The outlook is leading currency traders to temper bets in the euro against the dollar -- not only because euro-zone fundamentals are gnawing away at support for the common currency, but also because a deteriorating forecast will stymie further rate increases there. The Federal Reserve has more room to increase rates after an aggressive easing cycle. The threat of persistent inflation confounding euro-zone policy makers is shared by the U.S. as well.
European Central Bank President Jean-Claude Trichet repeated Wednesday that the rate-setting ECB governing council could raise the key interest rate July 3, but declined to comment on policy action further down the road to combat runaway inflation.
Mr. Trichet told the European Parliament Committee on Economic and Monetary Affairs in Brussels that the governing council may raise the ECB's main refinancing interest rate "by a small amount" to 4.25% from 4% currently, to anchor inflation expectations. "I said it's possible," he said, adding that markets participants had given this message the necessary attention.
Excluding the impact of the rebates and inflation, real disposable incomes were flat.
The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.
The financial sector has come under heavy pressure, currently down 2.9%, after Goldman Sachs lowered its rating on the broker sector and indicated Citigroup (C 17.78, -1.07) may incur additional write-downs and may also raise more capital, according to reports. Reports also indicated Goldman believes Merrill Lynch (MER 33.94, -1.52) may also raise capital. Shares of C were added to Goldman’s Conviction Sell List, according to Dow Jones.
Crude oil jumped above $140 a barrel to a record as Libya threatened to cut output, OPEC's president said prices may reach $170 by the summer and the dollar weakened.
Libya may curb output because of a U.S. law that allows terror victims to seize assets of foreign governments as compensation. OPEC President Chakib Khelil said oil may surge on a European interest rate rise, France 24 reported. Oil, gold and copper climbed today as the dollar dropped because the Federal Reserve gave no signal of higher interest rates yesterday.
Goldman also lowered its opinion of General Motors (GM - Cramer's Take - Stockpickr). Losing 10%, GM, along with fellow Dow component Citi, led the index downward. Every Dow stock was losing ground.
Fortis, Belgium's biggest financial- services company, scrapped a 1.3 billion-euro ($2 billion) cash dividend and will sell shares and assets to shore up capital as the earnings outlook deteriorates.
Fortis slumped as much as 12 percent to the lowest in five years after the company said today in a statement it will raise 8 billion euros by selling stock and ``non-core'' assets such as real estate. It is eliminating the interim dividend for the first time in at least three years.
Chief Executive Officer Jean-Paul Votron said he needs to take ``exceptional measures'' because the business environment won't improve anytime soon. Fortis is reeling after it spent 24 billion euros to buy part of Amsterdam-based ABN Amro Holding NV in the biggest banking takeover in history, just as the subprime mortgage market collapsed.
Citigroup Inc., the bank that's posted the biggest losses from the collapse of the U.S. mortgage market, may take an additional $8.9 billion in net writedowns in the second quarter, Goldman Sachs Group Inc. said.
Goldman also lowered its rating on U.S. brokerages to ``neutral'' from ``attractive,'' saying the pace of deterioration in the industry ``appears to be far worse than'' it originally anticipated, according to a June 25 note.
``The turnaround in business trends that we had been expecting in the second half of 2008 may not occur as quickly as we should have thought,'' Goldman said. ``We see multiple headwinds for Citigroup,'' such as risks of further writedowns, higher consumer provisions, and the potential need for additional capital raisings, dividend cuts or asset sales, Goldman said.
Barclays has said it is planning to raise £4.5bn ($8.8bn) in a share issue to bolster its balance sheet.
The firm is to sell shares to new investors, such as the Qatar Investment Authority, and existing shareholders including China Development Bank.
Barclays said the fundraising move would "strengthen its capital base".
It is the latest British bank, following the Royal Bank of Scotland and HBOS, to seek to raise money to ease the impact of the credit crunch.
Goldman Sachs cut its rating on U.S. brokers to neutral from attractive, and put Citi on its conviction sell list, saying that while it still believes the market is putting too much weight on the possibility that another investment bank may fail, it is "hard pressed" to find a catalyst to move the group significantly higher over the next few months as fundamentals continue to deteriorate.
Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.
The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Demand for expensive goods were flat in May, and a barometer of capital spending by businesses retreated, government data on the economy Wednesday showed.
Orders for durable goods didn't change last month, holding at a seasonally adjusted $213.64 billion, the Commerce Department said. Durables, which are manufactured goods designed to last at least three years, decreased 1.0% in April, revised down from a previously estimated 0.6% decrease.
While the data showed orders going nowhere in May, the report was better than Wall Street expected; economists had forecast a drop of 0.5%.
But durable orders have gone up measurably only twice over the past six months, a sign of what the sluggish economy is doing to the manufacturing sector.
A barometer of business equipment spending - orders for non-defense capital goods excluding aircraft - decreased in May by 0.8%, after rising 3.1% in April.
Home prices in 20 U.S. metropolitan areas fell in April by the most on record, signaling the housing recession is far from over, a private survey showed today.
The S&P/Case-Shiller home-price index dropped 15.3 percent from a year earlier, less than forecast, after a 14.3 percent decline in March. The gauge has fallen every month since January 2007. The group began keeping year-over-year records in 2001.
Mortgage defaults and foreclosures are adding to the glut of properties on the market, while stricter loan rules are making it more difficult for prospective buyers to get financing. The prolonged real-estate slump, along with higher fuel prices and a shrinking job market, is taking a toll on consumers and the economy.
``There's such an excess of inventories that we certainly expect to see more price declines,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``The economy is still weakening and housing still looks pretty weak.''
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All of the 20 cities in the index showed a year-over-year decrease in prices for April, led by a 27 percent drop in both Las Vegas and Miami. Charlotte, North Carolina, showed a decline for the first time.
One bright spot in the report was that more cities showed a gain in prices in April compared with the previous month. Houses in eight areas rose in value, compared with just two in March. Month-over-month gains were led by Cleveland and Dallas.
``There might be some regional pockets of improvement, but on an annual basis the overall numbers continue to decline,'' David Blitzer, chairman of the index committee at S&P, said in a statement.
Confidence among Americans dropped to the lowest level in 16 years and house prices fell the most on record, raising the risk that consumers will cut back on purchases after spending their tax rebates.
The Conference Board's confidence index fell to 50.4 in June, lower than forecast, from 57.2 in May. Home prices in 20 cities dropped 15.3 percent in April from a year earlier, according to S&P/Case-Shiller, the most since the group began collecting data.
Consumers, whose spending accounts for more than two thirds of gross domestic product, are being hurt by the housing slump, rising unemployment and higher food and fuel bills.
The economy has limped along at an annual growth rate below 1% for each of the past two quarters, and lenders continue to restrict credit.
Yet energy and food prices continue to soar. May consumer prices rose an uncomfortable 4.2% vs. a year earlier.
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But the Fed is worried about inflation expectations. Consumers in June expect inflation at 5.1% over the next year, just below May's 26-year high, according to the latest Reuters-University of Michigan survey.
The concern is that workers will demand bigger pay increases to keep up with prices, sparking a 1970s-style wage-price spiral. Inflation expectations, once entrenched, are hard to change.
"Certainly the Fed is scrutinizing inflation expectations because they don't want to get a wage-price spiral going, and so far it has not," Johnson said, adding that "the weak economy is preventing that from developing."
A theory which says the market is in an upward trend if one of its averages (industrial or transportation) advances above a previous important high, it is accompanied or followed by a similar advance in the other.
United Parcel Service Inc (NYSE:UPS - News) warned on Monday that second-quarter earnings would be below expectations, blaming high fuel prices and a sluggish U.S. economy.
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UPS estimated earnings of 83 cents to 88 cents a share for the quarter, down from a prior view of 97 cents to $1.04 per share.
In a statement, UPS said U.S. package volume had been lower than expected, while demand for higher-priced air delivery services had seen a particular drop.
Keith Schoonmaker, an analyst at Morningstar, said the warning from UPS was hardly a surprise, given the monstrous head winds the industry faces.
"This just shows that in a challenging economic environment, with high fuel prices, that some customers are shifting to slower, cheaper shipping alternatives" within both UPS and its rivals, he said.
FedEx(FDX - Cramer's Take - Stockpickr) says it will miss analysts' estimates for the current quarter and for fiscal 2009, as the continuing impact of high fuel prices and a weak economy drag on.
"We're pressured by serious economic difficulties," said CEO Fred Smith, on an earnings conference call. "Record high fuel prices and the weak U.S. economy dampened volume growth and substantially affected our bottom line."
Smith added that the "economic headwinds" the company is facing this year will continue into fiscal 2009. But he noted that results during this year and next "will be anomalies" that will "hopefully set the stage for fiscal year 2010."
