Retail Sales Shot Dollars Skywards

The dollar hit a one-month high against the yen on Wednesday after an unexpected rise in US retail sales.
Figures revealed US sales rose 0.3 per cent in January, confounding expectations for a 0.3 per cent fall.

Michael Woolfolk at Bank of New Mellon said the report implied US consumers might be in better shape than previously thought and the Federal Reserve's aggressive interest rate cuts in January might indeed succeed in averting a US recession. "The implication for the dollar is undeniably positive," he said.

By midday in New York, the dollar rose 0.8 per cent to Y108.20 against the yen, climbed 0.2 per cent to $1.4550 against the euro and gained 0.5 per cent to SFr1.1070 against the Swiss franc.

However, the dollar was flat at $1.9610 against the pound as the Bank of England's quarterly Inflation Report tempered expectations for aggressive cuts in UK interest rates.

The Bank said its projections for UK consumer price inflation were higher than in its November report, particularly in the near-term because of sharp rises in food, energy and import prices. It said consumer price inflation could well rise higher than 3 per cent - far above the central bank's 2 per cent target - in the short term if rates fell as expected.

Analysts said the projections suggested the Bank of England believed UK interest rates could fall by 50 basis points to 4.75 per cent in the coming months, but that expectations of a 75 basis-point cut might be overdone.

"The Bank of England believes the market has got a little ahead of itself on rate cut expectations," said James Knightley at ING.

However, he said he still believed that the deteriorating global backdrop would further damp price pressures. He said weaker domestic demand would lead to UK inflation dropping well below 2 per cent in 2009.

"Consequently, we retain our view that the Bank of England will be cutting rates to 4.5 per cent by the fourth quarter of this year, with the risks skewed to policy-easing coming earlier rather than later," said Mr Knightley.

The pound rose 0.2 per cent to £0.7421 against the euro and gained 0.8 per cent to Y212.10 against the yen.

Meanwhile, the Swedish krona rose 0.5 per cent to SKr9.3540 against the euro and climbed 0.3 per cent to SKr6.4250 against the dollar after a surprise rise in Swedish interest rates.

The Swedish central bank, raised interest rates by 25 basis points to 4.25 per cent. It justified the rise based on a 14-year high in inflation and solid economic activity but also hinted that this would be the last rate rise of the current cycle. The move wrong-footed analysts, who were expecting increased worries over global growth to keep the Swedish authorities from acting.

Vikram Pandit to be CEO of Citi Bank

Citigroup Inc. named Vikram Pandit, the head of its investment banking business, as its chief executive officer Tuesday, charging him with restoring the bank's profitability and reputation after missteps in lending and investing left Citi with billions of dollars in losses this year.

The banking company named Sir Win Bischoff, who has been Citi's acting CEO, as its chairman, replacing Robert E. Rubin, who had stepped into the role when former CEO and chairman Charles Prince was ousted last month.
Pandit, who ran a hedge fund bought by Citi earlier this year, is seen as a careful, decisive investment banker — qualities Citi needs following the revelation that Citi's writedowns of soured mortgages could amount to as much as $17.5 billion by the end of the year.
The appointments came after a two-day meeting of Citi's board.
Pandit is well known on Wall Street, having worked at Morgan Stanley for two decades until 2005, when he and a few other disgruntled colleagues left the brokerage and founded the hedge fund Old Lane Partners.
Earlier this year, Citigroup bought Old Lane for $800 million and put Pandit in charge of Citi's alternative investments. A few months later, Pandit took over the bank's markets and banking unit as well, and then reconfigured the business to mirror the Morgan Stanley structure he was familiar with.
His performance as Citi's leader will undoubtedly be scrutinized by investors until they see positive results — including his willingness to challenge the Citi strategy of the past several years. One question on Wall Street is whether Pandit will be beholden to the Citi board, which has remained steadfastly loyal to the Sanford Weill regime. Weill, a board member, built Citigroup through a series of mergers and acquisitions over the past few decades, and many have attributed the bank's failings this year to the Weill culture: Prince was his hand-picked successor.
Bischoff was the chairman of the British investment bank Schroders PLC, then joined Salomon Smith Barney Inc., a subsidiary of Citi, when it acquired Schroders. He began his current position in May 2000.
Unlike Merrill Lynch & Co., which took just two weeks to find a replacement for Stan O'Neal, its embattled CEO and another casualty of the mortgage crisis, Citi's search dragged on. Merrill's nab of John Thain, a Goldman Sachs alum who turned around the once-troubled New York Stock Exchange, eliminated him as a possibility for Citi.
Citi, with all its bad debt — not to mention the hemorrhaging funds known as structured investment vehicles that it manages — appeared to be a beast no one wanted to tame. According to various media reports, Citi's overtures to big names in the banking industry such as Deutsche Bank CEO Josef Ackermann and Royal Bank of Scotland CEO Frederick Goodwin were spurned.
Pandit faces multiple challenges. He must not only attract more cash to offset Citi's debt and bulk up the bank's risk management, but he also needs to strengthen Citi's lackluster consumer-oriented businesses and clean up its reputation.
Citi has shed about $120 billion in market capitalization this year, putting its market cap below that of Bank of America Corp. Citi is still the largest U.S. bank by assets, though, so while most major financial companies have seen problems navigating a surge in foreclosures and a freeze-up in credit, Citi's losses have been seen on Wall Street as particularly egregious.
Citi's cash levels will get a boost by the Abu Dhabi Investment Authority, which in late November bought a 4.9 percent stake in Citi for $7.5 billion. But the investment, while helpful in offsetting some of Citi's bad debt, is not a panacea. Many analysts and shareholders believe Pandit needs to sell more assets to bring in cash and make the huge conglomerate leaner. Citigroup has said non-essential assets selloffs are in the works, but many shareholders are hoping for more ruthless spinoffs — such as Citi's brokerage arm, Smith Barney.
The board has been adamant, though, about not breaking up the bank.
Rubin, who led the search committee, said after Prince's resignation that they were looking for someone to focus on Citigroup's "multiplicity of businesses."
"It is very important that whoever we have has a strong international focus — not necessarily enormous international experience, but can relate to the globalization of this institution and Chuck's (Prince's) strategy of having to ever increase that involvement," Rubin said at the time.
A few analysts have even tossed around the idea of another big bank like JPMorgan Chase & Co. and Bank of America Corp. buying or merging with Citi. But given regulatory obstacles and the credit market problems facing even the best-positioned banks, other analysts say such a deal is unlikely at this time.

Fed To The Rescue: Cuts Rate By A Quarter Point

The Federal Reserve cut a key interest rate by one-quarter of a percentage point Tuesday, but Wall Street took a tumble. Investors were disappointed that the central bank did not act more boldly to keep the country out of a recession.
The reduction in the federal funds rate to 4.25 percent marked the third rate cut in the past three months. Fed officials signaled that further cuts were possible if a severe housing downturn and mortgage lending crisis get worse.
But Wall Street was looking for a much stronger sign. The Dow Jones industrial average, which had been up about 40 points in afternoon trading, plunged by more than 200 points as investors deciphered the Fed's comments.
"They should have issued a statement that they were prepared to do what they needed to do to return the credit markets to more normal conditions and to protect the economy from the effects of the credit crisis," said David Jones, chief economist at DMJ Advisors.
David Wyss, chief economist at Standard & Poor's in New York, said he was still looking for three more rate cuts early next year, even though the language in the statement was not as forceful as some had expected.
Commercial banks quickly matched the Fed move by trimming their prime lending rate to 7.25 percent. That put the benchmark rate for millions of business and consumer loans at its lowest point in two years.
In addition to cutting the funds rate, the Fed announced it was reducing its discount rate, the interest it charges to make direct loans to banks, by a quarter-point as well to 4.75 percent. This reduction was aimed at encouraging banks to borrow more freely from the Fed at a time when there are worries that a rising number of bad loans will prompt banks to tighten credit conditions too severely, adding another strain on the already fragile economy.
The Fed embarked on this round of rate cuts in September in response to severe turbulence in credit markets around the globe as investors reacted to various reports of mounting losses from defaults in subprime mortgages, the latest fallout from the worst slump in the U.S. housing market in more than two decades.
After cutting the funds rate by a half-point on Sept. 11 and a quarter-point on Oct. 31, the central bank indicated that those two reductions might be all that were needed to combat the threat of a recession given that financial markets appeared to be stabilizing.
However, increased market turbulence following the October meeting and growing fears of a recession caused the Fed to do an about-face.
In a brief statement explaining its action, the Fed said that recent economic data indicated that the economy is slowing, "reflecting the intensification of the housing correction and some softening in business and consumer spending."
The Fed also noted that "strains in financial markets have increased in recent weeks."
In its Oct. 31 statement, the Fed said it viewed the risks from weak growth as roughly balanced with the risks of higher inflation.
However, that phrase was changed in the current statement to read, "Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation."
The Fed vote for the rate cut was 9 to 1 with Eric S. Rosengren dissenting, arguing for a bigger, half-point cut in the funds rate.
Many economists believe the housing slump and credit turmoil have raised the risks of a recession. Many analysts believe that economic growth, as measured by the gross domestic product, may have dipped to a barely perceptible 1 percent rate, raising the chance that some shock, such as another surge in energy prices, could push the country into a recession.
But many analysts still believe the Fed will be able to respond forcefully enough with rate cuts that it will keep the current expansion alive. These analysts believe that the economy will start to rebound to faster growth by the middle of next year, when they expect that lower mortgage rates will have spurred a rebound in home sales.

First Figure Roll Out For The Shopping Season

The nation's retailers had a robust start to the holiday shopping season, according to results announced Saturday by a national research group that tracks sales at retail outlets across the country.

According to ShopperTrak RCT Corp., which tracks sales at more than 50,000 retail outlets, total sales rose 8.3 percent to about $10.3 billion on Friday, the day after Thanksgiving, compared with $9.5 billion on the same day a year ago. ShopperTrak had expected an increase of no more than 4 percent to 5 percent.

"This is a really strong number. ... You can't have a good season unless it starts well," said Bill Martin, co-founder of ShopperTrak, citing strength across all regions. "It's very encouraging. When you look at September and October, shoppers weren't in the stores."

In a separate statement released Saturday, J.C. Penney Co. reported "strong performance across all merchandise categories," including fine jewelry, outerwear, and young men's and children's assortments.

But the department store chain cautioned, "while we are encouraged by our strong start, it is still early in the holiday season, and we are mindful of the headwinds consumers are facing."

J.C. Penney, Wal-Mart Stores Inc. and other major retailers are expected to report same-store results for November on Dec. 6. Same-store sales are those at stores opened at least a year and are considered a key indicator of a retailer's strength.

The upbeat reports were encouraging since merchants have been struggling with anemic sales in recent months, as shoppers, particularly in the middle and lower-income brackets, were becoming more frugal amid higher gas and food prices and an escalating credit crunch.

In an apparent sign of desperation, the nation's stores ushered in the official start of the holiday shopping season on Friday with expanded hours, including midnight openings, and a blitz of early morning specials that were more generous than a year ago. J.C. Penney and Kohl's Corp. opened at 4 a.m., an hour earlier than a year ago.

The strategy appears to have worked, as shoppers jammed stores in record numbers for early morning deals on Friday. Martin noted that judging by the strong figures on Friday, stores were able to sustain strong sales throughout the day. He said he's counting on strong traffic throughout the weekend as many stores, including Macy's Inc., are continuing with special deals.

While Black Friday -- so named because it was traditionally when the surge of shopping made stores profitable -- starts holiday shopping, it is not considered a bellwether for the season. However, merchants see Black Friday as setting an important tone to the overall season: What consumers see that day influences where they will shop for the rest of the year.

Last year, retailers had a good start during the Thanksgiving weekend, but many stores struggled in December, and a shopping surge just before and after Christmas wasn't enough to make up for lost sales.

This year, the Washington-based National Retail Federation predicted that total holiday sales would be up 4 percent for the combined November and December period, the slowest growth since a 1.3 percent rise in 2002. Holiday sales rose 4.6 percent in 2006 and growth has averaged 4.8 percent over the last decade.