(BN) Fitch Says 50% Greek Bond Haircut Would Be Default Event (2)

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Fitch Says 50% Greek Bond Haircut Would Be Default Event

Oct. 28 (Bloomberg) -- European leaders' agreement on a 50 percent haircut on Greek bonds may create an event of default if investors accept it, Fitch Ratings said in a statement today.

"The 50 percent nominal haircut on the proposed bond exchange would be viewed by the agency as a default event under its Distressed Debt Exchange criteria," the statement said. While the accord is "a necessary step to put the Greek sovereign's public finances on a more sustainable footing," Greece will face "significant challenges" including ratios of government debt to gross domestic product at "well over 100 percent even in a positive scenario."

European officials concluded their 14th crisis summit in 21 months early yesterday in Brussels with an agreement that persuades investors in Greek government bonds to write down half their holdings. Fitch said today that more details are needed on the accord, which includes an increase in the region's rescue fund to 1 trillion euros ($1.4 trillion).

"It's highly likely that all three rating agencies will classify this restructuring as a technical default," said Padhraic Garvey, head of developed debt-market strategy at ING Groep NV in Amsterdam. "Even if it's voluntary, investors are left with a product that's lower in value to what they originally agreed."

Greek Yields

The yield on Greece's 10-year bonds declined for a second day, falling 9 basis points to 23.25 percent. The extra yield, or spread, investors demand to hold the debt instead of German securities dropped to 2,016 basis points from 2,114 yesterday.

"The main elements of the announced policy measures appropriately target the key causes of the recent intensification of the euro area crisis," Fitch said. "The agency views the broad framework agreement on key principles as a positive outcome of the summit."

Fitch said it welcomed the agreement on banks reaching core capital ratios of 9 percent as an "important step towards enhancing confidence in the euro area financial system." Still, while conditions remain fragile, "further bouts of financial market volatility appear likely and downward pressure on sovereign ratings will persist."

ECB Role

"Given this level of uncertainty and until the viability of these options can be assessed, Fitch views as critical the role of the ECB in continuing to intervene in the secondary market for euro area sovereign bonds, and ultimately to be ready to act as a lender of last resort to solvent but illiquid sovereigns," the statement said.

Fitch said in a separate report the Greek debt exchange "would likely result in a post-default rating in the 'B' category or lower depending on private creditor participation."

The International Swaps and Derivatives Association, whose market decisions are binding, hasn't said whether the $3.7 billion of credit-default swaps linked to Greek government bonds should pay out, though it has indicated the decision hinges on whether investors accept losses voluntarily.

A credit event can be caused by a reduction in principal or interest, postponement or deferral of payments or a change in the ranking or currency of obligations, according to the New York-based trade group's rules.

ING'S Garvey said Fitch's announcement probably won't trigger insurance contracts linked to the debt. "The indications are that ISDA won't class it as a credit event," he said.

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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(BN) U.S. Consumer Confidence Rises in Sign Americans Will Keep Recovery Intact

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U.S. Michigan Consumer Sentiment Index Rises to 60.9

Oct. 28 (Bloomberg) -- Consumer confidence unexpectedly rose in October from the previous month, indicating the biggest part of the economy will help keep the U.S. recovery intact.

The Thomson Reuters/University of Michigan final index of consumer sentiment climbed to 60.9 from 59.4 in September. The gauge was projected to drop to 58, according to the median forecast of 66 economists surveyed by Bloomberg News. The preliminary reading for the month was 57.5.

Stock market gains and easing gasoline costs have brought relief to Americans at a time the jobless rate is hovering above 9 percent and home prices continue to fall. A sustained improvement in moods may encourage consumers to accelerate their spending, which accounts for about 70 percent of the economy.

"Consumers are not throwing caution to the winds, but their mood has lifted slightly from the recession-type readings late this summer," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who forecast a reading of 60. "The stock market is sharply higher and the consumer is back in a spending mind frame."

Estimates for the confidence measure ranged from 55 to 60, according to the Bloomberg survey. The index averaged 89 in the five years leading up to the recession that began in December 2007.

More Spending

Consumer spending accelerated in September, helping the world's largest economy skirt a recession, another report showed today. Purchases increased 0.6 percent, matching the median estimate of 81 economists surveyed by Bloomberg, after a 0.2 percent gain the prior month, according to Commerce Department figures. Incomes rose less than projected, sending the savings rate down to the lowest level in almost four years.

The Standard & Poor's 500 Index fell 0.3 percent to 1,280.91 at 2:27 p.m. New York time. The gauge rallied 3.4 percent yesterday, extending its biggest monthly rally since 1974 as European leaders agreed to expand a bailout fund.

Today's Michigan sentiment report contrasts with the Bloomberg Consumer Comfort Index, which fell to minus 51.1 in the week ended Oct. 23, the lowest in a month. Ninety-five percent of those surveyed had a negative opinion about the economy, the worst since April 2009 and one percentage point shy of a record high, according to figures reported yesterday.

The Conference Board's monthly sentiment index, which more closely follows the labor market, plunged in October to a low, a report showed this week.

Present Conditions

The Michigan survey's index of current conditions, which reflects Americans' perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars, rose to a three-month high of 75.8 from 74.9 the prior month.

The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, climbed to 51.8, also the highest since July, from 49.4.

Consumers in today's confidence report said they expect an inflation rate of 3.2 percent over the next 12 months, compared with 3.3 percent in the prior survey.

Over the next five years, the figures tracked by Federal Reserve policy makers, Americans expected a 2.7 percent rate of inflation, compared with 2.9 percent the previous month.

Fuel prices are easing. The average cost of a gallon of regular gasoline at the pump was $3.43 this month through yesterday, down from $3.58 in September, according to AAA, the nation's biggest motoring organization.

Confidence 'Weak'

Still, Jones Group Inc., a New York-based maker of women's clothing and footwear, is among companies concerned about the "mixed signals in the economy," according to Chairman Wesley Card. "With a constant stream of political noise, this is translating to weak consumer confidence."

"The level of consumer spending continues to be a question mark as we move into the fourth quarter," Card said on a conference call with analysts on Oct. 26. The American shopper "remains very much in a buy-now, wear-now mode and is responding to new fashion and promotional activity," he said, while sales of "more basic and lower-priced commodity items have been weaker."

Keeping spending from improving more is the slow job market. A Labor Department report next week may show payrolls grew by about 100,000 in October after a 103,000 gain the prior month, economists in a Bloomberg survey projected. The jobless rate was probably 9.1 percent for a fourth month.

President Barack Obama last month proposed a $447 billion plan to stimulate jobs, which included expanding a payroll tax break due to expire at the end of 2011, increasing spending on public works and extending jobless benefits.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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German Constitutional Court Halts EFSF Approval, Issues Temporary Injunction On Further Bailout Decisions | ZeroHedge

German Constitutional Court Halts EFSF Approval, Issues Temporary Injunction On Further Bailout Decisions | ZeroHedge:

The German constitutional court has already played a substantial role in the country's participation in the European bailout. Back in September when noting the first participation of the court in the European rescue machinery we noted that "giving the Bundestag’s Budget Committee the final say over the use of the bailout fund is welcome from a democratic point of view, but will add another element of uncertainty to the eurozone crisis. However, so far the Budget Committee has consistently taken the government line on the bailout, albeit reluctantly, and it remains to be seen whether it dares to exercise its new power." It appears the court has once again decided to step up only this time not in a favorable light, after, as Spiegel reports, that the court has "issued a temporary injunction banning the nine-person committee in the Bundestag from taking any decisions on the deployment by EFSF of German taxpayer money." In addition to this, the Court also put the whole German fast-track approval process in jeopardy after it expressed "doubts about the legality of a new panel of lawmakers set up by the German parliament to reach quick decisions on the release of funds from the euro bailout mechanism." This is hardly the ringing endorsement the EURocrats needed to hear from the only power in Europe with the funds to keep the EMU together.

From Spiegel:

Germany's highest court has issued a temporary injunction banning the work of a new panel convened by the country's parliament to quickly green-light decisions on disbursement of taxpayer funds through the euro bailout program. The decision could lead to further delays in German decision-making in efforts to rescue the beleaguered common currency.

Germany's Federal Constitutional Court on Friday expressed doubts about the legality of a new panel of lawmakers set up by the German parliament to reach quick decisions on the release of funds from the euro bailout mechanism, the European Financial Stability Facility (EFSF). The court issued a temporary injunction banning the nine-person committee in the Bundestag from taking any decisions on the deployment by EFSF of German taxpayer money.

The special committee was recently created in order to be able to provide a quick green light for EFSF aid in especially urgent situations in which it wouldn't be feasible to put the issue up for a vote before full parliament. The decision from the court, located in Karlsruhe, could also slow down Bundestag approval of the further application of German credit guarantees within the scope of the euro backstop fund.

SPD members of parliament Peter Danckert and Swen Schulz submitted their complaint on Thursday, expressing their concern that the nine-member panel might violate their rights as members of the legislative chamber.

Germany's own supercommittee:

The committee had been scheduled to convene its very first meeting on Friday. In September, Germany's highest court ruled that the Bundestag must be given a greater say in euro bailout decisions given the degree to which the common currency rescue could impose on parliament's right to create Germany's budget. In response, the Bundestag on Wednesday moved to include provisions for parliamentary co-determination of positions taken by Germany on the euro bailout at European Union summits in Brussels. Under the multilevel process, depending on the importance, the urgency and confidentiality, decisions can either be approved by the entire 620-member Bundestag, by the 41-person budget committee or by the nine-member special panel.

And we thought decisions made by our own central planning 10-person Fed supercommittee were bad: Germany just one upped our own all-knowing overlords with its very own 9-person star chamber, which without a shadow of a doubt, represents the entire German population with perfect accuracy.

Logically, we next expect the 9 member special panel to be also made redundant by a 1 person uber-committee. That will occur at roughly the time the much anticipated Keynesian fireworks begin...

'via Blog this'

(BN) Gold Declines as Biggest Weekly Gain Since August Spurs Investor Selling

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Gold Declines as Best Week Since August Spurs Investor Sales

Oct. 28 (Bloomberg) -- Gold declined for the first time in six sessions in London as the biggest weekly gain since August spurred some investors to sell the metal. Silver headed for the largest weekly advance since September 2008.

Gold reached a five-week high today after European leaders yesterday agreed on new measures to tackle the region's debt crisis. Federal Reserve policy makers, who meet next week, and the Obama administration are considering additional steps to boost the U.S. economy and cut unemployment.

"Gold's had a good rally, and a small pullback would be healthy for the market," Afshin Nabavi, a senior vice president at bullion refiner MKS Finance SA in Geneva, said today by phone. Still, "people won't give up their safe-haven investments," and that will support prices, he said.

Immediate-delivery gold fell $7.85, or 0.5 percent, to $1,737 an ounce by 11:49 a.m. in London. The metal reached $1,752.82, the highest level since Sept. 23, and is up 5.8 percent this week. Gold for December delivery was 0.5 percent lower at $1,738.40 on the Comex in New York.

The metal rose to $1,735 an ounce in the morning "fixing" in London, used by some mining companies to sell output, from $1,718 at yesterday's afternoon figure.

Bullion is in the 11th year of a bull market, the longest winning streak since at least 1920 in London. Prices reached a record $1,921.15 an ounce on Sept. 6 as investors sought to diversify away from equities and some currencies. The metal is up 22 percent this year.

1 Trillion Euros

European Union leaders meeting until the early hours of yesterday agreed to boost the region's rescue-fund capacity to 1 trillion euros ($1.4 trillion), crafted a second aid package for Greece, and persuaded holders of Greek bonds to accept a 50 percent writedown on the country's debt.

"The European debt deal should help gold in two ways," Jim Pogoda, an investor in Summit, New Jersey, and a former precious-metals trader for Mitsubishi International Corp., said by e-mail. "For the non-believers, safe-haven buying should keep the market well bid. For those thinking that impediments to growth have been lifted, the further stimulus should be viewed as gold-positive as well."

Silver for immediate delivery rose 0.8 percent to $35.40 an ounce after touching $35.6875, the highest price since Sept. 23. The metal is up 13 percent this week.

Palladium advanced 0.3 percent to $668.25 an ounce. Platinum gained 0.5 percent to $1,645.25 an ounce after earlier reaching a five-week high of $1,659.75.

To contact the reporter for this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net

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(BN) Treasuries Advance After Italian Auction as U.S. Equity Futures Decline

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Treasuries Advance After Italian Auction as Equity Futures Fall

Oct. 28 (Bloomberg) -- Treasuries rose, led by five-year notes, after borrowing costs climbed at an Italian debt sale, a sign of investor concern that European officials may need to take further steps to bring an end to the region's debt crisis.

Ten-year notes snapped a two-day drop, pushing yields down from an 11-week high, amid speculation the U.S. economy isn't expanding fast enough to justify this month's rout. They plunged yesterday after European officials announced a plan to increase the region's bailout fund, recapitalize banks and write down Greek debt. Futures on the Standard & Poor's 500 Index declined 0.5 percent.

"It doesn't look as if the European Union deal was sufficient to unwind some of the fears about Italy," said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. "We had a sharp jump in Treasury yields yesterday and risk markets look like they're taking a bit of a pause for breath. That's supporting Treasuries."

The yield on the five-year note declined four basis points, or 0.04 percentage point, to 1.17 percent at 7:01 a.m. New York time. The 1 percent security due in October 2016 rose 6/32, or $1.88 per $1,000 face amount, to 99 7/32. The yield jumped 11 basis points yesterday.

Ten-year note yields fell one basis point to 2.39 percent, after earlier rising to 2.42 percent, the most since Aug. 9. Two-year yields were also one basis point lower, at 0.30 percent.

Italian Auction

Italian notes and bonds slid after the Rome-based Treasury sold 3.08 billion euros ($4.4 billion) in bonds due in 2014 to yield 4.93 percent, up from 4.68 percent at the last auction of the same securities on Sept. 29. Italy also sold securities due in 2017, 2019 and 2022. Italy's bond market is Europe's biggest.

Europe's debt woes may not be over, according to Takuya Yamamoto, an investor at Diam Co. in Tokyo, which manages the equivalent of $130.5 billion

"The agreements in Europe are not so concrete," said Yamamoto, whose company is a unit of Dai-Ichi Life Insurance Co., Japan's second-biggest life insurer. "Treasury yields will decline again." Ten-year rates will be 2 percent to 2.2 percent by year-end, he predicted.

The 10-year rate will slide to 2.09 percent by Dec. 31 and be 2.26 percent by March 31, according to Bloomberg surveys of banks and securities companies, with the most recent forecasts given the heaviest weightings.

U.S. Recovery

The U.S. is "a long way from a satisfying, robust economic recovery," Stuart Hoffman at PNC Financial Services Group Inc. in Pittsburgh said yesterday on Bloomberg Television. "We're still staggering around." PNC's assets under management total $108 billion, according to the company's website.

Unemployment held at 9.1 percent in September and home prices in 20 U.S. cities dropped more than forecast in August, according to government and industry reports.

Still, Treasuries have handed investors a 1.9 percent loss in October as of yesterday, the most since December 2009, Bank of America Merrill Lynch data show. German bunds fell 1.5 percent in the month and Japanese government debt was little changed.

U.S. economic reports today will show gains in income, spending and inflation as well as an upward revision to consumer confidence, Bloomberg surveys of economists indicate.

The Federal Reserve is scheduled to sell $8 billion to $9 billion of Treasuries due from October 2013 to February 2014 from its holdings today, according to its website. It's swapping $400 billion of shorter-term debt for securities due in as much as 30 years to spur the economy by keeping long-term interest rates down.

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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(BN) Fed Is Willing to Gamble on Short-Run Trade-Off: Caroline Baum

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Fed Is Willing to Gamble on Short-Run Trade-Off: Caroline Baum

Oct. 28 (Bloomberg) -- Economists may not see eye to eye on much, but over the years I've found a few core concepts on which all but the most politically motivated would agree.

One is that inflation is a monetary phenomenon -- "always and everywhere," to quote the late Nobel laureate Milton Friedman. Another is that there is no long-term trade-off between inflation and unemployment, a relationship expressed by the Phillips Curve.

Friedman, again, along with fellow Nobel laureate Edmund Phelps, argued that any attempt to push employment below a so- called "natural rate" would backfire when workers realized the higher wages offered them were a "money illusion" and prices were rising even faster. Their augmented Phillips Curve became the accepted way to explain the coexistence of high inflation and high unemployment in the 1970s.

So why would the Federal Reserve be willing to risk higher inflation for, at best, a short-run boost to employment? The simple answer is that some policy makers don't see it as a risk. Today's 9.1 percent unemployment rate is well above what's considered full employment in the U.S., giving the Fed leeway to advance one of its dual mandates (maximum employment) without compromising the other (stable prices).

Fed governors Daniel Tarullo and Janet Yellen are already on record as ready or willing to expand the Fed's $2.86 trillion balance sheet. And if they can help the housing market in the process -- print money to buy mortgage-backed securities -- so much the better!

Casting Long Shadow

Not everyone is so sanguine about further stimulus. Three Fed District Bank presidents dissented at the last two meetings, opposing August's pledge to keep the funds rate near zero through mid-2013 and the decision in September to extend the maturity of the Fed's securities portfolio.

Members of the Shadow Open Market Committee, a group of independent economists who meet twice a year to evaluate the Fed's policy choices, are similarly inclined. The papers presented at the Oct. 21 meeting argue against further Fed actions.

"Aggressive monetary policy at the zero bound should be used only if deflation becomes a clear and present danger," Marvin Goodfriend, professor of economics at Carnegie Mellon University in Pittsburgh and a shadow committee member, writes in his paper.

Deflation isn't a danger. The consumer price index rose 3.9 percent in the year that ended in September, while the CPI excluding food and energy was up 2 percent. As recently as October 2010, the year-over-year increase in the core CPI was 0.6 percent.

Nor are inflation expectations, the Fed's sine qua non, flashing red, or even yellow. The central bank's own measure of inflation expectations five to 10 years out stands at 2.5 percent, above the 2 percent implicit target.

In his paper, Goodfriend divides what he calls "inflationist proposals" into three groups: those willing to risk higher inflation, those willing to tolerate higher inflation, and those willing to target higher inflation.

Tarullo and Yellen, as mentioned above, are in the "risk" camp. They look at measures of excess slack in the economy -- things like the rates of unemployment and capacity utilization - - and conclude there's room for further stimulus. Curiously, the quasi-monetarists, who advocate maintaining a constant level of nominal gross domestic product, think the Fed should embark on additional asset purchases as well.

Some respected economists, including Harvard's Ken Rogoff and the International Monetary Fund's Oliver Blanchard, are in the "target" camp. In their view, higher inflation would help the deleveraging process by allowing debtors to pay back their loans in devalued dollars. (Savers get hosed.)

'Flying Blind'

Who's in the "tolerate" camp?

"The silent majority of economists," Goodfriend says. They don't see inflation as a real risk, and if they're wrong, the attitude is that the Fed can always deal with it later.

Later has consequences. The lesson of the 1970s is that any short-run employment benefits from tolerating higher inflation today, which are "questionable," create adverse long-term effects, requiring tighter monetary policy, he says.

Policy makers rely on econometric models to forecast things like GDP growth, inflation and the output gap, a squishy concept that's supposed to reflect the difference between actual and potential GDP. It's the perceived output gap -- and particularly excess supply of labor -- that has some Fed officials willing to restart the printing press.

Goodfriend says inflation is indicative of the size of the output gap. And inflation isn't falling. Some economists posit that extended unemployment benefits and a mismatch between the skills offered by the unemployed and those required by employers have raised the natural rate.

Or it may be that, given the anemic recovery, the labor market just isn't "clearing," Goodfriend says. Something is preventing buyers (employers) and sellers (employees) from finding the equilibrium price (wage) where supply equals demand.

That's why targeting an unemployment rate or an output gap is a poor idea, the equivalent of "flying blind," he says. Not to mention the consistent failure of the Fed's models to predict outcomes.

It used to be an article of faith among central bankers that price stability is both an end in itself and the means to an end: maximum employment. Fed chief Ben Bernanke has said as much, though not recently.

With the Fed under tremendous pressure -- implicit, not explicit -- to do something, anything, to help a floundering economy, Bernanke saw fit to remind Congress of the limits of the central bank's powers.

"Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy," Bernanke said Oct. 4 in prepared testimony to the Joint Economic Committee of Congress.

That would make a good wall poster for the boardroom where Fed officials meet next week to discuss policy options.

(Caroline Baum, author of "Just What I Said," is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net .

To contact the editor responsible for this column: Mary Duenwald at mduenwald@bloomberg.net .

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(BN) Stocks in Europe, U.S. Futures Fall as Italian Bonds Decline; Copper Drops

Initial hype gone....

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European Stocks, U.S. Futures Fall as Italian Bonds Decline

Oct. 28 (Bloomberg) -- U.S. index futures and European stocks fell, paring a rally yesterday that followed an agreement to boost the euro-region's rescue fund. Italian bonds dropped and copper trimmed its biggest weekly gain since 2009.

Futures on the Standard & Poor's 500 Index slipped 0.6 percent at 7:55 a.m. in New York after the gauge jumped 3.4 percent yesterday. The Stoxx Europe 600 Index slid 0.5 percent, after climbing 0.8 percent. Italy's 10-year yield rose 10 basis points. The yen appreciated against 14 of its 16 major peers. Copper decreased 1.9 percent and oil retreated 1.8 percent.

Italy sold 7.93 billion euros ($11.24 billion) of bonds today, less than the maximum target, after Prime Minister Silvio Berlusconi vowed to boost economic growth and cut debt. This week's deal to boost Europe's rescue fund to 1 trillion euros and write down Greek debt was hailed by U.S. President Barack Obama yesterday as an "important first step." Data today may show U.S. personal spending climbed last month after figures yesterday showed economic growth accelerated last quarter.

"Yesterday's remarkable risk rally has taken a breather as markets digest the details of the euro-zone plan," Olivier Desbarres, Barclays Capital's Singapore-based head of foreign- exchange strategy for the Asia-Pacific region, wrote in a report today. "Questions remain regarding nearly all components of the summit agreement."

Two shares declined for every one that advanced in the Stoxx 600. Today's retreat trimmed this week's rally to 4 percent and the gain in October to 9.8 percent, poised for the biggest monthly increase since April 2009. Royal Dutch Shell Group Plc, Europe's largest oil company, fell 1.5 percent and BP Plc lost 1.2 percent as oil dropped.

Beating Estimates

Electrolux AB, the Swedish maker of household appliances, climbed 3.2 percent and Renault SA, France's second-biggest carmaker, jumped 2.5 percent after earnings beat estimates. SSAB AB, the world's largest supplier of high-tensile steel, advanced 6.5 percent after third-quarter net income and sales topped projections.

The S&P 500 erased its 2011 loss yesterday and has gained 14 percent in October, set for the biggest monthly rally since 1974. A report at 8:30 a.m. in Washington may show personal spending probably rose 0.6 percent last month after a 0.2 percent gain in August, according to the median of 81 economists' estimates in a Bloomberg survey. The Thomson Reuters/University of Michigan final index of consumer confidence for October is forecast to be revised higher to 58.

Job Cuts

Whirlpool Corp., the world's largest maker of household appliances, said it will cut more than 5,000 jobs and reduce capacity by six million units after lowering its earnings targets as consumers rein in spending.

The two-year Italian yield jumped 15 basis points. The Treasury sold 3.08 billion euros in bonds due in 2014 to yield 4.93 percent, up from 4.68 percent at the last auction of the same securities on Sept. 29. Demand was 1.35 times the amount on offer, compared with 1.36 last month. Italy also sold 2.98 billion euros of bonds due in 2022 and 871 million euros of bonds due 2019 and 1 billion euros of floating-rate bonds due 2017. Italy had aimed to sell as much as 8.5 billion euros.

The yen appreciated 0.2 percent to 75.77 per dollar, after strengthening yesterday to a post-World War II record of 75.66, and climbed 0.5 percent versus the euro. The euro weakened 0.2 percent versus the dollar.

Copper slipped to $8,000 a metric ton and oil sank to $92.22 a barrel after Japan's industrial production fell 4 percent in September, more than the 2.1 percent drop expected by economists in a Bloomberg survey. Gold fell 0.4 percent to $1,737.73 an ounce.

The MSCI Emerging Markets Index advanced 1.3 percent, extending its biggest weekly gain since December 2008. Benchmark gauges in China and India rose more than 1 percent. Industrial & Commercial Bank of China Ltd. gained 2 percent in Hong Kong after the world's largest lender by market value said third- quarter profit climbed 28 percent.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net Shiyin Chen in Singapore at schen37@bloomberg.net

To contact the editor responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net

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(BN) Banks’ Lending Should Start Playing Catch-Up With Economy: View

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Banks' Lending Should Start Playing Catch-Up With Economy: View

Oct. 28 (Bloomberg) -- There are tantalizing signs that the worst of the disastrous credit crunch may be over. The most tangible evidence can be found in the latest earnings reports from some of the U.S.'s largest banks.

With a few exceptions, financial institutions such as JPMorgan Chase & Co. and Wells Fargo & Co. reported increases in lending to big businesses and, to a lesser extent, to consumers. Since consumers power growth, making up about two-thirds of the U.S. economy, their ability to get credit may determine whether the fragile recovery endures.

There are several things regulators and banks can do to ensure that the lending revival doesn't fizzle. Although many bankers might disagree, regulators should continue to press banks to increase their capital. As we have argued before, more capital gives lenders a greater cushion to absorb losses, thus lowering risk to the financial system and the economy.

One of the reasons the credit crunch was so severe is that huge losses ate into banks' capital, which was too thin before the recession began. This robbed them of their ability to keep lending. At the moment, the 24 banks in the KBW Bank Index have average tangible common equity, the hardest measure of capital, of 7.4 percent, which puts them on much sounder footing than before the crisis.

Capital Beauty

The beauty of capital is that the more of it a bank has on hand, the more loans it can make. The U.S. Treasury has estimated that every $1 in capital can be used to create roughly $10 in loans. Even if banks didn't apply this level of leverage, more capital can still fuel an expansion in credit.

One concrete step that regulators can take to ensure banks maintain adequate capital is to keep a check on dividend payments, which come straight out of capital. Although it is gratifying to see most of the nation's lenders return to profitability, the Federal Reserve erred earlier this year when it gave some of the nation's 19 largest banks permission to resume or increase their payouts to shareholders.

We have nothing against stockholders. But until the nation's banks have been restored to full health their interests should take a backseat to taxpayers who inevitably would be called upon in another crisis. Another method of raising capital is issuing common stock.

Banks can use this increased capital to step up lending to consumers, millions of whom own small businesses and mingle their personal and professional finances. The Fed's latest survey of senior bank-loan officers showed that only about 10 percent of lenders have relaxed their standards for making consumer loans. And that applies mainly to customers with pristine credit records. For everyone else, it's almost as difficult to get a loan approved as it was at the peak of the credit crunch in 2009.

This hits small businesses hard. Pepperdine University's business school surveyed 2,595 small businesses that sought bank loans in the past year; 50 percent said they were turned down.

Outlived Usefulness

The industry's caution is partly understandable. The financial crisis jeopardized the solvency of some of the biggest U.S. banks.

But the recession ended more than two years ago and a level of risk aversion that made sense in the turmoil of 2008 and 2009 has outlived its usefulness. Banks can afford to ease some of the benchmarks they use, such as credit scores, down payments, employment history and repayment records. Mortgages lenders, in particular, should show more flexibility for borrowers who don't have 20 percent to put down, perhaps giving breaks to those with excellent credit records and stable job.

Bankers are sure to respond that demand for credit is low as consumers try to reduce personal debt, and businesses see little need to expand in the face of slack demand. There is some truth to this. Yet there are signs in the Fed's survey of bank loan officers that more consumers want to borrow.

Banking is a cyclical industry. Credit tends to be too lax during booms and overly restrictive when the economy needs credit most. We would never recommend a return to the reckless lending of the bubble years. But the economy is growing again, and yesterday the government said gross domestic product rose 2.5 percent in the third quarter. Banks need to start playing catch-up.

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(BN) Economy in U.S. Surpasses Pre-Recession Peak After 15 Quarters of Growth

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Economy in U.S. Surpasses Pre-Recession Level After 15 Quarters

Oct. 28 (Bloomberg) -- The value of goods and services produced in the U.S. surpassed its pre-recession level after 15 quarters, taking three times longer than the average for 10 previous recoveries since World War II.

Gross domestic product expanded at a 2.5 percent annual rate in the period from July through September, the Commerce Department reported yesterday, the fastest pace in a year and up from 1.3 percent in the prior three-month period. After adjusting for inflation, GDP climbed to $13.35 trillion last quarter, topping the $13.33 trillion peak reached in the last three months of 2007.

"The American economy finally has accomplished the recovery and has now entered the expansion," said Neal Soss, chief economist with Credit Suisse in New York, who was an aide to former Federal Reserve Chairman Paul Volcker. "But the growth is clearly too slow to solve the most significant problems the economy faces: jobs and getting the public budgets under control."

Consumers reduced savings to boost purchases and companies stepped up investment in equipment and software, even as the biggest drop in incomes in two years raises concerns about whether the spending increase will continue. The number of Americans with jobs last month, 131.3 million, was lower than the 138 million workers in December 2007, when the 18-month recession began, according to Labor Department data.

Stocks surged yesterday as European leaders agreed to expand a bailout fund to stem the region's sovereign debt crisis. The Standard & Poor's 500 Index jumped 3.4 percent to 1,284.59, extending the biggest monthly rally for the gauge since 1974. Treasuries sank, pushing the yield on the 10-year note up to 2.39 percent from 2.21 percent the day before.

Average Growth

The U.S. economy expanded at an average 0.9 percent rate in the first half of 2011, the worst performance since the recovery began in June 2009. Growth needs to exceed 2.5 percent to reduce the jobless rate, according to estimates by Kurt Karl, chief U.S. economist at Swiss RE in New York.

Unemployment stuck around 9 percent or higher for 30 months explains why Federal Reserve policy makers, who meet next week, and the Obama administration are considering additional measures to boost the economy.

"We are well below potential output," said Ben Herzon, an economist at Macroeconomic Advisers LLC, the St. Louis-based forecasting firm cofounded by former Fed Governor Laurence Meyer. "The time to get excited is when everyone who is looking for work has got work."

Business Spending

Corporate investment in equipment and software was a bright spot in yesterday's report, climbing at a 17.4 percent pace, the most in a year.

Profits for companies in S&P 500 rose 16 percent on average in the three months ended Sept. 30, based on results reported so far. Earnings are beating analyst predictions by 5.5 percent, compared with a rate of 3.3 percent since 2005, the data show.

A pickup in investment hasn't translated into more jobs. Payrolls rose by an average 96,000 workers per month last quarter, down from the 166,000 average in the first quarter.

Household purchases, the biggest part of the economy, increased at a 2.4 percent pace, more than forecast by economists.

"Because the strength was led by consumers, the economy's outlook is much better than we had previously thought," said Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York.

The savings rate last quarter dropped to 4.1 percent, the lowest since the last three months of 2007. After-tax incomes adjusted for inflation decreased at a 1.7 percent annual rate, the biggest drop since the third quarter of 2009.

Keeping Prices Down

McDonald's Corp., the world's biggest restaurant chain, is among companies trying to keep prices down to attract budget- conscious customers. The Oak Brook, Illinois-based company this month said third-quarter profit gained 8.6 percent.

"The environment out there is still fragile," James Skinner, McDonald's vice-chairman and chief executive officer, said in an Oct. 21 call with analysts. "Consumers everywhere continue to be cautious and hesitant to spend."

President Barack Obama this week said he is seeking ways to take action without congressional approval after the Senate blocked his $447 billion jobs bill earlier this month. The steps include altering a program to help homeowners refinance mortgages and easing the burden of student loans.

Easing Options

Fed policy makers are developing options for further monetary easing even as the economy picks up.

Vice Chairman Janet Yellen said last week that a third round of large-scale asset purchases "might become appropriate if evolving economic conditions called for significantly greater monetary accommodation." Governor Daniel Tarullo said buying mortgage-backed securities "should move back up toward the top of the list of options."

Policy makers pledged in August to hold the benchmark interest rate near zero through the middle of 2013 so long as joblessness stays high and the inflation outlook is "subdued." On Sept. 21, they announced a plan to replace debt in the central bank's portfolio with longer-term Treasuries to help cut borrowing costs.

Companies also kept a tight rein on stockpiles last quarter, making it less likely that production will have to be cut back. Inventories were built at a $5.4 billion annual pace, down from the second quarter's $39.1 billion rate, according to yesterday's GDP report. The reduction subtracted 1.1 percentage points from growth.

Excluding inventories, the economy grew at a 3.6 percent annual rate last quarter, up from a 1.6 percent in the April through June period.

A narrower trade deficit contributed 0.2 points to GDP. Government spending stagnated, continuing to restrain growth. A 2 percent gain in federal outlays was offset by a 1.3 percent drop in spending by state and local agencies.

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

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

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(BN) Asian Stocks, Won Gain on Europe Debt Deal, U.S. Outlook; Bond Risk Drops

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Asian Stocks, Won Gain on Europe, U.S. Outlook; Bond Risk Drops

Oct. 28 (Bloomberg) -- Asian stocks climbed, extending the best weekly rally since 2009, the won strengthened and bond risk fell as Europe's agreement to stem the debt crisis and better- than-expected U.S. data renewed confidence in the global economy.

The MSCI Asia Pacific Index rose 1.5 percent by 1:08 p.m. in Tokyo, taking its weekly increase to 7.6 percent. Standard & Poor's 500 Index futures slid 0.3 percent after the gauge's 3.4 percent jump yesterday. The won gained 1 percent. Japan's 10- year yield climbed to a seven-week high, while the Markit iTraxx Japan index of debt-default risk was set for its largest drop since May 2010. Copper and oil pared their weekly advance.

The deal to boost Europe's bailout fund and write down Greek debt was hailed by U.S. President Barack Obama as an "important first step" to resolve the crisis. French President Nicolas Sarkozy said China will "cooperate closely" to ensure the Group of 20 contributes to the enlarged fund, while a person familiar said Japan plans to support the increase. Data today may show U.S. personal spending climbed last month after figures yesterday showed economic growth accelerated last quarter.

"What they've done in Europe is put off the day of reckoning for a period of time," Adrian Mowat, JPMorgan Chase & Co.'s Hong Kong-based chief Asian and emerging-market strategist, said in a Bloomberg Television interview. "The U.S. economic data is better. It's unlikely we'll retest the October lows."

Almost three shares advanced for every one that declined on MSCI's Asia Pacific Index. Japan's Nikkei 225 Stock Average added 1.1 percent, South Korea's Kospi Index climbed 1 percent and Hong Kong's Hang Seng Index gained 1.9 percent.

Bank Profits

Industrial & Commercial Bank of China Ltd. rallied 2 percent in Hong Kong after the world's largest lender by market value said third-quarter profit climbed 28 percent. Bank of Communications Co. added 3.4 percent after saying quarterly profit increased 31 percent. Macquarie Group Ltd. rose 3.5 percent after Australia's largest investment bank said it plans to buy back as much as 10 percent of its shares.

The S&P 500 erased its 2011 loss yesterday and has gained 14 percent this month, set for the biggest monthly rally since 1974. Spending probably rose 0.6 percent last month after a 0.2 percent gain in August, according to the median forecast of economists surveyed by Bloomberg News. Separate data may show personal income increased 0.3 percent in September after a 0.1 percent decline, while a gauge of confidence among U.S. consumers climbed to 58 in October from 57.5.

"Consumer spending has contributed a lot into the U.S. growth, while inventory investment declined," said Masaru Hamasaki, who helps oversee the equivalent of $24 billion as chief strategist at Toyota Asset Management Co. in Tokyo. "That's a very good form of growth. Risk appetite should rise after Europe delivered a big answer to the debt crisis that's plagued the market for a long time."

Bond Yields

Treasuries dropped yesterday, sending 10-year yields up 19 basis points, after Commerce Department figures showed the U.S. economy grew at a 2.5 percent annual rate in the third quarter, up from 1.3 percent in the prior three months. The 10-year rate decreased four basis points to 2.36 percent today.

Japan's 10-year government bond yields gained three basis points to 1.04 percent. The yield on South Korea's benchmark three-year bond increased seven basis points to 3.59 percent.

The cost of insuring Asia-Pacific corporate and sovereign bonds against non-payment declined, with the Markit iTraxx Japan index dropping 18 basis points to 157 basis points, Deutsche Bank AG prices show. That will be its biggest daily decline since May 26, 2010, and its lowest close since Sept. 16, according to data provider CMA.

The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan decreased 18 basis points to 168.5, Royal Bank of Scotland Group Plc prices show. The Markit iTraxx Australia index fell 15 basis points to 154.5, according to Westpac Banking Corp.

Greece's Opportunity

Benchmark gauges of credit risk plunged globally yesterday after European leaders agreed to a rescue package for debt-laden nations and investors unloaded protection against a deal failing to materialize. Greek Prime Minister George Papandreou said on television late yesterday the agreement is an "opportunity" and buys time for the nation to revamp the economy.

Sarkozy, who spoke with his Chinese counterpart Hu Jintao yesterday, will host a G20 summit next week as Europeans seek to bolster the role of the International Monetary Fund in overcoming the region's crisis. The French president also said yesterday he plans up to 8 billion euros ($11 billion) in additional budget cuts to protect France's AAA credit rating.

Euro, Yen

The euro traded at $1.4166 from $1.4189 yesterday, when it gained 2 percent. The 17-nation currency weakened 0.3 percent to 107.45 yen, paring its weekly advance. The yen climbed 0.1 percent to 75.85 per dollar amid speculation Japan will avoid intervening in markets even after the currency rose to a record for the fourth time in five days yesterday.

The won climbed to 1,103.94 per dollar, taking its gain this week to 3.6 percent. It touched 1,100.70, the strongest since Sept. 16. Malaysia's ringgit strengthened 0.5 percent to 3.0778 and Taiwan's dollar climbed 0.6 percent to NT$29.898.

Commodities pared their weekly gains, sending S&P's GSCI Index of raw materials down 0.4 percent. The gauge is still up 3 percent this week.

Gold climbed to a one-month high and was set for the biggest weekly rally since January 2009, while silver headed for the largest weekly advance since September 2008. Gold for immediate-delivery gained as much as 0.5 percent to $1,752.82 an ounce, the highest level since Sept. 23.

Copper, Oil

Copper declined 0.1 percent to $8,136 a metric ton on the London Metal Exchange after advancing 1.7 percent. Three-month delivery copper has jumped 14 percent this week, poised for the biggest weekly rally since at least Jan. 2, 2009. Oil declined 0.4 percent to $93.63 a barrel in New York, trimming the largest weekly gain since February.

Rubber in Tokyo rose as much as 5.4 percent to 316.2 yen a kilogram, the biggest gain in a month, and is set to rise 10 percent this week. The worst floods in Thailand in half a century spurred concern supply will be curbed from the world's biggest producer and exporter.

To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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(BN) Greece Default Swaps Failure to Trigger Casts Doubt on Contracts as Hedge

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Greek Debt Swaps' Failure to Trigger Casts Doubt on Market

Oct. 27 (Bloomberg) -- The European Union's ability to write down 50 percent of banks' Greek bond holdings without triggering $3.7 billion in debt insurance contracts threatens to undermine confidence in credit-default swaps as a hedge and force up borrowing costs.

As part of today's accord aimed at resolving the euro region's sovereign debt crisis, politicians and central bankers said they "invite Greece, private investors and all parties concerned to develop a voluntary bond exchange" into new securities. If the International Swaps & Derivatives Association agrees the exchange isn't compulsory, credit-default swaps tied to the nation's debt shouldn't pay out.

"It will raise some very serious question marks over the value of CDS contracts," said Harpreet Parhar, a strategist at Credit Agricole SA in London. "For euro sovereigns in particular, the CDS market is likely to remain wary."

Politicians and central bankers came to a last-minute agreement after banks, the biggest private holders of Greece's government bonds, were threatened with a full default on their debt, according to Luxembourg Prime Minister Jean-Claude Juncker. ISDA General Counsel David Geen said his organization considered the agreement to be voluntary, even if there may have been "a lot of arm twisting."

Stopping Contagion

Leaders in Brussels agreed to boost Europe's rescue fund to 1 trillion euros ($1.4 trillion), to recapitalize banks and get a commitment from Italy to do more to reduce debt.

The talks were regarded by many investors as a last-ditch attempt to stem the sovereign crisis, while preventing the contagion to Spain, Italy and Portugal that they feared a default-swaps trigger would cause. The involvement of the Institute of International Finance, which represents lenders, helped progress toward an accord that the EU could portray as non-mandatory.

This approach threatens to affect banks that use credit- default swaps to hedge their holdings of government bonds, forcing them to look at other ways of laying off risk.

"It punishes the banks that were well-hedged and managed, and I think it's just starting to sink in as to what this might mean," said Peter Tchir, the founder of hedge fund TF Market Advisors in New York. "Bank hedging desks are definitely now trying to re-evaluate" their use of default swaps, he said.

Deutsche's Hedges

Deutsche Bank AG, Germany's biggest lender, used credit- default swaps to help cut its net sovereign risk related to Italy to 996 million euros ($1.4 billion) as of June 30, from 8.01 billion euros six months earlier, Chief Financial Officer Stefan Krause said July 26. The Frankfurt-based lender said this week it has since increased its risk associated with the nation's debt as it stepped up market making.

"If they find a way to avoid a trigger event in the CDS, then people will doubt the value of credit-default swaps in general, leading to more dislocations in the market," said Pilar Gomez-Bravo, the senior adviser at Negentropy Capital in London, which oversees about 200 million euros.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Schaeuble, Speculators

German Finance Minister Wolfgang Schaeuble is among European politicians who have expressed concern that the contracts have worsened the euro region's troubles. Speculators can use them to benefit as a nation's creditworthiness declines because the price of the insurance they offer rises.

ISDA's Geen, speaking today on Bloomberg Television's "InsideTrack" with Erik Schatzker, said that the agreement probably won't trigger the swaps because it's voluntary, despite the possibility of some "coercion."

The matter "is borderline," he said, adding that whether to trigger credit-default swaps on Greece is a matter for ISDA's Determinations Committee.

Default swaps still rallied on optimism the agreement means the euro region is a step closer to resolving its crisis.

The Markit iTraxx SovX Western Europe Index of contracts on 15 governments declined 46 basis points to 288 as of 2 p.m. in New York, the lowest since Aug. 31. That's still almost 100 basis points higher than at the end of last year. The Markit iTraxx Financial Index linked to the senior debt of 25 European banks and insurers plunged 37.5 basis points to 204, JPMorgan Chase & Co. prices show.

Greek Swaps Rally

The cost of insuring Greek debt fell. Credit-default swaps backing $10 million of the nation's bonds for five years cost $5.6 million in advance and $100,000 annually, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That implies an 85 percent chance of default assuming investors recover 32 percent of their holdings. The probability is down from 90 percent yesterday, when the upfront cost was $6 million.

The net notional value of default swaps outstanding on Greece has fallen from $5.3 billion at the start of the year, according to the Depositary Trust & Clearing Co., which maintains a warehouse of trading data. The total is a fraction of the $390 billion Greek bond market.

Greek bonds soared and the euro strengthened. The yield on the 10-year note dropped to 23.35 percent, from 25.32 percent yesterday and compared with 12.5 percent at the end of last year. The 17-nation common currency gained to a 1 1/2-month high of $1.4232 from $1.3906 yesterday, adding to its 6 percent advance this year.

Hedging Tool

Tchir of TF Market Advisors said be doubts whether the Greek debt exchange's likely failure to trigger credit-default swaps means the contracts have become useless as a hedging tool.

"Whoever agrees to this is making a business decision that it's worth doing," he said. "They're clearly being coerced into it and, I'm sure, threatened with all sorts of regulatory actions just to make their life difficult if they don't agree. But there's really nothing to stop them from saying no."

ISDA too rebuts suggestions that the swaps not paying out means they don't work as a hedge in a statement on its website.

"It has always been understood that the restructuring definition cannot catch all possible events," according to the statement. "If a creditor is hedging using CDS, and declines to participate in a voluntary restructuring, then the creditor would still hold its original debt claim and its CDS hedge."

Exchange Terms

Much still needs to be resolved after the 10-hour Brussels talks, including how to strengthen the euro region's 440 billion-euro bailout fund and what banks will get in return for accepting the writedown on their Greek bonds. This includes the collateral they'll be given and whether future bank debt is backed by a national or European guarantee. Either way, the deal will likely be structured as a voluntary agreement to avoid a default-swap trigger.

"It is symptomatic of the regulatory and legal goalposts being constantly shifted either randomly or to suit political interests," said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. "For genuine long-term investors, either financial or non-financial, it's a major liability."

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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(BN) S&P 500 Index Extends Best Monthly Gain Since ’74; Euro Rises on Debt Pact

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S&P 500 Extends Best Month Since '74, Euro Rises on Debt Accord

Oct. 27 (Bloomberg) -- Stocks surged, extending the biggest monthly rally for the Standard & Poor's 500 Index since 1974, and the euro strengthened as European leaders agreed to expand a bailout fund to stem the region's debt crisis. Treasuries sank, while metals and oil led a rally in commodities.

The S&P 500 jumped 3.4 percent to 1,284.59 at 4 p.m. in New York, sending its October gain to 14 percent and erasing its 2011 loss. The 20 percent monthly advance for the Dow Jones Transportation Average, a proxy for the economy, is the biggest since 1939. Benchmark gauges in France, Italy and Germany rose more than 5 percent as German and emerging-market stocks extended gains from this year's lows to more than 20 percent. The euro surged the most in more than a year and 10-year Treasury note yields rose 17 basis points to 2.38 percent.

Equities, commodities and the euro rallied as the European region's rescue fund was boosted to 1 trillion euros ($1.4 trillion) and investors agreed to a voluntary writedown of 50 percent on Greek debt. French President Nicolas Sarkozy spoke with Chinese leader Hu Jintao as Europe sought help in funding the bailout effort. U.S. data showed the world's largest economy expanded last quarter at the fastest pace in a year, easing concern that the economy may relapse into a recession.

"Europe has done enough for the time being," Russ Koesterich, the San Francisco-based global chief investment strategist for the IShares unit of BlackRock Inc., said in a telephone interview. His firm oversees $3.3 trillion as the world's largest asset manager. "It will remove near-term pressure," he said. "In the U.S., the GDP report was decent and it was encouraging to see the consumer hold. The fear of a recession is fading."

Bull Markets

JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. surged at least 8.3 percent to pace gains in all 81 financial companies in the S&P 500 today, sending the group up 6.2 percent and extending its advance from this year's low to almost 25 percent. A gain of at least 20 percent from a bear- market low is the common definition of a bull market. The MSCI Emerging Markets Index, Germany's DAX Index, Brazil's Bovespa and Russia's Micex have each surged more than 20 percent from their 2011 lows.

The S&P 500 rose to its highest level in almost three months and has rebounded 17 percent since Oct. 3, when it closed at the lowest level since September 2010. The advance has been fueled by better-than-estimated corporate earnings and economic data and growing confidence that European leaders would make progress in combating the sovereign debt crisis.

Earnings Season

More than half of the companies in the S&P 500 have released quarterly results since Oct. 11, and about three- quarters have beaten the average analyst estimate, data compiled by Bloomberg show. Net income has grown 16 percent for the group on an 11 percent increase in sales.

The Citigroup Economic Surprise Index for the U.S. this week climbed to the highest level in six months, reaching 17 on Oct. 24. The index increases when data exceeds economists' estimates. The gauge has rebounded from minus 117.20 on June 3, when it showed reports were trailing the median economist projection in Bloomberg surveys by the most since January 2009.

The U.S. economy grew at a 2.5 percent annual rate in the third quarter, matching the median forecast of economists surveyed by Bloomberg, according to figures from the Commerce Department. Household purchases, the biggest part of the economy, increased at a more-than-projected 2.4 percent pace.

European Banks

The Stoxx Europe 600 Index climbed 3.6 percent to a 12-week high as banks led gains. BNP Paribas SA and Deutsche Bank AG, the biggest lenders in France and Germany, advanced more than 15 percent. BASF SE rallied 7.5 percent as the world's largest chemicals maker reported profit that beat estimates. Ericsson AB rose 6.1 percent as Sony Corp. agreed to buy its 50 percent stake in their joint mobile-phone venture.

The 10-year German bund yield jumped 17 basis points to 2.21 percent, while the 10-year Spanish yield fell 15 basis points to 5.33 percent. That drove the difference in yield with German debt down by 32 basis points to 3.12 percent, the lowest since Oct. 14 on a closing basis.

Even after today's gains, the bonds of some of Europe's most-indebted countries are still trading near their historical lows. Greece's two-year yield slid 285 basis points to 76.91 percent today, compared with an average of 27 percent in the past year. Italy's 10-year yield, which averaged 4.93 percent in the past 12 months, fell five basis points to 5.87 percent.

'A Red Flag'

"If we're not seeing the sovereign debt markets turn around, that is a red flag," Michael Darda, the Stamford, Connecticut-based chief economist and chief market strategist at MKM Partners LP, told Bloomberg Television. "Equity markets have gotten optimistic here. One of the things that bothers me is the euro-zone debt markets have not registered the same degree of optimism, and that's really the core of the problem."

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments dropped 46 basis points to a mid-price of 287, the lowest in almost two months.

The EU agreement with investors for a voluntary 50 percent writedown on their Greek bond holdings means $3.7 billion of debt-insurance contracts won't be triggered, according to the International Swaps & Derivatives Association's rules. ISDA will decide if the credit-default swaps should pay out depending on whether it judges losses to be voluntary or compulsory.

'Voluntary Bond Exchange'

European leaders said in the agreement they "invite Greece, private investors and all parties concerned to develop a voluntary bond exchange" into new debt.

Other measures in the bailout plan include recapitalization of European banks, a potentially bigger role for the International Monetary Fund, a commitment from Italy to do more to reduce its debt and a signal from leaders that the European Central Bank will maintain bond purchases in the secondary market.

"The moves we saw last night were clearly better than the markets anticipated, it seems to have cut out some of the risk," Jeffrey Palma, global equity strategist at UBS AG, said in an interview on Bloomberg Television's "In the Loop" with Betty Liu. "This certainly gives some sort of clarity to what is going on in Europe, but we'll probably have other iterations to come."

Treasuries extended losses after the U.S. sold $29 billion of seven-year debt, the last of three auctions this week totaling $99 billion. The notes drew a yield of 1.791 percent, compared with a record low 1.496 percent at the last offering. The yield on existing seven-year notes increased 14 basis points to 1.80 percent.

Euro Strengthens

The euro surged to $1.4187 and climbed as much as 2.5 percent to $1.4247. The shared currency strengthened versus eight of 16 major peers, rallying 1.8 percent versus the yen. The Dollar Index, which tracks the U.S. currency against those of six trading partners, slid 1.7 percent to 74.96.

The yen rose to a record versus the dollar for the fourth time in five days on speculation Bank of Japan measures will fail to contain the currency's rally. The central bank expanded its credit and asset-purchase programs to a total of 55 trillion yen ($724 billion) from 50 trillion yen to damp the currency's appreciation, which harms exporters. It also kept the overnight lending rate at zero to 0.1 percent.

The S&P GSCI index of 24 commodities gained 3 percent, the most in a month, led by metals and oil. Nickel jumped 4.1 percent and copper rose 6.1 percent to close at $8,145 a metric ton ($3.69 a pound) in London and is up 14 percent this week, a record in Bloomberg data starting in 1986.

December gold futures increased 1.4 percent to $1,747.70 an ounce. Oil advanced to the highest level in almost three months, climbing 4.2 percent to settle at $93.96 a barrel, erasing yesterday's slump triggered by an increase in U.S. inventories.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net Rita Nazareth in New York at rnazareth@bloomberg.net

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

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(BN) First-Time Unemployment Claims in U.S. Declined 2,000 Last Week to 402,000

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Jobless Claims in U.S. Decreased 2,000 Last Week to 402,000

Oct. 27 (Bloomberg) -- Fewer Americans filed applications for unemployment assistance last week, while those on benefit rolls dropped to a three-year low, signaling limited improvement in the labor market.

First-time jobless claims decreased by 2,000 to 402,000 in the week ended Oct. 22, Labor Department figures showed today in Washington. The median forecast of economists in a Bloomberg News survey called for a drop to 401,000. The number of people collecting unemployment benefits fell in the prior week by 96,000 to 3.65 million, the fewest since September 2008.

Waning dismissals, which lay the groundwork for gains in payrolls, may forestall cutbacks by consumers whose spending accounts for about 70 percent of the economy. At the same time, faster hiring is needed to trim unemployment, lift household confidence and spur the recovery.

"We're not making much progress," said Robert Dye, chief economist at Comerica Inc. in Dallas. "Unless we see the labor market improve, we won't see income growth. The consumer will remain fundamentally constrained."

The U.S. economy grew in the third quarter at the fastest pace in a year as gains in consumer spending and business investment helped support a recovery on the brink of faltering, Commerce Department figures showed today.

Gross domestic product, the value of all goods and services produced, rose at a 2.5 percent annual rate, matching the median forecast of economists surveyed by Bloomberg and up from a 1.3 percent gain in the prior quarter. Household purchases increased at a more-than-projected 2.4 percent pace.

Stock-Index Futures

Stock-index futures maintained gains after the reports and as European leaders agreed to expand a bailout fund to $1.4 trillion in a bid to tame the region's debt crisis. The contract on the Standard & Poor's 500 Index expiring in December rose 2.5 percent to 1,268.5 at 8:48 a.m. in New York.

Jobless benefits applications were projected to decline from 403,000 initially reported for the prior week, according to the median forecast of 48 economists in the Bloomberg survey. Estimates ranged from 390,000 to 410,000. The Labor Department revised the prior week's figure to 404,000.

Today's data showed the four-week moving average, a less volatile measure than the weekly figures, rose to 405,500 last week from 403,750.

Continuing claims were forecast to decrease to 3.72 million. The figure does not include the number of Americans receiving extended benefits under federal programs.

Extended Benefits

Those who've used up their traditional benefits and are now collecting emergency and extended payments decreased by about 36,400 to 3.45 million in the week ended Oct. 8.

The unemployment rate among people eligible for benefits, which tends to track the jobless rate, declined to 2.9 percent from 3 percent in the prior week.

Forty-nine states and territories reported an increase in unadjusted claims, while four reported a drop. These data are reported with a one-week lag.

Initial jobless claims reflect weekly firings and tend to fall as job growth -- measured by the monthly non-farm payrolls report -- accelerates.

October Employment

A report next week may show employers added about 100,000 workers to payrolls in October after a 103,000 gain in September, according to the Bloomberg survey median. The jobless rate was 9.1 percent for a fourth month, economists projected.

"The pace of job growth in recent quarters has been barely enough to absorb the increase in the labor force and wholly insufficient to produce meaningful declines in unemployment," Federal Reserve Governor Daniel Tarullo said in an Oct. 20 speech in New York. "The number of new claims for unemployment insurance suggests only modest gains in employment in coming months, while measures of job vacancies seem to have turned down."

Businesses reporting job cuts last week included Thousand Oaks, California-based Amgen Inc., the world's largest biotechnology company, which is firing 380 employees in its research and development division. Alamo Group Inc. said it will eliminate 77 workers as it closes a plant in Sioux Falls, South Dakota, to consolidate operations in an Illinois facility.

Some companies are adding staff. FedEx Corp., operator of the world's largest cargo airline, this week said it plans to hire 20,000 seasonal workers, 18 percent more than last year, to handle a surge in holiday deliveries.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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(BN) U.S. Economy Expands at Faster Pace of 2.5% as Consumer Spending Picks Up

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U.S. Economy Expands at Faster Pace on Consumer Spending

Oct. 27 (Bloomberg) -- The U.S. economy grew in the third quarter at the fastest pace in a year as gains in consumer spending and business investment helped support a recovery on the brink of faltering.

Gross domestic product, the value of all goods and services produced, rose at a 2.5 percent annual rate, matching the median forecast of economists surveyed by Bloomberg News and up from a 1.3 percent gain in the prior quarter, Commerce Department figures showed today in Washington. Household purchases, the biggest part of the economy, increased at a more-than-projected 2.4 percent pace.

Americans last quarter cut savings to boost purchases as incomes dropped by the most in two years, calling into question the sustainability of the acceleration in sales. With the lack of jobs holding back wages, the Obama administration and Federal Reserve policy makers have proposed additional measures aimed at stimulating growth and hiring.

"While the first half numbers led many to fear something worse, we continue be in a moderate growth recovery," said Dean Maki, chief U.S. economist at Barclays Capital in New York who correctly forecast the GDP figures. "Despite the fears consumers are turning more cautious, their spending has actually slightly outpaced their income."

Stocks climbed after the report and as European leaders agreed to expand a bailout fund to $1.4 trillion in a bid to tame the region's debt crisis. The Standard & Poor's 500 Index rose 2 percent to 1,266.30 at 9:32 a.m. in New York, erasing its 2011 loss. Treasury securities fell, sending the yield on the benchmark 10-year note up to 2.29 percent from 2.21 percent late yesterday.

Jobless Claims

First-time jobless claims decreased by 2,000 to 402,000 in the week ended Oct. 22, Labor Department figures also showed today. The number of people collecting unemployment benefits fell in the prior week by 96,000 to 3.65 million, the fewest since September 2008.

GDP forecasts in the Bloomberg survey of 83 economists ranged from 1.5 percent to 3.5 percent.

The increase in consumer spending last quarter followed a 0.7 percent gain in the second quarter and exceeded the 1.9 percent median forecast in the Bloomberg survey. Purchases added 1.7 percentage points to growth.

Sales climbed at an average 2.7 percent annual rate during the expansion that ended in December 2007.

Savings Rate

The gain came at a cost as the savings rate last quarter dropped to 4.1 percent, the lowest since the last three months of 2007. After-tax incomes adjusted for inflation decreased at a 1.7 percent annual rate, the biggest drop since the third quarter of 2009.

McDonald's Corp., the world's biggest restaurant chain, is among companies trying to keep prices down to attract budget- conscious customers as unemployment saps confidence. The Oak Brook, Illinois-based company this month said third-quarter profit gained 8.6 percent.

"The environment out there is still fragile," James Skinner, McDonald's vice-chairman and chief executive officer, said in an Oct. 21 call with analysts. "Consumers everywhere continue to be cautious and hesitant to spend."

One bright spot last quarter was business investment. Corporate spending on equipment and software climbed at a 17.4 percent pace, the most in a year. It contributed 1.2 percentage point to growth.

Payroll Gains

The pickup in business investment, nonetheless, didn't translate into more jobs. Payrolls rose by an average 96,000 workers per month last quarter, down from the 166,000 average between April and June.

President Barack Obama proposed last month a $447 billion plan to stimulate jobs, which included expanding a payroll tax break due to expire at the end of this year, increasing spending on public works projects and extending jobless benefits.

Obama yesterday said he is seeking ways to take action without congressional approval after the Senate blocked the measure earlier this month. The steps include altering a program to help homeowners refinance mortgages and easing the burden of student loans.

Fed policy makers pledged in August to hold the benchmark interest rate near zero through the middle of 2013 so long as joblessness stays high and the inflation outlook is "subdued." On Sept. 21, they announced a plan to replace debt in the central bank's portfolio with longer-term Treasuries to help cut borrowing costs.

Less Inflation

Inflation decelerated in the third quarter, opening the door for the central to take action. The Fed's preferred price gauge, which strips out food and energy costs, climbed at a 2.1 percent annual pace following a 2.3 percent gain in the second quarter. The central bank's longer term projection is a range of 1.7 percent to 2 percent.

Companies also kept a tight rein on stockpiles last quarter, making it less likely that production will have to be cut back. Inventories were rebuilt at a $5.4 billion annual pace, down from the second quarter's $39.1 billion rate. The reduction subtracted 1.1 percentage points from GDP growth.

Excluding inventories, the economy grew at a 3.6 percent annual rate last quarter, up from a 1.6 percent in the April through June period.

The trade deficit shrank last quarter, contributing 0.2 points to GDP.

Government spending stagnated, continuing to restrain growth. A 2 percent gain in federal outlays was offset by a 1.3 percent drop by state and local agencies.

The U.S. economy expanded at an average 0.9 percent rate in the first half of 2011, the worst performance since the recovery began in June 2009. Growth needs to exceed 2.5 percent to reduce the jobless rate, according to estimates by Kurt Karl, chief U.S. economist at Swiss RE in New York.

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

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