Archive for July, 2010

T -2Hours; Markets Brace For Stress Test Results

Friday, July 23rd, 2010

In a cohorted effort to inject confidence back into the market, the European Union will release results of stress test on 91 pan-European banks by 12:00 PM EST. In all, markets will be pulled in either direction as the S&P has been unable to break the 1100 handle. The European Financial Committee took a page out of the US stress test criteria, however Analysts state, the tests is deemed very vague and not clear cut. But, if the results prove to be resilient which I anticipate, I believe markets will move upward and break the S&P 1100 resistance in similar fashion as the run-up in the US in 2009. Markets have been in a down draft since April 28. If this market moving information is not deemed positive subsequent to the Union’s 1 trillion euro injection to the reserve, then we’re in for a treat.

Criteria of the stress tests have been released this morning and is as follows:

The Committee of European Banking Supervisors (CEBS) said the tests were tougher than the ones carried out in the US last year, because its adverse scenario is so severe that it is a once-in-20- years possibility, while the US one was considered a one-in-seven-years possibility.

The euro 1.2826    -0.0057  (-0.44%) fell sharply after the release of the methodology, as investors still doubt that they will reflect the full extent of the financial sector’s woes.

Here are details of the methods and criteria applied in the tests:

ADVERSE SCENARIO:

-  Gross domestic product (GDP) 3 percent deviation on average, taking into account the European Commission’s forecast of around 1 percent GDP growth for 2010 and 2 percent in 2011

- A 6 percent increase in unemployment

-  A 6 percent rise in markets’ interest rates       

- Currency swings

- Banking book equity value drop of 20 percent in 2010 and 20 percent in 2011 (cumulative effect of 36 percent) and securitization external ratings downgrades of four notches

- House prices variations (which will be calculated by national authorities in each country)

SOVEREIGN SCENARIO:

-  No default applied

- Starting point is the value at the end of 2009

-  Haircuts were applied to all EU government bonds (even Germany – 4 percent for a 5-year bond)

-  Haircuts were applied to trading books only

-  Portuguese 5-year bonds haircut: -14 percent

- Germany 5-year bond haircut: – 4 percent

- A 10-year Greek bond would have a 42.2 percent haircut if a long-term interest rate that was 5.77 percent at the end of 2009 would surge to 14.69 percent at the end of 2011.

-  In this case, a 5-year Greek bond would see a fall in value of 23 percent.

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Stocks Surge On Upbeat Earnings And Forecasts

Thursday, July 22nd, 2010

Stocks have surged after strong earnings from Caterpillar, UPS and other companies revived optimism about the economic recovery. A better than expected report on housing and encouraging signs of growth in Europe added to the market’s upbeat mood.

Caterpillar, 3M, UPS and AT&T all topped forecasts and raised their outlooks for the future. Meanwhile, sales of previously occupied homes fell less than expected, and a report showed unexpected growth in the 16 countries that use the euro.

The DJIA    2 O rose 201 points, or 2 percent, to 10,322. The Standard & Poor’s 500 index rose 24, or 2.3 percent, to 1,093. The Nasdaq composite index rose 58, or 2.7 percent, to 2,245.

Only 397 stocks fell on the New York Stock Exchange while 2,675 rose. Volume came to 1.2 billion shares.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP’s earlier story is below.

NEW YORK (AP) — Stocks surged Thursday after another strong batch of earnings reports revived optimism about the economic recovery. Encouraging signs of growth in Europe added to the upbeat mood.

Traders largely wrote off a jump in the number of people seeking unemployment benefits for the first time. The increase was likely skewed by seasonal factors. Instead, investors focused on earnings from a broad range of companies that showed businesses aren’t seeing a slowdown in the recovery. News of corporate deals also lifted shares. In afternoon trading, the Dow Jones industrial average rose 206.54, or 2 percent, to 10,327.37. The S&P rose 2.2 percent, to 1,093.25

The Dow Jones industrial average rose more than 200 points in afternoon trading. Broader indexes also rose more than 2 percent. Interest rates surged in the Treasury market as investors felt less need to put their money into the safety of government securities.

Caterpillar Inc., 3M Co., UPS Inc. and AT&T Inc. all topped earnings forecasts and raised their outlooks for future profit. Only Travelers reported a dip in earnings, but that came as bad weather led to more claims payments. Investors who have been selling stocks on disappointing earnings and revenue figures over the past week got some reassurance from companies’ outlooks on Thursday. Caterpillar said its orders are growing and production will pick up in the second half of the year. UPS raised its outlook because of spending by businesses. Caterpillar’s stock rose 2.1 percent, while UPS gained 5.9 percent.

More earnings are due out later in the day, including from American Express Co., Microsoft Corp. and Amazon.com Inc. Nearly seven stocks rose for every one that fell on the New York Stock Exchange, where volume came to 565.6 million shares.

European markets rose after a report showed unexpected growth in the 16-nation group that uses the euro. In recent months, investors worldwide have been concerned that rising government debt in Europe would stall a global recovery. A jump in Europe’s purchasing managers index reported Thursday was a welcome relief after forecasts of a possible recession on the continent. The economic reports out of Europe was a big surprise. The market’s gains Thursday came a day after investors sold stocks because Federal Reserve Chairman Ben Bernanke warned Congress that the economy remains fragile. Bernanke confirmed investors’ fears that the best scenario for the economy is only slow growth and relatively high unemployment. Bernanke was testifying again before Congress on Thursday.

Stock trading has been erratic for weeks as investors were quick to sell at any signs of bad news and just as eager to buy on signs of optimism. The Dow has moved by at least 100 points in just over half the trading days since it hit its 2010 high of high for the year on April 26.

The upbeat corporate profits, outlooks and acquisitions come against a backdrop of still mixed economic data. The Labor Department said weekly claims for jobless benefits jumped by 37,000 to 464,000. Economists polled by Thomson Reuters expected claims to rise to 445,000 last week.

The big jump comes after a big drop a couple of weeks ago when companies like GM reported fewer temporary layoffs than usual for the time of year. Even with the distorted numbers, high unemployment remains of the biggest obstacles to a strong, sustained recovery.

News tommorrow:

Results of the European Stress Tests

Discussions from politicians of extending Bush’s tax cuts

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Euro-Zone Growth Unexpectedly Surges: PMI

Thursday, July 22nd, 2010

U.S. stocks surged 195 points for the DJIA; Thursday morning as investors were encouraged by strong U.S. corporate earnings and European economic data, helping them shrug off a bigger-than-expected rise in weekly U.S. jobless claims.

Investors are attempting to balance weak U.S. macroeconomic data against strong corporate earnings and glimmers of hope from Europe, which will release results of its “stress tests” of 91 banks on Friday.

The U.S. Labor Department said the number of U.S. workers filing initial claims for jobless benefits increased more than expected last week, reinforcing fears that a job rebound may not materialize. The data comes just one day after Federal Reserve Chairman Ben Bernanke told lawmakers that the U.S. economic outlook was “unusually uncertain” and signaled that he would not immediately shift Fed policy to boost the recovery. Investors will be watching the Fed chairman as he appears again before Congress Thursday morning.

At the same time, a pack of encouraging corporate earnings figures cheered the market, helping the DJIA, at 10269 in early trading Thursday. The S&P advanced 1.6% to 1086. Dow components Caterpillar and 3M rose 1.3% and 2.9% respectively, as the two economically-sensitive bellwethers reported soaring earnings numbers, beating analyst expectations. AT&T advanced 2.2% after it beat earnings forecast and issued strong guidance, though it disappointed on revenues.

United Parcel Services surged 4.4% after profit jumped 90% on higher package volume and revenues, easily topping expectations.

Online auctioneer eBay gained 5.6% as second-quarter earnings rose 26%, although the e-commerce operator reined in its guidance because of the stronger dollar.

In the technology sector, Microsoft and Amazon.com will report results after the market closes. Microsoft gained 2.3% while Amazon advanced 1.3% in trading.

In addition to the generally bright corporate earnings in the U.S., European data and corporate earnings added to investors’ tepid optimism.

Data out of Europe showed the composite purchasing managers index, which includes manufacturing as well as service industries in the region, rising to 56.7 in July from 56.0 in June, instead of falling to 55.2 as expected. Also, euro-zone industrial orders showed a 3.8% rise in May. The consensus forecast was for the orders to remain unchanged after a revised 0.6% rise in April. Finland’s Nokia, the world’s largest maker of mobile phones, reported a 40% fall in profit that was nonetheless better than expectations. Nokia shares surged 3.7% amid reports that Nokia is looking to replace its chief executive.

Credit Suisse, the first of Europe’s large investment banks to present second-quarter results, reported a small but unexpected rise in profit. However, shares slipped 1.6% as it echoed the U.S. banks’ trend of slumping investment-banking activity.

In the currency markets, the euro rose to $1.2845, while the U.S. Dollar Index, which tracks the currency against a basket of six others, fell 0.8%. Oil futures surged to approach $78 a barrel, while gold futures fell

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Futures Higher After Apple, MS Results

Wednesday, July 21st, 2010

Apple, Morgan Stanley post strong earnings

* Bernanke testimony on tap

* Futures up: Dow 29 pts, S&P 4.6 pts, Nasdaq 15.5 pts

U.S. stock index futures rose on Wednesday as solid earnings from technology giant Apple along with financials Morgan Stanley and Wells Fargo eased growth concerns.

Apple Inc (AAPL) gained 3.4 percent to $260.51 in premarket trade after an unusually upbeat revenue forecast calmed concerns that iPhone 4 antenna problems would dampen sales.  Apple was a bright spot after a string of disappointing revenue results, including ones from International Business Machines Corp (IBM) and chipmaker Texas Instruments Inc (TXN)

Investors closely watched top-line numbers for signs of growth in the economy as recent data has signaled a slowdown. Apple offered some hope that it is not an all-or-nothing situation, that growth is possible.

S&P 500 futures gained 4.6 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures added 29 points, and Nasdaq 100 futures  advanced 15.5 points.

Futures extended gains after Morgan Stanley (MS) and Wells Fargo & Co (WFC) gained posted quarterly results.  Morgan Stanley advanced 2.7 percent to $25.90, while Wells Fargo climbed 3.2 percent to $26.75 premarket.

Diversified U.S. manufacturer United Technologies Corp (UTX) reported a 13.7 percent rise in profit and raised its full-year forecast, saying demand and margins improved.

Fellow Dow component Coca-Cola Co (KO) gained 1.4 percent to $54 after the soft-drink maker reported higher quarterly profit on Wednesday, helped by increased revenue and sales volume.

U.S. Federal Reserve Chairman Ben Bernanke, in testimony before Congress at 2 p.m. EDT [1800 GMT], may provide a fresh outlook on the health of the world’s biggest economy as well as policy signals from the central bank.

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Unemployment Benefits Bill Clears Senate

Tuesday, July 20th, 2010

After months of deliberating and bickering about adding to the deficit, the Senate has now passed a key vote to extend unemployment benefits. Millions of Americans (approx 1.5 million people qualify for the extension which equates to 1% of the unemployment rate) can now pay off their mortgages and continue to pay bills with the assistance of the Government and essentially the tax payers footing the bill.

The Senate broke a stalemate on Tuesday over extending unemployment benefits for Americans who have been out of work for six months or more, voting to override Republican objections that the bill’s costs would add to the federal deficit. On a 60-to-40 vote, the Democratic-led Senate agreed to cut off debate on the $34 billion plan to distribute added unemployment compensation through November for those who have exhausted their standard 26 weeks of aid.

The 60 “Yes” were the minimum needed to overcome the threat of a filibuster and advance the bill to a final vote, expected later on Tuesday, when it is all but certain to pass. Two Republicans, Senators Susan Collins and Olympia J. Snowe of Maine, joined 56 Democrats and two independents in voting for the legislation; 39 Republicans and one Democrat, Senator Ben Nelson of Nebraska, opposed it.

An estimated 2 million Americans have seen their benefits run out over the past two months while the legislation has been stalled in the partisan impasse. “Finally, finally, finally,” said Senator Barbara A. Mikulski, Democrat of Maryland. She called the unemployment insurance program a social compact with American workers that meant “when you hit a speed bump and have to be laid off through no fault of your own, there will be a safety net so that you do not fall.”

Republicans said they backed the idea of extending benefits, but were determined to prevent the costs from being piled onto the mounting deficit. “We believe the federal debt has grown to an alarming level, where it is threatening the future of our children and grandchildren,” said Senator Lamar Alexander of Tennessee, the No. 3 Republican in the Senate.

After the Senate completes its final vote on the measure, the House must still act on it, a vote that is expected to come on Wednesday. President Obama would then quickly sign the bill into law at the White House, freeing the aid. The Senate action came just minutes after Carte Goodwin was sworn in as the new Democratic senator from West Virginia, replacing the late Robert C. Byrd. While the seat was vacant, Democrats lacked the votes to overcome the Republican filibuster. At age 36, Mr. Goodwin, a former legal adviser to Gov. Joe Manchin III, becomes the youngest member of the Senate; Mr. Byrd, at 92, had been the oldest.

Both parties expect the fight over the unemployment extension to figure in midterm election campaigns in the fall. Republicans say they believe their stand will strengthen them with voters worried about the rising deficit. Democrats will criticize Republicans’ willingness to set aside deficit concerns when they pushed through tax cuts for the affluent, but not when unemployment pay for ordinary workers was at stake.

Market News

Stocks closed higher Tuesday, recovering from steep loses earlier in the session, on optimism about quarterly earnings from Apple and speculation about possible moves by the Federal Reserve.  The DJIA rose 75 points, while the S&P rose 12 points. 

The tone improved in the afternoon on chatter that the Fed is considering additional steps to encourage bank lending. Ben Bernanke, chairman of the U.S. central bank, is scheduled to testify before Congress on Wednesday. But that’s all speculation and another reason to sell into strength. 

Apple is among the many companies slated to report quarterly results after the closing bell. Investors have been focused largely on corporate financial results, with over 120 companies due to report this week.

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Housing Starts Falls Further; Lowest Since Oct 09

Tuesday, July 20th, 2010

After a federal subsidy for buyers expired, housing starts fell 5% in June to a seasonally adjusted annual rate of 549,000 in June, the lowest level in eight months, the Commerce Department estimated Tuesday. The drop was worse than the 3% decline to 575,000 expected by economists surveyed by MarketWatch. Building permits rose 2.1% on the month, due to a 20% gain in permits for multi-family units. Permits for single-family homes – considered by many to be the most vital number in Tuesday’s release – fell 3.4% to a seasonally adjusted annual rate of 421,000, the lowest level since April 2009.

The retreat following the end of government support shows it will be difficult for the industry that precipitated the recession to sustain a recovery. Mounting foreclosures will swell the supply of houses on the market and pressure prices, while prospective buyers shy away as a lack of jobs shakes confidence in the world’s largest economy. We’re going to see general weakness in the housing market, at least into the fourth quarter. Sales were boosted until April by the tax credit and now we’re seeing a sharp falloff. The Commerce Department’s homebuilding figures are due at 8:30 a.m. in Washington. Estimates ranged from 525,000 to 620,000. Housing’s inability to maintain a rebound is one reason the economic recovery is not gaining speed. Building permits were probably little changed at 575,000 from 574,000 in May, the survey showed, signaling construction is not likely to rebound in coming months.

Credit Ends

The projected drop in housing starts would follow a 10 percent decrease in May from April’s 18-month high. The deadline for signing purchase agreements and becoming eligible to receive a government tax credit worth as much as $8,000 was April 30. Sales of existing homes fell to a 5.1 million annual rate in June from 5.66 million the prior month, economists forecast before a July 22 report from the National Association of Realtors in Washington. Builders have to contend with a growing supply of existing homes that is driving down home values as foreclosures rise. Home seizures jumped 38 percent in the second quarter from a year earlier, RealtyTrac Inc. said last week, putting lenders on pace to claim more than 1 million properties this year.

Homebuilder sentiment fell in July to its lowest level since April 2009, a report yesterday from the National Association of Home Builders/Wells Fargo showed. The group’s confidence index fell to 14 from 16 the prior month, and readings less than 50 mean more respondents said conditions were poor.

Builder Shares

Shares of homebuilders have underperformed the broader stock indexes this year. The Standard & Poor’s Supercomposite Homebuilding Index has fallen 12 percent this year, compared with a 3.9 percent decline for the S&P 500 Index. Other economic data have turned down. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment decreased in July to the lowest level in 11 months, the group reported last week. Earlier in the month, the Labor Department reported private payrolls rose a less-than-forecast 83,000 in June and total jobs fell by 125,000, the first decline this year. The unemployment rate will end the year at 9.5 percent, unchanged from the rate in June.

Lennar Corp.’s home sales were running 20 percent to 25 percent lower last month than a year earlier as the expiration of the tax credit sapped demand, Chief Executive Officer Stuart Miller said June 24. “The new home market and housing in general still face serious headwinds from current economic and legislative conditions,” Miller said on a conference call with investors. “The prospect of additional delinquencies ahead continues to moderate this recovery as shadow inventory continues to be absorbed.”

New US Privately Owned Housing Starts – 49 Year Graph
Historical Housing Starts Graph

1/1960        1/1970               1/1980               1/1990                1/2000               1/2010                1/20       
This historical graph shows monthly New US Privately Owned Housing Starts. Measurement is in
Thousands of Units (seasonally adjusted annual rate). For the forecast and other links related to this
economic indicator, click the links below. Updated Monday, June 14, 2010.

 

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Housing Starts – Annual Percentage Change

 
   

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//

//

Year

Percent

 
   

//

//

//

Year

Percent

 
   

//

//

//

 

Year

Percent

 
     

//

//

//

 

Year

Percent

 
     

//

//

//

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975		 -18%
4%
11%
9%
-3%
-5%
-21%
10%
17%
-1%
-3%
42%
16%
-13%
-35%
-13%

   
     

//

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1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991		 32%
28%
2%
-14%
-24%
-16%
-4%
61%
4%
-1%
4%
-10%
-9%
-7%
-13%
-16%

   
     

//

//

//

1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007		 19%
8%
12%
-6%
8%
0%
10%
2%
-4%
2%
7%
8%
5%
6%
-13%
-26%

   
     

//

//

//

//

2008
2009		 -33%
-39%

   
   
     

//

The annual percentage change in Housing Starts is shown in this table: 1960 to present.

 

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Moody's Downgrade Ireland's Debt Rating

Monday, July 19th, 2010

Global rating agency Moody’s on Monday cut the sovereign debt rating of Ireland due to the country’s deteriorating financial situation, indicating that European debt crisis is far from over. The latest downgrade comes within a week of the agency slashing the rating of Portugal, which is grappling with severe debt crisis.

Moody’s Investors Service, which is part of Moody’s, has cut Irish government bond ratings to Aa2 from Aa1, signalling increased risk of default.

“Today’s downgrade is primarily driven by the Irish government’s gradual but significant loss of financial strength, as reflected by deteriorating debt affordability,” Moody’s lead analyst for Ireland Dietmar Hornung said in a statement.

The agency noted that Ireland’s weakened growth prospects are mainly on account of severe downturn in the financial services and real estate sectors and an ongoing contraction in private sector credit. It pointed out that “crystallisation of contingent liabilities from the banking system as a result of the government taking on debt to provide support to the country’s ailing banks”. However, Moody’s has raised the rating outlook of Irish government to stable from negative since it views the “upside and downside risks as being evenly balanced at the current rating level”.

Even as the near-term deterioration in the government’s debt metrics is expected to be severe, Moody’s asserted that government debt-to-GDP ratio would stabilise at 95-100 per cent over the next two to three years. Ireland, Portugal, Greece and Spain are among the European countries facing acute debt turmoil, a scenario that has raised concerns of even impacting the fragile global economic revival.

On July 13, the agency had slashed Portugal’s rating in the wake of the nation’s deteriorating financial position and weak economic growth prospects.

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Financial Reform Bill Passed In Senate- Now Law

Friday, July 16th, 2010

After months of debate and compromise, the U.S. Senate has passed the “Dodd-Frank Wall Street Reform and Consumer Protection Act” that supporters say will protect consumers from hidden fees and investment scams and require the financial industry to provide clear information so consumers can make the best financial decisions. It is the most sweeping Financial Reform Bill on unprecedent proportions since the Great Depression.

The House has already passed the measure, which will now be signed into law by President Obama.

How will the measure affect consumers? Almost as much as it affects businesses, supporters say.

Consumer protection

It establishes a first-of-its-kind regulator, whose sole job will be consumer financial protection — cracking down on abusive lending and financial practices including mortgages, credit cards, payday loans and bank accounts. Mortgage reforms include requirements that borrowers provide evidence of their ability to repay mortgages, and prohibitions on compensating lenders for steering consumers into higher-cost loans.

For consumers who are also investors, it seeks to ensure accountable, transparent derivatives trading: Nearly all derivatives will have to be exchange traded and cleared, so trades have enough money backing them and regulators can spot problems before they threaten the entire economy. Commercial banks will be prohibited from trading in some of the riskiest swaps. Supporters say it will strengthen reform by closing the loophole to ban all swaps trading by taxpayer-backed commercial banks.

It adopts the so-called “Volcker Rule,” named for the former Federal Reserve chairman who proposed it, It limits banks’ ability to speculate with taxpayer-insured deposits, and prohibits financial companies from betting against their clients. Supporters say it closes the loophole to ban all speculation with taxpayer-backed funds.

It begins to tackle “too-big-to-fail,” creating a new system to break up, rather than bail out, failing financial firms and make banks pay the bill. It will set strict size and leverage limits, and rebuild the walls between investment and commercial banks.

Wall Street oversight

“This bill sets the wheels in motion to replace the failed deregulatory policies of the 1990s with real oversight of Wall Street,” said Carmen Balber, Washington Director for Consumer Watchdog.

AARP said it supports the legislation because it will establish a watchdog that will protect consumers from getting a mortgage or credit card that has hidden fees that cause their bills to skyrocket; ensure Americans get the clear, accurate information they need to shop for mortgages, credit cards and other financial products; and crack down on investment scams targeted at older Americans.

“Over the last three years, older Americans have lost billions of hard earned dollars due to the failure of an outdated and compromised financial regulatory system,” said AARP Maryland senior state director Rawle Andrews. “The failures that led to this crisis require bold action to restore responsibility, accountability and consumer confidence in our financial system, and this bill will protect Americans’ money and help stabilize our entire economy.”

Heather McGhee, Director of Demos’ Washington DC office who supported efforts to pass the bill, said the reform will help middle class consumers.

Greater security

After the new consumer regulator opens its doors, Americans will open a checking account or apply for a loan with greater security because their lender will be accountable to basic standards of fairness and transparency. Investors will know that their broker-dealers are acting in their interest. Businesses hedging risk will know the real price of the derivatives contracts they buy. And if we have truly independent regulators with the will to stop reckless speculation, those regulators will have the power and tools to do so.

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China's Growth Slows; JPM Earnings Rise

Thursday, July 15th, 2010

China’s rapid growth is slowing as its huge stimulus winds down and Beijing cools a credit boom, possibly weakening a global recovery. The world’s third-largest economy expanded by 10.3 percent in the second quarter over a year earlier, down from the first quarter’s explosive 11.9 percent growth, the National Bureau of Statistics said Thursday. China’s ability to help drive a global recovery might be dented if slower growth cuts its appetite for U.S. and European factory machinery, industrial components from Asian suppliers and iron ore from Australia and Brazil. Countries that export raw materials to China will feel a bigger impact from declining investment.

China rebounded quickly from the global downturn, powered by a 4 trillion yuan ($586 billion) stimulus and a flood of bank lending. But communist leaders worry about surging home prices and a possible spike in bad loans at state-owned banks. They have imposed curbs on lending and investment, key drivers of growth and demand for raw materials. A statistics bureau spokesman, Sheng Laiyun, said despite the decline, growth is “very high” and within the government’s target range. The official growth target for the year is 8 percent, which analysts say China easily should achieve.

A slowdown in the growth rate will benefit the economy because it will prevent it from growing too fast and being overheated. This would help Beijing’s effort to boost domestic consumption and reduce reliance on resource-intensive investment and exports to drive growth and become a consumer based economy as opposed to an export economy.

June growth in factory output slowed to 13.7 percent, down from May’s 16.5 percent rise. Growth in retail sales and investment in factories and other fixed assets also eased. June exports rose 35 percent over a year earlier but analysts expect Europe’s debt crisis to crimp trade. A survey earlier by a Chinese business group found manufacturing activity in June fell for a third month as foreign orders declined. This is evidence that the June activity data shows the economy is slowing faster than anticipated. Beijing could stimulate the economy by easing credit, but that would underline that China’s challenge of generating strong and sustainable domestic demand growth remains unresolved.

China’s latest expansion leaves it poised to pass Japan as the second-largest economy behind the United States. China reported 2009 output of $4.98 trillion, just behind Japan’s $5.1 trillion. And China is growing much faster than its neighbor. June inflation eased to 2.9 percent over a year earlier, falling back below the government target of 3 percent for the year after prices rose 3.1 percent in May. Also Thursday, the government said foreign direct investment in China rose 39.6 percent in June over a year ago to $12.5 billion.

Beijing tightened controls on mortgage lending this year to stop speculation fueled by stimulus-related lending and blamed for a double-digit rise in housing prices. The measures finally appear to be working. The government reported this week that housing prices fell in June for the first time in 18 months, declining 0.1 percent from May, though they still were up 11.4 percent from a year earlier. Beijing has tried to use targeted controls to curb lending while avoiding an across-the-board interest rate hike that might derail growth. Last Friday, the central bank promised a “moderately easy” monetary policy for the rest of the year. Despite the credit clampdown, the International Monetary Fund raised its China growth forecast for 2010 from 10 percent to 10.5 percent this month. But some private sector analysts have cut their estimates. Goldman Sachs lowered its forecast this month from 11.4 percent to 10.1 percent while JP Morgan lowered its outlook from 10.8 percent to 10 percent. CICC’s Xing said he expects 9.5 percent growth after the full impact of Europe’s debt crisis and Chinese investment curbs hit in the second half.

Thursday’s data also showed investment still is growing faster than retail spending despite efforts to promote domestic consumption. Retail sales rose 18.2 percent in the first half but spending on factories and other fixed assets jumped 25 percent.

J.P. Morgan 

JPM posted higher second-quarter earnings on Thursday after setting aside less money for loan losses. The second-largest U.S. bank by assets said earnings jumped to $4.8 billion, or $1.09 a share, from $2.7 billion, or 28 cents a share, in the year-earlier period. Analysts on average expected earnings of 67 cents a share, according to Thomson Reuters. It could not immediately be determined if that figure directly compared to the $1.09 the bank posted. Revenue was $25.6 billion in the second quarter, in line with expectations.

JPMorgan reported a benefit of $1.5 billion after trimming its loan loss reserves in the quarter. U.S. stock index futures rose following the earnings report by the bank, a component of the Dow Jones industrial average. JPMorgan shares closed down 13 cents at $40.35 on Wednesday. The shares are down 3 percent this year.

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Fed Sees Slowing In Economic Recovery

Wednesday, July 14th, 2010
Federal Reserve policymakers, acknowledging a slowing in the economic recovery at their meeting in late June, began to consider the possibility of providing additional stimulus if growth fell sharply — a possibility that has become all the more real as signs of weakness have piled up. (Buy Gold-GLD) Minutes of the Fed’s June 22-23 meeting, released Wednesday, indicate that while board members discussed the need for a contingency plan, they did not raise major new concerns about the economy. (Not Yet but will soon between 1-3 years) In fact, even as Fed members noted the debt problems in Europe and the weak U.S. job market, they made only a tiny downgrade in their forecast for moderate economic growth this year and acceleration in 2011. But that was before the release of a string of data in recent days that have pointed to further deterioration in key drivers of the economy, including consumer spending, housing and even manufacturing. Adding to that, the government reported Wednesday that retail sales fell in June for the second straight month, with car dealers, furniture outlets and building-supply stores all taking a hit. And analysts expect the Fed’s report Thursday on factory production to show that it lost some steam last month, confirming other recent reports.

In its June meeting, the Fed “did not foresee the weakness that has developed” since then, said Lyle Gramley, a former Fed governor who is a senior economic consultant at the Potomac Research Group. But he expects policymakers to express significantly stronger concerns about the economy at their next meeting Aug. 10. Most analysts agree that it would take a sharp decline in key economic indicators before Fed officials would seriously contemplate further stimulus measures, especially given that any additional action by the Fed is likely to have only limited effect. The central bank’s short-term interest rate already is near zero, and mortgage rates, which the Fed has helped to drive down by purchasing certain securities, are also at historical lows.

Moreover, some Fed members are reluctant to take steps that will further boost the central bank’s already oversized assets, which present potential inflation and other problems down the road. We’re currently experiencing deflationary pressures with prices at record lows. For most of this year, discussions about the Fed’s stimulus programs have been focused on the need for a so-called exit strategy, the point at which the central bank would begin tightening credit and reduce the money supply to lower the risk of inflation. But with the economic recovery proceeding more slowly than anticipated, some Fed members expressed more concern about the risk of falling wages and prices, or deflation, according to the minutes of the June meeting, which was released with the usual three-week lag.

Fed policymakers in June projected that U.S. gross domestic product would grow 3% to 3.5% this year, down slightly from the range of 3.2% to 3.7% in their prior meeting in April. That was the first downward projection in more than a year. However, recent economic data suggest that even these estimates are too optimistic. The nation’s GDP, a broad measure of total economic output, expanded at an annual rate of 2.7% in the first quarter. And by most measures, GDP in the second quarter looks to be below 3% as well, with weakening momentum heading into the second half of the year.

A major economic concern is that federal fiscal stimulus, such as spending for highway and bridge projects, is expected to largely end this year, removing an important support for the economy. At the same time, budget-strapped local and state governments are cutting back and putting further strains on an economy that is already burdened with near double-digit unemployment, consumers who remain heavily indebted and many businesses that either are too worried to invest or can’t get credit to do so

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