Food Prices to Extend Advances, Led by Corn, Wheat, Soybeans, UBS AG Says

Food prices will extend gains even as harvests expand, as exporters need to rebuild stockpiles, tightening global supplies and driving corn, wheat and soybeans higher, UBS AG said.

Corn may advance to $8.30 a bushel, 15 percent higher than yesterday’s close, Dominic Schnider, director for wealth management research at UBS, said in an interview. Wheat may jump 23 percent to $10 a bushel, while soybeans may surge 7.6 percent to $15 a bushel, he said.

“We need to have at least two or three years of good harvests” to rebuild stockpiles, Schnider said in Singapore yesterday. “We expect food prices to trend higher. At one point, it will come off in 2012,” he said, predicting a peak this year.

The global food price index, compiled by the United Nations’ Food and Agriculture Organization, surged to a record for a second month in January, driven by higher prices of cereals, dairy and sugar. Extending those gains may push millions more people into extreme hunger and poverty, prompting governments to pay more for food subsidies, widening national budget deficits.

Food prices are at “dangerous levels” after pushing 44 million people into poverty since June, World Bank President Robert Zoellick said Feb. 15. That adds to the more than 900 million people around the world who go hungry each day, he said.

Corn Stocks

Global corn stocks will slide for the third consecutive season in the year through June 2012 as record world production won’t be enough to satisfy rising demand, the International Grains Council forecast last month.

Inventories were forecast to decline further from a four- year low of 119 million tons at the end of June this year, the council said. It lowered its estimate for this season by 1 million tons from a previous forecast because of demand from U.S. ethanol makers.

Strong ethanol demand in the U.S. will continue to drain supply of corn, and prices of the grain would need to rise to $8.30 a bushel to squeeze margins by makers of the fuel additive and ration demand, Schnider said. Corn for May delivery was little changed at $7.2075 a bushel on the Chicago Board of Trade at 11:37 a.m. Singapore time, narrowing a 0.5 percent loss earlier. It reached a record $7.9925 a bushel on June 27, 2008.

About 43 percent, or 4.95 billion bushels of the 11.6 billion bushels of corn demand in the U.S., the world’s largest grower, user and exporter, is for ethanol use, according to a U.S. Department of Agriculture estimate on Feb. 9.

Demand for corn from U.S. ethanol makers is forecast to gain this season from 4.57 billion bushels a year ago, according to USDA data. Demand climbed after the nation’s Environmental Protection Agency agreed in January to let refiners increase the corn-based fuel additive in gasoline to as much as 15 percent, from 10 percent for vehicles of 2001 model-year and later.

‘Demand Rationing’

“The focus lies in demand rationing,” Schnider said. “Which demand will give in? It’s not going to be the consumption of food items. It’s going to be ethanol.”

Wheat futures may surge to as high as $10 a bushel if Russia maintains its export ban and China becomes a net importer of the cereal this year, he said.

Russia’s wheat stockpiles were forecast by the USDA to plunge to 3.87 million tons before this year’s harvest, from 11.87 million tons a year earlier. Its coarse-grain stockpiles, which include all cereals except for rice and wheat, were estimated to fall to 1.36 million tons, from 2.89 million tons a year ago, and 4.8 million tons in the 2008-2009 season, according to USDA data.

The worst drought in at least 50 years in China’s wheat- growing regions may curb the nation’s yields, Weather Trends International said. That may push the Asian nation to become a net wheat importer, intensifying competition for U.S. supplies, Schnider said.

To contact the reporter on this story: Luzi Ann Javier in Singapore at ljavier@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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Gold Trades Near Record on Demand for Haven Amid Turmoil in Middle East

Gold for immediate delivery rose 0.1 percent to trade near a record reached yesterday on demand for a haven. The metal was at $1,435.45 an ounce at 10:02 a.m. Melbourne time, compared with the all-time high of $1,440.32.

Bullion for April delivery in New York fell 0.2 percent to $1,435.50 an ounce after reaching a record yesterday of $1,441.

To contact the reporter on this story: Wendy Pugh in Melbourne at wpugh@bloomberg.net

To contact the editor responsible for this story: Wendy Pugh at wpugh@bloomberg.net

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U.K. House Prices Fall as Supply of Properties Surges Most in Three Years

U.K. house prices fell for an eighth month in February as the supply of homes for sale increased the most in three years, Hometrack Ltd. said.

The average cost of a home fell 0.2 percent from January, the London-based property researcher said in an e-mailed report today. Prices in London were unchanged, according to Hometrack, which no longer publishes an average property price. The supply of homes for sale jumped 7.5 percent.

“With supply likely to remain in check, it is the outlook for demand that will have the greatest impact on pricing levels and market activity in the coming months,” Hometrack director of research Richard Donnell said in the report. “We expect a continued modest pick-up in demand over March but the timing of interest rate rises is critical.”

Bank of England policy makers will meet next week after three of the nine-member panel voted to increase the benchmark interest rate last month to tame inflation. The Institute of Directors said in a separate report today that the central bank should hold its key rate at a record low of 0.5 percent or risk derailing the economic recovery.

Demand for homes rose 14.7 percent in February from January, the first increase in eight months, Hometrack said. Real-estate agents reported a 25 percent increase in sales last month, it said.

The decline in prices in February was the smallest in six months. O’Donnell said smaller drops “will be sustained if demand for housing continues to grow in the coming months and February’s increase proves to be more than a seasonal blip.”

As well as leaving its benchmark rate on hold, the Bank of England should consider extending its 200-billion pound ($326 billion) emergency bond-purchase program, the Institute of Directors said. It sees the U.K. economy growing 1.2 percent this year and said house prices will be “weak” and transactions levels “low.”

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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Bernanke Says Stronger Economic Growth Would Ease States Fiscal Problems

Federal Reserve Chairman Ben S. Bernanke said an improvement in state and local government finances will depend on the rate of U.S. economic expansion.

“If the economy continues to strengthen at about the pace projected by the Federal Reserve and many private forecasters, states and localities may start to get a little breathing space,” Bernanke said yesterday in a speech in New York. Measures of risk in the market for state and local debt that rose earlier this year are now receding, he said.

Concern that a wave of cash-strapped local governments will default prompted investors to pull money from municipal bond mutual funds during the past 15 weeks. Spending cuts by state and local governments also contributed to a revision lower of U.S. gross domestic product growth in the fourth quarter.

“Continued evidence that states and localities are addressing fiscal shortfalls should help calm the municipal bond market,” Bernanke said in the text of remarks at the Citizens Budget Commission’s annual awards dinner in New York. “The Federal Reserve will continue to monitor the municipal bond market closely.”

Yields on top-rated tax-exempt municipal bonds maturing in 10 years fell about 35 basis points in February, the steepest monthly decline since August, according to a Bloomberg Valuation index. A basis point is 0.01 percentage point.

While measures of risk “remain elevated, they have been looking somewhat better recently, presumably reflecting expectations of continuing improvement in the finances of states and localities,” Bernanke said in the speech. The municipal bond market in general “seems to be functioning reasonably well,” he said.

Perceptions of Risk

States and municipalities can help reduce investor perceptions of risk in the market for their debt by closing budget gaps, Bernanke said.

Investors withdrew about $610 million from U.S. municipal- bond mutual funds last week, the least in 11 weeks, Lipper US Fund Flows said Feb. 24.

Speculation about the possibility of widespread municipal bond defaults intensified after Meredith Whitney, the banking analyst who drew attention for correctly predicting Citigroup Inc.’s 2008 dividend cut, said in December that “hundreds of billions” of dollars in municipal bonds may default this year.

Whitney’s analysis drew criticism from investors and state officials, including California Treasurer Bill Lockyer, who said her estimates were too high.

More Defaults

Roubini Global Economics LLC, the consulting firm co- founded by Nouriel Roubini, said in a Feb. 28 report that U.S. municipal bond investors can expect about $100 billion of defaults over the next five years.

“Because the pace of near-term economic growth expected by most forecasters is relatively modest given the depth of the downturn, some time will likely be required before state and local fiscal conditions return to something approximating normal,” Bernanke said in the speech.

Bernanke’s speech expanded on remarks in congressional testimony this week. He said on March 1 that while it’s “possible” U.S. states could pose a risk to the financial system, the Fed won’t purchase state debt.

“While states are facing very tough financial conditions, at least as long as the recovery continues, they are seeing higher tax revenues and that will at least be helpful to some of them,” he said March 1 in response to questioning before the Senate Banking Committee. “Obviously, this is something we have to watch carefully.”

Tax Receipts

California, Texas, New York and Florida -- the four most- populous U.S. states -- reported better-than-expected tax and fee receipts last month. That may foreshadow a fifth straight quarterly gain after 41 states said revenue in the last three months of 2010 rose 6.9 percent from a year earlier, the Nelson A. Rockefeller Institute of Government said Feb. 1.

Local tax revenues have held up “relatively well” compared with states in the past couple of years, Bernanke said. “The continued softness in real estate prices, however, does not bode well for local government revenues” because of the greater reliance on property taxes.

The economy grew at a 2.8 percent annual pace in the fourth quarter, down from a 3.2 percent initial estimate, as state and local expenditures fell at a 2.4 percent annual rate, the Commerce Department said Feb. 25.

“What we’d like to see is a sustainable recovery,” Bernanke said yesterday before Congress. “We don’t want to see the economy falling back into a double dip or to a stall-out.”

Fed on Course

Bernanke, 57, signaled in testimony this week that he will keep the Fed on course to complete the purchase of $600 billion of Treasuries through June to spur economic growth and hiring. The central bank chief didn’t rule out expanding the so-called quantitative easing program, saying he doesn’t want to see the U.S. relapse into a recession.

“The economy’s recovery is not firmly established, and we think monetary policy needs to be supportive,” Bernanke told the House Financial Services Committee.

Separately yesterday, the Fed said in its regional Beige Book survey that the labor market improved throughout the country early this year, driven by increasing retail sales and “solid growth” in manufacturing.

Overall, the economy “continued to expand at a modest to moderate pace,” the central bank said in Washington. Eleven of the Fed’s 12 regional banks, including San Francisco and Philadelphia, described their regions as expanding, improving or experiencing moderate growth. Only Chicago reported growth “at a pace not quite as strong” as before.

To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Caroline Salas in New York at csalas1@bloomberg.net

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

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Fed Says Labor Market Strengthened `Modestly' on Manufacturing, Retailing

The Federal Reserve said the labor market improved throughout the country early this year, driven by increasing retail sales and “solid growth” in manufacturing.

“Labor market conditions continued to strengthen modestly, with all Districts reporting some degree of improvement,” the Fed said today in its Beige Book report, an anecdotal account of the economy released two weeks before meetings of the Federal Open Market Committee. Its last survey, released Jan. 12, said the job market was “firming somewhat.”

Overall, the economy “continued to expand at a modest to moderate pace,” the central bank said in Washington. Eleven of the Fed’s 12 regional banks, including San Francisco and Philadelphia, described their regions as expanding, improving or experiencing moderate growth. Only Chicago reported growth “at a pace not quite as strong” as before.

Fed policy makers at their last meeting in January took a more optimistic view of the economy while maintaining their dissatisfaction with job growth. Policy makers, who are pressing ahead with their plan to buy $600 billion in Treasuries through June, raised projections for economic growth this year and made little change to forecasts after 2011 for unemployment and inflation.

The Beige Book reported that all districts except St. Louis “experienced solid growth in manufacturing production” and noted an increase in retail sales in every district except Richmond and Atlanta.

Extended Gains

Treasuries extended losses after the report. The yield on the 10-year Treasury note rose to 3.45 percent as of 2:22 p.m. in New York, from 3.39 percent yesterday. The yield on the 30- year Treasury bond rose to 4.54 from 4.48 yesterday.

Fed Chairman Ben S. Bernanke, in congressional testimony today, said he’s still not satisfied with the strength of the recovery from a recession that the National Bureau of Economic Research describes as the longest since the Great Depression.

“The economy’s recovery is not firmly established, and we think monetary policy needs to be supportive,” Bernanke said in semiannual testimony to the House Financial Services Committee.

Responding to a question from Representative Nydia Velazquez, a New York Democrat, Bernanke said the Fed’s policy of keeping its benchmark rate near zero for an “extended period” helps provide support to the economy, “which in our judgment, it still needs.”

Economies Growing

The Beige Book’s characterization of growth was little changed from the report in January, when six Fed regions, including Atlanta and Chicago, showed economies growing “modestly to moderately,” and four, including New York and Boston, reported “improving” conditions.

The Commerce Department last week reduced its estimate of fourth-quarter economic growth to a 2.8 percent annual pace from 3.2 percent as state and local governments made deeper cuts in spending. Consumer purchases rose at a 4.1 percent pace, the most since 2006, providing a boost for retailers.

Last week Target Corp., the second-largest U.S. discount retailer, projected sales at stores open at least a year may rise as much as 5 percent this year, after a 2.1 percent gain the prior period.

“Retail spending strengthened compared with a year ago across all Districts except Richmond and Atlanta,” today’s report said, while noting that winter weather “had a negative impact on retail activity” in Boston, New York, Philadelphia, Atlanta, Kansas City and Dallas.

Beige Book

The Beige Book report released today reflects information collected on or before Feb. 18 and summarized by the Atlanta Fed.

“The Boston, Cleveland, Minneapolis, and Dallas Districts cited noticeable improvements in the manufacturing sector, and the Boston and Cleveland Districts also observed increased labor demand in the health-care and medical sectors,” today’s the report said.

The Labor Department will report March 4 that the economy added 190,000 jobs in February, the most since May 2010 when the government was hiring to conduct the decennial census, according to the median forecast of a Bloomberg News survey. The unemployment rate will rise to 9.1 percent.

“Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established,” Bernanke said this week.

The chairman repeated his call for lawmakers to adopt a long-term plan to reduce the federal government’s debt, and said the Fed won’t buy state debt to alleviate any funding crunch, even as it’s “possible” that U.S. states could pose a risk to the financial system.

Real Estate

The Beige Book report described the real estate market as “varied, but overall sales and construction remained at low levels across all districts.”

Four Fed districts, including Dallas and Boston, described the manufacturing outlook as “optimistic” and four, including Philadelphia and Atlanta, reported “more rapid improvement in factory orders.”

Manufacturing in the U.S. grew in February at the fastest pace in almost seven years, driven by gains in orders, employment and exports that signal factories will continue to propel the expansion.

The Institute for Supply Management’s factory index increased to 61.4, exceeding the median forecast of economists surveyed by Bloomberg News and the highest level since May 2004, the Tempe, Arizona-based group said yesterday.

Auto dealers are seeing improved demand. General Motors Co. yesterday said U.S. sales of its four remaining brands rose 49 percent in February, topping analysts’ estimates.

Company Profits

Berkshire Hathaway Inc.’s quarterly profit rose 43 percent to the highest since 2007, boosted in part by Chairman Warren Buffett’s purchase last year of Burlington Northern Santa Fe, the second biggest railroad in the United States. Economic expansion in the U.S. fueled profit gains at the freight-hauling unit in 2010.

The improvement in the job market has not translated to pay increases, the report said, describing wage pressures as “minimal across all Districts.”

The report noted that “non-wage input costs increased for manufacturers and retailers” and that many manufacturers “reported having greater ability to pass through higher input costs to customers.”

“Retailers in some Districts mentioned they had implemented price increases or were anticipating such action in the next few months,” the Fed said.

Price Gauge

The Fed’s preferred price gauge, which excludes food and fuel, rose 0.8 percent in January from a year earlier, matching December’s year-over-year gain, the lowest in five decades of record-keeping. Fed officials aim for long-run overall inflation of 1.6 percent to 2 percent.

Oil and crop prices have soared even as core inflation has remained low. The price of gasoline, among the most visible expenses consumers, has risen 25 percent in the last year, according to an index from the American Automobile Association.

Experience with such price gains in recent decades, along with currently stable labor costs, suggests a “temporary and relatively modest increase in U.S. consumer price inflation,” Bernanke told Congress today.

Farmland values also are rising as commodities soar. A report last month from the Chicago Fed showed Midwest farmland values rising 12 percent in the fourth quarter from a year earlier. The Kansas City Fed has recorded cropland prices nearly 20 percent above year-earlier levels in Kansas and Nebraska.

Kansas City Fed President Thomas Hoenig warned Feb. 17 that the surge in farmland prices may be part of an “unsustainable bubble.”

The Fed said today that for now, “strong commodity prices were benefitting producers” of many crops, even as there were reports “of rising input prices, particularly in fertilizer and feed prices.”

To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

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

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European Stocks Gain After Two Weeks of Losses; BHP Billiton, Rio Advance

European stocks rose this week, snapping two weeks of losses, as reports showed manufacturing in the U.S., China and Europe expanded and the U.S. unemployment rate unexpectedly declined in January.

Basic-resource shares posted the best performance among 19 industry groups as a report showing that Chinese manufacturing expanded last month boosted metal prices. EFG Eurobank Ergasias SA and Alpha Bank SA led gains as Credit Suisse Group AG upgraded its stance on Greece. ARM Holdings Plc surged 13 percent this past week after posting fourth-quarter revenue that beat analysts’ estimates.

The benchmark Stoxx Europe 600 Index advanced 1.9 percent to 285.9 this week. The gauge has gained 3.7 percent so far this year as reports suggested the global economy continues to recover and investors speculated that European leaders will increase their efforts to contain the region’s debt crisis.

“We had really good manufacturing numbers that helped the market this week,” said Markus Huber, the head of German sales trading at ETX Capital in London. “Payrolls rose less than estimated, but this was due to the weather and job numbers are overall good with unemployment decreasing. Americans are negotiating to solve issues in Egypt, but tensions could be a concern for equity markets if they spread to other countries.”

In the U.S., a report showed manufacturing increased at the start of the year at the fastest pace since May 2004. The Institute for Supply Management’s factory index jumped to 60.8 in January from 58.5 in December. Readings greater than 50 mean that manufacturing expanded. Economists had forecast a reading of 58 for the gauge, according to the median projection in a Bloomberg News survey.

Chinese Manufacturing

In China, a purchasing managers’ index released by the country’s logistics federation gave a reading of 52.9 for January, exceeding the 50 level dividing expansion and contraction. A PMI from HSBC Holdings Plc and Markit Economics climbed to 54.5 from 54.4.

In Europe, manufacturing expanded more rapidly than estimated in January, accelerating to the fastest pace in nine months because of stronger output in Germany. A gauge of manufacturing in the euro area rose to 57.3 from 57.1 in December, Markit Economics said.

A separate report this week showed the U.S. jobless rate unexpectedly fell in January to the lowest level since April 2009, even as payrolls rose less than forecast because of winter storms. Another report in the U.S. showed consumer spending climbed more than forecast in December, concluding consumers’ strongest quarter in more than four years.

Egyptian Protests

All week, Egyptians protested in the cities of Cairo, Alexandria and Suez, demanding that President Hosni Mubarak step down immediately. The demonstrations continued even after Mubarak said he would not stand in September’s presidential election. The Egyptian goverment said that Hosni’s son, Gamal Mubarak, would not seek election either. European stocks limited gains on concern that the protests could move to other Arab states and some investors speculated that violent unrest could affect trade through the Suez Canal.

Per-share earnings have topped analysts’ estimates at 39 of the 70 companies in the Stoxx 600 that reported results since Jan. 10, according to data compiled by Bloomberg.

National benchmark indexes rose in 14 of Europe’s 18 western markets. France’s CAC 40 Index gained 1.1 percent, the U.K.’s FTSE 100 Index rose 2 percent, while Germany’s DAX Index advanced 1.6 percent. Greece’s ASE Index soared 4.4 percent.

BHP Billiton, Rio

BHP Billiton Ltd., the world’s largest mining company, gained 6 percent, pulling a gauge of basic-resource producers to the biggest gain among the Stoxx 600’s 19 industry groups. Rio Tinto Group, the world’s third-largest mining company, climbed 5 percent, while Anglo American Plc jumped 10 percent.

EFG Eurobank Ergasias and Alpha Bank surged 15 percent and 11 percent, respectively. Credit Suisse upgraded its stance on Greece to “benchmark” from “underweight,” saying “Greek equities look cheap.”

“The Greek equity market starts looking interesting given that Greece is the cheapest of the peripheral markets,” Credit Suisse analysts led by London-based Andrew Garthwaite said in a note.

ARM Holdings Plc soared 13 percent as the designer of semiconductors used in most smartphones, including Apple Inc.’s iPhone, said fourth-quarter revenue rose 34 percent to 113.9 million pounds ($183.3 million). Analysts had estimated revenue at 105.8 million pounds in a Bloomberg survey.

Deutsche Bank Gains

Deutsche Bank AG climbed 6 percent as Germany’s biggest bank said higher revenue from fixed-income and equities trading lifted fourth-quarter earnings at its investment bank.

Pretax profit at the division rose to 625 million euros ($848.4 million) from 398 million euros in the year-earlier period, according to a statement. Revenue from sales and trading climbed 30 percent to 2.44 billion euros, helped by a rebound in asset values, the Frankfurt-based company said.

TUI Travel Plc lost 7.2 percent after Europe’s largest tour operator said that canceled holidays in Egypt and Tunisia and the cost of repatriating some customers may cut second-quarter profit by as much as 30 million pounds.

Thomas Cook Plc slid 5.1 percent after its German brands, including its namesake unit, Neckermann Reisen, Bucher Last Minute and Oeger Tours, said they have stopped tours to Egypt until at least Feb. 14.

To contact the reporter on this story: Julie Cruz in Frankfurt at jcruz6@bloomberg.net.

To contact the editor responsible for this story: David Merritt at dmerritt1@bloomberg.net.
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Copper Extends Rally to Records as Supply May Tighten on Rising Demand

Copper extended a rally to a record on mounting concern that the global economic recovery will boost consumption of the metal used in cars, homes and appliances while mining companies struggle to increase output.

Freeport McMoRan Copper & Gold Inc., the world’s largest publicly traded producer, said the market will be “tight in 2011, and for the foreseeable future.” The metal has more than tripled since the end of 2008 on rising demand from China, the world’s largest buyer. In the U.S., the second-biggest user, unemployment fell in January to the lowest level since April 2009, the Labor Department said today.

“Demand for copper continues to be robust and growing,” said James Dailey, who manages $185 million at TEAM Financial Asset Management LLC in Harrisburg, Pennsylvania. “Bringing copper production online is very costly and protracted, so it may be some time before production levels are able to grow fast enough to offset the growth in demand.”

Copper futures for March delivery rose 3.5 cents, or 0.8 percent, to close at $4.5795 a pound at 1:26 p.m. on the Comex in New York. Earlier, the price reached a record $4.614. The metal is up 4.7 percent this week, the biggest weekly gain since Dec. 3.

The global supply deficit will reach 822,000 metric tons in 2011, more than double last year’s shortfall, Barclays Capital said on Jan. 20. JPMorgan Securities Ltd. and Macquarie Bank Ltd. also predicted a deficit, and Australia & New Zealand Banking Group Ltd. and Morgan Stanley have boosted their price forecasts.

China Demand

“We have continuing strong demand out of China and the prospects of continued recovery in the U.S. and in parts of Europe,” Kathleen Quirk, Freeport’s chief financial officer, said yesterday in a telephone interview from Phoenix. “That is also overlaid on a situation where supply is very limited. Our industry hasn’t been able to expand capacity fast enough to meet the demand.”

Copper for three-month delivery added $120, or 1.2 percent, to $10,050 a ton ($4.56 a pound) on the London Metal Exchange. Earlier, the metal climbed to $10,100, the highest ever.

Also in London, tin climbed 2.1 percent to $31,200 a ton after reaching a record $31,300. Prices are up 16 percent this year. PT Timah, the biggest supplier of the metal, said on Jan. 14 its production may drop for a fourth straight year in 2011.

Aluminum, lead, nickel and zinc rose.

To contact the reporter on this story: Yi Tian in New York at Ytian8@bloomberg.net.

To contact the editor responsible for this story: Patrick McKiernan at pmckiernan@bloomberg.net.

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Oil Falls as U.S. Adds Fewer Jobs Than Forecast, Fuel Use Drops

Crude fell after a government report showed that the U.S. added fewer jobs in January than economists forecast, bolstering concern that fuel demand will slip in the world’s biggest oil-consuming country.

Futures dropped 1.7 percent after the Labor Department said employers increased payrolls by 36,000 last month. The number of workers was projected to climb by 146,000, according to the median forecast in a Bloomberg News survey. Gasoline stockpiles rose to the highest level in almost 18 years as demand decreased, according to an Energy Department report on Feb. 2.

“The fuel markets are weighing on crude,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “Today’s jobless numbers showed many fewer people got jobs than expected and that many others have simply given up looking for work, which raises concerns about U.S. consumer demand. We already are looking at weak demand and very high stockpiles.”

Crude oil for March delivery declined $1.51 to settle at $89.03 a barrel on the New York Mercantile Exchange. Prices are down 0.3 percent this week and have increased 22 percent over the past year.

Gasoline futures for March delivery tumbled 6.81 cents, or 2.7 percent, to end the session at $2.4353 a gallon in New York.

The unemployment rate dropped to 9 percent in January from 9.4 percent the previous month. The so-called underemployment rate, which includes part-time workers who’d prefer a full-time position and people who want work but have given up looking, decreased to 16.1 percent from 16.7 percent.

‘Poor Number’

“Once you get past the initial headline, the jobs report isn’t very good,” said Kyle Cooper, director of research for IAF Advisors in Houston. “A 9 percent unemployment rate is definitely better than 10 percent, but historically it’s a poor number. This shows that things still aren’t that great.”

The U.S. needs to see faster job growth for a sufficient period of time before policy makers can be assured the economic recovery has taken hold, Federal Reserve Chairman Ben S. Bernanke said yesterday in a speech at the National Press Club in Washington.

Supplies of gasoline rose 6.15 million barrels to 236.2 million last week, the highest level since March 1993, the Energy Department report showed. It was the biggest gain since January 2009. Inventories have climbed in 10 of the past 11 weeks.

Total fuel demand decreased 0.3 percent to 18.8 million barrels a day last week, the lowest level since November, the department said. Gasoline consumption fell 1 percent to 8.55 million barrels a day, the lowest amount since the week ended Feb. 12, 2010.

Egyptian Protest

Futures gained as much as 1.3 percent earlier today as Egyptians poured out of Friday prayer services and into Cairo’s Tahrir Square in the tens of thousands as yesterday’s fighting gave way to a peaceful mass protest.

Other Arab countries gripped by instability include Yemen, where police used tear gas against protesters yesterday, and Jordan, which sacked its government this week. Algeria’s President Abdelaziz Bouteflika said yesterday that a 19-year-old state of emergency will be lifted “in the very near future.” The protests began in Tunisia, where President Zine El Abidine Ben Ali was forced from office last month.

About 2.5 percent of global oil output moves through Egypt via the Suez Canal and the Suez-Mediterranean Pipeline, according to Goldman Sachs Group Inc. The waterway is open and operating normally today, Ahmed El Manakhly, head of traffic for the Suez Canal Authority, said by phone.

Egypt’s Revenue

“A significant part of Egypt’s revenue comes from the Suez Canal and tourism,” said Adam Sieminski, chief energy economist at Deutsche Bank in Washington. “Since tourism will be hurt for a while because of the unrest, whoever is in control will definitely want to keep both the Suez Canal and the SuMed pipeline running smoothly.”

The Organization of Petroleum Exporting Countries should only meet if the Suez Canal closes, Venezuelan Energy Minister Rafael Ramirez told reporters today in Caracas. Oil is rising to a “fair price,” he said. OPEC ministers are next scheduled to gather in June at the group’s Vienna headquarters.

Brent crude for March settlement fell $1.93, or 1.9 percent, to end the session at $99.83 a barrel on the London- based ICE Futures Europe exchange. The contract touched $103.37 yesterday, the highest intraday level since Sept. 26, 2008.

Oil volume on the Nymex was 699,437 contracts as of 3:27 p.m. in electronic trading in New York. Volume totaled 682,075 contracts yesterday, 3.4 percent lower than the average of the past three months. Open interest was 1.56 million contracts, the highest level since Sept. 12, 2007.

To contact the reporters on this story: Mark Shenk in New York at mshenk1@bloomberg.net.

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net.
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Merkel Makes Euro Indispensable by Turning Crisis Into German Opportunity

Chancellor Angela Merkel is turning Europe’s sovereign-debt crisis into an opportunity to reshape the euro region in Germany’s image.

As Spain raises its retirement age, Greece cuts wages and Portugal imposes the deepest spending reductions in more than three decades, Merkel’s resolve in refusing to aid neighbors unconditionally is showing signs of working.

Seeking to erase doubts that the markets can snuff out the 12-year-old euro, which she has called the “uniting idea” of post-World War II Europe, the 56-year-old scientist who grew up in communist East Germany is set to swap stick for carrot and throw the weight of Europe’s largest and richest economy behind a plan to bolster the area’s rescue effort.

“This is the right time and these are the right ideas,” Helmut Schlesinger, Bundesbank president from 1991 to 1993 when the euro’s founding treaty took effect, said in a telephone interview. Germany, the biggest contributor to bailouts for Greece and Ireland, “has a special responsibility to come up with proposals and see them through,” he said.

By demanding stricter oversight and tougher penalties on fiscal miscreants, Merkel would complete the job begun at the start of the euro. While German leaders in the 1990s equipped the European Central Bank with the same inflation-fighting mission as its Bundesbank, they failed to impose ironclad controls on national budget policies.

The result: a crisis that has frustrated unprecedented efforts by policy makers to calm markets and stoked doubts that the euro would survive.

EU Summit

Merkel and counterparts from the 27-member European Union met in Brussels today to review progress on a package they aim to finish by late March and which may include an increase in the bailout fund’s firepower, a reduction in interest rates on rescue loans and deeper coordination of economic policies.

Her task is two-fold: protect a single currency she views as indispensible and shift the euro-region toward the model of a fiscally virtuous, hard-money, stable-growth economy that underpinned Germany’s post-war recovery.

Still, as Europe prepared to bail out Ireland in November, Merkel’s appeal to her skeptical electorate focused on the euro as a symbol of peace to a nation ravaged by two world wars.

The euro “is about everything. If the euro fails, then Europe fails, the European ideal of common values and unity will fail,” Merkel said in a Nov. 15 speech to members of her party in Karlsruhe, Germany. “This ideal has always given us strength in the face of wars and destruction in Europe for the past centuries -- to fight for peace, for prosperity and for freedom on our continent.”

Merkel’s Task

Merkel is walking a fine line. Her effort could boomerang, raising German borrowing costs and eroding political support among voters hostile to channeling their taxes to those who avoided painful policy choices on their own.

Bunds will suffer whenever “German tax revenue is drawn upon for cross-border purposes” to help weaker euro countries, said Andrew Bosomworth, a Munich-based fund manager at Pacific Investment Management Co. who previously worked for the ECB.

The yield on the benchmark 10-year German bund reached the highest in almost a year this week as euro-area inflation advanced at its fastest pace in more than two years in January.

Germany undercut its own credibility in 2005 by teaming with France to loosen budget rules after both countries overran the EU deficit limit of 3 percent of gross domestic product. No sanctions have ever been slapped on high-deficit states, not even on Greece, a country that never met the targets.

Seeking Payoff

Now Merkel, who gained a degree in physics from the Karl Marx University in Leipzig and a doctorate in quantum chemistry from the Central Institute of Physical Chemistry in East Berlin, is seeking a payoff from a year of crisis-fighting and providing the biggest share of a $1 trillion euro-region bailout package.

A fluent speaker of Russian and English, Merkel, a former aide to Lothar de Maiziere, East Germany’s only democratically elected premier, was picked for Chancellor Helmut Kohl’s post- unification Cabinet. At 36, she became the youngest minister of the post-war era.

Her message of austerity is backed by a personal style recalling life in communist East Germany.

The chancellor and her second husband, Joachim Sauer, reject the sprawling living quarters in the chancellery and instead live in her 19th-century apartment building in Berlin’s central Mitte district. She disdains the official retreat, a restored 18th century Prussian palace, spending weekends at the family country house in the village of Hohenwalde, 80 kilometers (50 miles) northeast of the capital.

Potato Soup

Merkel wheels a shopping cart through her local food store, trailed by her security detail, at least once a month. She even bags her own groceries and during her 2009 re-election campaign she boasted that she makes a “mean potato soup” and does her own laundry when time permits.

For a country where inflation weakened democracy in the 1920s and aided Adolf Hitler’s rise to power, the chancellor says the euro is a pre-requisite for an economically strong, peaceful Europe and protecting it requires the pain of budget cuts in the so-called peripheral economies.

“Indebtedness is the biggest danger for prosperity on this continent,” Merkel told the World Economic Forum’s annual meeting in Davos, Switzerland, on Jan. 28. Any country that gets aid “must receive this solidarity under certain conditions.”

Tighter control of national finances tops Germany’s list of demands. Narrowing Europe-wide differences in taxes, pay and retirement age is also on the agenda, driven by Merkel and French President Nicolas Sarkozy, a convert to her lobbying.

“Mrs. Merkel and I will never -- do you hear me? -- never let the euro fail,” Sarkozy said in Davos.

Market Gains

Merkel may have pulled ahead for now in her battle to restore policy makers’ mastery over the markets. The euro climbed to a three-month high this week and bond-risk premiums for Spain, Portugal, Italy and Belgium narrowed as investors bet that Europe will agree on ways to strengthen its crisis response.

Governments are already taking Merkel’s medicine. Spain cut public wages 5 percent last year, reduced firing costs, made it easier for firms to opt out of collective-bargaining deals and plan further changes to those pacts by March. All but the lowest pensions have been frozen and the government is increasing the retirement age to match Germany’s 67.

“In my 25 years as an economist I can’t recall another advanced economy having undertaken such an agenda of reforms in such a short period of time,” said Erik Nielsen, London-based chief European economist at Goldman Sachs Group Inc.

Loosening Strings

In return, Merkel may be willing to loosen the purse- strings by bolstering a 440 billion-euro ($600 billion) European Financial Stability Facility, whose lending ability is limited by collateral rules to about 250 billion euros.

Merkel’s bailout tactics underscore her response to previous crises. She was criticized for moving too slowly on stimulus spending as the economy sank into recession, on supporting banks after the collapse of Lehman Brothers Holdings Inc. rocked the global financial system and on extending a lifeline to Greece.

Those who know her say that represents a scientific cast that differs from most of her political counterparts who are mainly lawyers or businessmen.

“It’s policy by trial and error. She passionately takes a position, then turns 180 degrees and changes her mind,” Gerd Langguth, political scientist at University of Bonn and Merkel biographer, in a phone interview today. “She doesn’t do politics from the gut. Sure, therein lies a danger, because those politicians often have a feel for getting it right. Merkel just wants all the facts on the table.”

Debt Limits

Merkel points to constitutional debt limits adopted by Germany in 2009 as a model for the rest of Europe and views the Sweden’s revamping of its welfare state in the 1990s as another inspiration. Years of wage restraint in Germany and cuts in social programs by Gerhard Schroeder, the previous chancellor, further strengthen her hand.

European Commission statistics show unit labor costs shrank in Germany each year from 2004 through 2007 and grew less than 1 percent in each of the six previous years. In that period, the euro-area average was only lower in 1998 and never contracted.

“Germany went through a difficult and painful restructuring,” said Klaus Baader, co-chief European economist at Societe Generale SA in London. “The fruits are clear to see and that’s what Germany expects of other euro member countries.”

German Expansion

Powered by exports, Germany had its fastest economic expansion in two decades last year with gross domestic product jumping 3.6 percent. Unemployment fell to an 18-year low of 7.4 percent in January -- the second lowest among the Group of Seven economies after Japan -- and business confidence reached a record high.

Continental AG, the second-biggest tire maker in Europe, last month reported sales and earnings that beat its 2010 goals, while Siemens AG, Europe’s largest engineering company, said fiscal first-quarter profit increased more than estimated.

Since spooking markets in October by saying bondholders will have to pay in future bailouts and again in November by calling the euro’s condition “exceptionally serious,” Merkel has shifted her public stance to a come-what-may defense of the currency. “We support whatever is needed to support the euro,” she said in Berlin on Jan. 12.

She may have other aims. Merkel may nominate Bundesbank President Axel Weber to replace Jean-Claude Trichet as president of the ECB after his term ends in October, a move that would install a so-called inflation hawk to keep a lid on prices.

Roubini’s Doubts

Merkel will ultimately fail if she attempts to impose the German diet on Europe without giving more in return, said Nouriel Roubini, chairman of Roubini Global Economics LLC. Germany and other countries should slow their deficit cuts and Greece should restructure its debt now, he said.

Germany’s message is “we don’t care about pain and the only solutions are austerity and structural reforms, and anything else has to wait for 2013,” when the EU aims to have a permanent defense system for the euro in place, said Roubini. “You need a more comprehensive solution sooner.”

Most international investors predict at least one of the 17 nations will leave the euro area within five years and that Greece and Ireland will default, according to the January 2011 Bloomberg Global Poll that underscored the urgency leaders face in calming markets. The same poll ranked Merkel as the most favored of nine global policy makers.

State Elections

Constraining Merkel are elections in seven of Germany’s 16 states this year -- with Baden-Württemberg’s on March 27 -- and public resistance to putting more taxpayer money on the line for bailouts, tinged with nostalgia for the deutsche mark. Within her governing coalition, the Free Democratic Party in January rejected any increase in the bailout fund.

Greater financial support for indebted euro-area countries was opposed by 64 percent of German respondents in a Jan. 28 FG Wahlen poll. About half of Germans would ditch the euro and return to the deutsche mark, a Dec. 26 YouGov survey for the Bild newspaper showed.

That underscores the need for her to keep both euro-region neighbors and her own voters on side, said Harvard University historian Niall Ferguson, who has written about Germany’s economy and yesterday met Merkel and Spanish Prime Minister Jose Luis Rodriguez Zapatero in Madrid.

“The euro has to survive because it’s in Germany’s interest and the German voters are gradually coming to see they can’t afford to see this fall apart,” Ferguson told Bloomberg Television. Merkel’s strategy means the “outlook for the euro has definitely improved.”

To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net; Simon Kennedy in London at skennedy4@bloomberg.net

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

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Most Asia Stocks Climb on Rising Commodities, U.S. Sales Data; Sanyo Falls

Most Asian stocks advanced, with the regional index near a 2 1/2-year high, as commodity producers gained after copper climbed to a record, crude oil rose and U.S. retail sales increased last week, adding to signs the economic recovery is on track.

Canon Inc., the world’s largest maker of cameras that gets about 28 percent of sales from the U.S., increased 1.9 percent in Tokyo. BHP Billiton Ltd., the world’s biggest mining company and Australia’s largest oil and has produced, climbed 0.9 percent in Sydney. Mitsui & Co., which counts commodities as its biggest source of profit, gained 0.7 percent. Sanyo Electric Co., a maker of rechargeable batteries, slumped 5.1 percent after its parent Panasonic Corp. announced plans to delist the company.

“The world economy is recovering moderately,” said Naoki Fujiwara, who helps oversee $6 billion in Tokyo at Shinkin Asset Management Co. “Investors see money is flowing into stocks and commodities, boosting confidence in the market.”

The MSCI Asia Pacific Index rose 0.1 percent to 134.94 as of 4:37 p.m. in Tokyo, with about the same number of stocks rising and falling. The gauge climbed to its highest level since July 2008 on Dec. 14 as U.S. economic reports boosted confidence in a global recovery, easing concerns that Europe’s debt crisis and China’s measures to slow inflation will hurt growth.

Japan’s Nikkei 225 Stock Average dropped 0.2 percent, erasing gains of as much as 0.2 percent, after the government said it is becoming more pessimistic about exports and business sentiment. Japan’s export growth accelerated for the first time in nine months in November, data released today showed.

South Korea’s Kospi Index, Australia’s S&P/ASX 200 Index and New Zealand’s NZX 50 Index climbed each climbed 0.1 percent. Taiwan’s Taiex Index gained 0.4 percent. China’s Shanghai Composite Index declined 0.9 percent as an increase in gasoline and diesel prices sparked concern inflation will accelerate.

Recovery Trend

Futures on the Standard & Poor’s 500 Index were little changed today after Nike Inc., the world’s largest maker of athletic shoes, reported orders that fell short of analysts’ estimates and chip maker Xilinx Inc. forecast sales will drop.

The measure rose 0.6 percent yesterday in New York to 1,254.60, surpassing its closing level on Sept. 12, 2008, the last trading day before Lehman Brothers Holdings Inc. filed the world’s biggest bankruptcy.

Same-store sales at a selection of U.S. retailers rose 4.2 percent last week, the biggest jump of this holiday season, as more consumers finished shopping, according to a survey of retailers released yesterday.

“U.S. economic indicators continue to exceed expectations and the U.S. economy is on a recovery trend,” said Hiroichi Nishi, an equities manager in Tokyo at Nikko Cordial Securities Inc. “The global economic recovery, surplus money and confidence in government measures are boosting commodity prices.”

Canon, HTC

Gauges of information technology companies, energy and raw material producers led the advance among the 10 industry groups in the MSCI Asia Pacific Index.

Canon climbed 1.9 percent to 4,265 yen. HTC Corp., the Taiwanese mobile phone maker that counts America as its biggest market, increased 4.1 percent to NT$914. Hyundai Motor Co., South Korea’s biggest carmaker, gained 2.3 percent to 181,500 won in Seoul.

BHP Billiton advanced 0.9 percent to A$45.82 in Sydney. Mitsui & Co. climbed 0.7 percent to 1,325 yen. Noble Group Ltd., a Hong Kong-based supplier of agricultural and industrial commodities, rose 1 percent to S$2.09 in Singapore.

Crude oil for February delivery gained 45 cents to $89.82 a barrel in New York yesterday, the highest settlement since Oct. 7, 2008. The London Metal Exchange Index of six metals including copper and aluminum climbed 1.8 percent yesterday, rising for a third day. Copper, rubber and cotton prices rose to record levels overnight.

Rig Order

In Singapore, Sembcorp Marine Ltd., the world’s second- largest oil-rig builder, climbed 2 percent to S$5.09. The company said it won an order two build two jack-up rigs, valued at $400 million, from Noble Corp., the world’s third-largest deep-water oil and gas driller.

The MSCI Asia Pacific Index increased 12 percent this year through yesterday, compared with gains of 13 percent by the S&P 500 and 11 percent by the Stoxx Europe 600 Index. Stocks in the Asian benchmark were valued at 14.8 times estimated earnings on average at yesterday’s close, versus 14.7 times for the S&P 500 and 12.4 times for the Stoxx 600.

Among stocks that fell, Sanyo Electric slumped 5.1 percent to 130 yen in Tokyo, its lowest close since July 28. Controlling shareholder Panasonic Corp. said it will give minority shareholders 0.115 shares each Sanyo share as part of plans to delist its 81 percent-owned subsidiary. Panasonic fell 1.5 percent to 1,152 yen.

Australian Luxury Homes

Lend Lease Group, Australia’s No.1 developer, dropped 1.1 percent to A$8.65 in Sydney after Deutsche Bank AG lowered its rating to “hold” from “buy.”

The stock also fell after the Real Estate Institute of Australia predicted that prices of luxury homes in the country will drop next year as homes worth at least A$1 million ($1 million) listed for sale increase. Leighton Holdings Ltd., Australia’s largest construction company, fell 2 percent to A$31.52.

Wilmar International Ltd., the world’s biggest palm-oil trader, dropped 4.6 percent to S$5.65 in Singapore after saying it will invest 889.2 million yuan ($134 million) in a joint venture with Kerry Properties (China) Ltd. and Shangri-La China Ltd. to develop a hotel in China’s Liaoning province.

“We believe that the market may take this announcement negatively,” Goldman Sachs Group Inc. analysts Patrick Tiah and Nikhil Bhandari wrote in a note to clients today. “This appears to be a sharp departure from Wilmar’s agri-processing core business and there may be concerns on management losing focus.”

To contact the reporters on this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net. Norie Kuboyama in Tokyo at nkuboyama@bloomberg.net

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

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U.S. Stocks Erasing Loss Since Lehman Failure Fuels 2011 Bulls

The benchmark gauge for American stocks rose 0.6 percent to 1,254.6 yesterday, surpassing its closing level of 1,251.70 on Sept. 12, 2008. Photographer: Jin Lee/Bloomberg

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Dec. 21 (Bloomberg) -- Bloomberg's Courtney Donohoe reports on the performance of the U.S. equity market today. Stocks rose, completing the Standard & Poor’s 500 Index’s recovery from the plunge that followed Lehman Brothers Holdings Inc.’s collapse in 2008, after Adobe Systems Inc.’s forecast added to speculation that the fastest profit growth in 22 years makes equities a bargain. Bloomberg's Pimm Fox also speaks. (Source: Bloomberg)

The advance that lifted the Standard & Poor’s 500 Index above its level before the collapse of Lehman Brothers Holdings Inc. in September 2008 is an encouraging sign for bulls, technical analysts said.

The benchmark gauge for American stocks rose 0.6 percent to 1,254.6 yesterday, surpassing its closing level of 1,251.70 on Sept. 12, 2008, the last trading session before Lehman Brothers filed the world’s biggest bankruptcy. After closing within 1 percent of the milestone on five of the six previous days, the index may now have room to rise, according to analysts who base forecasts on price charts.

“It’s a psychological and technical victory for the market,” said Christopher Verrone, lead technical analyst at New York-based Strategas Research Partners. “It strengthens the case that 2011 might be better than a lot of people expect.”

U.S. government and Federal Reserve spending to stimulate the economy and 70 percent of S&P 500 companies beating profit estimates for a record six straight quarters pushed the S&P 500 up 85 percent since March 2009. The index will end 2011 at 1,374, according to the average projection of 11 strategists at Wall Street’s biggest banks, producing the biggest three-year rally since 1997-1999.

Losses for the S&P 500 totaled 46 percent between Lehman’s failure and March 9, 2009, as the worst recession since the 1930s intensified. The index started to rebound three months before the contraction ended in June 2009, according to the National Bureau of Economic Research. It has to climb 25 percent to surpass its October 2007 record high of 1,565.15.

‘Starting Gun’

In the week of Lehman’s bankruptcy, Bank of America Corp. took over Merrill Lynch & Co. as it teetered on collapse and the government seized American International Group Inc. The S&P 500 surged in the final two days of that week after the government announced a plan to purge banks of bad assets and crack down on short sellers.

“Lehman Brothers was really the starting gun for creating this sense of fear, and we still haven’t fully overcome that fear but we’re in a healing process,” said Jeffrey Coons, president of Manning & Napier Advisors Inc. in Fairport, New York, which manages $35 billion. “The aggressive moves of the Fed right after Lehman and ongoing today have been an important driver for the stabilization of stock prices.”

The S&P 500, up 13 percent in 2010, has advanced 6.3 percent in December after losing 0.2 percent in November and posting a combined gain of 13 percent in September and October, the biggest increases during those months since 1998. The measure has rallied 20 percent since Fed Chairman Ben S. Bernanke suggested on Aug. 27 that he was prepared to purchase bonds to spur economic growth.

Tax Cuts, GE

The MSCI World Index, a gauge of 1,660 shares in 24 developed nations from the U.S. to Hong Kong, is within 1 percent of wiping out its 46 percent drop since Lehman’s collapse. The index has gained 85 percent since March 2009 as central banks worldwide maintained record-low interest rates and governments spent trillions of dollars to spur growth.

Should the MSCI World erase its loss, “it would be a positive and bullish development,” said Christian Bendixen, director of technical research at New York-based Bay Crest Partners LLC. “It has psychological and anecdotal significance.”

The S&P 500 has risen 13 of the past 16 weeks. The last time that happened was in 2004, according to Howard Silverblatt, S&P’s New York-based senior index analyst. The December advance was buoyed by an agreement between President Barack Obama and Republican lawmakers to extend tax breaks, and by reports showing consumer confidence, retail sales and manufacturing beat economists’ forecasts.

Priceline, Ford

Consumer stocks in the S&P 500 such as online travel agency Priceline.com Inc. and Dearborn, Michigan-based Ford Motor Co., had recovered all their losses from New York-based Lehman Brothers by March 4. The S&P 500 Consumer Discretionary Index has surged 21 percent since then.

Priceline, based in Norwalk, Connecticut, has surged almost five-fold since September 2008 to $407, bolstered by a rebound in hotel stays and international travel. Ford, the world’s most profitable automaker and the only major U.S. car company to avoid bankruptcy last year, more than tripled to $16.99 as demand for pickups and sport-utility vehicles revived.

Analysts forecast that S&P 500 earnings will total $85.33 a share in 2010, up 38 percent from $61.77 a share in 2009, according to the average projection in a Bloomberg survey. That’s the biggest increase since 1988, Bloomberg data show.

“The market is responding to earnings,” said Hayes Miller, the Boston-based head of asset allocation in North America at Baring Asset Management Inc., which oversees about $50.6 billion. “It’s a commentary on corporate flexibility, the ability of companies to cut costs and increase productivity. This looks like it can last through 2011.”

To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net.

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

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Oil Rises for a Fourth Day as U.S. Economic Recovery May Spur Fuel Demand

Crude rose for a fourth day as signs of U.S. economic recovery stoked speculation that fuel demand will increase in the world’s largest oil consumer.

Futures climbed as much as 0.5 percent to trade near the highest in two years before a report forecast to show the U.S. economy expanded more than estimated earlier. Holiday-season retail sales jumped, according to data released yesterday. Prices also gained after the American Petroleum Institute said crude inventories shrank a fourth week.

“Oil prices have been well supported above $80 a barrel since around October,” said Selena Ling, head of treasury research at Oversea-Chinese Banking Corp. in Singapore. “People are growing more confident that the U.S. is not entering a double dip recession.”

Crude oil for February delivery rose as much as 45 cents to $90.27 a barrel in electronic trading on the New York Mercantile Exchange and was at $90.24 at 4:14 p.m. Singapore time. Prices have climbed 14 percent this year.

Yesterday, futures gained 1.1 percent to $89.82 a barrel, the highest settlement since Oct. 7, 2008. That was 2 cents below a long-term resistance level on technical charts, the 50 percent Fibonacci retracement of the drop to $32.40 in December 2008 from a record high of $147.27 in July that year.

U.S. GDP grew 2.8 percent in the third quarter, up from an estimate of 2.5 percent last month, based on the median forecast economists surveyed by Bloomberg before a Commerce Department report.

Crude Supplies

Prices gained after the industry-funded American Petroleum Institute reported yesterday that U.S. crude-oil supplies declined 5.8 million barrels to 342 million last week. Gasoline inventories dropped 2.9 million while middle distillates increased 16,000 barrels, the API said.

“There’s no doubt that we’ve seen a tightening in the market’s balance over the last few months,” Ben Westmore, a minerals and energy economist at National Australia Bank Ltd. in Melbourne, said in a Bloomberg Television interview. “A lot of it does depend on what you see for the demand picture going forward.”

Crude also rose after U.S. holiday retail sales data, a key economic indicator, advanced. Same-store sales at a selection of U.S. retailers posted their biggest holiday jump, according to a chain-store sales index released yesterday by the New York-based International Council of Shopping Centers and Goldman Sachs Group Inc.

Heating Oil

The Department of Energy will release its own oil-inventory report in Washington today. The data may show U.S. crude stockpiles fell last week as refiners on the Gulf Coast reduced their assets for tax savings at the end of the year, according to a Bloomberg survey.

Supplies dropped 3.4 million barrels in the seven days ended Dec. 17 from 346 million, based on the median estimate of 14 analysts. Stockpiles in the previous week slumped 9.85 million as imports fell.

Gasoline inventories may have increased 1.5 million barrels from 214.8 million, the survey showed. Analysts were split over whether stockpiles of distillate fuel, a category that includes heating oil and diesel, declined or gained.

Brent crude oil for February settlement rose as much as 46 cents, or 0.5 percent, to $93.66 a barrel on the London-based ICE Futures Europe exchange. It gained 46 cents, or 0.5 percent, to end the session at $93.20 a barrel yesterday, the highest settlement since Oct. 1, 2008.

To contact the reporter on this story: Ann Koh in Singapore at akoh15@bloomberg.net

To contact the editor responsible for this story: Clyde Russell at crussell7@bloomberg.net

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Stocks Rising 17% Since Bernanke Disclosed QE2 Disarms Fed's Worst Critics

Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Joshua Roberts/Bloomberg

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Dec. 16 (Bloomberg) -- John Taylor, a professor of economics at Stanford University and a former Treasury undersecretary, discusses Federal Reserve monetary policy and the outlook for U.S. economic recovery. Taylor speaks with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)

Republican leaders in Congress say they have “deep concerns” about Ben S. Bernanke’s second round of quantitative easing. The U.S. stock and credit markets don’t share those reservations.

The Standard & Poor’s 500 Index has climbed 17 percent since the Federal Reserve chairman first indicated on Aug. 27 that the central bank might buy more securities to boost the economy. Junk bonds rallied, with the extra yield that investors demand to own the securities instead of government debt shrinking to 5.45 percentage points yesterday from 6.81 points, according to Bank of America Merrill Lynch index data.

“It has been successful,” Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York, said of Bernanke’s policy of pumping money into the financial system, dubbed QE2. “It’s contributed to the rally in the stock market” and has “been important in reducing substantially the downside risk of deflation.”

Economic reports signal the recovery is gaining strength. A bigger-than-projected increase in retail sales in November prompted Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, to raise his outlook for fourth-quarter consumer spending. Industrial production in November also exceeded forecasts, and a gauge of consumer confidence rose to a six-month high in December.

The data, coupled with the prospect Congress will pass an $858 billion plan to extend Bush-era tax cuts, has prompted economists to boost their estimates for growth next year. The economy will expand by 2.6 percent in 2011, according to the median forecast in a Bloomberg News survey of 66 economists this month, up from a 2.5 percent prediction in November.

Confidence Grows

“As people get more confident about the economy, money is coming into the stock market,” said Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School in Philadelphia. “The most important way quantitative easing works is the provision of liquidity.”

New York Fed President William Dudley said Oct. 1 that asset purchases would reduce borrowing costs and support the value of homes and stocks, leaving consumers with more money to spend and lowering the cost of capital for businesses.

The extra yield investors demand to own investment-grade corporate bonds instead of government debt narrowed to 1.7 percentage points yesterday from 1.91 percentage points on Aug. 27, Bank of America Merrill Lynch index data show.

“Markets in general have moved in a growth-friendly direction,” said Dean Maki, chief U.S. economist at Barclays Capital in New York.

Contrast With Summer

The latest economic data are in contrast to a drumbeat of negative economic reports last summer, including declines in home sales and payrolls, that prompted economists such as Harvard University’s Martin Feldstein to warn that the risks of a renewed recession were rising.

On Aug. 27, Bernanke said the Fed “will do all that it can” to support the recovery and signaled it was ready to start a second round of securities purchases, in addition to the $1.7 trillion it bought through last March to pull the nation out of the worst recession since the Great Depression.

The Fed’s Nov. 3 announcement that it will buy $600 billion of Treasuries through June came a day after Congressional elections gave Republicans a majority of seats in the House of Representatives.

‘Dangerous Experiment’

Sarah Palin, the 2008 vice presidential nominee who says she’s considering a run for president in 2012, wrote to the Wall Street Journal last month, saying “it’s time for us to ‘refudiate’ the notion that this dangerous experiment in printing $600 billion out of thin air, with nothing to back it up, will magically fix economic problems.”

Representative John Boehner of Ohio, nominated to be House speaker, and three other Republican leaders sent Bernanke a letter Nov. 17 expressing “our deep concerns over the recent announcement that the Federal Reserve will purchase additional U.S. Treasury bonds.”

“Such a measure introduces significant uncertainty regarding the future strength of the dollar and could result both in hard-to-control, long-term inflation and potentially generate artificial asset bubbles that could cause further economic disruptions,” they wrote.

Since then, the dollar has gained about 1.8 percent against the currencies of six major trading partners as measured by IntercontinentalExchange Inc.’s Dollar Index as of 1:19 p.m. in New York. The dollar is down 2.9 percent since Aug. 27.

The cost of living increased 0.1 percent in November, less than forecast, indicating higher prices for commodities aren’t filtering through into other goods and services, according to a Dec. 15 Labor Department report.

Seen as Favorable

“We don’t expect a rapid move higher in inflation anytime soon,” said Maki, who was the No. 2 forecaster overall for the U.S. economy in the two-year period ended on Sept. 30, according to data compiled by Bloomberg. “What we’re expecting is a very gradual upward trend that is likely to be seen by the Fed as favorable.”

Policy makers are concerned that too-low inflation will push up borrowing costs and increase the risk of deflation, or a debilitating decline in prices that boosts debt and reduces wages and profits.

The Fed’s policies have led inflation expectations to increase. The breakeven rate for 10-year Treasury Inflation Protected Securities, the yield difference between the inflation-linked debt and comparable maturity Treasuries, has risen to 2.3 percentage points from 1.63 percentage points on Aug. 27, according to data compiled by Bloomberg. The rate is a measure of the outlook for consumer prices over the life of the securities.

Diminished Risk

“Because the Fed is acting, I would say the risk is pretty low” of deflation, Bernanke said in an interview with CBS Corp.’s “60 Minutes” program broadcast Dec. 5. “But if the Fed did not act, then given how much inflation has come down since the beginning of the recession, I think it would be a more serious concern.”

Not every indicator is going Bernanke’s way. Payrolls in November increased by 39,000 jobs, less than the most pessimistic forecast in a Bloomberg News survey of economists, and the unemployment rate rose to 9.8 percent from 9.6 percent.

The pace of economic growth is “insufficient to bring down unemployment,” the Federal Open Market Committee said this week as it affirmed its bond-buying plan and renewed a pledge for an “extended period” of low interest rates.

An increase in Treasury bond yields has provided fodder to critics such as Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut.

‘Dismal Failure’

“Their effort to achieve the stated objective of pressing long-term yields lower has been a dismal failure,” Stanley said in a Dec. 14 report. The yield on the benchmark 10-year Treasury note has climbed to 3.36 percent from 2.64 percent on Aug. 27, according to data compiled by Bloomberg.

Kevin Hassett, director of economic-policy studies at the American Enterprise Institute in Washington and a former Fed economist, said the central bank can’t take sole credit for the stock rally, which he said was caused by “a slew of slightly better economic data.”

Hassett, one of 23 mainly Republican academics and former policy makers who signed a letter last month to Bernanke telling him to arrest his expansion of monetary stimulus because it will cause a surge in inflation, also questioned whether stock gains will spur consumer spending through the so-called wealth effect.

While consumers’ stock investments have gained in value, “their bonds are going down,” said Hassett, who is also a columnist for Bloomberg News.

Too Early to Judge

Former Fed Governor Lyle Gramley said it’s “too early to make any definitive judgment” on the Fed’s bond purchases.

“I don’t know how you parse out the effects of QE2 given the changes in the environment,” including the sovereign-debt crisis in Europe and prospects for an extension of tax cuts in the U.S., said Gramley, senior adviser at Potomac Research Group in Washington.

Others say the rise in bond yields is a positive signal that reflects the outlook for faster economic growth and rising inflation expectations.

Fed asset purchases are keeping yields lower than they otherwise would be, Citigroup Inc. analysts led by Robert DiClemente said in a Dec. 10 report. At 3.36 percent, the yield on the 10-year Treasury note is below its 10-year average of about 4.16 percent, Bloomberg data show.

‘Bad Mistake’

“Looking only at the long-term rate is a bad mistake on those interpreting this policy” because quantitative easing works by increasing liquidity, University of Pennsylvania’s Siegel said.

Siegel pointed to the rise in commodity prices as another sign of increased confidence in the economy. Oil futures increased 17 percent since Aug. 27 to settle at $87.70 yesterday on the New York Mercantile Exchange.

“What the Fed is trying to do is reflate the economy,” said Ward McCarthy, chief financial economist at Jefferies & Co. in New York. “To the extent it has prevented expectations of outright deflation and encouraged an increase in the stock market, then it’s been a success.”

To contact the reporter on this story: Caroline Salas in New York at csalas1@bloomberg.net

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

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Gold Climbs After IMF Says Sales of Reserves Conclude; Platinum Advances

Gold gained after the International Monetary Fund said that it had finished a program of sales of the metal to boost its finances, removing a source of supply from the global market. Platinum prices also rose.

Immediate-delivery gold advanced as much as 0.4 percent to $1,391.02 an ounce and traded at $1,389.25 at 2:53 p.m. in Singapore. The IMF concluded sales of about 403.3 metric tons, or 13 percent of its reserves, to central banks and other market participants, it said yesterday in a statement, without disclosing the total amount raised.

“The last of the overhang has now gone,” Peter Richardson, chief metals economist at Morgan Stanley in Melbourne, said by phone today. “The market will take that as a positive development,” said Richardson.

More than half of the IMF gold was acquired by the central banks of India, Sri Lanka, Mauritius and Bangladesh, according to past announcements. The disposal plan was announced in September 2009.

Gold has climbed 27 percent this year, gaining to a record $1,431.25 an ounce this month, and is poised to rise for a 10th consecutive year. Purchases by central banks as part of their efforts to diversify their reserves away from currencies have contributed to the metal’s advance.

The contract for February delivery on the Comex in New York was little changed at $1,390.10 an ounce.

‘In the Wings’

“It’s not clear whether there are new sellers waiting in the wings,” said Morgan Stanley’s Richardson. “The official sector is likely to be net buyers,” he said, referring to central banks.

Gold assets held in exchange-traded products fell about 1 ton to 2,113.7 tons as of Dec. 21 from a record the day before, according to data collected by Bloomberg from 10 providers. Holdings have climbed more than 17 percent this year.

U.S. gross domestic product may have expanded 2.8 percent in the third quarter on an annualized basis, according to the median of a 71-analyst survey by Bloomberg News. That would be more than a previously calculated 2.5 percent gain for the period. The Commerce Department will publish the data today.

“We could see some of today’s gold rally cut by a strong U.S. GDP,” Jeremy Friesen, an analyst at Societe Generale SA in Hong Kong, said today in an e-mail. “But I think global uncertainty on the fiscal, monetary and geopolitical front will remain supportive for gold well into 2011.”

The Dollar Index, which gauges the currency’s movement against six major counterparts, dropped as much as 0.3 percent today, declining for the first day in four. Precious metals usually move inversely to the dollar.

Immediate-delivery silver was little changed at $29.3312 an ounce. The metal, which has gained 74 percent this year, is likely to gain more than gold in 2011 as industrial demand strengthens, Credit Agricole SA said in a report yesterday.

Platinum rose 0.3 percent to $1,728.10 an ounce and palladium was little changed at $753.70 an ounce.

-- With assistance from Sandrine Rastello in Washington. Editor: Jake Lloyd-Smith

To contact the reporter on this story: Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@Bloomberg.net

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Copper, Sugar, Rubber Futures Drop Limit in China as Wen Vows Price Curbs

Copper, sugar and rubber futures slumped their daily limit in China, with copper set for its biggest four-day slide since 2008, on speculation the government will take steps to cool inflation, damping commodity demand.

Copper for February delivery dropped 5 percent, the maximum allowed by the Shanghai Futures Exchange, to 61,550 yuan ($9,259) per metric ton before trading at 61,560 yuan. Soybeans fell 4 percent and cotton, sugar and rubber declined 5 percent.

China is drafting measures to curb excessive price gains, Premier Wen Jiabao said yesterday, suggesting the government may raise interest rates and introduce price controls. Inflation in October was 4.4 percent, boosted by a 10.1 percent increase in food costs, statistics bureau data show. The futures exchanges have already announced moves to cool speculation.

“The precipitous fall indicates investors have become increasingly risk-averse, as the strong rally in the past few months seems vulnerable,” Wang Ning, an analyst at Xiangyu Futures Co., said by phone from Shanghai.

Commodities worldwide capped the biggest five-session slide since July 2009 yesterday. The Thomson Reuters/Jefferies CRB Index of 19 raw materials fell 3.2 percent to 296.22, bringing its decline since Nov. 9 to 7.2 percent. Three-month copper lost 0.3 percent to $8,124 a ton today on the London Metal Exchange after tumbling 5.7 percent yesterday.

Investor Retreat

A Chinese consumer confidence index fell for the first time in six quarters on expectations that the price of goods and services will keep increasing. The measure dropped to 104 in the third quarter from 109 in the previous three months, according to a statement from Nielsen Co. and the Chinese statistics bureau’s Economic Monitoring and Analysis Center.

“What I’ve seen was a lot of liquidation of long positions as investors retreat from the market and wait until they get a clearer macro picture,” Wang said.

Soybean futures jumped as much as 12 percent in Dalian this month and dropped 9.2 percent in the past four days, the biggest such decline since October 2008. Rubber soared as much as 28 percent in Shanghai, and fell 12 percent in the past four days, the most since December 2008.

Copper futures in Shanghai declined 10.4 percent in the past four sessions, heading for the biggest four-day slide since December 2008. Zinc slid 15 percent in the period, and was poised for the largest drop since November 2007.

Rate Speculation

China’s central bank may raise rates as soon as Nov. 19 because of sustained inflationary pressure, the China Securities Journal said today. Earlier announcements also indicate that rate decisions are often released on Fridays or around the 20th of the month, the newspaper reported.

Exchanges have introduced measures to cool speculation. The Dalian bourse said last week it will curb “abnormal” trading to prevent price manipulation and other activities that disrupt an orderly market. The Zhengzhou Commodity Exchange and Shanghai Futures Exchange have announced similar steps.

Stocks in China declined, with the Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, down 1.3 percent to 2,856.96. Aluminum in London gained 0.5 percent to $2,254 a ton, while zinc declined 1.8 percent to $2,100 a ton.

Corn for March delivery on the Chicago Board of Trade fell as much as 3.3 percent to $5.22 a bushel today, the lowest level for the most-active contract since Oct. 8, and traded at $5.29.

--Helen Sun, William Bi. Editor: James Poole

To contact the Bloomberg News staff on this story: Helen Sun in Shanghai at hsun30@bloomberg.net

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