U.S. Regulators Seek Trace-like Reporting for OTC Derivatives

By Matthew Leising

May 14 (Bloomberg) -- U.S. regulators may impose the same price reporting and transparency requirements on over-the- counter derivatives that reduced bank profits by almost half in the corporate bond market when the Trace system was adopted seven years ago.

“I think it’s something we’ll look at very closely as a potential model,” Securities and Exchange Chairwoman Mary Schapiro said yesterday at a news conference in Washington, in which regulators laid out potential structural changes to improve policing of the $684 trillion OTC derivatives market.

Trace, the bond-price reporting system of the Financial Industry Regulatory Authority, gives anyone with an Internet connection access to trading data for corporate bonds. The system, in full operation since February 2005, reduced the difference in prices that banks charge to buy and sell bonds by almost half.

Treasury Secretary Timothy Geithner, Schapiro and Michael Dunn, the acting chairman of the Commodity Futures Trading Commission, called for increased oversight of over-the-counter derivatives to reduce risk to the financial system. Lax regulation contributed to the failures last year of Lehman Brothers Holdings Inc. and American International Group Inc., leading to the seizure of credit markets and causing more than $1.4 trillion in writedowns amid the worst financial crisis since the Great Depression.

‘Accept the Reality’

“Dealers have to accept the reality that this business -- where margins were compressing already -- is getting less profitable,” said Stephen Bruel, research director for securities and capital markets for Tower Group, a research and advisory firm in Needham, Massachusetts. “A lot of the action you’ll see is to contain the size and scope and profitability of this market.”

The bid-ask spread on investment-grade corporate bonds was about seven basis points before Trace was implemented and about four basis points immediately after, according to a study by Kumar Venkataraman, an associate finance professor at Southern Methodist University’s Cox School of Business in Dallas, published in the Journal of Financial Economics. A basis point is 0.01 percentage point.

Schapiro helped developed the Trace system in 2002 when she was president of the NASD, which was consolidated into Finra. Schapiro, Geithner and Dunn pledged at the news conference to work together on changes in the market.

‘Significant Gaps’

“Significant gaps in the basic framework of oversight over critical institutions” helped cause the financial crisis, Geithner told reporters. “A series of comprehensive reforms to create a stronger system, less vulnerable to crisis, with stronger protections for consumers and investors” will be hashed out with Congress, he said.

Part of his plan is to push banks to increase price transparency by adopting electronic trading systems for over- the-counter derivatives. Over-the-counter derivatives transactions are now typically conducted over the phone between banks and customers.

Geithner sent a proposal to Congressional leaders listing four main objectives: to protect against systemic risk by creating a more resilient market, improve efficiency and transparency, prevent manipulation and fraud and reduce risks to less-sophisticated investors, Geithner said.

“Some of the U.S. authorities have said we were pretty close to a meltdown and I actually think listed marketplaces with multilateral clearing are part of the answer to that question,” said Thomas Kloet, chief executive officer of TMX Group Inc., owner of Canada’s main equities and derivatives market. “I hope authorities don’t let go of that. I think they have to address that.”

Shares Rise

Shares of CME Group Inc. and Intercontinental Exchange Inc. rose yesterday after Bloomberg News reported Geithner’s plan. Chicago-based CME Group, the world’s largest futures exchange, soared $15.62, or 6 percent, to $274.10 as of 4 p.m. in Nasdaq Stock Market trading. Intercontinental of Atlanta, the second- largest U.S. futures market, rose as much as 5.2 percent, before closing up 9 cents to $96.59 on the New York Stock Exchange.

“This is the best Wall Street can hope for,” said James Cox, a securities law professor at Duke University in Durham, North Carolina. “This will allow them to stay in business and still make money. It also cuts off what potentially would have been more regulation.”

Once a Day

Only about 10 percent of bank customers use electronic systems to trade over-the-counter derivatives, according to Paul Zubulake, a senior analyst with Boston-based Aite Group. That compares with about 90 percent of inter-bank trades that are done electronically through inter-dealer brokers such as London- based ICAP Plc or Dealerweb, according to Zubulake.

Prices for indexes of credit-default swaps, contracts used to hedge against or speculate on corporate debt, have been made public once a day since March by Markit Group Ltd. and Intercontinental Exchange, the first company to guarantee the contracts with a clearinghouse. Prices for other over-the- counter contracts, such as interest-rate swaps, are not widely available.

The need for transparency in the over-the-counter derivatives market was stressed by Theo Lubke, a senior vice president at the Federal Reserve Bank of New York, last month at a derivatives industry conference in Beijing.

More Information

Lubke, who was appointed in 2007 to oversee OTC derivatives by Geithner when he was president of the New York Fed, said the credit swap prices now available are not sufficient, according to a transcript of his comments.

Because investors don’t know when trades took place or how many occurred, more information is needed, he said April 23 at the International Swaps and Derivatives Association general meeting in Beijing.

“That window of opportunity to make changes as opposed to having those changes brought to the market by external forces is narrowing,” he said. “It is in market participants’ interest as well as the interest of regulators to see continued rapid movement.”

Derivatives are contracts whose values are tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

“ISDA welcomes the recognition of industry measures to safeguard smooth functioning of privately negotiated derivatives,” Robert Pickel, chief executive officer of ISDA, said in an e-mailed statement.

Lubke said at the ISDA conference that the major banks’ control of the over-the-counter derivatives market must end by allowing hedge funds and other investors more input into how market decisions are made.

“It is simply unacceptable in today’s environment that the design and structure of the OTC derivatives market can be controlled by a handful of large dealers,” Lubke said. “There is opacity in the OTC market that doesn’t have commensurate public policy benefits,” he said. “This is not something that can continue.”

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net

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TMX Says Derivatives on Exchanges May Align Buffett, Greenspan

By Doug Alexander

May 14 (Bloomberg) -- Over-the-counter derivatives contracts should clear on exchanges to improve transparency and reduce risk in the financial system, the head of Canada’s main bourse said.

“Almost all of the problems that relate to the economic crisis” stem from OTC derivatives, TMX Group Inc. Chief Executive Officer Thomas Kloet said in an interview yesterday in New York. “Listed derivatives are actually part of the solution, not part of the crisis.”

Kloet joins U.S. Treasury Secretary Timothy Geithner in calling for over-the-counter derivatives markets to be moved onto regulated exchanges and trading platforms. Transactions in this $684 trillion market are now typically conducted over the phone between banks and customers. Toronto-based TMX gets about 16 percent of its revenue from derivatives trading.

The shift may also create common ground between Warren Buffett and Alan Greenspan, Kloet, 51, said. Buffett, Berkshire Hathaway Inc.’s chairman and CEO, once called derivatives “financial weapons of mass destruction.”

In his annual letter to shareholders released in February he said that increased transparency won’t solve the problems derivatives pose. Carrie Kizer, Buffett’s assistant, didn’t immediately respond to an e-mail seeking comment.

“We think the derivative markets as they evolved have done more public damage than public benefit,” said Berkshire Vice Chairman Charles Munger, in a Bloomberg Television interview earlier this month.

Greenspan, the former U.S. Federal Reserve chairman, said for years that derivatives -- contracts used to bet on everything from bond prices to weather patterns -- reduce risk.

Closes Gap

“I actually do” think it bridges the gap in the views held by Buffett and Greenspan because over-the-counter derivatives cleared through exchanges are less risky, said Kloet.

Bank trading in unregulated markets such as over-the- counter derivatives was singled out by Geithner yesterday as he promised a more conservative oversight regime.

“The regulatory authorities have a unique window of opportunity to clean this mess up,” Kloet said. “I think the U.S. Fed very quietly gets it.”

TMX is in talks with the Bank of Canada to allow it to clear over-the-counter contracts such as interest-rate repurchase agreements and interest-rate swaps on its own platform, Kloet said. TMX operates the Toronto Stock Exchange, Canada’s main equities market, and the country’s derivatives market in Montreal.

Rates Swaps

“It’s a natural edge onto our fixed-income derivative markets,” Kloet said.

TMX may provide clearing of repurchase agreements within the year, followed by interest-rate swap contracts by 2011, he said. TMX is unveiling a new clearing system by the end of this month, which will allow it to handle these contracts, Kloet said.

The move to exchange-traded contracts would add transparency, increase liquidity and may help avoid the problems sparked by the subprime-mortgage collapse in the U.S., said John Aiken, a financial services analyst at Dundee Securities Corp. in Toronto.

“From a TMX standpoint, it’s definitely a positive because you’re putting one more product through the system,” Aiken said.

U.S. Expansion

TMX may also develop a new exchange in the U.S., modeled after the Toronto-based TSX Venture Exchange, a junior marketplace for 2,269 companies. This would allow TMX to attract more listings from U.S. companies, while adding more trading from foreign investors, he said.

“That kind of approach would make sense in an American exchange,” Kloet said. “That’s something we’ll continue to look at.”

Kloet expects to see more consolidation among global stock exchanges and that his bourse may expand through acquisitions.

“We would consider anything that adds a strategic niche to the organization and helps us with our overall strategy,” Kloet said in an interview on Bloomberg Television.

TMX has diversified from equity trading in the past year after buying a 20 percent stake in London Stock Exchange Group Plc’s derivatives market, acquiring majority ownership in Boston Options Exchange and spending about C$1.1 billion ($940 million) for the Montreal Exchange.

Kloet, who took over as CEO 10 months ago, said the investment with the London bourse isn’t necessarily the first step toward a merger of the two companies.

“We’re going to walk before we run,” he said. “Getting big just to get big doesn’t make a whole lot of sense.”

“The institution’s not for sale and not actively on the prowl” for mergers, he said.

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net.

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Harvard Buys Korea, Brazil ETFs as Emerging Markets Beat U.S.

By Gillian Wee

May 14 (Bloomberg) -- Harvard University, the richest U.S. college, raised its holdings of exchange-traded funds that track stocks in Brazil, China and Mexico in the first quarter as emerging markets outperformed U.S. equities.

The biggest new purchase reported by Harvard Management Co., which oversees the school’s $28.8 billion endowment, was 1.74 million shares of iShares MSCI South Korea Index Fund valued at $49 million, according to a filing yesterday with the U.S. Securities and Exchange Commission. Its largest stake was 8.28 million shares of iShares MSCI Emerging Markets Index valued at $205 million.

The quarterly 13F filing, which doesn’t reflect all of Harvard’s equities, offers a glimpse of how the Cambridge, Massachusetts, school is navigating the worst financial crisis since the Great Depression. The MSCI Emerging Market Index rose 0.52 percent in the quarter, while the Standard & Poor’s 500 Index, a benchmark of U.S. stocks, fell 12 percent.

Harvard Management Co. reported buying 61 U.S. listed securities in the quarter and selling off 28, leaving 90 issues. The value of its holdings rose 35 percent to $771 million.

Harvard’s endowment fell 22 percent from July 1 through Oct. 31, and is headed for its worst performance in at least four decades. The fund has been run since July by Jane Mendillo, former chief investment officer of nearby Wellesley College.

The report doesn’t show the school’s investments in stocks outside of the U.S. or in hedge funds, private equity, commodities and real estate. In addition, more than half of the endowment is overseen by outside firms. John Longbrake, a Harvard spokesman, didn’t respond to an e-mail seeking comment.

Vanguard Emerging Markets

Harvard added to its ETF holdings in the quarter by buying 2.27 million shares of Vanguard Emerging Markets, as well as 1.5 million shares of iShares MSCI Brazil Index Fund and 1.14 million iShares FTSE/Xinhua China 25 Index Fund.

Exchange-traded funds typically are designed to mimic the performance of market indexes. Unlike mutual funds, whose shares are priced once daily after the end of each trading session, ETFs are listed on an exchange where shares are bought and sold throughout the day like stocks.

Harvard’s new purchases during the quarter include 1.47 million Class A shares of News Corp., the media company run by Rupert Murdoch, and 1 million shares of wireless phone company Sprint Nextel Corp. The school sold all 722,000 shares of GenCorp Inc., a manufacturer of aerospace and defense products; 605,000 shares of Heckmann Corp., which sells bottled water in China; and 575,000 shares of Columbus Acquisition Corp., a company set up to make acquisitions.

Harvard, projecting an endowment loss of as much as 30 percent, has frozen hiring and salaries and fired staff. Harvard raised cash by issuing $2.5 billion in bonds in December after failing to sell $1.5 billion in private-equity stakes.

Harvard Management in February said it planned to fire as many as 50 workers, including investment professionals, as part of an effort by Mendillo to “rebalance and reengineer the organization,” Longbrake said at the time.

To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net;

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MSCI Boosts Taiwan Companies; Argentina Downgraded

By Patrick Rial and Reinie Booysen

May 14 (Bloomberg) -- MSCI Inc. boosted the number of Taiwanese companies in its indexes, while Argentina’s equities were downgraded following a semi-annual review. Maxim Integrated Products Inc. is among the three largest additions to the MSCI World Index.

The MSCI Taiwan Index will see 22 companies added and one deleted. The additions will result in $687 million in capital inflows to Taiwan, according to estimates by Merrill Lynch & Co., the most of any country. Argentina was downgraded from the Emerging Markets Indices to the Frontier Markets Index.

“The only real surprise was the magnitude of changes and additions for Taiwan,” said Chris Lobello, a risk and trading strategist at CLSA Ltd. Argentina’s cut is “a message from MSCI that the trading environment is just too difficult.”

Taiwan’s Taiex index has soared 39 percent this year, the second-best performance in Asia behind China, on optimism improved relations between the two countries will boost investments.

MSCI’s changes may trigger $687 million of inflows from fund managers who use the indexes, according to Merrill Lynch & Co. estimates. The Merval Index has climbed 35 percent in Argentina this year, following a 50 percent slide in 2008 after the South American nation’s government nationalized pension funds with stock investments.

Weight Increase

The weighting of Taiwan stocks in the MSCI Asia ex-Japan Index will likely rise to 17.9 percent from 16.9 percent, Lobello wrote in a report. He said stocks getting added to the benchmarks typically rise in the period up to the change and fall afterward.

U.S. companies Maxim, Crown Holdings Inc. and Myriad Genetics Inc. will be the three largest additions in the MSCI World, a dollar-based, free-float market weighted benchmark of stocks in 23 developed nations, MSCI said in a statement dated yesterday. The changes will occur after the May 29 close.

Maxim, a maker of microchips for laptop computers, has climbed 19 percent this year, outpacing a 2.1 percent decline by the Standard & Poor’s 500 Index. Aluminum can producer Crown has added 18 percent, while cancer test-maker Myriad lost 0.7 percent.

Global Contraction

The gauge has slumped 40 percent in the past year amid what the International Monetary Fund is predicting to be the first contraction in global growth since the end of World War II.

MSCI provides a variety of indexes divided into countries, industry groups, value metrics and other categories. The company estimates more than $3 trillion in funds are benchmarked against their indexes globally.

Changes to the MSCI indexes can cause shares that are chosen for inclusion to advance and those slated for deletion to drop as passively managed funds designed to mirror the benchmarks buy and sell stocks in accordance with those changes.

Hong Kong-listed Kingboard Chemical Holdings Ltd. and Renhe Commercial Holdings Co. and South Korea’s NCSoft Corp. are the three largest inclusions to the MSCI Emerging Markets Index.

Wintek Corp., a supplier of flat-panel displays for Apple Inc., and Farglory Land Development Co., Taiwan’s largest developer, both rose by their daily limit of 6.9 percent in Taipei after being added to MSCI’s indexes. Argentina’s Banco Macro SA, which appointed a government director to its board in April, climbed 38 percent this month prior to the announcement it will be deleted from MSCI’s gauges.

Trinidad and Tobago was added to the Frontier Markets Index.

Noble Energy Inc., TD Ameritrade Holding Corp. and Autozone Inc. were the biggest additions to the MSCI U.S. Large Cap 300 Index.

To contact the reporters on this story: Reinie Booysen at rbooysen@bloomberg.net; Patrick Rial in Tokyo at prial@bloomberg.net.

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CommVault, Forest City, MBIA, Whole Foods: U.S. Equity Preview

By Lu Wang

May 14 (Bloomberg) -- Shares of the following companies may have unusual moves in U.S. trading. Stock symbols are in parentheses.

Clearwire Corp. (CLWR US): The U.S. provider of high-speed WiMax mobile services reported a narrower first-quarter loss after adding customers in new markets.

Coca-Cola Enterprises Inc. (CCE US): The world’s largest soft-drink bottler was added to Goldman Sachs Group Inc.’s “conviction buy list” on expectation growing soda demand and falling commodity prices will bolster earnings.

CommVault Systems Inc. (CVLT US): The supplier of data- management software reported earnings of 9 cents a share in the fiscal fourth quarter, missing the average analyst estimate by 40 percent.

Forest City Enterprises Inc. (FCE/A US): The developer of New York’s $4.2 billion Atlantic Yards project said it plans to sell 40 million shares in a public offering and it’s in talks with lenders to extend its $750 million revolving credit line, which matures next March.

MBIA Inc. (MBI US): The biggest bond insurer was sued by Bank of America Corp., JPMorgan Chas & Co., UBS AG and 15 more of the world’s largest financial companies, which said the split of MBIA’s guarantee business illegally cut their odds of getting paid on policies.

Whole Foods Markets Inc. (WFMI US): The largest natural- goods grocer in the U.S. posted an adjusted second-quarter profit of 25 cents a share, exceeding the average analyst estimate by 34 percent.

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

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Japanese Stocks Slump on U.S. Retail Sales, Yen; Inpex Drops

By Masaki Kondo

May 14 (Bloomberg) -- Japanese stocks fell the most this month after U.S. retail sales unexpectedly dropped in April, clouding the earnings outlook for makers of cars and electronics.

Toyota Motor Corp., the world’s biggest automaker by market value, retreated 3 percent. Sony Corp., which gets a quarter of its sales from the U.S., declined 4.9 percent after the yen strengthened. Inpex Corp., Japan’s largest oil and gas explorer, sank 5.1 percent after it forecast a drop in full-year profit and oil prices slid. Nippon Telegraph & Telephone Corp. surged 4.1 percent after saying it will raise its dividend.

The Nikkei 225 Stock Average declined 208.02, or 2.2 percent, to 9,132.47 as of 9:42 a.m. in Tokyo, the steepest drop since April 28. The broader Topix index fell 19.47, or 2.2 percent, to 869.28. The Nikkei traded at 130 times estimated profit for its member companies yesterday.

“The U.S. retail report stole confidence from investors that the global economy was headed for a recovery,” said Mitsushige Akino, who oversees about $629 million at Ichiyoshi Investment Management Co. in Tokyo. “Current valuations are prohibitive unless you believe companies will raise annual forecasts later this year.”

The Nikkei gained 5.4 percent this year through yesterday, and companies on the measure are estimated to pay dividends equivalent to 1.68 percent of average share prices, according to gauge compiler Nikkei Inc. That compares to the 1.45 percent return on 10-year Japanese government bonds.

In New York, the Standard & Poor’s 500 Index slid 2.7 percent as the Commerce Department reported a 0.4 percent decline in retail sales last month. Economists had estimated the number would be unchanged.

Yen, Oil

Toyota lost 3 percent to 3,550 yen, while closest rival Honda Motor Co. dropped 3.4 percent to 2,730 yen. Sony, the world’s No. 2 electronics maker, sank 4.9 percent to 2,450 yen.

The yen appreciated against the dollar to as much as 95.14 today, the strongest level since March 20, from 96.47 at the close of stock trading in Tokyo yesterday. Japanese businesses expect the currency to average 97.18 this fiscal year, according the Bank of Japan’s quarterly Tankan survey.

The U.S. sales report fanned concern falling consumer spending will curb demand for resources. Crude oil for June delivery lost 1.4 percent to $58.02 a barrel in New York, the steepest drop since April 27. Copper futures fell 2.6 percent.

Lower crude prices prompted Inpex to forecast a 61 percent tumble in net income this fiscal year, a filing with the exchange showed yesterday. Inpex fell 5.1 percent to 689,000 yen.

MSCI Index

Mitsubishi Corp., Japan’s biggest trading company by value, declined 4.9 percent to 1,642 yen, and rival Mitsui & Co. lost 4.5 percent to 1,126 yen. Both companies derive more than half their earnings from commodities.

NEC Electronics Corp., the fourth-largest chipmaker in Japan, decreased 11 percent to 921 yen. Rinnai Corp., which makes gas appliances, soared 6.6 percent to 4,190 yen.

MSCI Inc. said yesterday NEC Electronics, Takefuji Corp., Alps Electric Co. and Haseko Corp. will be removed from its MSCI Japan Index as of the close on May 29. Rinnai, GS Yuasa Corp. and McDonald’s Holdings Co. Japan Ltd. will be added, MSCI said. Changes to indexes can alter share prices as passively managed funds buy and sell stocks to mirror the benchmarks.

NTT, Japan’s largest telecommunications provider, surged 4.1 percent to 4,050 yen after saying it plans to raise its dividend by 9.1 percent to 120 yen ($1.26). That will bring the stock’s dividend yield to 3.1 percent based on yesterday’s close.

Nikkei futures expiring in June retreated 2.4 percent to 9,140 in Osaka and slumped 2.3 percent to 9,145 in Singapore.

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

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Maxim Added to MSCI World Index; Argentina Downgraded

By Reinie Booysen and Patrick Rial

May 14 (Bloomberg) -- MSCI Inc. said shares of U.S.-based Maxim Integrated Products Inc. are among the three largest additions to the MSCI World Index, while Argentina’s equities were downgraded.

Maxim, Crown Holdings Inc. and Myriad Genetics Inc. will be the three largest additions in the MSCI World, a dollar-based benchmark of stocks in 23 developed nations, MSCI said in a statement today. The changes will occur after the May 29 close.

The gauge has slumped 40 percent in the past year amid what the International Monetary Fund is predicting to be the first contraction in global growth since the end of World War II.

MSCI provides a variety of indexes divided into countries, industry groups, value metrics and other categories. The company estimates over $3 trillion in funds are benchmarked against their indexes globally.

Changes to the MSCI indexes can cause shares that are chosen for inclusion to advance, while those slated for deletion to drop as passively managed funds designed to mirror the benchmarks buy and sell stocks in accordance with those changes.

Hong Kong-listed Kingboard Chemical Holdings Ltd. and Renhe Commercial Holdings Co. and South Korea’s NCSoft Corp. are the three largest inclusions to the MSCI Emerging Markets Index. NCSoft gained 1.4 percent even as the nation’s benchmark Kospi index lost 1.3 percent.

Argentina was downgraded from the Emerging Markets Indices to the Frontier Markets Index. Trinidad and Tobago was added to the Frontier Markets Index.

Noble Energy Inc., TD Ameritrade Holding Corp. and Autozone Inc. were the biggest additions to the MSCI U.S. Large Cap 300 Index.

To contact the reporters on this story: Reinie Booysen at rbooysen@bloomberg.net; Patrick Rial in Tokyo at prial@bloomberg.net.

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U.S.: Consumer Spending Disappoints, Again

Daily Forex Fundamentals | Written by TD Bank Financial Group | May 13 09 14:11 GMT |

U.S. retail sales declined by 0.4% M/M in April. Excluding autos, sales were also weak, falling by 0.5% M/M. On balance, the report was fairly disappointing and suggests that U.S. consumers are shying away from malls. U.S. retail sales declined for the second straight month in April, falling by 0.4% M/M, following the 1.3% M/M drop the month before (previously reported as -1.1% M/ M). This was noticeably worse than the market consensus for a flat print on the month. Excluding autos, sales were down 0.5% M/M, and were also softer than the market expectations for a 0.3% M/M rise. Core retail sales, which net out sales of autos and gasoline, declined by a more modest 0.3% M/M during the month. On a year ago basis, sales continue to be quite poor, as total retail sales have declined by a fairly big 10.1% since April last year. This is the eighth straight month in which sales have fallen below their year-ago level. The details of the report were quite weak, as the declines in sales were fairly broadly-based, with 8 of 13 spending categories down. There were big drops in the sale of electronics (down 2.8% M/M), gasoline (down 2.3% M/M), food (down 1.0% M/M) and at department stores (down 0.2% M/M). On the other hand, sales of health and personal care products (up 0.4% M/M), building materials (up 0.3% M/M), and motor vehicles (up 0.2% M/M) were higher. The crux of this report appears to be that the positive momentum seen in U.S. consumer spending in the first few months of this year has stalled. Indeed, despite the resurgence in the level of consumer confidence over the past few months, U.S. consumer spending seems to be buckling under the weight of the worsening labour market conditions and weakening economy. Nevertheless, we remain hopeful that the impact of rising equity markets plus the massive fiscal stimulus package, which is likely to start kicking in this quarter, will breathe new life into personal expenditures in the near term, thereby providing some much needed boost to U.S. economic activity. TD Bank Financial Group The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

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Retail Disappointment Undermines Euro

Daily Forex Fundamentals | Written by Investica | May 13 09 13:53 GMT |

Conditions within the credit markets have continued to ease and this will tend to lessen defensive demand for the US currency. The dollar is also showing some greater vulnerability over the fears of a medium-term credit-rating downgrade due to the escalating debt burden. These fears should certainly not be ignored, but the impact will be offset by a lack of attractive alternatives. Markets have also priced in a substantial amount of good news and any sustained setback for global equities would underpin the dollar. Overall, the Euro is liable to weaken to the 1.3420 region before finding fresh support. The US trade deficit was slightly lower than expected with an increase to US$27.6bn for March from a revised US$26.1bn the previous month. There was a further decline in trade volumes for the eight successive month with exports declining by 17.4% over the year while imports registering a sharp 27%.annual decline. The US federal budget recorded a deficit of US$20.9bn for April compared with a US$159.3bn surplus for the equivalent month last year. This was the first deficit for April since 1983, reinforcing the severe underlying deterioration seen over the past year and the need for huge debt issuance over the coming year. There has been further speculation that the US AAA credit rating could be at risk and the budget data will tend to reinforce these fears. The Euro re-challenged levels above 1.37 in early Europe on Wednesday, but was again unable to sustain the move with risk appetite dampened by a reported 0.4% decline in April US retail sales which created fresh doubts over the US economic conditions. Investica http://www.investica.co.uk Disclaimer: Investica's market analysis is not investment advice and must not be taken as recommending particular market positions. Investica can take no responsibility for any actions taken by investors.

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FX Thoughts for the Day

Daily Forex Technicals | Written by Kshitij Consultancy Services | May 13 09 12:20 GMT |

USD-CHF @ 1.1053/55...Ranged: 1.0980 - 1.1130 R: 1.1073 / 1.1122 / 1.1184 S: 1.0980 / 1.0913 / 1.0750 Dollar-Swiss was once again Supported near the 1.0980 level as the pair dipped during the day towards the bottom of the range (1.0980-1.1130) and has since bounced towards 1.1067. The view continues to be in the range mentioned earlier. So buy low (near the bottom of the range) sell high (near the top of the range). Overall trend remains bearish with possiblility of the SUpport at 1.0980 being broken past over the next few sessions if not immediately. If it manages to break past this Support during the day, then there's the Projected Max Low for the day at 1.0913 Cable GBP-USD @ 1.5137/40...Tests Max Low for day R: 1.5207 / 1.5259 / 1.5334 S: 1.5137-27 / 1.5050 / 1.4977 Cable is seeing some sideways consolidation as the Resistance near 1.53 is managing to pressure the pair down. It has been traversing on the back of the 8-DMA at 1.5129 presently which has held over the last few days. Both these levels have been keeping the pair ranged between 1.51-1.53 over the last few days with sudden bouts of "not-so-huge" spikes on either side. Is this range at jeopardy? May be, but till the time it does not breach the 21-DMA (1.4887), we would believe that the uptrend is not over yet and there could still be chances of 1.55 over the next few days. It is presently resting on the Projected Max Low for the day. We shall have to see if it holds, else it might fall further towards 1.50 during the US session. Aussie AUD-USD @ 0.7612/22...Range: 0.7560-0.7740 R: 0.7740-52 / 0.7935 / 0.8013 S: 0.7576-51 / 0.7501 / 0.7418-15 Aussie dipped sharply during the day as it allowed us to enter into the Long at 0.7645. It is likely to now find Support near 0.7560 which is the 61.8% retracement of the fall from 0.8524 (22 Sep 08) to 0.6007 (27 Oct 08). The range of 0.7560-0.7740 looks good for the next few sessions, if not days. One may buy towards the lower end of the range and sell towards the upper end of the range. A break on downside is likely to next target 0.7415 and 0.7935 on the upside. Holding: AUD 10K Long at 0.7645, SL 0.7530, TP 0.7730 (down from 0.7750) Kshitij Consultancy Service http://www.fxthoughts.com Legal disclaimer and risk disclosure These views/ forecasts/ suggestions, though proferred with the best of intentions, are based on our reading of the market at the time of writing. They are subject to change without notice.Though the information sources are believed to be reliable, the information is not guaranteed for accuracy. Those acting in the market on the basis of these are themselves responsibly for any profits or losses that might occur, without recourse to us. World financial markets, and especially the Foreign Exchange markets, are inherently risky and it is assumed that those who trade these markets are fully aware of the risk of real loss involved.

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Retail Sales in U.S. Probably Steadied as Confidence Climbed

By Courtney Schlisserman

May 13 (Bloomberg) -- Retail sales in the U.S. probably steadied in April as consumers gained confidence the economic slump may be easing, economists said before reports today.

Purchases were unchanged after dropping 1.2 percent in March, according to the median estimate in a Bloomberg News survey. Excluding automobiles, sales probably rose 0.2 percent, after a 1 percent decrease in March, the survey showed.

Lower borrowing costs, a rebound in stocks and smaller job losses last month led to the biggest jump in sentiment in three years, making it more likely spending will see sustained gains in the second half of 2009. Even so, an unemployment rate that is projected to remain elevated for years may make for a subdued economic recovery.

“We probably have seen the very worst in terms of massive declines in retail sales and we’re probably in this period of showing very little growth,” said Michael Gregory, a senior economist at BMO Capital Markets.

The Commerce Department’s report is due at 8:30 a.m. in Washington. Sales estimates ranged from a drop of 0.8 percent to an increase of 1.1 percent.

Other reports today may show the cost of goods from abroad climbed in April for a second month as fuel prices rebounded, and companies continued to trim inventories in March, according to economists surveyed.

Auto Slump

Car dealers were among the retailers that struggled last month. Autos sales dropped to a 9.3 million annual pace from a 9.9 million rate in March.

Chrysler LLC, whose U.S. sales tumbled 48 percent in April from the same month last year as bankruptcy neared, said last week it will offer rebates of as much as $6,000 to boost demand. The incentives began May 6 and end June 1.

Even so, fewer job losses and gains in stocks are making Americans less pessimistic, helping sales at other retailers to stabilize. Consumer confidence jumped by the most since 2005 in April, according to a report last month by the Conference Board, a New York-based private research group.

Payrolls fell by 539,000 workers last month, the smallest drop since October, the Labor Department reported last week. Still, the jobless rate climbed to 8.9 percent, the highest level since 1983, and economists surveyed this month project unemployment will average 9.6 percent in 2010.

Kohl’s, Wal-Mart

Kohl’s Corp. and BJ’s Wholesale Club Inc. were among retailers last week that said first-quarter preliminary earnings exceeded their forecasts and April sales signaled shoppers are returning to stores. Wal-Mart Stores Inc., the world’s largest retailer, said sales at U.S. stores open at least a year rose 5 percent, also beating estimates.

April same-store sales rose 0.7 percent, the first gain since September, according to a report last week from the International Council of Shopping Centers, the New York-based trade group that measures sales at about 40 retail chains.

“We’re still working our way through the slowdown,” said Mike Niemira, chief economist at the ICSC. “I think it will get better as the year progresses. The month of May will still be tough and I suspect by the summer that things will be a little broader in terms of the improvement.”

                        Bloomberg Survey

================================================================
                           Import   Retail   Retail Business
                           Prices    Sales ex-autos     Inv.
                             MOM%     MOM%     MOM%     MOM%
================================================================

Date of Release              05/13    05/13    05/13    05/13
Observation Period           April    April    April    March
----------------------------------------------------------------
Median                        0.6%     0.0%     0.2%    -1.1%
Average                       0.6%     0.0%     0.3%    -1.1%
High Forecast                 2.2%     1.1%     1.2%     0.5%
Low Forecast                 -0.4%    -0.8%    -0.6%    -1.8%
Number of Participants          46       67       65       44
Previous                      0.5%    -1.2%    -1.0%    -1.3%
----------------------------------------------------------------
Action Economics             -0.1%     0.0%     0.0%    -1.2%
AIG Investments               0.0%     0.5%     1.1%    -1.7%
Aletti Gestielle SGR          ---     -0.1%     0.0%    -1.2%
Ameriprise Financial Inc      0.6%     0.2%     0.5%    -1.8%
Argus Research Corp.          0.2%    -0.6%    -0.2%    -0.6%
Bank of Tokyo- Mitsubishi     1.3%     0.3%     0.8%    -0.6%
Bantleon Bank AG              0.8%     0.0%     0.2%     ---
Barclays Capital              0.7%    -0.1%     0.4%    -1.0%
BBVA                          0.6%     0.8%     1.0%    -1.2%
BMO Capital Markets           0.4%     0.1%     0.3%    -1.1%
BNP Paribas                   0.8%    -0.4%     0.1%    -1.0%
Briefing.com                  ---     -0.2%     0.0%    -1.0%
Calyon                        ---     -0.1%     0.1%    -1.0%
CIBC World Markets            ---     -0.4%    -0.2%     ---
ClearView Economics           ---      0.0%     0.3%    -1.0%
Commerzbank AG                ---      0.3%     0.2%    -0.7%
Credit Suisse                 0.3%     0.3%     0.4%    -1.0%
Daiwa Securities America      ---      0.3%     0.3%    -1.0%
Danske Bank                   ---     -0.5%    -0.1%     ---
DekaBank                      0.8%    -0.1%     0.0%    -0.9%
Desjardins Group              1.0%    -0.2%     0.2%    -1.0%
Deutsche Postbank AG          0.4%     0.3%     0.4%     ---
DZ Bank                       0.2%     0.2%     0.4%     ---
First Trust Advisors          1.3%     0.5%     0.8%    -0.8%
Fortis                        ---     -0.3%     0.1%     ---
FTN Financial                 ---     -0.3%     0.1%     ---
Goldman, Sachs & Co.          ---      0.3%     0.5%     ---
Helaba                        ---     -0.2%     0.0%    -1.2%
Herrmann Forecasting          1.1%     0.2%     0.3%    -1.3%
High Frequency Economics      0.7%     0.3%     0.5%    -1.3%
HSBC Markets                  0.4%     0.6%     0.7%    -1.1%
IDEAglobal                    0.4%     0.3%     0.1%    -0.9%
IHS Global Insight            ---      0.3%     0.7%     ---
Informa Global Markets        0.0%    -0.3%     0.4%    -1.5%
ING Financial Markets         1.0%    -0.4%     0.2%    -1.2%
Intesa-SanPaulo               0.4%     0.5%     0.1%     ---
J.P. Morgan Chase             1.0%     0.2%     0.8%    -1.3%
Janney Montgomery Scott L     0.6%     0.1%     0.6%    -1.8%
Johnson Illington Advisor    -0.4%     0.0%     0.0%     0.5%
Landesbank Berlin             1.0%    -0.2%    -0.2%    -1.5%
Landesbank BW                 0.5%    -0.5%     ---      ---
Lloyds TSB                    0.4%    -0.1%     0.0%    -1.0%
Maria Fiorini Ramirez Inc     ---     -0.1%     0.0%     ---
Merrill Lynch                 0.7%    -0.8%    -0.6%    -1.3%
Mizuho Securities             0.3%    -0.4%    -0.1%    -0.9%
Moody’s Economy.com           0.7%     0.2%     0.2%    -1.3%
Morgan Keegan & Co.           0.1%     0.9%     0.7%    -0.9%
Morgan Stanley & Co.          ---     -0.4%    -0.3%     ---
Natixis                       ---     -0.1%     0.0%     ---
Newedge                       0.5%     0.2%     0.3%     ---
Nomura Securities Intl.       ---      0.1%     0.3%     ---
PNC Bank                      ---      0.4%     0.5%    -0.9%
Raymond James                 ---      0.0%     0.2%    -1.4%
RBS Securities Inc.           ---     -0.1%     0.1%     ---
Ried, Thunberg & Co.          1.1%     ---      ---     -1.1%
Scotia Capital                0.3%     0.2%     0.4%     ---
Societe Generale              ---      0.2%     0.3%     ---
Stone & McCarthy Research     0.5%     0.2%     0.5%    -1.2%
TD Securities                 ---      0.3%     0.7%     ---
Thomson Reuters/IFR           0.7%     0.2%     0.4%    -1.3%
UBS Securities LLC            2.2%    -0.1%     0.2%    -1.4%
Unicredit MIB                 0.2%     0.5%     ---      ---
University of Maryland        0.5%    -0.2%     0.1%    -1.1%
Wachovia Corp.                1.5%     1.1%     1.2%    -1.2%
Wells Fargo & Co.            -0.1%     0.0%     0.0%     ---
WestLB AG                     0.4%    -0.1%     0.1%     ---
Westpac Banking Co.           0.7%    -0.5%    -0.1%    -1.2%
Wrightson Associates          1.1%    -0.1%    -0.1%     ---
================================================================

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net

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Spain Consumer Prices Drop by Record as Slump Deepens

By Emma Ross-Thomas

May 13 (Bloomberg) -- Spanish consumer prices fell the most on record in April as companies cut prices to spur demand amid the worst recession for 60 years.

Consumer prices fell 0.2 percent from a year earlier, using the European Union’s calculation method, more than estimated in an initial reading published April 30, the Madrid-based National Statistics Institute said in an e-mailed statement today. Prices fell 0.1 percent in March, the first annual drop since 1952. Underlying prices rose 1.3 percent from a year earlier, the same as in March.

Spanish inflation, which has generally been faster than in the euro area average over the last decade, is now slowing more sharply than in the rest of the region. The dual impact of a housing market collapse and the financial crisis has pushed Spain’s unemployment rate to a European high of 17.4 percent. The economy will contract 3.2 percent this year and shrink a further 1 percent in 2010, the European Commission forecasts.

“Companies took a long time to cut prices, but now they are doing it very quickly,” said Jose Carlos Diez, chief economist at Intermoney Valores in Madrid. “We’re devaluing,” he said.

Amid global concerns about deflation, the European Central Bank cut its benchmark interest rate to a record low of 1 percent on May 7 and said it would buy 60 billion euros ($82 billion) of covered bonds as part of its effort to revive the region’s economy.

President Jean-Claude Trichet said that day that he expects “negative inflation” in the euro region for a number of months this year before accelerating again.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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Japanese Housewives Lead $125 Billion Bet Against Yen

By Ron Harui and Yasuhiko Seki

May 13 (Bloomberg) -- Individual investors in Japan increased bets to the highest in six months that the yen will weaken as the economy stabilizes, jumping back into a trade that was all but wiped out last year.

Businessmen, housewives and pensioners held 153,326 margin contracts at the end of last month that will make money if the yen declines against currencies ranging from the euro to the Australian and New Zealand dollars, according to the Tokyo Financial Exchange. All told, they may have as much as $125 billion in yen so-called short positions, RBC Capital Markets strategists said.

“Investors believe the worst of the global recession is over and higher-yielding currencies are bottoming out,” said Yoshisada Ishide, who oversees $1.8 billion as a Tokyo-based fund manager at Daiwa SB Investments Ltd., a unit of Japan’s second-biggest investment bank.

Individual investors, called housewives after the women who traditionally managed finances in Japanese families, have 1,434 trillion yen ($14.9 trillion) of savings, according to the Bank of Japan. They’re seeking higher returns after the central bank cut its benchmark interest rate to 0.1 percent. Investors who sell the yen against the euro would earn 3.4 percent by year-end, compared with 0.25 percent in one-year yen-denominated deposit accounts, data compiled by Bloomberg show.

Carry Trade

Investors are returning to the so-called carry trade, where they borrow funds in countries with low interest rates and invest the proceeds in ones with borrowing costs that are 10 percentage points higher, or more.

The strategy contributed to the yen’s 18 percent slump against the dollar between January 2005 and June 2007. Investors abandoned the trade last year as losses and writedowns on securities tied to subprime mortgages exceeded $1 trillion and the September bankruptcy of Lehman Brothers Holdings Inc. froze credit markets.

Money managers retreated from higher-yielding assets to the safety of government debt and the currencies that are easiest to trade. The yen has strengthened 19 percent against the dollar since the Federal Reserve began cutting interest rates on Sept. 18, 2007.

Now, investors are growing more optimistic. Finance ministers from the Group of Seven industrialized nations said on April 24 that they see “signs of stabilization” in the world economy and expect a recovery to take hold later this year. The U.S. Labor Department said May 8 that America’s employers cut 539,000 jobs in April, the fewest in six months.

Housewives Return

“Individual players, though they lost sizable amounts of money after Lehman went under, are beginning to reinvest in higher-yielding currencies thanks to the stabilization of global financial markets,” said Masahiro Suzuki, a businessman who has speculated in foreign-exchange markets for seven years.

Suzuki, who works for a trading company in Kobe, western Japan, said he plans to increase bets that the Australian dollar will appreciate compared with the yen.

At the end of April, individuals held the most contracts betting on a yen decline compared with those expecting gains since October. The difference as 35 times more than this year’s low on March 4, according to data from the Tokyo Financial Exchange.

The yen is this year’s worst-performer of the 16 most- traded currencies tracked by Bloomberg. It depreciated 17 percent against the South Africa rand, where the benchmark rate is 8.5 percent. Versus the Brazilian real, where the key rate is 10.25 percent, it’s down 16 percent. The bulk of the losses have come since Japan’s individual investors began increasing their bearish bets.

Currency Forecasts

Japan’s currency traded at 73.98 per Australian dollar as of 8:11 a.m. in London, from 73.78 in New York yesterday. It dropped to 76.18 on May 11, the lowest level since Oct. 6. The yen was at 58.37 versus New Zealand’s dollar from 58.44, and bought 96.49 per U.S. dollar from 96.45.

The yen will probably weaken to 100 against the greenback by year-end, according to the median estimate of 49 analysts surveyed by Bloomberg.

The Japanese currency’s advance to a 13-year high of 87.13 per dollar on Jan. 21 this year wiped out almost all of the yen short positions. The housewives remained net sellers from Aug. 18 to Dec. 30, even as Japan’s currency rallied 22 percent versus the dollar. That resulted in a 17 percent loss.

Too Small

Carry trades may fail to bring the returns investors expect because the extra yield offered over Japan is too small to compensate for possible currency losses, said Akira Takei, a fund manager in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank.

“There is almost no currency that we can call higher- yielding across the globe given the shrinking interest-rate gap between Japan and the rest of the world,” Takei said. “This is especially the case if investors have to hold these positions without any chance to hedge.”

The yen may gain to 91.50 per dollar based on recent trading patterns if ‘the green shoots of economy recovery “are not a flower but a short-lived weed,” strategists at Brown Brothers Harriman & Co. in New York said in a report yesterday.

Japan’s 0.1 percent benchmark rate compares with 3 percent in Australia, 2.5 percent in New Zealand and 1 percent in the euro region. In August 2007, New Zealand’s official rate was 8.25 percent and Australia’s was 6.5 percent.

The number of bets by individual investors against the yen started to accelerate in early April, according to data compiled by the Tokyo Financial Exchange and RBC Capital.

‘Tentative Return’

The $125 billion in net yen short positions calculated by RBC is derived by taking the U.S. dollar-equivalent amount of each margin contract, which represents 10,000 units of foreign currency. While down from the April 27 peak, the shorts still stood at 64,274 on May 11.

“A very interesting dynamic is developing,” said Sue Trinh, a senior currency strategist at RBC in Sydney. “Leveraged yen short sellers are making a tentative return.”

The favorite bet is for the Australian dollar to strengthen versus the yen. Wagers on the Aussie more than tripled to 64,293 contracts in the five weeks to April 27, while those on the kiwi -- named after a flightless bird native to New Zealand and depicted on the one dollar coin -- rose to 36,454.

Japan’s economy will shrink 6.2 percent in 2009, compared with 1.4 percent for Australia and 2 percent for New Zealand, the Washington-based International Monetary Fund said last month.

The third-biggest carry trade is to buy the euro against the yen, Tokyo Financial Exchange data show. Bets on the single European currency’s gain reached 21,598 contracts on April 27.

Bolster Earnings

A weaker yen may bolster earnings at exporters such as Toyota Motor Corp., which on May 8 reported its first annual loss in 59 years and cut dividends. Japan’s automakers sell about half of their vehicles overseas. Exporters said they can remain profitable as long as the yen trades at 97.33 per dollar or lower, a Cabinet Office survey showed on April 22.

Traders’ expectations of fluctuations in major currencies are at the lowest level in eight months, indicating a smaller risk of exchange-rate fluctuations eroding carry-trade profits.

“When the markets start calming down and volatility moves less, the Japanese will come back and start investing abroad again to earn a higher yield,” said Rajeev De Mello, the Singapore-based head of Asia investments at Western Asset Management Co., which manages $513 billion.

Implied Volatility

Implied volatility on seven major currencies has fallen to 13.8 percent from a peak of 26.6 percent in October, a month after Lehman Brothers collapsed, according to a JPMorgan Chase & Co. index. The decline from an average of 15.4 percent over the past year has encouraged investors to resume carry trades.

“We have argued for more than a month that one of the best risk-reward ratios is currently offered by carry trades, in particular long positions in high-yielding emerging-market crosses, funded in low-yielding majors,” Thomas Stolper, an economist at Goldman Sachs Group Inc. in London, wrote in a research report to clients on May 8.

“Interest has been picking up in this theme and there is good anecdotal evidence of more risk taking in this area,” he wrote in the report.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.

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French Inflation Rate Falls to Lowest in 13 Years

By Sandrine Rastello and Helene Fouquet

May 13 (Bloomberg) -- France’s inflation rate fell to the lowest in at least 13 years in April as oil costs dropped amid the worst economic slump since World War II.

Consumer prices increased an annual 0.1 percent, based on European Union methodology, after a 0.4 percent advance in March, Paris-based national statistics office Insee said today. The April rate was the lowest since the data series began in 1996. Economists polled by Bloomberg News expected a reading of 0.2 percent, according to the median of 14 forecasts.

“Inflation is coming to near a low point and should be negative this summer,” said Olivier Bizimana, an economist at Credit Agricole in Paris. “Given the scope of the economic slump, it’s not impossible that oil prices may fall further in coming months.”

Crude oil is trading around $60 a barrel, less than half the price of a year ago, giving breathing space to households facing rising unemployment. France’s economy is forecast by the European Commission to shrink 3 percent this year as companies slash inventories and trim headcount, pushing the number of jobseekers to the highest in almost three years.

The price of oil products slipped 22 percent from a year earlier, while rising 2.7 percent from March, the report showed. Fresh food products declined 0.7 percent from 12 months ago.

The European Central Bank last week cut its main interest rate by a quarter point to 1 percent, a record low, and approved a plan to buy 60 billion euros ($82.1 billion) of bonds, stepping up its response to the recession.

“Inflationary pressure has been diminishing as money and credit growth have further decelerated,” ECB President Jean- Claude Trichet said on May 7.

Carrefour SA, Europe’s largest retailer, said it will extend price cuts to help revive sales growth and cope with “challenging” business conditions as cash-strapped Europeans defect to discounters.

French consumer prices rose 0.2 percent in April from March, led by the cost of clothing and services such as transportation, Insee said in today’s report, based on national methodology.

To contact the reporters on this story: Helene Fouquet in Paris at Hfouquet1@bloomberg.net; Sandrine Rastello in Paris at srastello@bloomberg.net.

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Japan’s Current-Account Surplus Falls at Slower Pace

By Keiko Ujikane

May 13 (Bloomberg) -- Japan’s current-account surplus narrowed at the slowest pace in six months in March as a decline in exports eased.

The surplus shrank 48.8 percent to 1.486 trillion yen ($15.5 billion) from a year earlier, the Ministry of Finance said in Tokyo today. Exports fell 46.5 percent after declining a record 50.4 percent in February.

Economists don’t expect shipments abroad to resume rising soon given that they have plunged at an unprecedented pace since last year. The International Monetary Fund says the global recession will be deeper and the recovery slower than earlier predicted as financial markets take longer to stabilize.

“Overseas demand is bottoming out, but the strength of its recovery is weak,” said Mitsumaru Kumagai, a senior economist at Daiwa Institute of Research Ltd. in Tokyo. “Both Japan and the world economy are unlikely to achieve a full- blown recovery until the second half of next fiscal year.”

The yen traded at 96.09 per dollar at 11:31 a.m. in Tokyo from 96.17 before the report was published.

The median estimate of economists surveyed was for the current-account surplus to narrow to 1.21 trillion yen. The gap fell every month in the year ended March, except for January, when Japan had a deficit for the first time in 13 years.

The Washington-based IMF said in April that the world economy will shrink 1.3 percent this year, compared with its January projection of 0.5 percent growth. It predicted expansion of 1.9 percent next year, slower than an earlier 3 percent estimate.

Imports Fall

Imports slid 37.8 percent, compared with an unprecedented 44.9 percent drop the previous month.

Shipments to China sank 31.6 percent in March, less than the 39.7 percent decline in the previous month, according to a separate trade report released last month. Exports to the U.S. fell 51.4 percent, moderating from 58.4 percent in February. Today’s figures don’t include regional breakdowns.

“China’s economy has started rebounding, but the emerging economies on the whole aren’t strong enough to lead the world economy,” said Junko Nishioka, an economist at RBS Securities Japan Ltd. “Capital probably won’t flow back into the emerging nations unless the industrialized countries return to growth.”

Japan’s government last month cut its economic forecast, saying the world’s second-largest economy will shrink a record 3.3 percent this fiscal year as exports and corporate spending tumble at an unprecedented pace.

Income Surplus

The income surplus, the difference between money earned abroad and payments made to foreign investors in Japan, narrowed 13 percent to 1.7 trillion yen in March from a year earlier, today’s report showed.

On a seasonally adjusted basis, the current-account surplus widened 31.7 percent from February, today’s report showed. Exports rose 5.3 percent and imports gained 4.9 percent.

The surplus narrowed 50.2 percent to 12.2 trillion yen in the year ended March 31, today’s report showed, the most since comparable data were made available in 1985. Exports tumbled a record 16.3 percent and imports fell 3.9 percent.

The current account tracks the flow of goods, services and investment income between Japan and its trading partners. It includes trade not shown in the customs-cleared balance.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

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Fed Views Jump in Treasury Yields as Sign of Better Outlook

By Scott Lanman and Steve Matthews

May 13 (Bloomberg) -- The Federal Reserve considers the recent jump in Treasury yields more as a reflection of a better economic outlook than a signal it needs to step up purchases of U.S. government debt, according to central bank officials who declined to be identified.

It’s too early to judge the effectiveness of the Fed’s $300 billion plan to buy Treasuries even after 10-year yields climbed 0.65 percentage point since the initiative began in March, the officials said. They added that the goal is to stimulate private lending, rather than to target government- bond rates.

The Fed officials’ stance contradicts the view of firms including BlackRock Inc. that have predicted the rise in yields will prompt the central bank to announce an increase in the size of the program as soon as next month.

“It would be very different if the economy still appeared to be in freefall and yields were backing up, but it’s not,” said John Ryding, founder of RDQ Economics LLC in New York and a former Fed researcher. Increasing Treasury purchases would “fight against what is in my opinion a recovery signal, or a signal that the recession is drawing to a close.”

Chairman Ben S. Bernanke said May 11 that the danger of deflation, or prolonged declines in consumer prices, is “receding” and earlier this month cited evidence the economy’s contraction is easing. The Treasuries market, along with stocks and some commodities, have reflected those shifts.

Inflation Expectations

Ten-year note yields closed at 3.18 percent late yesterday, up from as low as 2.46 percent after the March 18 announcement of the plan to buy long-term government debt. The gap in yields between the notes and 10-year Treasury Inflation Protected Securities, a gauge of the inflation rate expected by investors, hit a seven-month high of 1.64 percentage points last week.

The Standard & Poor’s 500 Stock Index closed at 908.35 yesterday in New York, up 21 percent from two months before. Crude-oil futures reached $60.08 yesterday, the highest level since November.

Fed policy makers committed to buy as much as $300 billion of Treasuries over a six-month period in their March 18 Open Market Committee statement. The aim was “to help improve conditions in private credit markets,” the FOMC said.

“The statement is pretty clear,” Richmond Fed President Jeffrey Lacker, who was the first FOMC member to vote for buying Treasuries this year, told reporters May 8. “It doesn’t say anything about a U.S. Treasury yield” as a target, he said after a Washington speech. “I would urge people to take it at face value.”

Fed’s Campaign

The Fed has bought $101.7 billion under the initiative so far, part of its campaign to cut borrowing costs by purchasing assets with the benchmark interest rate near zero. Policy makers in March also decided to boost purchases of mortgage securities this year to $1.25 trillion from $500 billion and buy $200 billion, double the previous amount, of federal agency debt.

Stuart Spodek, BlackRock’s co-head of U.S. bonds in New York, said in an interview last week the Fed “needs to consider increasing its purchases of Treasuries” to “stabilize” long-term yields. He told Bloomberg Television May 11 officials may announce an increase as soon as the June 23-24 meeting. Spokeswoman Melissa Garville declined to comment further.

Another fund manager, James Platz of Mountain View, California-based American Century Investments, expects the Fed to announce further purchases “at some point.”

Mortgage Impact

Should the rise in yields cause mortgage rates to surge, that may prove to be a trigger for a stronger Fed response, said Richard Clarida, a strategic adviser at Pacific Investment Management Co., the world’s biggest bond-fund manager. “That’s going to really, really, really hurt the economy,” Clarida said in a Bloomberg Television interview this week.

Last week, fixed mortgage rates rose for the first time in four weeks, with the average cost of a 30-year home loan climbing to 4.84 percent from 4.78 percent, which was the lowest level in Freddie Mac data going back to 1970.

The increase in Treasury yields, coupled with a drop in consumer prices, is increasing real interest rates for companies. Real investment-grade corporate borrowing costs climbed to 8.34 percent in March, the highest level since 1985, according to data compiled by Bloomberg and Merrill Lynch & Co.

Rising real yields may deter companies from borrowing to invest in new products or factories, delaying an economic recovery, said John Lonski, chief economist at Moody’s Capital Markets Group in New York.

No Specific Target

Bernanke and other Fed officials have said they’re trying to lower mortgage rates and other private borrowing costs without aiming for any specific levels.

“We’re not trying to target a particular interest rate,” Bernanke said in May 5 congressional testimony. “Our objective is to provide more liquidity to the system and to help private credit markets, and I think that it has had some benefit.”

Janet Yellen, president of the San Francisco Fed, said May 5 that higher yields are related to the “bit of optimistic news, good signs in the last several weeks that are reflected in the stock market.”

The situation poses a “dilemma” for the Fed, because if the rise in yields reflects “erroneous market views” about the economy, it will hold back growth, said former Fed Governor Lyle Gramley.

“The Fed is probably scratching its head at the moment and will wait and not react until the smoke clears,” said Gramley, who is now a senior economic adviser with New York- based Soleil Securities Corp.

To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Steve Matthews in Jekyll Island, Georgia, at smatthews@bloomberg.net.

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