Finance Blog number 1

President Barack Obama said the U.S. unemployment rate will reach 10 percent this year, even as the economy begins to emerge from the recession.

“You’re starting to see the engines of the economy turn,” Obama said today in an interview with Bloomberg Television at the White House. “It’s going to take a long time — we had a huge de-leveraging that took place.”

Obama acknowledged that unemployment lines may keep growing despite government efforts to boost economic growth, saying he’s confident an expansion will begin “shortly.” His outlook mirrors the forecasts of private economists who predict a jobless rate of 10 percent — a level unseen since 1983 — by the final three months of the year.

“What you’ve seen is that the pace of job loss has slowed,” the president said. “The economy is going to turn around, but as you know, jobs are a lagging indicator and we’ve got to produce 150,000 jobs every month just to keep pace, just to flatten this out.”

The U.S. economy lost 345,000 jobs in May, the smallest drop since September and less than half the decline in January, reinforcing signs that the deepest recession in half a century is starting to abate. The unemployment rate rose to 9.4 percent, the highest since 1983.

Obama said Treasury yields are rising because investors have grown “more confident that we may have avoided the very worst scenarios” for the economy and financial markets.

Rising Rates

The 10-year Treasury note yield has increased 0.57 percentage point since May 14, and Treasury bears say yields will keep increasing as the government sells record amounts of debt to fund recovery programs.

“People have a greater appetite for risk, which means that there’s going to be money flowing out of Treasuries and people are going to start putting money in other investments that provide higher yields,” he said. “That also means that yields on Treasuries are going to go up default payday loan.”

Obama said it’s important for the U.S. to maintain fiscal discipline to ensure investors around the world keep buying U.S. government debt.

China, the largest U.S. creditor, with $767.9 billion of debt, has shifted purchases of Treasuries into shorter-maturity securities amid concern about unprecedented debt sales.

Long-Term Deficits

“I am concerned about the long-term issue of our structural deficit and our long-term debt because if we don’t get a handle on that, then there’s no doubt that at some point, whether it’s the Chinese, the Koreans, the Japanese, and whoever else has been snatching up Treasuries are going to decide that this is too much of a risk,” Obama said.

“That’s why it’s so important for us to get a handle on our long-term structural deficit,” he said.

Earlier today, Commerce Department figures showed U.S. housing starts jumped more than forecast in May and industrial production tumbled, reflecting an American economy still struggling to emerge from the slump.

“I’m confident that if we take the steps that are necessary on health care, on energy, on education, if we get a strong financial regulatory system in place so that people have confidence in the markets again, that we will end up seeing recovery shortly,” Obama said.

The U.S. economy shrank at a 5.7 percent annual pace in the first quarter, capping its worst six-month performance in five decades and reflecting declines in housing, inventories and business investment.

Growth will turn positive in the second half of the year, accelerating 0.5 percent from July through September and 1.9 percent in the final three months of this year, according to the median estimate in a Bloomberg survey of 62 economists.

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The Federal Reserve may have few, if any, securities deals for the start of its program to aid the commercial real estate market and head off more losses at U.S. banks.

Today is the first monthly deadline for investors to apply for loans to buy new commercial mortgage-backed securities through the Term Asset-Backed Securities Loan Facility, or TALF. No issuers have publicly announced debt that’s eligible for the program. The Fed has made $25.2 billion in TALF loans for other securities, including those backed by auto and credit-card debt.

“I would be very surprised” if there are any deals this month, said Kevin Petrasic, a former official at the Office of Thrift Supervision who is now an attorney with Paul, Hastings, Janofsky & Walker LLP in Washington. “Unless the market really starts to pick up within the next couple weeks, I think July is going to be a little challenging as well.”

The stakes of TALF aid extend beyond the markets for office and retail space. Worsening problems in the commercial mortgage market may accelerate the drop in property values, increase defaults and weaken banks’ finances, New York Fed President William Dudley said this month.

Dudley set expectations low, saying in the June 4 speech that he didn’t expect any activity today because “the process for CMBS securitization takes quite a while to ramp up.”

“Don’t take that as a mark of the success of the CMBS effort, please,” he said at the time.

When Fed policy makers last met in April, some officials cited “mounting losses in commercial real estate, which could have substantial adverse consequences for regional banks and other financial institutions with significant concentrations of such assets,” according to minutes of the two-day session.

Deadline Today

Today’s application deadline applies to securities issued this year. In late July, the Fed will start accepting investor requests for loans to purchase older CMBS.

“This may be, and likely is, more challenging than dealing with other eligible assets,” said Laurence Meyer, vice-chairman of Macroeconomic Advisers LLC and a former Fed governor.

The Fed, acceding to an industry request in May, authorized TALF loans of as long as five years, up from three years for other parts of the TALF. Real estate groups including the Mortgage Bankers Association had lobbied the Fed for the extended loan terms.

Fed officials hope the TALF — an emergency program that may make up to $1 trillion in loans — will help revive the $760 billion market for CMBS. That in turn would lower interest rates and expand the availability of loans for the commercial real estate market.

Stabilize Market

“The revival of the CMBS market is essential to stabilizing the commercial real estate market,” Dudley said in the speech advance cash loan month paid.

A slow start for the TALF’s CMBS support would mirror the first phase for other asset-backed debt, which began in March with $4.7 billion in requests followed by $1.7 billion in April. Loan requests exceeded $10 billion in both May and this month.

Demand was hampered in part by investor opposition to government restrictions on hiring foreign workers for firms that accepted the subsidized loans, and concern that Congress would try to retroactively tax earnings.

Sales of CMBS plummeted to $12.2 billion last year, compared with a record $237 billion in 2007, according to estimates by JPMorgan Chase & Co. There have been no sales of the debt since June 2008.

Deals have been few partly because it can take up to six months from the time a loan is originated to when it’s securitized.

Making Deals

“It takes a little while to put the deals together,” Petrasic said.

In addition, the Fed posted the legal forms for CMBS in the TALF on June 9, leaving little time for participants, said Chip MacDonald, a partner at law firm Jones Day in Atlanta.

“I’m not saying it can’t be done, but it certainly makes it more challenging and reduces the people who will participate in it,” MacDonald said. TALF-related CMBS activity may not increase for one or two months, he said.

Standard & Poor’s said last month it may cut the ratings of top-rated commercial mortgage bonds, rendering the older securities ineligible for the Fed program, which only accepts AAA rated bonds. The yield gap, or spread, relative to benchmark interest rates on the top-rated CMBS has widened about 2 percentage points to 8.39 percentage points since the May 26 announcement.

‘No Final Decisions’

“There have been no final decisions made about our new CMBS criteria,” Ed Sweeney, a spokesman for S&P, said in an e- mailed statement. “Once we have examined all of the feedback, we will issue the new criteria.”

By comparison, the yield premium investors demand to buy investment-grade corporate bonds compared with benchmark Treasury securities has declined to 3.38 percentage points as of June 12 from 6.04 percentage points at year-end, according to Merrill Lynch & Co. data.

Fed Chairman Ben S. Bernanke said in congressional testimony on May 5 that lending conditions in the commercial real estate sector are “still severely strained.”

“The more liquidity you can get in the market, the better off the commercial real estate market is going to be,” MacDonald said.

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Russian Finance Minister Alexei Kudrin said the dollar is in “good shape,” further affirming that there’s no substitute for the world’s reserve currency.

Kudrin rushed to reassure investors of Russia’s confidence in the dollar just days after his boss, President Dmitry Medvedev, questioned its global status, joining China’s central bank Governor Zhou Xiaochuan in suggesting the world may need another benchmark for settling international debts.

“It’s too early to speak of an alternative,” Kudrin said in an interview two days ago in Lecce, Italy, after meeting officials from the Group of Eight nations.

Kudrin’s comments underscore the dependence of Brazil, China, Russia, and India on the currency of the U.S., the world’s largest economy and a $2.5 trillion export market. Even as some of their leaders questioned the dollar’s status, the four nations increased foreign reserves by more than $60 billion in May to limit their currencies’ gains and support their exports. They now have combined reserves of $2.8 trillion and are among the largest holders of Treasuries.

“At this point there’s no alternative to the U.S. dollar in terms of deep liquid markets and trading 24-7 globally,” Michael Woolfolk, senior currency strategist at the Bank of New York Mellon in New York, said yesterday in a telephone interview. “Nothing even comes close to the dollar in terms of reserve status.”

Stronger Dollar

The dollar rose today against all 16 of the most traded currencies expect for the yen, climbing 1.2 percent against the euro to trade at $1.3854 at 2:27 p.m. in London. Treasuries climbed for a third day and the yield on the U.S. 10-year note fell seven basis points to 3.72 percent.

At the end of 2008 the dollar accounted for 64 percent of central bank reserves, up from 62.8 percent in June 2008, according to the International Monetary Fund in Washington. The currency has underpinned exchange rates since the 1971 collapse of the Bretton Woods system, which linked their value to gold.

The Dollar Index, which tracks the greenback against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, has dropped 10.6 percent to 80.142 from its high this year of 89.624 on March 4, when the global financial crisis sent investors to the relative safety of U.S. debt.

Summit

Leaders of the so-called BRICs nations — Brazil, Russia, India and China — may use their first summit this week to press the case that their 15 percent share of the world economy and 42 percent of global currency reserves should give them more influence over global financial policies.

Among the topics in the Ural Mountains city of Yekaterinburg will be the global financial crisis, reshaping the IMF, climate change and the future of dialogue among the BRIC countries, He Yafei, a vice minister at China’s Ministry of Foreign Affairs, said last week. The leaders probably won’t discuss alternative reserve currencies, Medvedev aide Sergei Prikhodko told reporters in Moscow yesterday.

Developing countries say their votes in the IMF, founded at the end of World War II to promote global trade, don’t reflect the shift in economic power. Brazil, the world’s 10th-largest economy, has 1.38 percent of the IMF board’s votes, less than the 2.09 percent for Belgium, an economy one-third the size.

Record Debt

The real rallied 11.2 percent last month, the ruble gained 6.9 percent and the rupee 6.4 percent online car insurance quotes. The yuan appreciated 21 percent between July 2005, when the government allowed it to trade, and July 2008. China has prevented the currency from strengthening since then as the economy slowed.

Emerging-market currencies gained as international investors fled the dollar on concern record debt sales by the U.S. government to finance a mounting budget deficit will sap demand for American financial assets.

International holdings of long-term U.S. equities, notes and bonds rose at a slower pace in April, the Treasury said today, with total net purchases climbing a net $11.2 billion. That’s down from $55.4 billion in March.

Ten-year Treasury note yields reached 4 percent on June 11, the highest since October, a day after Russia and Brazil announced plans to buy $20 billion of bonds from the IMF and diversify foreign-currency reserves. China will purchase $50 billion and India may announce similar funding, according to Brazilian Finance Minister Guido Mantega.

Mix of Currencies

China and Brazil said last month they may look at ways of dropping the dollar for trade between the two countries. Medvedev on June 5 proposed that nations use a mix of regional reserve currencies to reduce reliance on the dollar, which he said “is not in a spectacular position.”

China’s central bank Governor Zhou suggested using the International Monetary Fund unit of account, known as special drawing rights, as an alternative in March.

The dollar got some support last week when Japanese Finance Minister Kaoru Yosano said his country’s confidence in U.S. Treasury securities is “unshakeable,” signaling the second- biggest foreign holder of the securities will keep buying them.

“We have complete trust in the fact that the U.S. views its strong-dollar policy as fundamental,” Yosano, 70, said in an interview in Tokyo on June 10 before attending the G-8 meeting of finance ministers in Italy. “So our trust in U.S. Treasuries is absolutely unshakable.”

Maintaining Dollar’s Value

Yosano’s comments, which sent the dollar higher against the euro and yen, show how Japan and other holders of dollar reserves have an interest in maintaining the value of the currency and avoiding any abrupt move toward an alternative, said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York.

“They want to protect the value of the assets they already have in terms of Treasuries,” Bennenbroek said. “If there’s going to be a move away from the dollar, it’s going to be very gradual, very cautious.”

China is the largest U.S. creditor, holding $767.9 billion of U.S. debt as of March, according to Treasury Department figures. Japan is second with $686.7 billion. Brazil holds $126.6 billion, while Russia has $138.4 billion.

Nations such as China are also dependent on the U.S. as a market for their exports, so they seek to suppress the value of their currencies with purchases of dollars. China’s exports to the U.S. last year rose to $337.7 billion from $321.4 billion in 2007.

“They can’t have their cake and eat it, too” said Woolfolk at Bank of New York Mellon. “These countries want to perpetuate this system of accumulating foreign currencies to hold down the value of their own, but they want someone else to bear the risk of holding those dollars.”

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The Group of Eight nations began considering how to reverse the emergency steps they took to rescue the world economy as it shows signs of recovery.

As they delivered their most upbeat outlook since Lehman Brothers Holdings Inc. collapsed, G-8 finance ministers said they will start planning exit strategies for when sustainable growth returns. It’s still too soon to roll back budget deficits and bank bailouts, they said after a meeting in Lecce, Italy.

“We discussed the need to prepare appropriate strategies for unwinding the extraordinary policy measures taken to respond to the crisis once the recovery is assured,” the ministers said in a statement yesterday after two days of talks. There are “signs of stabilization,” though “the situation remains uncertain.”

Governments are under pressure to turn their attention from fighting recession to smoothing a recovery as investors worry more than $2 trillion in stimulus programs will spark inflation if left unchecked. The officials bickered over whether Europe is endangering a rebound by refusing to impose stricter health checks on individual banks.

“Early signs of improvement are encouraging, but the global economy is still operating well below potential and we still face acute challenges,” U.S. Treasury Secretary Timothy Geithner told reporters. Central bankers didn’t attend this meeting and neither interest rates nor foreign exchange were mentioned in the statement.

Inflation

Signs the worst slump since World War II is moderating are prompting central bankers and investors to warn that inflation will accelerate if governments don’t cut back. U.S. Treasury 10- year note yields last week reached 4 percent for the first time since October.

“There is a distinct shift in tone” from the G-8, said Eswar Prasad, an economist at the Brookings Institution in Washington. Still, “rising interest rates due to concerns about fiscal deficits and prospects of inflation could choke off a nascent recovery.”

The governments didn’t outline how they will tighten policy once they deem their economies to be strong enough to take it and tasked the International Monetary Fund with studying ways to do so. They pledged to coordinate so as not to distort markets and economies as happened during the rush to save banks.

While German Finance Minister Peer Steinbrueck sought a “credible exit strategy” to avoid inflation, Geithner and U.K. Chancellor of the Exchequer Alistair Darling warned against hurting the global economy by acting prematurely.

Policy Restraint

“It is too early to shift toward policy restraint,” Geithner said. Darling said “no one is talking about exiting yet.”

The G-8 met a day after data showed consumer confidence rose for a fourth month in the U.S. in June, and climbed to a 14-month high in May in Japan. U.S. stocks advanced last week, erasing the Dow Jones Industrial Average’s 2009 loss.

Home Depot Inc., the world’s largest home-improvement chain, said June 10 that fiscal 2009 profit may decline less than it had projected, or not at all. Virgin America Inc., an airline partly owned by U.K. billionaire Richard Branson, said June 12 that its first-quarter net loss narrowed to $40.3 million as the carrier filled more seats on its planes.

“There are increased signs of stabilization in our economies,” the G-8 said cash loans no credit check. Still, it cited rising unemployment as a challenge and pledged to keep taking “all necessary steps to put the global economy on a strong, stable and sustainable growth path.”

Stress Tests

Stress tests were debated at the meeting, with euro-area governments reluctant to follow the U.S. by examining the capital needs of particular banks. They argue that the region’s institutions are too diverse to evaluate by a single standard and that publishing results could rekindle the crisis. They have instead conducted a test of their whole financial system, although still refuse to reveal the details.

By contrast, U.S. financial firms unveiled plans to raise more than $100 billion since government tests of the 19 largest banks found that 10 needed $74.6 billion of additional capital to weather a more severe recession.

Concern Europe isn’t doing enough is starting to undermine the euro and the IMF predicts the region’s banks will need to write down $750 billion through next year. The euro has fallen 11 percent against the pound since the start of the year.

“We want stress tests, but stress tests of the system not related to individual banks,” Steinbrueck told reporters in Lecce. “The European banking sector, and the German one in particular, is a lot more heterogeneous than the North American one.”

French Finance Minister Christine Lagarde said European leaders are not yet ready to commit to deeper probes of their banks though she backs greater transparency. The Financial Stability Board was charged with comparing the various tests, she said.

Resistance

European resistance drew criticism ahead of the talks from Canadian Finance Minister Jim Flaherty, who said it could impede a revival of the world’s financial markets and economy. The G- 8’s statement made no mention of the topic.

“There is more work to be done in some other European countries with respect to their banking systems,” Flaherty said in Lecce. “Around the world one needs that assurance between economies that the system is reliable and trustworthy.”

Flaherty said after the meeting that he was “much less frustrated” by Europe’s position after all G-8 officials agreed the importance of studying the banks.

Dollar Support

The dollar got some support from Russian Finance Minister Alexei Kudrin, whose central bank on June 10 sparked a drop in Treasuries after saying some of its reserves may be shifted out of U.S. bonds. Kudrin said in an interview with Bloomberg Television in Lecce that he has confidence in the dollar and there are no immediate plans to switch to a new reserve currency.

While the absence of central bankers limited discussion of exchange rates, Steinbrueck said he wasn’t concerned by the euro’s value against the dollar. IMF Managing Director Dominique Strauss-Kahn said he didn’t see a “weak dollar.”

The G-8 is composed of the U.S., Japan, Germany, France, U.K., Canada, Italy and Russia. Its ministers met to shape an agenda for when their leaders convene July 8-10 in L’Acquila, Italy.

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U.S. economic conditions were weak or got worse through May, but some areas of the country saw signs the contraction was moderating, a Federal Reserve report said Wednesday.

Fed contacts in several regions said their expectations for the economy have improved, but they still don’t expect much of an increase in economic activity in 2009.

The Fed’s "Beige Book" of reports gathered from the 12 Fed districts showed widespread economic weakness with a few glimmers of hope.

The Fed has cut interest rates to near zero and pumped more than $1 trillion into the financial system to revive devastated financial markets and pull the economy out of a deep recession.

Despite aggressive Fed actions, labor markets remained weak with wages generally flat or falling and housing markets were still soft, the report said free credit report instantly.

The Fed also said prices at all stages of production were flat or falling, with the "notable" exception ofoil prices.

However contacts reported some modest signs the pace of economic decline was easing.

"Some districts saw signs that job losses may be moderating," the report said.

Contacts in eight of the Fed’s districts reported an uptick in home sales, citing the traditionally strong spring selling season, low interest rates and shrunken house prices. 

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The Obama administration intends to seek new powers for the Securities and Exchange Commission to force financial firms to give shareholders votes on executive pay packages, according to people familiar with the matter.

The proposal may be included in an announcement on changing financial firms’ pay practices as soon as today, the people said on condition of anonymity. Congress would have to approve the authority for the nonbinding shareholder votes, covering everything from bonuses and salaries to severance packages.

The changes aim to ensure that even financial companies that free themselves of government stakes will be subject to universal guidelines aimed at reducing systemic risks. Treasury Secretary Timothy Geithner has repeatedly blamed pay practices keyed to short-term profits for contributing to the worst financial crisis since the 1930s.

“It clearly is going to force companies to be more transparent with their disclosure” on compensation, said Irv Becker, national practice leader for Philadelphia-based Hay Group’s executive compensation practice. If the measure is implemented, it likely will take several years before shareholders begin to confront management, he predicted.

“It’ll kind of be novel the first year, maybe the first two, and then likely be a little bit more serious in future years,” said Becker, a former head of compensation and benefits at Goldman Sachs Group Inc.

Treasury Meeting

Geithner is scheduled to meet today with SEC Chairman Mary Schapiro, Federal Reserve Governor Daniel Tarullo and executive- compensation specialists at the Treasury.

The Treasury chief said yesterday that the Fed and other bank regulators will define “standards and principles that supervisors would use to help bring about reforms in compensation practices in the financial industry.”

“A centerpiece of sensible reforms will be to tie compensation to better measures of long-term investment and return, and to adjust them to reflect the risk” incurred by executives’ decisions, Geithner said during a hearing at a Senate Appropriations subcommittee.

Changing executive pay practices is part of a broader initiative by President Barack Obama to overhaul U.S. financial rules in the aftermath of the crisis. Obama will unveil his “series of specific proposals” streamlining and reorganizing regulation on June 17, White House spokesman Robert Gibbs said.

Regulation Overhaul

Geithner was scheduled to meet late yesterday with officials including Fed Chairman Ben S guaranteed payday advance. Bernanke and Schapiro to discuss the regulatory revamp, according to people familiar with the matter.

The Treasury as soon as today will name Washington lawyer Kenneth Feinberg to review compensation at companies that have received infusions of government capital, people familiar with the matter said. Feinberg, who works as a mediator, is expected to take the job without pay, the people said.

Feinberg is retained by corporations, insurers, government agencies and courts to help settle cases. He’s best known for being named the special master of the September 11th Victim Compensation Fund, which made payments to the victims of the terrorist attack.

Geithner has been a proponent of so-called say-on-pay rules since taking office. In a May 18 speech in Washington, he said that giving shareholders a vote on compensation would bring a “kind of disclosure that can help a lot.”

Two Frameworks

In developing the executive compensation rules, the Treasury must reconcile the Obama administration’s initial pay policy with measures since enacted by Congress.

Senate Banking Committee Chairman Christopher Dodd added a provision to the $787 billion stimulus legislation passed in February that tightened pay restrictions at firms that took government capital, while also making it easier for banks to repay their aid to escape the new regulations.

Dodd’s provision restricts bonuses for senior executives and the next top 20 employees at companies getting more than $500 million from Treasury’s financial-rescue fund. Limits on bonuses apply to other companies on a sliding scale based on how much assistance they received.

The Obama administration’s original proposal, released Feb. 4, limited salaries and required bonuses to be paid in restricted stock. This was intended to provide incentives for bank executives to consider firms’ longer-term interests, without setting an overall cap on compensation.

Geithner hasn’t said how he plans to reconcile the two policies, other than to say that the Treasury will implement the law.

The Wall Street Journal reported that the administration intends to drop its own proposals and just leave the firms that received federal rescue money subject to the Dodd measures, citing people it didn’t name. Bank of America Corp. and Citigroup Inc. are among the firms that continue to have government shares.

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New Zealand central bank Governor Alan Bollard may keep the benchmark interest rate unchanged for the first time since July amid early signs of a recovery in the housing market and business confidence.

The Reserve Bank of New Zealand will leave the official cash rate at a record-low 2.5 percent, according to six of 11 economists surveyed by Bloomberg. Three predict a quarter-point cut and two a half-point reduction. The decision will be announced at 9 a.m. in Wellington tomorrow.

Bollard, who reviews borrowing costs every six weeks, began cutting rates in July last year as New Zealand slumped into its worst recession in more than three decades. House sales are rising and businesses are more optimistic about sales and profits, adding to signs the economy may return to growth before the end of the year.

“Economic data have continued to evolve in a manner consistent with a return to positive economic growth toward the end of the year,” said Darren Gibbs, chief economist at Deutsche Bank AG in Auckland. “Further easing could prove counterproductive.”

Bollard cut borrowing costs by a half point to 2.5 percent on April 30 and said he was unlikely to raise rates until late 2010 because of the outlook for global growth. He said he couldn’t rule out further reductions.

He is likely to reiterate this message tomorrow because the central bank doesn’t want to fan expectations that the benchmark rate may rise, said Gibbs.

U.S. Payrolls

Since April 30, economic reports in many countries with which New Zealand trades have shown a rebound. U.S. payrolls fell in May by the smallest amount in eight months, reinforcing signs the recession is starting to abate.

Australia’s economy unexpectedly grew in the first quarter, allowing the nation to avoid a recession. The Reserve Bank of Australia kept its benchmark interest rate unchanged at 3 percent for a second month.

In New Zealand, house sales rose from a year earlier for a second straight month in April. Home-building approvals increased for the second time in three months and immigration growth was the strongest in five years.

New Zealand businesses become optimistic for the first time in eight months in May, according to a survey by ANZ National Bank Ltd. published May 27. Consumer confidence in late May was the strongest since September, according to a Roy Morgan research poll published this week.

Credit Crisis

“Developments on the domestic front continue to challenge the assumptions underpinning the bank’s economic projections,” said Gibbs, citing the housing outlook and confidence measures affordable health insurance.

New Zealand’s economy began contracting in the first quarter of last year amid a drought and a housing slump as Bollard pushed borrowing costs to a record high. The recession was prolonged by the global credit crisis and a slump in commodity prices that stalled exports and business investment.

The economy will probably shrink for seven quarters before expanding in the fourth quarter of 2009, the Treasury Department said in a report last week, also citing the outlook for increasing business confidence.

Company optimism may be curbed by the New Zealand dollar’s 25 percent gain against the U.S. dollar in the past three months, say exporters and farmers, who want Bollard to keep cutting interest rates.

“The appreciation in the New Zealand dollar will have a major impact on margins, and more importantly sentiment amongst exporters,” John Walley, chief executive of the New Zealand Manufacturers and Exporters Association, said in a statement.

Currency Surge

The currency surged even after Bollard’s April 30 rate cut as the U.S. dollar fell and investors were prepared to take on more risk. The governor may comment on the currency’s gains, but is unlikely to use the cash rate to try to drive it lower, said Cameron Bagrie, chief economist at ANZ National Bank in Wellington.

“It’s hard to see how lowering the cash rate will make a real difference with sentiment being dominated by risk appetite,” he said. “Beyond the reaction on the day, there may not be any follow through.”

Still, the high exchange rate threatens to stall the fragile economic recovery and should be in Bollard’s sights, others say. Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, said last month it will pay its New Zealand farmers 12 percent less for milk in the season ending May 31, 2010, because of weak prices and the strong currency. That would cut farm incomes by NZ$830 million ($513 million).

“The Reserve Bank must be uncomfortable with the relentless squeezing of financial conditions,” said Annette Beacher, senior strategist at TD Securities in Singapore. “We risk celebrating the revival of the housing sector at the expense of the slow death of the export sector.”

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Japan’s deepest postwar recession is easing, according to the government’s broadest measure of economic health.

The coincident index climbed to 85.8 in April, the first advance in 11 months, the Cabinet Office said today in Tokyo. Economists surveyed by Bloomberg expected the gauge, a composite of 11 indicators including factory production and retail sales, to rise to 86.

Japan’s exports have gotten a boost from public spending in China and other countries, while Prime Minister Taro Aso’s record stimulus spending on tax incentives and cash handouts helped consumer sentiment advance to a 10-month high in April. Investor optimism that the worst is over for Japan has also spurred a 38 percent gain in the Nikkei 225 Stock Average since March 10, when it was at a 26-year low.

“We expect the economy to register positive growth between the second and third quarters, given the stabilization of the export environment,” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo.

The Cabinet Office said the coincident index is showing signs of bottoming, raising its assessment of the measure.

Reports since the first quarter, when the economy shrank a record 15 easy fast payday loans.2 percent, suggest the nation is recovering from its worst recession since World War II. Industrial production and exports have improved two months running and bankruptcies fell in May for the first time in a year. Finance Minister Kaoru Yosano said today higher stock prices indicate the economy may recover in six months.

Still, even as overseas demand shows signs of stabilizing, exports and factory output have fallen by more than a third since the global financial crisis deepened in September. Corporate profits tumbled a record 69 percent last quarter, putting pressure on companies to cut jobs and investment.

Economists surveyed by Bloomberg expect the unemployment rate will rise next year to an unprecedented 5.7 percent from the current 5 percent. Japanese companies plan to reduce spending on plant and equipment by 16 percent in the current business year, according to a Nikkei newspaper survey published yesterday. Automakers Toyota Motor Corp. and Honda Motor Co. will cut spending by more than a third, the survey said.

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As if General Motors Corp. didn’t have enough to worry about, a 60 percent jump in gasoline prices this year may cause inflation to soar as it did in 2008 and throw another roadblock in the way of recovery.

It’s “one thing that we have to keep our eye on,” said Mike DiGiovanni, executive director of global market and industry analysis for the automaker, which filed for bankruptcy last week.

It isn’t only GM’s sales that might suffer. Higher energy costs helped trigger a 20 percent rise in a Standard & Poor’s index of 24 commodities during May, the biggest monthly percentage gain since September 1990. The increases threaten a burst of inflation that could sap demand just as the U.S. economy is starting to right itself after the biggest contraction in five decades.

“You could end up with something like a stagflation scenario,” said David Hensley, director of global economic coordination for JPMorgan Chase & Co. in New York. “There’s a risk the economic recovery might be stifled.”

Gasoline was up to an average $2.59 a gallon nationwide last week from $2.05 on May 1, according to AAA. A 50-cent-a- gallon markup removes about $70 billion from consumers’ annual spending power, says James Hamilton, a professor of economics at the University of California, San Diego.

Prices still remain short of the $4.11 record set on July 15, which helped push inflation that month to a 5.6 percent annual rate, the highest in 17 years.

DiGiovanni told Wall Street analysts and reporters June 2 that Detroit-based GM was better positioned to deal with more expensive gasoline this year than last as it introduces several fuel-efficient models, including a Chevrolet Equinox sport utility vehicle that the company says will get 32 miles per gallon on the highway.

Getting Attention

At United Technologies Corp., it’s copper that has gotten executives’ attention. The metal has climbed 59 percent this year on the New York Mercantile Exchange to $2.28 a pound as of June 5.

Gregory Hayes, senior vice president and chief financial officer, told a conference on May 14 that Hartford, Connecticut- based UTC is keeping tabs on price movements because its Otis elevator and Carrier air conditioner divisions buy 75 million to 80 million pounds of copper per year.

At that rate, the increase so far this year would cost UTC about $65 million, about triple Carrier’s $22 million operating income for the quarter ended March 31.

The metal is still down more than 40 percent from an all- time high of about $4 last year, and that’s “good news” for UTC, according to Hayes. “We’ll see where that goes,” he said.

Commodities Index

The S&P GSCI Total Return index, which tracks metals and agricultural commodities as well as energy, has surged 39 percent since touching an almost seven-year low on Feb. 18.

Concerns about higher inflation are reflected in the widening difference between rates on 10-year notes and Treasury Inflation Protected Securities. The spread on June 5 was close to a nine-month high at 2.01 percentage points after the government reported payrolls declined in May by 345,000, the smallest decrease since September.

Spurring the commodity rally are signs of an economic recovery worldwide, particularly in China, the world’s biggest consumer of iron ore, rubber, copper and zinc; more interest from investors; and an 11 percent drop over the last three months in the dollar, the currency in which most commodities are priced. Stockpiling by China’s government and supply constraints have also played a role.

Stockpiling

China’s Ministry of Land and Resources in January announced plans to build emergency supplies of coal and metals to guard against potential shortages. The nation’s imports of Australian coal have soared more than 10-fold from a year ago.

Macarthur Coal Ltd., the world’s biggest exporter of pulverized coal used in steelmaking, is seeing new demand this year from China, said Shane Stephan, chief development officer in Brisbane, Australia. That is “a major change,” he adds. “We historically have never sold coal into China at all.”

If the advances in raw materials were being driven mainly by U.S. demand, there would be less worry that inflation might stymie growth. That’s not what’s happening this time. Economists surveyed by Bloomberg forecast the economy will contract at a 1 unique business cards.9 percent annual pace this quarter after shrinking 5.7 percent in the first three months of the year.

China, India Growth

What’s pushing up commodities instead is growth elsewhere in the world, particularly in Asia, Hamilton said. India’s economy grew at a 5.8 percent annual pace in the first quarter, topping economists’ projections of 5 percent. Chinese manufacturing picked up for the third straight month in May, according to a purchasing managers’ index published May 31.

Investors have also helped fuel the price surge. More than $6 billion has poured into commodity-industry funds so far this year, swelling assets under management by more than 21 percent, according to Cambridge, Massachusetts-based researcher EPFR Global, which tracks global fund flows. In all of 2008, new investment boosted assets by just 1 percent, EPFR figures show.

“Investors have been strongly attracted to commodity and energy plays this year,” said Brad Durham, managing director at EPFR.

Stagflation

Higher commodity costs are reminiscent of their climb in the 1970s and early 1980s, when a 10-fold jump in oil prices drove both unemployment and inflation above 10 percent. Economists coined the phrase “stagflation” to describe what was then a new phenomenon of accelerating inflation coupled with stagnant demand.

Hensley sees a risk of that happening to a lesser degree in the third quarter, as costlier gasoline lifts annualized inflation to 4 percent from 1.4 percent in the second quarter, depressing consumer demand in the process.

“This is unambiguously bad news for consumers, who are already feeling the squeeze from slowing wage gains and collapsing home prices,” said Ian Shepherdson, chief U.S. economist at Valhalla, New York-based High Frequency Economics.

Consumers’ sensitivity to gas prices is “extraordinarily high,” according to Richard Hastings, a consumer strategist at Global Hunter Securities LLC of Newport Beach, California.

“You don’t have to go back to record-high fuel prices to see damage to the economy,” he said.

Federal Reserve Chairman Ben S. Bernanke noted the rise in oil and other commodities in testimony to Congress on June 3, while saying excess capacity in the economy would keep a lid on inflation. U.S. factories, mines and utilities operated at a record-low 69.1 percent of capacity in April, according to Fed figures.

Capacity Constraints

The picture is different for some raw materials. Global oil production capacity use is about 95 percent, “and with the cutback in capital expenditures and drilling, future capacity is dropping,” according to a May 8 Goldman Sachs Group Inc. report. Production of copper is at 85 percent of capacity and corn and wheat are above 90 percent, the report said.

Soybean supplies are squeezed by drought in Argentina and tighter credit that curtailed plantings. Argentine farmers may harvest 32 million tons of the crop, down from a record 48 million tons last year, the Buenos Aires Cereals Exchange reported on June 3. Goldman Sachs says output in Brazil will fall as much as 10 percent this year. Soybeans on the Chicago Board of Trade have gained 22 percent in 2009 to $12.26 a bushel, the highest since September.

Not everyone is convinced that the rally in commodities, including oil, is sustainable.

‘Artificial Market’

Weaker demand “will eventually force those prices back down,” Jim O’Donnell, president of BMW of North America LLC in Woodcliff Lake, New Jersey, said in an interview. Commodities are in “an artificial market. I don’t think it’s real at this time. Worldwide demand is not there.”

Still, a growing number of companies aren’t taking any chances and are acting to protect themselves against higher costs. Emerson Electric Co., the St. Louis-based maker of industrial equipment and garbage disposals, hedges its risk from copper-price gyrations a year to 18 months ahead, according to Chief Executive Officer David Farr.

“We have seen more of our customers coming to hedge this quarter than the previous one,” said Craig Smyth, Citigroup Inc.’s Singapore-based vice president of commodities in Asia. “We have seen a two-fold increase in hedging.”

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The Philippine central bank could cut the benchmark interest rate to a record low this year as economic growth weakens and inflation heads to the slowest in two decades, central bank Governor Amando Tetangco said.

“We’re in a good position because we have remaining ammunition or bullets, unlike in other countries where rates are already very low and they have little room to move down further,” Tetangco said in an interview at his office in Manila yesterday. “This gives us more flexibility.”

The central bank has cut borrowing costs by a total 1.75 percentage points since mid-December to 4.25 percent, in its longest easing cycle since at least 2002. Economic growth slowed to a decade low last quarter as the global recession hurt exports, adding pressure for further reductions in the key rate, which is higher than that of Malaysia, Thailand and South Korea.

“There is a lot of room to cut relative to the U.S. and other countries we benchmark with,” said Ces Tanchoco, an economist at Bank of the Philippine Islands in Manila. Still, “there’s a reversal in the oil price scenario already. They really have to look at how growth is emerging. I think they’ll be a little more cautious.”

The Philippines imports almost all of its oil.

Inflation will ease to 1 percent in the third quarter, damped by softer commodity prices, an improving exchange rate and an economy that grew the least in a decade in the first quarter, Tetangco said. That would be the slowest pace since April 1987.

Record Low

“The inflation forecast shows we will be within the target range in 2009 and 2010,” he said. “In each of these years, the forecast is below the mid-point of the target range. That would indicate that there is further room to maneuver.”

A further reduction in the key rate to 4.125, which would be a smaller cut than the last move, would bring the benchmark to the lowest level since central bank data started in 1990.

The central bank may lower its overnight borrowing rate by a quarter of a percentage point in July and then “see how the second quarter is looking,” Bank of the Philippine Islands’ Tanchoco said.

The central bank’s rate cuts will ease pressure on government bond yields that have been rising on concern the budget deficit will widen, Tetangco said payday loans.

The growing deficit will have to be seen in the context “that it’s temporary” and due to higher public spending to boost the economy, the governor said. “If the market is convinced that government is still on a fiscal consolidation path in the medium term, it may even be positive because it signals that government is ready to sustain economic growth.”

Public Spending

Public spending needs to complement monetary policy to stimulate the economy, and the government needs to ensure that money allocated for projects is “actually used,” Tetangco said.

The Philippines may cut its 2009 economic target and widen the budget-deficit estimate a third time this year as it increases public spending amid faltering revenue, Budget Secretary Rolando Andaya said June 1. The government is “committed” to boosting spending to support the $144 billion economy, Finance Secretary Gary Teves said the same day.

The government “has room” to increase borrowings from the overseas and domestic markets to fund its budget deficit, Tetangco said. The central bank’s easing stance will have to be calibrated, he added.

“At this point in time, the stance of policy is still towards easing but at the same time we remain cognizant of the fact we’ve been easing since the fourth quarter,” Tetangco said.

Inflation Risk

There are “upside risks” to inflation with oil prices rising again, he said. “We also need to look at the medium term because if there’s a need to change the stance of monetary policy at some point in the future, that change or shift should be done in a smooth adjustment.”

The local currency has strengthened 0.3 percent this year, lagging behind a 6.2 percent gain in Indonesia’s rupiah and a 1.7 percent increase in the Thai baht.

Sustained inflows from overseas Filipinos sending money home and returning appetite for the nation’s stocks and bonds will boost the nation’s balance of payments and support the peso, Tetangco said. International reserves will climb to $39.5 billion in May from $39.3 billion in April, he said.

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