The latest massive maneuvers by the Federal Reserve and European Central Bank have had the desired calming effect on money markets. But as those central banks acknowledge, the moves haven't eliminated the threat from a cascade of bad news from financial firms, worries about more bad news to come and the likely impact of falling U.S. housing prices.
The most visible indicator of persistent bank reluctance to lend to each other -- plus the reluctance of money-market mutual funds to lend to banks for more than a few days -- has been that banks are paying unusually high rates for short-term loans, compared with the target the Fed and ECB set for overnight loans.
The central banks have "alleviated a lot of the train-wreck fears about year-end," says Lou Crandall, chief economist at Wrightson ICAP, a New York bond-research firm. While the central banks' actions are temporary -- extending only through January -- "it buys us more time, which is the only thing that's going to resolve this."
FedEx Corp.'s second-quarter earnings fell 6% because of a weaker U.S. economy and higher fuel prices, the shipping-services giant said Thursday.
The Memphis, Tenn.-based company considered an economic bellwether, also gave a third-quarter earnings forecast below the Wall Street consensus. For the quarter, Fedex anticipates earnings in the range of $1.15 to $1.30 a share, while analysts, on average, are looking for earnings of $1.37 a share, as provided by a poll from Thomson Financial.
For the three months ended Nov. 30, FedEx said it earned $479 million, or $1.54 a share, down from $511 million, or $1.64 a share, in the year-ago second quarter. Analysts' average projection as derived by Thomson Financial stood at $1.50 a share.
"As we noted last month, higher fuel prices and continued weak growth in the U.S. economy have hindered profitability," said Chief Financial Officer Alan Graf in a statement. "While we have indexed fuel surcharges in place, they cannot keep pace in the short term with rapidly rising fuel prices."
"We continue to benefit from solid international growth, which helps mitigate softness in U.S. industrial production," said Chief Executive Frederick Smith. "While we see challenging near-term economic trends, we remain confident about long-term prospects in all our business segments."
Sales at U.S. retailers declined for the third straight week as storeowners grappled with winter storms and rising gasoline prices that discouraged shoppers during what may be the worst holiday season in five years.
Sales in the seven days through Dec. 15 fell 0.4 percent from a year earlier, following declines of 2.7 percent and 4.4 percent the previous two weeks, Chicago-based ShopperTrak RCT Corp. said yesterday.
This year's holiday shopping season may grow at the slowest pace since 2002, according to the National Retail Federation. U.S. shoppers finished just 20 percent of their holiday gift buying last weekend, according to a joint survey conducted by the International Council of Shopping Centers and UBS Securities LLC. Consumers may be holding out for lower prices in coming days, analysts said.
The railroad operator slashed its Q4 earnings outlook by 20 cents to $1.70 - $1.80 a share, below $1.98 forecasts. Union Pacific (UNP) blamed higher diesel costs. Q4 fuel costs will average $2.60 a gallon — 34% above last year — topping $2.70 this month. Union Pacific also cited weak Dec. traffic due to winter storms. Its shares fell 4%.
The Fed said banks submitted 93 bids totaling $61.553 billion for the $20 billion in loans auctioned off Monday. That put the bid-to-cover ratio at a little more than 3-to-1.
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Jay Bryson, global economist with Wachovia, said the strong auction demand was positive.
"It shows that there's not a stigma attached to this as there was at the discount window and that banks are willing to come to the Fed directly," Bryson said.
The interest rate on the 28-day loans — set by the bidding process — was 4.65%. That's higher than the fed funds target rate of 4.25% for overnight bank loans. But it's below the 4.75% discount rate.
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Scott Brown, chief economist with Raymond James, said that at this early stage the results of the Fed's first auction are still somewhat hard to interpret.
The heavy demand for the auction loans "suggests either that there's a huge need for (the auction) or that it's working," Brown said. "You need to see the results in the credit markets in the next few days — the Libor (market) in particular is the one to watch."
Federal Reserve Bank of Richmond President Jeffrey Lacker warned Wednesday that the inflation picture has "deteriorated" since August amid high energy prices and said the Fed needs to keep overall prices down.
In a prepared speech given to the Charlotte Chamber of Commerce's Annual Economic Outlook Conference, the Fed official said that a key inflation gauge, the PCE, rose significantly in September and October (November's figure will be released Friday). And, he said, given higher consumer price inflation numbers for last month, "the [PCE] numbers for November will be even worse."
"Because the job of a central banker is to protect the purchasing power of currency, it is overall inflation that we need to keep down, not just core inflation," said Mr. Lacker. "I am uncomfortable with the inflation picture."
"We think $100 per barrel oil is on the horizon in 2008, perhaps in the Spring," said Brian Hicks, co-manager of the Global Resources Fund. "Our forecast sees an average oil price around $80-$85, up from about an average of $70 in 2007."
He's far from alone. About 54% of a Barclays survey of 150 commodity investors expect the average price of oil over the next five years to top $100 a barrel, with 27% responding that it would be $80-$100 a barrel and 16% expected $60-$80 a barrel.
This view is largely backed up by the Energy Information Administration, the official statistics center of the U.S., which just upped its oil price outlook to an average of $84.93 in 2008, from its earlier view of $80 a month earlier.
"Expectations that tight market conditions will persist into 2008 are keeping oil prices high," the EIA said in its latest short-term outlook. "Despite the OPEC decision ... to hold production quotas steady and downward revisions to projected consumption growth in 2008, the oil balance outlook remains characterized by rising consumption, modest growth in non-OPEC supply, fairly low surplus capacity, and continuing risks of supply disruptions in a number of major producing nations."
Foreclosure filings for November surged 68% from a year ago but dropped 10% from October, another sign that foreclosure activity overall may have peaked for the year, a foreclosure-listing service said.
RealtyTrac Inc. Chief Executive James J. Saccacio said that November's 10% drop from October was the first double-digit monthly decrease observed since April 2006.
The sequential decline "could indicate that foreclosure activity has topped out for the year, but the true test of whether this ceiling will hold will come at the beginning of next year -- when we anticipate that a seasonal surge in foreclosure filings and another possible wave of resetting mortgages could place further pressure on the housing market," Mr. Saccacio said.
But after years when American consumers have pulled the global economy forward, today the roles are largely reversed. A growing global economy is providing the best source of momentum America has right now, as the nation's consumers struggle to cope with high oil prices and a downturn in the housing market.
How big is the momentum? Enough to offset much of housing's negative impact. Over the year that ended on Sept. 30, a rise in US exports has equaled the decline in residential construction that represents the biggest portion of housing's current drag on growth.
"One of the reasons that the US economy has avoided a recession so far, despite a ... prolonged downturn in the housing industry, is because of the stimulus that the US has received from the global boom," says Ed Yardeni, an economist at Yardeni Research Inc. in Great Neck, N.Y. "It's been a big benefit, and I think it will continue be so."
Global growth benefits the US through several channels:
•The most obvious is that exports have been rising, now running at an annualized pace of $1.7 trillion, up from $1.5 trillion a year ago.
•America's largest companies also gain profits from sales of goods and services by their foreign-based operations. The employees are overseas, but the resulting profits provide a cushion for these companies during a US slowdown. Just ask General Motors Corp.
•The US enjoys access to foreign sources of capital that are more abundant than ever. This includes a continuing flow of investment funds – despite the drawbacks of a weaker dollar and the mortgage woes of US banks. It also means direct investment by foreign firms in US operations.
This past weekend brought a big surge of traffic, but not enough to make up for the lack of sales throughout the holiday season, industry observers say. As a result, retailers will have to cut their prices deeper -- driving down profit margins -- and keep their doors open longer to gain some ground in the home stretch.
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Britt Beemer, chairman of America's Research Group, expects holiday sales to increase only 1.8% this year, his lowest forecast in over 10 years.
Even with deeper discounts this week, Beemer is skeptical that retailers can make up for the traffic they lost all season.
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Although Black Friday, or the day after Thanksgiving, generated a 4.8% increase in traffic, industry watchers say things have tapered off considerably since. The first two weeks of December saw a lull, and only now are the crowds starting to come back.
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And the peak of the season is still to come. This Saturday is expected to be the busiest shopping day of the year for retailers, eclipsing Black Friday.
Chen expects those retailers who have been promoting all along will continue promoting, including in the women's apparel sector, which saw soft sales even before the holiday season began.
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Even online sales seem to be losing some traction. According to research firm, comScore, online retail spending has grown more than $22 billion between Nov. 1 and Dec. 14, which marks an 18% climb. While that still represents a record level, it is less than the 26% increase during the same period last year.
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"The current economic realities appear to be having a negative impact on the growth in consumer spending," said comScore Chairman Gian Fulgoni in a statement. "From the subprime housing meltdown to a decline in home values to higher gas prices and an uncertain stock market, many consumers across all income segments are either feeling the pinch this holiday season or are lacking the confidence to spend at the rate they had in the past."
Wheat futures gained in Chicago as rising food costs signaled increased demand for the grain at a time of shrinking global stockpiles. Corn and soybeans declined as recent advances may have been overdone.
U.S. consumer prices rose the most in two years last month, while inflation surged 6.9 percent in China and 3.1 percent in Europe. Inflation is accelerating as oil and other energy prices reached records in November, spurring investors to buy commodities as a store of value.
``The global backdrop of inflationary pressure is supportive for agricultural products as we head into 2008,'' Nie Ben, manager at Liaoning Cifco Futures Co., said by phone from Dalian in northeastern China today.
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Corn reached a nine-month high yesterday at $4.4325 a bushel, while soybeans extended a rally to the highest since 1973 on speculation that U.S. demand for fuel made from grain and oilseeds will surge. The Senate passed a bill Dec. 13 that may boost use of alternative fuels such as ethanol and biodiesel.
