QE3 more plausible if inflation expectations keep falling
When it comes to the price stability half of their mandate, Federal Reserve officials have made one thing clear: they will not allow inflation expectations to veer very far from their preferred path. That’s because they believe inflation expectations are a good proxy for the pace of future price increases.
This applies both to the upside, when rising prices are a problem, and when the opposite is true, and policymakers fear deflation. The Fed argues that its second round of quantitative easing or QE2, when it purchased $600 billion in Treasury bonds, averted the risk of such a downward spiral of falling prices and wages, which can take years to overcome.
That’s why the latest figures from the Thomson Michigan survey of consumer sentiment may strike a chord, particularly with the Fed’s more dovish camp. Inflation expectations one-year out dipped to 3.2 percent from 3.3 percent. Even more strikingly, 5-years out, consumers’ inflation projection fell to 2.7 percent from 2.9 percent. That was the lowest in a year and just 0.1 percentage point above the mid-crisis low of 2.6 percent.
Central bank officials also like to look at market-based measures, which derive investors’ expectations of inflation from the spread between regular bonds and ones that guarantee protection against inflation. Those readings have also been coming down, prompting Fed Chairman Ben Bernanke to respond to a question from an economics student in Cleveland last month with the following comment:
It is something that we’re going to be watching very carefully. If inflation falls too low or inflation expectations fall too low, that would be something we have to respond to because we do not want deflation.
UPDATE 1-Fitch downgrades UBS, puts other banks on review
* Economic, market, regulatory challenges citedBy Lauren Tara LaCapraOct 13 (Reuters) - Fitch Ratings downgraded UBS AG
on Thursday and placed seven other U.S. and European banks on
credit watch negative, citing challenges in the economy and
financial markets, as well as the impact of new regulations.The ratings agency lowered UBS’s long-term issuer default
rating to A from A+.Fitch is also reviewing ratings for Barclays Bank Plc, BNP Paribas , Credit Suisse Group AG , Deutsche Bank AG , Societe Generale, Bank of America Corp , Morgan Stanley and Goldman Sachs Group Inc for further possible
downgrades.The cuts would in most cases be one notch and in some cases
two notches, Fitch said. A lower bond rating can make debt more
expensive to issue and lead to higher collateral requirements.Earlier on Thursday, Fitch also lowered its ratings on
Royal Bank of ScotlandLloyds Banking Group PLC two notches to A from AA-.Exposure to the European debt crisis and concern about the
business model of pure-play investment banks were catalysts for
most of the ratings actions, Joo-Yung Lee, a managing director
in Fitch’s financial institutions group, told Reuters.”Some of these banks have greater reliance on wholesale
funding and greater reliance on what we view as volatile
trading earnings,” Lee said. “That’s particularly true of
Goldman Sachs and Morgan Stanley in the U.S. They are less
diverse than their global universal bank peers.”In the case of Bank of America, its exposure to
mortagage-related litigation was a driver for Fitch’s review.
Competitors like Wells Fargo & Co and JPMorgan Chase &
Co were not targeted because they have diverse business
models, steady funding streams and no company-specific issues
that put them at serious risk, Lee said.Fitch does not have a specific deadline to finish its
review, but Lee said it hopes to resolve the matter quickly to
reduce market uncertainty.
UPDATE 1-UTC’s Pratt to buy Rolls share of engine venture
Oct 12 (Reuters) - Pratt & Whitney said on Wednesday that
it is buying Rolls Royce Holding Plc’s share of the
International Aero Engines consortium, which produces the
engine that powers the Airbus A320 plane family, for
$1.5 billion.Pratt said it intends to offer a portion of the Rolls
shares it is buying to other IAE partners: Germany’s MTU Aero
Engines and Japanese Aero Engines Corp.Pratt, a unit of United Technologies Corp , and
Britain’s Rolls Royce also said they would form a new company
in which each partner will hold an equal share to develop new
engines for mid-size aircraft. The companies added the venture
will focus on high-bypass ratio geared turbofan technology.Rolls Royce will also make a “modest financial investment”
in the geared turbofan engine made by Pratt that is an option
for the Airbus A320neo narrowbody program.Pratt’s geared turbofan engine has secured more than 1,000
orders.
Infosys Q2 profit up, cuts revenue outlook
Kicking off results for India’s nearly $76 billion IT sector, shares in Infosys rose 6 percent on Wednesday to their highest level in more than two months, outperforming the broader market .NSEI.The company, which counts Goldman Sachs (GS.N), BT Group (BT.L) and BP (BP.L) among its main clients, trimmed its dollar revenue growth forecast to 17.1 percent to 19.1 percent for the fiscal year, from 18 percent to 20 percent projected earlier.”The dollar revenue guidance cut is due to cut in discretionary spending by clients. But it was modest compared with what people had expected,” said Jagannadham Thunuguntla, research head at SMC Global Securities.He said analysts had expected Infosys to slash its dollar revenue outlook by 4 to 5 percentage points.By 0500 GMT, Infosys shares were trading at 2,646 rupees a share, up 5.7 percent.Infosys Chief Financial Officer V. Balakrishnan said the reduction in forecast was mainly due to currency volatility.India’s IT sector, which feeds off increased outsourcing by companies looking to cut costs, is expected to face pricing pressure and a decline in new orders as Europe struggles with a debt crisis and the United States sees an economic slowdown.Infosys and domestic rivals Tata Consultancy Services (TCS.NS) and Wipro (WIPR.NS) (WIT.N) also face stiff competition from global players including IBM (IBM.N) and Accenture (ACN.N) for large outsourcing deals.More than half of Bangalore-based Infosys’ revenue is generated in the United States. Europe is its second largest market, accounting for 20.5 percent of its revenue in the second quarter, down from 21.8 percent a year ago.UNCERTAINTY”The global macroeconomic environment is still uncertain. It is and should be a concern for the IT industry,” S.D. Shibulal, chief executive officer of Infosys, said in a statement.Nasdaq-listed Infosys (INFY.O) said consolidated net profit rose to 19.06 billion rupees ($387 million) for the fiscal second quarter ended September 30, from 17.37 billion rupees reported a year ago, as a weaker rupee boosted results.Revenue rose 16.6 percent to 81 billion rupees as the company added 45 clients in the quarter.A Reuters poll of brokerages had forecast a profit of 18.9 billion rupees on revenue of 81.2 billion rupees for the company.”The results have been helped partly by the depreciation in the rupee. The main thing to watch out for will be how the U.S. and Europe will move in the coming months,” said R.K. Gupta, Managing Director at Taurus Asset Management.”But Indian IT companies and Infosys in particular have a cost advantage over their global peers. I am not very pessimistic on these companies,” he said.Infosys, worth about $29 billion, has lost more than a quarter of its market value this year, roughly in line with a 25 percent fall in the sector index , but outperforming a 19 percent decline in the Mumbai market index.The company expects its dollar revenue to rise to $7.08 billion to $7.2 billion in the fiscal year ending March 2012.($1 = 49.3 rupees)
Pakistan and Afghanistan, spoiling for a full-blown fight ?
With a series of spectacular attacks over the past few months, first in the provinces and then in the Afghan capital Kabul, the Talban have captured attention and even prompted comparisons with the Viet Cong’s Tet offensive. But they are not the only ones attacking Afghanistan, according to The Middle East Media Research Institute (MEMRI). It lists a series of attacks from early this year to build the case that Pakistan has joined the Taliban in what it called a “military invasion of Afghanistan”, driving another nail in the faltering U.S. effort in the country.
Beginning from the February bombardment of Afghan border police posts in Nangarhar and Khost provinces in eastern Afghanistan by Pakistani planes to the firing of hundreds of rockets last month in Kunar and Nuristan, Pakistani forces have stepped up cross border action, MEMRI said in a report. It quoted Afghan officials as saying the artillery and missile strikes backed by air intrusions were an “act of intrusion.”
By August there had been 50 incidents of border violation by Pakistani forces, Afghan border police commander Aminullah Amarkhel said. He also made the startling claim that Pakistani forces had established 16 checkpoints inside the territory of Afghanistan in the east, taken control of some parts and even offered offered citizenship to the local tribes. He said there was proof that Pakistan provided Pakistani citizenship cards to Afghans in the eastern border towns, particularly in Kunar and Nuristan provinces.
It’s hard to tell what is going on in the remote and rugged area straddling the two countries. Pakistan says it has legitimate security concerns with many of the militant groups fighting the state operating from sanctuaries just over the border in Afghanistan. With foreign forces stretched and focused largely on securing the Afghan south, the eastern region was left largely uncovered, allowing militant groups to reconstitute themselves. Indeed there is growing concern that some militant groups may have shifted their base from Pakistan’s Waziristan strongholds to provinces such as Kunar.
Pakistan has in recent months faced down attacks from groups of up to 400 militants crossing the border from Afghanistan. On Sunday, Pakistani soldiers killed 30 Afghan militants who had crossed the border to attack the Pakistani army, it said. One Pakistani soldier was killed and four were wounded in the latest frontier incident, which lasted close to an hour when some 200 militants launched the attack. The Pakistani army says that with the Afghans and the foreign forces unable to crack down on militant nests in the east, it risks losing the hard-fought gains made against them in offensives over the past few years on its side of the border.
Whatever the claims and the counter-claims, what is indisputable is that ties between the two countries are rapidly deteriorating. Tension has been high since Afghan officials accused Pakistan’s main intelligence agency of masterminding the September 20 assassination of Kabul’s chief peace negotiator with the Taliban. Pakistan strongly denied the allegations.
A strategic partnership agreement between India and Afghanistan during President Hamid Karzai’s trip to New Delhi last week will further rankle Pakistan which has doing everything it can to limit Indian involvement in what it sees as its immediate sphere of influence. The agreement lifts the relationship to another level just as Islamabad’s ties with Kabul nosedive. No longer will Indian involvement be confined to offering aid and development; it will also get involved in the training of Afghan security forces as they prepare to take over responsibilities from Western fores by 2014.
India was a great friend, while Pakistan was a twin brother, Karzai said trying to sooth ruffled feathers in Islamabad.
At the moment, though, the brothers are looking dangerously estranged.
