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Fed to buy U.S. government debt The Federal Reserve held its benchmark lending rate steady this afternoon, but announced plans to buy long-term Treasury securities amid signs of a fizzling recovery and mounting fears of deflation. The central bank said it will use its mortgage-bond holdings to buy the paper, while at the same time still rolling over the other Treasury securities it holds as they mature. "The pace of recovery in output and employment has slowed in recent months," the central bank's policy-setting panel said. The move is seen as a small step. Here's what some economists think:
- "With recent economic data, including the ever-important jobs report, showing a slowing in the pace of U.S. economic activity, the Fed has moved its near-term stance away from potential withdrawal of monetary stimulus, towards the possibility of easing further. The decision to reinvest the proceeds of previous purchases of mortgage-backed securities in longer-term Treasury securities is an important signal of this change in stance. From a policy of passive balance sheet contraction, the Fed has opened the door to further monetary stimulus. Moreover, by purchasing Treasuries as opposed to agency debt, the Fed has made evident its preferred path should future easing become necessary." Toronto-Dominion Bank senior economist James Marple
- "The Fed gave a token nod in the direction of market worries by committing to reinvest principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities ... This is a short-term confidence measure to offset what would have otherwise been post-statement prospects for a modest near-term market shock that was being priced in during the course of the day. But such a measure will do absolutely nothing to the real economy." Derek Holt and Gorica Djeric, Scotia Capital
- "This action likely signals that the Fed is prepared to take further steps should its economic outlook deteriorate further. The Fed noted that the pace of recovery in the economy and employment has 'slowed in recent months,' and that the recovery 'is likely to be more modest in the near term than had been anticipated.' However, it did not indicate a change in its medium-term outlook, suggesting it still believes policy is about right to reduce unemployment and prevent deflation." BMO Nesbitt Burns senior economist Sal Guatieri
- "The Fed's decision today to start reinvesting the proceeds from maturing agency and [mortgage-backed securities]holdings into Treasury securities is a largely symbolic gesture, designed to reassure the markets rather than boost the economy. Its MBS holdings aren't scheduled to mature for at least another 10 years and the maturity distribution of its much smaller holdings of agency debt are pretty evenly spread over the next 10 years. Basically, all the Fed will be doing is reinvesting the returned principal from mortgages that are prepaid earlier than scheduled." Senior U.S. economist Paul Ashworth, Capital Economics
- Fed to buy government debt
- Market Lab: Fed needs time to see how the economy plays out
- David Rosenberg: Evidence suggests recovery far from normal
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Did HP make the right call? Hewlett-Packard Co. found no evidence of sexual harassment when it probed a consultant's complaint against chief executive officer Mark Hurd, but sent him packing anyway amid allegations of improper expense forms. Now, some are questioning whether the computer giant made the right move in taking the advice of a public relations firm, The New York Times reports today.
To recap, actress and consultant Jodie Fisher had been hired for several HP functions and, according to reports, forged a relationship with Mr. Hurd, though both say there was no sexual relationship. On Friday, after probing Ms. Fisher's allegations of sexual harassment, Mr. Hurd resigned and the company cited allegations of improper expenses, but no evidence of her accusations. Thus ended the reign of a successful CEO who turned his company around.
According to The New York Times, HP acted on the advice of APCO, a public relations outfit, which warned of the fallout if the allegations were made public. The firm went so far as to write a mock newspaper article for HP's board, and said the company should disclose all despite there being no finding of sexual harassmment. While some observers believe the company did the right thing, some in Silicon Valley disagree, arguing that HP overreacted, the newspaper said.
"What the expense fraud claims do reveal is an HP board desperately grasping at straws in trying to publicly explain the unexplainable," Lawrence Ellison, CEO of Oracle and a friend of Mr. Hurd, told The Times, citing "some petty expense report errors."
On the other side, Jeffrey Sonnenfeld, an expert in corporate governance at the Yale School of Management, said HP's board made a "courageous" decision. At some companies, he added, "there may not be a legal issue, but there is still a moral issue." HP said Mr. Hurd didn't violate its sexual harassment policy but broke its rules of conduct and irreparably harmed his credibility and integrity.
Mr. Hurd says the business expenses were legitimate, but said in a statement Friday that "as the investigation progressed, I realized there were instances in which I did not live up to the standards and principles of trust, respect and integrity that I have espoused at HP and which have guided me throughout my career."
Productivity slips in U.S. The days of rapid increases in productivity in the U.S. have come to an abrupt halt. Productivity among non-farm businesses fell in the second quarter at an annual pace of 0.9 per cent, according to the U.S. Labor Department today. That's the first decline since the depths of the recession in late 2008. Since then, productivity has marked up strong gains, ending with 3.9 per cent in the first quarter of the year. To date in the current recovery, The Wall Street Journal notes, American businesses have met higher demand primarily by squeezing more from existing workers, though that appears to be changing.
"If firms are forced to hire more workers to expand output further, rather than relying on productivity gains, personal incomes would rise at the expense of weaker corporate profits," said Paul Ashworth, senior U.S. economist at Capital Economics in Toronto." Whether this would benefit the recovery is debatable, however, since households are proving just as reluctant to spend their incomes as businesses."
China's trade surplus balloons Trade numbers from China today suggest its economic growth is slowing, adding to market concerns. The numbers show imports slowed rapidly in China in July, raising fears that the engine of the world's recovery will require less from its trading partners. Imports still rose by 22.7 per cent from a year earlier, but that's down sharply from the 34.1-per-cent pace in March and well shy of what economists had expected. Exports, in turn, showed much stronger growth, surging 38.1 per cent and pumping up the trade surplus to its highest level in 18 months, $28.7-billion (U.S.).
"In China the trade surplus rose to an 18-month high in July, with annual imports slowing by a third, which seems to suggest that the Chinese economy continues to slow down," said CMC Markets analyst Michael Hewson. "Analysts had expected imports to climb by about 30 per cent. This fear of a continued slowdown has weighed on risk appetite elsewhere, with the Australian dollar sliding back, and helping the U.S. dollar rebound against the euro and pound."
The surge in Chinese exports, and the wider overall trader balance, will no doubt raise the hackles of those in the United States who have complained bitterly about the low level of China's currency. Other countries have also pressed Beijing to allow the yuan to rise, which it has done, though the currency has gained only marginally. Today's data will only serve to heighten tensions between China and its trading partners over the level of the yuan, which is also known as the renminbi.
"China's July trade data suggest that global demand is still strong while the domestic economy is flagging," said Mark Williams, senior China economist at Capital Economics in London. "With the trade surplus not far off a record high, China's critics overseas are unlikely to understand the need to move so slowly on the renminbi. The decline in China's trade surplus in 2009 and the consequent support China gave to global demand has reversed at a startling pace ... If the usual seasonal pattern is a guide, the surplus will continue to rise over the second half of the year."
Canada's housing slowdown 'most dramatic' The recent slowdown in Canada's real estate market is the "most dramatic" of a general global softening, Bank of Nova Scotia said today. While Canada and Australia led a post-recession surge as world housing markets entered 2010, activity seems to have cooled again amid softer demand and prices that came with moderating economic growth, financial market turmoil and a sluggish rebound in labour markets, economist Adrienne Warren said in a new report.
"The slowdown has been most dramatic in Canada," she said. "Average home prices in [the second quarter]were up just 6.8 per cent [year over year] compared with 16.6 per cent y/y in [the first quarter] Sales, while still at a high level, have trended steadily lower alongside reduced affordability and exhausted pent-up demand. Meanwhile, increased listings are tilting overall market conditions back in favour of buyers. We expect demand to remain at a lower ebb into next year, and prices on average to be roughly flat."
Ms. Warren's report came as new numbers showed housing construction in Canada dipped in July by 1.6 per cent, largely because of a slowdown in single family homes. The annual rate of housing starts fell to 189,200 units from a revised pace of 192,300 a month earlier, Canada Mortgage and Housing Corp. said today. "Housing starts moved lower in July, largely due to a decrease in urban single starts and a reduction in rural starts," said CMHC chief economist Bob Dugan. "Multiple starts partially offset this moderation."
"After rebounding sharply earlier this year, the downward trend in homebuilding activity seen over the past three months should not come as a shock," said Toronto-Dominion Bank economist Dina Cover. "Starts running ahead of the household formation rate (estimated at 175,000-180,000 units) can only be temporarily sustained when prices are rising rapidly. This is no longer the case.
"Indeed, the moderation in starts is consistent with a cooling in the overall housing market. Existing home sales have been trending down since the start of this year - with the decline accelerating in May-July - while prices have been losing modest ground since May. In turn, lower home prices have dampened the incentive for homebuilding. With prices expected to slide a bit further, fewer home starts are likely to hit ground."
- Housing starts slip in July
- Global housing rebound loses steam
- New house prices rise slightly in July
RBC shops U.S. insurance unit Royal Bank of Canada is trying to sell its U.S. insurance business, The Globe and Mail's Tara Perkins reports today. Working through investment bankers at Goldman Sachs Group Inc., Canada's biggest bank has been scouting for buyers for the business, reportedly likely to fetch less than $1-billion, for some time. RBC paid some $580-million (U.S.) for Liberty Life Insurance Co. in 200. "While this transaction, if it happens, would be immaterial for Royal's performance, its overall US strategy remains a high focus for investors," said Desjardins analyst Michael Goldberg.
Teachers sells part of Maple Leaf stake The Ontario Teachers' Pension Plan is selling a 10-per-cent stake in Maple Leaf Foods Inc. , part of its significant holding in the Canadian food company. The sale to West Face Capital Inc. comes months after Teachers' first started approaching potential buyers of its 36.27-per-cent interest in Maple Leaf. The pension plan will still own roughly one-quarter of Maple Leaf after the deal with West Face goes through.
RIM wins Saudi reprieve Research In Motion Ltd. has won a reprieve from Saudi telecom regulators who had threatened to shut down its BlackBerry Messenger service. The Saudis have been meeting with RIM officials, pressing for access to encrypted data and vowing to block Messenger if they couldn't get it. Other countries, such as the United Arab Emirates and India, have also been pressing the Waterloo, Ont.-based technology giant for access. Saudi Arabia's Communications and Information Technology Commission said it was making sufficient progress in talks with RIM to allow Messenger to continue.
Small business optimism wanes Small businesses in the United States are taking a slightly dimmer view of the economy. The National Federation of Independent Business optimism index dipped in July, but at a far slower pace than a month earlier, inching down 0.9 points to 88.1 after a steeper fall of 3.2 points in June. "The recovery in optimism that we are currently experiencing is very weak compared to recoveries after the 1982 and 1975 recessions," said Bill Dunkelberg, the NFIB's chief economist. "The small business sector is not on a sustained positive trajectory, and with this half of the private sector missing in action, the economy's poor growth performance is not surprising."
From today's Report on Business
- Dismal July job figures under fire
- China starts a green attack
- Oil sands toxins growing rapidly
- Boyd Erman: Why insurers are the least qualified to predict markets
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