Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Democrats split over Bush-era tax cuts
By James Politi in Washington
Copyright The Financial Times Limited 2010
Published: July 23 2010 00:23 | Last updated: July 23 2010 00:23
http://www.ft.com/cms/s/0/9375b7ac-95e4-11df-bbb4-00144feab49a.html


Senior Democrats and Obama administration officials on Thursday defended plans to let tax cuts for wealthy Americans enacted under George W. Bush expire at the end of the year, amid growing opposition from centrist members of the Democratic party.

“We believe it is appropriate to let those tax cuts that go to the most fortunate expire,” said Tim Geithner, US Treasury secretary, as the political fight over the controversial tax breaks intensified.

Mr Geithner also suggested that the administration would seek a wider overhaul of US tax policy next year, after a report due in December by a bipartisan commission established by Barack Obama, US president, to propose solutions for reducing the US budget deficit.

“We are likely to have to take a broader look at corporate tax reform next year,” Mr Geithner said at an event organised by the Christian Science Monitor.

This week, Kent Conrad of North Dakota, chairman of the Senate budget committee, joined fellow Democrats Evan Bayh of Indiana and Ben Nelson of Nebraska in saying that the tax cut expiration for high-income earners should be delayed in the light of the weak economic recovery.

Many conservative economists and Republican politicians have been calling for the extension of all the Bush tax cuts, while the Obama administration and Democratic leaders have insisted that the tax cuts should only be maintained for middle and lower class Americans earning less than $250,000 (£164,000, €195,000) per year.

Mr Conrad did not refute the notion that the tax credits for wealthy Americans should expire eventually, but suggested that such measures should be postponed by up to two years. “The general rule of thumb would be you’d not want to do tax changes, tax increases . . . until the recovery is on more solid ground,” he said.

Nancy Pelosi, the Democratic speaker of the House, sought to link the tax cuts to the rising US deficit.

“Our position has been that we support middle-income tax cuts. The tax cuts at the high end have increased the deficit enormously,” Ms Pelosi said.

Republicans played up what appeared to be emerging Democratic divisions on the issue. “[Mr] Geithner and [Ms] Pelosi delivered a one-two punch to America’s small businesses today by signalling that their taxes will soon go up,” said John Boehner, Republican leader in the House.

Ben Bernanke, Federal Reserve chairman, did not offer much support for either side on Thursday, backing the extension of the Bush tax cuts as one potential option for providing more “stimulus” for the US economy, but warning that they should be paid for.

Many Republicans claim this is unnecessary as the tax cuts would spur growth and generate revenue.

Separately, Mr Obama signed legislation on Thursday to restore unemployment benefits to about 2.5m Americans, after a two-month long battle that encapsulated divisions in Washington over economic policy and the deficit. “Americans who are fighting to find a good job and support their families will finally get the support they need to get back on their feet during these tough economic times,” Mr Obama said.




ECB chief calls for global tightening
By Chris Giles in London
Copyright The Financial Times Limited 2010
Published: July 22 2010 18:47 | Last updated: July 22 2010 18:47
http://www.ft.com/cms/s/0/b2c49986-95b5-11df-b5ad-00144feab49a.html


Public spending cuts and tax increases should be imposed immediately across the industrialised world as evidence of a healthy European recovery mounts, according to Jean-Claude Trichet, president of the European Central Bank.

In a strident article for the Financial Times, Mr Trichet argues that policymakers who want to prolong the stimulus are mistaken and that cutting borrowing would have “very limited” effects on growth.

The view from Europe’s senior economic policymaker contrasts with continued US demands for fiscal tightening to be delayed at least until 2011 and suggests there is still little agreement over the best way to foster a strong global recovery from the financial and economic crisis of the past two years.

“We have to avoid an asymmetry between bold, if justified, loosening and unduly hesitant retrenchment,” Mr Trichet says in his article.

Firing a shot at the US administration and the International Monetary Fund, Mr Trichet criticises last year’s global push for budgetary stimulus.

“With the benefit of hindsight, we see how unfortunate was the oversimplified message of fiscal stimulus given to all industrial economies under the motto: ‘stimulate’, ‘activate’, ‘spend’.”

The US view in favour of continued short-term stimulus was repeated by Ben Bernanke, chairman of the Federal Reserve, on Thursday. Giving evidence to Congress, Mr Bernanke supported fiscal efforts to boost demand before the US embarked on a “well-controlled” longer-term deficit reduction plan.

“In the short-term I would believe that we should maintain a reasonable degree of fiscal support, stimulus for the economy,” Mr Bernanke said.

After his remarks on Wednesday that US prospects were “unusually uncertain”, Mr Bernanke elaborated to US lawmakers yesterday on the further actions the Fed might take to boost the economy if growth disappoints. Mr Bernanke made clear that the Fed is considering a range of options in case growth weakens and it needs to ease policy further.

The differences over the timing of budget cuts reflects in part the different fortunes of the economies on either side of the Atlantic. US data on Thursday were mixed, with existing home sales falling less than had been expected but initial jobless claims higher than forecast.

Although European growth was weak in the first quarter, more recent data have been surprisingly robust, suggesting the fallout from the Greek sovereign debt crisis will be more limited than feared.

Both manufacturing and services output in the eurozone grew significantly faster than expected in July, according to the latest purchasing managers’ indices, driven by a strong performance in both sectors in Germany and in the services industry in France. The eurozone index of consumer confidence was also at its highest level in July for more than two years, the European Commission said.


UK growth fastest for four years
By Norma Cohen, Economics Correspondent
Copyright The Financial Times Limited 2010
Published: July 23 2010 10:41 | Last updated: July 23 2010 11:26
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Britain’s economy surged in the second quarter of 2010, with gross domestic product expanding by 1.1 per cent, its fastest pace of growth in four years, according to official statistics released on Friday.

The figures from the Office for National Statistics were far stronger than the consensus 0.6 per cent expansion forecast by a Thomson Reuters poll of economists. The economy expanded by 0.3 per cent in the first three months of this year.

“This is an absolutely incredible growth number – way above all expectations and the best performance since the first quarter of 2006,” said Howard Archer, economist at IHS Global Insight. “Furthermore, the pick-up was widespread across all sectors with service sector activity picking up sharply, manufacturing output humming and the construction sector returning to growth with a vengeance.”

The pound immediately jumped on the news, rising 0.8 per cent to $1.5372. Gilt yields, which move in the opposite direction to prices, rose sharply. The yield on the 10-year UK bond jumped 6 basis points to 3.41 per cent. The yield on the two-year note advanced 5bps to 0.82 per cent.

Lending to Britain’s private non-financial companies fell £1.1bn in June, compared to an average for the last six months of £1.9bn, writes Norma Cohen.

Lending for mortgages expanded but at a slower pace than seen in June, adding evidence to the view that the bounce seen in house prices in the second half of 2009 is now running out of steam, according to the British Bankers’ Association.

The unexpected rise in GDP is likely to alter the complexion of the discussions within the Bank of England’s Monetary Policy Committee, which only two weeks ago discussed whether more needed to be done to prevent growth from flagging too sharply.

James Knightly, economist at ING, said: “Andrew Sentance will also perhaps feel vindicated in voting for interest rate rises at the last two Bank of England meetings.”

However, he noted that many economists were now expecting a slower pace of growth for the rest of 2010. “We still believe that monetary policy tightening is a long way off,” he said. “ We expect much weaker growth figures in the second half of 2010 and look for inflation to continue to push lower.”

Hetal Mehta, senior economic advisor to the Ernst & Young ITEM [Independent Treasury Economic Model] Club, said: “The second quarter is likely to represent the high point of quarterly growth as fiscal tightening and a renewed slowdown in global activity constrains a more robust recovery.”

Mr Knightly noted that the growth in the manufacturing sector, at 1.6 per cent, was the fastest for that sector since the third quarter of 1999.

GDP in June stood 1.6 per cent above its level in June 2009.

Business services and finances expanded by 1.3 per cent in the quarter, compared with a rise of 1.0 in the previous quarter.

Construction, one of the hardest-hit sectors of the economy in the recession, expanded by 6.6 per cent, compared with a decline of 1.6 per cent in the first three months of the year.

Separately, the ONS revealed that the index of services had increased 1.0 per cent in May.


German business sentiment hits three-year high
By Quentin Peel in Berlin
Copyright The Financial Times Limited 2010
Published: July 23 2010 10:57 | Last updated: July 23 2010 10:57
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The improvement in German economic sentiment was confirmed on Friday by a surge in business confidence, which reached the highest level in July for three years.

The business climate index produced by the Munich-based Ifo institute jumped from 101.8 in June to 106.2 in July, against general expectations of a slight decline.

“The German economy is in a party mood,” said Professor Hans-Werner Sinn, president of the Ifo institute. The increase in the index was the largest recorded since German unification in 1990.

Publication of the index comes just as stress tests are due to be published for 91 European banks, including 14 German institutions. In response, the euro rose against the dollar and the yen, and European stocks rallied for a fourth day in succession.

The respected monthly Ifo survey of 7,000 German business executives, normally one of the most reliable tools used by economic analysts for forecasting, reported expectations for the coming half year were also more optimistic than in June, contrary to general concern about a renewed economic slowdown.

In manufacturing, “the business outlook has brightened strongly,” said Prof Sinn, with improved capacity utilisation of plant and machinery and export opportunities seen to be as positive as in June. “Firms’ employment plans are more favourable and point towards slight increases in staff levels.”

The export-led recovery of the German economy also seems to be spreading gradually into the domestic economy, with wholesale, retail and construction sectors all reflecting the improved business climate.

“An increasing number of wholesalers and retailers have assessed the current business situation as good,” the institute reported. “Business expectations … for the coming six months are now more positive in both distribution sectors.”

The figures, coming on top of the publication of positive purchasing managers’ indices on Thursday, were greeted with surprise and delight by many analysts, even as they continued to caution about a slowdown towards the end of the year.

“These are fantastic numbers,” said Andreas Scheuerle of DekaBank. “It’s incredible what is going on.” He said there were reports of some German factories shortening their summer holiday breaks to deal with improving demand.

Ralph Solveen of Commerzbank told Reuters: “We expected an increase, but we did not expect this. The companies are not letting themselves be distracted by all the negative discussions going on, such as the bank stress tests, the debt crisis, or the threat of a double-dip recession in the US.”

There was further evidence on Friday of sentiment improving outside the German economy in the eurozone, with an index of Italian consumer confidence showing stronger growth than expected. The index produced by the ISAE research institute rose from a revised figure of 104.5 for June to 105.6 for July, compared with analysts’ forecasts of 103.9.



Spain halts works projects worth €6.4bn
By Mark Mulligan in Madrid
Copyright The Financial Times Limited 2010
Published: July 22 2010 22:19 | Last updated: July 22 2010 22:19
http://www.ft.com/cms/s/0/b4afc62e-95d5-11df-bbb4-00144feab49a.html


The Spanish government announced on Thursday it would postpone or cancel 231 public works projects as part of an austerity drive aimed at slashing a budget deficit equivalent to 11.2 per cent of gross domestic product.

José Blanco, the public works minister, said he had been forced to cut €6.4bn ($8.2bn, £5.4bn) of state-funded works over the next two years, equal to about 20 per cent of planned or awarded tenders.

This would mean delaying 199 contracts for up to four years and cancelling or restructuring 32 others. Worst hit by the austerity drive were road and rail developments in northern regions such as Catalonia, Aragon and Cantabria.

Spanish construction and infrastructure companies, already bowed under the weight of boom-time debt and hit by the collapse of the residential housing market, have warned that the cuts could add more than 100,000 workers to the 4.2m already unemployed.

“The projects had already been awarded, so the companies had already taken on workers,” said Juan Lazcano, chairman of the National Construction Confederation. “These [job contracts] will have to be cancelled.”

Mr Blanco, however, told parliament he had no choice. “We are aware that this will have an important effect on infrastructure companies,” he said. “[However], the civil works sector must be restructured.”

Spain’s governing Socialists have been under pressure to rein in spending after watching a public sector surplus turn into one of the eurozone’s largest deficits in just two years.

Although expected, the cuts have been harshly criticised by lobbyists for a sector that grew accustomed to generous returns during a 15-year property, tourism and civil works boom, partly financed by European Union funds. Mr Blanco said on Thursday the government had invested €86bn in the past six years.

The good times ended when the housing bubble burst in 2007 and the global credit squeeze and ensuing recession starved companies and governments of infrastructure funds. Thousands of small and medium-sized property developers, construction companies and suppliers have disappeared , putting 1m workers on the dole.

UBS, in a report published this week, warned that even company-funded infrastructure projects were at risk because of Spanish banks’ reluctance to lend to a sector that is already over-leveraged.

Public sector budgetary restraints would also hit infrastructure groups that had diversified into street cleaning, waste management and similar services, according to the bank.

“Spanish infrastructure groups are highly exposed to environmental and urban services, where the major clients are municipal governments also facing tough budget restrictions,” UBS said.




Ford profits hit six-year high
By Bernard Simon in Toronto
Copyright The Financial Times Limited 2010
Published: July 23 2010 13:31 | Last updated: July 23 2010 13:31
http://www.ft.com/cms/s/0/1ee78aa0-9652-11df-96a2-00144feab49a.html


Ford Motor said on Friday that it expected to be debt-free, net of cash reserves, by the end of next year as its operating performance continued to improve.

Detroit’s number-two carmaker reported its fifth profitable quarter in a row and its highest profit in six years, with second-quarter net income of $2.6bn, up from $2.3bn a year earlier. Per-share earnings fell to 61 cents from 69 cents.

Excluding special items, the latest per-share earnings of 68 cents significantly exceeded most analysts’ estimates.

“We are ahead of where we thought we would be despite the still-challenging business conditions”, Alan Mulally, chief executive, said in a statement, adding: “We expect even better financial results in 2011.”

Ford, the only one of the three Detroit carmakers not to accept a government bail-out, has benefited from a steadily improving share of its core North American market and rising transaction prices for many of its models.

However, it has acknowledged that its debt, now far higher than that of General Motors or Chrysler, remains a burden. Gross debt stood at $27.3bn at the end of the second quarter, down from $34.3bn on March 31.

Net debt shrank to $5.4bn from $9bn. “By the end of 2011, Ford expects to move from a net automotive debt position to a net cash position,” the company said.

All major regional operations reported improved second-quarter results. Lewis Booth, chief financial officer, singled out cost efficiencies and a slew of new models as key factors behind the performance.

Ford’s North American operations reported a pre-tax operating profit of $1.9bn, a sharp turnround from the $899m loss a year ago and a big improvement on first-quarter earnings of $1.2bn. Revenues climbed to $16.9bn from $10.7bn.

Ford Europe’s operating profit rose to $322m from $57m a year ago and $107m in the first quarter.

Nonetheless, Ford said that it expected its market share in Europe to be lower this year than in 2009. “We’ve made a conscious decision that we’re going to run the European business for profit rather than for market share,” Mr Booth told the Financial Times.

Sweden’s Volvo, sold in March by Ford to Geely Automotive of China, reported a $53m operating profit, compared with a $237m loss last year.




McDonald’s improves around the world
By Greg Farrell in New York
Copyright The Financial Times Limited 2010
Published: July 23 2010 14:03 | Last updated: July 23 2010 14:21
http://www.ft.com/cms/s/0/c5d5f072-9657-11df-96a2-00144feab49a.html


In a sign that the global economy has rebounded from the low points of 2009, McDonald’s reported a 5 per cent increase in sales for the second quarter on Friday, buoyed by strong results across a variety of regions, compared with last year’s lagging second-quarter earnings.

For the three-month period ended this June, McDonald’s generated $5.9bn in revenue. Comparable store sales, which are a more accurate barometer of performance, were up 4.8 per cent across the board, with a 3.7 per cent increase in the US, a 5.2 per cent jump in Europe and a 4.6 per cent gain across the Asia/Pacific, Middle East and Africa regions.

“McDonald’s second quarter reflects strong top-line and bottom-line results with each area of the world generating higher comparable sales, traffic and profits,” said Jim Skinner, chief executive officer. “This performance demonstrates the popular appeal of McDonald’s relevant menu choices.”

The Illinois-based company’s success in the US was boosted by its beverage line-up, led by its new Frappe coffee offerings.

Operating income at the US fast food giant was up 10 per cent for the quarter over the previous year’s tally, paced by a robust performance in Europe where the UK, France and Russia delivered strong results. Mr Skinner attributed the success in Europe to the launch of the company’s modernised store décor, new menu items and aggressive marketing practices.

Overall, the company’s net income for the quarter, at $1.23bn, or $1.13 a share, was up 12 per cent from the same quarter a year ago.

Shares of McDonald’s fell $1.61 to $70.25 in pre-market trading on Friday.