ST. LOUIS
U.K. consumer confidence plunged the most since 1994 this month as an increase in sales tax hurt shoppers’ appetite for spending, a report by GfK NOP Ltd. showed.
The index of sentiment fell 8 points from December to minus 29, the lowest since March 2009, the research group said in a statement in London today. All five measures of the index fell, with a gauge on the climate for making major purchases dropping 22 points to minus 29.
Prime Minister David Cameron, who raised value-added tax to 20 percent from 17.5 percent this month, has vowed to stick to planned spending cuts to reduce the budget deficit even after the economy unexpectedly shrank in the fourth quarter. Household sentiment may be further undermined as inflation accelerates and the economy endures what Bank of England Governor Mervyn King warned will be a “choppy” recovery.
“Today’s figures, when combined with the bleak economic forecast, will make talk of a double-dip recession unavoidable,” GfK Social Research Managing Director Nick Moon said in the statement. “With inflation on the up and the full force of the cuts yet to hit, these figures could be the beginning of a very painful period.”
The pound declined 0.3 percent against the dollar today and was at $1.5876 as of 11:02 a.m. in London.
Debt Specter
Cameron reasserted his commitment to eliminating the deficit at the World Economic Forum in Davos, Switzerland today.
“Our first priority is to kill off the specter of massive sovereign debts,” he said in a speech. “We can’t just flick on the switch of government spending or pump the bubble back up.”
A measure of the general economic situation over the next 12 months fell 7 points to minus 30, GfK said. An assessment of the economy over the last year dropped 3 points to minus 54.
A gauge of Britons’ views of their personal finances for the coming year fell 4 points to minus 12, and an index for the last year declined 2 points to minus 18. GfK NOP conducted the survey of 2,000 people from Jan. 7 to Jan. 16. The research was carried out on behalf of the European Commission.
U.K. inflation, which has exceeded the central bank’s 2 percent target for more than a year, accelerated to 3.7 percent in December. King said on Jan. 25 that it may rise to between 4 and 5 percent in the coming months and domestic spending faces “strong headwinds,” partly due to a squeeze on incomes.
Inflation Expectations
A separate report today from Citigroup Inc. and YouGov Plc showed that consumers’ inflation expectations for the coming year rose to 3.6 percent in January, the highest since September 2008, from 3.5 percent in December.
The drop in consumer confidence is hitting demand at stores and for property, reports yesterday showed. The Confederation of British Industry said its retail-sales index fell in January for the first time in three months, while Hometrack Ltd. reported that home prices dropped for a seventh month as demand plunged.
Still, the National House-Building Council said today that new housing registrations, a gauge of future construction, rose 3.3 percent to 7,385 in December from a year earlier. NHBC Chief Executive Officer Imtiaz Farookhi said the “biggest obstacles” to the recovery in homebuilding are mortgage availability and “monetary pressures” on consumers.
OTTAWA
The Federal Reserve will probably push forward with $600 billion in securities purchases even as the biggest jump in business loans in more than two years adds to signs the U.S. economy is gaining strength.
Commercial and industrial loans increased at an annual rate of 7.6 percent last month, the largest gain since October 2008, according to Fed data. Total bank credit has risen in three of the past six months as business loans cushioned against declines in real estate and consumer credit.
Bernanke and his fellow policy makers will probably note improvements in the economy such as higher consumer spending in a statement to be released tomorrow, former Fed governor Lyle Gramley said. Encouraging signs like firmer bank credit are unlikely to prompt a reduction in stimulus so long as growth remains weak and unemployment persists near 10 percent, he said.
“The Fed is not ready to let up on its accelerator,” said Gramley, senior economic adviser for Potomac Research Group in Washington. “They are going to be impressed with the fact the economy has gained some momentum, but there are still strong headwinds to growth, and bank lending is quite modest.”
The Federal Open Market Committee today begins a two-day meeting in Washington that culminates with a policy statement at around 2:15 p.m. tomorrow.
Policy makers will probably affirm their plan to buy Treasury securities through June to reduce long-term yields and spur lending, said Mark Gertler, a New York University professor and research co-author with Bernanke.
Close to Zero
Since reducing its target federal funds rate to near zero in December 2008, the central bank has used its balance sheet as a monetary policy tool. Its assets have tripled to $2.43 trillion from $873 billion in February 2008.
The committee may continue to describe credit as “tight” while acknowledging a pickup in growth in the fourth quarter to the fastest pace in three quarters, Gramley said.
Gross domestic product rose last quarter at a 3.5 percent annual rate, up from 2.6 percent in the previous three months, according to the median estimate of 67 economists surveyed by Bloomberg News before a Jan. 28 Commerce Department report.
Bernanke probably won’t be in a hurry to withdraw stimulus with joblessness persisting at 9.4 percent and inflation low, Gertler said. The Fed will probably affirm its pledge to keep interest rates low for an “extended period.”
“This is likely to be a stay-the-course meeting,” Gertler said.
Timing Withdrawal
When weighing the timing for a withdrawal of stimulus, the Fed will look for a sustained rise in credit such as business loans, said Paul Kasriel, chief economist at Northern Trust Corp. in Chicago. This would signal banks are deploying record reserves, potentially rekindling inflation, he said.
“That is going to be a tipoff that the Fed has to start an exit strategy” from its stimulus, said Kasriel, a former research economist at the Chicago Fed cash advance. “We are not there yet.”
Treasury yields have risen amid signs of a stronger economy. The yield on the 10-year note increased to 3.40 percent yesterday from 2.57 percent after the Nov. 3 FOMC meeting, when the asset purchases were announced.
Yields have increased because of “a stronger economy and better expectations,” Bernanke said at a forum in Arlington, Virginia on Jan. 13.
Jim Comiskey, a senior market strategist at Lind-Waldock in Chicago, disputed that view, saying yields have risen on concern that Fed bond purchases will stoke inflation.
“The market is scared about the inflationary impact of what the Fed is currently doing,” Comiskey said.
Slight Increase
The personal consumption expenditures index excluding food and energy rose 0.8 percent in November from a year earlier, according to Commerce Department data released last month. Including all items, prices rose 1 percent. That’s less than policy makers’ long-term goal for inflation of 1.6 percent to 2 percent.
Fed officials will update their economic forecasts at the meeting beginning today. In their forecasts at the Nov. 2-3 meeting, most central bankers saw inflation excluding food and energy ranging from 0.9 percent to 1.6 percent this year and from 1.0 percent to 1.6 percent in 2012.
Since the announcement of the Fed’s asset purchases on Nov. 3, the dollar has risen 3.7 percent against the euro as of yesterday in New York and the Standard & Poor’s 500 Index has climbed 7.8 percent.
Investment-Grade Companies
The premium that investment-grade companies pay to borrow above government debt narrowed to 1.59 percentage points yesterday from 1.78 points on Nov. 3, according to Bank of America Merrill Lynch index data.
The Fed needs to keep rates low to aid deleveraging and fuel growth, said Lena Komileva, head of G-7 market economics at Tullett Prebon Plc, a broker for commercial and investment banks in London.
“The economy’s debt level is so high it will make it extremely difficult for the Fed to begin raising borrowing costs in the near future,” Komileva said. The central bank probably won’t begin to raise rates until the middle of next year, she said.
The fifth-biggest U.S. bank by assets received $9 billion in orders for its $2.5 billion of debentures sold on Jan. 21, according to Mizuho Securities USA. The 6.25 percent senior bonds yield 170 basis points more than similar-maturity Treasuries, at the low end of a 5-basis-point range marketed by the New York-based firm, data compiled by Bloomberg show.
Economists are lowering forecasts for consumer price rises next year, with the median estimate declining to 1.9 percent this month from 2 percent in December, according to a Bloomberg survey of 55 economists. The record $13 billion auction of 10- year Treasury Inflation-Protected Securities on Jan. 20 attracted lower-than-average demand and the difference between yields on 10-year notes and TIPS narrowed the most since May.
“People aren’t too worried about inflation,” said Anthony Valeri, market strategist with LPL Financial Corp. in San Diego, which oversees $293 billion. “Goldman was noticing there’s some demand here and they could get that deal done.”
Thirty-year Treasuries yield 3.07 percentage points more than the consumer price index, above the average of 2.38 percentage points since the start of 2000. Goldman Sachs economists predict a 0.6 percent increase in personal consumption expenditures this year, compared with the median 1.05 percent of 59 economists surveyed by Bloomberg.
‘Satiate’ Demand
The bank’s last benchmark-sized offering of 30-year dollar- denominated bonds was in September 2007, Bloomberg data show. In that sale, Goldman Sachs issued $2.5 billion of 6.75 percent debt at a 190 basis-point spread, Bloomberg data show. Benchmark sales are typically at least $500 million.
“With Goldman Sachs doing a 30-year, it allows them to satiate some of the demand in the 30-year part of the curve and gets them close to all the buyers that are knocking on their door for bonds with duration,” said Timothy Cox, an executive director of debt capital markets at Mizuho in New York.
Elsewhere in credit markets, spreads on global company bonds narrowed for a third week, shrinking to the lowest since May. Securities issued by Petroleo Brasileiro SA in Brazil’s largest corporate debt offering rose on their first day of trading as issuance worldwide fell. Leveraged loan prices increased, reaching the highest level in more than three years during the period.
Yields on company debt from the U.S. to Europe and Asia narrowed 4 basis points relative to government bonds to 162 basis points, or 1.62 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Spreads, which have tightened 7 basis points this month, are down from 177 on Nov. 30 and at the lowest since reaching 158 on May 5.
Petrobras Bond Sale
Yields jumped to an average 3.98 percent from 3.93 percent on Jan. 14. The Barclays Capital Global Aggregate Corporate Index of bonds has gained 0.08 percent this month.
In emerging markets, relative yields widened 4 basis points to 239 basis points, according to JPMorgan Chase & Co. index data. During the past three months the index has ranged from a high of 279 on Nov. 30 to as low as 217 on Jan. 5.
Petrobras, Brazil’s state-controlled energy producer, sold $6 billion of bonds as worldwide issuance declined to $73.3 billion for the week, from $111 billion in the prior period, according to data compiled by Bloomberg.
The Rio de Janeiro-based company’s $2.5 billion of 5.375 percent notes due in 2021 rose on the first day of trading, climbing 1.52 cent from the issue price on Jan. 20 to 101.32 cents on the dollar, according to Trace, the bond price- reporting system of the Financial Industry Regulatory Authority.
Loans Climb
The cost of protecting corporate securities from default in the U.S. was little changed. Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 0.3 basis point to 83.6 basis points, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell for a second week, declining 4.6 to 100 no fax payday loans.
Credit-default swaps typically rise as investor confidence deteriorates and fall as it improves. Contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a swap protecting $10 million of debt.
The Standard & Poor’s/LSTA US Leveraged Loan 100 Index increased 0.3 cent for the week to 95.54 cents on the dollar after reaching 95.59 on Jan. 19, the highest since November 2007. The index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has gained 1.98 percent this month. Speculative-grade debt is rated less than Baa3 by Moody’s Investors Service and BBB- by S&P.
‘Bumping Along’
Goldman Sachs may have offered the long-maturity debt to get ahead of an increase in borrowing costs, said LPL’s Valeri. Yields on 30-year Treasuries climbed last week to 4.61 percent, the highest since April.
“They’re probably saying, ‘Look, this 30-year’s still not performing well, it’s bumping along in terms of price, let’s get this debt done now before interest rates get higher,’” Valeri said. “As an investor you’re being compensated more to stand out on the yield curve. You’re getting more yield for extending the maturity.”
Michael DuVally, a spokesman for Goldman Sachs, said the firm doesn’t comment on its own deals.
Including Goldman Sachs’s offering, companies have issued $5.32 billion of 30-year debt in dollars this month, up from $1.5 billion of sales in December, Bloomberg data show. That compares with an $8.86 billion average in the first 11 months of 2010.
‘Buckets’ to Fill
“A lot of investors have buckets they need to fill up within their portfolios, and there’s a need for 30-year paper,” said Rajeev Sharma, a money manager at First Investors Management in New York, who helps oversee $1.5 billion of investment-grade credit. “It’s very hard to get 30-years out there.”
The U.S. auction of 10-year TIPS on Jan. 20 drew a yield of 1.17 percent, compared with an average forecast of 1.108 percent in a Bloomberg survey of nine of the Federal Reserve’s 18 primary dealers, who are obligated to bid in U.S. debt auctions. The yield at the last auction of the maturity on Nov. 4 was the lowest ever, 0.409 percent.
The sale was the largest 10-year TIPS offering since the government began selling inflation-indexed debt in 1997.
The bid-to-cover ratio, which gauges demand by comparing the amount offered with the amount sold, was 2.37, the lowest since April 2009. It was 2.91 at the last sale in November and averaged 2.73 at the past 10 offerings.
Negative Return
“Inflation expectations implied by TIPS are down this week,” Valeri said. “That’s probably motivating investors to feel more comfortable with long-term debt.”
Yields on 10-year TIPS show bondholders expect the consumer price index to increase 2.19 percentage points a year on average over the life of the debt. The CPI rate rose 1.5 percent in 2010 and is forecast to climb 1.7 percent this year, based on a Bloomberg survey of more than 60 economists.
The so-called breakeven rate on TIPS reached 2.41 on Jan. 5 and is up from 1.51 percent in August amid concern that the $600 billion of cash the Federal Reserve will print to buy Treasuries would cause faster inflation.
U.S. corporate bonds due in 15 years or more are poised for a fifth consecutive month of declines, losing 1.23 percent in January, the worst-performing class in the Bank of America Merrill Lynch indexes.
JPMorgan Sale
The last benchmark offering of 30-year debt by a U.S. bank was in October, when New York-based JPMorgan sold $1.25 billion of bonds, Bloomberg data show. The 5.5 percent securities paid a spread of 165 basis points. Goldman Sachs sold $1.3 billion of 50-year debt on Oct. 26, Bloomberg data show. The bonds were offered in $25 denominations and can’t be called, or redeemed, for five years, the bank said in a regulatory filing.
Goldman Sachs “is saying, ‘Hey, listen, the market wants this, let’s give it to them because if we do this a year from now, there’s a good chance rates could be up 100 basis points,’” Mizuho’s Cox said. “If you believe we’re in the beginning of a recovery, then you would certainly anticipate the 30-year to move up in yield.”
Regulators have closed banks in North Carolina, South Carolina, Georgia and Colorado, bringing to seven the number of closures in 2011 following last year’s toll of 157 bank failures amid the limping economy and mounting bad loans.
The Federal Deposit Insurance Corp. on Friday took over the banks, the largest by far being United Western Bank, based in Denver, with $2.05 billion in assets.
Also seized were Bank of Asheville, based in Asheville, N.C., with $195.1 million in assets, CommunitySouth Bank and Trust, based in Easley, S.C., with $440.6 million in assets, and Enterprise Banking Co. of McDonough, Ga., with $100.9 million in assets.
Manufacturing in the Philadelphia region expanded in January for a fourth month as orders grew the most since September 2004 and employment picked up.
The Federal Reserve Bank of Philadelphia’s general economic index slipped to 19.3 from 20.8 last month. The gauge was forecast to hold at 20.8, according to the median estimate in a Bloomberg News survey. Readings greater than zero signal expansion in the area covering eastern Pennsylvania, southern New Jersey and Delaware.
Demand for new equipment and more exports to countries like China are boosting sales at manufacturers such as International Business Machines Corp. Gains in consumer spending, which accounts for about 70 percent of the economy, may keep factories expanding and lead to the job growth needed to accelerate the expansion.
“Manufacturing is continuing to see a particularly good period at present,” said David Semmens, a U.S. economist at Standard Chartered Bank in New York. As a result, there is a “large potential for hiring to pick up,” he said.
Estimates for the manufacturing gauge in the Bloomberg survey of 56 economists ranged from 12.5 to 25.
Stocks fell on concern China will raise interest rates to cool its economy. The Standard & Poor’s 500 Index dropped 0.4 percent to 1,276.5 at 10:37 a.m. in New York. Treasury securities fell, pushing up the yield on the benchmark 10-year note to 3.42 percent from 3.34 percent late yesterday.
Leading Indicators
Separate figures from the Conference Board showed the economy is gathering momentum. The New York-based group’s index of leading economic indicators rose 1 percent in December after a 1.1 percent gain in November.
The National Association of Realtors said purchases of previously owned homes rose 12 percent in December to a 5.28 million annual rate, the fastest since May.
The Labor Department said today that fewer Americans filed claims for jobless benefits last week, a sign of an improving labor market. Applications for unemployment insurance dropped by 37,000 to 404,000 in the week ended Jan. 15.
The Philadelphia Fed bank’s new orders measure rose to 23.6, from 10.6 in December. The employment index increased to 17.6, the highest since April 2006, from 4.3 last month. A measure of the average workweek fell to 10.6 in January from 16.8.
Sales, Prices
The shipments gauge increased to 13.4 from 5.2 last month. The index of prices paid jumped to 54.3, the highest since July 2008, from 47.9 the prior month, while the measure of prices received rose to 17.1 from 9.4.
The overall Philadelphia Fed’s index isn’t composed of the individual measures, so some economists consider it a gauge of sentiment among manufacturers fast cash online. The New York Fed’s factory measure, released Jan. 18, rose to 11.9 this month from 9.9 in December.
Economists monitor the New York and Philadelphia Fed factory reports for clues about the Institute for Supply Management national figures on manufacturing during the month.
The ISM will release its report on Feb. 1. The measure last month increased to 57, a seven-month high, from 56.6 in November.
Business Spending
Manufacturing makes up about 11 percent of the economy and is getting a boost from expanding world trade. Exports rose 0.8 percent in November to the highest level since August 2008, according to Commerce Department data released Jan. 13. Business spending on equipment and software advanced at a 15.4 percent annual rate in the third quarter.
IBM, the world’s largest computer-services provider, said this week that fourth-quarter hardware revenue climbed 21 percent to $6.3 billion, as a mainframe computer introduced in July helped boost sales in that product category by almost 70 percent.
“The improvement in our revenue growth was driven by the hardware and software transactional businesses,” Mark Loughridge, chief financial officer of the Armonk, New York- based company, said on a Jan. 18 conference call. “We see customers starting to spend more in their base business as we exit the recession.”
The U.S. is moving to strengthen economic ties with China as a way to boost American exports. President Barack Obama said the U.S. and China both reap “substantial benefits” from cooperation on economic and strategic issues even as friction remains over currency, trade and human rights.
Following a meeting with business leaders from both countries yesterday, Obama said that a prosperous and growing China is an important market for U.S. goods, and the administration highlighted deals to sell Boeing Co. airplanes and General Electric Co. locomotives.
“We want to sell you all kinds of stuff,” Obama said at a White House news conference with Chinese President Hu Jintao. “We want to sell you planes, we want to sell you cars, we want to sell you software.”
Residents of rural communities in southeastern Australia were sent emergency evacuation orders before dawn Wednesday, urged to leave their homes with three days of supplies just before floodwaters breached levees and swamped the town.
Up to 1,500 homes in the northern Victoria town of Kerang could be affected if the Lodden River rises any further.
The State Emergency Services (SES) said the Kerang levee has been breached in many places and the townspeople should head for a relief center on higher ground.
“You should ensure you have left your property immediately,” the SES said in text message alerts sent about 5:20 a.m. to the town’s 2,500 residents.
“We have enough resources and enough high ground for people to still operate within Kerang, but if it becomes totally inundated there will be very few people left in town,” Mayor Max Fehring told Sky News.
Walls of water miles (kilometers) wide are surging across northern and western Victoria in the wake of record rainfall last week.
Floodwaters have already left 1,000 households in Victoria’s northwest without power, and thousands more homes are under threat of cuts as substations and low-lying power lines are submerged.
Energy supplier Powercor built earthen barriers around the substation in Kerang, in a floodplain expected to be inundated by six feet (two meters) of water.
Across Victoria state, more than 3,500 people have evacuated their homes, with 51 towns and 1,500 properties already affected by rising waters.
The Victorian floods follow weeks of massive flooding in northeastern Queensland which left two-thirds of the giant state underwater and 30 people dead, most of them in a flash flood that hit towns west of the state capital, Brisbane.
The government has said the Queensland floods could be the country’s most expensive natural disaster ever.
The price tag from the relentless floods was already at $5 billion before muddy brown waters swamped Brisbane last week.
What is the best financial advice you ever received?
It’s hard to be an actor and be able to plan for lean times… but they happen and you must be ready. The profession is very much feast or famine, and when you consider 90 per cent of artists in Canada live below the poverty line you must ask yourself: are you ready for tough times? Don’t be afraid of part time jobs. They can facilitate peace of mind as you wait for the roles you need and want.
What is the best information you researched yourself?
Never carry a balance on your credit cards and get into real estate as early as possible.
What has been your savviest investment?
Any savings as opposed to spending really! When my kids first started grade school I took out RESPs for them and deposited $2,000 each for them yearly. It is paying off for me big time now . . . I heartily recommend RESPs starting at an early age.
Have you learned any financial lessons the hard way?
I unfortunately had a very messy and costly divorce recently that left me almost bankrupt a few times. With the love of friends and family I am finally getting back on my feet and hope I’m lucky enough to keep working for a loooong time. This brings me to another piece of advice: avoid family law lawyers who encourage delay or confrontation or both while leeching off your retainer funds! Get to know the law yourself and assert that you are the jockey and they are the horse!
How did your childhood influence your attitude toward money?
Despite being of very limited means my parents still could afford a home, food, and whatever schooling we needed. They sent me to LAMDA in England, paid for flying lessons and for my university. They were great savers. I scarcely approach their talent for this.
What was your first big purchase?
I bought a house when I was about 28. It was the earliest I could afford a high-ratio, CMHC-insured mortgage. I used the allowance for first-time home buyers to use a repayable part of personal RRSPs for the down payment. It started a cycle of home ownership that paid off.
What advice would you give to people about to enter the entertainment industry?
An actor in Canada is not the richest profession. Working for CTV is NOT like working for NBC! Learn your profession, always be prepared, and be prepared to try new things. Whatever is worth doing is worth doing well. I have a motto: do one thing that scares you every day. Internet stuff is a wild west that must be explored and tamed. Also: there is a cult of celebrity out there these days with the proliferation of YouTube and shows like So You Want To Be A Star. Don
ST. LOUIS
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