Regions

[Muthukali]

Insight: Morgan Stanley cut Facebook estimates just before IPO



(Reuters) - In the run-up to Facebook's $16 billion IPO, Morgan Stanley, the lead underwriter on the deal, unexpectedly delivered some negative news to major clients: The bank's consumer Internet analyst, Scott Devitt, was reducing his revenue forecasts for the company.

The sudden caution very close to the huge initial public offering, and while an investor roadshow was underway, was a big shock to some, said two investors who were advised of the revised forecast.

They say it may have contributed to the weak performance of Facebook shares, which sank on Monday - their second day of trading - to end 10 percent below the IPO price. The $38 per share IPO price valued Facebook at $104 billion.

The change in Morgan Stanley's estimates came on the heels of Facebook's filing of an amended prospectus with the U.S. Securities and Exchange Commission (SEC), in which the company expressed caution about revenue growth due to a rapid shift by users to mobile devices. Mobile advertising to date is less lucrative than advertising on a desktop.

"This was done during the roadshow - I've never seen that before in 10 years," said a source at a mutual fund firm who was among those called by Morgan Stanley.

JPMorgan Chase and Goldman Sachs, which were also major underwriters on the IPO but had lesser roles than Morgan Stanley, also revised their estimates in response to Facebook's May 9 SEC filing, according to sources familiar with the situation.

Morgan Stanley declined to comment and Devitt did not return a phone message seeking comment. JPMorgan and Goldman both declined to comment.

Typically, the underwriter of an IPO wants to paint as positive a picture as possible for prospective investors. Investment bank analysts, on the other hand, are required to operate independently of the bankers and salesmen who are marketing stocks - that was stipulated in a settlement by major banks with regulators following a scandal over tainted stock research during the dotcom boom.

The people familiar with the revised Morgan Stanley projections said Devitt cut his revenue estimate for the current second quarter significantly, and also cut his full-year 2012 revenue forecast. Devitt's precise estimates could not be immediately verified.

"That deceleration freaked a lot of people out," said one of the investors.

Scott Sweet, senior managing partner at the research firm IPO Boutique, said he was also aware of the reduced estimates.

"They definitely lowered their numbers and there was some concern about that," he said. "My biggest hedge fund client told me they lowered their numbers right around mid-roadshow."

That client, he said, still bought the issue but "flipped his IPO allocation and went short on the first day."

"VERY UNUSUAL"
Sweet said analysts at firms that are not underwriting IPOs often change forecasts at such times. However, he said it is unusual for analysts at lead underwriters to make such changes so close to the IPO.

"That would be very, very unusual for a book runner to do that," he said.

The lower revenue projection came shortly before the IPO was priced at $38 a share, the high end of an already upwardly revised projected range of $34-$38, and before Facebook increased the number of shares being sold by 25 percent.

The much-anticipated IPO has performed far below expectations, with the shares barely staying above the $38 offer price on their Friday debut and then plunging on Monday.

Companies do not make their own financial forecasts prior to an IPO, and underwriters are generally barred from issuing recommendations on the stock until 40 days after it begins trading. Analysts often rely on guidance from the company in building their forecasts, but companies doing IPOs are not permitted to give out material information that is not available to all investors.

Institutions and major clients generally enjoy quick access to investment bank research, while retail clients in many cases only get it later. It is unclear whether Morgan Stanley only told its top clients about the revised view or spread the word more broadly. The firm declined to comment when asked who was told about the research.

"It's very rare to cut forecasts in the middle of the IPO process," said an official with a hedge fund firm who received a call from Morgan Stanley about the revision.

 

[Muthukali]

World Bank: 2012 GDP growth 4.5%

The World Bank's forecast for Thailand’s gross domestic product growth for 2012 is 4.5 per cent and it has warned the country of the impact of the global economic crisis on its exports, the bank's senior economist Kirida Paopichit said on Wednesday.

Thailand must prepare to deal with the effects of a substantial global economic slowdown, make sure that its financial status is strong enough and must rapidly strengthen its export ability, said Mrs Kirida.

She projected government revenue growth at 16.8 per cent, expenditure at 22.8 per cent and public debt at 41.7 per cent of GDP.

GDP growth for 2013 is expected at five per cent, on the back of government’s revenue growth of 15.8 per cent, an expenditure at 23.3 per cent and the public debt at 42.1 per cent of GDP, the economist said.

 

[Muthukali]

BOJ Keeps Policies Unchanged as Analysts See More Easing by July

The Bank of Japan (8301) refrained from adding monetary stimulus after boosting its asset-purchase fund last month, as economists predict that political pressure will compel easing next quarter.

The central bank left the fund at 40 trillion yen ($501 billion) and a credit-lending program at 30 trillion yen, it said in a statement in Tokyo today. All 14 economists surveyed by Bloomberg News forecast that outcome. The policy board kept the key overnight lending rate between zero and 0.1 percent.

Half of the economists in the survey anticipate the central bank will add stimulus by July, when its price forecasts will indicate any progress in countering decade-long deflation. Fitch Ratings yesterday lowered Japan’s credit rating and escalated pressure on the government to raise the sales tax, as the Organization for Economic Cooperation and Development warned the nation’s debt is heading into “uncharted territory.”

“Chances for further easing will increase if the market becomes volatile,” Mari Iwashita, a bond strategist at SMBC Nikko Securities Inc. in Tokyo, said before the decision. “I expect additional easing once every three months.”

The Japanese currency traded at 79.81 per dollar as of 11:30 a.m. in Tokyo, advancing more than 1 percent in the past month amid growing instability in Greece. The Nikkei 225 Stock Average fell to a four-month low last week.

“Calls for more monetary stimulus won’t stop as politicians want to end deflation before raising the sales tax,” said Daiju Aoki, a Tokyo-based economist at UBS AG. “The BOJ won’t really be able to take a breather this year.”

Higher Taxes
Japan must uphold its pledge to start raising the sales tax in 2014 to control a public debt burden forecast to exceed 220 percent of gross domestic product next year, the Paris-based OECD wrote in a report yesterday. Prime Minister Yoshihiko Noda’s plans to increase the levy have been met by opposition from lawmakers.

“Developments in Europe are the key factor in determining when more BOJ stimulus will come” because a slowing global economy may make it harder for the central bank to achieve its 1 percent inflation goal, said Akio Makabe, an economics professor at Shinshu University in central Japan.

Concern that Europe’s debt crisis will spread has prompted investors to seek refuge in safe assets. Japan’s 10-year bond yields fell to a nine-year low and the same-term yield for German bunds dropped to all-time low last week. A regular BOJ buying operation, known as Rinban, on May 18 didn’t attract enough offers, which hasn’t happened since 2006.

Reconstruction Demand
Analysts including Yoshiki Shinke, chief economist at the Dai-Ichi Life Research Institute in Tokyo, forecast Japan’s economy to slow because reconstruction demand will fade after it grew at an annualized 4.1 percent pace in the three months ended March 31.

Renesas Electronics Corp. (6723), the world’s biggest maker of automotive microcontrollers, plans to cut about 6,000 jobs or the 15 percent of total workforce, the Yomiuri Newspaper reported yesterday without identifying its source.

 

[Muthukali]

New dollar futures in the works

A US-dollar futures contract will begin trading in Thailand on June 5, with 1,000 contracts a day expected to change hands initially.

Kesara Manchusree, managing director of the Thailand Futures Exchange (TFEX), said the contract will be good for exporters in need of a hedging tool.

It will also be useful for investors interested in speculating on currency movements.

She said exporters currently hedge their currency risk through commercial banks, and the dollar futures contract will offer them an alternative.

It will also act as indicators of sentiment and future price.

"The contract will be a crucial reference when we open up the country or link our trading platform to other Asean countries," said Mrs Kesara.

"Traders everywhere will be able to see local currency movements in real time on the TFEX board. At present, investors have to check prices at midday or through bank reports after closing,"

She said four contracts will be offered, to be available for trading from 9.15am until 4.55pm. Night trading will not be offered at first.Contract size will be set at a maximum US$1,000.

Investors will be prohibited from holding more than 5,000 contracts exceptfor market makers, which will be allowed 25,000.

The TFEX is in talk with commercial banks to act as market makers for the new contract.

Mrs Kesara said many currency analysts forecast the baht will continue weakening to 32 to the dollar this year.

"If the market accepts this product, then the TFEX will consider other currency futures such as dollar-euro contracts," she said.

Mrs. Kesara said TFEX has an average daily trading volume of 37,000 contracts, still lower than the target of 55,000 contracts due to global factors.

 

[Muthukali]

Asian Stocks Swing Between Gains, Losses on Europe Talks

Asian stocks swung between gains and losses as investors await the outcome of a summit in Brussels at which European leaders have clashed over how to fight the region’s debt crisis.

Nintendo Co., a maker of video-game players that depends on Europe for a third of its sales, fell 3.6 percent in Tokyo. Hitachi Construction Machinery Co (6305), a Japanese machinery maker that gets 17 percent of its sales in China, gained 0.6 percent ahead a report today on Chinese manufacturing. Hanwha Corp., a trader of petrochemicals and machinery, gained 4.8 percent in Seoul after its construction unit won an $8 billion deal to build housing units in Iraq.

The MSCI Asia Pacific Index fell 0.1 percent to 111.90 as of 10:20 a.m. in Tokyo before the Hong Kong market opened. It swung between gains and losses at least four times.

“The market is right now confused and obviously worried about whether Greece will end up leaving the euro or not,” said Nader Naeimi, Sydney-based head of dynamic asset allocation at AMP Capital Investors Ltd., which manages almost $100 billion. “The market is pretty convinced Greece will leave at some stage, but the big difference is if their exit will be orderly or disorderly, and an orderly exit has already been priced into the market.”

The Asian Pacific gauge has dropped 13 percent from this year’s high on Feb. 29 as amid investor concerns that Greece may abandon the euro and put other debt-stricken nations such as Italy and Spain at risk. Greece is scheduled to have a second election on June 17 following an inconclusive ballot this month.

Nikkei, Kospi
Japan’s Nikkei 225 Stock Average was little changed. Australia’s S&P/ASX 200 climbed 0.1 percent. South Korea’s Kospi Index rose 0.2 percent and Taiwan’s Taiex Index (TWSE) gained 0.4 percent. Singapore’s Straits Times Index added 0.1 percent.

The Standard & Poor’s 500 Index (SPXL1) added 0.2 percent in New York yesterday. Futures on the index lost 0.2 percent today as European leaders clashed over joint bond sales at the EU summit in Brussels, while they called on Greece to stick with austerity measures needed to stay in the euro.

Stocks in the Asian benchmark are valued at 1.2 times book value, compared with 2.08 times for the S&P 500 and 1.31 times for the Stoxx Europe 600, according to data compiled by Bloomberg.

 

[Muthukali]

Hong Kong Short Selling of Stocks Surges to 13-Year High

Short-selling of stocks in Hong Kong surged yesterday to the highest level since 1999.

The ratio of total short selling by value on Hong Kong’s mainboard versus the shares traded reached almost 1-to-7 yesterday, the highest level since Feb. 25, 1999, according to data compiled by Bloomberg. The benchmark Hang Seng Index declined 0.5 percent today as of 10:26 a.m. local time.

“The bears are dominating the market,” said Alex Wong, asset-management director at Ample Capital Ltd. in Hong Kong. “We will probably see some rebound toward the end of this month. The U.S. is heading into a long weekend and during the weekend there will probably be some news coming out from Europe, so people will probably cover their positions.”

U.S. markets will be closed on May 28 for a holiday. European leaders, meeting in Brussels today to find ways to contain the region’s dent crisis, clashed over joint debt sales as they called on Greece to stick with the budget cuts needed to stay in the euro. An inconclusive May 6 ballot in Greece raised speculation it will scuttle austerity measures imposed upon the nation after two bailouts and have to leave the single-currency bloc. New elections are due on June 17.

Futures on the Hang Seng Index rose 0.2 percent to 18,625, while the gauge’s volatility index rose 0.6 percent to 28.75, indicating traders expect a swing of about 8.2 percent in the benchmark index during the next 30 days.

 

[Muthukali]

Facebook Investor Spending Month’s Salary Exposes Hype

Ryan Cefalu, who lives with his wife and two kids in Baton Rouge, Louisiana, saw in Facebook Inc. (FB)’s much-anticipated initial public offering a chance to buffer his retirement fund. His expectations fizzled along with the stock within the first minutes of trading.

“It’s disheartening to know that things get over-hyped,” Cefalu, a 34-year-old data-systems manager who spent about $4,000 on the stock, said in an interview. “That’s about a 12th of my annual income -- so a month’s salary. I’m trying to do an on-my-own retirement kind of thing.”

Facebook, a site used by 901 million people worldwide, allocated more than 25 percent of shares to retail investors, said two people familiar with the offering who asked not to be identified because the process was confidential. That means the value of stock bought by that group for $38 in the IPO has dropped by at least $630 million in total, based on the closing price of $32 yesterday and assuming investors held onto the stock.

While asset managers and hedge funds got to buy the stock in private trading years before the IPO and investment banks made money in the offering, small-time investors had to wait until last week’s IPO for a piece of the action. The outcome: After Facebook and its underwriters misjudged demand in pricing the IPO and glitches on the Nasdaq hampered trading on the first day, the world’s largest social-network website lost 18 percent in three days. The stock is still about 16 percent under its $38 IPO price after paring some losses yesterday.

Facebook, the biggest technology IPO in history, turned into a quagmire of blame. Buyers of the stock sued the company, Nasdaq OMX Group Inc. and the underwriters, claiming they were misled. The U.S. Securities and Exchange Commission and the brokerage industry’s watchdog both said they may review the offering, and the scrutiny prompted Morgan Stanley (MS), the lead underwriter, to defend its handling of the IPO in a statement.

‘Should I Bail?’
“I thought it would be fun to get in on the initial frenzy,” said Linda Lantz, an online marketer in Granite Bay, California, who bought 100 shares. “Now it makes me think ‘Oh god, should I bail or is it going to come back?’”

For Cefalu, whose children are age 12 and 1, the first-day glitches meant more than a bad day of trading: they made him buy twice as many shares as he intended after an order he canceled went through hours later, he said. With shares of Zynga Inc. (ZNGA) slumping along with Facebook, he estimates he lost a combined $2,250 as a result of the Facebook debut debacle.

Michael McClafferty, a freshman finance major at Michigan State University, saw his “first big investment” turn into a $3,000 loss when he sold the shares at $35.

“I didn’t want to lose more,” McClafferty said. “I didn’t know what to do.”

‘They Messed Up’
The 19 year-old student estimates he spent $8,000 more than he wanted to while repeating orders that wouldn’t go through on the first day, and failing to cancel them because of the technical problems.

“I didn’t know what happened,” he said. “Then I was like, ‘they should be able to do something about it.’ They messed up pretty big from what I see, and it hurt more people than just me.”

The stock rose 3.2 percent to $32 at 4 p.m. yesterday in New York. On its debut, the Menlo Park, California-based website jumped to $45 at the start of trading, which was delayed 30 minutes, before ending the day up 0.6 percent at $38.23. It paled in contrast with Google Inc.’s 18 percent jump in its 2004 initial public offering, Visa Inc.’s 28 percent gain in 2008 and LinkedIn Corp.’s 109 percent surge last May.

“The reaction of the retail investor is ‘Wow, what a flop,’” Jay Pestrichelli, co-founder of the Omaha, Nebraska- based investment adviser Zega Financial, said in an interview.

Retail Investors
Larry Yu, a spokesman for Facebook, declined to comment.

Facebook increased the number of shares sold and the price range days before the IPO, raising $16 billion and valuing the company at $104.2 billion.

Pat Brogan, a Yahoo! Inc. manager who trades on sites run by E*Trade Financial Corp. (ETFC) and Fidelity Brokerage in her spare time, called the experience of buying Facebook stock the “biggest fiasco” in her 30 years of day trading.

“They flooded the market with so many shares,” Brogan said. “I’m actually going to dump them if they get back to $38.”

Demand from retail buyers was higher than normal for Facebook, with personal investment website Sigfig.com seeing 10 times more orders than it had for other recent technology IPOs, said Terry Banet, chief investment officer for the site.

“Facebook wanted to get more retail involvement and they succeeded,” Banet said.

Big Gamble
Some investors managed to take advantage of the initial gain. James DiMaggio, a 29-year-old product line sales manager at Ametek Inc. in Morton, Pennsylvania, said he bought 200 shares at $38, sold half for $40.98 and made about $280.

“The other half is now tanking,” said DiMaggio, who estimates his losses so far at $320. “It was really exciting in the beginning. I don’t gamble, and this is obviously a gamble.”

In the wake of the stock’s losses this week, small-time investors took to the Web to express their agitation on sites including Twitter Inc. and online investing community StockTwits Inc.

“There’s a lot of questioning about the IPO process in general and a sentiment that the real investor is getting taken by the larger Wall Street,” said Phil Pearlman, executive editor of StockTwits.

Long-Term Potential
Some investors still see potential in the long term. At Sigfig, 7 percent of users who bought Facebook on May 18 sold it the same day, below the 15 percent to 31 percent first-day flipping of stock that has been more typical of recent technology IPOs, according to Banet.

“Short term fluctuations don’t bother me,” said Charles Landry of Sacramento, California, who bought 1,000 shares on May 18. “Facebook has the potential to be, in the long term, one of the iconic companies in Silicon Valley, a la Google, a la Apple.”

Renee Morrison, who runs accounting at Empyrion Wealth Management in Roseville, California, had never bought a stock in her life before investing in Facebook last week. She too plans to wait it out, she said.

“I have been very well educated and prepared that it’s kind of like gambling, there’s no guarantee,” Morrison said.

 

[Muthukali]

Frozen Europe Means ECB Must Resort to ELA

The first rule of ELA is you don’t talk about ELA.

The European Central Bank is trying to limit the flow of information about so-called Emergency Liquidity Assistance, which is increasingly being tapped by distressed euro-region financial institutions as the debt crisis worsens. Focus on the program intensified last week after it emerged that the ECB moved some Greek banks out of its regular refinancing operations and onto ELA until they are sufficiently capitalized.

European stocks fell and the euro weakened to a four-month low as investors sought clarity on how the Greek financial system would be kept alive. The episode highlights the ECB’s dilemma as it tries to save banks without taking too much risk onto its own balance sheet. While policy makers argue that secrecy is needed around ELA to prevent panic, the risk is that markets jump to the worst conclusion anyway.

“The lack of transparency is a double-edged sword,” said David Owen, chief European economist at Jefferies Securities International in London. “On the one hand, it increases uncertainty, but at the same time we do not necessarily want to know how bad things are as it can add fuel to the fire.”

Under ELA, the 17 national central banks in the euro area are able to provide emergency liquidity to banks that can’t put up collateral acceptable to the ECB. The risk is borne by the central bank in question, ensuring any losses stay within the country concerned and aren’t shared across all euro members, known as the euro system.

ECB Approval
Each ELA loan requires the assent of the ECB’s 23-member Governing Council and carries a penalty interest rate, though the terms are never made public. Owen estimates that euro-area central banks are currently on the hook for about 150 billion euros ($189 billion) of ELA loans.

The program has been deployed in countries including Germany, Belgium, Ireland and now Greece. An ECB spokesman declined to comment on matters relating to ELA for this article.

The ECB buries information about ELA in its weekly financial statement. While it announced on April 24 that it was harmonizing the disclosure of ELA on the euro system’s balance sheet under “other claims on euro-area credit institutions,” this item contains more than just ELA. It stood at 212.5 billion euros this week, up from 184.7 billion euros three weeks ago.

The ECB has declined to divulge how much of the amount is accounted for by ELA.

Ireland’s Case
Further clues can be found in individual central banks’ balance sheets. In Ireland, home to Europe’s worst banking crisis, the central bank’s claims on euro-area credit institutions, where it now accounts for ELA, stood at 41.3 billion euros on April 27.

Greek banks tapped their central bank for 54 billion euros in January, according to its most recently published figures. That has since risen to about 100 billion euros, the Financial Times reported on May 22, without citing anyone.

Ireland’s central bank said last year it received “formal comfort” from the country’s finance minister that it wouldn’t sustain losses on collateral received from banks in return for ELA.

“If the collateral underpinning the ELA falls short, the government steps in,” said Philip Lane, head of economics at Trinity College Dublin. “Essentially, ELA represents the ECB passing the risk back to the sovereign. That could be the trigger for potential default or, in Greece’s case, potential exit.”

Greek Exit
The prospect of Greece leaving the euro region increased after parties opposed to the terms of the nation’s second international bailout dominated May 6 elections. A new vote will be held on June 17 after politicians failed to form a coalition, and European leaders are now openly discussing the possibility of Greece exiting the euro.

A Greek departure could spark a further flight of deposits from banks in other troubled euro nations, according to UBS AG (UBSN) economists, leaving them more reliant on funding from monetary authorities. Banks in Greece, Ireland, Italy, Portugal and Spain saw a decline of 80.6 billion euros, or 3.2 percent, in household and corporate deposits from the end of 2010 through March this year, according to ECB data.

“ELA is a symptom of the strain in the system, and Greece is the tip of the iceberg here,” Owen said. “As concerns mount about break-up, that sparks deposit flight. Suddenly we’re talking about 350 billion, 400 billion as bigger countries avail of ELA.”

German ELA
ELA emerged as part of the euro system’s furniture in 2008, when the global financial crisis led to the bailouts of German property lender Hypo-Real Estate AG and Belgian banking group Dexia. While the Bundesbank’s ELA facility has now been closed, Dexia Chief Executive Officer Pierre Mariani told the bank’s shareholders on May 9 that it continues to access around 12 billion euros of ELA funds.

ELA was a measure that gave central banks more flexibility to keep their banks afloat in situations of short-term stress, said Juergen Michels, chief euro-area economist at Citigroup Global Markets in London.

“It seems to be now a more permanent feature in the periphery countries,” Michels said, adding there’s a risk that “the ECB loses control to some extent over what’s going on.”

The ECB was forced to confirm on May 17 it had moved some Greek banks onto ELA after the news leaked out, roiling financial markets. The ECB said in an e-mail that as soon as the banks are recapitalized, which it expected to happen “soon,” they will regain access to its refinancing operations. The ECB “continues to support Greek banks,” it added.

‘Life Support’
By approving ELA requests, the ECB is ensuring that banks that would otherwise not qualify for its loans have access to liquidity.

“The ELA is a perfect life-support system, but it’s not a system for what happens after that,” said Lorcan Roche Kelly, chief Europe strategist at Trend Macrolytics LLC in Clare, Ireland. “What you need is a bank resolution mechanism, a method to get rid of a bank that’s insolvent. In Ireland, and perhaps in Greece as well, the problem is that you’ve got banking systems that are insolvent.”

For Citigroup chief economist Willem Buiter, there is a bigger issue at stake. ELA breaks a key rule that is designed to bind the monetary union together, he said.

“It constitutes a breach of the principle of one monetary, credit and liquidity policy on uniform terms and conditions for the whole euro system. The existence of ELA undermines the monetary union.”

 

[Muthukali]

Exports down 3.67% in April

Exports in April had a total worth of US$16.91 million, down 3.67 per cent from the same month last year, the Ministry of Commerce reported on Friday.

Imports were up 7.87 per cent to $19.78 million, for a trade deficit of $2.87 billion, it said.

Exports over the first four months of the year (Jan to April) contracted 3.86 per cent from the same period last year to $71.56 million. Imports totalled $79.61 million, an increase of 9.79 per cent, leaving a trade deficit of $8.05 million.

The ministry attributed the decrease in export expansion to a substantial decline in Thai products shipped to major export markets, including countries in Europe, to Japan and the United States, caused by the global economic slowdown and impact of the great flood that hit many industrial estates late last year.

 

[Muthukali]

Singapore Production Unexpectedly Declines on Electronics, Drugs

Singapore’s industrial production unexpectedly fell for the third time in four months in April as manufacturers cut output of electronics and pharmaceuticals.

Manufacturing dropped 0.3 percent from a year earlier after a revised 3.1 percent decline in March, the Economic Development Board said today. The median of 17 economists surveyed by Bloomberg News was for a 4.1 percent gain. Output slipped a seasonally adjusted 3.5 percent from the previous month.

Asian policy makers, many of whom have cut interest rates this year, are under renewed pressure to support growth as the world grapples with the threat of a Greece exit from the euro. China’s manufacturing may shrink for a seventh month in May, a private survey showed yesterday, adding to signs of weakening demand for Asian goods that have emerged across the region as Malaysia, Thailand and the Philippines reported export declines.

“The easing of economic momentum in the advanced economies and China is likely to weigh down on activity in Singapore, driving subdued growth rates in both non-oil domestic exports and industrial production in the coming months,” Vincent Conti, a Singapore-based analyst at Australia & New Zealand Banking Group Ltd., said before the report.

Electronics production decreased 12.5 percent from a year earlier in April, while pharmaceutical output fell 7.6 percent after dropping 6.3 percent in March.

 

[Muthukali]

Europe Crisis Fails to Damp South Korean Consumer Confidence

South Korean consumer confidence rose to the highest level in 15 months as easing inflation helped to offset concern that Europe’s debt crisis will undermine growth.

The sentiment index was at 105 in May, the strongest since February 2011 and up from 104 in April, the Bank of Korea said in an e-mailed statement today. A reading above 100 indicates optimists outnumber pessimists.

South Korea’s won fell to the weakest level in more than seven months and government bonds rose yesterday amid doubts Europe will succeed in containing the sovereign-debt crisis as Greece teeters on the brink of an exit from the euro. Inflation moderated to a 21-month low of 2.5 percent in April and today’s report showed that expectations for price gains have declined.

The consumer confidence index is based on survey responses from 2,091 households in 56 cities. It was conducted by mail and telephone between May 11 and May 18. The expected inflation rate over the next year was 3.7 percent in May, slower than last month’s 3.8 percent, the report showed.

 

[Muthukali]

SET up on day, down on week

Thai stocks rose slightly on Friday but closed the week down 1.9% from a week earlier as foreign investor sentiment remained weak in light of uncertainties in Europe.

The Stock Exchange of Thailand main index closed at 1,132.83 points, up 7.05 points or 0.63% on the day but down from 1,154.44 the previous Friday. The weekly decline was the third in a row.

Turnover on Friday was modest at 25.07 billion baht, with 2.89 billion shares traded.

The slump in the SET was in line with weakness elsewhere in Asia, sparked by concern that China’s biggest banks may miss lending targets as the economy slows more quickly than expected.

The MSCI Emerging Markets Index fell 0.9% on the week, its 10th weekly decline and the longest losing streak since 1994, on concern that Europe’s debt crisis and China’s economic slowdown will curb demand for riskier assets.

On the SET, foreign investors were net sellers of 1.57 billion baht worth of shares on Friday. Local institutions and individual investors were net buyers while brokers were net sellers.

The SET50 index of blue chips ended at 786.87, up 3.01 points or 0.38%, in turnover worth 17.24 billion baht.

The MAI index gained 3.08 points or 1.09% to close at 284.71, in trade worth 729.64 million baht.

Among listed companies making news on Friday, Khon Kaen Sugar Industry Plc (KSL) rose 1.6% to 12.40 baht, on news that it had received a loan of 2.15 billion baht from Kasikornbank to fund new sugar and power plants.

Nippon Pack, a producer of food packaging, slumped 8.2% to 59 baht, the largest drop since December 2009. Shares had been pushed up earlier on reports of a dividend payment, but the company said on Friday that it had not made a final decision.

The Pepsi bottler Serm Suk Plc climbed 11% to 111 baht, rebounding from Thursday’s 30% slump. "Serm Suk is operating as normal and there is no significant development to announce," CEO Somchai Bulsook said in a statement in response to queries from the market about Thursday's movements.

The top five most active stocks by value on Friday were: PTT, closing at 307.00 baht, down 6 baht (1.92%); KBANK (150.00 baht, up 1.50); PTTGC (56 baht, down 0.75); BBL(178.50, down 3.00 baht); TOP (54.75 baht, unchanged).

 

[Muthukali]

Vietnam cuts interest rates a third time to bolster economy

Vietnam’s central bank cut interest rates for the third straight month as policy makers deepen efforts to revive a struggling economy after inflation slowed to the lowest since 2010.

The State Bank of Vietnam’s refinancing rate will fall to 12 percent from 13 percent effective May 28, according to a statement on the central bank’s website Friday. The discount rate will be cut to 10 percent from 11 percent and deposit rate cap will be lowered to 11 percent from 12 percent, it said.

“Business and production activities are still facing many difficulties,” the central bank said. The rate cuts are meant “to resolve difficulties for business and production, in line with the government’s policy.”

Asian nations have diverged in monetary policy responses to shield their economies from Europe’s debt crisis and a growth slowdown in China as some kept rates steady or cut borrowing costs, while others tightened to limit price gains. Vietnam’s economy expanded 4 percent in the first quarter, the least since 2009, and Deputy Prime Minister Nguyen Xuan Phuc said this month that helping businesses and checking inflation are urgent tasks.

“We expect inflation to moderate further this year, and with the economy likely to remain weak, further rate cuts are likely,” Gareth Leather, a London-based economist at Capital Economics Ltd., said in a note after the decision.

Government resolution
The Vietnamese government asked the central bank to speed up lending-rate cuts after consumer-price gains eased, according to a resolution on the government website on May 10. Inflation was at a 21-month low of 8.34 percent in May.

The central bank on May 4 said short-term commercial lending rates will be capped at 3 percentage points above the deposit rate limit for some sectors to help reduce borrowing costs. Commercial bank lending fell 0.66 percent through April from the end of 2011, Dau Tu newspaper reported this month.

Vietnam cut fuel costs twice this month, lowering the price of the most commonly used grade of fuel by 4.6 percent.

Power tariffs will increase “in the near future,” the Thanh Nien newspaper reported on May 11, citing Nguyen Tien Thoa, head of price control at the Finance Ministry.

Not performing
“The economy is not performing as it could or should,” Jean-Christophe Ganz, the Zurich-based chairman of Vietnam Holding Asset Management Ltd., said before the decision. There is always a risk that cutting rates “will re-start inflation and recreate the situation we have experienced many times, but the State Bank still has some room to maneuver.”

The rate cap for deposits with terms of one month or longer will drop to 11 percent from 12 percent. The interest limit for non-term deposits and those with terms of less than one month will be lowered to 3 percent from 4 percent, the central bank said.

Vietnam’s central bank will give companies that are currently trading gold bars a six-month transition period from July 10 to register with the monetary authority if they want to continue with the business, according to a separate statement on its website Friday.

 

[Muthukali]

Vietnam’s Stocks Seen Gaining 65% as Rates Fall: Southeast Asia

Vietnamese stocks, Asia’s biggest losers during the past five years, are rising the most in 2012 as the nation’s largest money managers say falling interest rates will reverse the deepest earnings slump in three years.

The benchmark VN Index (VNINDEX) may extend its rally by another 65 percent through 2013 after climbing 24 percent since December, said Samsung Asset Management. Financial and real-estate companies in Asia’s 13th-largest equity market may lead gains, Eastspring Investments said. Dragon Capital, Vietnam’s biggest private stock investor, favors consumer and agricultural shares such as Vietnam Dairy Products Joint Stock Co. and Petrovietnam Fertilizer & Chemical Joint Stock Co., the nation’s largest listed fertilizer maker.

Vietnam is cutting borrowing costs from a three-year high after inflation fell to 8.3 percent this month from 23 percent in August, economic growth slowed to the weakest pace since 2009 and VN Index profits sank 12 percent in the first quarter. The stimulus has spurred Samsung Asset Management to invest in the country’s $40 billion equity market for the first time, while Vietnam mutual funds tracked by EPFR Global lured inflows for 20 straight weeks, the longest stretch for any developing nation.

“The stock market is discounting improving economic and corporate fundamentals ahead,” said Alan Richardson, who helps oversee about $87 billion as a money manager at Samsung Asset in Singapore. His Samsung ASEAN Securities Master Investment Trust has gained about 26 percent annually during the past three years, topping 92 percent of rivals, data compiled by Bloomberg show.

Leading Gains
While the VN Index has retreated 11 percent from its 2012 high on May 8 amid a global equity rout sparked by Europe’s debt crisis, the gauge has still outperformed indexes in all 73 markets tracked by Bloomberg this year except Egypt’s EGX30 Index (EGX30) and Venezuela’s IBC Index. (IBVC)

Vietnam’s stock market is classified by MSCI Inc. as a frontier market, which has an average stock-market value of about $29 billion. That’s 94 percent less than in emerging countries designated in MSCI indexes, data compiled by Bloomberg show. Vietnam’s market value of $40 billion is about half that of Walt Disney Co., based in Burbank, California.

The MSCI Frontier Markets Index (MXFM), which includes shares in 25 countries with a combined market value of $369 billion, has slipped 2.5 percent this year. Institutional money managers tracked by EPFR Global and Citigroup Inc. have about $11 billion in frontier-market funds, compared with $654 billion in emerging markets, according to a November report by New York-based Citigroup.

Bond Rally
Vietnam’s stock exchange in Ho Chi Minh City started trading in 2000 with shares of four companies that began as state-controlled businesses. The first private company was listed four years later and a second bourse in Hanoi opened in 2005. The two exchanges now have about 700 stocks. The ruling Communist Party has plans for 254 government-run businesses to sell stakes this year, according to the State Capital Investment Corporation’s website.

Vietnam’s bond market is also signaling higher confidence that policy makers have tamed Asia’s fastest inflation rate.

Five-year government securities in Vietnam have surged this year, sending yields down 287 basis points, or 2.87 percentage points, to 9.68 percent, the biggest drop among 43 countries tracked by Bloomberg. The nation’s currency, the dong, has been little changed at about 20,900 per dollar for the past 15 months, after losing about 18 percent the previous three years.

2011 Retreat
Vietnam’s stocks and bonds retreated in 2011 as the central bank raised interest rates by 6 percentage points to restore confidence in the dong, reduce inflation and curb a 28 percent surge in credit growth. The policy helped slow the economy’s expansion to 4 percent in the first quarter of this year from 6.8 percent at the end of 2010, government data show.

More than 17,700 companies halted production in the first four months of 2012, according to the Ministry of Planning and Investment. Per-share earnings in the VN Index declined to 41 dong at the end of March from 46 dong a year earlier, the biggest drop since the year ended June 2009, according to data compiled by Bloomberg.

Weaker exports may prolong the country’s economic slowdown. Overseas sales fell to $8.96 billion in April from $9.48 billion in March, government data show. Growth in garment shipments, Vietnam’s biggest export, slowed to 15 percent through April after expanding 33 percent a year earlier, according to preliminary figures from the statistics office.

Trading volumes have discouraged some investors from buying Vietnam stocks. The 30-day average value of shares changing hands on the Ho Chi Minh Exchange as of May 24 was 1.6 trillion dong ($77 million), data compiled by Bloomberg show. That compares with about $52 million in Dubai and $14 billion on China’s Shanghai Stock Exchange.

Growth Spur
“Liquidity is one of the big issues,” said Andrew Beal, a London-based money manager at Henderson Global Investors who helps oversee about $104 billion and invests in Vietnam through closed-end funds listed overseas.

While the slowdown has been “painful,” Vietnam’s $106 billion economy will probably recover toward the end of this year as the government switches its focus from curbing inflation to spurring growth, said Dominic Scriven, who co-founded Dragon Capital, a Ho Chi Minh City-based money management and securities firm, in 1994.

The government cut corporate income tax for small- and medium-sized companies by 30 percent this month, and Deputy Prime Minister Nguyen Xuan Phuc said on May 21 the government will help some companies repay loans.

 

[Muthukali]

Interest Rates
The central bank, led by Governor Nguyen Van Binh, has reduced its benchmark refinancing rate by 300 basis points to 12 percent since March and capped some lending rates for smaller businesses at 14 percent this month. Binh said in March that policy makers would cut borrowing costs by 100 basis points in each of the second, third and fourth quarters.

The government has stepped up efforts to bolster lenders and has encouraged takeovers of weaker financial institutions, Fitch Ratings said in a May 11 statement, affirming its B+ foreign-currency credit rating for Vietnam, four levels below investment grade.

Policy makers will probably reduce borrowing costs further this year as inflation falls toward 7 percent, the slowest pace since 2009, said Scriven, who expects corporate earnings to rally about 14 percent this year.

“There’s a steely determination in the government to regain the mandate and confidence of Vietnamese savers, investors and businesses,” said Scriven, whose $415 million Vietnam Enterprise Investments Ltd. fund is the biggest actively-managed stock fund focused on Vietnam, according to data compiled by Bloomberg. It returned 14 percent in dollar terms during the past 18 months, beating the VN Index by 14 percentage points, the data show.

Stock Valuations
Earnings at Ho Chi Minh City-based Vietnam Dairy Products, known as Vinamilk, will probably climb 15 percent this year and 35 percent in 2013, according to the average of analyst estimates compiled by Bloomberg. The dairy producer is valued at 10.8 times reported profit, compared with 29 times for global packaged food and meat companies, according to data compiled by Bloomberg. The stock has returned 2.8 percent this year.

Petrovietnam Fertilizer, based in Ho Chi Minh City, posted a 69 percent surge in unconsolidated net income in the first quarter. The shares, up 45 percent this year, trade for 3.8 times trailing 12-month earnings, versus the 27.1 times average for global peers, according to data compiled by Bloomberg.

Consumer Demand
While the VN Index’s rally has boosted its price-to- reported earnings ratio to 9.8 from 7.2 at the start of this year, the measure is still about 34 percent cheaper than its five-year average, according to data compiled by Bloomberg. The VN Index has lost 60 percent during the past five years, the most among stock gauges in 17 Asian nations tracked by Bloomberg.

“The level of valuations is quite low compared to international standards,” Ngo The Trieu, who oversees about $1 billion as head of public investment at Eastspring Investments, the Vietnam unit of Prudential Plc’s asset management business.

Long-term investors will benefit from Vietnam’s surging consumer demand and its allure to global manufacturers as a lower-cost alternative to China, according to Dragon Capital’s Scriven. Retail sales increased 22 percent in April, near the 24 percent average growth rate since 2005, according to data compiled by Bloomberg.

About 95 percent of Vietnam’s 91 million people are below the age of 65 and the minimum wage is equivalent to about $67 a month, compared with about $230 in Shanghai, according to the U.S. Census Bureau and government statements.

Stock Outperformance
Nokia Oyj (NOK1V), the Espoo, Finland-based mobile-phone maker with about 6 percent of its long-term assets in China, said last month it started building a manufacturing plant in Vietnam’s Bac Ninh province and plans to start production of low-cost phones next year.

The VN Index has outperformed the Shanghai Composite Index (SHCOMP) by 17 percentage points this year as Vietnam funds tracked by EPFR Global recorded $122 million of inflows, equivalent to 13 percent of their total assets. China funds lured $1 billion during the same period, or 3 percent of assets, the data show.

“In the long-run, we are still very positive on the market” in Vietnam, said Tran Thi Kim Cuong, head of equities at Manulife Asset Management (Vietnam) Co. “We are still buying stocks.”

 

[Muthukali]

Euro tumbles on Spain fear

European equity markets advanced on Tuesday but the euro tumbled on fears that debt-plagued Spain could be forced to seek a bailout as sovereign borrowing rates spiked close to danger levels.

At the close, London's benchmark FTSE 100 index advanced 0.65 percent to 5,391.14 points, Frankfurt's DAX 30 added 1.16 percent to 6,396.84 points and in Paris the CAC 40 rose 1.37 percent to 3,084.70 points.

Spain's IBEX 35 index dived 2.34 percent however as the interest rate on Spanish 10-year government bonds surged to almost 6.5 percent.

Most European shares boosted their gains after the open on Wall Street where US stocks rose after a long holiday weekend on hopes that China will launch a stimulus program.

At around 1600 GMT, the Dow rose 0.75 percent, the S&P 500 index gained 0.68 percent, while the Nasdaq added 0.68 percent.

In foreign exchange deals, meanwhile, the European single currency plummeted late in the session to $1.2486 from $1.2541 late in New York on Monday. The dollar eased to 79.45 Japanese yen from 79.47 yen.

"It is not surprising that the Spanish equity market is suffering losses,'' said trader Anita Paluch at Gekko Global Markets.

Negative sentiment prevailed, she added, as investors watched Spanish bonds near the 7.0-percent mark, "a level that is considered a breaking point at which Spain will need to revert to international financial help.''

"It's actually something we have seen back in the days when Greece, Ireland and Portugal had to be bailed out,'' Paluch said.

The risk premium which Spain must pay to borrow compared with benchmark German rates hit a record 5.156 percentage points in mid-day trading amid rising tension over the situation of Spanish banks.

The interest rate which Spain must pay to borrow for 10 years, as indicated by trading in bonds on the secondary market, was nearly 6.5 percent. But the German 10-year rate, the lowest in the eurozone, fell to a new record of 1.345 percent.

Spanish stocks had already plunged by 2.17 percent on Monday, when troubled Spanish lender Bankia lost 13.38 percent after it asked for a record 19-billion-euro ($24-billion) state bailout.

Spanish banks are at the heart of fresh market fears that the eurozone's fourth-largest economy might have to seek an international financial bailout.

"Bankia, the bank crippled by the collapse in the real estate market, is adding to the worries about the banking sector and the amount of debt they hold and the most recent figures in retail sales are not really helping the whole picture,'' said Paluch.

"So, all in all, Spain seems to be the new problem child in Europe,'' she added.

But Portugal, which has already benefitted from one bail-out, risked being caught out by very "serious risks of contagion'' brought on by Spain's problems, the Portuguese central bank warned in a report Tuesday.

Portugal, which is forecast to suffer an economic contraction of more than 3.0 percent this year, remains vulnerable to the worsening eurozone crisis and poor economic performances in other EU nations, the central bank said.

Asian equities had risen in earlier trade as dealers picked up bargains after heavy selling through May, with confidence boosted by hopes that Greece will avoid exiting the eurozone.

Hong Kong jumped 1.35 percent, Shanghai rallied 1.20 percent, Sydney won 1.14 percent and Tokyo rose 0.74 percent.

Shares also received a lift on hopes that China will implement new stimulus measures to raise domestic demand and fast track some major construction projects.

Investors, however, remained nervous by eurozone debt woes as attention turned towards the 17-nation bloc.

"Spanish markets continue to come under pressure as concerns remain as to how the Spanish government will be able to avoid a bailout as concerns about the health of its banking sector rise,'' said CMC Markets analyst Michael Hewson.

Spain's Prime Minister Mariano Rajoy acknowledged on Monday that the state was struggling to borrow. Rajoy also attempted to soothe investors by insisting his government would not have to follow Greece, Ireland and Portugal in asking for a bailout to help pay its bills.

 

[Muthukali]

Asian Stocks Drop as Euro Approaches Two-Year Low

Asian stocks dropped and the euro fell toward its lowest level in almost two years as Spanish borrowing costs rose and China damped speculation of large-scale stimulus to revive economic growth.

The MSCI Asia Pacific Index slipped 0.7 percent as of 9:41 a.m. in Tokyo, where the Nikkei 225 Stock Average (NKY) declined 0.8 percent. The euro slid 0.3 percent to $1.2470 and the Australian dollar weakened 0.3 percent. Crude for July delivery fell 0.1 percent to $90.64 a barrel in New York.

Spain’s 10-year bond yields rose to the highest level since November yesterday as the Bank of Spain said the economy will sink further into a recession, fueling concern Europe’s debt crisis will worsen. In China, the official Xinhua News Agency said the government has no plan to introduce stimulus measures of the scale during the global financial crisis.

“The Chinese authorities do see downside risk to growth this year,” said Dwyfor Evans, a Hong-Kong based strategist at State Street Global Markets, part of State Street Corp., which has $1.9 trillion under management. “They will continue addressing the slowdown but it’s hard to assess if it will be enough.”

The MSCI Asia Pacific Index is headed for a 9.9 percent decline this month, which would be the biggest loss since May 2010, amid signs of a deepening slowdown in China and as European leaders pressure Greece to meet bailout terms and stay in the euro. Greece will hold an election next month that may settle the matter.

The euro has lost 5.7 percent this month, headed for its biggest monthly decline since September, and touched $1.2461 yesterday, the weakest level since July 1, 2010. Spain backtracked on a plan to use government debt instead of cash to bail out Bankia, as Prime Minister Mariano Rajoy struggles to shore up the nation’s lenders without overburdening public finances.

“It’s all about what happens with Spain and their banks, and what could be the scenario in terms of how much money they ask for,” said Mary Nicola, a currency strategist at BNP Paribas SA in New York. “But there’s still that Greek shadow.”

 

[Muthukali]

U.S. Labor Market Cools as Jobless Claims Rise: Economy

The number of Americans applying for unemployment benefits rose to a one-month high and companies hired fewer workers than forecast, casting doubt on the vigor of the labor market.

First-time claims for unemployment insurance payments increased by 10,000 to 383,000 in the week ended May 26, Labor Department data showed today. Private employment climbed by 133,000 in May, Roseland, New Jersey-based ADP Employer Services said. The median estimate of 39 economists surveyed by Bloomberg News called for an advance of 150,000.

Stocks and Treasury yields fell as the figures pointed to weakness in the world’s largest economy just as Europe’s debt crisis intensifies. Other reports today showed gross domestic product grew less than initially estimated in the first quarter and business activity in May expanded at the slowest pace in more than two years.

“All the signposts are in the same direction -- which is for slowing job growth,” said Michelle Meyer, a senior U.S. economist at Bank of America Corp. in New York, who projected claims would rise. “The backdrop for consumer spending is weak. This is the recovery of fits and starts and it seems like we are entering a slow patch again.”

The Standard & Poor’s 500 Index slipped 0.2 percent to 1,310.33 at the close of trading in New York. The yield on the benchmark 10-year Treasury note decreased six basis points, or 0.06 percentage point, to 1.56 percent as of 4:59 p.m. after earlier falling to a record 1.5309 percent.

Payroll Forecast
Companies may be wary of adding workers until they see more evidence of a pickup in consumer spending. A Labor Department report tomorrow may show private payrolls rose by 160,000 in May, and unemployment held at 8.1 percent, economists projected. Including government workers, employment probably rose by 150,000 following a 115,000 April increase that was the smallest in six months.

“Businesses have exhibited an extreme degree of caution in terms of capital investment as well as hiring,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “Things are just kind of slogging along.”

The Institute for Supply Management-Chicago Inc. said its barometer decreased to 52.7, the lowest since September 2009, from 56.2 in April. Readings greater than 50 signal growth. Economists projected the gauge would rise to 56.8, according to the median of 55 estimates in a Bloomberg survey.

Gross domestic product climbed at a 1.9 percent annual rate from January through March, down from a 2.2 percent prior estimate, reflecting smaller gains in inventories and bigger government cutbacks, according to revised Commerce Department figures released today. The report also showed corporate profits rose at the slowest pace in more than three years and smaller wage gains at the end of 2011.

Global Slowdown
The U.S. cooled last quarter just as other global economies also lost steam. Growth in the 17-nation euro region stagnated in the first quarter from the same time in 2011. China’s economy expanded 8.1 percent in the first three months of 2012 from a year earlier, the slowest pace in 11 quarters.

Prices in Europe rose at the slowest pace in more than a year as the economic slump showed signs of deepening, according to other figures released today.

Inflation in the 17-nation euro area rose 2.4 percent in May from a year earlier after increasing 2.6 percent in 12 months ended April, the European Union’s statistics office said in Luxembourg. A separate report showed German unemployment fell in May.

Demand in Asia
In Asia, domestic demand spurred an unexpected gain in South Korean industrial production and stronger-than-forecast growth in the Philippine economy.

American households were a mainstay of the U.S. expansion last quarter. Consumer spending climbed at a 2.7 percent annual rate, revised from a 2.9 percent initial estimate and following a 2.1 percent gain in the prior three months. Purchases added 1.9 percentage points to growth.

Revisions to income figures may raise concern about whether purchases can sustain similar gains. Wages and salaries rose by $28.9 billion in the fourth quarter, less than the $89.1 billion gain previously reported. That reduced the saving rate to 4.2 percent at the end of 2011. The rate decreased to 3.6 percent in the first quarter, the lowest since the fourth quarter of 2007.

Gasoline prices have declined since the end of the first quarter, leaving consumers with more to spend on other goods and bolstering confidence in their finances.

Sentiment Improves
The Bloomberg Consumer Comfort Index rose to minus 39.3 in the week ended May 27 from minus 42 in the prior period. The reading was little changed from this year’s average of minus 38.9. All three of its components -- the economy, personal finances and buying plans -- advanced.

“I remain cautiously optimistic about improving economic trends as the year goes on and I feel like our North American business is performing OK in a difficult environment,” Ron Sargent, chief executive officer of office-supply retailer Staples Inc. (SPLS), said during a May 16 earnings call. “We continue to see modest improvement in the U.S. economy and ongoing weakness in Europe.”

In a sign consumers have yet to retrench, Target Corp. (TGT) and TJX Cos. posted May same-store sales that topped analysts’ estimates, helped by warmer weather and lower prices at filling stations.

Purchases at Target, the second-largest U.S. discount retailer, climbed 4.4 percent, beating the average projection for a 3.3 percent gain from analysts surveyed by researcher Retail Metrics Inc. TJX, the owner of the T.J. Maxx and Marshalls retail chains, had an 8 percent increase in same-store sales, topping the 5.1 percent estimate.

Jobless Claims
Last week’s claims for jobless benefits were the highest since 392,000 in the week ended April 21, and exceeded the median estimate of 370,000 in a Bloomberg News survey. The number of people on unemployment benefit rolls dropped.

Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, said more easing isn’t necessary even though she predicts the jobless rate probably won’t fall to 6 percent for about four years.

“Our monetary policy stance is appropriate,” Pianalto told reporters today after a speech in Cleveland, in which she predicted growth of “slightly above” 2.5 percent this year. The Fed has pledged to keep its key interest rate near zero at least through late 2014.

 

[Muthukali]

U.S. Employers Add 69,000 Jobs, Fewer Than Forecast

American employers in May added the fewest workers in a year and the unemployment rate unexpectedly increased as job-seekers re-entered the workforce, further evidence that the labor-market recovery is stalling.

Payrolls climbed by 69,000 last month, less than the most- pessimistic forecast in a Bloomberg News survey, after a revised 77,000 gain in April that was smaller than initially estimated, Labor Department figures showed today in Washington. The median estimate called for a 150,000 May advance. The jobless rate rose to 8.2 percent from 8.1 percent, while hours worked declined.

Stock-index futures and Treasury yields plunged as the figures showed a looming recession in the euro area and slower growth in China and Brazil are taking a toll on the U.S. Bigger job and wage gains are needed to jumpstart a self-sustaining increase in hiring and consumer spending.

“The labor market is clearly deteriorating,” Hugh Johnson, chairman and chief investment officer at Albany, New York-based Hugh Johnson Advisors LLC, whose payrolls projection of 75,000 was the closest to the May reading among economists surveyed by Bloomberg. “Confidence in the economy is declining. Businesses are extremely reluctant to add workers when there’s so much uncertainty.”

The contract on the Standard & Poor’s 500 Index expiring this month slumped 1.7 percent to 1,286.7 at 9:08 a.m. in New York. The yield on the benchmark 10-year Treasury note dropped to 1.47 percent from 1.56 percent late yesterday.

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Economists’ Estimates
Estimates of the 87 economists surveyed ranged from increases of 75,000 to 195,000 after a previously reported 115,000 rise in April. Revisions subtracted a total of 49,000 jobs to payrolls in March and April.

The figures follow data earlier today showing the global economy is struggling as Europe’s sovereign-debt crisis roils financial markets. A measure of manufacturing in the 17-nation euro fell to a three-year low, while measures of the industry in China, India, South Korea and Taiwan also weakened.

The jobs data also come five months before Americans head to the polls to either re-elect President Barack Obama or choose presumptive Republican nominee Mitt Romney, who has said White House policies have prevented a stronger economic recovery.

The unemployment rate was forecast to hold at 8.1 percent, according to the survey median. Estimates in the Bloomberg survey ranged from 8 percent to 8.2 percent. Unemployment has exceeded 8 percent since February 2009, the longest such stretch since monthly records began in 1948.

Participation Rate
The participation rate, which indicates the share of working-age people in the labor force, rose to 63.8 percent from 63.6 percent.

Private payrolls, which exclude government agencies, rose 82,000 after a revised gain of 87,000. They were projected to rise by 164,000, the survey showed.

“The U.S. economy is recovering but at a stubbornly slow pace,” Carl Camden, president and chief financial officer at staffing provider Kelly Services Inc., said on a May 9 conference call. “Weakening European economies have shaken confidence here in the U.S. business, consumers and investors remain cautious.” Still, with demand increasing for skilled workers, “we remain optimistic about 2012,” he said.

Factory employment increased by 12,000, less than the survey forecast of a 15,000 increase.

General Motors Co. is among companies boosting payrolls. The world’s biggest automaker said last month it will add 600 employees to a second shift at an assembly plant in Lansing, Michigan, according to the Detroit News.

Service Employment
Employment at service-providers increased 84,000 in May. Construction companies cut 28,000 jobs, the most in two years, and retailers boosted payrolls by 2,300.

“I have been searching relentlessly and I can’t find anything,” said Dexter Favors, 57, of Atlanta. Favors has been out of work for three years, though his wife is employed. “It is kind of rough right now because she is pulling the load.”

Favors, who worked last as a grocery store department manager and is an Air Force veteran, said he has put out around 80 applications for work and continues to search.

Government payrolls declined by 13,000.

Average hourly earnings increased 0.1 percent, today’s report showed. Compared with May of last year, earnings climbed 1.7 percent, the smallest increase since December 2010.

The average work week for all workers fell to 34.4 hours from 34.5 hours.

Underemployment Rate
The so-called underemployment rate -- which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking -- increased to 14.8 percent from 14.5 percent.

The report also showed an increase in long-term unemployed Americans. The number of people unemployed for 27 weeks or more rose as a percentage of all jobless, to 42.8 percent from 41.3 percent.

Faster economic growth would help lay the groundwork for more hiring. Gross domestic product climbed at a 1.9 percent annual rate from January through March, down from a 2.2 percent prior estimate, reflecting smaller gains in inventories and bigger government cutbacks, according to revised Commerce Department figures released yesterday. The report also showed corporate profits rose at the slowest pace in more than three years and smaller wage gains at the end of 2011.

The pace of growth has been “disappointing” and “the headwinds retarding recovery are well known,” Federal Reserve Bank of New York President William C. Dudley said this week. He reiterated that he expects growth of about 2.4 percent over the next four quarters and said Europe’s sovereign debt crisis poses a downside risk to the outlook.

Today’s figures may put more pressure on the Fed to take further steps to boost the economy after their current maturity extension program, known as Operation Twist, expires at the end of June.

 

[Muthukali]

Consumer Spending, Incomes in U.S. Increased in April

U.S. consumer spending rose in April, a sign that households are supporting the economy as the labor market seeks to gain momentum.

Purchases increased 0.3 percent after a revised 0.2 percent gain the prior month, Commerce Department figures showed today in Washington. The median estimate of 78 economists surveyed by Bloomberg News called for a 0.3 percent increase in so-called nominal sales. Incomes rose 0.2 percent, less than forecast.

Households have managed to stretch their budgets to propel growth in the U.S., with consumer spending making up 70 percent of the economy. At the same time, households may have trouble sustaining the pace of spending in the future until a stronger labor market leads to bigger income gains.

“Income growth isn’t sufficient enough to really prop up spending,” said Sean Incremona, a senior economist at 4Cast Inc. in New York, who correctly forecast the gain in purchases. “Match this with the weak payrolls data and this really suggests that spending is going to continue to lose momentum amid a soft and fragile economy.”

In a separate report the Labor Department said today American employers in May added the smallest number of workers in a year and the unemployment rate unexpectedly increased as job- seekers re-entered the workforce. Payrolls climbed by 69,000 last month, less than the most-pessimistic forecast in a Bloomberg News survey, the Labor Department said. The jobless rate rose to 8.2 percent from 8.1 percent, while hours worked declined.

Stock Futures
Stock futures fell after the reports. The contract on the Standard & Poor’s 500 Index dropped 2 percent to 1,283.70 at 8:40 a.m. in New York. The benchmark Treasury 10-year note yield fell nine basis points, or 0.09 percentage point, to 1.47 percent at 8:35 a.m. New York time.

Projections for spending ranged from gains of 0.1 percent to 0.5 percent. The Commerce Department revised the March spending figure from a previously reported 0.3 percent increase.

Incomes increased in April after a 0.4 percent gain the prior month. Economists forecast incomes would rise 0.3 percent, according to the Bloomberg survey. Wages and salaries rose 0.2 percent in April after 0.3 percent a month earlier.

Adjusting consumer spending for inflation, which renders the figure used to calculate gross domestic product, it rose 0.3 percent.

Seasonal Events
Seasonal events may have pulled some sales into the previous month. The average temperature in March was the warmest on record in the U.S., and Easter fell on April 8 compared with April 24 the year before.

Inflation-adjusted spending on durable goods, including automobiles, increased 0.8 percent in April after a 1.2 percent decline the previous month. Outlays for non-durable goods, which include gasoline, rose 0.2 percent in April.

Households stepped up their purchases last quarter to bolster the expansion. Their spending grew at a 2.7 percent annual rate, the most since the final three months of 2010, according to data from the Commerce Department.

To maintain spending at last quarter’s pace, Americans dipped into more of their savings. The savings rate dropped to 3.6 percent, the lowest level since the last three months of 2007, from 4.2 percent in the fourth quarter.

Today’s income report showed the April savings rate dropped to 3.4 percent from 3.5 percent.

Cooling inflation could also help take pressure off Americans’ wallets. A measure of prices tied to consumer spending was unchanged in April. Excluding food and energy, prices increased 0.1 percent.

Overall Economy
“The overall economy is still our customers’ main concern,” Bill Simon, the U.S. chief executive officer of Wal- Mart Stores Inc. said during a May 17 during earnings call. “In particular, they remain concerned about job security or the availability of jobs, followed by gas and energy prices and rising food costs.”