While you were sleeping: US economy shrinks 6.3%, Dow rises

Friday 27th March 2009

The US economy contracted by 6.3% in the fourth quarter, the biggest slump since 1982, while unemployment benefit rolls rose to a record 5.56 million earlier this month and 652,000 more Americans made jobless claims last week.

Stocks rallied on Wall Street amid speculation the world's biggest economy has hit its trough and companies including Best Buy Co. and ConAgra Foods posted better-than-expected earnings.

The fourth-quarter drop in gross domestic product was larger than earlier estimated, according to the US Commerce Department. Corporate profits dropped by about 11%, or US$120 billion, in the final three months of 2008. For the year, profits were down 10%, the biggest yearly decline since 1970.

Best Buy climbed 4.3% to US$37.73 after the biggest US electronics retailer posted earnings before one-time items of US$1.61 a share, beating the US$1.40 forecast in a Bloomberg survey on mobile phone sales in Europe. Its profit forecast exceeded expectations.

ConAgra rose 1.5% to US$17.02 after posting a 14% gain in earnings as the food-maker benefited from lower prices of ingredients.

General Motors climbed 13% to US$3.39, leading the Dow Jones Industrial Average higher, after the automaker said 12% of its unionised workers accepted buyouts and retirements, allowing it to hire new workers at cheaper rates of pay. SLM Corp., the student loan company known as Sallie Mae, jumped 16% to US$4.13, the biggest advance on the S&P 500.

The Dow gained 2.3% to 7924.56 and the Standard & Poor's climbed 2.3% to 832.86. The Nasdaq Composite surged 3.8% to 1587.

US Treasury Secretary Timothy Geithner flagged plans to overhaul regulatory oversight of US financial markets, widening the net to include hedge funds, buyout firms and derivatives markets.

He proposed the creation of a new regulator to monitor systemic risks, which could compel companies to strengthen their balance sheets and even seize control of corporate in financial strife.

"This will require comprehensive reform," Geithner told a hearing of the House Financial Services Committee. The changes constitute "new rules of the game."

Under the changes, hedge funds and private equity firms would be required to register with the Securities and Exchange Commission, with disclosure rules subject to inspection.

Derivatives trading would be channeled through central clearing houses.

Treasury bonds rose after an auction of US$24 billion of seven-year notes drew stronger demand, easing concern the flood of new issuance would swamp debt markets.

The yield on 10-year Treasuries fell 6 basis points to 2.74% while the yield on 30-year debt dropped 8 basis points to 3.66%.

The yen fell against most major currencies as rallying stocks reduced demand for the Japanese currency as a haven. The yen weakened to 98.81 per dollar from 97.54 and fell to 133.56 against the euro from 132.48. The euro dropped to $1.3514 from $1.3583.

Crude oil rose to a four-month high as stocks gained, stoking optimism the economy will revive and lift demand fro fuel. Crude for May delivery rose 3% to $54.34 a barrel on the New York Mercantile Exchange.

Copper rose on speculation Chinese fiscal initiatives will help lift demand in the world's biggest consumer of the metal.

Copper futures for May delivery rose 2.9% to US$1.855 a pound on the New York Mercantile Exchange. Gold for April delivery rose US$4.20 to US$940 an ounce.

In Europe, the Dow Jones Stoxx 600 index rose 0.2% to 179.12 as Barclays climbed 14%. The FTSE 100 rose 0.6% to 3925.20 and the DAX 30 gained 0.9% to 4259.37. France's CAC 40 slipped 0.1% to 2892.07.

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