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U.S. economy likely shrank in first quarter, but fundamentals strong

WASHINGTON The U.S. economy likely contracted in the first quarter as it buckled under the weight of unusually heavy snowfalls and a resurgent dollar, but activity since has rebounded modestly.

The government is expected to report on Friday that gross domestic product shrank at a 0.8 percent annual rate instead of growing at the 0.2 percent pace it estimated last month, according to a Reuters survey of economists.

A larger trade deficit and a smaller accumulation of inventories by businesses than previously thought will probably account for much of the expected downward revision.

With growth estimates so far for the second quarter around 2 percent, the economy appears poised for its worst first half performance since 2011.

Economists, however, caution against reading too much into the expected slump in output. They argue the GDP figure for the first quarter was held down by a confluence of temporary factors, including a problem with the model the government uses to smooth the data for seasonal fluctuations.

“The weakness in the U.S. recovery is not like a cart losing its wheels because the labor market remains healthy and housing activity is picking up,” said Thomas Costerg, a U.S. economist at Standard Chartered Bank in New York.

Several economists, including those at the San Francisco Federal Reserve Bank, have cast doubts on the accuracy of GDP estimates for the first quarter, which have tended to show weakness over the last several years.

They argued the so-called seasonal adjustment is not fully stripping out seasonal patterns, leaving “residual” seasonality. The government said last week it was aware of the potential problem and was working to minimize it.

The Commerce Department will publish its first-quarter GDP revision on Friday at 8:30 a.m.


Apart from the statistical quirk, the economy, which expanded at a 2.2 percent pace in the fourth quarter, was hammered by labor disruptions at a major port. Also dragging on growth was a sharp decline in investment spending in the energy sector as companies such as Schlumberger (SLB.N) and Halliburton (HAL.N) responded to the plunge in crude oil prices.

“The cutback in oil investment was bigger than what people thought and the benefits through increased purchasing power for consumers have not materialized,” said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.

Economists estimate unusually heavy snowfalls in February chopped at least one percentage point from growth.

Trade was hit both by the strong dollar and the ports dispute, which weighed on exports through the quarter and then unleashed a flood of imports in March after it was resolved.

The GDP report is also expected to show a second quarterly drop in corporate profits because of the dollar and oil prices.

While the economy has pulled out of its first-quarter stall, data on retail sales and industrial production have suggested only a modest pace of growth early in the second quarter. But reports on housing, consumer confidence and business spending plans indicated momentum could be building.

Unlike 2014, when growth snapped backed quickly after a dismal first quarter, the dollar and investment cuts by energy companies continue to hamstring activity.

But growth could accelerate as the year progresses.

Inventory is likely to be revised down from the lofty $110.3 billion increase reported last month. That would suggest warehouses are not bulging with unwanted merchandise and that business have latitude to order more goods from factories.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, could also finally get a lift from the considerable savings households amassed because of cheaper gasoline.

The dollar rally has faded and the greenback is about 4 percent off its peak in March, easing pressure on U.S. exporters. In addition, rig counts suggest the energy investment rout is nearing its end.

“As temporary factors fade in importance, fundamentals will reassert themselves,” said Ben Herzon and economist at Macroeconomic Advisers in St. Louis, Missouri.

(Reporting by Lucia Mutikani; Editing by Tim Ahmann and Steve Orlofsky)

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Intel nears $15 billion deal to buy Altera: NY Post

Intel Corp (INTC.O) is close to a deal to buy smaller chip maker Altera Corp (ALTR.O) for about $15 billion, the New York Post reported.

The deal price could be as much as $54 a share, a 15 percent premium over Altera’s Thursday closing price of $46.97, the New York Post reported, citing a source close to the situation. (

“A deal is likely by the end of next week,” the newspaper quoted the source as saying. The source also cautioned that the talks could still fall apart.

Intel signed a standstill agreement earlier this year with Altera that expires on June 1, giving the world’s largest chipmaker the option to launch a hostile bid after that, Reuters reported in April, citing sources.

Altera in April rejected an unsolicited $54 per share offer from Intel following months of negotiations, the sources told Reuters.

Avago Technologies Ltd (AVGO.O) agreed on Thursday to buy Broadcom Corp (BRCM.O) for $37 billion in the largest merger of chipmakers ever.

The merger is the industry’s second megadeal this year and is unlikely to be the last, analysts told Reuters.

Intel and Altera could not be reached immediately for comments outside regular business hours.

(Reporting by Subrat Patnaik and Rishika Sadam in Bengaluru; Editing by Anupama Dwivedi)

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Japan’s Skymark to seek revival plan approval despite creditor opposition: sources

TOKYO Failed Japanese budget carrier Skymark Airlines Inc (SKALF.PK) will seek court approval on Friday for a revival plan despite opposition from creditors Airbus Group (AIR.PA) and Intrepid Aviation Ltd (INTR.N), two people familiar with the matter said.

European jet maker Airbus and aircraft leasing company Intrepid have both threatened to block Japan’s biggest airline, ANA Holdings (9202.T), from buying a 16.5 percent stake in Skymark in a bid to persuade ANA to purchase or lease Airbus jets, people familiar with the situation previously told Reuters.

“Delaying the restructuring of Skymark would me a minus for the big creditors too,” one person with knowledge of the plan to seek court approval said. The people who disclosed details of Skymark’s intentions spoke on condition of anonymity because the matter wasn’t public knowledge.

A spokeswoman for Skymark declined to comment.

Skymark has until July, when creditors are slated to meet to discuss revival plans, to persuade Airbus and Intrepid to drop their opposition to ANA’s participation. With the jet maker and the aircraft lessor holding around two-thirds of Skymark’s debt of around 300 billion yen ($2.43 billion), any plan to revive the discount airline will need to be approved by Airbus and Intrepid.

By gaining a stake in Skymark ANA’s would win access to valuable landing rights at Tokyo’s crowded Haneda airport. ANA already controls more than half of the landing slots at the capital’s downtown airport, and adding more would bolster its lead over local rival Japan Airlines Co (9201.T).

Intrepid, Airbus and ANA all declined to comment on the spat.

Other planned Skymark sponsors include Sumitomo Mitsui Financial Group Inc (8316.T) and the Development Bank of Japan, which are set to take a combined 33.4 percent stake.

(Reporting by Maki Shiraki; Writing by Tim Kelly; Editing by Kenneth Maxwell)

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Airbus debates new A320 output hike, suffers test glitch

TOULOUSE Airbus (AIR.PA) is leaning toward a new hike in production of its A320 jet, raising the stakes in a battle with Boeing to translate record orders into tangible deliveries, but has yet to decide on the risks of handling unprecedented volumes.

Europe’s largest aerospace firm indicated the chances were rising that it would increase production targets again just months after setting an output goal of 50 medium-haul aircraft a month by early 2017, compared with 42 a month now.

The debate is the latest evidence of a prolonged upcycle in the aerospace industry as demand soars from new players in emerging markets and established airlines renew older fleets.

But a decision on whether to increase output again depends mainly on whether suppliers can keep pace with the challenges of producing a 150-seat jetliner every few hours, just as other civil aerospace firms are ramping up volumes worldwide.

At a media briefing on Thursday, company officials conveyed different levels of urgency about the decision, which would only follow a thorough analysis of several tiers of suppliers.

Sales chief John Leahy said likely demand already exceeded the planemaker’s existing production goal of 50 planes a month and the market could absorb over 60, possibly as many as 63. He expected Airbus to take a decision this year.

But chief operating officer Tom Williams said there were still “hot spots” in the supply chain and that he would not be “boxed in” to setting a deadline for the decision.

He said that supply chain risks were by definition increasing as the industry tackles ever greater volumes.


Medium-haul planes are significant sources of cash for both Airbus and Boeing (BA.N). Aviation market sources see scope for several hundred more orders at next month’s Paris Airshow.

If agreed, the next Airbus output hike could take place from 2018, putting pressure on Boeing to follow suit.

Demand has been boosted by the transition to new fuel-saving models of both the A320 and rival 737.

Airbus said a glitch with a small part in new Pratt Whitney (UTX.N) engines had disrupted A320neo flight testing.

The setback is unlikely to delay first delivery, due at end-2015, but requires some parts to be replaced, it said.

Airbus sounded marginally more optimistic than before on the larger A330, another cash cow for the company.

It had spooked investors last year with plans to cut A330 production to 6 a month from a planned level of 9 as it waits for development of a new revamped version.

In January, it did not rule out taking this down further but Williams and others said they now felt comfortable with the target of six due to a number of sales in the pipeline.

Airbus meanwhile said it had still not decided whether to improve its even larger but slow-selling A380 with new engines as requested by Dubai’s Emirates, which has expressed interest in up to 200 of the planes if Airbus decides to build them.

But it began to address one of the problems overshadowing such a decision: what to do about a surge of second-hand A380s that might come onto the market when those revamped A380neo models replace earlier A380s already in the Emirates fleet.

Bregier and strategy chief Kiran Rao said there could be a future for second-hand superjumbos among long-haul, low-cost carriers due to what would by then be much lower costs.

Such a plane could help them open new markets, they said.

Critics say wide-body jets have proved risky for low-cost carriers that demand flexible operations and quick turnarounds, and that the 544-seat A380 could prove even more challenging.

Airbus says its flexibility has been under-estimated.

(Editing by Victoria Bryan)

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Unrepentant Lehman ex-CEO Fuld says firm ‘was not bankrupt’

NEW YORK Six years, seven months and 13 days after Lehman Brothers Holdings Inc filed for bankruptcy, its former chief executive, Richard Fuld Jr., is still insisting it did not go broke.

“Lehman Brothers in 2008 was not a bankrupt company,” Fuld said at a conference in Manhattan on Thursday, his first such public appearance since the financial crisis for which Lehman’s massive Chapter 11 filing marked a tipping point.

During a speech that lasted a little more than 30 minutes, Fuld waxed nostalgic about the history of Lehman Brothers and his career on Wall Street, and ruminated about financial markets and current events.

At times he flashed a sense of humor – joking, for instance, that the beverage he was drinking was not alcoholic and teasing the audience for paying more attention to their lunch than to him. At other times he became emotional, remembering how “dark” it felt in the aftermath of Lehman’s bankruptcy, and mimicking the way he looks in the mirror and speaks to himself to boost his confidence.

“Open your heart and love and be loved,” he said. “My mother still loves me. She’s 96.”

But in his comments, Fuld was not humble or contrite. He blamed the financial crisis on a “perfect storm” and characterized Lehman’s collapse as something that was largely outside of his control.

“Regardless of what you heard about Lehman’s risk management, I had 27,000 risk managers at the firm because they all owned a piece of the firm,” he said, referring to Lehman’s employees at the time, who he said were all shareholders.

Lehman filed for the largest bankruptcy in U.S. history on September 15, 2008 after a harrowing weekend during which big-bank CEOs and senior government officials tried, but failed, to come up with a rescue plan.

Its collapse triggered a broader market panic that eventually led to a massive taxpayer bailout for Wall Street. Lehman’s failure also set off years of litigation with creditors and counterparties, not to mention devastating losses for shareholders and employees.

Fuld has blamed his company’s demise on factors ranging from short sellers to the federal government.

On Thursday he again defended his decision-making, saying it was based on the information he had at the time. He also suggested a lack of liquidity was the true culprit behind Lehman’s demise: “You have to have enough liquidity to ride out the storm. Been there. Done that. No comment.”

Fuld now runs a small company called Matrix Advisors, which he characterized as an old-line merchant banking firm. He spoke before a crowd of 1,300 who were attending a micro cap stock conference hosted by the accounting firm Marcum.

When asked in a QA following his speech why he had chosen to make his first appearance at the event, Fuld said it was time for him to move on from the past.

“Not a day goes by where I don’t think about Lehman Brothers.” he said. “I’d love to tell you I’m over it, it’s behind me. Doesn’t happen.”

(Reporting by Lauren Tara LaCapra; Editing by Christian Plumb)

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Wall St. inches down on Greece, China worries

U.S. stocks eased on Thursday as mixed messages about Greece’s debt talks kept investor uncertainty high along with a sharp drop in Chinese shares after brokers tightened margin rules.

Seven of the 10 major SP 500 sectors were lower, with the industrials sector .SPLRCI falling the most, 0.4 percent, a day after the Nasdaq closed at a record high.

International Monetary Fund Managing Director Christine Lagarde said there was still a lot of work to do before Greece and its international lenders could clinch a cash-for-reforms deal.

Greece’s government said it aims to reach an agreement with lenders by Sunday. A euro zone official said Greece will not be able to get the money still available under its current bailout plan if it does not agree to the outline of a such a deal by the end of the week.

“Everybody is coming out with a different story. I’m looking for an EU-endorsed comment rather than something coming from Greece to be sort of the final arbiter on what the sentiment really is with regard to a resolution,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia, which manages about $67 billion in assets.

Shares of Caterpillar (CAT.N) fell 2.2 percent to $86.01 and helped to drag down the SP 500 and Dow, while shares of transportation companies extended recent losses. The Dow Jones transportation average .DJT was down 0.9 percent.

The Dow Jones industrial average .DJI fell 36.87 points, or 0.2 percent, to 18,126.12, the SP 500 .SPX lost 2.69 points, or 0.13 percent, to 2,120.79 and the Nasdaq Composite .IXIC dropped 8.62 points, or 0.17 percent, to 5,097.98.

In China, indexes plummeted 6 percent after more brokerages tightened margin trading requirements in a move seen aimed at curbing risks in a red-hot market.

Investors also were cautious ahead of Friday’s reading on U.S. gross domestic product.

Among gainers, action camera maker GoPro Inc (GPRO.O) rose 6.6 percent to $56.81 after GoPro and Google Inc (GOOGL.O) introduced a virtual reality system using 16 cameras and Google software. Google shares were near flat at $554.18.

Declining issues outnumbered advancing ones on the NYSE by 1,756 to 1,282, for a 1.37-to-1 ratio on the downside; on the Nasdaq, 1,468 issues fell and 1,277 advanced for a 1.15-to-1 ratio favoring decliners.

The SP 500 posted 16 new 52-week highs and seven new lows; the Nasdaq Composite recorded 85 new highs and 45 new lows.

About 5.7 billion shares changed hands on U.S. exchanges, below the 6.2 billion daily average for the month to date, according to BATS Global Markets.

(Editing by Savio D’Souza and Nick Zieminski)

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Fed rate hike in 2015 not consistent with mandate: Kocherlakota

HELENA, Montana A U.S. interest rate hike this year would be a mistake, a top Federal Reserve official said on Thursday, and would represent a missed opportunity to boost employment and too-low inflation in an economy that has plenty of room to grow.

“The (Fed policy-setting) committee needs to make policy choices that will lead to more great years like 2014,” Minneapolis Fed President Narayana Kocherlakota said in remarks prepared for delivery in Helena, Montana, citing the dramatic improvement in the U.S. labor market last year.

The Fed must be “extraordinarily patient” about reducing monetary policy accommodation, he said, so the job market can return to the strength it had in 2006, before the financial crisis hit.

Kocherlakota’s views put him at the dovish extreme at the U.S. central bank, where most policymakers, including Fed Chair Janet Yellen, expect to begin raising interest rates this year. The Fed has kept rates near zero since December 2008.

By pushing for a later rate rise, Kocherlakota hopes to nudge his fellow central bankers to aim for an even stronger labor market than the current 5.4 percent unemployment rate implies.

Full employment, he said, should be measured by the percent of people employed, which in December 2006 stood at 63 percent. Even after last year’s extraordinary job gains, only about 59 percent of the population is employed.

“We can do better,” he said, reiterating that his call for continued monetary policy accommodation is based on optimism about the economy’s prospects, rather than pessimism.

Meanwhile, the economy is not necessarily living up to his hopes. Inflation probably won’t rise back to the Fed’s 2 percent goal until 2018, he said, and GDP probably contracted last quarter.

Still, he said, labor market damage from the recession does not need to be a permanent part of the nation’s future.

“I don’t see raising the target range for the fed funds rate above its current low level in 2015 as being consistent with the pursuit of the kind of labor market outcomes that we are charged with delivering,” he said.

(Reporting by Ann Saphir; Editing by Meredith Mazzilli)

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Workers at Deutsche Bank HQ call for Jain to quit as job cuts loom

FRANKFURT Labor representatives at Deutsche Bank’s (DBKGn.DE) Frankfurt headquarters called on Thursday for the resignation of co-Chief Executive Anshu Jain as Germany’s largest lender prepares to slash jobs.

The works council representing employees in key administrative functions at the bank’s “corporate center”, based at its twin tower head offices, said staff morale was suffering, according to a flyer distributed by the council.

The existence of the flyer was first reported by daily Handelsblatt.

“A radical new start would restore our credibility and could produce a real boost to morale,” the council wrote in the flyer, which it produced independently and not in coordination with other works councils at the bank, the paper wrote.

Around 2,500 employees work in the corporate center, involved in functions including finance, audit, tax, legal, investor relations, communications as well as group strategy and planning.

Deutsche Bank, which declined comment on the flyer, has 98,615 staff globally, of which 45,803 work in Germany.

The labor representatives who distributed the flyer are not members of the bank’s supervisory board, or board directors where labor representatives hold half the seats.

The bank’s vice-chairman of the supervisory board, Alfred Herling, who oversees management, said he was not aware of any critique of individual members of management at the supervisory board level, Handelsblatt said.

The bank is preparing some 4.7 billion euros ($5.1 billion) in cost cuts that are expected to hit staff worldwide, as part of a strategy designed to pare its retail and investment banking exposure.

Jain was made directly responsible for reforms and cost cuts in a boardroom shakeup last week.

(Reporting by Kathrin Jones and Thomas Atkins; Editing by David Holmes)

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Avago to buy Broadcom for $37 billion in biggest-ever chip deal

Avago Technologies Ltd agreed to buy Broadcom Corp for $37 billion in the largest chip industry deal ever, turning a lesser-known company run by a ferocious dealmaker into a rival to the biggest in the field.

Avago, a maker of chips for the wireless and industrial markets, is offering Broadcom shareholders $17 billion in cash and Avago shares valued at $20 billion.

The deal is the biggest so far by Avago Chief Executive Hock Tan, who has grown a small chipmaker into a $36-billion company through acquisitions since taking the helm nine years ago.

Tan, known as a serial deal-maker who thinks like a private equity executive, has trimmed Avago’s portfolio by divesting units while bulking up in faster-growing areas.

The Broadcom deal, which will create the third-largest U.S. semiconductor maker by revenue behind Intel Corp and Qualcomm Inc, is the second big one in the industry this year and is not likely to be the last, analysts said.

The deal represents a premium of about 28 percent, according to Reuters calculations based on Broadcom’s market value of $28.85 billion as of Tuesday’s close, the day before the Wall Street Journal reported that the companies were in talks.

Demand for cheaper chips and new products to power Internet-connected gadgets is driving consolidation in the industry.

“I think it makes sense for companies to be aggressive now because there are a limited number of properties out there and I think the guys that are being more aggressive now have the best opportunities to get the best of what’s available,” Raymond James analyst Steven Smigie told Reuters.

Pacific Crest Securities analysts said Qualcomm could also bid for Broadcom, noting that the company recently filed a shelf registration for an indeterminate amount.


Other chipmakers such as Xilinx Inc, MaxLinear Inc, Intersil Corp, Cavium Inc and Atmel Corp could be acquisition targets, analysts have said.

The Avago-Broadcom deal follows NXP Semiconductors’ $11.8 billion offer to buy Freescale Semiconductor Ltd in March. Avago had also bid for Freescale, people familiar with the matter said at that time.

Reuters, citing sources, reported in March that Intel was in talks to buy chipmaker Altera Corp in a deal that could top $10 billion.

Until Thursday, Avago’s biggest deal was for chipmaker LSI Corp, which it bought for $6.6 billion last year.

Tan’s strategy has been to look at potential targets that do not necessarily have the best strategic fit but have potential to eliminate costs to build value.

Avago and Broadcom first spoke about a potential merger in October 2014 but could not agree on price, according to people familiar with the matter.

Talks heated up in April when Avago approached Broadcom again with a few higher offers and negotiations continued until the two agreed on a deal, the people said.


The deal will also help the companies improve their bargaining position with manufacturers.

After the deal the combined company would be named Broadcom, sources close to the deal told Reuters.

Irvine, California-based Broadcom makes semiconductors for a variety of products, including set-top boxes, cellphones and network equipment.

The company is best known for its connectivity chips, which are used widely in smartphones made by Apple Inc and Samsung Electronics Co Ltd.

But Broadcom has been struggling to grow amid intense competition in the mobile chip business, and the company’s revenue increased by just 1.5 percent last year.

Broadcom’s shares were down 2 percent at $55.80 in afternoon trading, while Avago’s were down 0.5 percent at $141.03. Broadcom rose as much as 23 percent on Wednesday following the Journal report, while Avago rose as much as 10 percent.

The companies said they expected to close the transaction by the end of first quarter of 2016 and save $750 million in costs within 18 months. The deal has a breakup fee of $1 billion, according to a source familiar with the matter.

The combined company, to be based in Singapore, would have annual revenue of $15 billion and an enterprise value of $77 billion, the companies said in a statement.

Broadcom shareholders will own about 32 percent of the combined company. They would also have the option to choose between various combinations of cash and stock.

Avago, which is incorporated in Singapore and has dual headquarters there and in San Jose, California, said it intended to fund the cash portion of the deal by using funds from the combined companies and a new debt of $9 billion.

Avago was advised by Deutsche Bank, Bank of America, Barclays, Citigroup and Credit Suisse.

Broadcom was advised by JPMorgan Chase, while Evercore served as financial adviser to the Special Committee of the board.

Skadden, Arps, Slate, Meagher Flom LLP is the legal adviser to Broadcom. Broadcom co-founder Henry Nicholas was advised by Centerview and Morrison Forester.

(Additional reporting by Abhirup Roy Editing by Sriraj Kalluvila and Ted Kerr)

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