While you were sleeping: Bernanke sees challenges, data tepid, greenback gains

Wednesday 18th November 2009

Federal Reserve Chairman Ben Bernanke said the US economy still faces “significant economic challenges” as data showed industrial production is barely growing and wholesale inflation is tame.

Bernanke singled out the labour market is an “area of great concern,” saying scarcity of jobs would restrain household spending and the unemployment rate above 10% may abate only slowly.

His comments at a lunch meeting of the Economic Club of New York underline speculation that the Fed will hold its line on keeping interest rates near zero in the world’s biggest economy for an extended period.

The US dollar rose as the prospects for a more subdued recovery deterred investors from seeking out higher-yielding assets in other currencies. US Treasury bonds strengthened.

Other Fed officials said the road back to tighter monetary policy shouldn’t be too long. Jeffrey Lacker, president of the Richmond Federal Reserve Bank, said the central bank must remain vigilant in keeping inflation under control.

"We cannot be paralysed by patches of lingering weakness, which could persist well into the recovery," Lacker said in a speech to the Virginia House of Delegates.

Janet Yellen, president of the San Francisco Fed, told a meeting in Hong Kong yesterday that accommodative central bank policy risks stoking inflation.

US industrial production rose 0.1% in October, slowing from a 0.6% gain in the previous month and lagging behind economists’ expectations for a 0.4% rise.

At the same time, producer prices rose 0.3%, missing estimates, reflecting the end of the Federal ‘cash for clunkers’ scheme that encouraged consumers to trade in older, less fuel-efficient cars.

Core producer prices, excluding food and energy, fell 0.6%, the biggest drop since 2006, according to the Labor Department report.

The yield on 30-year Treasuries slipped two basis points to 4.27% as the producer prices report confirmed bets that inflation won’t flare.

The benchmark 10-year Treasury yield dipped two basis points to 3.33%.

The US dollar rose against the euro, snapping a three-day slide, as signs of weaker than expected activity in the world’s biggest economy prompted some investors to eschew riskier, or higher-yielding assets elsewhere.

The dollar rose to US$1.4853 against the euro from US$1.4970 and traded at 89.24 yen from 89.05. The euro traded at 132.57 yen from 133.33.

President Barack Obama urged China to allow the yuan to strengthen as the two leaders ended their summit, touching on the source of tension between the two trading partners.

Chinese President Hu Jintao avoided mentioning the currency when the pair held a media conference after their meeting, instead railing against trade protectionism.

Stocks on Wall Street swung between gains and losses. The Dow Jones Industrial Average edged higher 0.04% to 10411.50 and the Standard & Poor’s 500 declined 0.2% to 1107.35. The Nasdaq Composite rose 0.04% to 2198.76.

Wal-Mart Stores Inc. rose 0.8% to US$53.58 and Exxon Mobil gained 0.7% to US$74.96 after Warren Buffett disclosed purchases of the shares.

Home Depot Inc. fell 3.1% to US$26.80 after saying the first half of 2010 may be “soft” even after it posted quarter earnings that beat estimates. Caterpillar, the heavy earthmoving equipment maker, fell 1.5% to US$59.48 after the tepid industrial figures.

In Europe, the Dow Jones Stoxx 600 fell 0.4% to 250.36. Among regional benchmarks, the UK’s FTSE 100 fell 0.7% to 5345.93, Germany’s DAX 30 fell 0.5% to 5778.43 and France’s CAC 40 declined 0.9% to 3829.06.

Inflation in the UK advanced in October for the first time in eight months. Consumer prices rose 1.5% from a year earlier, according to the Office for National Statistics.

General Motors said it may eliminate up to 10,000 jobs as it restructures its European operations, after scrapping plans to sell its Opel unit to a group led by Canadian auto parts maker Magna.

The company must reduce output in Europe by 20% to 25%, said Nick Reilly, GM’s acting head of Europe.

Gold prices fell from a record as the greenback’s gain eroded the appeal of the precious metal as an alternative investment.

Gold futures for December delivery fell 0.3% to US$1,135.80 an ounce on the New York Mercantile Exchange.

US crude oil for December delivery fell 46 cents to US$78.44 a barrel.

Copper traded near its highest levels in more than a year. On the London Metal Exchange, benchmark copper fell 0.4% to US$6,826 a tonne.

Businesswire.co.nz

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