News Archive


U.S. economy nearly stalls in first-quarter as weather, lower energy prices bite


WASHINGTON (Reuters) – U.S. economic growth braked more sharply than expected in the first quarter as harsh weather dampened consumer spending and energy companies struggling with low prices slashed spending, but there are signs activity is picking up.

Gross domestic product expanded at an only 0.2 percent annual rate, the Commerce Department said on Wednesday. That was a big step down from the fourth quarter’s 2.2 percent pace and marked the weakest reading in a year.

A strong dollar and a now-resolved labor dispute at normally busy West Coast ports also slammed growth, the government said. The weak growth, though probably temporary, reduces the chances of a June interest rate hike from the Federal Reserve.

“A stalling of U.S. economic growth at the start of the year rules out any imminent hiking of interest rates by the Fed,” said Chris Williamson, chief economist at Markit in London.

Economists polled by Reuters had forecast the economy expanding at a 1.0 percent rate.

The dollar fell to an eight-week low against a basket of currencies after the report. The yield on the benchmark 10-year U.S. Treasury note retreated from a six-week high.

The sharp growth slowdown is probably not a true reflection of the economy’s health, given the role of temporary factors such as the weather and the ports dispute.

The first-quarter GDP snapshot was released just hours before Fed officials conclude a two-day policy meeting. Policymakers at the U.S. central bank are expected to acknowledge the softer growth, but shrug it off as temporary in a statement they will issue after their gathering.

While there are signs the economy is pulling out of the soft patch, data on home building, manufacturing, retail sales and business investment suggest the rebound will lack the vigor seen last year when the economy snapped back after being blindsided by cold weather.

At the start of this year, many economists believed the Fed would raise interest rates from near zero in June. Now, most of the guessing centers around September.

HIBERNATING CONSUMERS

The government did not quantify the impact of the weather, the strong dollar, lower energy prices and the ports disruptions on growth last quarter.

Economists, however, estimate unusually cold weather in February chopped off as much as half a percentage point, with the port disruptions shaving off a further 0.3 percentage point.

The weather impact was evident in weakness in consumer spending. Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, slowed to a 1.9 percent rate. That was the slowest in a year and followed a brisk 4.4 percent pace in the fourth quarter.

The sharp moderation in consumer spending came even though households enjoyed huge savings from a big drop in gasoline prices. Consumers boosted their savings to $727.8 billion from $603.4 billion in the fourth quarter.

Construction also took a hit from the weather, while lower energy prices, which have cut into domestic oil production, undermined business investment.

Spending on nonresidential structures, which includes oil exploration and well drilling, tumbled at a 23.1 percent rate. That was the fastest pace of decline in four years and marked the first contraction since the first quarter of 2013.

The decline in nonresidential structures was driven by mining, exploration, shafts and wells, which plunged at a 48.7 percent pace in the first quarter.

“The downward pressure on profits, the large drop in oil-related investment and the strong dollar are holding back the U.S. economy,” said Gad Levanon a managing director at the Conference Board in New York.

Schlumberger (SLB.N), the world’s No. 1 oil-field services provider, has slashed its capital spending plans for this year by about $500 million to $2.5 billion, while competitor Halliburton (HAL.N) cut its by about 15 percent to $2.8 billion.

While companies have not given a time frame, economists believe the bulk of the spending cuts were front-loaded into the first quarter, and they expect energy-related investment cuts will present less of a drag on growth in the April-June quarter.

The dollar, which gained 4.5 percent against the currencies of the United States’ main trade partners in the first quarter, weighed on trade, as did the West Coast ports dispute. Trade subtracted 1.25 percentage points from first-quarter GDP growth.

The dollar is expected to remain an economic headwind in the quarters ahead. Economists estimate it will reduce growth by 0.6 percentage point this year.

There was a surprise increase in inventory accumulation, which added 0.74 percentage point to GDP growth.

Inventories increased $110.3 billion from $80.0 billion in the fourth quarter. But the jump suggests inventories will weigh on growth in the second quarter.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/ZPV_ImhwtPM/story01.htm

Time, and oil prices, ticking for Shell-BG deal


LONDON (Reuters) – Rising oil prices are putting Royal Dutch Shell (RDSa.L) under pressure to execute its landmark $70 billion deal to buy rival BG (BG.L) as soon as possible before investors in BG start to take a more critical look at the terms.

Announced three weeks ago, the deal was seen as a bold bet by Shell on the oil price recovering to $80-$90 per barrel within three years, justifying a 50 percent premium the Anglo-Dutch giant agreed to pay for BG in the biggest oil merger of the decade.

The cash and share deal followed a relatively low oil price of around $55 per barrel during the first three months of 2015.

That means the conversion rate was arguably more favorable for Shell shareholders as its stock is more resilient during periods of cheaper oil. BG stock tends to perform better when the oil price recovers because it eases concerns over the development of expensive projects, such as in Brazil and East Africa.

Since the cash and stock deal was first discussed by Shell and BG’s executives over a phone call in mid- March, the price of oil has risen by 25 percent to $65 per barrel.

Given that the deal was based on the average share price of BG stock in the three months to April 7, BG’s shareholders risk feeling they are not getting full value for that oil bounce.

“The maths would suggest that were the oil price at or above $80 then Shell would be snaring BG for a very attractive price,” said Matthew Beesley, head of global equities at Henderson, which has $81 billion under management including BG’s stock.

“While the total determination is of course dependent on the level of Shell shares at the time of issuance to BG shareholders, above $80 its not inconceivable that BG shareholders could start to agitate for a higher bid or indeed a competing bid,” added Beesley.

BG investors will receive 383 pence in cash and 0.4454 Shell B class shares for each of their BG shares. At current prices, that values BG shares at around 13 pounds, a premium of around 12 percent to where they now trade.

Shell, which reports its first quarter results on Thursday, declined to comment.

ANTI-TRUST OBSTACLES

Ivor Pether, senior fund manager at Royal London Asset Management, which has $82 billion under management including Shell stock, said he believed that even at $75-$80 per barrel the deal worked for Shell both strategically and financially.

“If the oil price shot up to that level while the deal was completing it could prompt some debate about the value being offered to BG holders. But you would have to believe the oil price rise was here to stay,” he said.

“I don’t expect major regulatory hurdles, but the timetable isn’t clear yet,” Pether said adding that Shell needs clearance from anti-trust authorities in Brazil, the EU, Australia and China before it can issue offer documents to BG’s shareholders.

Shell has said it does not expect major obstacles in obtaining anti-trust clearance but has indicated it could extend into 2016 given the complexity of talks.

“With CEO Ben van Beurden loudly espousing the strategic rationale of the deal and the role it can have in foisting change upon Shell, they’ll be looking to get it approved by regulators and closed as soon as they can – just in case,” said Beesley.

Van Beurden is determined to make Shell a mega-player and the merger with BG will allow Shell to overtake its top rival U.S. ExxonMobil (XOM.N) as the largest hydrocarbon producer as early as 2018 thanks to new huge fields in Brazil and Australia.

Van Beurden has already traveled to Brazil, where he met with the country’s leadership as well as Trinidad, where BG has large gas facilities.

China and Australia will be next on the agenda as the Shell leadership is perfectly aware of the pressures the rising oil price has created, according to industry and banking sources.

Back when the deal was first discussed, it wasn’t only the oil price but several other factors, which helped Shell persuade BG’s board it was the right deal.

“The stars really aligned back in March,” one senior source familiar with the discussions said.

Several days before Van Beurden called BG’s veteran chairman Andrew Gould to offer the deal, BG’s stock fell heavily on news that rival Portuguese firm Galp saw delays to projects in Brazil because of an ongoing corruption probe.

However, in the past few weeks the general mood in the oil market has improved, with most industry watchers saying prices could rise further from now on.

(writing by Dmitry Zhdannikov; Editing by Keith Weir)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/_XJ0R0LKN9M/story01.htm

Pimco hires Bernanke as senior adviser


NEW YORK (Reuters) – Former Federal Reserve chairman Ben Bernanke is joining bond giant Pimco as a senior adviser, as the firm seeks to bolster its star power following the departure of co-founder Bill Gross.

The move may be questioned by some competitors who had criticized the Fed during Bernanke’s reign for being too close to Pimco, whose full name is Pacific Investment Management Co. The critics suggested that could have potentially given the Newport Beach, California-based firm an advantage in interpreting monetary policy.

    In an interview, Bernanke, who only last week announced he’d signed on to consult for the hedge fund Citadel, said he will restrict his Wall Street advisory roles to just the two firms. He also works at the Brookings Institution.

    “I remain full time at Brookings. I am not an employee of either firm. I am an outside senior adviser,” Bernanke, 61, told Reuters.

    “This is it,” he said.  “There won’t be anymore. They (Pimco and Citadel) prefer not having me consult too many firms and I personally think working with two firms will be plenty.”

    Both Pimco, which oversees $1.59 trillion in assets as of March 31, and Bernanke declined to say how much he would be paid but did say he will be attending every Pimco quarterly meeting of top executives. He will not come cheap, though, given he received as much as $250,000 for single speaking engagements last year – more than the $200,000 he received in annual salary as Fed chairman.

    Bernanke said he has never met Gross, the legendary bond manager known as the ‘Bond King’ who suddenly exited Pimco last September for smaller rival Janus Capital Group Inc (JNS.N). For decades, Gross had brushed off the suggestions that Pimco was too close to the Fed under Bernanke, who chaired the Fed between February 2006-February 2014.

    “The Fed does not regulate Pimco or its parent or any other firm that is affiliated with it,” Bernanke said. The same situation obtains with Citadel, he said. “So there is no contact.”

    He added: “I am not going to be involved in any kind of lobbying or any kind of influence with the Fed or Congress or anybody else in the government.”

Former Fed chairman Alan Greenspan, Bernanke’s predecessor, also consulted for Pimco, which is owned by Germany’s Allianz SE (ALVG.DE), between 2007 and 2011.

    In late 2008, the Fed hired Pimco, along with three other big Wall Street firms, to implement enormous purchases of agency mortgage-backed securities to keep interest rates low and spur the U.S. economy. Pimco also managed the commercial-paper assets for the Fed during that period.

“If they were employed to do that kind of thing, that was in their professional capacity,” Bernanke said. “I had nothing to do with selecting them or I had no involvement with them myself.”

When asked if he has advised Pimco to prepare for an expected interest rate hike this year, Bernanke said: “No, I haven’t given them any advice on that. I will be speaking broadly about the economy and markets.”

    All told, Bernanke said: “From my perspective, they are a firm that the way they operate is by taking a macro view — they try and decide how they see the economy evolving both in the United States and abroad and they base their investment strategies on that macro view. That’s something where I believe I can be helpful, thinking about where the economy is going.”  

     Bernanke, who was a guest speaker at a Pimco client event in mid-March and a participant at the firm’s year-end investment forum last December, said discussions about joining Pimco began in October.

    Bernanke’s lawyers, Robert Barnett and Michael O’Connor of Williams Connolly LLP, were the chief architects of the Pimco arrangement, according to a source familiar with the matter. Barnett and O’Connor are said to also have brokered Greenspan’s advisory deal with Pimco, the source added.

    Bernanke’s appointment comes as investors continue to pull money from some Pimco funds six months after the exit of Gross. Pimco has seen $123.5 billion of net withdrawals from its open-ended funds since Gross’ departure even as performance has improved. 

    Outflows from the flagship Pimco Total Return Fund, the world’s largest bond fund which Gross managed since 1987, have slowed to an average of $7 billion to $8 billion a month recently from $23.5 billion in September. 

    In the first three months of the year, the Pimco Total Return Fund delivered a net after-fee return of 2.22 percent, outperforming its benchmark by 61 basis points and generating excess returns of 68 basis points above the Morningstar Intermediate Term Bond Average.

    “We are honored to have Dr. Bernanke serve as an advisor to Pimco, and look forward to benefiting from his extraordinary knowledge and expertise to help us add value for our clients,” Douglas Hodge, Pimco’s chief executive officer said in a statement.

    “His unrivalled experience in navigating the global economy through the financial crisis will provide Pimco’s investment professionals with unique insights as we help our clients amidst a challenging and uncertain period for global markets in coming years.”

    Hodge declined to discuss Bernanke’s compensation or whether Bernanke will have an equity stake in Pimco.

(Reporting By Jennifer Ablan; Editing by Martin Howell)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/jlIYOLxypJk/story01.htm

Wall Street opens lower as data shows slowing economic growth


(Reuters) – U.S. stocks fell at the open on Wednesday after data showed that economic growth braked more sharply than expected in the first quarter, and ahead of the U.S. Federal Reserve’s likely move to maintain interest rates.

U.S. gross domestic product grew at only 0.2 percent annual rate in the quarter as harsh weather dampened consumer spending and energy companies struggling with low prices cut spending.

The reading was the weakest in a year and was lower than the 1.0 percent rate forecast by economists polled by Reuters.

Investors will closely examine the Fed’s statement for clues on when rates are likely to be increased, as a batch of soft data could push back the timing of a hike until the end of the year. The statement is expected at 1400 p.m. EDT (1800 GMT).

“The mixed economic data has been a concern. The low-rate environment is a bubble in itself and its like riding a balloon until the pin pops,” said Andre Bakhos, managing director at Janlyn Capital in Bernardsville, New Jersey.

At 9:59 a.m. EDT (1359 GMT) the Dow Jones industrial average .DJI was down 49.22 points, or 0.27 percent, at 18,060.92, the SP 500 .SPX was down 4.86 points, or 0.23 percent, at 2,109.9 and the Nasdaq Composite .IXIC was down 10.41 points, or 0.21 percent, at 5,045.01.

A number of companies also posted mixed earnings.

Twitter (TWTR.N) shares were down 4 percent at $40.64 in early trading, a day after the company cut its full-year forecast due to weak demand for its new direct response advertising.

MasterCard (MA.N) rose 2.6 percent to $92.63 after reporting a better-than-expected profit as costs fell and people spent more on its cards. The results also boost Visa (V.N) 1.7 percent to $67.95, making it the biggest boost to the Dow Jones Industrial average.

Lumber Liquidators (LL.N) slumped 16.7 percent to $27.81 after the hardwood flooring retailer said the U.S. Department of Justice is seeking criminal charges related to the import of certain wood flooring products from China.

Starwood Hotels (HOT.N) rose 8.6 percent to touch a record high of $87.88 after it said it was exploring strategic and financial alternatives.

GrubHub (GRUB.N) declined 8 percent to $41.56 after the online food delivery company’s profit missed market estimates due to a spike in expenses and taxes.

Goodyear (GT.O), the largest U.S. tire maker, rose 5.4 percent to $28.63 after reporting a better-than-expected quarterly profit as it offset the effects of a stronger dollar by managing costs.

Declining issues outnumbered advancing ones on the NYSE by 2,094 to 693, for a 3.02-to-1 ratio on the downside; on the Nasdaq, 1,526 issues fell and 842 advanced for a 1.81-to-1 ratio favoring decliners.

The benchmark SP 500 index was posting 9 new 52-week highs and 1 new lows; the Nasdaq Composite was recording 25 new highs and 27 new lows.

(Editing by Savio D’Souza)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/sYWAbbEcRtk/story01.htm

Contracts for U.S. home sales at highest level since June 2013


WASHINGTON (Reuters) – Contracts to purchase previously owned U.S. homes rose in March to their highest level since 2013, a positive sign for the U.S. housing market amid expectations it is emerging from a soft patch.

The National Association of Realtors on Wednesday said its pending home sales index rose 1.1 percent last month.

Economists polled by Reuters had forecast a 1 percent gain. The NAR also revised its February reading to show a larger gain than initially reported.

The increase last month put contract signings, which usually turn into sales after a month or two, at their highest level since June 2013.

(Reporting by Jason Lange; Editing by Paul Simao)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/2GdLV_yoPVg/story01.htm

Lower costs help MasterCard handily beat profit estimates


(Reuters) – MasterCard Inc (MA.N), the world’s No. 2 debit and credit card company, reported a better-than-expected quarterly profit as costs fell and shoppers spent more on its cards.

MasterCard’s shares rose about 3.6 percent to a record-high of $93.59 in early trading on Wednesday. Larger rival Visa Inc’s (V.N) shares also rose 1.7 percent.

“We are managing well, despite a mixed economic environment and challenging currency situation,” Chief Executive Ajay Banga said in a statement.

Operating expenses fell about 1 percent to $879 million in the first quarter ended March 31, helped mainly by currency hedging.

The dollar .DXY, which has gained about 22 percent in the past 12 months against a basket of major currencies, has hurt U.S. multinational companies.

“Continued revenue momentum, good cost control, executing on our tax strategies … contributed to the performance,” Chief Financial Officer Martina Hund-Mejean said on a post-earnings conference call.

The company said it expects net revenue growth rate to be in low single digits in 2015 due to a stronger dollar.

MasterCard and larger rival Visa Inc (V.N) get more than 60 percent of their revenue from outside the United States, making them vulnerable to currency fluctuations. Visa is expected to report first-quarter earnings on Thursday.

American Express Co (AXP.N), the world’s largest credit card issuer, said earlier this month the dollar was partly to blame for its lower-than-expected quarterly revenue.

“(MasterCard) was able to overcome a drag from currency and grow volumes and earnings based on cost discipline,” Wedbush Securities analyst Gil Luria said.

MasterCard’s worldwide purchase volume increased 11.8 percent to $783 billion in local currency terms during the quarter, while cross-border volumes jumped 19 percent.

The company said on the call that it would be in a position to start operations in China by the end of 2016.

Last week, China said it would open up its market for clearing domestic bank card transactions to foreign firms.

MasterCard’s strong association with Chinese bank card behemoth UnionPay is expected to help it reap more benefits than Visa in the Chinese market.

MasterCard’s net revenue rose 2.7 percent to $2.23 billion.

Net income rose 17.2 percent to $1.02 billion, or 89 cents per share. On an adjusted basis, the company earned 91 cents a share, including a 2-cent acquisition charge.

Analysts on average had expected earnings of 80 cents per share on revenue of $2.28 billion, according to Thomson Reuters I/B/E/S.

(Reporting by Neha Dimri in Bengaluru; Editing by Joyjeet Das and Saumyadeb Chakrabarty)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/AlG4-tq404A/story01.htm

Profit beat wins VW respite after boardroom clash


BERLIN (Reuters) – Cost cutting and an improving European car market helped Volkswagen (VOWG_p.DE) post higher-than-expected profit in the first quarter, easing the pressure on management following the shock ouster of long-standing chairman Ferdinand Piech.

Four days after Piech quit in a showdown with his chief executive, Europe’s largest automaker reported a 17 percent rise in operating profit and the first quarterly increase in earnings for seven years at Spanish division Seat.

Operating profit reached 3.33 billion euros ($3.65 billion), Volkswagen (VW) said on Wednesday, close to the top end of forecasts in a Reuters poll of analysts and well above the average estimate of 3.12 billion euros.

With Piech raising question marks about CEO Martin Winterkorn’s ability to drive through improvements at VW, analysts were particularly relieved by signs of progress with the group’s modular production strategy which aims to use a core range of components across a wide variety of models.

“These are good numbers,” Bankhaus Metzler’s Juergen Pieper said. “The modular production strategy is progressing and tailwinds may grow over the course of the year,” he said, citing positive currency effects and cost savings at the core VW brand.

Earnings were boosted by a strengthening economic recovery in Europe — destination of 40 percent of the group’s auto sales — and by progress in the VW brand’s drive to cut costs by 5 billion euros a year by 2017.

Porsche, accounting for almost a quarter of group earnings, on Wednesday raised its profit guidance after posting better-than-expected results, citing favorable currency moves.

The yuan’s strength against the euro helped profit to surge 29 percent at VW’s two joint ventures in China, its biggest market, even though group sales only edged up 2 percent, finance chief Hans Dieter Poetsch said on a conference call.

CHALLENGING YEAR

However, a slowdown in emerging economies, falling deliveries in the United States and a collapse in Russian demand pose challenges for VW and still leave questions over Winterkorn’s strategy.

The underperformance of the VW brand in the United States and Latin America was one factor leading Piech to provoke the two-week confrontation with VW’s CEO that ended up forcing the chairman to resign.

The group said cost cuts boosted earnings by “a low triple-digit million-euro” amount at the VW brand between January and March, lifting the brand’s operating margin to 2 percent from 1.8 percent — still far off its 6 percent long-term goal.

“We have always emphasized that 2015 will be a challenging year for the automotive industry as a whole, and also for us,” Winterkorn said. “Our key figures show that the VW group remains on course, despite the headwinds.”

The German group still expects higher unit sales, revenue and an operating margin between 5.5 and 6.5 percent this year, after it reached 6.3 percent last year.

“The environment is getting better, there’s a good chance they’ll raise their margin target,” Bankhaus Metzler’s Pieper said.

VW shares, which initially gained as much as 2.2 percent, traded 3.4 percent lower at 1500 GMT ( 11.00 a.m. EDT) in line with the European stock market.

(Additional reporting by Jan Schwartz.; Editing by Georgina Prodhan and Mark Potter)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/CZfo6gQquA8/story01.htm

Ford recalls over 591,000 vehicles for steering, other problems


DETROIT (Reuters) – Ford Motor Co (F.N) said on Wednesday it is recalling more than 591,000 vehicles in North America for four separate problems, including possible broken bolts that could make steering more difficult.

The No. 2 U.S. automaker said it is recalling 518,313 Ford Fusion and Lincoln MKZ sedans from model years 2013-2015 and Ford Edge crossover vehicle from 2015 model year because steering gear motor attachment bolts may break due to corrosion. In that case, the steering system would default to manual mode, making it more difficult to steer, especially at lower speeds.

While no total loss of steering would occur, the problem could increase the risk of a crash, Ford said.

Ford said it was not aware of any accidents or injuries in the recall. Of the affected vehicles, 487,301 are in the United States and its territories, and 31,012 in Canada.

Dealers will replace the bolts and any damaged steering gear at no cost, Ford said. Customers located in non-corrosion states or provinces will be covered by an extended warranty.

Ford also recalled 50,157 Ford Focus, Edge Escape and Transit Connect vehicles from 2014 model year and Fiesta cars from 2014-2015 model years because of a nickel plating issue that could cause the fuel pump to seize. That could cause the vehicle to fail to start or to stall while driving.

Ford said it was aware of one incident that may be related to this issue.

Of the recalled vehicles, 45,505 vehicles are in the United States, 4,618 are in Canada and 34 are in Mexico. Dealers will replace the fuel delivery module.

Ford recalled 22,616 Lincoln MKZ sedans from 2015 model year because the parking lamps may be brighter than regulations allow, adversely affecting the vision of oncoming drivers. Of the affected vehicles, 21,435 are in the United States, 1,066 are in Canada and 115 are in Mexico.

Dealers will update software that controls the intensity of the lamps. Ford said it was not aware of any accidents or injuries related to the issue.

Ford also recalled 91 Ford F-150 pickup trucks from model year 2015 for potential underbody heat shield issues that increase the risk of a fire. Of the affected vehicles, 73 are in the United States and 18 in Canada.

Dealers will install missing parts as needed. Ford said it was not aware of any accidents or injuries.

(Reporting by Ben Klayman in Detroit; Editing by Jeffrey Benkoe)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/CghqhI-ratg/story01.htm

Fed meeting seen as chance to nudge markets on rate hike timing


WASHINGTON (Reuters) – As the Federal Reserve’s policy-setting committee wraps up its third meeting of the year, a critical task awaits the U.S. central bank: narrowing the wide gap between how it and the markets view the path of interest rates.

The Fed previously ruled out raising rates at the end of its two-day meeting on Wednesday, and the chances of a hike at the June meeting, while still on the table, have steadily decreased amid a drum-beat of weak first-quarter economic data.

Gross domestic product expanded at a 0.2 percent annual rate in the first quarter, the Commerce Department reported on Wednesday. That was well below economists’ expectations for 1 percent growth and the fourth quarter’s 2.2 percent pace of expansion.

U.S. stock index futures fell sharply and the U.S. dollar touched an eight-week low after the data.

The central bank says its decision on when to raise rates will be data-dependent and made on a meeting-by-meeting basis, a stance that it may reaffirm on Wednesday.

Economists say September is more likely than June for the Fed’s so-called “lift-off.” It has kept rates near zero since late 2008 as part of its effort to spur the recovery from the financial crisis.

Futures traders see an even later time horizon, meaning they have little trust in the Fed’s message that it’s moving ahead with plans for what would be the first rate hike since June 2006.

The Fed faces a dilemma this week, according to Bank of America: accommodate market expectations of a later lift-off, or “update their communications to nudge the market in the Fed’s direction.” Bank of America’s rates and currencies team said on Monday it expects the Fed to lean more to the latter option.

Futures traders put the odds of a September hike at only 25 percent, according to CME Group’s FedWatch. The Fed’s median federal funds rate estimate in December is 0.625 percent, nearly double where futures contracts show the rate that month.

The Fed could nudge investors on Wednesday by striking a more hawkish tone on inflation.

Stubbornly low inflation has been among the factors holding back the Fed’s lift-off plans, but U.S. consumer prices ticked higher for a second straight month in March due in part to a rebound in energy prices.

Fed officials say the factors behind low inflation – a drop in the cost of oil and a rising U.S. dollar – are transitory, and believe prices will rise once those swings level off.

“A September lift-off is the marginal favorite, but June and July are possibilities if it becomes clear quickly that the first-quarter slowdown was a temporary weather-related blip rather than something more serious,” Capital Economics said in a research note on Monday.

Employers added just 126,000 workers last month, the fewest since December 2013, breaking a 12-month streak of gains above 200,000. In addition to Wednesday’s GDP report, the data on manufacturing, housing and consumer spending also have pointed to weakness.

At the core of the Fed’s struggle is whether to view the inflation rebound as a key step forward, or to view the weaker economic data as a sign the markets are not yet ready to have the monetary policy stimulus punch bowl taken away.

JP Morgan predicted in a note last week that the meeting will be “relatively uneventful” and that the third paragraph in the Fed’s policy statement, where it gives its rate guidance, would remain mostly the same as March, when the central bank said lift-off was dependent on further improvement in the labor market and “reasonable confidence that inflation will move back toward 2 percent over the medium-term.”

(Editing by Paul Simao)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/XHDTvBBBM5g/story01.htm