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Investors give thumbs down to Bernanke speech
MARKET BLOG: Invesco fund manager Neil Woodford backs Buckles amid growing pressure for him to quit.
- US and European markets turn lower after Bernanke fails to meet stimulus hopes
- Woodford, G4S's second largest shareholder, supports CEO Buckles
- Investors sell Wolseley as it mulls French future
- National Grid shares slip amid dividend doubts
15.50: Investors gave the thumbs down to Ben Bernanke after the US Federal Reserve chairman provided few signals of further monetary stimulus in a long-awaited speech.
Markets turned lower after Bernanke spoke, as his long-winded comments were given a poor grade by traders who at best got a re-hash of previous promises that the Fed ‘is prepared to take further action as appropriate’.
Alongside this faint suggestion of a distant QE3 scheme, Bernanke reeled off a list of threats to the US economy – principally the eurozone crisis and coming US fiscal crunch.
‘The most effective way that the Congress could help to support the economy right now would be to work to address the nation's fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.’
‘The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year.’
Chairman Ben S. Bernanke
Semiannual Monetary Policy Report to the Congress
Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.
July 17, 2012
Chairman Johnson, Ranking Member Shelby, and other members of the Committee, I am pleased to present the Federal Reserve's semiannual Monetary Policy Report to the Congress. I will begin with a discussion of current economic conditions and the outlook before turning to monetary policy.
The Economic Outlook
The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year. After rising at an annual rate of 2-1/2 percent in the second half of 2011, real gross domestic product (GDP) increased at a 2 percent pace in the first quarter of 2012, and available indicators point to a still-smaller gain in the second quarter.
Conditions in the labor market improved during the latter part of 2011 and early this year, with the unemployment rate falling about a percentage point over that period. However, after running at nearly 200,000 per month during the fourth and first quarters, the average increase in payroll employment shrank to 75,000 per month during the second quarter. Issues related to seasonal adjustment and the unusually warm weather this past winter can account for a part, but only a part, of this loss of momentum in job creation. At the same time, the jobless rate has recently leveled out at just over 8 percent.
Household spending has continued to advance, but recent data indicate a somewhat slower rate of growth in the second quarter. Although declines in energy prices are now providing some support to consumers' purchasing power, households remain concerned about their employment and income prospects and their overall level of confidence remains relatively low.
We have seen modest signs of improvement in housing. In part because of historically low mortgage rates, both new and existing home sales have been gradually trending upward since last summer, and some measures of house prices have turned up in recent months. Construction has increased, especially in the multifamily sector. Still, a number of factors continue to impede progress in the housing market. On the demand side, many would-be buyers are deterred by worries about their own finances or about the economy more generally. Other prospective homebuyers cannot obtain mortgages due to tight lending standards, impaired creditworthiness, or because their current mortgages are underwater--that is, they owe more than their homes are worth. On the supply side, the large number of vacant homes, boosted by the ongoing inflow of foreclosed properties, continues to divert demand from new construction.
After posting strong gains over the second half of 2011 and into the first quarter of 2012, manufacturing production has slowed in recent months. Similarly, the rise in real business spending on equipment and software appears to have decelerated from the double-digit pace seen over the second half of 2011 to a more moderate rate of growth over the first part of this year. Forward-looking indicators of investment demand--such as surveys of business conditions and capital spending plans--suggest further weakness ahead. In part, slowing growth in production and capital investment appears to reflect economic stresses in Europe, which, together with some cooling in the economies of other trading partners, is restraining the demand for U.S. exports.
At the time of the June meeting of the Federal Open Market Committee (FOMC), my colleagues and I projected that, under the assumption of appropriate monetary policy, economic growth will likely continue at a moderate pace over coming quarters and then pick up very gradually. Specifically, our projections for growth in real GDP prepared for the meeting had a central tendency of 1.9 to 2.4 percent for this year and 2.2 to 2.8 percent for 2013.1 These forecasts are lower than those we made in January, reflecting the generally disappointing tone of the recent incoming data.2 In addition, financial strains associated with the crisis in Europe have increased since earlier in the year, which--as I already noted--are weighing on both global and domestic economic activity. The recovery in the United States continues to be held back by a number of other headwinds, including still-tight borrowing conditions for some businesses and households, and--as I will discuss in more detail shortly--the restraining effects of fiscal policy and fiscal uncertainty. Moreover, although the housing market has shown improvement, the contribution of this sector to the recovery is less than has been typical of previous recoveries. These headwinds should fade over time, allowing the economy to grow somewhat more rapidly and the unemployment rate to decline toward a more normal level. However, given that growth is projected to be not much above the rate needed to absorb new entrants to the labor force, the reduction in the unemployment rate seems likely to be frustratingly slow. Indeed, the central tendency of participants' forecasts now has the unemployment rate at 7 percent or higher at the end of 2014.
The Committee made comparatively small changes in June to its projections for inflation. Over the first three months of 2012, the price index for personal consumption expenditures (PCE) rose about 3-1/2 percent at an annual rate, boosted by a large increase in retail energy prices that in turn reflected the higher cost of crude oil. However, the sharp drop in crude oil prices in the past few months has brought inflation down. In all, the PCE price index rose at an annual rate of 1-1/2 percent over the first five months of this year, compared with a 2-1/2 percent rise over 2011 as a whole. The central tendency of the Committee's projections is that inflation will be 1.2 to 1.7 percent this year, and at or below the 2 percent level that the Committee judges to be consistent with its statutory mandate in 2013 and 2014.
Risks to the Outlook
Participants at the June FOMC meeting indicated that they see a higher degree of uncertainty about their forecasts than normal and that the risks to economic growth have increased. I would like to highlight two main sources of risk: The first is the euro-area fiscal and banking crisis; the second is the U.S. fiscal situation.
Earlier this year, financial strains in the euro area moderated in response to a number of constructive steps by the European authorities, including the provision of three-year bank financing by the European Central Bank. However, tensions in euro-area financial markets intensified again more recently, reflecting political uncertainties in Greece and news of losses at Spanish banks, which in turn raised questions about Spain's fiscal position and the resilience of the euro-area banking system more broadly. Euro-area authorities have responded by announcing a number of measures, including funding for the recapitalization of Spain's troubled banks, greater flexibility in the use of the European financial backstops (including, potentially, the flexibility to recapitalize banks directly rather than through loans to sovereigns), and movement toward unified supervision of euro-area banks. Even with these announcements, however, Europe's financial markets and economy remain under significant stress, with spillover effects on financial and economic conditions in the rest of the world, including the United States. Moreover, the possibility that the situation in Europe will worsen further remains a significant risk to the outlook.
The Federal Reserve remains in close communication with our European counterparts. Although the politics are complex, we believe that the European authorities have both strong incentives and sufficient resources to resolve the crisis. At the same time, we have been focusing on improving the resilience of our financial system to severe shocks, including those that might emanate from Europe. The capital and liquidity positions of U.S. banking institutions have improved substantially in recent years, and we have been working with U.S. financial firms to ensure they are taking steps to manage the risks associated with their exposures to Europe. That said, European developments that resulted in a significant disruption in global financial markets would inevitably pose significant challenges for our financial system and our economy.
The second important risk to our recovery, as I mentioned, is the domestic fiscal situation. As is well known, U.S. fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority. At the same time, fiscal decisions should take into account the fragility of the recovery. That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken. The Congressional Budget Office has estimated that, if the full range of tax increases and spending cuts were allowed to take effect--a scenario widely referred to as the fiscal cliff--a shallow recession would occur early next year and about 1-1/4 million fewer jobs would be created in 2013.3 These estimates do not incorporate the additional negative effects likely to result from public uncertainty about how these matters will be resolved. As you recall, market volatility spiked and confidence fell last summer, in part as a result of the protracted debate about the necessary increase in the debt ceiling. Similar effects could ensue as the debt ceiling and other difficult fiscal issues come into clearer view toward the end of this year.
The most effective way that the Congress could help to support the economy right now would be to work to address the nation's fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.
In view of the weaker economic outlook, subdued projected path for inflation, and significant downside risks to economic growth, the FOMC decided to ease monetary policy at its June meeting by continuing its maturity extension program (or MEP) through the end of this year. The MEP combines sales of short-term Treasury securities with an equivalent amount of purchases of longer-term Treasury securities. As a result, it decreases the supply of longer-term Treasury securities available to the public, putting upward pressure on the prices of those securities and downward pressure on their yields, without affecting the overall size of the Federal Reserve's balance sheet. By removing additional longer-term Treasury securities from the market, the Fed's asset purchases also induce private investors to acquire other longer-term assets, such as corporate bonds and mortgage backed-securities, helping to raise their prices and lower their yields and thereby making broader financial conditions more accommodative.
Economic growth is also being supported by the exceptionally low level of the target range for the federal funds rate of 0 to 1/4 percent and the Committee's forward guidance regarding the anticipated path of the funds rate. As I reported in my February testimony, the FOMC extended its forward guidance at its January meeting, noting that it expects that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee has maintained this conditional forward guidance at its subsequent meetings. Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to the economic outlook, the Committee made clear at its June meeting that it is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
Thank you. I would be pleased to take your questions.
Britain’s FTSE 100 extended its losses, down 0.6% to 5,628, while the Dow and S&P 500 turned sharply lower to 12,659 and 1352 respectively.
Goldman Sachs among top US risers
14.54: US stocks have opened higher, reflecting hopes that Ben Bernanke will offer up more quantitative easing when he speaks today.
Goldman Sachs shares are among the top risers after the investment bank reported forecast-beating second-quarter earnings.
British shares are adding a splash of red on otherwise positive stock screens. The FTSE 100 is down 0.3% at 5,644.
Some of the significant data out from the US:
- CPI inflation was flat in June +1.7%, in line with expectations, with falling energy prices and small gains in food and core prices. ‘Neither inflation nor deflation seems to be a clear and present danger,’ summed up Bernd Weidensteiner of Commerzbank.
- Industrial production grew 0.4% last month, slightly above economists’ expectations, with a 0.7% rise in manufacturing activity. Julia Coronado of BNP Paribas put the numbers in context: ‘Given the weakness in many forward looking manufacturing indicators such as new orders survey measures and the build up of inventories relative to sales, we expect further slowing, although the June report suggests a less pronounced path.’
The Dow is up 0.2% and S&P 500 is 0.5% higher.
Woodford, G4S's second largest shareholder, supports CEO
12.19: As G4S (GFS.L) shares lead the FTSE 100 lower yet again, Invesco fund manager Neil Woodford has given his backing to chief executive Nick Buckles amid growing pressure for him to quit over Olympic staffing failures.
According to Reuters, Woodford, G4S's second largest shareholder, said in an interview today:
‘It is my view that the interest of shareholders are best served by keeping Nick Buckles in this business because his track record is excellent.
‘I don't want to throw all of that away on the back of this failure of local management to deliver one contract, one of literally thousands and thousands of contracts that this company has around the world.’
Buckles is currently answering questions from a committee of MPs over the company’s failure to provide staff for the Olympics. He agreed with one MP who suggested G4S’s reputation is ‘in tatters’.
G4S shares are down 3.5% to 245p today, down from 290p before the news headlines about its staff shortages. This decline is 'because we haven't delivered on a contract', Buckles admitted to the MPs.
German investor confidence dips
10:58: Germany’s closely watched ZEW measure of investor confidence has dropped for the third month in a row, adding to concerns about the resilience of the eurozone's biggest economy.
The fall of 2.7 points in July to -19.6 points was, however, better than economists had predicted.
Wolfgang Franz, president of the ZEW think tank, said:
‘The decline of the economic expectations concering the end of 2012 is flattening out gently. This could possibly be an early sign of an encouraging development in 2013. However, risks should not be underestimated. Besides the weak demand from the eurozone for German exports, the German economy is also burdened by weakening growth dynamics in other important partner countries.’
UK inflation drops more sharply than expected
09.40: UK inflation has dropped much more steeply than expected, down to 2.4% in June on the CPI measure.
This is great news for UK consumers. But the rate is still above the Bank of England's 2% target.
Some rapid reaction from James Knightley of ING Bank: 'This gives the Bank of England plenty of room to respond aggressively to the downturn in activity and we suggest that the BoE’s Asset Purchase Facility will be expanded to £450 billion by the end of 2012.'
Full story here.
National Grid shares slip amid dividend doubts
09.02: Shares in National Grid (NG.L) are falling again today, as analysts mark down their target prices and raise the dividend alarm after the company clashed with regulator, Ofgem, over £22 billion investment plans to upgrade the UK's electricity and gas networks.
Ofgem has said it will reduce power companies' request for funding by 20%. National Grid said Ofgem's proposals were flawed. 'We believe that these initial proposals will not appropriately incentivise the essential investments necessary to provide safe, reliable networks for the UK consumer and avoid delays to the achievement of the UK's environmental targets,' it said in a statement yesterday.
Societe Generale today reduced their target price for National Grid from 673p to 642p, but kept their ‘hold’ rating on the stock.
Here’s what the analysts say:
JP Morgan: 'Under the initial proposals, we believe that over the regulatory review period, Grid may well struggle to finance its capex programme and pay its dividend. We therefore expect the share price to struggle to perform until the final proposals are published in December, or unless Ofgem takes a more conciliatory stance.'
Berenberg: ‘Expect to see consensus downgrades, and questions over DPS policy as the numbers are digested.’
But from analysts at Liberum Capital… National Grid ‘should be able to sustain dividend but on negative knocks off value as every £1 invested is worth £1.15 and therefore... knocks off 20p/share from our PT’.
And analysts at UBS described it as only ‘a Small Disappointment’, maintaining their ‘buy’ rating.
National Grid is down 1.5% to 671p.
Investors sell Wolseley as it mulls French future08.25: Investors have pushed Wolseley (WOS.L) down to the bottom of the FTSE after the heating and plumbing distributor announced it was considering the future of its French business amid continuing ‘difficult market conditions’ on the continent.
The company said it expected to incur non-cash impairment charges for both France and Denmark, where it has also faced challenging trading conditions.
Wolseley operates in six regions: France, the Nordics, UK, Central Europe, USA and Canada.
This is not the first time the company has reported difficult conditions in the French and Nordic regions. Kevin Lapwood of Seymour Pierce said a sale of Wolseley’s French operations is unlikely, as it probably would have already happened by now if it were possible. Some or all of the French business will instead be closed.
‘This will incur significant costs going forwards but it is likely to be well-received as it will allow Wolseley to concentrate on its strong North American operations and on revitalising the UK business,’ Lapwood said, as he maintained his ‘hold’ stance on the shares.
Charlie Campbell of Liberum Capital said today's announcement was 'helpful as it demonstrates that management is fighting very hard to restore margins'.
Shares are down 3.95% to 2236p
FTSE flat as investors await Bernanke08.10: The FTSE 100 has opened just slightly higher, up six points to 5,669, with other European markets also flat, as investors prepare for a busy news day.
UK inflation data is due today, alongside retail sales numbers and house prices. While Bank of England government Mervyn King is due in front of MPs to discuss the Bank’s financial stability report – a conversation that could soon turn to King’s knowledge of Libor rate-rigging.
Then later, US Federal Reserve chairman Ben Bernanke will deliver his semi-annual testimony to congress, with investors on desperate standby for any mention of QE3.
Festering money laundering breaches at HSBC
0745: Regulators allowed money laundering breaches at HSBC to 'fester', the US Senate will be told today.
The bank could be the next large UK lender to be hit with a massive fine after it last week admitted to a failure in its anti-money-laundering controls.
A hearing into the matter is due to be held in the US today; however, ahead of the session, documents have revealed HSBC has been accused of consistent failures to prevent terrorists and drug cartels laundering money through America.‘Between 2004 and 2010, our anti-money-laundering controls should have been stronger and more effective and we failed to spot and deal with unacceptable behaviour,’ HSBC chief executive Stuart Gulliver is reported to have told staff.
When the news initially came to light, analysts estimated that any fine HSBC received could run beyond $1 billion. HSBC had previously warned in its 2011 annual report and accounts that fines relating to this issue could be ‘significant’.
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