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U.S. economy slowed in the fourth quarter, but growth outlook still favorable

WASHINGTON (Reuters) – U.S. economic growth braked more sharply than initially thought in the fourth quarter as businesses slowed their pace of stock accumulation and the trade deficit widened, but the underlying fundamentals remained solid.

Gross domestic product expanded at a 2.2 percent annual pace, revised down from the 2.6 percent pace estimated last month, the Commerce Department said on Friday. The economy grew at a 5 percent rate in the third quarter.

With consumer spending accelerating at its quickest pace since the first quarter of 2006 and sturdy gains in other measures of domestic demand, the slowdown in growth is likely to be temporary.

“There is every reason to believe that domestic demand will grow at a rapid clip over the first half of this year too,” said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, was revised down by one-tenth of a percentage point to a 4.2 percent pace in the fourth quarter, still the fastest since the first quarter of 2006.

A tightening labor market and lower gasoline prices are likely to keep supporting domestic demand and help the economy navigate a turbulent global economy.

Improved employment prospects and cheaper gasoline also are keeping consumers in a buoyant mood.

A second report showed the University of Michigan’s final February reading on the overall index on consumer sentiment was 95.4, higher than the initial reading of 93.6. The data pointed to sturdy consumer spending growth this year.

“We continue to expect consumer spending to kick the year off on a robust foot after the drop in energy prices gave consumers a substantial windfall,” said Bricklin Dwyer, an economist at BNP Paribas in New York.

Business spending on equipment in the fourth quarter was revised to show it rising at a 0.9 percent rate instead of the previously reported 1.9 percent contraction.

A first-quarter acceleration is now in the cards, with data on Thursday showing a rebound in business spending intentions in January after four straight months of declines.


The Commerce Department data showed that growth in final sales to domestic purchasers, a key measure of domestic demand, was revised to a 3.2 percent pace for the fourth quarter from the previous 2.8 percent rate.

The GDP growth revision was generally in line with expectations. Prices for most U.S. Treasury debt rose, while U.S. stocks were trading marginally lower. The U.S. dollar fell against a basket of currencies.

Businesses accumulated $88.4 billion worth of inventory in the fourth quarter, far less than the $113.1 billion the government had estimated last month.

That resulted in the GDP growth contribution from inventories being revised down to one-tenth of a percentage point from 0.8 percentage point previously.

The slower pace of inventory accumulation, however, will be a boost to GDP growth this quarter. Current estimates put the first-quarter growth pace at between 2.4 percent and 3 percent.

Strong domestic demand sucked in more imports than previously reported in the fourth quarter, resulting in a trade deficit, which subtracted 1.15 percentage points from GDP growth instead of the previously reported 1.02 percentage point drag.

Despite the strong consumption, inflation pressures were muted, with the personal consumption expenditures price index falling at a 0.4 percent rate – the weakest reading since early 2009. The PCE index was previously reported to have declined at a 0.5 percent pace.

Excluding food and energy, prices rose at an unrevised 1.1 percent pace, the slowest since the second quarter of 2013.

The low inflation environment suggests little urgency for the Federal Reserve to start raising interest rates from near zero, where they have been since December 2008.

Residential construction spending in the fourth quarter was revised down, while government spending was not as weak as previously reported.

But with the labor market gaining steam, housing is set for an acceleration this year.

A third report on Friday from the National Association of Realtors showed contracts to purchase previously owned homes rose 1.7 percent in January to their highest level in 1-1/2 years.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

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Retail loan investors return as rate rises near

NEW YORK (Reuters) – Retail investors are returning to bank loan mutual funds following seven straight months of outflows, with the Federal Reserve more clearly signaling an interest rate hike and higher secondary loan market prices starting to attract momentum buyers, investors and strategists said.

The first weekly inflows of $130 million broke a 31-week streak of outflows in the week ending February 18. Although net flows turned negative again with $118 million withdrawn in the week ending February 25, they have moderated and are seen turning positive with Fed rate hikes nearer, these sources said.

Fed Chair Janet Yellen’s congressional testimony this week increased confidence that the central bank will raise interest rates this year for the first time since 2006, although Yellen refused to be pigeon-holed on precise timing.

Floating rate loans provide a natural hedge against rising interest rates. Retail accounts poured $81 billion into bank loan funds for 95 straight weeks until April 2014, Lipper data shows, before global economic concerns and crashing oil prices held U.S. interest rates low for longer than most economists anticipated.

When the interest rate rise failed to materialize, retail accounts started a seven-month exodus that saw around $36 billion pulled from loan funds until the pace slowed this month, according to Lipper.

“Retail investors capitulated over the summer on rising interest rates,” said Leland Hart, head of BlackRock’s bank loan team. “A rate rise will likely have to stare them right in the face because people have waited so long for it to happen.”

Whether rates rise in June, or in September or October as some economists predict, higher interest rates are now within sight after several false starts that triggered selling in the loan market, strategists agree.

Fears of over-valuation in the leveraged finance market are also subsiding, spurring the gradual return of retail investors to leveraged loans.

Fed and other government officials, concerned about a bubble forming in junk bonds and leveraged loans, clamped down on risky deals in mid-2014 to try to cool aggressive borrower-friendly terms driven by robust investor demand.

“It had gotten to the point where it was definitely a borrower’s market, and that probably scared a lot of people off when rates didn’t rise,” said Jeff Tjornehoj, head of Lipper Americas Research.

“Once people love loan funds, they love them for a long time until they don’t love them, and then they don’t love them for a long time,” he said.

Talk of a bubble has also subsided, however, and Yellen did not highlight below-investment grade corporate debt in her congressional testimony.

Investors now see the leveraged loan market as better aligned and valued, after volatility widened spreads, pushed average secondary prices to more than a two-year low of 97.16 and led to sweeter terms on new transactions.

Interest rates are setting the tone and 2015’s swings in Treasury yields have helped to raise confidence in the loan market that the Fed is on course to tighten monetary policy this year, investors said.

Heavier outflows persisted as Treasury 10-year yields sank to about 1.64 percent on January 30, the lowest rate since May 2013, before abating in recent weeks as the Treasury yield hovered around 2 percent.

There is also growing evidence that leveraged lending guidance from U.S. regulators is reining in some of the riskier deal structures that were seen last year.

Although the loan market is seeing a supply-demand imbalance again, with a relative dearth of new primary deals rather than abundant volume, there is more of a two-sided market this year.

“Leveraged lending guidance will have some effect” in tempering froth, said Steven Oh, global head of credit and fixed income at PineBridge, adding that retail investors in loan funds are typically momentum driven and tend to follow market shifts.

Secondary loan prices are rebounding, boosted by continued demand from Collateralized Loan Obligation (CLO) funds. New CLO issuance this year of about $12 billion is higher than the same period in 2014, although estimates for the full year of $60 billion to $100 billion for 2015 are below last year’s record $123 billion.

Average bids in the overall secondary loan market were 97.69 late Wednesday, up from 97.43 at the end of last year, according to Thomson Reuters Secondary Market Intelligence. The average bid in the SMi100, which measures the 100 most widely held loans, was 98.82, up from 97.75 at year-end.

If retail demand is sustained, loan funds could start to compete with CLOs for leveraged loans, which could cause spreads to tighten, Deutsche Bank analysts said in a February 25 report.

Retail investors have been pulled in recently by the sharp increases in secondary loan prices, the analysts said, and fund inflows will subside as prices stabilize.

“Over the medium to longer term, however, we still believe that the prospect of rising rates should slow outflows as investors rekindle their love for the floating-rate nature of leveraged loans,” the analysts said.

(Editing By Tessa Walsh and Michelle Sierra)

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Wall St flat as mixed data provides scant incentives

NEW YORK (Reuters) – U.S. stocks were little changed on Friday, as a mixed batch of economic data provided investors with little incentive to push equities to new records.

Data continues to point to a slowly improving U.S. economy. U.S. growth slowed more sharply than initially thought in the fourth quarter but the underlying fundamentals remained solid, while a gauge of business activity in the U.S. Midwest dropped to its lowest reading since July 2009 in February.

However, pending home sales rose to their highest level in 1-1/2 years in January and the University of Michigan’s final February reading on the overall index on consumer sentiment slipped from an 11-year high but topped expectations.

“You are in a place where the U.S. economy is a little softer, at least the data we are getting. I would argue it is still on solid footing, it is just we are in a bit of an ebb and the market is kind of ebbing with it a little bit,” said Bill Stone, chief investment strategist at PNC Wealth Management in Philadelphia.

The Dow and Nasdaq were on track for a fourth straight week of gains, while the SP was flat for the week. The Dow and SP 500 are near record highs and the Nasdaq is within striking distance of the 5,000 level.

“You are sitting at highs and obviously some bit of good news at least is built into those highs and you need something else to get you over the hump,” said Stone.

The Dow Jones industrial average .DJI fell 16.95 points, or 0.09 percent, to 18,197.47, the SP 500 .SPX gained 0.57 points, or 0.03 percent, to 2,111.31 and the Nasdaq Composite .IXIC dropped 2.57 points, or 0.05 percent, to 4,985.32.

After a sluggish start to the year, stocks have rebounded sharply in February. Both the Dow and SP 500 are on track for their best month since October 2011, while the Nasdaq is on pace for its best month since January 2012.

Bank of America (BAC.N) shares lost 1.8 percent to $15.76 after the company said two members of its board of directors and its chief accounting officer will be leaving the company in coming weeks. UBS also cut its rating on the stock to “neutral” from a “buy” rating.

J.C. Penney (JCP.N) dropped 7.8 percent to $8.41 after the retailer posted a surprise quarterly loss and forecast small margin improvements this year.

With earnings season mostly wrapped up, Thomson Reuters data through Thursday morning showed that of the 475 companies in the SP 500 that have reported earnings, 69.5 percent have beaten expectations, against 69 percent in the last four quarters. Earnings growth for the quarter is expected to be 6.8 percent.

Advancing issues outnumbered declining ones on the NYSE by 1,529 to 1,245, for a 1.23-to-1 ratio; on the Nasdaq, 1,282 issues fell and 1,207 advanced for a 1.06-to-1 ratio favoring decliners.

The benchmark SP 500 index was posting 21 new 52-week highs and 1 new lows; the Nasdaq Composite was recording 68 new highs and 10 new lows.

(Editing by Bernadette Baum)

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Greece runs out of funding options despite euro zone reprieve

BRUSSELS/ATHENS (Reuters) – Greece is running out of options to fund itself despite a four-month bailout extension, raising pressure on Athens to quickly implement reforms it has vocally opposed or default on debt repayments in a matter of weeks.

Eurozone and IMF creditors gave Greece extra time until the end of June to complete the bailout program and receive the remaining 7.2 billion euros but it will not be allowed any funds until it passes a review that could take weeks to negotiate.

Shut out of debt markets and faced with a steep fall in tax revenues, Athens is expected to run out of cash by the middle or end of March. Its finance minister has warned that Greece will struggle to repay creditors starting with a 1.5 billion euro IMF loan repayment due in March.

Athens has been looking for quick fixes to tide it through the coming weeks but has not found one yet.

Euro zone officials hope the liquidity squeeze will force Prime Minister Alexis Tsipras’s nascent government to agree reform plans more quickly than the end of April deadline set by creditors, paving the way for bailout funding to be released.

“The liquidity squeeze is being used to push the Greeks to very quickly start discussions on the review and finish that as soon as possible – not even waiting for the end of April,” one euro zone official said.

Other options all appear to have problems. One possibility – the transfer of 1.9 billion euros worth of profits that the European Central Bank made on buying Greek bonds – will not be allowed until Greece has completed the bailout program.

Greece had also hoped it could tap the almost 11 billion euros of leftover money in the Greek bank stabilization fund, but euro zone finance ministers have decided the money would be returned to the Luxembourg-based euro zone bailout fund.

While it would still be available for Greek banks, it could only be released on the say-so from the ECB.

The only source of quick cash left to the Tsipras government now is issuance of Treasury bills, or short-term debt that matures in three or six months. But Athens’ creditors have set a 15 billion euro cap on such debt and it has already been reached.

The euro zone has so far ruled out any raising that ceiling, partly on concerns that it is tantamount to central banks financing governments. That’s because Greek banks have been using the T-bills as collateral to tap central bank funding and then using the cash to invest in more T-bills, helping the state cover short-term needs.

One person familiar with ECB thinking said that any extension of the T-bill limit was “very unlikely”. A senior Greek banker said the expectation in Athens remained that the ECB would relent and allow some leeway on T-bills.

“The Greek state is pinning all its hopes on the ECB allowing an extra T-bill auction,” the banker said.

The government is also putting a brave face on its funding crisis, and insists that T-bill issuance remains an option.

“At the moment the Greek economy can cover its funding needs in ways which don’t need any loan,” government spokesman Gabriel Sakellaris told Greek television. “For example, an increase in the level of T-bills which can be issued by the Greek state. That is a decision which the ECB should and can take.”


The onus is now on Athens to rush through reforms to unlock the remaining aid.

The government has submitted a reform plan to creditors that sidesteps politically dangerous measures like pension cuts, tax hikes and public sector layoffs included in the existing bailout.

But despite the acceptance of the reform plan by the euro zone, it has been criticized by two major creditors – the ECB and the IMF – for lacking detail and it is not clear how much flexibility Athens has in veering from its original bailout.

The reforms agreed under the previous government could be implemented within two to three weeks, a second euro zone official said.

But that appears highly unlikely, given complaints from Greece’s official creditors of not knowing who to negotiate with in Athens and a mood of anger and mistrust over contradictory messages on reforms.

For a period, Greece could save money by delaying payments to suppliers or try to raise up to 3 billion euros by borrowing from state entities such as pension funds though the government may already have used up part of this, one source familiar with the matter said.

In any case those options would only give Athens a breather of a few weeks, since it has monthly needs of about 4.5 billion euros, including a wage and pension bill of 1.5 billion and 1 billion euros in health and social security costs.

Latest budget data for January, meanwhile showed a 1 billion euro shortfall on tax revenues, adding to the country’s woes.

After the March IMF repayment, Athens faces 800 million euros in interest payments in April with a major financing hump in the summer, when it has to repay about 8 billion euros to official lenders including 6.5 billion euros to the ECB.

“Eventually they will have no other choice but to adopt the measures, and move quickly,” the first euro zone official said.

(Additional reporting by Lefteris Papadimas and Costas Pitas in Athens, John O’Donnell in Frankfurt; editing by Anna Willard)

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U.S. consumer sentiment drops from 11-year peak in February

NEW YORK (Reuters) – U.S. consumer sentiment fell from an 11-year high in February, weighed down by an unusually severe winter, a survey released on Friday showed.

The University of Michigan’s final February reading on the overall index on consumer sentiment was 95.4, sliding from January’s 98.1, which was the highest since January 2004.

February’s final number, however, was higher than the initial estimate of 93.6 released in the middle of the month, and was stronger than the market forecast of 94.0.

The survey’s barometer of current economic conditions fell to 106.9 from 109.3 in January, but beat a forecast of 103.

The report’s gauge of consumer expectations also slipped to 88 from 91, but was roughly in line with forecasts for this metric.

“It is hard not to attribute the small February decline to the temporary impact of the harsh weather, as declines that occurred in the Northeast and Midwest were triple the average loss, while Southern residents grew more optimistic,” the report said.

Data also indicated that personal consumption expenditures will grow 3.3 percent this year.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Meredith Mazzilli)

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Fed’s Dudley: Risk of raising rates too soon higher than waiting longer

(Reuters) – The Federal Reserve faces a greater risk of raising interest rates too soon than it does in waiting, a top Fed official said on Friday, citing a depressed level of current inflation.

New York Federal Reserve Bank President William Dudley, a permanent voter on the Fed’s policy setting committee, urged caution on the issue of when the central bank should lift rates, which it is expected to do later this year.

“I believe that the risks of lifting the federal funds rate off of the zero lower bound a bit early are higher than the risks of lifting off a bit late,” he said in prepared remarks at a University of Chicago Booth School of Business event in New York. “This argues for a more inertial approach to policy.”

Dudley was responding to a paper presented at the event.

The former Goldman Sachs economist said he did not agree with the notion that a central bank should follow a simple policy rule, as some conservative economists and lawmakers have argued.

(Reporting by Michael Flaherty; Editing by Chizu Nomiyama)

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Brent rises above $61, set for first monthly gain since June

LONDON (Reuters) – Crude oil futures rebounded on Friday and Brent headed for its first monthly gain since June, helped by strong investor inflows, an improving demand outlook and supply outages.

At 9.53 a.m. ET, Brent crude futures LCOc1 were up $1.26 at $61.32 a barrel, off an earlier high of $61.75. U.S. crude CLc1 was up 94 cents at $49.12 a barrel. Both contracts tumbled on Thursday, with U.S. crude falling hardest.

Brent is trading at a premium of more than $12 to U.S. crude, which remains hamstrung by massive inventory builds [EIA/S]. This is the widest spread since January 2014.

“The main event this week has been the widening of the spread between Brent and WTI (U.S. crude),” Ole Hansen, senior commodity strategist at Saxo Bank, said. “WTI is still only a few dollars above the lows, but Brent has lifted off.”

Brent is up around 15 percent this month from January’s close of $52.99, on course for its biggest monthly gain since May 2009. U.S. crude is also set for its first monthly rise in eight, but with a modest gain of about 1.9 percent.

Brent is being helped by positive euro zone and Chinese data, plus supply disruptions in Libya, said Hans van Cleef, energy economist at ABN Amro.

China’s implied oil demand is set to grow by 3 percent this year, the country’s top energy group China National Petroleum Corp said.

Disruptions to production and exports from Libya and Iraq in recent weeks have contributed to tightness in the physical market in the Mediterranean, while in the North Sea, Statoil has shut its Statfjord C platform after discovering cracks in the flare tower.

But analysts at JBC Energy warned that supply-side support could wane in coming weeks. “Many of the outages that we have witnessed of late appear bound to come back next month,” they said in a note.

The latest rig-count number from oil services company Baker Hughes will emerge later on Friday, providing an update on how the U.S. shale industry is responding to lower oil prices.

But analysts said much of the move up in Brent was speculative and fundamentals could not explain its relative strength given that the market remains oversupplied.

“The market is searching for a new balance, or a fair price, as OPEC would call it,” van Cleef said. “We are seeing a lot of speculative trading and prices can rise or fall 2 or 3 percent on a daily basis based on nothing.”

(Corrects headline and first paragraph to say first monthly gain since June, not July)

(Additional reporting by Jane Xie in Singapore; Editing by Dale Hudson)

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Fiat Chrysler says recalling 467,500 SUVs worldwide

DETROIT (Reuters) – Fiat Chrysler Automobiles (FCAU.N) said on Friday it will recall about 467,500 SUVs worldwide in order to fix a fuel-pump issue that could cause the engine to either stall or not start.

The U.S. arm of Fiat Chrysler said it wasn’t aware of any crashes or injuries linked to this issue.

The vehicles affected are the Dodge Durango from model years 2012 and 2013 and the Jeep Grand Cherokee diesel versions from 2011 model year sold outside North America.

The recall is related to one last September in North America for 230,760 Grand Cherokee and Durango SUVs with gasoline engines, both from the 2011 model year. No injuries or crashes linked to the issue were reported.

FCA said the no-start issue was more prevalent than the engine stall in the latest recall. It affects an estimated 338,216 vehicles in the United States, 18,991 in Canada, 10,829 in Mexico and 99,444 outside North America.

(Reporting by Bernie Woodall; Editing by Chizu Nomiyama and Bernadette Baum)

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Standard Chartered staff braced for big change under Winters

HONG KONG (Reuters) – Incoming Standard Chartered Chief Executive Bill Winters will need to take tough decisions that predecessor Peter Sands deemed unnecessary, in order to reverse a two-year slump in the bank’s fortunes, according to some insiders and bankers.

In a major boardroom reshuffle that signaled the end of an era at the Asia-focused bank, Standard Chartered said Thursday that Winters would take over in June, initially prompting a giddy reaction among investors, analysts and some staff.

The lender’s shares (STAN.L) have risen nearly 10 percent in the last two days.

Winters faces challenges including cleaning up the bank’s books following a spike in bad loans, raising at least $4 billion in capital, trimming costs further in an underperforming retail division and improving investment banking performance.

“There’s a mood of borderline euphoria and excitement today… after six grim months where the sense of passion and urgency fell away a bit,” said a senior Asia-based insider.

That mood reflects the expectation that Winters, 53, a seasoned American investment banker, will tackle some of the bank’s problems head-on rather than argue, as Sands had done, that only smaller revisions to its strategy were necessary.

The biggest of those problems is the need to raise capital to cover the costs of a clean-up of the bank’s books, which have been hit by rising bad loans in countries including China and India and by exposure to commodities.

“(Winters) has to do some very deep plumbing to understand the depth of the problems in asset quality, credit exposure, litigation risks, mismarked positions,” said Michael Dee, former Southeast Asia CEO of Morgan Stanley and senior managing director at Temasek, Standard Chartered’s biggest investor, from 2008-10.

Once Winters has assessed those problems, he will then have to raise a lot of capital in one go, Dee added.

Analysts differ in their assessment of how much the bank needs, but the consensus is at least $4 billion, with some saying as much as $7 billion in order to get the bank’s core capital ratio to 11 percent by the year-end.

Outgoing CEO Sands said the bank had no immediate plans to raise capital.


Sands has had a grim time since the summer of 2012, facing problems with the U.S. regulator and a rise in losses on loans to commodities firms. But before then the bank had 10 successive years of record growth and delivered good returns to investors, and Sands was praised for steering the bank through the financial crisis better than almost all rivals.

He was prepared to make changes more recently, including the January announcement that the bank would shut its equities division and cut around 4,000 jobs in its underperforming retail unit, a move which won praise from the market.

Insiders are bracing for further major changes once Winters assesses the bank he is taking over.

“We’ve got a ton of challenges. Bill Winters has one mandate: to change things. I fully expect a review of everything,” said the senior Asia-based Standard Chartered insider.

Deputy CEO Mike Rees held an internal call on Thursday during which he said there would be no major change in strategy, according to someone on the call, but some people inside the bank expect further job cuts.


While Winters is a well-regarded banker, he lacks much experience in Asia where the bulk of Standard Chartered’s business, and its problems, lie.

In recent results announcements, the bank has focused attention on credit problems in China and India, but it also saw bad loans spike 31 percent in Southeast Asia in the first half of last year. The bank is due to report on Wednesday.

The lender’s business model involves funding companies that trade across its core markets of Asia, the Middle East and Africa, providing them with loans, cash management, forex and other products.

That can be capital-intensive, a strategy that has become harder amid rising funding costs and regulatory changes that put more pressure on banks’ use of capital.

“The model is quite old-school, lending to resource companies over tech, very balance sheet-intensive, and that’s more challenging now,” said a former senior Standard Chartered banker who worked in Asia.

Winters will also need to fix Standard Chartered in Korea, where the bank recorded a $1 billion writedown in 2013, and has seen its return on equity decline annually since 2008 from 12.4 percent to 0.1 percent in the first 9 months of 2014.

Insiders and market observers are betting problems like these could prompt Winters to make bold decisions.

“Standard Chartered was a collection of fiefdoms, run by warlords and overseen by princes,” said former Temasek director Dee. “Sustainable change will take five to seven years if it happens at all,” he said.

(Additional reporting by Saeed Azhar; Editing by Mike Collett-White)

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