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Fed official warns of deflation threat A member of the Federal Reserve committee that sets interest rates warned today that the central bank's own policies threaten a Japanese-style bout of deflation within the next several years. The comments today by James Bullard, president of the Federal Reserve Bank of St. Louis, are his own, but The New York Times said this, and other signs, hint at a policy shift at the Fed amid a weakening recovery.
"The U.S. is closer to a Japanese-style outcome today than at any time in recent history," Mr. Bullard wrote in a paper posted on the Federal Reserve Bank of St. Louis website. "In part, this uncomfortably close circumstance is due to the interest rate policy being pursued by the [Federal Open Market Committee] That policy is to keep the current policy rate close to zero, but in addition to promise to maintain the near-zero interest rate policy for an extended period. But it is even more than that, because the reaction to a negative shock in the current environment is to extend the extended period even further delay the day of normalization of the policy rate farther into the future. This certainly seems to be the implication from recent events."
A better avenue, he argued, is to expand the quantitative easing program by purchasing Treasury securities. Speaking to reporters, Mr. Bullard said he was not urging this be done immediately, but such measures should be taken if new shocks hit the economy.
"This is very significant," Laurence Meyer, a former Fed governor, told The New York Times. "He has been one of the most hawkish members, but he is now calling for the Fed to ease aggressively. There seems to be no question he wants to do it sooner rather than later, and relatively forcefully."
U.S. fiscal cracks showing As Europe shows signs of beginning to climb out of its funk - economic sentiment in the euro zone is at its highest in more than two years, and German unemployment is falling - attention turns increasingly to the economic and fiscal woes of the United States. The euro, for example, today hit its best level since a massive bailout package was unveiled in early May, buoyed by ever stronger signs such as a dip in Germany's jobless rate and heightened sentiment in the euro zone.
In the United States, despite strong corporate earnings, economists continue to focus on the country's troubles. Scotia Capital currency strategist Sacha Tihanyi today points to yesterday's state of emergency by California's muscle-bound governor, Arnold Schwarzenneger.
California's troubles, he noted, didn't dominate headlines "despite the fact that without a budget (1 month overdue), the state is projected to run out of cash by October (at the latest." Markets, he said, are discounting the probability that California goes bust, and they assume a budget in place before the money runs out.
"But the size of California's economy and the delay in the fiscal process reminds us of the U.S. national fiscal situation," Mr. Tihanyi said. "We continue to be concerned over the lack of anything more than lip service by government officials being paid towards the need for U.S. fiscal consolidation, instead using double-dip recession fears as a buffer to political pressures. The euro's outperformance against the [U.S. dollar] today, with a break of the 1.3050 level, reminds us that the [U.S. dollar] can no longer rely on the sovereign risks of others to bolster its fortunes and keep government bond yields restrained."
To drive home that point, the lead sovereign analyst for the U.S. at Moody's Investors Service, Steve Hess, told Dow Jones Newswires today that the Obama administration must spell out a credible plan to deal with its swollen debt if it wants to keep its Triple-A rating. Mr. Hess, according to the report, said the U.S. government doesn't appear to have a plan at this point.
U.S. jobless claims fall New claims for jobless benefits in the United States have dropped for the third week out of four, welcome news though economists point to several temporary factors. The U.S. Labor Department said today first-time claims for benefits fell 11,000 last week to a still-high level of 457,000. A four-week average, according to The Associated Press, shows a dip to 452,500, the lowest since May. " It is very difficult to get a clean read,: said BMO Nesbitt Burns senior economist Jennifer Lee. "But I don't think there is anyone who is expecting a quick decline in the jobless rate anytime soon. Today's data still point to soft payroll growth."
Ottawa on track to beat projections Ottawa should be able to wipe out its deficit a year ahead of projections if it can keep its spending in check, but the provinces are another matter, Conference Board of Canada economists say. "The financial crisis and recession wreaked havoc on the fiscal positions of governments around the globe," chief economist Glen Hodgson and senior economist Matthew Stewart wrote today. "Canada was not spared from the shock, but The Conference Board of Canada still expects federal books to be back in balance by 2015, a full year ahead of the government's plan. However, some provincial governments will have difficulty re-balancing their books in the foreseeable future, especially as health care costs continue to mount."
They project that growth in nominal GDP this year will top Ottawa's forecast, at 7.2 per cent compared to the budget consensus of 4.9 per cent, a "very strong first step on the path to restoring fiscal balance at the federal level." Ottawa has already reported that its deficit in the first two months of the 2010-2011 fiscal years fell to $4.4-billion from $7.5-billion in the same period a year earlier.
But the provinces - notably Ontario - face greater challenges, having increased spending in areas such as health care when the economy was strong, to be followed by a combination of declining revenues and stimulus spending in the recession. "Provinces are now facing some hard choices to regain fiscal health," they said. "Structural changes will be needed in how services are delivered, given the health care demands of an aging population and the impact of those same democraphics on revenues.
Corporate earnings on rise Several major international companies are reporting stronger results today, including many heavyweights of their sector, helping to buoy the mood among investors. Among them:
- Exxon Mobil Corp. profit soared to $7.56-billion (U.S.) or $1.60 a share from $3.95-billion or 81 cents a year earlier, topping projections.
- Japan's Nissan Motor Co. swung to a quarterly profit of ¥106.6-billion or $1.2-billion (U.S.) as sales soared more than 35 per cent.
- Motorola Inc. topped analysts' estimates with a second-quarter profit of $162-million or 7 cents a share, up from $26-million or 1 cent.
- Volkswagen AG's second-quarter profit surged to €1.25-billion from $283-billion a year earlier, as revenue climbed more than 20 per cent.
- Sony Corp. returned to a quarterly profit - ¥25.7-billion or $294-million as revenue rose almost 4 per cent - and it boosted its outlook for the year.
- Royal Dutch Shell PLC , the biggest oil company in Europe, posted a 15-per-cent jump in second-quarter profit to $4.39-billion as revenue surged to $90.6-billion.
- Colgate-Palmolive Co. reported a 7-per-cent gain in second-quarter profit and 2-per-cent jump in revenue. It earned $603-million or $1.17 a share.
"The tally now shows 81 per cent of S&P 500 companies beating earnings estimates (better than last quarter) and 65 per cent beating revenues (down slightly from the prior two quarters)," said BMO Nesbitt Burns economist Robert Kavcic.
Suncor swings to profit Suncor Energy Inc. says its strategy is on track after digesting Petro-Canada last year. The Calgary-based energy giant reported today that it swung to a second-quarter profit of $480-million or 31 cents a share from a loss of $51-million or 6 cents a year earlier. "One year out from our historic merger with Petro-Canada, we're very pleased with the progress we've seen," said chief executive officer Rick George. "Sales of non-core assets have proceeded well and our growth plans are on track. Every part of this business, from our core oil sands operations and conventional and offshore oil and gas production to our downstream refining and marketing division is delivering on strategy."
Barrick hikes dividend amid profit surge For Barrick Gold Corp. , all that glitters is gold. The world's biggest gold producer said today its second-quarter profit surged 59 per cent and it boosted its dividend amid high gold prices . Barrick's profit jumped to $783-million (U.S.) or 79 cents a share from $492-million or 56 cents a year earlier, as revenue climbed to $2.6-billion from $1.97-billion. Barrick boosted its quarterly dividend by 20 per cent to 12 cents a share. Gold averaged almost $1,200 an ounce in the quarter, about 30 per cent higher than prices a year earlier.
"With Barrick's strong financial position and its positive outlook on the gold price, the company is able to continue to make high return investments in its project pipeline and at the same time increase its dividend," the gold producer said in a statement. "As the gold price has increased in the last five years, Barrick has increased its dividend by about 120 per cent."
Potash profit climbs Potash Corp. of Saskatchewan is seeing a recovery in sales volumes, posting a second-quarter profit today of $472-million (U.S.) or $1.55 a share, up from $186.2-million or 61 cents a year earlier.In volume terms, sales of potash surged to 1.9 million tons from 394,000. "With the worst of the global recession behind us, the inevitable need for increased food production and proper fertilizer use is being re-established," said chief executive officer Bill Doyle. "The demand for food has tightened global grain supplies, increasing the importance of addressing nutrient deficiencies in the soil. This is expected to strengthen demand for all nutrients, especially potash, in the near and long term. We believe this increased demand gives us the opportunity to demonstrate our unmatched ability to meet the needs of our customers and deliver value to our shareholders."
Thomson Reuters profit dips Thomson Reuters Corp. posted a dip in second-quarter profit, but, its news agency Reuters noted, the results indicate the company is climbing back from the financial crisis that affected subscriptions to trading terminals and products for the legal sector. Profit slipped to $290-million, and underlying operating profit fell to $655-million. Adjusted earnings per share declined to 47 cents from 58 cents.
"While our markets are only slowly improving, we have seen accelerating results in terms of revenues, net sales and customer uptake of our new products," chief executive officer Thomas Glocer said in a statement. "Based on these encouraging trends, we expect that Thomson Reuters will return to revenue growth in the third quarter."
UBS Securities Canada analyst said in a research note that "business continues to improve as planned."
They're not LOL-ing at Goldman Some employees at Goldman Sachs Group Inc. may be asking today what the hell is going on. Make that heck, actually. Goldman, whose internal messages got something of a public airing at a Senate hearing, has told employees they can't swear in e-mail, The Wall Street Journal reports today. Can't do **** either. The new rules aren't entirely clear, the newspaper said, because the directive is through word-of-mouth, not e-mail, obviously. The ban includes texts from corporate cell phones and instant messages, and will be enforced via screening software.
From today's Report on Business
- RIM aims to take bite out of Apple
- Enbridge spill yields fresh ammo for oil sands critics
- ArcelorMittal to boost steel price
- Obama pushes for small-business bill