More fiscal warfare on the horizon A new committee must find further savings
S&P under pressure over US credit rating Agency silent so far on possibility of downgrade
US deserves double A  Carmen and Vincent Reinhart on debt ceiling

Economists React: Very Weak, Very Disappointing The Institute for Supply Management’s gauge of manufacturing activity slipped to its lowest level in two years in July. Economists and others weigh in.

-The key issue looking forward… is why orders dropped back after rising slightly in June? It might be a response to debt ceiling fears, or a reflection of weak consumption. Either way, it makes it hard to be a Q3 bull. Growth nearer 2% than 3%? -Ian Shepherdson, High Frequency Economics

-It stretches credibility to say that manufacturing conditions continue to slow because of supply-chain disruptions. We believe that unless Friday’s jobs report shows a sharp pickup in job growth, forecasters will be marking down third-quarter growth to closer to 2%… The economy seems to be mired in a growth recession where the economy cannot expand fast enough to reduce unemployment. -John Ryding and Conrad DeQuadros, RDQ Economics


“The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support,” Fed Chairman Ben Bernanke said last month. “We have to be careful,” Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said in an interview. “The notion that we can have a substantial impact on output and employment over the near term is a difficult case to make.”

U.K. Manufacturing Contracts The U.K. manufacturing sector posted an unexpected contraction in July, falling to its most sluggish level in more than two years.

OECD Inflation Rate Eases Data released by the Organization for Economic Cooperation and Development on Tuesday showed consumer prices in its 34 member countries rose by 3.1% in the 12 months to June, having risen by 3.2% in the year to May. However, food inflation picked up, with prices having risen by 4% in the 12 months to June, up from 3.9% in the year to May. Another worrying development for central banks is that prices of goods and services other than energy and food continued to rise at the 1.7% rate recorded in May, which was the fastest since July 2009.

Euro-Zone Producer Prices Flat Eurostat said producer prices in June were unchanged from May, and up 5.9% from June 2010. The annual rate of increase was the lowest since January, and has now fallen for two straight months. That appears set to continue, with manufacturers surveyed by the European Commission last month indicating they expect to raise their prices less rapidly in coming months. The levelling out in factory-gate prices was partly due to a 0.3% decline in energy prices, which followed a 1.1% drop in May. Offsetting that decline, prices of capital goods rose by 0.2%, while prices of intermediate and nondurable consumer goods were up 0.1%. Prices of durable consumer goods were unchanged. Excluding energy, factory-gate prices rose by 0.1% on a monthly basis, and 4.2% annually. In the European Union as a whole, producer prices were also flat on the month, but up 6.9% on the year.

FIBER: Commodity Prices Suggest Lackluster Economy On balance, industrial commodity prices have been moving sideways since the spring. At 174.8, the latest price index reading from the Foundation for International Business and Economic Research (FIBER), which covers industrial materials prices, is just slightly below where it was in May. That sideways movement is consistent with the recent weakness in industrial output. Three-month growth in industrial materials output has been zero versus 5% growth in Q1. The weakness does not, however, suggest that prices are low or that output has fallen. The overall level of the FIBER index is up by three-quarters from its recession low. In conjunction, industrial output is up 13% from its nadir.

Vital Signs: Fewer Home Vacancies Fewer homes in the U.S. are sitting empty than earlier in the year. Residential vacancy rates ticked down during the second quarter from the first quarter as well as the year-ago period, to 9.2% for rental properties and 2.5% for privately owned homes. Both are below their recession-era levels but reflect continued weakness in the housing market.

Australia Leaves Key Rate Unchanged Australia’s central bank left its cash rate at 4.75% in August for a 10th month in succession as it weighs conflicting economic data.

Barclays Profit Takes Double Hit Barclays said its first-half net profit fell 38%, as it set aside $1.63 billion to compensate customers who were sold faulty insurance products and amid a sharp decline in revenue at its key investment-banking unit.

Funding Values Twitter at $8.4 Billion Twitter said it received a “significant” round of funding led by Digital Sky Technologies, a Russia-based venture firm that has invested in other social-networking companies that have enjoyed surging valuations. The funding values Twitter at $8.4 billion.

Skilled-Nursing Stocks Plunge Nursing-home operators Sun Healthcare, Skilled Healthcare and Kindred Healthcare lost more than a quarter of their market value Monday after Medicare said it would reduce reimbursement rates to those facilities by 11.1% over the next fiscal year.

A Steel Plant Rises in Ohio Demand for steel tubes used by natural-gas drillers has spurred a steelmaker to build the unthinkable: a new $650 million plant in Youngstown, Ohio.



Stock Futures Rally U.S. futures surged, as a debt deal reached by Congressional leaders sparked a global relief rally in equities.

Plan Leaves Out Hard Issues After weeks of partisan wrangling, Obama and congressional leaders reached a deal to raise the debt ceiling while cutting spending by about $2.4 trillion, avoiding default but setting up debates over how Washington taxes and spends.

US deficit: dodging the fundamentals Debt deal avoids default, but is a failure by any other measure

HSBC to Cut Jobs HSBC said it will cut around 5,000 jobs as part of its plan to cut costs, as the bank reported flat first-half revenue of $35.7 billion. CEO Stuart Gulliver also said the bank could reduce head count in its retail division by 25,000.


A Nation in Pain

German Plant Orders Edge Up New orders in June for Germany’s plant and machinery industry rose 1% year-to-year in real terms, the industry group VDMA said.

U.K. Growth Forecast to Slow The U.K. economy will grow significantly more slowly this year than previously forecast because companies have curbed their activity following a series of shocks around the world. The Confederation of British Industry cut its forecast for U.K. economic growth this year to 1.3% from the 1.7% that it predicted in May, citing the continuing sovereign-debt drama in the euro zone, the U.S. government’s wrangling over its debt problems, and the March tsunami in Japan as factors that have weakened business sentiment and stifled growth.

India Panel Cuts Growth Estimate An influential advisory panel cut India’s economic growth estimate to 8.2% due to global economic uncertainty and prolonged monetary tightening that has crimped industrial activity and also warned that the central bank will continue raising rates until inflation shows definite signs of trending down.

RBI: Need to Raise Rates to Tame Inflation India needs to raise interest rates to control inflation, its central bank governor said, firming expectations of continued monetary tightening as authorities grapple with uncomfortably high prices.

Apple more than doubled its share of the global mobile-phone market last quarter to 5.6%, reports IDC, while Nokia, Samsung and LG Electronics all saw their market share shrink (to 24.2%, 19.2%, and 6.8%, respectively). Overall handset shipments rose 11.3% in the quarter to 365.4M.

Barron’s Alan Abelson: Mr. Obama suffers from one serious flaw as a negotiator — a tendency to shout “let’s compromise” before he learns what the other side is proposing or, for that matter, whether it’s proposing anything. Had he been president in the early 19th century, in all likelihood, Florida would still be part of Spain (although to be fair, Americans, thanks to his hard bargaining, probably would enjoy beach privileges).



Taiwan President Sees Weaker Global Economy  “In the second half of this year, we believe that due to the influence of the U.S. and E.U. debt, the economic situation will be weaker than the first half. We have made corresponding preparations. But Taiwan will inevitably be affected by this situation, primarily because many of our exports go to the U.S. and Europe, so we’re paying very close attention to the development of the debt situation in the U.S. and Europe,” Mr. Ma said in a wide-ranging interview.

China’s Xinhua Criticizes U.S. Leaders About Debt China’s state-run Xinhua news agency criticized U.S. leaders for putting the world economy in jeopardy in their wrangling over the debt limit.

Roach Says China ‘Appalled’ by U.S. Debt Impasse, May Curb Treasury Buying Senior Chinese officials are “appalled” by the impasse among U.S. politicians on raising the nation’s debt ceiling to avoid a default, said Stephen Roach, non-executive chairman of Morgan Stanley Asia Ltd.

German Jobless Numbers Fall Adjusted unemployment fell in July by 11,000 compared with June, following June’s 8,000 drop. Experts had expected a decline of 15,000. The seasonally adjusted unemployment rate stood at 7% in July, matching June’s figure.

Italy’s Funding Costs Surge Italian funding costs soared in bond auctions that raised $11.45 billion, as bond investors kept up the pressure on the highly indebted country.

Credit Suisse to Cut 2,000 Jobs Credit Suisse will cut 4% of its workforce to slash spending after profit dropped by more than half due to the strong Swiss franc and a trading slump.

HSBC may cut more than 10,000 jobs: report

Beige Book Highlights: Debt Worries and Difficulty Passing Along Higher Prices The Fed’s beige book report, the anecdotal summary of economic conditions across the central bank’s 12 regional districts, notes slowing growth through much of the nation.

Companies Bracing for U.S. Default  While companies generally expect Washington to resolve the debt-ceiling impasse at the last moment, they are lining up extra sources of financing, and carefully husbanding cash just in case a deal falls through. The confusion is also giving them another reason to delay hiring and investment.Half of the respondents planned to take defensive actions, such as a freeze on hiring, reducing capital spending and drawing on credit lines to build cash, the AFP said.


US groups hit as tax keeps cash overseas As much as half US companies’ record $1,240bn in cash balances is being held overseas, according to Moody’s research, with groups wary of incurring a 35 per cent repatriation tax. “We have an outdated tax code that basically rewards companies or incentivises companies to keep cash offshore,” David Anderson, chief financial officer of Honeywell told the Financial Times. “It artificially distorts your investment incentives and . . . in the US you have to borrow because a lot of your cash is used for dividend and other payments.”

Industrials and Technology: Two Roads Diverging

China’s industrial profits up 28.7% in H1  Profits for China’s industrial businesses rose 28.7 percent year-on-year to 2.41 trillion yuan ($374 billion) in the first half of this year, the National Bureau of Statistics (NBS) announced Wednesday. The NBS figures showed that combined revenues for the country’s industrial firms rose by 29.7 percent from a year earlier to reach 38.86 trillion yuan from January to June.

Labor shortage a headache for factories  Workers in the Pearl River Delta Region witnessed a pay rise of 30 percent. General workers’ wages rose to about 3,000 yuan per month (around $465), double the minimum wage in Shenzhen, which is 1,320 yuan. However, general workers are still difficult to hire in this region, the newspaper said. The region is now facing a labor shortage of more than two million. Lu Xinggan of the Shenzhen Le Yun Tong Export Co Ltd told the reporter that wages of around 2,000 yuan were becoming unattractive to workers in coastal areas, plus, the general workers are mostly post 90s, who are frequently moving. The mobility of workers is a major problem, according to the newspaper. Shen Xinmin, an advisor to the governor of Guangzhou province, told the reporter that the labor shortage is structural. General workers are lacking in catering, service and manufacturing industries, while modern service and high-end manufacturing industries are in need of highly-skilled workers. Raising the minimum wage level is the most direct and effective way to solve the problems, according to Shen.

South Africa’s Jobless Rate Rises to 25.7% as Manufacturing Growth Stalls

Why anyone takes the US “AAA” Credit Rating seriously is beyond me. The $14 trillion debt is dwarfed by a multiple of that in unfunded liabilities and guarantees that no public corporation would be allowed to ignore in it’s financial statements. Any entity dependent on borrowing 40% of every dollar it spends is on a course to self-destruction, and a very rude awakening when reality trumps denial. (Ian McAvity)



Business Abroad Drives U.S. Profits A third of the way through the second-quarter reporting season, earnings for companies in the S&P 500 are the highest they have been in four years, and they could be stronger in the second half. But the gains in many cases have come from operations outside the U.S. About three-quarters of the companies that have reported so far have done better than analysts expected. Many of them—ranging from manufacturers Honeywell International Inc. and CaterpillarInc. to drug maker Abbott Laboratories—raised their earnings forecasts for later in the year.

Eaton Profit Climbs 49% Eaton’s second-quarter earnings rose 49% as the diversified manufacturer continued to benefit from a recovery in automotive production. The company again raised its full-year guidance.

Reckitt’s Profit Rises 6% Reckitt Benckiser said surging demand for household and personal care products in emerging economies boosted its second-quarter profit and sales, keeping the company on track to grow faster than its rivals.

Canon Posts 20% Fall in Net Profit Canon’s net profit for the second quarter slid 20% from a year earlier as the March 11 earthquake and tsunami disrupted domestic production, while the strong yen trimmed its overseas earnings.

Lorillard (LO): Q2 EPS of $2.05 beats by $0.03. Revenue of $1.69B (+11.7% Y/Y).

Kimberly-Clark (KMB): Q2 adj. EPS of $1.18 beats by $0.02. Revenue of $5.3B (+8.3% Y/Y).

US IT-sector price and earnings



New Cracks in Oil Cartel An acrimonious OPEC meeting failed to produce an agreement to increase oil production despite tight supplies and rising prices.

OPEC Acts Like Dallas Cowboys Meetings of the Organization of the Petroleum Exporting countries tend to be long on drama and short on substance. Wednesday’s get-together was true to form.

China Property Bubble Deflates After years of housing prices gone wild, China’s property bubble is starting to deflate. Residential prices are heading downward, raising the prospect that the Chinese economy may slow more rapidly than anticipated.


Fed Sees U.S. Recovery Lagging Bernanke offered a relatively glum view of the economy, acknowledging that it is growing more slowly than the Fed had expected, but predicted improvement later this year.

Beige Book confirms break in supply chain Report suggests growth bounce once supplies normalise

France Cuts GDP Forecast  The Bank of France now sees the pace of gross domestic product growth slowing to a 0.4% expansion in the second quarter from the first quarter, when GDP jumped 1%, a rate not seen for almost five years. The latest estimate is also lower than the Bank of France’s previous estimate of 0.5% GDP growth in the second quarter.

German Exports, Output Fall A sharp drop in German exports and disappointing industrial production numbers added to signs that the pace of growth is moderating in Europe’s largest economy, even as the European Central Bank prepares to raise interest rates again.

South Korea Revises Down GDP Growth The country’s first-quarter gross domestic product grew a revised, seasonally adjusted 1.3% from the previous quarter, slightly lower than the 1.4% rate estimated by the Bank of Korea in late April.


Brazil in fourth interest rate rise Rise of 25 basis points intended to stem rise in inflation

BOE Holds Key Rate Steady The Bank of England Thursday left its key interest rate unchanged for the 27th straight month as most policy makers continued to fear that weak consumer spending could lead to a long period of slow economic growth.

Texas Instruments Cuts Outlook  Semiconductor maker Texas Instruments Inc. reduced its expectations for the second quarter because of weaker demand from wireless customer Nokia Corp.

U.K. Retail Shares Slump U.K. retail stocks fell after Home Retail Group said consumer-electronics sales collapsed in the first quarter, dragging down same-store sales at its general-merchandise retailer Argos 9.6%. Total Argos sales fell 8.1% to £817 million ($1.34 billion) in the 13 weeks to May 28. Argos’s consumer-electronics sales fell 20% in March and April, accounting for around three-quarters of the total sales drop. Argos sells one in every five televisions in the U.K.

Rents on the Rise Again  The Manhattan vacancy rate in May fell to 0.7%, its lowest level in nearly five years, according to broker Citi Habitats. Landlord concessions, such as a free month’s rent for signing a new lease, have dried up. Average Manhattan rental prices are just a hair below their 2007 peaks.




Greek Default ‘May Hit Europe Ratings’ A Greek debt restructuring could affect the credit ratings of other European sovereigns and would likely also lead to rating downgrades for Greek banks, Moody’s said.

Greek Debt Restructuring a ‘Horror Scenario’ A restructuring of Greece’s sovereign debt is “a horror scenario” that would cause the Greek economy to collapse by cutting all funding to the country, European Central Bank governing council member Christian Noyer said.

Greek opposition rejects call for new austerity Main opposition leader bluntly rejects call for support from the prime minister

U.K. Banks Face Ratings Cuts  Part state-owned U.K. banks Royal Bank of Scotland Group PLC and Lloyds Banking Group PLC face ratings cuts as their chances of further state support recede, Moody’s Investors Service said Tuesday, in its latest effort to determine what “normal” credit ratings are post-financial crisis. The ratings agency in April had said it would reassess the effect of implied state support on 19 U.K. financial institutions. On Tuesday, it formally put some of the banks on review for downgrade and changed the outlook to negative on Barclays PLC while affirming a negative outlook on HSBC Holdings PLC.

Dr. Copper’s Summer Cold Dr. Copper is feeling under the weather. But will his ailment prove fatal?


Factory Blast Roils Tech Supply Chain A deadly factory explosion is putting new scrutiny on the technology industry’s biggest Chinese manufacturer and raising concerns about the supply of tablet computers, laptops and televisions from Apple Inc. to Hewlett-Packard Co. Hon Hai Precision Industry Co., a Taiwan-based company better known by the trade name Foxconn that operates dozens of factories across China, said it closed all of its workshops that handle polishing for electronic parts and products pending further inspections. But the closures, if prolonged, could have a broad-reaching impact on the world’s electronics supply from cellphones to game consoles. In addition to Apple and H-P, Hon Hai, which reported more than $80 billion in revenue last year, also makes products for companies such as Sony Corp., Dell Inc. and Nintendo Co., analysts say.

Unprecedented power shortages expected China is likely to face the most severe power shortage in its history this summer, with the electricity shortfall increasing to at least 30 gigawatts (gW) and estimated to peak at 40 gW, officials said.


Goldman cuts China GDP growth forecasts  Goldman Sachs has trimmed its economic growth forecasts for China to 9.4 percent this year, from 10 percent previously, citing a recent run of surprisingly weak data, high oil prices and supply constraints. “The growth slowdown has been even sharper than we forecast, especially evident in April industrial production,” Goldman said in a research note to clients. “In addition, inflation is not coming down as rapidly as we hoped,” the US bank said. It predicts China’s annual inflation will peak at 5.6 percent in June, with average annual inflation hitting 4.7percent in 2011.

Liberty Says Nook Inspired B&N Bid Liberty Media Chairman John Malone, in explaining his bid for Barnes & Noble, said he believes the Android operating system powering the Nook e-reader could dominate the e-book market.



China Keeps Steel Sector Guessing China’s flawed statistics system presents a problem for global steelmakers: No one knows precisely how much steel the country makes or consumes.




U.K. Inflation at 4.5%  Inflation in the U.K., as measured by the consumer prices index, rose to 4.5% in the 12 months to April from 4% in March. Inflation rose 1% month-to-month—only the second time since 1996 inflation has risen so much in a single month. The ONS said the rise in inflation was driven by a rise in transport costs, an increase in excise duty on alcohol and higher rental costs for social housing. Core inflation hit a record high of 3.7% in the 12 months to April.

Merkel rejects Greek debt restructuring European finance chiefs play down absence of Strauss-Kahn
‘Hidden’ debt raises Spain bond fears Revelations after polls likely to damage market standing, report says.

FDI rises 26% in China in first 4 months Foreign direct investment (FDI) in China rose 26.03 percent year on year to $38.8 billion during the first four months of this year. In April, the FDI climbed 15.21 percent to $8.46 billion, down from March’s growth of 32.9 percent.

China cuts US Treasury holdings for 5th month The Treasury Department said Monday that China cut its holdings by $9.2 billion to $1.14 trillion. Japan, the second-largest foreign holder, boosted its holdings by $17.6 billion to $907.9 billion. There had been concerns that the March 11 earthquake and tsunami would lead Japan to scale back its purchases so it could use the money for reconstruction. Britain, the third-largest buyer, increased its holdings by 10 percent to $325.2 billion in March.




The quarterly U.S. Census housing data were hardly constructive. The total number of empty housing units rose 2.5% in Q1 to 18.845 million units. The “shadow inventory” (the number of vacant single family units listed for sale for “unspecified reasons”) surged 7.2% to an all-time high of 3.86 million units. In sum, the total residential real estate (homeownership and rental) vacancy rate rose to 14.4% from 14.1% and is more than three percentage points above the pre-bubble norm.






China’s Trade Surplus Surprises China’s trade surplus widened sharply in April to $11.4 billion as import growth slowed, which will likely add to the pressure on Beijing to allow faster yuan appreciation. Exports in April rose 29.9% from a year earlier, down from March’s 35.8% climb. Imports rose 21.8%, down from the 27.3% increase in March.

Small-Business Pessimism Deepens Small-business owner pessimism worsened in April for a second consecutive month, even though current sales performance was the best in 40 months. The National Federation of Independent Business‘s small-business optimism index dropped 0.7 point to 91.2 in April. That followed a 2.6-point decline to 91.9 in March.  Even so, there was improvement in the recent pattern of earnings. The earnings trend subindex rose 6 points to -26% in April. One reason for the increase was the rise in the share of small-business owners lifting their selling prices. The report said the seasonally adjusted net percentage of owners reporting higher selling prices increased to 12% in April, from 9% in March.

NFIB Optimism Index - May 2011

California Economy Gets Jolt From Tech Hiring California’s economic recovery is kicking into higher gear, with unexpectedly strong job growth propelled by a pickup in technology hiring, as the nation’s biggest and richest state starts to beat back its formidable budget deficit.


Pimco Turns More Negative on U.S. Debt Underscoring Mr. Gross’s bearish stance on that debt due to his worries over the country’s fiscal deficit and debt burden, the holdings of U.S. government-related debt weighted by market value fell to negative 4% at the end of April, signaling increased short bets, compared with negative 3% at March’s end. Mr. Gross boosted holdings of cash and its equivalent to 37%, up from 31% by the end of March in the fund. The holdings of mortgage-backed securities were reduced to 24% from 28% by the end of March and 34% in February.

New Greek Deal Possible by June Greece expects a new package of nearly $86.11 billion in financial aid to cover its financial needs into 2013 as early as June, a senior government official said.

Microsoft Is Near Deal To Acquire Skype Microsoft is close to a deal to buy Skype for between $7 billion and $8 billion—the most aggressive move yet by Microsoft to play in the worlds of communication, information and entertainment.