RBA Shocks Markets & AUD Collapses

Daily Forex Fundamentals | Written by AC-Markets | Feb 02 10 11:05 GMT |

News and Events: The RBA stunned the market by holding their cash rate steady at 3.75% and not hiking another 25bp, as was widely expected (roughly 80%). The AUD immediately collapsed, as traders anticipated eroding yield spread. The AUDUSD shed nearly one and a half big figures, trading from 0.8927 to 0.8780. However, the RBA's accompanying statement clearly indicates that rates might go higher in the future. And that is what the traders are betting on, as near-term bank bill futures rallied by around 30bps. The RBA mentioned persistent concerns over global credit conditions, strong Aussie, growing sovereign credit risk and China's probable tightening as reasons for the temporary pause. The central bank also wanted to monitor the effect of the last three hikes, as information was still 'limited'. Deputy Governor Battellino stated in December that 'since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being.' The fact that so many bright, well-trained analysts completely misread the intentions of this central bank highlighted the fact that monetary policy is far from being certain. This clearly calls into question one of the main FX tenets, that the Fed will lead the ECB in normalizing policy and therefore the current EURUSD depreciate is warranted (when combined with fears over struggling EU members). But back to the fate of the AUD, first we believe that the China tighten story is overdone and believe China / Asia will power on through 2010. And second, the economic data in Australia, including an unemployment rate that was peaking at 6.0%, will remain constructive, while inflation is running above its 2-3% inflation target band. Given our expectations explained above, we believe the RBA will be forced to raise rates by 25bp in March and end 2010 around 5.25%, which means the AUD sell-off was merely a knee-jerk reaction and the AUD should be well supported moving forward. For today, the lack of first tier data will keep FX markets range-bound with majors in major pairs in a consolidation mode, ahead of Thursday's BOE & ECB and Friday's critical NFP. Today Key Issues: 09:00 GBP PMI construction, index Jan 47.1 exp, 47.1 prior 10:00 EUR PPI, % m/m (y/y) Dec 0.0 (-3.1) exp 0.1 (-4.4) prior 15:00 USD Housing vacancy rate, % Q4 2.6 prior 00:00 USD USD Vehicle sales, mn Jan 11.2 exp 15:00 USD Pending home sales, % m/m (y/y) Dec 0.9 (11.2) exp The Risk Today: EurUsd Very little change in EURUSD's picture today, with consolidation likely to be the name of the game between 1.3855 and 1.4000 in the short term. Our bias remains to play this pair from the short side and sell smalls towards 1.4000, but given the considerable sell-off since the beginning of December and the impending risk event (ECB meeting and press conference on Thursday), expect some players to lighten up on risk in case of Trichet fireworks. Looking at the larger picture it is clear that the bear trend remains the dominant driver, and should we be lucky enough to get a bounce towards 1.4190, expect plenty of selling interest. The breakdown of the 12 month uptrend back in December has been extremely orderly, and the target of the bear flag pattern carved out in January around 1.3600 has still not been reached, suggesting further room for this move below. GbpUsd GBPUSD took a tumble down through the lower bound of the 2 week downtrend channel yesterday as frayed nerves ahead of Thursday's BoE took their toll and GBPUSD bears found buyers in short supply. The low of 1.5851 was within 20 pips of critical downside support and 30 Dec lows of 1.5833; but the pair bounced strongly to close back within the channel even after the post-ISM wave of USD strength. There is sufficient uncertainty in the predicted outcome of Thursday's BoE meeting to expect a choppy range between 1.5833 lows and the 1.6080 area of major supply between now andthe MPC decision, but if we do see any bounces toward 1.6080 we would look to re-short with a stop just above the 50-day moving average resistance (1.6147), and wait for a retest of 1.5833 and thereafter 1.5707. UsdJpy We got another massive upside surprise in US data yesterday with the ISM Manufacturing posting a whopping 58.4 in January; but frustratingly USDJPY is still failing to breach the stubborn 91.00 resistance that also thwarted the rally on Friday. USDJPY bulls can at least take some solace in the fact that we finally got a daily close above the 90.55 neckline that eluded us on Friday, but for now the sellers are still keen to short around this vibration channel of the down trend, now coming in around 90.80; backed up by the 38.2% fibonacci retracement of the sell-off from 93.77 to 89.14 (at 90.91). If we do finally exhaust the selling interest around 90.80-91.00 it would open up a visit to the upper bound of the 1 month downtrend channel at 91.35 which if surpassed would confirm 89.14 as the new higher low in the rally from 84.82. Not much scheduled on the economic release calendar today to provide much catalyst, but the coming session will be the deal-breaker as a further rally is contingent on the 1 week uptrend support holding (currently comes in at 90.30); if we are wrong and this breaks then a resumption of the longer term downtrend should be considered. UsdChf USDCHF is arguably one of the least exciting pairs right now, essentially moving on the same drivers as EURUSD but with less bang for your buck. The pair has been subdued since Friday's suspected SNB intervention; locked in a tight range between 1.0643 post-intervention highs and 1.0550 prior resistance turned support -the latter taking on a slightly greater significance today as it coincides with the recent 1 month uptrend. We still look for further USD strength and a break above 1.0643 to target major downtrend resistance around 1.0710; really only a break below 1.0250 would threaten our view that 0.9919 is the bottom for this downtrend EURUSD GBPUSD USDJPY USDCHF 1.4115 1.6110 93.77 1.0750 1.4090 1.6080 92.50 1.0710 1.4030 1.6020 91.90 1.0643 1.3943 1.5913 90.76 1.0560 1.3830 1.5875 89.36 1.0445 1.3790 1.5845 88.00 1.0400 1.3755 1.5770 87.37 1.0375 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot ACM FOREX Disclaimer: This report has been prepared by AC Markets (thereof ACM) and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Salesperson or Traders of ACM at any given time. ACM is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.

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European Shadows Of Optimism On Good Data Or A Needed Correction?!

Daily Forex Fundamentals | Written by ecPulse.com | Feb 02 10 11:07 GMT |

The day starts like any other in Europe today, with the jitters and anxiety still prevalent within markets overshadowed by a stream of sound economic fundamentals. The incoming data is not topnotch today from Europe, yet the general sentiment is taking over following yesterday's big manufacturing surprise from Europe and the United States. Starting the day was a rebound in German retail sales in December, capping the holiday sales with a gain amid gloomy celebrations highlighting a recessionary year all through. Sales rebounded with 0.8% gain following a lower revision to November's drop to 1.7%. The volatility in markets can surely be resembled by their interpretation of economic data, which recently has been based on a very volatile short term basis overshadowing the longer term trends. This shallow analysis of the data merely explains the periodic sentiment slumps that are being seen, echoed in panic sell-offs across markets. In assessing the trends, once will see that a monthly rise in retail sales is sufficient enough to say the economic recovery has not lost its steam, which was coupled today with rising prices at factory gates in the Euro Block. December Producer Prices gained 0.1% following 0.2% revised rise in November beating the flat estimates. While on the year the drop eased to 2.9% from -4.4% in November. Anchored pipeline pressures Well, here is the case, inflationary data are surely being watched thoroughly nowadays, which was triggered mainly in the latter months of the year when speculation grew over the ECB to withdraw measures and start hiking rates. Well, they did indeed take the first step in ending some of the liquidity measures starting December, but again, if we focus on Trichet's testimony if I may call, after every meeting, his reiterates the Governing Council's stance regarding subdued price developments and anchored inflationary pressures. For one, that is very true for the time being, with the rising slack in economic activity, the high unemployment and the slowing government spending on the back of swelling deficits, the picture sounds about right. Our central assessment for medium term inflationary trend develop from the unorthodox easing measures adopted by the ECB and other central banks to ease the credit crunch and snitch the economy out of its recession, and so far, the extra liquidity has not spurred inflation! Two main factors linger to that central projection; one is the inability of central banks and governments to withdraw stimulus measures in time as the economy remains weak. While the second is the reversal of the support to the banking sector in an ironic inflationary trap as banks refrain from limiting their excessive risk taking measures and settle with their revitalized balance sheets on the back of government sponsored bailouts! Well, the first is the main fear, as the second so far is under heavy scrutiny thanks to already announced plans by governments and central banks to rein on excessive risks by banks and their capability to maneuver, like the Obama proposal, Darling's windfall tax on bonuses and Basel committee recommendations! Nevertheless, the market can not help but image a flawless market once again and positive optimism over current conditions and the outlook for the global economy! A clear testimony to that is the United Kingdom itself; the economy lingered for six consecutive quarters in recession and when the economy did expand in the fourth quarter it was by a slim 0.1% that even missed median estimates for 0.4%! Take for instance the construction data today, the construction PMI from UK reported continued enhancement in the sector as the performance improved in January to 48.6 from 47.1 which coupled with rising property values for the past couple of months was taken as a testimony to the improvement and the bottoming out of the sector's depression! Hate to break it to you dear reader, just the sector remains in contraction with the reading below 50, house prices were in fact rising, just the pace of closed sales, mortgage approvals, and property loans where not at the same pace hinting that the decline in supply did in fact have a great role in supporting prices! Let's talk facts! I am not a pessimist dear reader, I am a realist. If we want to talk facts and figures, well as a rational spectator of this economic fiesta I surely will not say that we are resting ashore until the latter half of this year, and maybe the last month of the year. That is reality, an exodus of the recession will not be a quarterly, two or three GDP expansion, it will exiting of expansionary monetary measures, trending down of jobless, rising in baseline inflation, and PRUDENT FISCAL POLICIES! All we have seen now was promises and no rationalized work on the move. As for the jitters of the market, well let us face it, markets are still moving on rumors and reversing on facts and that is pure 101 market hesitation in terms of economic realities; national statistics are clearly not the same as corporate endeavors! We are going to look beyond the economic data today and we are going to focus on the current sentiment in the market; which is the economic recovery is loosing momentum! I am placing my bets on two main events this week, where the first is with tomorrow's EC issuance of recommendations on Greece's budget program. Let us face it, all the figures from the euro zone where silenced against the growing speculation of Greece's deficit build up to 12.7% of the GDP the highest in the EU and the fear that Greece will drop the euro and others will be forced to follow suit –which I might say is absurd- has tarnished the euro strongly and we expect will continue towards testing the $1.37 barrier! As for the other fact of the week, well it need's no introduction, as its Thursday's rate fiesta. The BoE's stance on the APF program and Trichet's insight on the deficit and the exiting of another lending facility by the end of this quarter are to take the heat in Europe. We are advising you dear reader to not be victimized by the cliché in the market or be captivated by headlines! The market is READJUSTING and to be a smart one you need to understand where the bottom is and what is the new trend going to be! So place your bets on the winning horse and be sure that the volatility and the market rollercoaster is far from over and the joyride is about to start. Put your dancing shoes on for the risk limit to our assessment will only be the euro below $1.36!!! Ecpulse disclaimer: The content of ecPulse.com and any page in the website contain information for investors/traders and is not a recommendation to buy or sell currencies, stocks, gold, silver & energies, nor an offer to buy or sell currencies, stocks, gold, silver & energies. The information provided reflects the writers' opinions that deemed reliable but is not guaranteed as to accuracy or completeness. ecPulse is not liable for any losses or damages, monetary or otherwise that result. I recommend that anyone trades currencies, stocks, gold, silver & energies should do so with caution and consult with a broker before doing so. Prior performance may not be indicative of future performance. Currencies, stocks gold, silver &energies presented should be considered speculative with a high degree of volatility and risk

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Forex Technical Analysis

Daily Forex Technicals | Written by DeltaStock Inc. | Feb 02 10 10:30 GMT |

EUR/USD Current level-1.3922 EUR/USD is in a downtrend, after peaking at 1.5146 (Nov.25,2009). Technical indicators are neutral, and trading is situated below the 50- and 200-Day SMA, currently projected at 1.4793 and 1.4169. The break above 1.3920 signals, that the pair has entered a larger corrective phase ans will target 1.40+ sentiment level, before drowning to 1.3740 support. Resistance Support intraday intraweek intraday intraweek 1.3920 1.3990 1.4260 1.5146 1.3851 1.3740 1.3740 1.30+ USD/JPY Current level - 90.56 The overall downtrend has been renewed with the recent break below 87.12. Trading is situated below the 50- and 200-day SMA, currently projected at 89.50 and 93.54. We saw on more test in the 90.90 resistance area and the pair is still struggling below that zone. Only a break below 89.79 will initiate a downtrend for 88.36, en route to 87.35. The intraday bias is positive, well supported at 90.45. Resistance Support intraday intraweek intraday intraweek 90.80 91.90 93.40 95.60 89.60 88.35 87.12 83.45 GBP/USD Current level- 1.5920 The pair is in a downtrend after peaking at 1.7042. Trading is situated between the 50- and 200-day SMA, currently projected at 1.6454 and 1.5258. The pair has entered a larger consolidation pattern in the 1.5833-1.6070 zone. Intraday expect 1.5880 to support the pair for a rise towards 1.6050. Resistance Support intraday intraweek intraday intraweek 1.5980 1.6070 1.6280 1.7042 1.5880 1.5833 1.5833 1.5352 DeltaStock Inc. - Online Forex & Securities Broker www.deltastock.com RISK DISCLAIMER: These analyses are for information purposes only. They DO NOT post a BUY or SELL recommendation for any of the financial instruments herein analyzed. The information is obtained from generally accessible data sources. The forecasts made are based on technical analysis. However, Delta Stock’s Analyst Dept. also takes into consideration a number of fundamental and macroeconomic factors, which we believe impact the price moves of the observed instruments. Delta Stock Inc. assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person's reliance upon the information on this page. Delta Stock Inc. shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation, losses or unrealized gains that may result. Any information is subject to change without notice.

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Euro to Drop to 8-Month Low in ‘Correction’: Technical Analysis

By Candice Zachariahs

Feb. 2 (Bloomberg) -- The euro may face a “correction” that will drive the currency to its lowest level since May after closing below support at $1.3981, Citigroup Inc. said.

Europe’s common currency closed at $1.3863 on Jan. 29, below its 55-week moving average and close to the 200-week moving average of $1.3859. The European currency “typically corrects” by 10 percent before resuming gains, the bank said, citing losses in 1994 and 2004 that preceded U.S. interest-rate increases. The euro lost as much as 9 percent between Feb. 18, 2004, and April 26, 2004. The Federal Reserve in June 2004 raised benchmark borrowing costs for the first time since 2000.

“A 10 percent correction down in the euro from the November high takes the pair to $1.3630 where further support levels converge,” Citigroup technical analysts led by Tom Fitzpatrick in New York wrote in a note to clients yesterday. “Overall further short-term weakness down to the $1.36-plus area would not be surprising.”

The euro traded at $1.3926 as of 9:56 a.m. in Tokyo from $1.3931 yesterday and last traded below $1.37 on May 20. The euro will find buyers in the $1.36 area which includes its 55- month moving average of $1.3589 and the December 2004 high of $1.3666, the bank said.

“We would still be biased to call the move down from the November high a correction down rather than a trend,” the analysts wrote. The euro touched $1.5144 on Nov. 25, the most since August 2008.

Support levels are areas on a chart where orders to buy a currency may be clustered. In technical analysis, investors and analysts study charts of trading patterns and prices to forecast price changes in a security, commodity, currency or index.

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

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Bank of America, Microsoft, Exxon May Face Obama Tax Increases

By Mark Drajem

Feb. 2 (Bloomberg) -- Bank of America Corp., Exxon Mobil Corp. and Microsoft Corp. would be among companies paying $400 billion in additional taxes under President Barack Obama’s $3.8 trillion budget.

Obama wants to impose a fee on 50 of the biggest financial companies, costing $90 billion to firms such as JPMorgan Chase & Co. and Bank of America. His budget also proposes ending tax breaks for oil companies led by Exxon, the largest U.S. company, and taxing overseas profits for companies such as Microsoft, the world’s largest software maker.

The tax increases undermine Obama’s goal of doubling exports and creating jobs, said John Castellani, president of the Business Roundtable, a Washington-based group representing the chief executive officers of companies such as Exxon and Microsoft.

“Now, more than ever, we simply cannot afford to gamble away economic recovery and job creation on risky tax increases,” Castellani said in a statement.

The budget, sent to Congress yesterday, is for the fiscal year that begins Oct. 1. It reflects the administration’s struggle to boost the economy and job growth while tightening the government’s belt to reduce deficits in the years ahead. It is subject to approval, and modification, by Congress.

Other companies may come out ahead. Fairfield, Connecticut- based General Electric Co., a maker of nuclear and renewable energy equipment, would benefit under spending proposals to boost development of energy-efficient technology. Insurer Amerigroup Corp. would gain from an extension of Medicaid funding to the states.

Tax Credits

Aside from the levy on banks, which was first proposed last month, Obama offered scaled-back versions yesterday of tax increases he advanced in his first budget plan a year ago.

“Compared to last year, this was surprisingly tame,” Andrew Parmentier, managing partner of the Washington-based research firm Height Analytics, said in a report to clients. “The market was largely uninterested.”

The budget calls for the elimination of $36.5 billion over the next decade in tax credits for oil and gas companies such as Exxon, Chevron Corp. and ConocoPhillips. The administration dropped other proposals from last year, easing the impact on energy producers, said Kevin Book of Washington-based managing director for analysis firm Clearview Energy Partners LLC.

After complaints from Microsoft of Redmond, Washington, and Peoria, Illinois-based Caterpillar Inc., the administration also scaled back a proposed tax increase on overseas income. It would yield $122.2 billion in revenue, not the $210 billion estimated a year ago. Congress didn’t enact the proposal last year.

Microsoft, Pfizer, Caterpillar

Representatives for Microsoft, drugmaker Pfizer Inc. and Caterpillar, the world’s largest maker of bulldozers, have said the tax increase would undermine their competitiveness with overseas rivals, and could lead them to set up operations offshore instead of in the U.S.

“It makes U.S. jobs more expensive,” Microsoft CEO Steven Ballmer said in an interview in June.

Lockheed Martin Corp. could benefit from increased defense spending, and Boeing Co. from a $2 billion weather satellite system.

A program of loan guarantees for nuclear-power makers and renewable energy could assist manufacturers such as GE. The world’s biggest maker of freight locomotives could also win from an increase in spending for high-speed rail.

Energy Department

The Energy Department proposed $48 billion in loan guarantees to finance projects aimed at cutting U.S. emissions of greenhouse gases tied to global warming, including help for nuclear-power plant developers, such as Atlanta-based Southern Co.

Automakers would get $11.4 billion in loans for “clean” technology, a 115 percent increase over Obama’s 2010 plan. Ford Motor Co., Tesla Motors Inc. and Nissan Motor Co. all have received aid under that program.

Obama’s spending plan would also extend emergency funding the federal government provided for Medicaid, the government’s health program for the poor, in last year’s U.S. stimulus package. Those programs are administered in some states by Minnetonka, Minnesota-based UnitedHealth Group Inc. and Virginia Beach, Virginia-based Amerigroup.

Companies including White Plains, New York-based ITT Corp. would benefit from the Federal Aviation Administration’s plan to boost spending for so-called NextGen equipment overhauls by almost a third, to $1.1 billion. ITT won a contract in 2007 to build and maintain ground stations that enable the FAA to use satellites to guide planes.

Not an Edict

All of these proposals must now run the gauntlet in Congress, which didn’t take up many of the tax increases Obama proposed last year.

“Investors should not mistake this (or any other) budget request for an edict,” Book said. “Congress still controls final spending decisions, and election years can widen ideological differences between a thrifty White House and lawmakers hoping to win reelection.”

To contact the reporter on this story: Mark Drajem in Washington at mdrajem@bloomberg.net.

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Australian Dollar Slides as Central Bank Keeps Rate Unchanged

By Paul Dobson and Yasuhiko Seki

Feb. 2 (Bloomberg) -- The Australian dollar slid after the nation’s central bank unexpectedly avoided raising interest rates, prompting traders to favor other higher-yielding currencies such as the Norwegian krone and South African rand.

The Aussie fell against all 16 of its most-traded peers monitored by Bloomberg, dropping to the lowest level in almost six weeks versus the U.S. dollar. Reserve Bank of Australia Governor Glenn Stevens left the overnight cash rate target at 3.75 percent, confounding the prediction for a quarter-point increase from all 20 economists surveyed by Bloomberg.

“The foreign-exchange market is definitely seeking yield following the Australian rate decision,” said Paul Robson, a senior currency strategist in London at Royal Bank of Scotland Group Plc.

Australia’s currency slid 1.3 percent to 88.03 U.S. cents as of 10:24 a.m. in London, after weakening to 87.81 cents, the lowest level since Dec. 23. It fell 1.1 percent to 79.89 yen.

The dollar traded at $1.3946 per euro, from $1.3931 in New York yesterday, when it rose to $1.3853, the strongest since July 8. The U.S. currency was at 90.77 yen, from 90.61, and the yen traded at 126.62 per euro, from 126.24.

The RBA’s Stevens became the first central banker among the Group of 20 nations to raise borrowing costs last year, boosting them three times. Officials in the U.S., the U.K. and Europe kept their benchmark rates at record lows. The difference in rates helped make the Australian dollar the top performer versus its U.S. counterpart from Sept. 1 though yesterday.

Rate ‘Surprise’

“It’s a surprise they didn’t hike today,” said Lee Hardman, a currency strategist in London at Bank of Tokyo- Mitsubishi UFJ Ltd. The decision “should help ease some of the downward pressure on the U.S. dollar” because “the market last year got ahead of itself expecting other central banks to tighten more aggressively than the Federal Reserve,” he said.

The Aussie will probably depreciate to 85 U.S. cents as markets begin to bet on rate increases by the Fed, UBS AG said. The Swiss bank advised investors sell the Aussie against Norway’s krone before the Norges Bank meets tomorrow. The “risk clearly” is that the Oslo-based central bank surprises by raising borrowing costs, said Mansoor Mohi-uddin, chief currency strategist at UBS in Singapore.

The Norwegian central bank will keep its main rate unchanged at 1.75 percent, according to all 16 analysts surveyed by Bloomberg.

ECB Meets

The European Central Bank meets the following day and will also keep its main rate unchanged, at 1 percent, according to all 55 economists in a separate Bloomberg survey. The Fed’s target rate for overnight loans between banks is a range of zero to 0.25 percent.

The rand strengthened 0.5 percent to 7.4588. The South African central bank’s main interest rate is 7 percent.

Traders had put the odds of an increase in Australia’s rate at 74 percent, according to contracts traded on the Sydney Futures Exchange.

Borrowing costs in Australia will be “adjusted further” to keep inflation within the central bank’s target range of 2 percent to 3 percent “if economic conditions evolve broadly as expected,” Stevens said in a statement today.

To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

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Oil May Pull Back After Rising Above $78: Technical Analysis

By Yee Kai Pin

Feb. 2 (Bloomberg) -- Crude oil may pull back below $73 a barrel even if the market retraces two weeks of losses and climbs back above $78, National Australia Bank Ltd. said.

Oil, which fell in January in its first monthly decline since July, is “on the defensive” after technical support marked by two short-term moving averages was breached, said Gordon Manning, a Sydney-based technical analyst at Australia’s fourth-largest bank. While prices are rebounding, the risk remains skewed to the downside, he said.

“Enough pressure’s come out of the market, but I’m not convinced that the bounce will have much in it,” Manning said today in a telephone interview. “I could see oil getting back to $78 to $79. That wouldn’t surprise me, but any rally is going to conk out.”

Crude oil futures lost 8.2 percent in January, the most since December 2008, amid concern the recovery in global fuel demand would slow. The contract for March delivery on the New York Mercantile Exchange was at $74.76 a barrel in electronic trading, up 33 cents, at 1:09 p.m. Singapore time, after data yesterday showed manufacturing expanded in the U.S. and Europe.

Futures reached $72.43 a barrel on Jan. 29, the lowest in more than five weeks, after chart readings slipped below the 21- day and 30-day moving averages. Should oil hold off from those lows over the first half of this month, the chances for a sustained recovery will be improved, he suggested.

“If within two weeks’ time we’re still around these levels and haven’t broken to new lows, I would think there’s a chance we’re going into a bigger ‘sideways’ period -- with risks to the upside coming back,” Manning said.

To contact the reporter on this story: Yee Kai Pin in Singapore at kyee13@bloomberg.net

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AngloGold Chief Cutifani Sees Gold at $1,000-$1,200 This Year

By Carli Lourens

Feb. 2 (Bloomberg) -- AngloGold Ashanti Ltd.’s Chief Executive Officer Mark Cutifani said the metal may trade between $1,000 and $1,200 an ounce this year.

At levels below $1,000, several producers would struggle as total costs to produce the metal are around $800 or $900 an ounce, he told reporters in Cape Town late yesterday. AngloGold is the world’s third-biggest producer of the metal.

To contact the reporter on this story: Carli Lourens in Johannesburg at clourens@bloomberg.net.

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Godrej Plans to Triple Palm Oil Output as Indian Demand Surges

By Thomas Kutty Abraham

Feb. 2 (Bloomberg) -- Godrej Agrovet Ltd., India’s biggest palm oil producer, plans to triple domestic output as demand for cooking oil surges, a company executive said.

Godrej will invest 1 billion rupees ($22 million) in the next five years building refineries to process production from more than 100,000 hectares (247,000 acres) of palm trees, Managing Director B.S. Yadav said in an interview in Mumbai yesterday. That may boost the Mumbai-based company’s output to more than 75,000 metric tons, he said.

India surpassed China as the biggest buyer of palm oil last year as rising incomes increased demand for fried and processed food. The country imports almost all its palm oil requirements. Palm represents 80 percent of all cooking oil purchases, which will jump 34 percent to a record 9.4 million tons this year, according to the Solvent Extractors’ Association of India.

“If the government ramps up oil-palm cultivation, they can substantially reduce the import bill,” Yadav said. “We certainly hope to play a part in that growth story.”

Imports will climb this year after drought across half of the country damaged crops and pushed food inflation near to an 11-year high. Shipments will also increase after an import-tax waiver lowered costs, the association said last month.

Monsoon-sown oilseed production may drop 9 percent this season to 13.7 million tons, according to the Central Organization for Oil Industry and Trade, the country’s biggest group of processors.

Government Subsidy

India’s government subsidizes as much as 60 percent of the cost of growing oil palms in a bid to reduce purchases from Indonesia and Malaysia, the biggest producers.

Increasing demand will maintain India’s reliance on imports for the next few years, Yadav said. Boosting the national crop to 1 million hectares would do a lot to cut them, he said.

“It’s a business model that works for the government, the farmer and the companies,” he said.

The company, a unit of Godrej Industries Ltd., has about 36,000 hectares of oil palms in the south Indian states of Andhra Pradesh, Tamil Nadu and Goa, producing 25,000 tons of raw oil annually. The producer plans new plantations in Orissa in east India and Mizoram in the northeast and will consider acquisitions, to help increase the share of sales from palm oil to 10 percent in five years from 7 percent now, Yadav said.

To contact the reporter on this story: Thomas Kutty Abraham in Mumbai at tabraham4@bloomberg.net;

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U.S. Stocks Gain as Manufacturing Beats Estimates, Exxon Rises

By Nikolaj Gammeltoft and Rita Nazareth

Feb. 1 (Bloomberg) -- U.S. stocks rose, driving a rebound in the Standard & Poor’s 500 Index from a three-month low, after measures of manufacturing and income increased more than economists estimated and Exxon Mobil Corp. beat forecasts.

Exxon gained 2.7 percent as profit fell less than estimated because of higher oil prices and output, giving energy companies the second-biggest rally in the S&P 500 behind commodity producers. Coal company Consol Energy Inc. climbed more than 7 percent after the Commerce Department said income advanced 0.4 percent in December and factory output expanded at the fastest rate since 2004. Banks pared gains after demand for business and household loans slipped over the past three months.

The S&P 500 rose 1.4 percent to 1,089.19 at 4 p.m. in New York. The Dow Jones Industrial Average rallied 118.20 points, or 1.2 percent, to 10,185.53. The advance reversed a decline in the MSCI World Index of equities in 23 developed markets, which added 1 percent to break an eight-day losing streak.

“The trend of the market is up,” said David Dreman, chairman and chief investment officer at Dreman Value Management LLC, which has about $5 billion under management. “There’s still good value to be picked up and we’re getting close to 100 percent invested in stocks.”

While the S&P has surged 61 percent since March 9, it completed a third straight weekly loss on Jan. 29 after Qualcomm Inc., Motorola Inc. and Microsoft Corp. tempered enthusiasm about an earning-reporting season in which 80 percent of index members have topped the average analyst profit estimate since Jan. 11, according to Bloomberg data.

“Phenomenal corporate profits are driving stocks up,” said Wayne Wilbanks, chief investment officer at Wilbanks, Smith & Thomas in Norfolk, Virginia, which manages $1.4 billion. “That’s why we won’t get more than a 10 percent correction because the corporate earnings numbers are simply too good.”

Most Since 2004

Manufacturing expanded in January at the fastest pace since August 2004. The Institute for Supply Management’s factory index rose to 58.4, higher than the median economist forecast of 55.5, figures from the group showed. Readings greater than 50 signal expansion. Orders, production and employment increased.

The U.S. factories report followed surveys showing China, the world’s third-biggest economy, sustained its manufacturing expansion in January as export orders jumped and inflation pressures grew.

U.S. Commerce Department data showed U.S. personal income rose 0.4 percent in December, more than the 0.3 percent economist forecast. U.S. gross domestic product grew 5.7 percent at an annual rate in the fourth quarter, the government said on Jan. 29.

“I like the manufacturing number -- it stops the near-term sell-off in the market and it supports Friday’s GDP data,” said Scott Armiger, who helps manage about $2 billion at Christiana Bank & Trust in Greenville, Delaware. “We’re optimistic companies will do better earnings-wise this year, but the question is still whether we’re going to get stronger growth from the U.S. consumer.”

Producers of metals, chemicals and agricultural commodities climbed 3.7 percent for the biggest gain among 10 industries. Energy companies in the S&P 500 rose 3 percent as Exxon rallied.

Higher Output

Exxon added 2.7 percent to $66.18. The largest U.S. company by market value posted a smaller decline in fourth-quarter profit than analysts estimated as gains in oil prices and output cushioned the impact of slumping demand for diesel and gasoline.

Chevron Corp. added 2 percent to $73.58.

The data on manufacturing also boosted coal companies. Massey Energy Co. climbed 7.9 percent to $41.58 for the biggest gain in the S&P 500. Consol Energy Inc. rose 7.2 percent to $49.97. Peabody Energy Corp. advanced 4.9 percent to $44.19.

Cliffs Natural Resources Inc. advanced 7.8 percent to $43.07 for the second-biggest gain in the benchmark index for U.S. equities. North America’s largest iron-ore producer had its fourth-quarter earnings estimate raised to 39 cents a share, from 17 cents, by FBR Capital Markets.

CME Group Inc. added 1.5 percent to $291.22. The world’s largest futures market is in talks to buy the News Corp. stock- index business that owns the Dow Jones Industrial Average for up to $700 million, according to two people familiar with the matter.

Falling Revenue

Financial institutions climbed 1.6 percent, paring an earlier gain of 1.9 percent. The Federal Reserve said loan demand slipped last quarter, according to a quarterly survey of Senior Loan Officers, while fewer banks tightened standards.

Gannett Co. posted the biggest decline in the S&P 500, falling 7 percent to $15.02. The largest U.S. newspaper publisher reported declining revenue and a fourth-quarter profit that was helped by job cuts. New York Times Co. fell 3.3 percent to $12.49.

Amazon.com Inc. had the second-biggest decline in the S&P 500, slipping 5.2 percent to $118.87. The world’s largest Internet retailer said it will start selling Macmillan books on its Web site again and give in to the publisher’s demands to charge more for titles on the Kindle digital reader.

To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.

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Asian Stocks Rise as U.S. Manufacturing Expands; Toyota Climbs

By Jonathan Burgos and Shani Raja

Feb. 2 (Bloomberg) -- Asian stocks climbed, driving the MSCI Asia Pacific Index up the most in more than two weeks, after U.S. manufacturing expanded more than estimated and Australia unexpectedly refrained from raising interest rates.

Canon Inc., a camera maker that gets about 28 percent of revenue from the Americas, added 2.7 percent in Tokyo. Toyota Motor Corp. gained 4.5 percent after the automaker said it will resume some production operations that were halted. Mitsui Mining & Smelting Co. climbed 7.2 percent in Tokyo after raising its profit forecast. Westfield Group, the world’s largest owner of shopping malls by value, climbed 4.5 percent in Sydney after announcing a dividend payment.

“Markets overall were as oversold as they had been for some months and a bounce was expected,” Prasad Patkar, who helps manage about $1.5 billion at Platypus Asset Management in Sydney. “The world is a markedly better place, in an economic sense, than it was 12 months ago so there is good reason to believe the market will stay bid.”

The MSCI Asia Pacific Index gained 1 percent to 117.39 as of 5:29 p.m. in Tokyo, the biggest advance since Jan. 14. The gauge sank 3 percent last month, the most since February last year, on concern central banks from China to India will tighten monetary policy to curb inflation.

Australia’s S&P/ASX 200 Index climbed 1.8 percent, the biggest advance among Asia Pacific benchmark indexes, after the country’s central bank kept the overnight cash rate target at 3.75 percent after three increases.

Nikkei Advances

Japan’s Nikkei 225 Stock Average advanced 1.6 percent. DeNA Co., a Japanese operator of auction and shopping Web sites, soared 19 percent after reporting higher sales. Office equipment maker Brother Industries Ltd. climbed 8.9 percent as it raised its profit forecast.

China’s Shanghai Composite Index lost 0.2 percent as concern the government will curb lending spurred declines by developers and overshadowed gains by commodity producers. Hong Kong’s Hang Seng Index added 0.1 percent.

Futures on the Standard & Poor’s 500 Index lost 0.3 percent. The gauge added 1.4 percent in New York yesterday after measures of manufacturing and incomes increased more than economists estimated.

The Institute for Supply Management’s factory index rose to 58.4, exceeding the highest estimate in a Bloomberg News survey of economists. Readings greater than 50 signal expansion. Incomes climbed 0.4 percent, also more than expected, according to the Commerce Department in Washington.

Pedal Repairs

Canon added 2.7 percent to 3,610 yen. Sony Corp., which gets about 24 percent of sales from the U.S., gained 3.1 percent to 3,155 yen.

Toyota, which gets about 31 percent of sales from North America, climbed 4.5 percent to 3,605 yen after saying its dealers will begin fixing flawed gas-pedals that caused the car maker to recall over 5 million vehicles and that its North American assembly operations will resume on Feb. 8. The stock slumped 18 percent through yesterday since the company announced the initial recall on Jan. 21.

Yesterday’s U.S. data added to signs global growth is accelerating. Two surveys released yesterday showed the Chinese economy sustained its manufacturing expansion in January as export orders jumped and inflation pressure grew. China’s economy expanded 10.7 percent in the fourth quarter while consumer prices rose a higher-than-estimated 1.9 percent in December from a year earlier, government data on Jan. 21 showed.

Mining Stocks Climb

A gauge of material producers on the MSCI Asia Pacific Index rose 1.9 percent as the U.S. manufacturing data boosted the prospects for commodities demand. The materials gauge is the MSCI Asia Pacific’s second-best performer in the past 12 months.

BHP Billiton Ltd., the world’s largest mining company, rose 3.2 percent to A$40.46. Rio Tinto Group, the world’s No. 3 mining company, advanced 5.3 percent to A$71.01. Mitsubishi Corp., a Japanese trading house which gets about 40 percent of sales from metals and energy, rose 5.1 percent to 2,249 yen. Jiangxi Copper Co. Ltd., China’s biggest producer of the metal, gained 1.7 percent to HK$15.82 in Hong Kong.

“The better-than-expected U.S. data are a positive for the market,” said Fumiyuki Nakanishi, a senior strategist at Tokyo- based SMBC Friend Securities Co. “Commodities are also swinging back.”

Mitsui Mining surged 5.1 percent to 247 yen. The company doubled its net income forecast for the year ending March 31 to 8 billion yen ($89 million), saying higher zinc prices are boosting sales.

Unexpected Decision

In Sydney, Westfield climbed 4.5 percent to A$12.90 after reporting a dividend for the six months to Dec. 31 of 47 Australian cents a share.

Commonwealth Bank of Australia rose 1.1 percent to A$53.55, while Telstra Corp., the nation’s biggest phone company, added 1.8 percent to A$3.38 as today’s rate decision confounded the forecast of all 20 economists in a Bloomberg News survey for a quarter-point increase.

“This is a big relief and reduces the serious risk of a policy blunder,” said Platypus Asset’s Patkar.

Concerns that central banks will take steps to prevent regional economies from overheating has brought the average price of the MSCI Asia Pacific Index’s companies down to 1.54 times book value from 1.65 times on Jan. 15, when the index settled at a 17-month high.

China last month required banks to raise their reserve ratios and asked some banks to curb lending. The Reserve Bank of India increased the reserve ratio for banks on Jan. 29, while the Philippines boosted the rate it charges for lending money to banks from yesterday.

‘Buying Opportunity’

“Recent declines provide a good buying opportunity,” Wang Tao, president of the Technical Analysis Society of Singapore, told Bloomberg Television. The MSCI Asia Pacific’s 200-day moving average could provide a strong support for the gauge, he said. The index’s 200-day moving average is presently at 112.21, according to data compiled by Bloomberg.

The MSCI Asia Pacific Index advanced 34 percent last year, the most since 2003, on optimism growth in Asia, led by China and India, will help drag the global economy out of its worst recession since World War II. The MSCI World Index climbed 27 percent in 2009.

DeNA surged 19 percent to 625,000 yen after saying sales for the nine months ended Dec. 31 rose 7.1 percent. Brother Industries gained 8.9 percent to 1,100 yen. The company reported a 19 percent increase in net income for the nine-months ended Dec. 31 and raised its full-year forecast by 16 percent.

To contact the reporters for this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net.

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European Stocks Advance; Stoxx 600 Index Increases 0.2 Percent

By Andrew Rummer

Feb. 2 (Bloomberg) -- European stocks advanced for a third day, the longest stretch of gains in three weeks, as basic- resources producers climbed.

The Dow Jones Stoxx 600 Index added 0.2 percent to 249 at 9:49 a.m. in London, having previously dropped as much as 0.5 pecent.

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Consumer Spending in U.S. Increases for Third Month

By Timothy R. Homan

Feb. 1 (Bloomberg) -- Spending by U.S. consumers increased in December for a third consecutive month, signaling the biggest part of the economy will contribute more to growth in coming months.

The 0.2 percent increase in purchases was less than anticipated and followed a 0.7 percent gain in November that was larger than previously estimated, Commerce Department figures showed today in Washington. Incomes climbed 0.4 percent, exceeding expectations.

Retailers such as Amazon.com Inc. are posting profits on increased sales as Americans spent more this past holiday season than the year before. Employment is key to propelling bigger gains in spending, one reason the Obama administration is proposing a fiscal 2011 budget today that calls for $100 billion in additional stimulus focusing on jobs.

“Consumers have the wherewithal to support good spending, however they are going to be reticent until they see a few good months of job gains,” said Craig Thomas, a senior economist at PNC Financial Services Group Inc. in Pittsburgh, who correctly forecast the gain in spending. “2010 is lined up to be a moderately good year.”

Stock-index futures held earlier gains following the report. The contract on the Standard & Poor’s 500 Index rose 0.6 percent to 1,076.5 at 9:10 a.m. in New York. Treasury securities fell.

The median estimate of 65 economists surveyed called for a 0.3 percent increase in spending, after an originally reported gain of 0.5 percent the prior month. Projections ranged from no change to 0.7 percent.

Income Gains

The gain in incomes followed a 0.5 percent increase in November and exceeded the 0.3 percent median estimate in the Bloomberg survey. Wages and salaries climbed 0.1 percent in December after increasing 0.4 percent the prior month.

Today’s report showed prices were stabilizing. The inflation gauge tied to spending patterns rose 2.1 percent from December 2008, less than the survey median forecast.

The Fed’s preferred price measure, which excludes food and fuel, climbed 0.1 percent in December from the previous month and was up 1.5 percent from a year earlier.

Adjusted for inflation, spending climbed 0.1 percent following a 0.4 percent rise the prior month.

Because the increase in spending was smaller than the gain in incomes, the savings rate rose to 4.8 percent from 4.5 percent the prior month.

Disposable income, or the money left over after taxes, increased 0.4 percent.

Better Sales

Amazon, the world’s largest Internet retailer, posted profit and sales that beat analysts’ estimates and said revenue growth may accelerate this quarter as consumers start spending more following the recession. Sales may rise as much as 43 percent to $7 billion in the first quarter, more than last year’s 18 percent growth, the Seattle-based company said last week in a statement. Analysts surveyed by Bloomberg had estimated sales of $6.42 billion.

Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, climbed 0.2 percent in December after rising 2.3 percent the prior month.

Purchases of non-durable goods decreased 0.8 percent, and spending on services, which account for almost 60 percent of all outlays, increased 0.4 percent.

The economy grew at a 5.7 percent annual rate in the fourth quarter, exceeding the median forecast of economists surveyed, figures from the Commerce Department showed last week. Consumer spending, which accounts for 70 percent of the economy, climbed at a 2 percent pace, also exceeding expectations.

To contact the reporter on this story: Timothy R Homan in Washington at thoman1@bloomberg.net

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Manufacturing in U.S. Expands More Than Forecast

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Manufacturing in U.S. Expands More Than Forecast (Update2)

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By Bob Willis

Feb. 1 (Bloomberg) -- Manufacturing expanded in January at the fastest pace since August 2004, spearheading the U.S. recovery from the worst recession since the 1930s.

The Institute for Supply Management’s factory index rose to 58.4, exceeding the highest estimate in a Bloomberg News survey of economists, from December’s 54.9, figures from the Tempe, Arizona-based group showed. Readings greater than 50 signal expansion. The gain reflected increases in orders, production and employment.

Factories are stepping up production as stimulus-fueled gains in demand and record cutbacks in inventory boost orders. After job cuts of 7.2 million in the last two years, some companies such as Ford Motor Co. are beginning to hire again, laying the groundwork for sustained gains in spending.

“Manufacturing is growing, it’s going to continue to expand,” said Hugh Johnson, who manages more than $1.6 billion as chairman of Albany, New York-based Johnson Illington. His forecast of 58 was highest in the Bloomberg survey. “Whether or not this continues to unfold will depend very heavily on final demand.”

Stocks and Treasury yields rose after the report, with the Standard & Poor’s 500 Index gaining 1.1 percent to 1,085.16 at 10:47 a.m. in New York. The yield on the 10-year Treasury note rose 7 basis points to 3.66 percent, according to BGCantor Market Data.

The factory index exceeded economists’ median forecast of 55.5, according to 67 projections in a Bloomberg survey. Estimates ranged from 53.5 to 58. Manufacturing accounts for about 12 percent of the economy.

Spending, Incomes

A separate report today showed U.S. personal spending rose 0.2 percent in December, the third straight gain, according to the Commerce Department in Washington. Incomes climbed 0.4 percent, exceeding expectations.

The pace of global manufacturing is picking up in response to faster economic growth, separate reports showed today. U.K. factories expanded in January at the fastest rate since 1994, figures from the Chartered Institute of Purchasing and Supply and Markit Economics showed.

Growth in the 16-nation euro region’s manufacturing industry accelerated more than estimated in January, according to a separate report from London-based Markit Economics.

The U.S. ISM’s production index rose to 66.2 from 59.7 and the new orders index increased to 65.9, the highest since December 2004, from 64.8.

Employment Rises

The employment index rose to 53.3 in January, the highest since April 2006, from 50.2 a month earlier.

A gauge of export orders increased to 58.5 from 54.5. The index of prices paid jumped to 70 from 61.5.

The supplier delivery gauge, a measure of the time it takes to receive goods, rose to 60.1 from 56.8 the prior month. The measure of orders waiting to be filled increased to 56 from 50. The inventory index rose to 46.5 from 43.

Government stimulus helped spark rebounds in the housing and automobile industries, two of the most depressed areas during the recession.

Factories also benefited from increased orders after companies pared inventories last year by a record $125 billion. Efforts to rebuild depleted stockpiles at the end of the year contributed 3.4 percentage points to a fourth-quarter growth rate of 5.7 percent, the strongest in six years.

Corporate spending on new equipment is also beginning to pick up. Texas Instruments Inc., the second-largest U.S. chipmaker, said it will spend almost $1 billion this year to expand three factories and open a fourth to fill orders.

Federal Reserve

Federal Reserve officials, who left the benchmark lending rate unchanged in a range between zero and 0.25 percent on Jan. 27, noted in their policy statement that “business spending on equipment and software appears to be picking up.”

Employers last month may have added jobs for the second time in the last two years. Economists surveyed by Bloomberg forecast an 8,000 gain in payrolls in January after a loss of 85,000 the previous month. The Labor Department will report the figure on Feb. 5.

Production gains are starting to encourage the hiring needed to ensure the recovery is sustained.

Ford said Jan. 26 it will spend about $400 million and add 1,200 jobs at two Chicago plants to build a new, more fuel- efficient Explorer sport-utility vehicle.

Recalling Workers

Caterpillar Inc., the world’s largest maker of earthmoving equipment, has recalled more than 500 workers and said Jan. 27 that higher production will require “selective” increases in employment. Economies in North America, Europe and Japan are improving and more rapid rebounds are occurring in China and most developing countries, the Peoria, Illinois-based company said.

General Electric Co. is hiring workers in energy, health care and rail transportation, in part because governments’ economic-stimulus plans have helped lift demand.

GE, whose power-plant equipment generates one-third of the world’s electricity, is bidding to supply new passenger locomotives for Amtrak and in November announced a joint venture in China that would make high-speed rail locomotives that may add 200 U.S. jobs.

“We will create jobs in the United States that could not have been created any other way,” John Rice, chief executive officer of GE Technology Infrastructure, said of the rail programs in a Jan. 28 Bloomberg Television interview.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

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Carlyle’s Rubenstein Warns Against Roubini Pessimism in Davos

By Simon Kennedy and Aaron Kirchfeld

Jan. 27 (Bloomberg) -- Carlyle Group LP co-founder David Rubenstein said it’s a “pretty attractive” time to invest, telling New York University Professor Nouriel Roubini that his pessimism about the economic outlook is misplaced.

“There are a lot of great opportunities we see in the United States and abroad,” Rubenstein said today at the World Economic Forum’s annual meeting in Davos, Switzerland. “Sometimes generals fight the last war, economists fight the last recession.”

Diverging outlooks of investors and economists are being thrown into relief in the ski resort as the worst financial crisis since the Great Depression ebbs. While the MSCI World Index has surged about 65 percent since March, Davos delegates including Roubini and Nobel laureate Joseph Stiglitz say the rally may end as the economic rebound loses steam.

“There is now a debate about the shape of this recovery,” Roubini, who predicted the crisis a year before it began in 2007, told the opening panel before Rubenstein challenged him. “I see a faltering of growth in the U.S., Europe and Japan.”

Rubenstein, who heads the world’s second-largest private equity firm, identified emerging economies as “attractive places” for investors alongside U.S. markets for energy and health care. Prices are low and the risk of systemic failure has been eliminated, meaning deals done last year will be among “some of the best” struck in a decade, he said.

‘Largely Recovered’

“The U.S. economy has largely recovered in the view of professional investors from the worst,” he said. “We’ve gone through a bit of a heart attack and heart attacks are not fatal so much anymore, so we’ve learned a lot.”

While he agreed that emerging markets will outperform their richer rivals, Roubini predicted growth in advanced economies such as the U.S. will slacken in the second half of the year. He cited weakening labor markets, declining consumer spending, tight credit, manufacturing overcapacity, government budget cuts and rising bond yields, he said.

“In advanced economies, the first half of the year is going to better than the second half,” Roubini said.

Roubini’s caution was shared by Dennis M. Nally, global chairman of New York-based PricewaterhouseCoopers LLP. A survey conducted by his company found 81 percent of 1,198 chief executives in 52 nations are confident in the next 12 months, yet majorities are worried by the threat of a protracted recession and intend to cut costs deeper.

‘Cautionary View’

“We’re not out of the woods yet,” Nally said. “There is a cautionary view.”

The International Monetary Fund yesterday raised its forecast for global growth this year to 3.9 percent from 3.1 percent, yet said the recovery in industrial nations will stay “sluggish” amid high unemployment and rising public debt.

Rubenstein and Roubini found common ground in agreeing that rising debt in the U.S. poses a threat to its economy and markets. Failure to tackle the debt will trigger a “sinking” dollar and undermine its role as the world’s reserve currency, Rubenstein said. Roubini warned that investors may “wake up” to the fiscal imbalances and push up long-term interest rates, choking the economic recovery.

To contact the reporter on this story: Simon Kennedy in Davos at skennedy4@bloomberg.net; Aaron Kirchfeld in Davos at akirchfeld@bloomberg.net

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Fed May Take Chance Ending Debt Purchases Won’t Hurt Housing

By Steve Matthews and Vivien Lou Chen

Jan. 27 (Bloomberg) -- The Federal Reserve may take a chance the housing market can stage a comeback without its support by announcing today it will stick to the plan to end a $1.25 trillion program of mortgage-debt purchases in March.

Fed Chairman Ben S. Bernanke and other policy makers meet after the sixth straight monthly gain in home prices in November added to signs housing is stabilizing. With financial markets rebounding, the central bank has said it plans to end emergency aid to bond dealers and money markets by Feb. 1.

The Fed will probably acknowledge growth accelerated last quarter while noting that tight credit and unemployment near a 26-year high still pose risks to the recovery. Officials are likely to maintain a pledge to keep interest rates low for “an extended period” as they look for evidence of a sustained expansion that will create jobs without raising inflation expectations, former Fed governor Lyle Gramley said.

“The Fed wants to sit still until the smoke clears,” said Gramley, a senior economic adviser to Potomac Research Group. “To change the ‘extended period’ language would send a signal to markets that a tightening is not far off, and I don’t think the Fed wants to do that,” Gramley said. He doesn’t expect a rate increase for at least six months.

The Federal Open Market Committee, gathering while Bernanke awaits a Senate vote on whether to confirm him for a second term, is scheduled to issue its statement at around 2:15 p.m.

Regional Fed presidents have differed over whether to continue buying mortgage-backed securities after March 31, with James Bullard of St. Louis saying the central bank should create such an option and Philadelphia’s Charles Plosser saying the purchases should end as scheduled.

Backed by Government

The Fed plans to buy $1.25 trillion of mortgage-backed securities sold by government-backed, housing-finance firms Fannie Mae, Freddie Mac and federal agency Ginnie Mae, along with $175 billion of corporate debt issued by Fannie, Freddie and the government-chartered Federal Home Loan Banks.

During the current meeting “the real discussion will be when they end the MBS program,” said former Atlanta Fed research director Robert Eisenbeis, using the acronym for mortgage-backed securities.

“This raises a huge risk to the recovery,” said Eisenbeis, now chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey. “You don’t want to risk cutting off the recovery in housing by essentially pulling the rug from under it.”

The Fed’s purchases have helped reduce mortgage rates by a range of a 25 basis points to 75 basis points, Boston Fed President Eric Rosengren said through Thomas Lavelle, a spokesman. A basis point is 0.01 percentage point.

Large Portfolio

Rates won’t increase by an equal amount after the end of purchases because the Fed will continue to hold a large portfolio of mortgage-backed securities, Rosengren said.

Eisenbeis disagreed, saying mortgage rates could rise by 75 basis points to 100 basis points.

The rate for 30-year fixed U.S. home loans, which reached a record low of 4.71 percent last month, was 4.99 percent in the week ended Jan. 21, according to mortgage finance company Freddie Mac.

“Housing is so heavily dependent on the Fed right now,” said Sung Won Sohn, former chief economist at Wells Fargo & Co. and now an economics professor at California State University- Channel Islands in Camarillo, California.

“The important thing for them is not to rock the boat and leave themselves plenty of flexibility so that in February and March they can alter their position if they need to,” he said.

Home-Price Index

The S&P/Case-Shiller home-price index increased 0.2 percent in November, the sixth consecutive gain, the group said yesterday in New York. The index was down 5.3 percent from November 2008, more than anticipated and the smallest year-over- year decline in two years.

U.S. central bankers, after reducing the main interest rate to a range from zero to 0.25 percent, switched last year to asset purchases and credit programs as the primary policy tools. The Fed has expanded its balance sheet to $2.24 trillion at the end of 2009 from $879 billion at the start of 2007. Since March, the FOMC has said “exceptionally low” rates are likely warranted for “an extended period.”

Bullard, who votes this year on policy, said in a speech in Shanghai this month the Fed should adjust asset purchases based on changes in the economy. Chicago Fed President Charles Evans told reporters Jan. 13 that the central bank would consider expanding purchases “if conditions were to deteriorate.”

In contrast, Kansas City Fed President Thomas Hoenig, who also votes on policy this year, said in a Jan. 11 interview that “the private market now is healing” and the program should end. Richmond Fed President Jeffrey Lacker said last month, “I think we have to move over time away from channeling resources to the housing market.”

Unexpected Loss

Policy makers will likely note continued “slack” in labor markets following last month’s unexpected loss of 85,000 jobs. The FOMC projects the unemployment rate will be between 9.3 percent and 9.7 percent in the fourth quarter of this year, according to forecasts released after its November meeting.

“It’s still too early to expect a dramatic announcement with regard to the Fed’s exit strategy because the economy is still finding its footing,” said Alan Skrainka, chief market strategist for Edward Jones & Co. in St. Louis, which oversees $500 billion in stocks, bonds, and mutual fund assets.

“It’s a delicate balancing act,” he said. “If the Fed pulls back too soon, the economy falters. If the Fed waits too long, the inflation risk grows.”

The central bank will probably continue to describe inflation as “subdued” and inflation expectations as “stable,” economists said. The Fed’s preferred price measure, which excludes food and fuel, climbed 1.4 percent in November from a year earlier.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net; Vivien Lou Chen in San Francisco at vchen1@bloomberg.net.

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