U.S. Stocks Drop to 18-Month Low After Foreclosures Hit Record

U.S. stocks fell to an 18-month low, led by banks, after home foreclosures climbed to a record and loan defaults by Thornburg Mortgage Inc. and a Carlyle Group bond fund spurred concern that credit losses are deepening.

Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. led financial shares to the lowest level since May 2003. Retailers J.C. Penney Co. and Gap Inc. fell on sales that trailed estimates. The Standard & Poor's 500 Index lost 10 points in the final half hour of trading as investors speculated tomorrow's U.S. employment report will show the economy has tipped closer to recession.

The S&P 500 tumbled 29.36 points, or 2.2 percent, to 1,304.34, the lowest closing level since September 2006. The Dow Jones Industrial Average lost 214.6, or 1.8 percent, to 12,040.39. The Nasdaq Composite Index decreased 52.31, or 2.3 percent, to 2,220.5. More than 11 stocks fell for every one that rose on the New York Stock Exchange.

It's a tough environment, Paul Rasplicka, who manages $4 billion at AIM Investments, said in a Bloomberg Television interview in New York. Lending terms are tighter. The willingness to extend credit is less. It's making it very tough for business.

Financial stocks dropped for a sixth day, the longest losing streak since November, after an industry report showed foreclosures surged at the end of 2007 and late payments rose to the highest in 23 years. The S&P 500 slid below its lowest close of the year on Jan. 22, the day Federal Reserve policy makers slashed interest rates by the most in 23 years in response to tumbling global stocks and concern the economy was contracting.

Banks Decline

Citigroup, the biggest U.S. bank by assets, fell 98 cents to $21.17, its lowest close since November 1998. Bank of America, the second-largest, decreased $1.03 to $36.52. JPMorgan, the No. 3, lost $1.37 to $37.37.

Yield spreads on some mortgage-backed securities climbed to 22-year highs today, signaling home loans will be more expensive for borrowers. The collapse in subprime mortgages has caused at least $181 billion of writedowns and credit losses worldwide, prompting banks to restrain lending.

J.C. Penney, the third-largest U.S. department-store chain, tumbled $5.34 to $42.77. Same-store sales last month dropped 6.7 percent, worse than the average estimate for a decline of 2.4 percent, according to Retail Metrics LLC.

Gap, the largest U.S. clothing retailer, lost $1.15 to $19.37. Sales fell 6 percent, almost twice the average estimate for a 3.1 percent decrease.

Luxury Department Stores

Nordstrom Inc., a luxury department-store chain, dropped $2.34 to $35 after posting sales that trailed estimates.

The S&P 500 Retailing Index declined 4 percent to the lowest since Jan. 17 as 30 of 31 members fell. The first drop in employment in more than four years in January and higher gasoline prices are causing Americans curtail spending. Gas prices climbed today and crude oil rose to a record $105.97 a barrel as the U.S. dollar fell to its lowest ever against the euro.

The S&P 500 Consumer Discretionary Index extended its decline to 2.6 percent after Fed data showed U.S. household wealth fell in the fourth quarter for the first time in five years and borrowing slowed as home values plunged and lenders restricted credit.

The Labor Department may report tomorrow that the U.S. added 23,000 jobs in February after losing 17,000 the previous month, according to the median estimate of economists surveyed by Bloomberg News.

`More Bad News'

People are expecting more bad news, said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages $5 billion in San Antonio. You're going to have a spillover effect into unemployment. It goes from one sector to another.

All 10 industry groups in the S&P 500 dropped, with 483 members posting declines. Financial shares were the biggest drag on the index, falling 3.7 percent as a group.

Merrill Lynch declined $3.46 to $45.86, the lowest since June 2003. The securities firm said it would sweeten the terms on $2.2 billion of convertible bonds that investors can redeem next week, giving them the prospect of a bigger ultimate payout.

Separately, Merrill and four of its Wall Street rivals had their first-quarter profit estimates cut by Keefe, Bruyette & Woods Inc. analyst Lauren Smith for the second time in less than a month. More than a dozen analysts have lowered first-quarter profit estimates for the biggest U.S. securities firms in the last two weeks on expectations of more debt-related writedowns.

18-Month Low

Goldman Sachs Group Inc. lost $6.32 to $158.65, an 18-month low. Bear Stearns Cos. retreated $5.88, or 7.8 percent, to $69.90 for the steepest decline since October 2000. Lehman Brothers Holdings Inc. fell $2.03 to $46.03. Morgan Stanley dropped $1.80 to $39.67, the lowest since October 2004.

Thornburg Mortgage lost $1.75, or 51 percent, to $1.65. JPMorgan sent a default notice after Thornburg failed to meet a $28 million margin call, Thornburg said. That triggered defaults on other financing agreements and the amounts involved are material. RBC Capital Markets wrote in a research note today that bankruptcy is now a more likely outcome for Thornburg. Shares of Thornburg, a jumbo home mortgage specialist, had changed hands for more than $12 last week.

Fannie Mae, the largest source of money for U.S. home loans, declined $2.57 to $21.70, the lowest since April 1995. Freddie Mac, the second-biggest, lost $1.50 to $20.14.

Washington Mutual Inc. dropped $1.04 to $11.76, the lowest since May 1996. Standard & Poor's lowered its credit rating on the largest U.S. savings and loan and said another cut is possible.

Missed Margin Calls

Carlyle Capital Corp., Carlyle Group's publicly traded mortgage bond fund, said it missed four of seven margin calls yesterday totaling more than $37 million. The fund, which raised $300 million in July and used loans to buy about $22 billion of AAA-rated mortgage securities issued by Fannie Mae and Freddie Mac, expects to get at least one more notice of default related to the margin calls.

Carlyle Group, started by David Rubenstein in 1987, is the world's second-biggest private-equity firm.

UBS AG's U.S.-traded shares dropped $1.31 to $29.52, the lowest since October 2003. Europe's biggest bank by assets likely sold its 25 billion francs ($24 billion) prime Alt-A mortgage portfolio in a fire sale, JPMorgan said as it lifted its credit-crisis writedown estimate for the bank to 18.5 billion francs.

`Painful Exercise'

Leverage is coming off across the system, said David Baker, the Boston-based chief investment officer at North American Management, which oversees $1.1 billion. It's going to be a painful exercise and I don't think the equity market has full appreciation of what it's going to mean and how it's going to be unwound.

New foreclosures jumped to 0.83 percent of all home loans in the fourth quarter from 0.54 percent a year earlier, the Mortgage Bankers Association said. The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.82 percent, the highest since 1985.

The difference in yields, or spread, on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened about 11 basis points, to 227 basis points, the highest since 1986 and 93 basis points higher than Jan. 15. The spread helps determine the interest rate homeowners pay on new prime mortgages of $417,000 or less. A basis point is 0.01 percentage point.

More Capital Needed?

Ambac Financial Group Inc., the bond insurer that announced plans yesterday to raise $1.5 billion by selling common shares and equity units to salvage its AAA credit rating, dropped $1.28 to $7.42. JPMorgan analysts said the shares may fall in the near term and the company may need more capital to avoid a downgrade.

Wal-Mart Stores Inc. gained 43 cents, or 0.9 percent, to $49.98 for the only gain in the Dow average. The world's largest retailer said February sales increased 2.6 percent, exceeding its forecast, after price cuts spurred demand for groceries and medicines.

Fed Bank of New York President Timothy Geithner said the central bank may need to keep interest rates low for a while if financial markets remain under stress and threaten economic growth.

Traders priced in an 98 percent chance that the Fed will lower its benchmark lending rate by 0.75 percentage point to 2.25 percent by its March 18 policy meeting, up from 54 percent odds yesterday, according to Fed funds futures prices compiled by Bloomberg. The rest of the bets are for a 0.5 point reduction.

Treasuries rose and three-month bill rates fell to the lowest level since 2004 as investors took refuge in government securities.

You don't know when the next shoe is going to drop and where the next writedown is going to come from, said John Buckingham, who helps oversee about $700 million as president of Al Frank Asset Management in Laguna Beach, California. The news in the short run is likely to continue to be ugly. You have to have a strong stomach.

Father of Bush tax cuts: Recession likely

Harvard economist Martin Feldstein says more tax relief, deeper Fed rate cuts needed if U.S. is to avoid recession.

Martin Feldstein, the Harvard economist credited with being one of the fathers of the Bush administration tax cuts, says the U.S. economy is now likely to slip into a recession, and that avoiding one will take a new round of tax cuts and interest rate cuts from the Federal Reserve.

Feldstein is president and CEO of the National Bureau of Economic Research (NBER), the organization charged with determining when the economy is in a recession and when it is growing. He told CNNMoney.com that he had thought the chance of a recession was about 50-50 even before last week.

But he said he now believes a recession is likely, as he pointed to both a report from the Institute of Supply Management showing manufacturing activity in decline for the first time in almost a year, and Friday's December jobs report that showed a jump in the unemployment rate to a two-year high.

He did not give a new percentage for the chance of a recession, saying that will depend on what both the Federal Reserve and Congress and the administration do in response to the weakness.

"It's not just clear that lower interest rates and monetary policy more generally will have enough traction because of conditions in the credit market," he said when asked if the Fed could hold off a recession. "We should have some fiscal stimulus to back that up."

Feldstein made his remarks the same day President Bush gave a speech in Chicago in which he said that economic indicators are "increasingly mixed," and he acknowledged that many Americans are growing anxious about the economy. But the president argued the economy itself is resilient.

The president did not propose any kind of short-term economic stimulus package in his comments, as some had expected, although he argued that it was important not to raise taxes and called for making permanent the tax cuts he passed early in his administration that are due to expire after he leaves office.

Feldstein said he was not surprised that there was no plan laid out on Monday, saying he expects to see it in the State of the Union address. He said an extra $300 tax credit for each tax payer, similar to what was passed in 2001, would only be a good first step this time, and that some kind of deeper cuts might be necessary if the economy starts to lose jobs.

"The precise mix is not as important as a decision that what the economy needs is an additional amount of fiscal stimulus on top of the lower interest rate. That can be a cut in personal taxes, it can be a business investment credit of the sort we had in 2003 or some combination of the two," he said.

Feldstein served as chairman of the Council of Economic Advisers during the Reagan administration. He has served as president and CEO of NBER since leaving that post in 1984, as well as serving on Harvard's faculty. He has given notice that he will be retiring from NBER in June of this year.

Feldstein said that the NBER generally waits at least six months after the economy goes into recession to meet and assign a date to the start of the downturn, and that it is nowhere near ready to call such a meeting. But he said that some stimulus is needed, even if it turns out that the economy continues to grow, albeit at a weak rate.

"What's clear is even if the economy doesn't go into a full scale recession it will be a slow year, one that would benefit from a fiscal stimulus like a $300 (tax credit.) If we're going to actually going to slip into negative GDP, I would want to see more than that."

While he did not serve in the Bush administration, he was an advisor to the campaign and was seen as a leading force in shaping the administration's tax cut strategy, as well as its push to privatize social security. He also served as the faculty advisor for several top members of the Bush administration's economic team when they were working on their doctorates in economics.

Pending Sales of Existing U.S. Homes Fell in November

The number of Americans signing contracts to buy previously owned homes fell more than forecast in November, signaling further deterioration in housing.

The National Association of Realtors' index of pending home sales decreased 2.6 percent to 87.6, following a 3.7 percent gain in October that was larger than previously estimated, the group said today in Washington.

The figures underscore Treasury Secretary Henry Paulson's forecast today that the U.S. housing recession will continue, posing the biggest risk to economic expansion. Economists said more stringent lending practices after the collapse in subprime lending and prospects that home prices will keep falling are deterring buyers.

There is no evidence it is bottoming, Paulson said today about the housing market. He added that a plan designed to stem a wave of foreclosures may need to be expanded beyond subprime homeowners.

Economists forecast the index of signed contracts for existing homes would fall 0.7 percent following a previously reported 0.6 percent October increase, according to the median of 33 projections in a Bloomberg News survey. Estimates ranged from a drop of 3 percent to a 0.3 percent increase.

Compared with a year earlier, the index was down 19 percent.

`Further to Fall'

Inventories are still high, and home prices have further to fall in order to lift affordability, said Justin Smirk, senior economist at Westpac Banking Corp. in London. There's more bad news to come in housing before it gets better. Westpac forecast pending sales would drop 2.5 percent.

The housing slump is likely to last well into 2008, hurting economic growth and prompting Federal Reserve policy makers to lower interest rates, analysts said.

Stocks extended gains following the report, led by miners and energy products as the price of oil rebounded. Treasury securities fell as the gain in stocks reduced demand for the relative safety of U.S. government debt. The benchmark 10-year note yielded 3.88 percent at 10:33 a.m. in New York, up from 3.83 percent late yesterday.

Today's report showed pending resales fell in three of four regions. Purchases decreased 13 percent in the Northeast, 4.1 percent in the Midwest and 2.1 percent in the West. Sales rose 2.3 percent in the South.

The bigger gain in October than previously estimated suggested the market may be stabilizing, according to Lawrence Yun, the group's chief economist.

`Uncertain' Outlook

Although there could be some minor slippage in the first quarter, existing home sales should hold in a narrow range before trending up, Yun said in a statement. The exact timing and the strength of a home-sales recovery is a bit uncertain.

Paulson, speaking during a visit to New York on CNBC television, said evidence shows the housing decline has further to run.

The Treasury chief indicated the outlook may prompt an expansion of the plan Bush administration officials brokered with mortgage lenders last month. The initiative was designed to make it easier to negotiate affordable loans and freeze some adjustable-rate mortgages at current rates.

One thing we will consider is maybe expanding this beyond subprime borrowers to other borrowers, Paulson said.

Unsold Homes

There was a 10.3 months' supply of previously owned homes on the market in November at the current sales pace, compared with an average 6.5 months in 2006 and 4.5 months a year earlier.

That excess is one reason property values are dropping. Home prices in 20 U.S. metropolitan areas fell in October by the most in at least six years, based on the S&P/Case-Shiller home- price index. The decrease, reported last month, was the biggest since the group started keeping year-over-year records in 2001.

Record foreclosures are adding to the supply of unsold homes and will weigh further on prices this year, economists said.

We'll probably see more weakness in existing home sales given that inventories are so high, said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. Prices may keep dropping for a while.

Tougher lending rules are adding to market woes. A third of planned home sales were canceled or delayed in September, October and November because of loan problems, according to the results of a survey of 2,416 real-estate agents issued yesterday.

The Realtors association estimates 5.7 million homes will be sold in 2008, little changed from an estimated 5.65 million last year. Purchases of new homes will fall to 669,000 from 773,000.

KB Home

KB Home, the fifth-largest U.S. homebuilder, today reported a fourth-quarter loss as tumbling demand for new homes forced the company to write down land values. Los Angeles-based KB Home operates in 13 states, including California, Florida, Nevada and Arizona.

A report last week showed the labor market weakened in December, fueling concern the real-estate slump is spilling over to the rest of the economy.

The jump in the unemployment rate caused some economists to raise the odds of recession. Harvard University economist Martin Feldstein, member of the group that dates U.S. economic cycles, said the chance of recession had risen to more than 50 percent.

Central bankers said economic growth would probably be somewhat more sluggish than their previous estimate, according to minutes of the Dec. 11 Federal Open Market Committee meeting released last week. Policy makers cited housing and weaker consumer spending.

Fed's Plosser

While traders anticipate the Fed will lower its benchmark rate by at least a quarter point this month, Philadelphia Fed Bank President Charles Plosser said he hasn't made up his mind yet.

A substantially weaker outlook than expected, particularly if that weakness is projected to be more prolonged than anticipated, may require further adjustments to policy, Plosser said in a speech in Gladwyne, Pennsylvania.

The real-estate agents' group began reporting pending home resales in March 2005 and has supplied historical data back to February 2001. The gauge is considered a leading indicator because it tracks contract signings. The group's existing-home purchases report tracks closings, which typically occur a month or two later.

U.S. Economy: Home Prices Declined at Faster Pace

Home prices in 20 U.S. metropolitan areas fell in October by the most in at least six years, raising the risk that more Americans will walk away from properties that are worth less than they owe.

Values fell a greater-than-forecast 6.1 percent from October 2006, the S&P/Case-Shiller home-price index showed today. The decrease was the biggest since the group started keeping year-over-year records in 2001.

Prices will continue falling as record foreclosures put even more homes on the market while stricter lending rules make financing tougher to get. Declining values also pose a risk to consumer spending by making it harder for owners to tap home equity for extra cash.

You are likely to see more people giving up on their loans as they end up with little or no equity in their homes, said Abiel Reinhart, an economist at JPMorgan Chase & Co. in New York. It's one more factor that weighs on the path of consumption.

Compared with a month earlier, home prices dropped 1.4 percent, the biggest one-month decline since records began. The figures aren't seasonally adjusted, so economists prefer to focus on the year-over-year change.

The median forecast of 12 economists surveyed by Bloomberg News projected a 5.7 percent decline after the index dropped 4.9 percent in the 12 months ended in September.

Manufacturing Slumps

A report from the Federal Reserve Bank of Richmond today also showed manufacturing in its region contracted for the second time in three months in December. Combined with earlier reports this month that showed factory activity slowed in New York and also shrank in the Philadelphia region, the reports suggest the housing slump is filtering through the economy.

Seventeen of the 20 cities in the S&P/Case-Shiller index showed a year-over-year decline in prices, led by 12 percent slumps in Miami and Tampa, Florida. Three cities, Charlotte, North Carolina, Seattle and Portland, Oregon, showed an increase from a year earlier.

All 20 areas covered showed a drop in prices compared with September.

The current state of the single-family housing market remains grim, Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, said in a statement.

Shiller and Karl Case, an economics professor at Wellesley College, created the home-price index based on research from the 1980s.

Prices to Worsen

The housing market may continue to weaken as an increase in foreclosures adds to a glut of unsold homes on the market, spurring sellers to cut prices, economists said.

With supply overhang enormous and mortgage financing tougher to obtain, home prices are going to decline considerably further in the quarters ahead, said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm.

Lower home prices may also threaten spending. This holiday shopping season is forecast to be the weakest in five years, according to the National Retail Federation. A jump in November sales and a rush of last-minute purchases the weekend before Christmas probably weren't enough to change that outlook, according to analysts.

Stocks dropped for the first time in four days on concern over the outlook for consumer spending, which accounts for more than two thirds of the economy. The S&P 500 index was down 4 points, or 0.3 percent at 12:47 p.m. in New York. The S&P supercomposite homebuilder index was down 0.9 percent.

Fewer Sales

Figures later this week from the Commerce Department may show new homes sold at an annual rate of 718,000 in November, down from October's 728,000 rate, based on the median estimate of economists surveyed by Bloomberg News.

Sales of new houses probably will fall 8.9 percent in 2008 after a 25 percent drop this year, according to a Dec. 13 forecast from Fannie Mae, the largest mortgage buyer.

The market is too challenging to make predictions for fiscal 2008, Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc., said on a conference call on Dec. 19. It will be a difficult year. The Red Bank, New Jersey- based company reported a net loss of $467 million for the three months ended Oct. 31.

Residential investment has subtracted from economic growth for the past seven quarters. Home building dropped at a 20.5 percent annual pace in the third quarter, the most since 1991.

The S&P/Case-Shiller index and another by the Office of Federal Housing Enterprise Oversight track the same home over time and more accurately reflect price trends, economists said.

Price gauges from the Commerce Department and the Realtors group can be influenced by changes in the types of homes sold. Higher sales of cheaper homes relative to more-expensive properties will bias the figures down.

Source - Bloomberg

Japan Slashes Growth Forecast to 1.3% on Housing Woes

Japan's government slashed its economic growth forecast after stricter rules for obtaining building permits caused housing starts to plummet to a four- decade low.

The world's second-biggest economy will probably grow 1.3 percent in the year ending March 31, slower than a previous forecast of 2.1 percent, the Cabinet Office said in Tokyo today. The government predicts a 2 percent expansion the following year.

Slower growth may cause tax revenue to decline, making it more difficult for the government to eliminate the deficit and curb the world's largest public debt. The Finance Ministry will release its budget proposal for next fiscal year overnight.

The more the economy loses steam, the more difficulty the government will have in stoking economic growth through policy measures, said Takahira Ogawa, director of sovereign ratings at Standard and Poor's in Singapore.

Revenue from taxes could start falling, Economic and Fiscal Policy Minister Hiroko Ota said in Tokyo after the forecasts were published. Finance Minister Fukushiro Nukaga told reporters the government still wants to balance the budget by the year ending March 2012.

Government spending is likely to increase to 83.2 trillion yen ($734 billion) in the year starting April 1, the Nikkei newspaper reported on Dec. 16, as an aging population swells social welfare costs.

Sales Tax

Japan's debt will remain at 1.8 times the size of the economy as discussions on raising the nation's sales tax are likely to be delayed, Fitch Ratings said last week. The ruling Liberal Democratic Party and New Komeito last week released a proposal that excluded any mention of when, or how much, the country's 5 percent sales tax might increase.

The proposal of the coalition parties clearly mentioned it will drastically reform the tax system, Nukaga said today. In that environment, we need to stick with our efforts to achieve a primary balance.

The building slowdown will erase 0.6 percentage point from growth, the Cabinet Office said. That's the equivalent of about 3 trillion yen ($26 billion) of GDP, or the same size as Sri Lanka's economy, Bloomberg data show.

Housing starts plunged 35 percent in October and 44 percent in September because the regulations, introduced after an architect fabricated earthquake-resistance data in 2005 to cut costs, caused a logjam in building applications.

Prime Minister Yasuo Fukuda said he regrets the results of the changes to the building code, Chief Cabinet Secretary Nobutaka Machimura told reporters today.

`Bad Preparation'

The instruction manual describing the permit process was issued six weeks after the rules were introduced on June 20. Ota this week called the lapse a case of bad preparation.

Pent-up demand will help housing investment rebound next fiscal year, adding 0.4 percentage point to growth, the Cabinet Office said. The government yesterday said housing construction has almost stopped decreasing.

Spending by households is likely to remain sluggish next fiscal year because companies aren't increasing wages, Ota said.

Japan's gradual recovery hasn't been enough to push up wages and we can't expect a large improvement in consumer spending, she said. Stalled wage growth is a major reason why Japan hasn't been able to shake off deflation.

The GDP deflator, a broad measure of price changes, will rise for the first time in 11 years in the period starting April 1, the government said in today's report. The Cabinet Office predicted, incorrectly, in each of the past two years that the GDP deflator would rise.

Source - Bloomberg

Housing Crash Deepens in 2008 as U.S. Realtors See Record Drop

For U.S. homeowners, builders, bankers and realtors, the crash of 2007 will only get worse in 2008.

Everyone from mortgage-finance company Fannie Mae to Lehman Brothers Holdings Inc. expects declines next year. Existing home sales will drop 12 percent and existing home prices will fall 4.5 percent, Washington-based Fannie Mae says. Lehman analysts estimate almost 1 million mortgage loans will default in 2008, up from about 300,000 this year.

We're only halfway through the housing shock, said Ethan Harris, chief U.S. economist at New York-based Lehman, the fourth-biggest U.S. securities firm by market value. It's just a matter of time before the weakness spreads to the rest of the economy.

The housing market collapse has been anything but the soft landing that Federal Reserve Bank of San Francisco President Janet Yellen and David Lereah, former chief economist at the National Association of Realtors in Chicago, predicted for real estate at the start of 2007.

Median home prices declined in the U.S. this year, the first annual drop since the Great Depression, according to forecasts from the National Association of Realtors.

I'm not going to sit here and tell you it's going to turn real strong next year, said Jim Gillespie, chief executive officer of Coldwell Banker Real Estate LLC, the largest U.S. residential brokerage, according to Franchise Times. It's not going to turn real strong next year.

`Let the House Go'

Analysts at New York-based CreditSights Inc. predict housing won't rebound until 2009, at best. Moody's Economy.com Inc., the economic forecasting unit of Moody's Corp. in New York, says home sales will hit bottom next year, declining 40 percent from their peak. And U.S. Treasury Secretary Henry Paulson's plan to slow foreclosures won't help those who already are facing the loss of their homes, like C.W. and Sandy Hicks of Las Vegas.

The Hickses refinanced the mortgage on their four-bedroom, 1,300-square foot home two years ago. Their $237,000 adjustable- rate loan resets every month, and now their monthly payment has jumped 50 percent to $2,700. The couple can't afford it.

Source - Bloomberg

Bush Subprime Mortgage Rate Freeze Stuns Bond Market

President George W. Bush's plan to freeze interest rates on some subprime mortgages may prove to be a cure that breeds another disease.

If the government goes in and changes contracts it will definitely have a chilling effect on the securitization of mortgages, said Milton Ezrati, senior economist and market strategist at Lord Abbett & Co. in Jersey City, New Jersey, which oversees $120 billion in assets. When the government comes in and says you have contracted to have this arrangement and you can no longer have it, I think it opens the door for lawsuits.

Bush and Treasury Secretary Henry Paulson yesterday announced an agreement with lenders that will fix rates on some loans for five years. The deal will help borrowers who will fall behind once rates reset to higher levels through July 2010. The plan may force investors in the $6.3 trillion market for home- loan bonds, created by pooling loans and funneling interest payments to bondholders, to revalue their holdings.

It could end up there's less confidence in the viability in the bond markets and the mortgage markets going forward and it could lead to higher interest rates and higher mortgage rates for everybody, said Kenneth Hackel, managing director of fixed- income strategy at RBS Greenwich Capital Markets.

Hackel said in an interview from his Greenwich, Connecticut, office that he has been fielding a lot of calls from clients pounding the tables and beating the drums.

Existing Contracts

The American Securitization Forum, the New York-based industry group that worked with regulators to forge the deal, said Bush's plan is designed to work within the existing contracts. As part of a typical bond contract, servicers are required to modify loans only when it would yield more cash to debtholders than a foreclosure. Agreements also state that loans can't be modified unless a default is reasonably foreseeable.

Servicers will be acting in the best interest of bond investors because foreclosures would cause greater losses, the ASF said in a statement yesterday. The ASF cautioned servicers against modifying more loans than allowed under some contracts.

The initial reaction of a lot of people including myself a week ago would have been, `Hey this isn't fair,' said Andrew Harding, chief investment officer for fixed income at Allegiant Asset Management in Cleveland, which manages $18 billion. It isn't fair but it most likely is in the best interest of both those who are making payments and those who can't make higher payments.

Mortgage securities and leveraged loans have already caused $66 billion of losses at the world's banks. Goldman Sachs Group Inc. estimated last month that losses in credit markets worldwide may reach $726 billion.

Foreclosures

Foreclosures almost doubled in October from a year earlier as borrowers with poor credit failed to make higher payments, Irvine, California-based RealtyTrac Inc. said Nov. 29. Credit Suisse Group analysts project 775,000 homes with $143 billion of mortgage debt will go into foreclosure in the next two years.

There's a glimmer of hope on the horizon, said Vivek Tawadey, a strategist at BNP Paribas SA in London. This should spark a relief rally across all financials. Whether this rally can be sustained over the medium term is the key question.

The agreement addresses homeowners unable to afford higher interest rates once starter rates increase. The options are freezing rates or refinancing into either a new private mortgage or a Federal Housing Administration-backed loan. As many as 1.2 million subprime, adjustable rate mortgage holders will be eligible for assistance under the plan.

Mortgage Resets

About $77 billion of subprime mortgages are due to reset higher in the first three months of next year, according to Bank of America Corp. analysts Hans Mikkelsen and Mike Cho in New York. The resets will continue at a pace in excess of $30 billion a month in the following four months, the analysts wrote in a note published yesterday.

The specter of rising interest rates will affect about $450 billion of subprime mortgages by the end of next year, according to bond research firm CreditSights Inc. in New York.

If investors all of a sudden feel that a contract can be changed at the whim of industry participants or at the jawboning of government, ultimately that could have the effect of cutting off capital, said Joshua Rosner, managing director at New York- based research firm Graham Fisher & Co.

Standard & Poor's said yesterday that freezing rates on subprime mortgage loans may lead to credit-rating reductions on some mortgage bonds. The government's plan may shrink the difference between interest payments received from home loans and the interest due to bondholders, S&P said in a report.

Source - Bloomberg

U.S. Mortgage Delinquencies Rise to 20-Year High

The number of Americans who fell behind on their mortgage payments rose to a 20-year high in the third quarter as borrowers were unable to refinance or sell their homes.

The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.59 percent, the highest since 1986, the Mortgage Bankers Association said in a report today. New foreclosures hit an all-time high for a second consecutive quarter.

The surge in foreclosures is expanding the inventory of unsold homes and contributing to the decline in housing demand. Sales of new and previously owned homes probably will drop to 5.09 million next year, 32 percent below the 2005 peak of 7.46 million, according to Frank Nothaft, chief economist of Freddie Mac, the second largest U.S. mortgage buyer. About 40 percent of lenders have increased standards for their most creditworthy borrowers, according to a Federal Reserve study in October.

These are the first numbers we've seen that combine the meltdown of the credit markets with the drop in home prices, said Jay Brinkmann, vice president of research and economics for the Washington-based bankers trade group.

Bush Plan

President George W. Bush and U.S. Treasury Secretary Henry Paulson plan to announce a proposal today to freeze some subprime mortgages to stop a wave of foreclosures that has cut prices and demand for houses.

As the U.S. housing slump enters its third year, investors are shunning securities backed by mortgages, the top 15 U.S. home builders have lost about $35 billion in market value this year, and the inventory of unsold houses has risen to almost an 11-month supply, the highest in 22 years.

One in every five adjustable-rate subprime loans had late payments in the quarter, a number that excludes the one of every 10 already in foreclosure, the bankers group said in their report. Foreclosures started on all types of mortgages rose to an all-time high of 0.78 percent from 0.65 percent.

In the quarter, 3.12 percent of prime borrowers made their mortgage payments at least 30 days late, up from 2.73 percent in the second quarter, the report said. The subprime share of late payments rose to 16.3 percent from 14.8 percent.

California, Florida Lead

The numbers were driven by California, the U.S.'s largest state, and Florida, Brinkmann said. The two states had 36.4 percent of all of the nation's prime adjustable-rate loans and had 42.4 percent of new foreclosures during the quarter, he said. They had 28.1 percent of subprime adjustable mortgages and 33.7 percent of foreclosure starts for that type of loan.

Sixty percent of banks said they tightened qualifications for in October for so-called non-traditional mortgages such as interest-only loans, the Fed said.

Housing permits in the U.S. have declined for five consecutive months, falling to a 14-year low of 1.178 million at an annual pace in October, the Commerce Department said in a Nov. 20 report.

Sales of previously owned homes fell to a rate of 4.97 million that month, the lowest in a study that goes back to 1999, the National Association of Realtors said Nov. 28. The inventory of single-family homes for sale increased to a 10.5 months' supply, the highest since July 1985.

The U.S. asset-backed commercial paper market has shrunk $394 billion, or 33 percent, since August. Debt maturing in 270 days or less and backed by mortgages, credit-card loans and other holdings fell $23 billion, or 2.8 percent, to a seasonally adjusted $801.2 billion for the week ended Dec. 5, the Federal Reserve in Washington said today.

Toll Brothers Inc., the largest U.S. luxury-home builder, today reported its first quarterly loss in 21 years as fiscal fourth quarter revenue slid 35 percent from a year ago to $1.17 billion. Net income for the full fiscal year plunged 95 percent to $35.7 million, the lowest since 1993.

The Mortgage Bankers report is based on a survey of 45.4 million loans by mortgage companies, commercial banks, thrifts, credit unions and other financial institutions.

Source - Bloomberg

Industrial production nosedives

Largest plunge in nine months, led by electricity, gas, auto and housing weakness; rate cut more likely if conditions worsen, analysts say.

Industrial production plunged in October by the largest amount in nine months, reflecting a big drop in utility output and continued troubles in auto and housing-related industries.

The Federal Reserve said that output at the nation's factories, mines and utilities fell by 0.5 percent last month, a much worse outcome than had been expected.

The October decline, the biggest since a similar drop in January, was led by a sharp plunge in output of electricity and natural gas due to warmer-than-normal weather during the month.

Also contributing to the weakness was the third straight drop at auto factories and further weakness in industries producing lumber, appliances and other products tied to housing.

Auto makers are struggling with slumping demand in the face of soaring gasoline prices while housing is enduring its worst slump in more than two decades.

Analysts believe that the economy will slow significantly in the current quarter and the first three months of next year, with many raising the odds for a recession.

The Federal Reserve has cut interest rates twice since September but Federal Reserve Chairman Ben Bernanke sought to lower expectations for further rate cuts to boost economic growth. He said that Fed policymakers see the risks of weaker economic growth as roughly balanced with the risks of higher inflation that could be triggered by the latest surge in oil prices. That surge pushed the price of a barrel of crude oil briefly above $98 per barrel last week.

Still, many analysts believe that if the economic slump worsens, the Fed will cut interest rates again, possibly as soon as its next meeting on Dec. 11.

Manufacturing output fell by 0.4 percent in October, the biggest drop since a 0.4 percent decline in August.

Output at the nation's utilities was down 1.6 percent. Mining output, a category that includes oil production, fell 0.6 percent.

The declines left factories, mines and utilities operating at 81.7 percent of capacity last month, down from an operating rate of 82.2 percent in September.

Source - CNN Money

Treasuries Rise to the Highest in Two Years on Credit Concern

Treasuries rose to the highest since 2005 as credit-market losses related to delinquent subprime mortgages drove investors to the safety of government debt.

Two-year notes gained for a fifth straight week, extending their rally to the longest in eight months on speculation the Federal Reserve will cut borrowing costs a third time this year. The Fed will release minutes of its October meeting next week, and the Commerce Department is expected to report that housing starts fell to the lowest since 1993.

The market's pricing in an easing by the Fed, said Anne Briglia, senior fixed-income strategist in New York at UBS Wealth Management Research. Price action is being driven by institutional investors who are acutely aware of the broader financial stresses here.

The two-year note's yield fell 8 basis points, or 0.08 percentage point, to 3.34 percent this week, according to bond broker Cantor Fitzgerald LP. It reached 3.28 percent yesterday, the lowest since February 2005. The price of the 3 5/8 percent security due in October 2009 rose 1/8, or $1.25 per $1,000 face amount, to 100 17/32. Yields move inversely to bond prices.

Yields on 10-year notes decreased 5 basis points to 4.17 percent after yesterday touching 4.13 percent, the lowest since September 2005. They yielded 84 basis points more than two-year notes, the widest spread since March 2005. A steepening of the yield curve suggests investors are favoring shorter-dated notes in anticipation of rate reductions by the Fed.

A slump in global credit markets will force banks, brokerages and hedge funds to cut lending by $2 trillion, triggering the risk of a substantial recession in the U.S., Jan Hatzius, chief economist in New York at Goldman Sachs Group Inc., wrote in a report dated Nov. 15.

Goldman Forecast

Losses related to record U.S. home foreclosures using a back-of-the-envelope calculation may be as high as $400 billion for financial companies, according to Hatzius.

Citigroup Inc. and Merrill Lynch & Co. have led companies writing down more than $50 billion on securities linked to subprime mortgages. The risk of further losses by banks has pushed their borrowing costs above the average for investment- grade companies.

The credit stories continue, said Paul Horrmann, a strategist in Jersey City, New Jersey, at ICAP Plc, the world's largest inter-dealer broker. The addition of this one, of that one, add up to a sizeable amount, and we're starting to feel it. There is some doubt now about global growth.

In a sign of increased short-term credit risk, the three- month London interbank offered rate, or Libor, for dollars rose 7 basis points to 4.95 percent, the biggest weekly gain in two and a half months.

Fed Rate Outlook

Interest-rate futures on the Chicago Board of Trade showed a 84 percent chance that the Fed will lower its target rate for overnight lending between banks by an additional quarter- percentage point on Dec. 11. The Federal Open Market Committee cut the benchmark borrowing cost to 4.5 percent at its Oct. 31 meeting. Minutes will be released Nov. 20.

Fed Governor Randall Kroszner said yesterday in a speech in New York that an economic rough patch in coming months won't be enough to warrant additional rate cuts. St. Louis Fed President William Poole told Dow Jones that he's an optimist about credit market problems clearing up.

The Fed is trying to jawbone the market away from the view that they will ease again in December, said Thomas Atteberry, who oversees $2.8 billion in fixed income in Los Angeles at First Pacific Advisors LLC. We continue to see mortgage and credit problems worm their way into different places and causing concern for people.

Housing Starts

Housing starts probably fell in October to 1.17 million, the lowest since March 1993, according to the median forecast of 66 economists surveyed by Bloomberg News. The Commerce Department is scheduled to release the report Nov. 20.

U.S. debt was supported as a government report showed investors purchased the most Treasuries in September in six months. International demand for U.S. debt increased by $26.3 billion, compared with a loss of $2.8 billion in August.

Total holdings of equities, notes and bonds rose a net $26.4 billion after sales of a revised $70.6 billion in August, the Treasury Department said yesterday.

Source - Bloomberg

Asian Stocks Fall, Led by Exporters, Financials on U.S. Outlook

Asian stocks fell for a second day, led by Toyota Motor Corp. and Canon Inc., after the yen strengthened against the dollar and Wells Fargo & Co. said the U.S. housing market is the worst since the Great Depression.

Mizuho Financial Group Inc. and National Australia Bank Ltd. dropped on concern banks may report widening losses linked to U.S. home loans to borrowers with poor credit.

You just don't see an end to the subprime housing-loan problem, said Soichiro Monji, who helps oversee $47 billion at Daiwa SB Investments Ltd. in Tokyo. Unless we see some light at the end of the tunnel, we can't expect the market to rise.

BHP Billiton Ltd. climbed after its mines in Chile resumed production following an earthquake and the Wall Street Journal said Rio Tinto Group was considering a counter bid for the company.

The Morgan Stanley Capital International Asia Pacific Index fell 1.6 percent to 158.74 as of 11:04 a.m. in Tokyo. All 10 industry groups on the measure dropped, with a group of financial stocks as the biggest contributor to the decline.

Japan's Nikkei 225 Stock Average slid 1.6 percent to 15,150.68, while the broader Topix index slumped 2 percent. Benchmarks in other markets open for trading fell, except in New Zealand.

In the U.S, the Dow Jones Industrial Average decreased 0.9 percent to 13,110.05. The Standard & Poor's 500 Index lost 1.3 percent and the Nasdaq Composite Index slipped 1 percent.

Exporters Decline

Toyota Motor, which gets about 70 percent of its profit from operations in North America, fell 1.8 percent to 6,110 yen. Canon, the world's biggest seller of digital cameras, declined 1.8 percent to 5,470 yen. Other stocks tumbled on concern the U.S. housing recession will crimp demand from Asia's biggest export market.

The yen strengthened to 110.49 to the dollar at 10:21 a.m. in Tokyo from 111.26 at the close of the Tokyo Stock Exchange yesterday. A stronger Japanese currency decreases the value of companies' overseas earnings when translated into yen.

Samsung Electronics Co., South Korea's largest exporter, retreated 1.1 percent to 564,000 won. James Hardie Industries NV, the biggest seller of home siding in the U.S., dropped 2.4 percent to A$6.22 in Sydney.

Mizuho Financial, the second-biggest publicly traded Japanese bank, declined 3.9 percent to 525,000 yen. Moody's Investors Service cut its financial strength outlook for the company to negative from stable because of losses related to U.S. subprime mortgages.

National Australia Bank, the country's largest lender, fell 3.3 percent to A$42.53. Kookmin Bank, South Korea's biggest, slid 2 percent to 69,600 won.

BHP, the world's largest mining company, gained 1.4 percent to A$41.73. Production at its mines in Chile, including Escondida, the world's largest copper source, have resumed production following a magnitude 7.7 quake earthquake on Nov. 14.

Its shares also rose after the Wall Street Journal said Rio Tinto, which is fighting a hostile takeover from BHP, is considering a counter-bid. Rio slipped A$0.02 to A$134.57.

Both companies declined to comment on the report.

Source - Bloomberg

Japan May Suffer From U.S. Woes

Bank of Japan Deputy Governor Toshiro Muto said the U.S. housing recession and financial- market turmoil could hurt Japan's economy, making it difficult to decide when to raise interest rates.

The central bank expects the economy to keep growing with stable prices, though we must examine both upside and downside risks carefully, Muto, 64, said in an interview yesterday in Tokyo. This is quite a difficult situation.

Governor Toshihiko Fukui, who Muto is favored to replace in March, this week also said the U.S. housing slump and market gyrations could become worse than expected, threatening global growth. Credit Suisse Group, Goldman Sachs Group Inc. and UBS AG this month pushed back forecasts for the next rate increase from the first quarter of next year until at least the third quarter.

Muto said policy makers are fully aware that growth in Japan would be threatened should the U.S. slowdown spread to the rest of the world. The housing crisis and banks' reluctance to lend have yet to damp spending by U.S. consumers and companies, he added.

The central bank this week held the benchmark overnight lending rate at 0.5 percent, the lowest among major economies.

Muto said expectations that borrowing costs will stay low for a long time regardless of improvements in the economy could cause fluctuations in growth and prices and encourage inefficient investment.

Risky Investments

In the past month, Fukui has also said Japan's rates need to rise to deter companies and traders from making risky investments, even as barriers mount against an increase.

Export growth slowed in September as shipments to the U.S., Japan's biggest market, fell at the fastest pace in almost four years. At home, consumer prices have yet to rise this year and household spending is being curtailed by falling wages and a deteriorating job market.

Muto rebuked criticism that the central bank is eager to raise rates hastily.

Policy makers have never said such things, he said. We have repeatedly said we'll raise interest rates in accordance with improvements in the economy and prices; we don't have any predetermined schedule.

Japan has struggled to beat deflation that emerged after an asset-price bubble burst in the early 1990s and compelled the central bank to cut interest rates to near zero percent. The bank raised the key rate for the first time in almost six years in July 2006 and doubled it to 0.5 percent in February.

Third-Quarter Growth

Recent data, including gross domestic product figures that showed the economy rebounded in the third quarter, back the bank's outlook that the expansion will be sustained, Muto said.

Japan's economy grew an annualized 2.6 percent last quarter after contracting 1.6 percent in the previous three months, as exports and consumer spending countered a drop in housing investment, the government said this week.

Muto said the severe decline in housing will eventually be reversed. The drop was caused by the enforcement of stricter rules for obtaining building permits and pent-up demand will be met later, he said. Muto forecasts economic growth will average about 2 percent over the two years through March 2009.

Japan's housing starts tumbled 44 percent in September after the government introduced the rules in response to a 2005 scandal involving faked earthquake-engineering data.

Core consumer prices, which exclude fresh food, are highly likely to enter positive territory from the end of the year or toward the beginning of next year, even if only modestly, Muto said.

Source - Bloomberg

Deutsche Bank analyst lowers his 2007 estimates for home-improvement retailers on bleak housing forecast

A Deutsche Bank analyst downgraded shares of home-improvement retailers The Home Depot Inc. and Lowe's Cos. on Monday, saying that a recovery in the U.S. housing market is further off than he previously thought.

Deutsche Bank's Mike Baker now has a "Hold" rating on both stocks, saying that economic indicators and business trends from suppliers suggest a later-than-expected recovery. He said his "Buy" rating on each company was based on a recovery in housing and demand for home improvement products in late 2007 or early 2008.

Even after 18 months of year-over-year housing declines, the latest month's data was the worst yet, with existing home sales down 19.1 percent year-over-year, Baker wrote in a client note.

Baker also said inventories are at an all-time high, which is pressuring home prices.

The turmoil in the mortgage market hurt suppliers, Baker said, especially appliance vendors with big-ticket items for sale in home centers.

Baker said Wall Street's 2008 earnings per share estimate does not fully reflect persistent weakness in the U.S. housing market. For full-year 2008, analysts forecast $2.37 in earnings per share for Home Depot and $1.95 in earnings per share for Lowe's.

He lowered his 2007 estimate for Home Depot to $2.38 from $2.40 per share, and for Lowe's to $1.92 per share from $1.97.

The unknown is determining when this negative spiral will reverse, and our call now is that the recovery in housing is going to take longer than expected.

Shares of Home Depot gave up 53 cents at $29.87 in early trading, after ending at $30.40 on Friday.

Source - CNNMoney

Dollar Falls to Record Low Versus Euro Before Fed Rate Meeting

The dollar fell to a record low against the euro on signs a slump in housing is hurting the U.S. economy, bolstering the case for the Federal Reserve to lower interest rates next week.

The U.S. currency has weakened three straight weeks on speculation the housing recession will spread to consumers and erode corporate earnings. Sales of previously owned homes declined last month by almost twice the rate economists forecast, and consumer confidence dropped to the lowest since May 2006.

The dollar will continue to fall as long as the Fed is cutting interest rates, said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto.

The dollar weakened 0.6 percent this week to $1.4393 per euro. It touched an all-time low of $1.4395 per euro yesterday and declined against 15 of the 16 major currencies this week. The U.S. currency dropped 0.3 percent this week to 114.19 yen.

The U.S. Dollar Index, measuring the dollar's performance against six major peers, has lost 8 percent in 2007 and set a record low of 76.977 on Oct. 26.

Interest-rate futures traded on the Chicago Board of Trade show a 92 percent chance the Fed will lower its benchmark overnight rate a quarter-percentage point to 4.50 percent on Oct. 31, after reducing the rate a half-point on Sept. 18 in the first cut since 2003. Futures show an 8 percent chance of a half-point cut on Oct. 31.

Slowing Economy

A government report on Oct. 31 may show U.S. gross domestic product slowed to an annualized 3.1 percent growth rate last quarter, from a 3.8 percent clip in the prior quarter, according to the median estimate in a Bloomberg News survey.

Sales of previously owned homes fell 8 percent last month, while the median price dropped the most in almost a year, the National Association of Realtors said this week. Countrywide Financial Corp., the biggest U.S. mortgage lender, reported its first quarterly loss in 25 years yesterday as borrowers defaulted.

Oil rose above $92 a barrel for the first time in New York this week, pushing Canada's dollar to the highest since 1974 versus the U.S. dollar.

The yuan had its biggest weekly advance in six weeks, to 7.4877 per dollar, reaching the strongest since China ended a peg to the dollar in July 2005. Finance ministers and central bankers from the Group of Seven major industrialized nations last week called for a faster appreciation in the yuan, which they contend is artificially cheap.

A recovery in global stocks this week gave investors confidence to resume carry-trade bets, where they buy assets in countries with high yields, using loans in low-yielding currencies such as the yen. The Standard and Poor's 500 Index gained 2.3 percent this week, following a 3.9 percent tumble the week before.

The yen fell 0.3 percent this week to 164.34 per euro, and dropped 2.2 percent versus the New Zealand dollar.

Dollar May Extend Drop After G-7 Fails to Address Record Slide

The dollar, trading at an all-time low against its major trading partners, may extend the decline after the Group of Seven failed to address the drop following a meeting of finance officials.

The policy makers, representing the U.S., U.K., Japan, Germany, Italy, France and Canada, stuck to language in prior statements by saying excess volatility' in currencies is undesirable and that currencies should trade in line with fundamentals. They also intensified calls for China to let its currency strengthen, during yesterday's gathering in Washington.

The dollar is going to be under pressure as the growth outlook weakens. Risk aversion is the focus now. The dollar dropped this week by the most in two months versus the yen, on concern the U.S. housing slump will rekindle a credit market sell-off.

The yen rose against the 16 most-actively traded currencies this week as a decline in global stocks prompted investors to sell assets funded by loans in Japan. A report next week is forecast to show existing home sales in the U.S. fell to the lowest since 2001 in September.

Sell the Dollar

The dollar fell 2.6 percent to 114.51 yen, from 117.61 on Oct. 12, the biggest weekly decline since the period ended Aug. 17. The U.S. currency weakened 0.9 percent to $1.4301 per euro. It touched an all-time low of $1.4319 yesterday.

The statement gives the market a green light to sell the dollar, said Brian Dolan, chief currency strategist at FOREX.com, a unit of the online currency trading firm Gain Capital in Bedminster, New Jersey, which has about $250 million of funds under management. With no comment from the G-7 about its weakness, the dollar could decline to $1.45 per euro in a month.

An Oct. 24 report from the National Association of Realtors may show sales of existing homes fell to an annualized 5.25 million last month, from 5.5 million in August, according to the median estimate of 64 economists surveyed by Bloomberg News.

The International Monetary Fund cut its forecast for 2008 U.S. economic growth to 1.9 percent from 2.8 percent on concern the sell-off in the credit markets will cut business and consumer spending.

Risk Aversion

Increased risk aversion caused investors to pare carry trades financed by yen. In such transactions, investors get funds in countries with lower borrowing costs and buy assets in nations with higher rates.

The trades have pushed the yen down 8.9 percent versus the euro and 12 percent against the Australian dollar in the last 12 months. The Japanese currency gained 1.8 percent to 163.79 versus the euro this week, the biggest increase since the period ended Aug. 17.

The Bank of Japan's benchmark borrowing cost is 0.5 percent, the lowest among major economies, and compares with the European Central Bank's 4 percent, the Federal Reserve's 4.75 percent and Australia's 6.5 percent.

Interest-rate futures traded on the Chicago Board of Trade show a 92 percent chance the Fed will cut its benchmark interest rate a quarter percentage point to 4.5 percent on Oct. 31. The odds were 32 percent a week ago. The chance of another rate cut in December to 4.25 percent is 74 percent, up from 15 percent on Oct. 12.

Source - Bloomberg

Yen May Rise Against Dollar on Credit Concerns, Risk Aversion

The yen may rise for a second straight day versus the dollar as comments from the biggest U.S. bank about deteriorating credit markets stoked risk aversion.

Citigroup Inc. yesterday said the financial industry is in for more losses from the housing market. A private report is forecast to show confidence among U.S. homebuilders fell to a record low. Federal Reserve Chairman Ben S. Bernanke speaks about the U.S. economy in New York.

``Risk aversion is going to be an ongoing theme,'' said Steven Butler, director of foreign exchange trading at Scotia Capital Inc. in Toronto. ``Even in pockets of calm, the market realizes things are going to get a whole lot worse in the U.S. before they get better.''

The yen traded at 117.39 per U.S. dollar and 166.75 versus the euro at 6 a.m. in Tokyo. The euro bought $1.4205. Japan's currency gained 0.2 percent versus the dollar yesterday.

The yen yesterday advanced 0.9 percent versus the Australian dollar and Brazilian real after Citigroup Inc. said third-quarter earnings fell 57 percent. Chief Financial Officer Gary Crittenden said late payments on home loans may worsen in the fourth quarter.

``An air of skepticism is re-emerging around the credit problems,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut.

U.S. Stock Indexes

The Standard & Poor's 500 Index and the Dow Jones Industrial Average fell 0.8 percent yesterday. The indexes lost more than 3 percent in June and July as credit markets were roiled by the worst recession in the U.S. housing market in 16 years.

The National Association of Home Builders/Wells Fargo index of builder confidence may drop to a record low of 19 this month, according to the median estimate of 36 economists surveyed by Bloomberg News. The data will be released at 1 p.m. Washington time.

Bernanke may speak about the resilience of the U.S. economy in the face of the housing slump at his address to the Economic Club of New York at 7 p.m. New York time on Oct. 15.

The Bank of Japan yesterday cut its economic assessment in three of the country's nine regions yesterday, making it more difficult to continue the policy of gradual interest-rate increases. Japan's 0.5 percent benchmark interest rate is the lowest among major economies and compares with 11.25 percent in Brazil and 6.5 percent in Australia.

Source - Bloomberg