U.S. Stocks Rise as Economic Optimism Overshadows Increase in Oil Prices

By Cecile Vannucci and Nikolaj Gammeltoft - Mar 5, 2011 12:01 PM GMT+0700

U.S. stocks rose this week, with a rebound in the final hour of trading yesterday preserving the advance, after improvements in employment and service industries overshadowed concern that oil’s surge will slow economic growth.

Equities pared their weekly gain yesterday as crude rose to a 29-month high of $104.42 a barrel. Pfizer Inc. (PFE) and Merck & Co. led advances in the Dow Jones Industrial Average, gaining at least 2.7 percent. Agilent Technologies Inc. (A) rose 10 percent, the most in the Standard & Poor’s 500 Index, after the maker of scientific-testing equipment boosted its long-term sales and margin forecasts. Motorola Mobility Holdings Inc. fell 13 percent on concern about competition from Apple Inc.’s iPad 2.

The S&P 500 rose 0.1 percent to 1,321.15 after losing 1.7 percent the prior week. The Dow climbed 39.43 points, or 0.3 percent, to 12,169.88. Oil futures advanced 6.7 percent, extending their advance since Feb. 11 to 22 percent.

“It’s a battle between the negative geopolitical environment versus the very strong economic fundamentals,” said Benjamin Pace, who helps oversee about $420 billion as the New York-based chief investment officer of Deutsche Bank Private Wealth Management. “The economic environment is very equity friendly. The current geopolitical environment and its impact on oil prices, not so much.”

Production Cut

The S&P 500 lost 0.7 percent yesterday as crude oil jumped after fighting in Libya cut crude production in the African country by as much as 1 million barrels a day, spurring concern that there will be a slowdown in U.S. consumer spending, which makes up about 70 percent of the world’s biggest economy. The stock index had surged 1.7 percent on March 3 for the biggest increase in three months, pushed up by reports showing claims for first-time jobless benefits decreased.

The S&P 500 has gained 5.1 percent this year, amid government stimulus measures, improving economic data and higher-than-estimated corporate earnings. Per-share profit topped estimates at 71 percent of the 470 companies in the S&P 500 that have reported results since Jan. 10, according to data compiled by Bloomberg.

“Oil is the ultimate wildcard in terms of being a drag on the market and economic growth,” said Stephen Wood, the New York-based chief market strategist for Russell Investments, which manages $155 billion. “That can overshadow the modest yet measurable improvement in the economy which we now see being registered in an improving labor market.”

Jobless Rate Falls

The jobless rate unexpectedly declined to 8.9 percent, the lowest level since April 2009, and employers added 192,000 jobs in February, Labor Department figures showed yesterday. Applications for unemployment benefits fell by 20,000 to 368,000 in the week ended Feb. 26, the Labor Department report said on March 3. Economists forecast claims would rise to 395,000, according to the median estimate in a Bloomberg News survey. The total number of people receiving unemployment insurance fell to the lowest level since October 2008.

The Institute for Supply Management’s index of non- manufacturing businesses rose to 59.7, the highest level since August 2005, from 59.4 in January. Economists forecast the gauge would fall to 59.3, according to the median estimate in a Bloomberg News survey. A reading above 50 signals growth. The institute’s factory index rose to 61 in February, the highest since May 2004, from January’s 60.8, according to the median estimate in a Bloomberg News survey of economists.

The better-than-estimated data pushed the Citigroup Economic Surprise Index to its highest level ever yesterday, according to data compiled by Bloomberg.

Pfizer, Merck

Pfizer rallied 4.2 percent to $19.66 for the biggest gain in the Dow. At least four states are considering legislation backed by the world’s biggest drugmaker that would impede the efforts of Medicaid and private insurers to save money by widening the use of generic drugs. Merck, the second-biggest U.S. drugmaker, gained 2.7 percent to $33.06. Health-care companies rose the most among 10 industries in the S&P 500, climbing 2.4 percent.

Agilent Technologies rose 10 percent to $46.75, the biggest gain in the S&P 500. The world’s biggest maker of scientific- testing equipment increased its long-term sales and operating margin forecasts at a meeting with analysts, JPMorgan said in a note to clients.

JDS Uniphase Corp. (JDSU), the network-analysis company which bought Agilent’s network solutions test unit last year, also climbed 10 percent, ending the week at $27.37.

Energy Stocks

Higher oil prices drove energy shares in the S&P 500 to a 0.4 percent gain. The stocks have surged 34 percent since March 9, 2010 -- the one-year anniversary of the index’s slump to a 12-year low -- leading the S&P 500’s advance. Chevron Corp. (CVX), the second-largest U.S. oil company, climbed 1.6 percent $103.75 this week.

Financial stocks had the biggest decline in the S&P 500, dropping 1.6 percent. The KBW Bank Index (BKX) slumped 2.4 percent as 23 of its 24 stocks retreated.

Citigroup Inc. (C) dropped 3.4 percent to $4.54. The third- largest U.S. bank was cut to “neutral” from “buy” by analysts at Bank of America Corp., who also cut Goldman Sachs Group Inc. (GS) to “neutral” from “buy.” Goldman Sachs fell 2.5 percent to $161.

JPMorgan Chase & Co. (JPM), the second-biggest U.S. bank, decreased the most in the Dow, losing 2.5 percent to $45.52.

Motorola Mobility slipped 13 percent to $26.65, the second- biggest decline in the S&P 500. The mobile-phone maker was cut to “neutral” from “outperform” by Cowen & Co. analyst Matthew Hoffman, who cited competition for the company’s Xoom tablet from Apple’s iPad 2, which will go on sale on March 11.

Hudson City Bancorp Inc. (HCBK) fell the most in the S&P 500, sinking 13 percent to $9.88. The largest U.S. bank to forgo a government bailout said regulators may require it to “reduce its level of interest-rate risk and funding concentration.” About 98 percent of its borrowed funds are structured putable borrowings, which may have to be replaced if interest rates rise significantly, Hudson City said. The bank said it would have to buy back about 26 percent of its borrowings in the next 12 months if interest rates jumped by 3 percentage points.

To contact the reporter on this story: Cecile Vannucci in New York at cvannucci1@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net.

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

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Dubai Stocks Rise Most in a Month After 15% Tumble, Following Saudi Rally

By Zahra Hankir - Mar 6, 2011 7:02 PM GMT+0700

Dubai shares advanced the most in a month, leading gains in the Middle East, as a rebound in Saudi Arabia’s index yesterday spurred speculation the selloff in regional stocks because of political unrest was overdone.

Emmar Properties PJSC, builder of the world’s tallest tower, increased 2.5 percent and Dubai Islamic Bank PJSC (DIB) advanced the most since October. The DFM General Index (DFMGI) climbed 2.7 percent, the most since Feb. 2, to 1,389.04 at the 2 p.m. close in the emirate. The gauge has lost 15 percent since Tunisia’s President Zine El Abidine Ben Ali was ousted in January. Saudi Arabia’s Tadawul All Share Index (SASEIDX) rallied 7.3 percent yesterday, the most since November 2008, snapping a 13- day losing streak. It gained 0.8 percent at 2:21 p.m. in Riyadh.

“The gains were prompted by what we saw yesterday in Saudi Arabia,” said Sebastien Henin, who helps oversee $110 million at The National Investor in Abu Dhabi. “Investors took this opportunity to buy. Looking forward, there is no visibility as the news flow is very rich and there are tensions across the Gulf Cooperation Council countries.”

Stocks tumbled across the region last week, sending the Bloomberg GCC 200 Index (BGCC200) of Persian Gulf shares to the lowest level since 2009 and propelling the Saudi benchmark index down the most in two years, on concern turmoil in Libya will spread to the kingdom after uprisings erupted in Bahrain and Oman. The GCC 200 measure rose 0.6 percent today.

An increase in oil prices will boost the “strong condition” of the kingdom, Finance Minister Ibrahim al-Assaf told Al Arabiya TV yesterday. Stock prices in Saudi Arabia, which holds about 20 percent of the world’s proven oil reserves, are attractive and the Saudi Public Pension Agency bought shares last week, he said.

Saudi Rallies

Oil rose 2.5 percent to a 29-month high on March 4. Crude oil for April delivery increased to $104.42 a barrel on the New York Mercantile Exchange, the highest settlement since Sept. 26, 2008. The six nations of the GCC, including the United Arab Emirates and Qatar, supply about a fifth of the world’s oil.

Shiite Muslims in the eastern province of Saudi Arabia held two demonstrations on March 3 to call for the release of prisoners. Saudi Arabia’s Interior Ministry said demonstrations, marches and sit-ins are “strictly” prohibited under the kingdom’s laws, the official Saudi Press Agency reported March 5, citing an unidentified official at the ministry.

Emaar rose the most since Feb. 2 to 2.47 dirhams. Dubai Islamic Bank gained 4 percent, the most Oct. 20, to 2.10 dirhams.

Bahrain’s BB All Share Index rose 1.3 percent. Kuwait’s SE Price Index climbed 0.7 percent and Abu Dhabi’s ADX General Index (ADSMI) advanced 1.1 percent. Oman’s MSM30 Index (MSM30) increased 0.8 percent. Qatar’s gauge is closed for a holiday.

Egypt Bourse

In North Africa, Egypt stock trading remained suspended today after the bourse postponed plans to resume operations as Prime Minister Ahmed Shafik quit. No date was given for the opening. The bourse has been shut for more than a month amid a popular revolt that toppled the 30-year-old regime of former President Hosni Mubarak. The measure lost 16 percent in the week ended Jan. 27, when it last traded.

“The fact that Egypt’s market is not open today is a very big negative, especially as we do not have an idea of when it may reopen,” said Ahmed Talhaoui, the Abu Dhabi-based head of investment at Royal Capital. “We expect a lot of volatility in regional markets.”

Tunisia’s stock exchange said it will resume operations tomorrow, according to a statement on its website. The market regulator suspended trading on Feb. 28. The benchmark Tunindex has retreated 21 percent so far this year.

In Israel, the TA-25 Index slipped 0.3 percent in Tel Aviv. The benchmark Mimshal Shiklit government bond due January 2020 dropped, pushing the yield on the 5 percent bond up 2 basis points to 5.19 percent.

To contact the reporter on this story: Zahra Hankir in Dubai at zhankir@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net

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Today's Market Outlook

Daily Forex Technicals | Written by Windsor Brokers Ltd | Mar 03 11 08:32 GMT

EURUSD

Yesterday's fresh strength from 1.3742 higher low has finally cleared 1.3860 resistance and spiked to 1.3889, ahead of shallow correction to 1.3860 zone, former resistance and now reverted to support. While the latter holds dips, immediate target lies at 1.3947, 76.4% Fibonacci retracement of 1.4280/1.2872 downleg, ahead of psychological barrier at 1.40. Further correction on overbought hourly conditions would target 1.3835/15, Fibonacci levels, while 1.38 marks key near-term support and needs to hold to keep near-term bullish outlook intact.

Res: 1.3874, 1.3889, 1.3900, 1.3947
Sup: 1.3845, 1.3803, 1.3780, 1.3742

GBPUSD

Has posted a fresh high at 1.6342 after pullback from double top at 1.6328 reached 1.6215, 38.2% retracement of 1.6030/1.6328 ascend, where good support was found . Hourly studies look somewhat exhausted, but 1.63/1.6270 supports hold for now. Wider picture remains bullish, with scope for fresh extension higher and 1.6456, Jan 2010 high in sight. At the downside, 1.6215 offers key near-term support and should contain corrective dips.

Res: 1.6331, 1.6342, 1.6371, 1.6456
Sup: 1.6300, 1.6271, 1.6245, 1.6215

USDJPY

Remains at the back foot after recovery attempt from 81.61 failed to sustain gains above 82 zone, with fresh weakness extending through 81.61 to test 81.57, trendline drawn off 80.24 low. Bounce from 81.57 is so far capped by 82.00, and clearance of 82.00/23 is needed to improve near-term outlook and signal fresh recovery towards 82.90/83.05 resistance zone. At the downside, loss of 81.57 will focus 81.10/80.92.

Res: 81.91, 82.10, 82.23, 82.31
Sup: 81.76, 81.57, 81.10, 80.92

USDCHF

Extends the latest downleg from 0.9773 high, to post fresh record low at 0.9200, after corrective attempt from 0.9221, previous low, stalled at 0.9320. Overall tone remains bearish, with 0.9100 zone seen next, while 0.9320 expected to limit the upside for now.

Res: 0.9261, 0.9289, 0.9320, 0.9390
Sup: 0.9221, 0.9200, 0.9150, 0.9100

About the Author

Windsor Brokers Ltd

The information contained in this document was obtained from sources believed to be reliable, but its accuracy or completeness cannot be guaranteed. Any opinions expressed herein are in good faith, but are subject to change without notice. No liability accepted whatsoever for any direct or consequential loss arising from the use of this document.

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EUR/USD Sets New 2011 High Going Into The ECB Meeting

Sunrise Market Commentary

• Global core bonds correct lower
  Global core bonds were under downward pressure virtually from the opening of trading in Europe to the closure in the US. Stronger eco releases in the EU and US didn't provoke immediate reactions. Today, the ECB-meeting and the fol-lowing press conference will be very closely monitored.
• EUR/USD sets new 2011 high going into the ECB meeting
  On Wednesday, the correction in EUR/USD didn't last long as markets expected the ECB to raise its inflation alert which gave the euro additional interest rate support. EUR/USD reached a new 2011 top. Trichet holds the key to decide on a further up-leg of the single currency

The Sunrise Headlines

• US Equities ended slightly up on Wednesday led by gains in energy shares. This morning, most Asian shares trade in positive territory, while Chinese stocks lose some ground on expectations that inflation will rise above 5%.
• The European Central Bank is expected to step-up its anti-inflation rhetoric at the monetary policy meeting today as it may raise its alertness on inflation. Another step in the exit policy is likely, but it might be a small step rather than a giant leap.
• Libyan leader Muammar Gaddafi and the president of the Arab League are considering a peace plan from Venezuela's President Hugo Chavez to end the crisis in the North African country, news agencies reported this morning.
• Bundesbank President Axel Weber has proposed to automatically extend ma-turities of bonds issued by countries that tap Europe's future rescue fund in order to give them breathing room to consolidate their public finances.
• Many manufacturers are passing along higher input costs to their customers, a sign that rising prices for commodities could increasingly reach consumers, the Fed's Beige Book survey showed.
• China's annual inflation is likely to top 5% in the first quarter of 2011, a senior government economist said this morning.
• Brent crude oil prices dropped this morning below $115/barrel on speculation that a peace plan to end the crisis in Libya was under consideration.
• Today, the eco calendar contains the euro zone (final) and UK services PMI, the US non-manufacturing ISM, euro zone retail sales, preliminary estimate of euro zone Q4 GDP and US initial claims. The ECB holds its monthly policy meeting.

Currencies: EUR/USD Sets New 2011 High Going Into The ECB Meeting

EUR/USD

On Wednesday, EUR/USD opened the session on a weaker footing. The pair was seen in the 1.3745 area after a correction on Tuesday evening. Question was whether this was just a technical correction after the rejected test of the 1.3857/62 resistance area (week highs/year high) or whether the euro had again become more sensitive to global risk aversion. The jury is still out on this issue as markets don't really know how to react to higher oil prices. However, at least for now, it looks that the decline on Tuesday evening and yesterday morning was nothing more than a simple correction. In Europe there were only some second tier eco data on the agenda, but the euro soon found again a better bid. EUR/USD traded again in the 1.3840 area around noon in Europe. The dollar tried a moderate comeback going into the ADP labour market report. The report showed a rise in private jobs of 217 000, well above the market consensus. However, there were no follow-through gains of the US currency against the euro. Even more, EUR/USD even set a 'minor' new high for 2011 at 1.3890. The expectation that the ECB will step up its inflation rheto-ric today kept the euro well supported. A further slide on the equity markets and oil holding close to the $115/116 level (Brent) were unable to derail the single currency. The Beige Book, giving input for the March 15 Fed meeting indicated that that overall economic activity continued to expand at a modest to moderate pace in January and early February. However, in general there was no euphoria on the progress in the la-bour market yet. EUR/USD closed the session at 1.3866, compared to 1.3777 on Tuesday

Today, the calendar is extremely busy with several items that have market moving potential. In Europe the (final) services PMI's; the January retails sales and the pre-liminary release (with details) of the EMU Q4 GDP will be published. These data might provide interesting information on the health of the European economy, but in-vestors and traders probably won't adjust positions ahead of the key ECB policy meeting. The ECB press conference will be a key factor for investors to decide whether there is enough reason to push EUR/USD for an further up-leg beyond the 1.3862 resistance which is showing serious cracks. We expect Trichet to hold a hawkish tone (for an in debt analysis of the ECB policy decision see our KBC flash report and the bond part of this report). Of course, interest rate markets have already priced in the rising chance of an ECB rate hike mid this year. Nevertheless, the ECB indicating that inflation risks have moved to the upside and/or the Bank raising its 2012 inflation forecast above 2.0% would be a strong sign that an early ECB rate hike is highly probable. Such a scenario might pull the trigger for another up-leg in EUR/USD. The US initial jobless claims and the ISM of the non-manufacturing sector are interesting from an economic point of view. However, with the Fed giving no indi-cation at all that it intends to change its assessment/tactics anytime soon, the relevance of these data for markets should be limited after all. As was the case over the previous two weeks, oil and the tension in the MENA countries will continue to play a role on the background. However, we expect the ECB to be the decisive factor for EUR/USD trading today.

Looking at the technical charts, EUR/USD yesterday moved already (temporary?) above the 1.3862 resistance and the test is ongoing. Of late, we advocated that a sustained break above this 1.3862 resistance wouldn't be easy. Over the previous days, our working hypothesis was under heavy pressure. If the euro would get addi-tional interest rate support after the ECB press conference, we will have to adapt our strategy as it would open the way for a retest of the November high (1.4282).

EUR/USD: setting new 2011 top ahead of the ECB meeting.

Support comes in at 1.3827/08 (break-up hourly/ STMA + Daily envelope), at 1.3730/12 (Daily flag bottom)/MTMA +reaction low), 1.3694 (Broken daily down-trend line) and at 1.3641 (LTMA).

Resistance stands 1.3890/96 (Reaction high hourly/Daily Boll top), at 1.3932/47 (Daily Flag top/76% retracement since 1.4283) and at 1.4010 (2nd target double bottom).

The pair is in overbought terri-tory.

USD/JPY

On Wednesday, the USD/JPY cross rate showed some intraday swings but at the end of the session the difference with Tuesday's close was again very limited. USD/JPY tried to regain the 82.00 mark early in Europe and after the publication of the stronger than expected ADP labour market report. However, the dollar remained under pressure across the board as higher oil prices and declining interest rate sup-port weighed on the US currency. USD/JPY reached an intraday low at 81.57. Of course, the higher oil price is also not a present for the Japanese economy and for the yen. So, traders didn't really know which way to go. USD/JPY regained the ear-lier losses. The pair closed the day at 81.87, almost unchanged from the 81.86 close on Tuesday.

This morning, Q4 capital spending data in Japan were reported below market con-sensus. This might have negative implications for the revision of the Q4 GDP. Asian stocks are mostly in positive territory (except for China). At the moment of writing, the oil price shows some tentative signs of topping out. It is not yet clear whether this move will have strong legs. However, if US bond yields would move higher (in case of easing tensions in the Middle East or for another reason), this might give USD/JPY downside protection.

Recently we favoured range trading in the 81.00/84.50 sideways pattern. Early February, a correction bottomed out in the low 81.00 area and the cross rate reached a correction high just below 84.00 mid-February. However, the rebound did run out of steam as the rise in US interest rates slowed. An unexpectedly sharp rise in US bond yields will probably be needed to push USD/JPY beyond this range top. However, of late, US data were unable to inspire such a move. So, we expect the above men-tioned range to hold for now. Last week, USD/JPY made a setback due to declining interest rate support for the US dollar and as the yen profited from safe haven flows.

In a day-to-day perspective, the pair is still within striking distance of the 81.10/80.93 support area. We continue to doubt that risk aversion originated by tensions in the Middle East should be a lasting support for the yen. So, for now, we assume that the 81.10/80.93 range bottom will hold.

USD/JPY: capped by higher oil prices

Support is seen at 81.57 (week low), at 81.43 (Broken daily downtrend line), at 81.24/10 (Daily Boll bottom/Reaction low), at 81.93 (year low) and at 80.54/21 (Nov Low/2010 low)

Resistance comes in at 82.14/24 (Daily envelope/Week high), at 82.45/53 (LTMA/MTMA), at 82.67 (Weekly envelope) and at 83.01 (Breakdown daily).

The pair is in oversold territory

EURGBP

On Wednesday, there was again no big story to tell on EUR/GBP trading. The cross rate reached an intraday low at 84.64 after the publication of a better than expected PMI of the UK construction sector. However, the week low at 0.8460 held. Later in the session, EUR/GBP joined the rebound in EUR/USD and filled offers just above 0.8500 late in Europe/at noon in the US. The pair closed session at 0.8493 (com-pared to 0.8469 on Tuesday).

This morning the Hometrack housing survey came out at -0.2%M/M and -2.7% Y/Y. EUR/GBP tries to extend gains above the 0.8500 mark. Later today, sterling traders will keep an eye at the UK PMI of the services sector. A moderate decline from 54.5 to 53.7 is expected. However, the euro side of the story will prevail today. ECB's Trichet bringing a hawkish message at the press conference might also support this euro cross rate.

In a longer term perspective, we expect a bumpy road for the UK economy in 2011. The BoE faces a big policy dilemma. Inflation remains much too high, but the real economy will most probably require ongoing policy support. Since early January, the pair moved up and down within a range of 0.8285 and 0.8672. In the first halve of February, investors started taking into account the scenario of an early UK rate hike. This supported sterling. At the same time, the euro ceded some ground as Trichet didn't step up his inflation rhetoric at the February meeting. In the February inflation report, the BoE saw rising upside inflation risks. However, BoE governor King was less committed to a rate hike than a lot of investors had anticipated. So, there was a window of opportunity to take profit on sterling long positions. From here, we expect some consolidation in EUR/GBP. The downside in this pair has become better pro-tected. Hawkish ECB talk might continue to support this process. A first important support is coming at around 0.8355/60, while 0.8285 is the key point of reference. We expect this level to be tough to break without high profile news. The day-to-day overall euro gains might cause EUR/GBP to try to regain the 0.8529 neckline.

EUR/GBP: slightly higher on overall euro strength

Support comes in at 0.8483 (Re-action low + LTMA), at 0.8461/60 (Reaction low + MTMA/Daily Boll Midline), at 0.8445 (Break-up daily + daily envelope), at 0.8429/22 (Weekly enve-lope/reaction low hourly) and at 0.8406 (Break-up hourly).

Resistance is seen at 0.8504 (STMA), at 0.8518 (Breakdown hourly), at 0.8549/54 (Daily Boll top/Reaction high) and at 0.8688/94 (daily downtrend line/Weekly envelope + Reaction high).

The pair is in neutral territory.

News

US: ADP employment report remains strong in February

The ADP employment report showed another decent gain in private employment. In February, private employment increased by 217 000, according to the ADP report, while the consensus was looking for an increase by 180 000. The previous figure was slightly upwardly revised to 189 000 (from 187 000). Looking at the details, the service providing sector added 202 000 jobs (from 166 000) and employment rose by 15 000 in goods-producing (from 23 000); of which 20 000 in manufacturing (from 24 000). Employment rose the most in medium (104 000) and small (100 000) size firms, while large firms added only 13 000 workers. The ADP report incorporates the claims data which fell from 447 000 in the week ended January 8 to 385 000 in the week ended February 7, which might be partially explain the strong ADP data. Nevertheless, the ADP report is less pre-cise at capturing payrolls changes at large firms, possibly because they process their own payrolls. This outcome provides further evidence that the US labour market is improving, but we are still looking for confirmation of the official BLS payrolls re-port, which was lagging in the previous months and remained weak. For February, we hope to see some improvement in the BLS report too, partially due to a weather-related rebound.

EMU: PPI jumps at fastest pace since 1982

Euro zone PPI inflation surprised on the upside of expectations in January. On a monthly basis, inflation rose by 1.5% M/M to an annual level of 6.1% Y/Y, significantly above the expected 5.7% Y/Y level. This was the highest monthly jump since 1982, while the annual. The details show that inflationary pressures were led by energy (3.2% M/M), but also prices of intermediate goods (1.5% M/M), non-durable consumer goods (0.4% M/M), durable consumer goods (0.2% M/M) and capital goods (0.2% M/M) rose in Janu-ary. Excluding energy, PPI rose by 0.8% M/M. Although the data are rather outdated, they confirm that price pressures are rising sharply led by higher energy prices

About the Author

Disclaimer: This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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ECB Dilemma, Euro Peripherals Vs. Inflation

Daily Forex Fundamentals | Written by Saxo Bank | Mar 03 11 09:08 GMT

The ECB rate meeting tops the agenda Thursday as markets await the verdict of Trichet; does the ECB fight the inflationary pressures building or does it do what it can to save the peripheral countries of the Euro bloc?

ECB to ramp up hawk speak?

The Euro has been quite resilient throughout the commotion in the Middle East with various ECB members making noises about the untenable trajectory of inflation in the 17-nation region. The markets are preparing themselves for hikes as they are currently pricing in 98.5 bps (or 1%) within the next twelve months. We are still more dovish on this call though the history of the Trichet-led ECB suggests that the central bank is capable of surprise; e.g. the 25bps hike in July 2008 as the world was in (about to enter) a global recession. The question is whether the ECB will focus on the looming inflation threat or the need for low rates in various Eurozone countries, the peripherals in particular.

The recent data points to even higher inflation in the near term as commodity price gains ripple through the Eurozone econonmy. The CPI flash report suggests inflation of 2.4 percent in February on a year-on-year basis while yesterday's ´report on producer prices showed a jump in inflation there to 6.1 percent in January from 5.3 percent in December.

Today's ECB meeting also provides the council with new forecasts from the staff of economists where the new forecast of inflation is of course key at the moment.

European data today

The ECB meeting is the high point, but the revised GDP report for the fourth quarter or 2010, in which we wil have new information of the components that make up the GDP aggregate, and retail sales, will also be interesting. In particular retail sales may surprise consensus to the upside (we look for 0.6 percent month-on-month vs. a consensus forecast of 0.3 percent) as Germany was out with much better retail sales this morning. Sales at the retail level in Germany jumped 1.4 percent month-on-month in January against expectations of 0.5 percent while December's 0.3 percent decline was changed into a 0.3 percent gain.

Equity Kickoff: US employment data sparked optimism among investors

European stocks will open flat to slightly higher as Wednesday's U.S. employment data showed an improving labour market. Stocks will probably range trade ahead of Friday's non-farm figures unless we see significant changes in Eurozone GDP or retail sales.

The FTSE 100 index futures are unchanged ahead of the opening. Today's economic figures are centred around Eurozone gross domestic product and retail sales (both at 10:00 GMT). Eurozone GDP is expected to come in unchanged quarter-over-quarter from the previous period and retails sales is expected to show a 0.3 percent increase month-over-month. With Brent crude oil prices also slightly lower than USD 115 per barrel, stocks might find some support in today's session despite the continuous tensions in the Middle East.

Yesterday, the S&P 500 index rose 0.2 percent as the ADP employment change in February came in higher than expected at 217K and showed a healthy improvement, ahead of Friday's non-farm figures, and compared to the revised 189K figure for January. The initial reaction to the data was modest in the futures market but as the market opened, the ADP employment figures gave fuel to the gains in U.S. stock indices. An interestingly underlying signal in the ADP report was that small and medium sized businesses hired aggressively in February, which is good news for the U.S. economy. The Federal Reserve's Beige Book also confirmed an improving U.S. labour market but added at the same time that companies are reporting greater ability to pass on rising input costs to consumers and this could signal inflationary pressures going forward, noted the Fed.

Saxobank
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Euro Trades Near November High on ECB Rate Outlook; Yen Erases Its Gains

The euro rose toward its strongest since November against the dollar on speculation the European Central Bank will emphasize its readiness to raise interest rates as price pressures increase.

The single currency maintained gains from yesterday before a report forecast to show European retail sales increased and before U.S. figures tomorrow on non-farm payrolls. The yen erased gains versus the euro as reports the Arab League was studying a peace plan for Libya curbed demand for Japan’s currency as a refuge.

“The ECB must act to curb inflation given they already have sustained growth -- the U.S. doesn’t have that,” said Kurt Magnus, executive director of currency sales at Nomura Holdings Inc. in Sydney. “If payrolls disappoint in the U.S. we could see euro through $1.40 by Friday.”

The euro traded at $1.3867 as of 7:58 a.m. in London from $1.3866 in New York yesterday, when it reached $1.3891, the strongest since Nov. 9. Europe’s common currency was at 113.55 yen from 113.52 yen. The greenback fell as low as 81.77 yen before buying 81.89 yen from 81.87. It yesterday declined to 81.57, the weakest since Feb. 4.

The ECB, which aims to keep annual gains in consumer prices to just below 2 percent, will publish inflation projections for 2011 and 2012 today after its monthly policy meeting. Council member Yves Mersch said Feb. 21 the central bank may raise its 2011 inflation forecast to more than 2 percent from 1.8 percent. Policy makers have kept the benchmark interest rate at 1 percent since May 2009.

European Inflation

The euro was supported by “speculation the ECB will sharpen its anti-inflation rhetoric,” John Kyriakopoulos, head of currency strategy at National Australia Bank Ltd. in Sydney, wrote today in a note to clients.

Retail sales in the bloc rose 0.3 percent in January after falling 0.4 percent the prior month, according to a Bloomberg survey of economists before today’s European Union statistics office report. An index of services and manufacturing industries in the euro area rose to 58.4 from 57, a separate survey showed ahead of the Markit Economics data today. Figures above 50 indicate growth.

U.S. employers added 195,000 jobs last month, the most since May 2010, according to a Bloomberg News survey of economists before tomorrow’s Labor Department report.

Bernanke signaled in congressional testimony he will keep the Fed on course to finish $600 billion of Treasury purchases through June.

Bernanke Comments

Asked at a House Financial Services Committee hearing yesterday what conditions would warrant a third round of so- called quantitative easing, Bernanke said “what we’d like to see is a sustainable recovery. We don’t want to see the economy falling back into a double dip or to a stall-out.”

The Fed has kept its benchmark interest rate at zero to 0.25 percent since December 2008.

The yen erased gains after Al Arabiya TV cited the Arab League secretary general as saying the group is studying a plan proposed by Venezuelan President Hugo Chavez to end the violence in Libya.

Japan’s currency earlier climbed against most of its major peers as crude oil held above $100 a barrel. A U.S. government report showed crude stockpiles unexpectedly dropped last week, while fighting in Libya renewed concern that supply disruptions may spread to the Middle East.

Oil Prices

Nouriel Roubini, an economist who predicted the credit- market collapse, said yesterday an expansion of troubles in the Mideast could push oil prices as high as $140 to $150 per barrel, triggering a double-dip recession in parts of Europe.

“We could still see some more significant risk aversion,” said Jonathan Cavenagh, a currency strategist in Singapore at Westpac Banking Corp, Australia’s second-largest lender. “The Middle East situation still remains very uncertain.”

The yen typically strengthens in times of political, financial and economic turmoil. Japan’s trade surplus makes the currency attractive because it means the nation doesn’t have to rely on overseas lenders.

To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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Asian Stocks Gain as Improving U.S. Jobs Data Offsets Middle East Unrest

Japanese stock futures rose as signs of a strengthening U.S. job market overshadowed concern that political unrest in the Middle East and North Africa will drive energy costs higher. Photographer: Tomohiro Ohsumi/Bloomberg

Asian stocks rose as signs of a strengthening U.S. job market overshadowed concern that political unrest in the Middle East and North Africa will drive energy costs higher.

Honda Motor Co., Japan’s second-biggest carmaker that gets 84 percent of its revenue abroad, advanced 0.6 percent in Tokyo. BHP Billiton Ltd. (BHP), Australia’s biggest oil producer, rose 0.5 percent and Woodside Petroleum Ltd. (WPL) gained 1.4 percent in Sydney as crude in New York rose for a third day to near a 29-month high. BlueScope Steel Ltd. lost 2 percent amid concern the Australian government’s carbon-pricing plans may force a shutdown of its Port Kembla steelworks.

“The employment data showed a better-than-expected improvement and we got confirmation of upward momentum in the U.S. economy,” said Mitsushige Akino, who oversees about $450 million in Tokyo at Ichiyoshi Investment Management Co. “It’s possible turmoil in the Middle East and North Africa will spread to Saudi Arabia and Iran, so uncertainty still remains.”

The MSCI Asia Pacific Index rose 0.2 percent to 137.72 at 9:31 a.m. in Tokyo, with almost four stocks rising for each that fell. The gauge dropped 2.1 percent last week as political unrest swept the Middle East and North Africa.

Japan’s Nikkei 225 (NKY) Stock Average gained 0.5 percent. Australia’s S&P/ASX 200 Index was little changed, while South Korea’s Kospi Index advanced 1 percent.

U.S. Jobs

Futures on the Standard & Poor’s 500 Index added 0.1 percent today. The index climbed 0.2 percent yesterday in New York after a report from ADP Employer Services showed U.S. employment increased by 217,000 in February, compared with a median estimate of 180,000 in the Bloomberg News survey. The Federal Reserve separately said the labor market improved throughout the U.S. early this year, driven by increasing retail sales and “solid growth” in manufacturing.

The MSCI Asia Pacific Index slid 0.2 percent this year through yesterday, compared with gains of 4 percent by the S&P 500 and 2.5 percent by the Stoxx Europe 600 Index. Stocks in the Asian benchmark are valued at 14 times estimated earnings on average, compared with 13.6 times for the S&P 500 and 11.2 times for the Stoxx 600.

Crude for April delivery climbed 2.6 percent to $102.23 a barrel in New York yesterday, the highest settlement since Sept. 26, 2008, on concern that the unrest curbing exports from Libya will spread to other countries in the region. Today, crude rose as much as 0.7 percent.

Libyan forces loyal to Muammar Qaddafi counter-attacked rebels in the coastal region where much of the country’s crude is refined or shipped abroad, according to a local oil official. And Qaddafi, speaking on state television, said his government retains control of oil fields though output has fallen to “the lowest level” after workers fled.

To contact the reporters on this story: Shani Raja in Sydney at sraja4@bloomberg.net. Satoshi Kawano in Tokyo at skawano1@bloomberg.net.

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

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Crude Drops From 29 Month High in New York to Trade Below $102 a Barrel

Oil dropped from the highest close in 29 months in electronic trading on the New York Mercantile Exchange. April futures fell 67 cents to $101.56 a barrel at 1:57 p.m. in Singapore. The contract earlier rose as much as 71 cents to $102.94 a barrel.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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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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