss of 700 billion yen ($7.81 billion) for the year ending March 31. Demand in the automobile, semiconductor and industrial-equipment industries was declining “rapidly,” the company said.

Panasonic Corp., the world’s largest maker of consumer electronics, dropped 4.6 percent to 1,048 yen. The company may report a 350 billion yen net loss for this business year, the Yomiuri newspaper reported yesterday. The median of analyst estimates compiled by Bloomberg projected 6 billion yen in profit.

Mizuho, the Japanese bank with the biggest subprime writedowns in Asia, slumped 5.3 percent to 215 yen. The company turned to a 145.1 billion yen loss in the three months ended Dec. 31 from a 66 billion yen profit a year earlier.

Japanese companies from car manufacturers to electronics makers have cut their full-year earnings outlooks as the world’s largest economies plunged into recession. Domestic businesses reporting their third-quarter earnings have posted an 85 percent tumble in net income for the quarter, Tokyo-based Shinko Research Institute Co. said in a report dated Jan. 30.

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



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Australia Stocks: Alumina, BHP, Henderson, Rio, Sino, Westfield

By Shani Raja

Feb. 2 (Bloomberg) -- The S&P/ASX 200 Index fell 1.4 percent to 3,490.10 at 10:54 a.m. in Sydney. The broader All Ordinaries Index declined 1.1 percent to 3,440.50, while the futures contract expiring in March slipped 1.1 percent to 3,457.

The following companies are among the most active shares in the market today. Stock symbols are in parentheses.

Mining shares: Gold stocks rose after the precious metal gained 2.4 percent to $928.40 an ounce in New York, capping a third straight monthly gain, as investors sought an alternative to holding cash.

St. Barbara Ltd. (SBM AU), aiming to become Australia’s third-largest gold producer, rallied 4.8 percent to 33 cents, the most since Jan. 22. Sino Gold Mining Ltd. (SGX AU) rose 2.8 percent to A$5.10, the highest since Sept. 23

U.S.-linked stocks: U.S. stocks slid on Jan. 30, capping the worst January for the Standard & Poor’s 500 Index, as more companies reported disappointing earnings. The S&P 500 slipped 2.3 percent to 825.88 to complete a fourth straight weekly drop, its longest losing streak since July.

James Hardie Industries NV (JHX AU), the biggest seller of home siding in the U.S., dropped 3.1 percent to A$3.80, the lowest since Dec. 12. Westfield Group (WDC AU), which owns shopping malls in the U.S., lost 6.1 percent to A$11.31, a record low.

Alumina Ltd. (AWC AU), partner in the world’s biggest producer of the material used to make aluminum, slipped 1.8 percent to A$1.12, the lowest since Dec. 23. Oleg Deripaska, the biggest shareholder of the world’s largest aluminum producer, said he expects “no more happy times” in the industry as a sluggish global economy saps demand.

BHP Billiton Ltd. (BHP AU), the world’s largest mining company, declined 2.7 percent to A$29.69, the most since Jan. 23. A measure of six metals traded in London dropped for the second day, losing 1.9 percent. Copper slipped 2.3 percent, zinc 2.1 percent, and nickel 1.8 percent.

Separately, BHP Chairman Don Argus may announce his departure from the company as early as this week, the Independent on Sunday reported, without saying where it got the information.

Henderson Group Plc (HGG AU), a U.K. money manager, soared 17 percent to A$1.62, a record gain and the benchmark’s best performance. Henderson agreed to buy rival fund manager New Star Asset Management Group Plc in a deal valuing the company at 115 million pounds ($166 million). In a separate statement, Henderson said a placing is set to raise about 47 million pounds for the New Star acquisition.

Rio Tinto Group (RIO AU), the third biggest mining company, gained 2.5 percent to A$43.21, the highest since Jan. 9. Rio said it’s in talks with Aluminum Corp. of China to sell stakes in some of its units to its largest shareholder and raise cash to reduce debt.

Straits Asia Resources Ltd. (SRL AU) rallied 6.6 percent to A$1.13, the index’s second-biggest gainer. The company said it hasn’t been informed about any formal offer for a stake its parent was considering selling in the Singapore coal producer. Reuters reported the deal and cited unidentified people saying Noble Group Ltd. and PT Indika Energy Tbk were among companies interested in bidding.

To contact the reporter on this story: Shani Raja in Sydney at sraja4@bloomberg.net.

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Japan Stocks Fall as Earnings Slump Signals Prolonged Recession

By Masaki Kondo

Feb. 2 (Bloomberg) -- Japanese stocks dropped after Hitachi Ltd., Fujitsu Ltd. and NEC Corp. reversed their profit forecasts to losses, indicating the nation’s economic slump is deepening.

Hitachi, the world’s third-largest maker of hard-disk drives, plunged, 17 percent. NEC dropped almost 7 percent. Fujitsu, Japan’s biggest computer-service provider, declined 4.1 percent. Mizuho Financial Group Inc., the nation’s second- largest listed bank, retreated 4.9 percent after posting its second quarterly loss in a row.

“We’ll likely continue to see a series of downward earnings revisions from companies and analysts,” Tomochika Kitaoka, a Tokyo-based strategist at Mizuho Securities Co., said in an interview with Bloomberg Television. “With more companies cutting dividends, domestic investors will likely shy away from the equity market.”

The Nikkei 225 Stock Average declined 153.27, or 1.9 percent, to 7,840.78 as of 9:29 a.m. in Tokyo. The broader Topix index fell 15.77, or 2 percent, to 778.26, with almost four stocks slumping for each that rose.

The Nikkei lost a record 42 percent last year and anther 9.8 percent in January, the steepest monthly decline since October, as Japanese companies from car manufacturers to electronics makers have cut their full-year earnings outlooks. Domestic businesses reporting their third-quarter earnings have posted an 85 percent tumble in net income for the quarter, Tokyo-based Shinko Research Institute Co. said in a report dated Jan. 30.

NEC Retreats

Hitachi dropped 6.7 percent to 294 yen, headed for the lowest close since December 1980, after reversing its profit forecast on Jan. 30 to a record net loss of 700 billion yen ($7.81 billion) for the year ending March 31. Demand in the automobile, semiconductor and industrial-equipment industries was declining “rapidly,” the company said.

NEC, Japan’s biggest personal computer maker, retreated 6.9 percent to 228 yen after worsening earnings prospects prompted the company to announce it would cut more than 20,000 workers by March 2010. Fujitsu, the nation’s largest computer-service provider, sank 4.1 percent to 395 yen after projecting its first net loss since the fiscal year ended March 2003.

Panasonic Corp., the world’s largest maker of consumer electronics, dived 4.6 percent to 1,048 yen. The company may report a 350 billion yen net loss for this business year, the Yomiuri newspaper reported yesterday. The median of analyst estimates compiled by Bloomberg projected 6 billion yen in profit.

Sharp Corp., Japan’s largest maker of liquid-crystal displays, lost 3.8 percent to 651 yen. The company will probably report a full-year net loss for the first time since becoming a publicly traded company in 1956, the Asahi newspaper reported on Jan. 31.

Mizuho slid 4.9 percent to 216 yen. The bank posted a quarterly net loss in the three months ended Dec. 31 after writing down the value of its stockholdings and non-performing loans swelled.

Nikkei futures expiring in March retreated 1.4 percent to 7,830 in Osaka and by the same degree to 7,840 in Singapore.

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

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Canada’s Dollar Falls as Economy Contracts, Investors Shun Risk

By Chris Fournier

Jan. 31 (Bloomberg) -- Canada’s currency fell in January as a report showed the economy shrank in November and the global recession led investors to take refuge in the U.S. dollar.

The Canadian dollar, known as the loonie, depreciated 0.8 percent this month as the U.S. economy contracted the most in the fourth quarter since 1982. The U.S. is Canada’s largest export market.

“There’s not a lot of good things out there right now for the Canadian dollar,” said Andrew Busch, a currency strategist at BMO Capital Markets in Chicago. “We’ve been getting earnings and economic data that continue to show a dire situation. It’s hard to gain any traction.”

The Canadian currency slid to C$1.2296 per U.S. dollar yesterday in Toronto, from C$1.2188 on Dec. 31. One Canadian dollar buys 81.40 U.S. cents.

The loonie will weaken to C$1.26 against the U.S. dollar by the end of March before rebounding by year-end to C$1.20, according to the median forecast of 41 economists surveyed by Bloomberg News.

Canada’s economy, the world’s eighth-largest, contracted 0.7 percent in November, Statistics Canada said yesterday in Ottawa. The drop, which was more than forecast, was the biggest since August 2003, when northeastern North America was hit by a power blackout.

“GDP numbers for Canada were horrible,” said David Watt, a senior currency strategist in Toronto at RBC Capital Markets. “Any sort of rebound in confidence in the Canadian dollar has proved elusive.”

C$40 billion Stimulus

Petro-Canada, Canada’s third-biggest oil and gas producer posted a C$691 million fourth-quarter loss on Jan. 29. Procter & Gamble Co., the world’s largest consumer-products company, posted quarterly sales yesterday that trailed estimates, and the company reduced its annual forecast.

A collapse in demand for commodities and a recession in the U.S. weakened the loonie by 18 percent last year, the currency’s worst-ever performance. It fell in seven of the last eight months. Raw materials such as crude oil generate half the country’s exports.

Canada’s dollar rose to C$1.2026 on Jan. 28, the strongest in two weeks, after the opposition Liberal Party spared the ruling Conservative Party from defeat by signaling accord with its proposed C$40 billion ($32.6 billion) package of economic revival measures.

The greenback strengthened this week against 10 of its 16 most actively traded counterparts as investors sought relative safety from global economic turmoil in the world’s reserve currency. The exceptions were the pound, South Korea’s won, the loonie, Brazil’s real, Norway’s krone and South Africa’s rand.

The yield on the two-year government bond rose 18 basis points in the week, or 0.18 percentage point, to 1.42 percent. The price of the 2.75 percent security due in December 2010 fell 35 cents to C$102.40.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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Zambia Will Scrap Windfall Tax on Mining Companies

By Geoffrey Kapembwa

Jan. 30 (Bloomberg) -- Zambia, Africa’s biggest copper producer, will scrap a windfall tax on mining companies, Finance Minister Situmbeko Musokotwane said, following opposition to the duty from miners.

The levy will be abolished with effect from April 1, Musokotwane said in his annual budget speech today in the capital, Lusaka. A variable-rate profit tax will be kept.

The government will “remove the windfall tax and retain the variable-profit tax, which will still capture any windfall gains that may arise in the sector,” Musokotwane said.

Zambia introduced the two levies last year, raising the effective tax rate on miners to 47 percent from 31 percent. Copper prices last year dropped 54 percent on the London Metal Exchange, the most since at least 1987, as recessions in the U.S., Japan and Europe curbed demand for industrial metals. Copper accounts for about 70 percent of Zambia’s export income.

On June 10, former Finance Minister Ng’Andu Magande said the country was renegotiating the new code with some mining companies in order to boost mineral production.

Fiscal revenue from the mining industry in 2008 was 319.3 billion kwacha ($62.3 million), compared with a target of 917.3 billion kwacha, according to the Economic Intelligence Unit.

The windfall tax required miners to pay a levy on sales of copper when the price rose above $2.50 per pound. A charge of 25 percent applied to the surplus amount above $2.50 to a maximum of $3.00 per pound. The rate increased to 50 percent at between $3.00 and $3.50 and 75 percent above $3.50.

Economic Growth

A tax on profits of up to 15 percent was also imposed on companies that earned a return in excess of 8 percent on their investments.

Companies including First Quantum Minerals Ltd., Vedanta Resources Plc and Glencore International AG operate in Zambia.

Zambia’s economy expanded an estimated 5.8 percent last year, down from 6.3 percent the year before, while consumer inflation accelerated to 16.6 percent from 8.9 percent, driven by higher food costs, the budget showed. The government is targeting growth of 5 percent this year and inflation of 10 percent.

“Our export receipts are expected to be significantly lower than in previous years due to the fall in world copper prices,” Musokotwane said. “This will adversely affect our balance of payments. This problem is compounded by our continued dependence on a single major export commodity.”

The government expects to spend 15.3 billion kwacha ($297 million) this year, with 17.2 percent of that allocated toward education, 11.9 percent toward health and 9.9 percent toward transport.

To contact the reporter on this story: Geoffrey Kapembwa in Lusaka via Johannesburg at pmrichardson@bloomberg.net.

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Bank Bailout Plan Will Toughen Rules on Bonuses, Axelrod Says

By Julianna Goldman

Jan. 31 (Bloomberg) -- President Barack Obama’s senior adviser, when asked whether the new administration will ban Wall Street bonuses, said “limiting some of this executive compensation” is necessary to rally public support for a financial-rescue plan.

David Axelrod, who was Obama’s chief strategist during the campaign, stopped short of embracing a ban on bonuses for companies receiving bailout funds. He left no doubt, however, that the administration will take tough steps to address the issue.

“It’s very hard for the American people to understand how a bank executive should get a multimillion dollar bonus at a time when he’s asking the government to essentially bail out his institution,” Axelrod said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” scheduled to air this weekend.

Obama, 47, expressed outrage this week after the New York state comptroller reported that Wall Street firms disbursed $18.4 billion in bonuses last year as the U.S. sank into a recession. While the figure represents a decline of 44 percent from the previous year amid record losses in the securities industry, the bonus pool was the sixth-largest ever, the comptroller said in a yearly report.

Geithner Plan

Axelrod said Treasury Secretary Timothy Geithner will “have something to say about” bonuses as early as next week when he releases guidelines for banks receiving funds from the second half of the $700 billion financial rescue package.

The administration is committed to “a strong, private financial sector” in the bank bailout, Axelrod said when asked whether there are discussions to partially nationalize U.S. banks.

“Obviously, we’re trying to help these institutions on a temporary basis, but that’s our goal,” Axelrod said. “We’re going to provide assistance to these institutions and hope that they -- hope and expect that they’ll -- get back on their feet and that credit will flow.”

Financial experts and lawmakers including Democratic Senator Chuck Schumer of New York have said the government may need to spend more than $1 trillion to help the financial markets. Axelrod declined to discuss specific numbers, though he said the administration is crafting a plan that will “set up new rules of the road” for spending the remaining $350 billion of the rescue package approved under the Bush administration.

‘Trust’

“There are a variety of things that we need to do in order to win the trust and confidence of the American people,” Axelrod said. “And we’ll address these other issues down the road, but right now, we’ve got to work with what we’ve got.”

Axelrod defended Geithner, who sparked controversy during his confirmation hearings last week by saying Obama believes China is “manipulating its currency.”

“What Tim said was akin to what the president said during the campaign, these are issues that we have to work through,” Axelrod said. “We weren’t blazing new ground there.”

Obama spoke with President Hu Jintao of China this week following Geithner’s testimony. Axelrod wouldn’t say whether Obama reassured the Chinese leader on this issue.

Separately, Axelrod said the president will “make an announcement shortly” on his choice to lead the Commerce Department, the only Cabinet post left unfilled.

Judd Gregg

Speaking of Republican Senator Judd Gregg, a leading candidate for the position, Axelrod said the lawmaker and Obama “haven’t agreed on all issues,” though the president has “a great respect for his ability and for his seriousness about public service.”

Axelrod also expressed confidence the Senate would confirm former South Dakota Senator Tom Daschle, Obama’s choice as Health and Human Services secretary, whose tax records have come under scrutiny by Republicans on the Finance Committee.

“I think that he’s going to be confirmed,” Axelrod said.

Obama’s economic recovery plan cleared a hurdle this week with House passage of an $819 billion stimulus measure, which now goes to the Senate for approval.

Even though Obama took the unusual step of traveling to Capitol Hill to ask for support from Republican lawmakers, not a single House Republican voted for the bill.

Senate Republicans

Axelrod said he couldn’t predict whether any Republicans would support the package in the Senate, where the bill has grown to almost $900 billion.

“We’ll see,” Axelrod said. “You know, we’re hopeful. But the important thing is that a dialogue was opened. There were good discussions back and forth.”

He also said Obama would continue to try to set the tone of bipartisanship he pledged to bring to Washington during the campaign.

“Old habits die hard in this town,” Axelrod said. “There will be many instances in which there’ll be cooperation -- maybe not with every Republican, and maybe not with every Democrat -- but we’re going to forge coalitions behind all of our initiatives.”

Karl Rove, President George W. Bush’s former adviser, wrote this week that the Obama administration is trying to consolidate more power in the White House at the expense of the Cabinet by doubling the staff.

Axelrod said the larger staff reflects a “multidisciplinary kind of approach” to coordinate issues such as health care and global warming with their related Cabinet departments.

“I appreciate any advice that Karl Rove has,” he said. “But you know, they had their eight years and now we have our chance.”

To contact the reporter on this story: Julianna Goldman in Washington at jgoldman6@bloomberg.net.

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Toyota to Cut Pay for Executives as Sales Slump, Nikkei Says

By Toru Fujioka

Jan. 31 (Bloomberg) -- Toyota Motor Corp., the world’s second-largest automaker, will cut salaries for its executives, the Nikkei newspaper reported.

The automaker hasn’t decided when and by how much it will lower compensation, the paper said without saying where it obtained the information.

Toyota already announced plans in December to skip bonuses for board members. The carmaker is forecasting its first loss in 71 years as a stronger yen and sales slump squeeze profits.

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

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London Luxury-Homes Prices Have Second-Biggest Drop on Record

By Peter Woodifield

Jan. 31 (Bloomberg) -- London luxury-home prices had the second-biggest decline on record in January as would-be buyers struggled to secure mortgages from banks hurt by the global financial crisis.

The average value of homes costing more than 1 million pounds ($1.4 million) in London’s most expensive neighborhoods fell 3.7 percent from a month earlier, Knight Frank LLP said in an e-mailed statement today. In the past 12 months, prices have slumped 21 percent, the biggest annualized drop recorded by Knight Frank.

“The sudden restriction of mortgage finance” was the main cause of the market’s decline last year, Liam Bailey, head of residential research at London-based Knight Frank, said in the statement. “This factor is continuing to cause problems for the housing market and the wider economy.”

The cost of buying a luxury home in the U.K. capital has fallen for 10 straight months, declining 21 percent since the market’s peak in March. The biggest drop since the broker started the survey in 1976 was 3.9 percent, recorded in October.

Financial-services companies in London may cut as many as 60,000 jobs in London by the end of 2010, according to research firm Oxford Economics. As a result, the market won’t rebound anytime soon, Knight Frank said.

“Price falls should begin to level out towards the end of 2009, although 2010 is likely to see prices move sideways at best,” said Bailey. Knight Frank now expects prices to fall as much as 35 percent from their peak, compared with its previous estimate of 30 percent.

Country-Wide Slump

House prices across the U.K. fell 1.3 percent in January from the previous month and about 17 percent on an annual basis, Nationwide Building Society, the U.K.’s largest customer-owned mortgage lender, said Jan. 29. The report covered all types of homes.

London isn’t the only prime residential property market to lose value because of the credit crisis. In the Hamptons, the New York seaside resort favored by financiers and celebrities, median prices were 14 percent lower at $690,000 in January than a year earlier according to New York property appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate.

London-based Knight Frank compiles its monthly index from estimated values of properties in the Mayfair, St John’s Wood, Regent’s Park, Kensington, Notting Hill, Chelsea, Knightsbridge, Belgravia and the South Bank neighborhoods of London.

To contact the reporter on this story: Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net.

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Asian Currencies Post Monthly Loss as Global Recession Deepens

By Kim Kyoungwha and David Yong

Jan. 31 (Bloomberg) -- South Korea’s won led a decline in Asian currencies this month as a deepening global recession hurt regional exports and sapped demand for emerging-market assets.

The Korean currency dropped 8.7 percent versus the dollar, its worst start to a year since at least 1991, as the government announced the steepest drop in gross domestic product in a decade. Asian shares tumbled yesterday after reports showed U.S. orders for durable goods and new home sales slumped in December, while Japanese manufacturers cut production at a record pace.

“The data suggests recession in Asia intensified in December and probably got significantly uglier this quarter,” said Kit Wei Zheng, an economist in Singapore at Citigroup Inc. “There’s room for downside surprises for Asian currencies. Risk appetite is still going to be quite poor.”

The won traded at 1,379.50 per dollar in Seoul versus 1,259.50 at end-December, according to Seoul Money Brokerages Ltd. Malaysia’s ringgit slumped 4.3 percent over the same period to 3.6077, its worst January performance in a decade, according to data compiled by Bloomberg News.

The MSCI Asia Pacific Index of regional equities declined 1.7 percent yesterday, extending its January slide to 7.1 percent. The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 most-active currencies excluding the yen, was poised for a 2.4 percent drop.

U.S. durable goods orders fell for a fifth month in December while new home sales reached a record low, according to Commerce Department reports on Jan. 29. Japan said yesterday industrial production fell by a record 9.6 percent last month from November. The two nations are the world’s biggest economies.

Dollar Shortage

South Korea’s won traded near a seven-week low of 1,399.10 on Jan. 28 on concern tighter global credit markets and sliding exports will curb the supply of dollars the nation needs to meet payments on imports and foreign debt.

Asia’s fourth-largest economy contracted by a larger-than- expected 5.6 percent in the fourth quarter, the most since the Asian financial crisis a decade earlier, the Bank of Korea said on Jan. 22.

The central bank yesterday reported a current-account deficit of $6.41 billion for 2008, the first shortfall in 11 years, as higher oil prices and a weaker won drove up the cost of imported goods. “More active measures” may be used to improve to ease the credit crunch, Governor Lee Seong Tae said.

Demand for Dollars

“There’s a general feeling that demand for dollars is outweighing supplies given concern that January may see a trade deficit,” said Jeff Kim, a currency dealer with Korea Exchange Bank in Seoul. “The decline in stocks is also unnerving currency players.”

The Philippine peso declined 0.4 percent yesterday to 47.38 per dollar after the central bank slashed interest rates and signaled more cuts to help spur economic growth. The currency rose 0.3 percent in January, making it the sole gainer among the 10 most-traded regional currencies excluding the yen.

Bangko Sentral ng Pilipinas on Jan. 29 cut its overnight borrowing rate by half a percentage point to 5 percent, the second reduction in six weeks. Governor Amando Tetangco told reporters that cooling inflation provides the central bank “room for further easing.”

Sliding Support

“The more you cut rates, the more you take the fundamental support for the currency,” said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong. “Even if inflation is falling, you need some premium for holding the peso. If they overdo the cutting, the peso could get hurt.”

Indonesia’s rupiah fell 1.1 percent to 11,440 yesterday, capping a 4.7 percent slide for the month. Overseas investors sold a net $128 million worth of Indonesian stocks in the four weeks of January, contributing to this month’s 1.7 percent drop in the Jakarta Composite Index.

“The global stock market kept declining as well as the Jakarta stock exchange and this is spurring fund outflows,” said Lindawati Susanto, head of currency trading at PT Bank Resona Perdania in Jakarta. “In addition, there is month-end corporate demand for dollars.”

Elsewhere, the Singapore dollar fell 4.2 percent for the month to S$1.5076 versus the greenback, the Thai baht dropped 0.7 percent to 34.94 and India’s rupee declined 0.2 percent to 48.875 per dollar.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net.

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Japan’s Bonds Complete Worst Month Since May on Supply Outlook

By Yasuhiko Seki and Nate Hosoda

Jan. 31 (Bloomberg) -- Japan’s 10-year bonds completed their worst month since May on concern the government will increase debt sales as it seeks to spend its way out of the deepest recession in the postwar period.

Benchmark yields extended this month’s advance to 12 basis points as government reports yesterday showed factory output slumped a record 9.6 percent in December, unemployment surged the most in 41 years and households cut spending for a 10th month. The Ministry of Finance may need to sell a record 38.1 trillion yen ($426 billion) of new bonds in the fiscal year starting April 2011, official calculations show.

“As governments across the globe scramble to address the deepening recession, the market is shifting its attention to the supply problem,” said Ryutaro Matsuyama, a strategist in Tokyo at Mizuho Investors Securities Ltd., the brokerage arm of Japan’s second-largest banking group. “The market has already priced in an acceleration of the economic slump.”

The yield on the 1.3 percent bond due in December 2018 touched a three-week high of 1.29 percent yesterday in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. A basis point is 0.01 percentage point.

Ten-year bond futures for March delivery fell 0.90 to 138.91 during the week in Tokyo, the biggest slump since the five days ended Jan. 9.

Production Slides

Japan’s drop in production eclipsed the previous record of 8.5 percent set only a month earlier, the Trade Ministry said yesterday in Tokyo. The jobless rate climbed to 4.4 percent from 3.9 percent and household spending slid 4.6 percent.

Bond declines were limited after a statistics bureau report yesterday showed consumer prices excluding fresh food rose 0.2 percent from a year earlier in December, less than the previous month’s 1 percent increase. Slower inflation helps preserve the purchasing power of fixed-income securities.

“If Japan’s economy falls into a deflationary spiral, I wouldn’t be surprised if the 10-year yield falls below 1 percent,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute. The “data suggest the economy is now on the verge of returning back to deflation.”

Demand for Japanese debt weakened after yields on 10-year Treasuries on Jan. 29 rose the most since Nov. 21, after the U.S. government sold a record $30 billion of five-year notes at a higher yield than analysts forecast, indicating weak demand.

Supply Concerns

The auction results may signal investors will have trouble absorbing debt issued to pay for a $1 trillion U.S. budget deficit and programs to spur growth. The U.S. will probably borrow a record $2.5 trillion this fiscal year ending Sept. 30, versus $892 billion in notes and bonds sold in the prior 12 months, according to Goldman Sachs Group Inc.

“The supply concerns are more pronounced in the U.S. and Europe than in Japan,” said Akitsugu Bandou, a senior economist at Okasan Securities in Tokyo.

The Ministry of Finance will sell 1.9 trillion yen of 10- year securities bearing a coupon of 1.3 percent on Feb. 3. The prior sale on Jan. 8 drew bids for 2.33 times the amount on offer, compared with a so-called bid-to-cover ratio of 2.9 at the December auction.

“There is emerging uncertainty about whether the Bank of Japan alone can absorb the swelling debt issuance,” said Yuuki Sakurai, general manager of financial and investment planning in Tokyo at Fukoku Mutual Life Insurance Co., which manages the equivalent of $54 billion in assets.

To contact the reporter on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net; Nate Hosoda in Tokyo at nhosoda@bloomberg.net.

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Real GDP in Q4: Weaker than Meets the Eye

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

Real GDP declined at an annualized rate of 3.8 percent in the fourth quarter, which was not as bad as the consensus forecast had anticipated. However, the economy is weaker than it appears. Indeed, the rise in inventories in the fourth quarter suggests that the economy will contract at a faster pace in the current quarter. GDP Head Fake in the Fourth Quarter U.S. real GDP declined at an annualized rate of 3.8 percent in the fourth quarter (see top chart). Although the decline in GDP was the largest contraction since the first quarter of 1982, the outturn was not nearly as bad as the 5.5 percent plunge that the market consensus forecast had anticipated. Is it time to break out the champagne and start celebrating the incipient economic recovery? Hardly. The real surprise in today's report was the unexpected increase in real inventories, which rose $6.2 billion in the fourth quarter following a $30 billion drawdown in the third quarter (see middle chart). Inventories made a positive contribution to GDP growth equal to 1.3 percentage points in the fourth quarter. Without the build in stocks, overall GDP growth in the fourth quarter would have been much weaker. Indeed, final sales to domestic purchasers, which include personal consumption expenditures (PCE), fixed investment, and government spending, plunged 4.9 percent in the fourth quarter (see bottom chart). Real PCE tumbled 3.5 percent and fixed investment spending cratered, down 20 percent. Within fixed investment spending, purchases of equipment and software plunged nearly 28 percent – the sharpest quarterly decline in fifty years - and residential construction continued its freefall, down another 24 percent. As if to rub salt in the wound, gross exports plunged nearly 20 percent, a by-product of recession in most foreign countries. However, gross imports also tanked (down nearly 16 percent), so there was little overall effect on GDP from net exports. The only bright spot in domestic spending was the 1.9 percent rise in government consumption expenditures. A modest decline in state and local spending was offset by an increase in federal government spending. As the Obama stimulus package hits the economy in the quarters ahead, government spending will continue to rise. Inventory Rise in Fourth Quarter Should Be Reversed in First Quarter In sum, today's GDP report is no cause for celebration - the economy is even weaker than the "headline" growth number would suggest. In addition, the apparent inventory build-up in the fourth quarter sets up a big drawdown of stocks in the first quarter that will weigh significantly on GDP growth. Prior to today's report, we had thought that the weakest quarter in the current cycle would be the fourth quarter of 2008. However, with mounting job losses weighing on consumer spending, businesses axing their capex plans and a big decline in inventories looming, an even sharper contraction in the economy seems to be shaping up in the first quarter. Wachovia Corporation http://www.wachovia.com Disclaimer: The information and opinions herein are for general information use only. Wachovia Corporation and its affiliates, including Wachovia Bank, N.A., do not guarantee their accuracy or completeness, nor does Wachovia Corporation or any of its affiliates, including Wachovia Bank, N.A., assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or any foreign exchange transaction, or as personalized investment advice. Securities and foreign exchange transactions are not FDIC-insured, are not bank-guaranteed, and may lose value.

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