Business Blog Posts

The U.S. central bank's $600 billion stimulus plan was supposed to lower interest rates. But President Barack Obama's tax deal with Republicans, by rekindling fears of budget deficits in the bond market, has pushed them higher.

As the Fed meets this coming week, the surprise shot in the arm from the fiscal authorities might strengthen the case of hawks at the central bank, who think the economy is already growing of its own momentum. They could argue to scale down the $600 billion in bond purchases announced in November.

"The shift to fiscal stimulus implies that officials would be less inclined to extend the current program beyond the second quarter of 2011," said Richard Berner, an economist at Morgan Stanley.

On Wall Street, economists are busy revising up their forecasts for U.S. economic growth in 2011, in part because the tax deal will offer more short-term stimulus than many expected.

The package, which still needs congressional approval, extends the Bush-era income tax cuts, lowers payroll taxes by 2 percentage points and provides additional jobless benefits.

But it is unclear how much these new Wall Street economic projections factor in the renewed deficit fears that drove yields on benchmark 10-year notes to a six-month high last week. That's a question Fed officials will ponder when they meet on Tuesday.

Moody's Investors Service said it is worried the proposed tax reductions could become permanent when many of them come up for review in the presidential election year of 2012, hurting U.S. finances and credit ratings in the long run.

FEELS LIKE ARGENTINA

With Europe's crisis putting debt worries high on investors' minds, it is little surprise bond traders grew jittery at the prospect of more U.S. government debt.

The tax deal announcement came swiftly on the heels of a proposal from Obama's deficit-reduction commission that failed to win enough support to force legislative action.

"Yields are up ... because we got $1 trillion in deficit spending with no signs of fiscal discipline on the horizon," said Julia Coronado, economist at BNP Paribas in New York.

"It feels to global investors like the U.S. is becoming Argentina," she said. "The back up in bond yield will rob much of the positive impact of the stimulus."

With the U.S. housing sector still mired in a prolonged rut, higher rates are certain to do more damage, curtailing refinancing activity and worsening a logjam in foreclosures linked to faulty documentation.

Against that backdrop, it is somewhat baffling to see forecasters frantically raising projections for economic growth. Berner at Morgan Stanley says the tax agreement could push growth up by as much 1.2 percentage points in 2011, putting it above 4 percent.

shore up the dollar.

Investors appeared intent on ending the year on a bright note, with Asia Pacific stocks up some 10 percent so far this year .MIAP00000PUS, outperforming an 8 percent rise in global equities .MIWD00000PUS.

The market was also heartened by U.S. data showing a rise in consumer sentiment to six-month highs and a 3.2 percent rise in exports, figures that pointed to a firmer economic recovery.

MSCI's index for Asia Pacific stocks rose 0.3 percent, while the index excluding Japan .MIAPJ0000PUS put on 0.45 percent.

The dollar gained ground against a basket of major currencies .DXY. Against the yen, it held near 84.00, not far from a two-month high around 84.40 set recently.

The euro slipped 0.1 percent to $1.3189, with worries about debt levels in peripheral euro zone members casting a shadow on its outlook. Traders still expect the currency to retest $1.3000 before long.

Chinese leaders said on Sunday they will ratchet up efforts to quell inflation in 2011 in the wake of data showing the country's inflation soared past forecasts to a 28-month high in November.

Ahead of the data, the Chinese central bank raised the amount of money lenders must keep in reserve for a third time in a month. Beijing, however, held back from raising interest rates, a move many analysts still expect will happen.

"Investors are thinking about this issue more sensibly than they may have done so in the past, realizing the broad growth in the Chinese economy is good and policy makers aren't over-reacting in terms of trying to slow the economy down," said Craig James, chief economist at CommSec.

"At the same time, you've got more optimism on the U.S. economy."

Australia's S&P 200 index .AXJO rose 0.4 percent, Shanghai stock index .SSEC was up 0.3 percent, while both South Korea's KOSPI .KS11 and Japan's Nikkei average .N225 were little changed.

"The market is watching whether there will be another tightening before the end of the year, but for the time being the Nikkei will be supported by the weaker yen," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley Securities.

Among the best performers were top Australian bank shares, with investors relieved that reform measures to boost the sector, unveiled on Sunday, were not harsher.

National Australia Bank (NAB.AX) and Commonwealth Bank (CBA.AX) rose about 0.9 percent.

(Editing by Miral Fahmy)

Once the largest U.S. grocer, the owner of about 400 stores under brands such as A&P, Waldbaum's and Super Fresh filed for Chapter 11 bankruptcy in New York with more than $1 billion in assets and more than $1 billion in debt, according to court documents.

As of September 11, A&P had total debt of more than $3.2 billion, but it is unclear how much the company is currently carrying.

JP Morgan Chase & Co(JPM.N) will provide $800 million in debtor-in-possession financing, the company said. The U.S. Bankruptcy Court for the Southern District of New York will hold a hearing on Monday to approve a portion of the facility.

The Montvale, New Jersey-based company said its stores will remain fully stocked and open with no interruption of business. It has struggled since it acquired Pathmark Stores in 2007 with a $1.4 billion financing package.

A&P had nearly $9 billion in sales in its fiscal year to February 2010, but it has been bleeding cash at a rate of nearly $5 million a week.

The company reported having less than $100 million in cash and short-term investments on hand in September and it faces debt maturities in June.

BIG SHAREHOLDERS BACK THE MOVE

Its biggest stockholders are activist investor Ron Burkle and the German retail group Tengelmann. A&P said in a statement that its major shareholders support the action.

Burkle's Yucaipa investment firm has built up a large position in the company's debt recently, which could put it in a stronger position to control the bankruptcy, according to people familiar with the firm's activities.

The recession and slow economic recovery have claimed several supermarket chains. They have been squeezed on prices by discounters that have expanded into the food business such as Wal-Mart Stores Inc (WMT.N), while well-heeled customers have been lured away by high-end offerings of competitors such as Whole Foods Market Inc (WFMI.O).

Bruno's, Bi-Lo, Penn Traffic Co and Bashas' have all filed for bankruptcy over the past two years.

Trading in A&P's stock was halted on Friday in the early afternoon because of news pending. Before the halt, A&P's stock lost 67 percent in Friday's session to trade at 93 cents. It had traded as low as 86.97 cents during Friday's session. The stock peaked this year at $12.97 on January 7, according to Reuters data.

The case is in Re: The Great Atlantic & Pacific Tea Company Inc,, U.S. Bankruptcy Court, Southern District of New York, No. 10-24549.

(Reporting by Michael Erman and Caroline Humer, Writing by Tom Hals; Editing by Jan Paschal and Diane Craft)

The retailer's talks with the Building and Construction Trades Council of Greater New York could lead to Wal-Mart using union labor to build its first New York stores, even though it would use nonunion workers to staff the stores, the Journal said.

Wal-Mart has been courting the building trades, pledging to use union labor for any new construction, among other concessions, the Journal said, citing multiple people familiar with discussions.

"Wal-Mart and the building trades have discussed our common interest in stimulating local economic development in the city," spokesman Steven Restivo said in a statement e-mailed to Reuters. "We do not have an agreement, but look forward to a continued dialogue."

The Trades Council, in Albany, New York, was not immediately available outside ordinary business hours.

Wal-Mart has no stores in New York City, while rival discounter Target Corp penetrated the Manhattan market with a store in Harlem earlier this year after 13 years of trying to open the site.

Wal-Mart has said bringing more stores to urban markets is one of its priorities.

(Reporting by Nick Zieminski, editing by Maureen Bavdek and Diane Craft)

In an interview published on Sunday in Bild am Sonntag newspaper, Schaeuble said the decision made at the euro's creation to not integrate state finances into a European framework could be addressed anew.

"The basic decision was for fiscal and budgetary policy to be decided on the national level. If that is to be changed, then we can talk about it," he said.

Berlin has opposed calls by Spain and other countries to move toward a full-fledged "fiscal union" in the 16-nation bloc but appeared last week to have agreed to a limited form of policy coordination.

Looking forward, Schaeuble predicted that member states of the European Union would come ever closer politically.

"In ten years we will have a structure that corresponds much stronger to what one describes as political union," he said.

In an advance portion of the interview released on Saturday, Schaeuble said the euro currency is here to stay, and warned those betting against its survival that they are making a mistake.

European leaders meet next week to discuss ways to solve a euro zone debt crisis which has triggered bailouts for Greece and Ireland and which analysts say could engulf other countries. They are expected to agree the terms of a permanent rescue mechanism for the bloc.

Germany and France have pledged to better align their tax and labor policies to foster convergence in the euro zone, but have rejected calls for an increase in the bloc's rescue fund and joint sovereign bonds.

Pressure on high-deficit euro members eased slightly over the past week after the European Central Bank bought government bonds in a thin end-of-year market, pushing down the borrowing costs of countries on Europe's southern periphery.

(Writing by Brian Rohan; Editing by Louise Heavens)

The Central Economic Work Conference, chaired by President Hu Jintao, reaffirmed a shift to a "prudent" monetary policy from the previous "appropriately loose" stance announced by the Communist Party's ruling body last week.

The change in wording, coupled with heightened concerns over inflation, could pave the way for a more aggressive course of interest rate increases and lending restrictions, analysts say.

"The priority is to actively and properly handle the relation between maintaining steady and relatively fast economic growth, economic restructuring and managing inflation expectations," state media said, citing a statement from the conference.

"Strategic economic restructuring will be accelerated and stabilizing price levels will be given a more prominent position."

Beijing is trying to promote the role of domestic consumption, to reduce the economy's reliance on exports.

The leadership pledged to put a lid on liquidity in the banking system fueled by rising capital inflows and to guide more bank loans into the real economy, according to state media.

China's inflation soared past forecasts to a 28-month high in November and showed signs of spreading beyond food prices, putting pressure on the government to tighten policy.

Other economic data issue on Saturday should have given the Chinese government the confidence to intensify its tightening, because all signs point to impressive growth momentum in the world's second largest-economy.

On Friday the central bank raised banks' reserve requirements for the third time in a month to mop up excess cash in the economy. The jump in inflation suggested that more resolute action was needed.

"Current macro control measures are a bit looser. So the key is to watch how strongly it is implemented early next year," said Dong Xian'an, chief economist with Industrial Securities in Beijing.

STABLE YUAN

China will take steps to control mounting local government debt, a legacy from the government's massive stimulus unveiled in late 2008 to counter the global crisis.

The conference also pledged to keep gradually raising government purchasing prices for grains, to encourage farmers to continue planting those strategic crops.

After several years of strong harvests, planners fear there is little room to further raise grains output.