Fed Going to cut Rate
Bernanke Cut Rates Stokes Price
Investors' expectations for inflation over the next 10 years jumped to the highest since June after Bernanke pledged to the House Financial Services Committee to act in a ``timely manner'' to combat ``downside risks'' to growth. A day after government figures showed wholesale costs rose 7.4 percent in January from a year ago, Bernanke said the price outlook has deteriorated ``slightly.''
Rising consumer prices, the ``classic bond worry,'' may start exceeding concerns about the stresses in credit markets, Lehman Brothers Holdings Inc.'s fixed-income strategy team said in a note to clients yesterday. ``We'd nominate the unmooring'' of inflation expectations ``as a prime risk for 2009-2010,'' they wrote.
Representative Gary Miller, a California Republican, told Bernanke that with continued high oil prices, ``it may be more difficult for the Fed to cut interest rates,'' and he asked the Fed chief about his other options besides lowering rates.
Bernanke goes to the Senate Banking Committee today in the second day of semiannual testimony on the economy.
Consumer prices last year surged 4.1 percent, the most in 17 years, spurred by higher fuel and food costs. Labor Department figures this week showed the biggest 12-month increase in wholesale costs since 1981 in January.
Yields Climb
Ten-year Treasury yields climbed to 3.85 percent yesterday from their January low of 3.29 percent. The notes rallied today as stocks slumped, with yields at 3.79 percent at
Inflation expectations as measured by the difference in yield between regular 10-year notes and 10-year Treasuries linked to consumer prices reached 2.56 percent after Bernanke spoke, the highest since June. The gauge is now at 2.43 percent.
Consumers' forecasts are also heading up. Households' estimate of price increases one year ahead reached 3.7 percent this month, the highest since August 2006, according to a gauge published by the
Fed Forecasts
Bernanke told lawmakers the Fed anticipates inflation will slow, in part because of ``sluggish'' economic growth and rising unemployment. In their quarterly forecasts published this month, central bankers projected prices, excluding food and energy, will rise 2 percent to 2.2 percent this year, slowing to a 1.7 percent to 2 percent pace in 2009.
Traders see a 100 percent chance that the FOMC will lower the target rate for overnight loans between banks by at least a half-point, to 2.5 percent. Officials have cut the rate by 2.25 percentage points since September.
Unlike recent remarks by other Fed officials and minutes of the last policy meeting, Bernanke made no mention of needing to raise rates once the economy stabilizes.
Rapid Reversal
At the Jan. 29-30 FOMC meeting, some policy makers ``noted that, when prospects for growth had improved, a reversal of a portion of the recent easing actions, possibly even a rapid reversal, might be appropriate.''
Fed Governor Frederic Mishkin, who has collaborated with Bernanke on research, said Feb. 15 the Fed ``should be prepared to take back the insurance'' from rate cuts ``once the recovery becomes clearly established.''
Yesterday, Bernanke reiterated that the Fed's stance ``must be determined in light of the medium-term forecast for real activity and inflation as well as the risks to that forecast.''
GDP Rose Less Than Forecast
The
Gross domestic product rose at a 0.6 percent annualized rate, unchanged from the initial estimate last month, after a 4.9 percent gain in the third quarter, the Commerce Department said today in
The report, combined with figures today showing claims for unemployment insurance jumped last week, reinforced traders' expectations that the Federal Reserve will cut interest rates again. Investors see a 100 percent chance of at least a half- point reduction in the benchmark rate to 2.5 percent by the end of the next meeting on March 18. Odds of a three-quarter point cut rose to 36 percent, from 10 percent.
Fed Chairman Ben S. Bernanke, testifying to the Senate Banking Committee today, signaled he's ready to lower interest rates again to sustain the expansion.
Jobless Claims
The Labor Department said initial claims for unemployment insurance climbed 19,000 last week to 373,000, higher than forecast. The level was the second-highest since a surge in claims in the aftermath of Hurricane Katrina in 2005.
The trade deficit narrowed to an annualized $506.8 billion, adding 0.9 percentage point to GDP.
Excluding the improvement in trade, the economy would have shrunk at a 0.3 percent annual pace, the first decline since 2001, when the
Rate Cuts, Stimulus
Consumer spending, which accounts for more than two-thirds of the economy, rose at a 1.9 percent annual rate in the fourth quarter, down from the 2 percent increase estimated last month, according to today's report.
Deteriorating sentiment is likely to keep restraining spending. Purchases may grow at a 1 percent pace this quarter, according the median estimate in a Bloomberg survey. The survey also projected 0.5 percent growth this quarter.
Consumer confidence fell this month to the lowest level since 2003 as the job market deteriorated, according to a report this week from the Conference Board, a New York-based research group. Americans' expectations for the next six months dropped to the lowest level since January 1991.
Weaker Incomes
Adding to concerns about spending, revisions for the third and fourth quarters also showed smaller gains in incomes, according to today's report. Personal income increased at a 4.1 percent annual pace from October through December, compared with an initial projection of 4.5 percent.
Income growth may slow further in coming months as the labor market softens. The
Fourth-quarter estimates for commercial construction, business investment on new equipment, government spending and inventories were also revised down.
Residential construction decreased at a 25 percent pace, more than previously estimated and the most since 1981. Declines are likely to continue through much of 2008.
Today's report is the second of three estimates released by the Commerce Department. The data will be revised again next month as more information becomes available.
Stock Market
Sprint, the third-biggest
The Standard & Poor's 500 Index declined 7.49 points, or 0.5 percent, to 1,372.53 at
The
Profit Slump
The S&P 500 has dropped 6.6 percent this year on concern the collapse of subprime mortgages and a slowdown in the world's largest economy will drag down profits. Earnings for S&P 500 companies will shrink this quarter and next, according to analysts' estimates.
Markets roll over with a wave of bad news. We're much more optimistic about the economy later this year.''
Sprint Nextel fell 98 cents, or 11 percent, to $7.97 on the NYSE. The company's per-share loss was $10.36 as customers defected and it wrote down the value of the purchase of Nextel Communications Inc. Sprint also eliminated its dividend.
Lampert's Company
Sears, the retailer controlled by investor Edward Lampert, reported fourth-quarter profit that plunged more than analysts projected after appliance and clothing sales declined. The stock lost $3.32 to $98.28.
JPMorgan lost 92 cents to $43.49. Goldman Sachs and Merrill Lynch reduce their forecasts on expectations of writedowns in the value of its home-equity loans.
Financial shares lost 1.8 percent, the most among 10 industries in the S&P 500.
Most
Mylan Inc. sank 82 cents, or 6.2 percent, to $12.33. The company said it had a quarterly loss of $1.38 billion on expenses from its $6.9 billion purchase of Merck KGaA's generics unit.
Japanese Stocks
Japanese stocks fell for a second time this week, led by automakers and electronics companies, after manufacturers forecast factory production will slow and the yen strengthened against the dollar. Companies expect factory output to fall 2.9 percent this month from January, worse than previously forecast, the Trade Ministry said today. The yen rose to the highest in three weeks after Federal Reserve Chairman Ben S. Bernanke signaled the
The Nikkei 225 Stock Average declined 105.79, or 0.8 percent, to close at 13,925.51 in
Honda retreated 2.3 percent to 3,360 yen, while Mazda fell 4 percent to 461 yen. Sony, which gets three quarters of its sales from outside of
Factory output dropped 2 percent last month, more than double what economists had predicted. Production of transport equipment, including cars, ships and motorcycles, fell the most in four months on a seasonally adjusted basis.
Stronger Yen
The yen strengthened against the dollar to as much as 105.96 in
Sharp Corp.,
KDDI,
OMC Card Inc. and Central Finance Ltd. didn't trade in the afternoon as bids outnumbered orders to sell the shares by more than 7-to-1. Sumitomo Mitsui Financial Group Inc. will combine consumer finance units OMC Card, Central Finance and Quoq Inc., the Asahi newspaper said.
Other consumer lenders gained on the news, including Pocket Card Co., which soared 18 percent, and Jaccs Co., which jumped 15 percent.
Sumitomo Metal Mining Co.,
Nikkei futures expiring in March fell 0.8 percent to 13,920 in
Currencies
The dollar fell against the euro for a third straight day as a weakening U.S. labor market and slower-than-forecast economic growth bolstered bets the Federal Reserve will cut interest rates through June.
The dollar also declined to the weakest versus the yen in month and to a record low against the Swiss franc.
The
The U.S. Dollar Index, which tracks the currency against six major counterparts, touched the lowest since its start in 1973. The index, traded on ICE Futures in
The
The yen advanced 2 percent to 14.01 per rand and gained 1 percent versus the
Oil
Oil Rises Above $100 as Dollar Drops to Record Low Against Euro
Crude oil rose above $100 a barrel in New York after the U.S. dollar dropped to an all-time low against the euro for a third day, prompting investors to buy commodities as an inflation hedge.
The dollar and stocks fell after a government report showed the
All the crude oil available is being vacuumed up by investors, in part because interest rates are low and there's no alternative to commodities that looks very good. Beside it, The fall in the dollar also attracted funds.''
Nigerian Disruption
There was a ``small'' disruption to its
``The size of the crude-oil market is still relatively small compared to the currency, bond or stock markets, so it doesn't take much of a reallocation of funds to have a major impact,'' Evans said.
Gold is trading less than 1 percent from the record $964.99 an ounce yesterday on prospects the Federal Reserve will cut interest rates, weakening the dollar and fueling inflation. Oil rebounded to more than $100 a barrel after a report that a militant attack in
Investor demand has been driven by concern about inflation in the
BHP Billiton Ltd., the biggest producer of aluminum in Africa, yesterday said current restrictions on smelters in Mozambique and South Africa to 90 percent of normal electricity consumption aren't sustainable in the ``long term.
``The market's betting that aluminum production will be cut in South Africa and the power will be returned to the rest of the mining industry,'' East said. ``That would be a negative for platinum.''
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