Financial thoughts

U.K. producer prices climbed in April at the fastest annual pace since at least 1986 as raw-material costs jumped, adding to the case for the Bank of England to moderate the pace of interest-rate cuts.

Prices charged by factories rose 7.5 percent from a year earlier, the most since records began two decades ago, the Office for National Statistics said in London today. Economists predicted 6.4 percent, the median of 26 forecasts in a Bloomberg News survey shows. On the month, prices increased 1.4 percent, also the fastest pace on record.

Bonds fell and the pound surged after the report. Bank of England Governor Mervyn King said last month that commodity-price gains will push inflation to the government's 3 percent limit, presenting policy makers with a “difficult balancing act'' as economic growth slows. The bank left the benchmark rate at 5 percent May 8 after three cuts since December.

“The numbers intensify the dilemma faced by the members of the Bank of England's Monetary Policy Committee,'' Neil Mackinnon, chief economist at ECU Group Plc and a former U.K. Treasury official, said in an interview on Bloomberg Television. “It's going to be very difficult for the MPC to implement near-term interest-rate reductions.''

Market Reaction

The pound rose as much as 0.5 percent against the dollar after the report. It traded at $1.9586 at 12:17 p.m. in London. Prices for two-year government bonds fell, boosting yields 7 basis points to 4.34 percent. The yield on the September interest rate futures contract rose 12 basis points to 5.42 percent.

“There is a wall of costs out there waiting to dump on the U.K. consumer,'' said Geoffrey Dicks, an economist at Royal Bank of Scotland Group Plc. “That is the bad news. The awful news is that higher costs are increasingly finding their way through to the factory gate, where today's numbers were a real shocker.''

All 10 categories of producer prices rose on the month and on the year, the statistics office said. The gain from March was led by increases in other manufactured products, tobacco, alcohol and petroleum products. Food prices rose an annual 9.3 percent, the most since records began.

So-called core producer prices, which exclude food, beverages, tobacco and petroleum, rose 4.6 percent in April from a year earlier, the most since 1995.

Inflation Risk

King told lawmakers April 29 that inflation may hold close to 3 percent for longer than last year while growth slows at the same time. British law requires him to write a letter of explanation to the government if inflation strays more than 1 percentage point above or below the 2 percent target fast cash advance.

“Setting bank rate to meet the inflation target is not straightforward when the outlook is so uncertain,'' he said.

He will give the bank's latest estimates for inflation and growth on May 14.

Oil prices reached a record $126.27 per barrel last week and traded at $125.35 today. Wheat prices have risen about 75 percent over the past year and the cost of rice has more than doubled.

Associated British Foods Plc, based in London and the maker of Twinings tea and Kingsmill bread, said April 22 first-half profit increased 33 percent after it charged more for bread to offset higher wheat costs.

Raw material costs rose 2.4 percent on the month and 23.3 percent on the year, the statistics office said. That was the biggest annual gain since records began.

Consumer Prices

Economists predict the inflation rate rose to 2.6 percent in April from 2.5 percent the previous month, according to the median of 37 estimates in a Bloomberg News survey.

Consumer price gains may be short-lived as slower economic growth limits businesses' scope to charge customers more. Policy maker David Blanchflower sought a half-point rate cut at the April decision and said later that month a reduction is needed soon to avert a recession and keep inflation from slowing below the government's 1 percent lower limit.

“There is a real risk that inflation may undershoot the target in the medium term, and take us into letter-writing territory,'' he said in a speech April 29.

ECU's Mackinnon said that Britain faces a “very uncomfortable economic environment.''

“My guess is, we will see a sharp slowdown and I believe the U.K. economy cannot escape a recession,'' he said.

Turmoil in credit markets prompted the International Monetary Fund to forecast U.K. growth of 1.6 percent in 2008, the least since the end of the last recession 16 years ago. The statistics office said last week manufacturing declined in March and a Chartered Institute of Purchasing and Supply survey showed service industries growth slowed to a five-year low.

Still, factories are benefiting as the decline in the pound to a record versus the euro boosts demand for British goods from the nation's biggest trading partner. The U.K. currency traded at 80.99 against its European counterpart on April 16.

The goods trade gap narrowed to 7.4 billion pounds ($14.4 billion), the least in six months, the statistics office said. Exports rose 0.4 percent and imports declined 0.3 percent.

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Research In Motion Ltd (RIM.TO: Quote, Profile, Research)(RIMM.O: Quote, Profile, Research) is launching a new high-end version of the BlackBerry aimed at its core base of business users, but it hopes the sleek device will also catch on in the broad retail market.

The BlackBerry Bold, as the new smartphone is called, is the first BlackBerry to support high-speed HSDPA cellular networks and comes with integrated GPS, Wi-Fi and a host of multimedia features.

“It’s really a step up in function in many core aspects of the system,” RIM Co-CEO Jim Balsillie said in an interview.

The smartphone rolls out globally this summer and will cost between $300 and $400. AT&T (T.N: Quote, Profile, Research) will be its lead carrier in the United States.

While Waterloo, Ontario-based RIM hopes the Bold will entice corporate users to upgrade the handsets they currently use, Balsillie said he “wouldn’t be surprised if it gets picked up by the consumer”.

The device will be a test of whether the shaky U.S quick payday. economy is making corporations less willing to spend on new wireless hardware. Some analysts have expressed concerns that companies will delay upgrades or cut back on spending on items such as the BlackBerry.

RIM helped dispel such worries last month when it delivered a higher fourth-quarter profit and a robust outlook.

The Bold features the most vivid display ever on a BlackBerry, a 2-megapixel camera with video recording capability, and a media player for watching movies and managing music collections. 

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China needs to save less to boost consumption and narrow the trade surplus, said People's Bank of China Governor Zhou Xiaochuan.

“The government has pledged to boost consumption and cut the surpluses in the trade and capital accounts,'' Zhou said at the Lujiazui Financial Forum in Shanghai today. That “requires that we reduce the current high savings ratio,'' he said.

China's trade surplus is pumping cash into the world's fastest-growing major economy, threatening to stoke inflation that jumped to an 11-year high of 8 percent in the first quarter. April's trade gap was about $16.8 billion, according to figures derived from Ministry of Commerce data released yesterday.

Zhou didn't refer to the role of currency appreciation in slowing export gains. Growth in China's overseas shipments has cooled this year as economies around the world weaken and the U.S. skirts a recession.

China has conflicting targets, the central banker said. “On the one hand, we need to boost consumption to adjust the economic growth structure, but on the other hand we also need to prevent excessive demand from fueling inflation,'' Zhou said. “We need to balance those targets so that more savings are spent, while the spending doesn't add too much pressure for inflation.''

The household savings rate needs to fall, Zhou said.

Company Earnings

China's overall savings rate as a proportion of gross domestic product climbed over the past five years to about 51 percent from about 40 percent, according to a May 5 report by Jonathan Anderson, an economist with UBS AG free credit report.com.

The increase reflected increased company earnings from the growth of heavy industry, Anderson said.

In his speech, Zhou highlighted the interdependence of global economies and referred to contradictions between the policies of central banks.

World liquidity is excessive and injections of money to revive credit markets have added to the problem, he said.

The U.S. is loosening its monetary stance just as emerging markets are tightening to combat inflation, the central banker said.

China has raised the proportion of deposits that lenders must set aside as reserves to a record 16 percent this year. The central bank has kept interest rates on hold, wary that increases will attract inflows of foreign capital.

The world's fourth-largest economy expanded 10.6 percent in the first three months of 2008 from a year earlier, the ninth straight quarter of growth of more than 10 percent.

China will increase agricultural supplies to cool inflation, Zhou said. Food costs have driven this year's surge in consumer prices.

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The House on Wednesday began debate on a housing package that would let the government back loans for homeowners at risk of foreclosure - a move many Republicans have opposed and which the White House has threatened to veto.

The centerpiece of the package is a proposal to let the Federal Housing Administration (FHA) insure up to $300 billion in new loans over four years if lenders agree to reduce the mortgage principal.

To qualify, the lender would have to cut the debt to no more than 85% of a home’s appraised value. If the FHA-refinanced loans went into default, the FHA would pay the lender the remaining principal owed.

The bill is sponsored by House Financial Services Chairman Barney Frank, D-Mass.

While 1.4 million loans are likely to be eligible for such a program, the Congressional Budget Office estimates such a measure would end up insuring 500,000 borrowers and estimates doing so could cost $2.7 billion over 5 years, of which $1.7 billion could be a cost to taxpayers.

The package is expected to pass the Democrat-led House - with some help from Republican congressmen representing states hard hit by the housing crisis.

But the bill also includes elements intended to attract the support of Senate Republicans and the White House, both of whom have expressed concerns that Frank’s FHA rescue plan could amount to bailing out lenders, borrowers and investors.

Nevertheless, late Tuesday, the White House issued a statement threatening to veto the bill in its current form.

The elements in the bill intended to draw Republican support are "modernizing" the FHA - for which both the House and Senate have already passed their own bills - and more stringent oversight of Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that guarantee the purchase and sale of home mortgages in the secondary market.

But the administration statement called the inclusion of FHA modernization and GSE reform "largely symbolic" and said Frank’s FHA rescue plan "would force FHA and taxpayers to take on excessive risk, and jeopardize FHA’s financial solvency."

Despite the veto threat, "the House will proceed today. It is too bad President Bush ignored the advice of [Federal Reserve] Chairman Bernanke and decided on right wing ideology over needed compassion and good economics," a spokesman for Frank said.

In a speech about the housing crisis on Monday evening, Bernanke did not explicitly endorse Frank’s FHA proposal. But he said that for borrowers who meet certain debt-to-income ratios and own homes worth less than the mortgage debt owed on them, "the best solution may be a write-down of principal or other permanent modification of the loan by the servicer, perhaps combined with a refinancing by the Federal Housing Administration or another lender."

Meanwhile in the Senate, Banking Committee Chairman Chris Dodd, D-Conn get a free credit report. has been busy negotiating with Republicans about the parameters of an FHA refinancing plan and GSE reform.

The committee’s ranking member, Sen. Richard Shelby, R-Ala., has repeatedly expressed resistance on both counts. Regarding the FHA backing high-risk loans, he has questioned the fairness of laying the risk of potential foreclosures at taxpayers’ feet. The FHA is not supported by taxpayer money, but it could be if its revenue from borrower-paid premiums and fees is overwhelmed by a substantial number of defaults in the new FHA-backed refinanced loans.

Dodd said on Wednesday he is continuing to try to broker a bipartisan agreement and, according to Congress Daily, wants the Banking Committee to mark up legislation for an FHA rescue proposal and GSE reform next week.

Shelby’s office, meanwhile, told CNN producer Lesa Jansen that discussions are ongoing but it remains to be seen if an agreement can be reached.

It’s not clear yet what the administration’s veto threat will ultimately mean for the prospects of lawmakers in the House and Senate finalizing a housing rescue package and sending it to the president’s desk.

"We see this more as an effort to gain leverage over the final shape of the bill and less about an actual veto. The politics of killing this bill are negative for the Republicans, who very much need to win either Ohio or Florida if they hope to keep the White House in November. Both of those states are suffering severely during the housing mess," said Jaret Seiberg, senior vice president at the Stanford Group, a Washington policy research firm.

In an interview with the Associated Press, Treasury Secretary Henry Paulson said the administration would continue negotiating with Congress. "I view my job as to work to get something that is acceptable and that the president can sign. That is what we always should be doing. We are working to get a housing bill that the president can sign, and I’m going to work to that end."  

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German manufacturing orders unexpectedly declined for a fourth month in March as the euro's ascent against the dollar crimped export sales.

Orders, adjusted for seasonal swings and inflation, fell 0.6 percent from February, the Economy Ministry in Berlin said today. Economists expected a gain of 0.3 percent, according to the median of 33 forecasts in a Bloomberg News survey. Orders fell 5 percent in the year, the first drop in the annual figure since March 2005.

European manufacturing growth is faltering as near-record oil prices push up inflation and crimp the spending power of companies and consumers just as a surging euro weighs on exports. Germany's leading government-sponsored economic institutes last month cut their 2008 growth forecast and business confidence declined.

“German manufacturers have done surprisingly well because of strong demand in emerging markets such as in Asia,'' said Joerg Angele, an economist at Bayerische Landesbank in Munich. “We still expect orders to weaken further in coming months. The global slowdown and the euro are starting to hurt.''

The euro fell more than half a cent to as low as $1.5419 after the report from $1.5472 before the figures were released and traded at $1.5422 at 12:08 p.m.

February orders were revised down to a drop of 0.6 percent from a previously reported 0.5 percent decline. In the first quarter, orders fell 1.3 from the fourth, the ministry said today. Domestic and foreign orders both declined in March.

Slowing Growth

The German economy, Europe's largest, may expand 1.8 percent this year instead of a previously projected 2.2 percent, the research institutes said April 17. Growth will slow to 1.4 percent in 2008, less than the economy's long-term average of 1.5 percent, they forecast.

Germany's expansion is losing momentum after the collapse of the U.S. subprime mortgage market sparked global writedowns and pushed up lending costs. The International Monetary Fund in Washington last month cut its global growth forecast and said the world economy faces a 25 percent chance of recession.

German business confidence declined for the first time in four months in April pay day loan. Investors also became more pessimistic. European manufacturing growth slowed for a third month in April and confidence dropped to the lowest in 2 1/2 years.

Companies are also grappling with the euro's 6 percent gain against the dollar this year, which threatens to erode exports by making them less competitive. The currency hit a record $1.6019 on April 22. Crude oil prices increased 25 percent this year and breached $120 per barrel for the first time this week.

Output Drop?

German industrial production probably declined 0.5 percent in March from the previous month, when it increased 0.4 percent, according to a Bloomberg survey. The Economy Ministry is scheduled to release the report tomorrow at noon.

Volkswagen AG, Europe's largest carmaker, based in Wolfsburg, Germany, said on April 30 that North American first-quarter sales declined 11 percent as the dollar's decline dented earnings. Porsche AG, the maker of the Cayenne sport-utility vehicle, said last month that North American sales fell 4.6 percent in April.

For now, booming Asian economies are helping bolster companies' orders. German exports probably rose 0.5 percent in March, a Bloomberg survey shows. The Federal Statistics Office in Wiesbaden will release the report tomorrow at 8 a.m.

In March, factory orders from non euro-region member states increased 2.1 percent in the month. Overall demand for semi- finished goods increased 2.4 percent, today's report showed.

Peter Loescher, chief executive officer of Siemens AG, Europe's largest engineering company, said April 30 that the order situation is still “excellent'' and that he's “guardedly optimistic'' about the second half of 2008 even with the Munich- based company sensing the slowdown in Germany.

The European Central Bank tomorrow will probably keep its key rate at a six-year high of 4 percent, according to all 53 economists in a Bloomberg survey. The Frankfurt-based central bank is scheduled to announce its decision at 1:45 p.m.

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China's economy is at risk of overheating and policy makers may raise interest rates and do more to soak up the cash flooding the financial system, officials said.

“We will combat demand and prevent rapid economic growth from turning into overheating,'' Vice Finance Minister Li Yong told delegates at the Asian Development Bank's annual meeting in Madrid today.

Consumer prices rose 8.3 percent in March, close to an 11- year high, as food costs soared and the trade surplus pumped $13 billion into the financial system. China is trying to cool growth without triggering a slump in the world's fastest-growing major economy as export demand wanes.

“We always say there is a possibility to use interest rates'' to restrain inflation, central bank Governor Zhou Xiaochuan told reporters in Basel, Switzerland, adding that policy makers have a range of options.

China's economy, the world's fourth-largest, expanded 10.6 percent in the first quarter, down from 11.2 percent in the previous three months. Consumer prices climbed 8.7 percent in February, the fastest pace since 1996.

“Growth has started to slow, why take the risk of taking additional cooling measures and risk stalling the economy?'' asked Leslie Phang, Singapore-based head of private clients at Schroders Plc, which manages $275 billion.

Overseas investors attracted by the yuan's gains and climbing interest rates have channeled money into China, adding to the inflows from trade and foreign direct investment. The benchmark one-year lending rate is at a nine-year high of 7.47 percent after six increases last year.

`New Situation'

Rate cuts by the U.S. Federal Reserve have created a “new situation'' for China, attracting short-term investors, Zhou said, adding that the Chinese government is monitoring the inflows of so-called hot money 24 hour payday advances.

“China is a very large economy — usually a small amount of abnormal capital inflow doesn't have a serious impact on monetary policy,'' the central banker said. Zhou has been in Basel for a Bank of International Settlements meeting.

China will do more to “sterilize'' inflows, Li said, using a term that describes measures such as sales of government bills to take currency out of circulation. He said he was also referring to bank reserve requirements — already raised three times this year to require lenders to set aside a record 16 percent of deposits.

`Strengthen Our Efforts'

“We will strengthen our efforts in sterilizing excess liquidity by using a combination of tools such as open-market operations and required-reserves ratios,'' Li said. The government will maintain a tight monetary policy, he added.

Commodity prices are adding to inflationary pressures.

While the nation will take “lots of action,'' including reducing the money supply, to stem inflation, it can do little about global price increases, Li said.

China won't increase capital controls to curtail money inflows, said Li, who also reiterated the policy of allowing the yuan's flexibility to increase.

Economic growth this year is likely to exceed the government's 8 percent target, Li said.

“The priority is to maintain sound and fast economic growth,'' the official said. “We put sound first, not fast first.''

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Rising food and commodity prices that are stoking inflation will probably dominate a meeting of the Asian Development Bank as the region's finance ministers seek ways to shield their economies from higher costs.

Japan's Fukushiro Nukaga, China's Xie Xuren, South Korea's Kang Man Soo and Southeast Asian ministers are meeting at the sidelines of the Asian Development Bank's annual gathering in Madrid this weekend. Inflation in Asia is expected to reach a decade-high this year even as economic growth cools, ADB predicts.

Crude oil has risen 85 percent, and rice prices have more than doubled since Asian finance ministers met a year ago in Kyoto, Japan. The increases have stoked social tensions and led to wider fiscal deficits as governments subsidize food and energy costs for their people.

“Inflation will be pushed to the fore over global growth concerns,'' said Tetsuo Yoshikoshi, an analyst at Sumitomo Mitsui Banking Corp. in Singapore. “There's little Asia can do to avoid a global slowdown but cooperation to contain inflation, especially on food prices, is possible.''

Vietnam and other rice-producing nations have curtailed exports to maintain supplies and damp local inflation, pushing up prices for buyers such as the Philippines, the world's biggest importer of the grain. Corn, wheat and soybean prices have all reached records this year too.

“Several Southeast Asian countries are major rice producers and exporters and more can be done within the region to help each other out,'' said Joseph Tan, a strategist at Fortis Bank in Singapore. “The question is whether there is the political will to do so.''

Slower Growth

Asian governments are predicting growth to be at the lower end of targets, or are reducing their forecasts even as they increase their estimates for inflation.

The U.S. economy grew 0.6 percent in the first quarter, matching the pace of the previous period, which was the slowest since 2002. The International Monetary Fund last month lowered its forecast for global growth this year and said there's a 25 percent chance of a world recession, citing the worst financial crisis in the U.S. since the Great Depression.

The Bank of Japan on April 30 said the world's second- largest economy will probably expand at a slower pace this year than it had expected six months ago, while almost tripling its forecast for core consumer prices. Indonesia lowered its growth estimate on the same day, and South Korea has said its economy entered a “downturn.''

Foreign Reserves

Finance ministers from China, South Korea and Japan will gather for a meeting on May 4, before getting together with their counterparts from the 10-member Association of Southeast Asian Nations. Besides inflation and the outlook of the region's economies, issues that will be discussed include the pooling of foreign-exchange reserves and the development of bond markets bad credit payday loans.

Officials last year agreed to set aside part of their $3.4 trillion of foreign reserves to be tapped by member nations when needed, an expansion of a current arrangement that only allows for bilateral currency swaps.

The pool may ensure central banks have enough to shield their currencies against any speculative attacks after the Asian financial crisis a decade ago depleted the reserves of some countries. The ministers are expected to discuss the size of the pool, estimated at between $80 billion and $100 billion, and when they would start the arrangement.

`Counter Instability'

The ministers from South Korea, Japan and China will also discuss setting up a forum on the economy and financial regulatory issues when they meet in Madrid, South Korea's finance ministry said in a statement.

The three finance ministers “will discuss setting up an Asian Financial Stability Forum to strengthen regional cooperation among the policy and financial supervisory authorities to counter instability of international financial markets,'' the ministry said.

“The purpose of the fund would be to heal wounds when they are still small should liquidity or financing problems arise,'' Hiroshi Watanabe, Japan's former top currency official, said in an interview last month. “It would be like a first-aid measure that would provide care before the International Monetary Fund gets involved.''

Officials will also participate in seminars organized by the Manila-based ADB at the Madrid meeting from May 3 to 6. The lender's governors, who include Japan's Nukaga and Indonesian Finance Minister Sri Indrawati Mulyani, will discuss the ADB's strategy to boost infrastructure development and partnerships between companies and governments.

Fighting Poverty

At last year's meeting, the bank was rebuked by members on its long-term plan to focus on financing roads and ports instead of fighting poverty. The group is owned by 67 member countries, both from within and outside of the region.

The ADB was formed in 1966 to improve the welfare of people in the Asia and the Pacific. Two-thirds of the world's poor reside in the region, and about 600 million Asians survive on less than $1 a day.

The lender expects to disburse about $10 billion in loans in 2008, after lending $10.1 billion last year, ADB managing director Rajat Nag said in an interview in Singapore last week. It may issue between $9 billion and $10 billion in bonds this year, Nag said.

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South Korea's consumer prices rose in April at the fastest pace in almost four years, exceeding the central bank's target for a sixth straight month. Exports growth accelerated.

The consumer-price index jumped 4.1 percent from a year earlier, the highest since August 2004, the statistics office said in Gwacheon today. Exports, the engine of more than half of the economy's first-quarter economic expansion, jumped 27 percent in April.

The figures pose a problem for the Bank of Korea because while the 6.6 percent drop in the won versus the dollar this year has made the nation's exports more competitive, it has also increased the cost of imports. A rate cut to spur growth may exacerbate inflation and damp consumer spending.

“The Bank of Korea's dilemma about whether to cut interest rates or not has become bigger,'' said Kwon Young Sun, an economist at Lehman Brothers Holding Inc. in Hong Kong. “The question now is whether the economy will benefit or suffer more from the weaker won.''

The median estimate of 18 economists surveyed by Bloomberg News was for inflation to climb 3.9 percent. The index rose 0.6 percent from March. Financial markets in Seoul are closed today for a holiday.

The Bank of Korea left its key interest rate unchanged for an eighth straight month on April 10 as it gauges the risks to inflation and growth. It next meets May 8. Ten of eighteen economists surveyed by Bloomberg last month forecast an interest- rate reduction by the end of June same day payday loans.

`Less Room'

“The latest numbers suggest that the Bank of Korea faces far less room to cut rates than initially assumed,'' said Frederic Neumann, an economist at HSBC Holdings Plc in Hong Kong, who pushed back his rate cut expectation to the third quarter. We “see a chance that the total easing for the remainder of the year will be only 25 basis points, rather than 50 basis points as we and the market previously expected.''

Rising food and energy costs have fueled price surges this year across Asia in nations including Japan, China, India and Australia. Dubai crude oil, South Korea's benchmark, has climbed almost 90 percent since the start of last year.

The Bank of Korea aims to keep inflation between 2.5 percent and 3.5 percent, on average, for the three years to 2009. It may average 3.5 percent this year, up from the 3.3 percent previously forecast, the finance ministry said April 28.

Core inflation, which strips out oil and food costs, gained 0.5 percent from March and 3.5 percent from a year earlier. The year-on-year gain was the fastest since core prices rose 3.6 percent in December 2001.

Prices for oil products rose 18.7 percent in April from last year, pushing up the costs for industrial goods by 6.7 percent from a year ago, today's report showed.

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