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Thursday, 07 November 2013 03:50

World markets cautiously await key US data

   KUALA LUMPUR, Malaysia (AP) — Global stock markets were mostly weaker Thursday, with a cautious mood prevailing ahead of key U.S. data that will provide further clues on when the Federal Reserve will cut monetary stimulus.

   Major European benchmarks were muted in early trading. Britain's FTSE 100 fell 0.3 percent to 6,724.16 and France's CAC-40 added 0.1 percent to 4,290.43. Germany's DAX gained 0.1 percent to 9,047.30.

   Futures pointed to a weaker open on Wall Street where Twitter will start trading following an initial public offering that valued the social network at $18 billion. S&P 500 and Dow Jones futures were both down 0.1 percent.

   Stan Shamu, market strategist for IG in Melbourne, Australia, said investors are staying on the sidelines ahead of the release of the advance estimate of U.S. third quarter economic growth later Thursday and October jobs figures on Friday.

   Both reports could signal how much longer the Federal Reserve will continue its bond purchases at the current $85 billion a month rate. That program has held down interest rates, kept bond yields low and made stocks more attractive for investors.

   Market expectations are also growing that the European Central Bank and the Bank of England may disappoint and not cut interest rates at policy meetings Thursday to shore up a recovery from recession, he said.

   "With two central banks, a U.S. GDP and jobs report all due out, we were always bound to see some nervous trading," Shamu said.

   DBS Vickers in Hong Kong said in a market commentary that the ECB is likely to put off a rate cut amid a pick-up in production and confidence, but it may open the door for possible easing in December when it releases its quarterly economic projections,

   Earlier in Asia, Japan's Nikkei 225 shed 0.8 percent to 14,228.44 and Hong Kong's Hang Seng lost 0.7 percent at 22,881.03. China's Shanghai Composite fell 0.5 percent to 2,129.40 and Seoul's Kospi dropped 0.5 percent to 2004.04.

   Benchmark crude for December delivery was down 17 cents at $94.63 in electronic trading at the New York Mercantile Exchange. The contract rose $1.43 to close at $94.80 a barrel on Wednesday.

   The euro rose to $1.3520 from $1.3510 late Wednesday. The dollar was little changed at 98.68 yen.

Published in National News

   WASHINGTON (AP) — Renewed questions about the economy's health and uncertainty surrounding the government's budget fight will likely lead the Federal Reserve on Wednesday to maintain the pace of the stimulus it's supplying to the economy.

   That expectation marks a reversal from just six weeks ago, when almost everyone expected the Fed to start trimming its $85 billion in monthly bond purchases. The bond buying is intended to keep long-term interest rates low to help the economy rebound from the Great Recession.

   The Fed is to announce its decision in a statement after a two-day policy meeting.

   The central bank surprised investors and economists at its last meeting in September when it chose not to reduce its bond buying. Since then, a 16-day partial government shutdown shaved an estimated $25 billion from economic growth this quarter. And a batch of tepid economic data pointed to a still-subpar economy.

   Now, few think the Fed will reduce its stimulus any time soon. Many analysts now predict the Fed will maintain the pace of its bond purchases into next year.

   "I think March is now the earliest that any reduction in bond purchases will happen," said Diane Swonk, chief economist at Mesirow Financial.

   By then, Fed members expect to have seen several months of stronger job growth. They also expect Congress to have resolved its budget impasse.

   If the Fed does start slowing its stimulus in March, it will have left its policy unchanged not just this week but also at its next meeting in December and at its subsequent meeting in late January.

   The January meeting will be the last for Chairman Ben Bernanke, who is stepping down after eight years. President Barack Obama has chosen Vice Chair Janet Yellen to succeed Bernanke.

   Assuming that Yellen is confirmed by the Senate, her first meeting as chairman will be in March. Many economists think no major policy changes will occur before a new chairman takes over.

   Congress' budget fight has clouded the Fed's timetable. Though the government reopened Oct. 17 and a threatened default on its debt was averted, Congress adopted only temporary fixes. More deadlines and possible economic disruptions lie ahead.

   A House-Senate conference committee is working toward a budget accord. But wide differences separate Democrats and Republicans on spending and taxes. Without a deal by Jan. 15, another shutdown is possible. Congress must also raise the government's debt ceiling after Feb. 7. If not, a market-rattling default will remain a threat.

   The standoff has led economists to trim their forecasts for economic growth in the October-December quarter. The Conference Board said Tuesday that its index of consumer confidence dropped to 71.2 in October, the lowest level since April. The decline was attributed, in part, to the government shutdown.

   Employers added just 148,000 jobs in September, a steep slowdown from August. And temporary layoffs during the shutdown are expected to depress October's job gain.

   In June, when Bernanke suggested that the Fed could reduce its bond buying by year's end, the Dow Jones industrial average plunged 560 points in two days. Many investors feared that the Fed might remove its support prematurely and derail an already subpar recovery from the recession.

   Interest rates rose, too. The increase particularly in mortgage rates, before the Fed had even begun to change policy, alarmed the central bank. Higher mortgage rates could dampen the gains in housing, which has been a rare bright spot for the economy.

   Given the panic among investors when Bernanke raised the prospect that the Fed would slow its bond purchases, analysts think any pullback will be very gradual.

   "The one thing Janet Yellen will not want to do is start her term by making a mistake," said Brian Bethune, an economics professor at Westmont College in Santa Barbara, Calif. "She will be extremely cautious and will try to signal that the Fed is starting to back off its bond purchases without causing the kinds of effects we saw in the summer."

   This week's meeting is the first since Obama announced Oct. 9 his choice of Yellen to be chairman. David Jones, chief economist at DMJ Advisors and the author of several books on the Fed, said her status could change the dynamics.

   "Bernanke is essentially a lame duck, and Yellen has not yet taken over," Jones said. "It will make the Fed more cautious."

   Sen. Rand Paul, R-Ky., has said he will oppose Yellen's nomination unless the Senate votes on a bill he's sponsoring to subject the Fed's rate decisions to review by the Government Accountability Office.

   Yellen is still expected to win Senate confirmation, but a vote by the full Senate may not come until January. The Senate Banking Committee is considering holding a hearing on the nomination Nov. 14.

   Once the Fed starts trimming its bond purchases, economists foresee reductions of $10 billion to $20 billion a month as long as the economy improves consistently. Some analysts think the Fed could finish its purchases by the end of 2014.

   "But if something goes wrong, then they will stop or at least slow down the reductions," said David Wyss, a former chief economist at Standard & Poor's and now an economics professor at Brown University.

Published in National News

   WASHINGTON (AP) — Hiring is soft. Pay is barely up. Consumers are cautious. Economic growth has yet to pick up.

   And yet on Wednesday, the Federal Reserve is expected to take its first step toward reducing the extraordinary stimulus it's supplied to help the U.S. economy rebound from its deepest crisis since the Great Depression.

   If it does, the Fed will likely spark a debate: Has the economy strengthened enough to withstand the pullback?

   The answer might not be clear for months.

   The Fed is meeting this week at a time of deepening uncertainty about who will succeed Chairman Ben Bernanke when his term ends in January. On Sunday, Lawrence Summers, who was considered the leading candidate, withdrew from consideration.

   Summers' withdrawal followed growing resistance from critics. His exit could open the door for his chief rival, Janet Yellen, the Fed's vice chair. If chosen by President Barack Obama and confirmed by the Senate, Yellen would become the first woman to lead the Fed.

   For months, the Fed has said it will slow its $85 billion-a-month in Treasury and mortgage bond purchases once the outlook for the job market has improved substantially. Those purchases have been designed to keep long-term loan rates low to get people to borrow and spend and invest in the stock market.

   Super-low rates are credited with helping fuel a housing comeback, support economic growth, drive stocks to record highs and restore the wealth of many Americans.

   Few think the Fed will significantly reduce its bond purchases — not now, anyway. Many economists think the Fed will announce when its two-day policy meeting ends Wednesday that it will slow its purchases by $10 billion — to $75 billon a month.

   The pullback is expected to come from the Fed's Treasury purchases. It will likely maintain the pace of its mortgage bond buying to try to keep home-loan rates down to sustain the housing rebound.

   Some had once expected a sharper first reduction in the Fed's purchases of around $20 billion a month. But that was before the government said that job growth was only modest in August and that employers added many fewer jobs in June and July than previously thought.

   So why do economists think the Fed will reduce its stimulus for the economy at all?

   In part, some Fed officials don't think the bond purchases are doing much good anymore. And they feel that by continuing to flood the financial system with cash, the Fed might be raising the risks of high inflation or dangerous bubbles in assets like stocks or real estate. Just the mention of a slowdown in bond purchases spooked investors. Some fear that the Fed's ultra-low-rate policies distorted the prices of some assets.

   In addition, the Fed eventually needs to sell its vast investment portfolio, which is on track to top $4 trillion next year, without upsetting markets. The more the Fed expands its portfolio, the harder and more perilous the eventual sell-off could be.

   And because the Fed has been raising expectations that its pullback will start as soon as September, some Fed officials may worry that defying those expectations would rattle investors.

   Finally, there's Bernanke's expected departure in January. If the Fed is going to slow its stimulus, officials may not want to wait until their last meeting of the year in December, just before a new chairman takes over. That's, in part, why some think a pullback in bond purchases will be announced Wednesday.

   "Bernanke may well want to have a bond-reduction program in place before a new chairman comes in," said David Wyss, a former chief economist at Standard & Poor's and now an economics professor at Brown University.

   All that said, it's possible the Fed will choose not to slow its bond purchases now. In recent public remarks, some Fed officials have sounded uncertain that the economy and the job market have improved enough.

   Once the Fed announces its decisions Wednesday, it will issue updated forecasts for the economy and Bernanke will hold a news conference.

   Analysts expect the Fed to downgrade its economic outlook for 2013 from its previous forecast in June. That forecast estimated that the economy would grow at a still-sluggish annual rate between 2.3 percent and 2.8 percent this year. Through the first six months of 2013, the economy has grown at a much slower 1.8 percent rate.

   Many think the Fed will try to cushion the response to a pullback in long-term bond purchases by stressing it has no intention of raising short-term interest rates anytime soon. The Fed has said it expects to keep its benchmark short-term rate near zero at least until the unemployment rate falls to 6.5 percent — as long as the inflation outlook remains mild.

   The unemployment rate is now 7.3 percent, the lowest since 2008. Yet the rate has dropped in large part because many people have stopped looking for work and are no longer counted as unemployed — not because hiring has accelerated. Inflation is running below the Fed's 2 percent target.

   Any long-term reassurances from the Fed could face skepticism from investors who know that a new chairman might alter its policymaking. In addition, up to five new officials could join the Fed's seven-member board next year.

   The Fed has struggled at times to send a clear message about its likely timetable for changing policies. Yet in recent months, the Fed and Bernanke have been explicit that a pullback in bond purchases would likely start by year's end and perhaps by September.

   "This is the market's consensus view, and Fed officials are the ones who have guided the market to that consensus," said Mark Zandi, chief economist at Moody's Analytics. "At this point, the Fed doesn't want to jumble its communications."

   Investors have sent long-term rates up in anticipation of a slowdown in purchases. Since Bernanke first hinted in May that a pullback was likely by year's end, the rate on the 10-year Treasury note has jumped from 1.63 percent in early May to 2.89 percent.

   And long-term mortgage rates have surged more than a full percentage point since May, an increase that's made home-buying more difficult for some.

   David Jones, chief economist at DMJ Advisors, foresees the Fed cutting back on its purchases at a rate of about $10 billion at each meeting between now and mid-2014.

   Even by that timetable, the Fed's stock of Treasury and mortgage bonds will grow: The investment portfolio will likely near $4.5 trillion by next summer. It's now a record $3.66 trillion — a four-fold increase from its level when the financial crisis erupted five years ago.

   Even after new bond buying winds down, the Fed plans to keep reinvesting its bond holdings. It just won't be adding to its stockpile. It will still be providing extraordinary support for the economy.

   And yet some economists remain unconvinced that now is the time to slow the purchases.

   "Interest rates have already gone up as a result of their just talking about bond reductions," said Sung Won Sohn, an economics professor at California State University's Martin Smith School of Business. "If they actually began cutting bond purchases, that would push interest rates up more and damage the economy."

   Wyss thinks Bernanke's imminent departure is the main factor.

   "If this were a decision based on economics, I think the Fed would wait, but given the politics of a new chairman having to go before Congress for confirmation, that could be an argument for moving now," Wyss said.

 
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