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Wall St. flat as consumer stocks’ gains offset by tech, financials

Wall Street opened little changed on Friday, coming off six straight days of gains, as investors took to the sidelines ahead of a three-day holiday weekend.

The Dow Jones Industrial Average .DJI dipped 8.56 points, or 0.04 percent, to 21,074.39. The SP 500 .SPX edged lower by 1.38 points, or 0.05 percent, to 2,413.69. The Nasdaq Composite .IXIC eked out a gain of 1.64 points, or 0.03 percent, to 6,206.90.

(Reporting by Tanya Agrawal; Editing by Savio D’Souza)

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U.S. economy grows at tepid 1.2 percent; business spending softens

WASHINGTON The U.S. economy slowed less than initially thought in the first quarter, but there are signs it could struggle to rebound sharply in the second quarter amid slowing business investment and moderate consumer spending.

Gross domestic product increased at a 1.2 percent annual rate instead of the 0.7 percent pace reported last month, the Commerce Department said on Friday in its second GDP estimate for the first three months of the year.

“The second estimate paints a better picture about the degree of slowing in activity at the start of the year, but the main concern about soft growth in private consumption remains,” said Michael Gapen, chief economist at Barclays in New York.

That was the worst performance since the first quarter of 2016 and followed a 2.1 percent rate of expansion in the fourth quarter. The government revised up its initial estimate of consumer spending growth, but said inventory investment was far smaller than previously reported.

The first-quarter weakness is a blow to President Donald Trump’s ambitious goal to sharply boost economic growth rates. During the 2016 presidential campaign Trump had vowed to lift annual GDP growth to 4 percent, though administration officials now see 3 percent as more realistic.

Trump has proposed a range of measures to spur faster economic growth, including corporate and individual tax cuts. But analysts are skeptical that fiscal stimulus, if it materializes, will fire up the economy given weak productivity and labor shortages in some areas.

The economy’s sluggishness, however, is probably not a true reflection of its health. GDP for the first three months of the year tends to underperform because of difficulties with the calculation of data.

Economists polled by Reuters had expected GDP growth would be revised up to a 0.9 percent rate.

Prices of U.S. Treasuries trimmed gains and U.S. stock indexes slightly pared losses after the data. The dollar gained modestly against a basket of currencies.

While GDP growth appears to have regained speed early in the second quarter, hopes of a sharp rebound have been tempered by weak business spending, a modest increase in retail sales last month, a widening of the goods trade deficit and decreases in inventory investment.


In a second report on Friday, the Commerce Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, were unchanged in April for a second straight month.

Shipments of these so-called core capital goods dipped 0.1 percent after rising 0.2 percent in March. Core capital goods shipments are used to calculate equipment spending in the government’s gross domestic product measurement.

The GDP report also showed an acceleration in business spending equipment was not as fast as previously estimated. Spending on equipment rose at a 7.2 percent rate in the first quarter rather than the 9.1 percent reported last month.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose at a 0.6 percent rate instead of the previously reported 0.3 percent pace. That was still the slowest pace since the fourth quarter of 2009 and followed the fourth quarter’s robust 3.5 percent growth rate.

Businesses accumulated inventories at a rate of $4.3 billion in the last quarter, rather than the $10.3 billion reported last month. Inventory investment increased at a $49.6 billion rate in the October-December period.

Inventories subtracted 1.07 percentage point from GDP growth instead of the 0.93 percentage point estimated last month.

The government also reported that corporate profits after tax with inventory valuation and capital consumption adjustments fell at an annual rate of 2.5 percent in the first quarter, hurt by legal settlements, after rising at a 2.3 percent pace in the previous three months.

Penalties imposed by the government on the U.S. subsidiaries of Credit Suisse and Deutsche Bank related to the sale of mortgage-backed securities reduced financial corporate profits by $5.6 billion in the first quarter.

In addition, a fine levied on the U.S. subsidiary of Volkswagen (VOWG_p.DE) related to violations of U.S. environmental regulations cut $4.3 billion from nonfinancial corporate profits.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

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Glass Lewis recommends Buffalo Wild Wings’ board nominees

Proxy adviser Glass Lewis Co LLC recommended shareholders of Buffalo Wild Wings (BWLD.O) to vote for the company’s slate of directors, saying activist hedge fund Marcato Capital had failed to make a compelling case for making changes to the board.

Glass Lewis’s recommendation on Friday comes two days after another adviser, Institutional Shareholder Services (ISS), recommended voting for Marcato’s nominees.

Marcato, which owns a 6.1 percent stake in Buffalo Wild Wings, launched a proxy fight in February, nominating four directors for the nine-member board.

“We believe the dissident’s nominees, other than the one also nominated by the company, either have experience that would not be additive to the refreshed board or potential conflicts which weakens their candidacies,” Glass Lewis said in a report.

ISS has put its weight behind Marcato nominees Mick McGuire, the hedge fund’s founder, and Scott Bergren, the former chief executive of Yum Brands’ (YUM.N) restaurant chain, Pizza Hut.

It has also backed Sam Rovit, a former Kraft Foods’ executive, who has been nominated by both Marcato and the company.

ISS did not recommend support for Lee Sanders, the former chief development officer at TGI Fridays.

Buffalo Wild Wings will hold its annual meeting on June 2.

Among its demands, Marcato has asked for Chief Executive Sally Smith to be replaced.

(Reporting by Sruthi Ramakrishnan in Bengaluru; Editing by Anil D’Silva)

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U.S. home prices to rise at a strong pace on tight supply: Reuters poll

U.S. home prices look poised to rise at a robust pace over the next few years, mainly because of a chronic shortage of houses and steady demand, a Reuters poll showed on Friday.

Still, a slim majority of analysts in the poll taken May 16-25 said the Trump administration should pursue some form of housing market deregulation, although 60 percent were not convinced that Congress would pass such policies.

The lack of any strong consensus among analysts in this poll and the one three months ago stems from uncertainty about what kind of deregulation, if any, will be proposed.

The administration’s inability to push other promised legislation, like a healthcare overhaul, has also not helped matters.

But some respondents had strong words about any withdrawal of regulations put in place after the 2007-2008 housing market crash, which knocked property prices down by 40 percent in some areas and triggered a punishing global financial crisis.

“Coming out of a period where we had a real housing sector collapse and where prices seemed so out of line and now having surpassed that, any housing deregulation should be done very carefully,” said FAO Economics chief economist Robert Brusca.

Even without stimulus, U.S. home prices are likely to rise at almost double the current rate of underlying consumer prices and wages, according to the latest Reuters poll of around 40 property market analysts and economists.

After climbing 5.0 percent in each of the last two years, the SP/Case Shiller composite index of home prices in 20 metropolitan areas is expected to gain another 5.6 percent this year and 4.2 percent next year.

This is the fifth straight quarterly Reuters poll in which analysts have bolstered their view of higher prices in 2017.

“Healthy demand and low inventory continue to place upward pressure on home valuations,” said Wells Fargo chief economist John Silvia. “Those trends look to remain in place in the near term and therefore continue to underpin solid, single-digit home price increases.”

The latest data showed the number of houses for sale had dropped for 23 straight months from year-earlier periods. This pushed the median price in April to its highest since June 2016 and marked the 62nd straight month of year-on-year gains.

Turnover has not alleviated much pressure, either. In April, homebuilding dropped, new home sales plunged, and even resales fell from a more than 10-year high.

Property analysts now forecast annualized existing home sales in each quarter this year to average less than the 5.70-million-unit pace hit in March, which was the highest since February 2007.

Before the housing market crash, existing home sales peaked above a 7-million-unit pace in 2005.

“With the (April) supply of existing homes for sale at its lowest level since 1982, home sales will be constrained even as a strong labor market and gradual loosening in credit conditions supports housing demand,” wrote Capital Economics property economist Matthew Pointon.

The average 30-year mortgage rate is now forecast at 4.25 percent this year and 4.60 percent in 2018, according to the latest poll. That is below expectations from just three months ago.

When asked to rate affordability of U.S. housing on a scale of 1 being the cheapest and 10 the most expensive, the median answer was 6. That is similar to what analysts rated British and Canadian property in separate polls. [GB/HOMES] [CA/HOMES]

(Polling by Anu Bararia and Hari Kishan; Editing by Ross Finley and and Lisa Von Ahn)

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Oil edges up after dip on disappointing OPEC meeting outcome

LONDON Oil prices edged back up on Friday after a 5 percent fall in the previous session on disappointment that an OPEC-led decision to extend current production curbs did not go deeper.

At Thursday’s meeting in Vienna the Organization of the Petroleum Exporting Countries and some non-OPEC producers agreed to extend a pledge to cut around 1.8 million barrels per day (bpd) of output until the end of the first quarter of 2018. The initial agreement would have expired next month.

Producers have expressed confidence that this plan will bring down crude oil stocks to their five-year average of 2.7 billion barrels but the market had hoped for a last-minute agreement on more far-reaching action.

“The problem is that investors look at the impact today, while OPEC focuses on reaching stability in the coming six to nine months, so the long squeeze yesterday was overdone a bit,” said Hans van Cleef, senior energy economist at ABN Amro.

Clawing back some of Thursday’s losses, global benchmark Brent futures LCOc1 were up 17 cents at $51.63 a barrel at 1103 GMT .

U.S. West Texas Intermediate (WTI) crude futures CLc1 remained below $50, at $49.05, though up 15 cents from their last close.

“The front of the curve declined the most, which at least for now implies that the market doesn’t quite believe that a tightening and/or backwardation is really coming,” said analysts at JBC Energy.

Concerns remain that OPEC-led production cuts will only stimulate a further rise in output from the United States, where producers can operate at much lower costs.

Ann-Louise Hittle, vice president at energy consultancy Wood Mackenzie said the decision in Vienna sent a signal of continued support for oil prices from OPEC which helped U.S. onshore drillers make plans to further raise their production.

U.S. oil production C-OUT-T-EIA has already risen by 10 percent since mid-2016 to over 9.3 million bpd, close to the output of top producers Russia and Saudi Arabia.

With U.S. output rising steadily and OPEC and its allies potentially raising production in 2018 to regain lost market share, many traders, including Goldman Sachs, already expect another price slump.

Other assessments pointed to the possibility of output cuts being extended into 2019 in order to bring down both crude oil and refined product stocks.

“Output controls will eventually be extended at least until the end of 2018, and more likely than not into 2019 … At this pace, it will not be until at least the end of 2018, or indeed, 2019, when surplus inventories can be eliminated,” said analysts at Deutsche Bank.

(Additional reporting by Henning Gloystein, Gavin Maguire and Mark Tay in Singapore; Edited by David Evans, Greg Mahlich)

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China’s reforms not enough to arrest mounting debt: Moody’s

BEIJING China’s structural reforms will slow the pace of its debt build-up but will not be enough to arrest it, and another credit rating cut for the country is possible down the road unless it gets its ballooning credit in check, officials at Moody’s said.

The comments came two days after Moody’s downgraded China’s sovereign ratings by one notch to A1, saying it expects the financial strength of the world’s second-largest economy to erode in coming years as growth slows and debt continues to mount.

In announcing the downgrade, Moody’s Investors Service also changed its outlook on China from “negative” to “stable”, suggesting no further ratings changes for some time.

China has strongly criticized the downgrade, asserting it was based on “inappropriate methodology”, exaggerating difficulties facing the economy and underestimating the government’s reform efforts.

In response, senior Moody’s official Marie Diron said on Friday that the ratings agency has been encouraged by the “vast reform agenda” undertaken by the Chinese authorities to contain risks from the rapid rise in debt.

However, while Moody’s believes the reforms may slow the pace at which debt is rising, they will not be enough to arrest the trend and levels will not drop dramatically, Diron said.

Diron said China’s economic recovery since late last year was mainly thanks to policy stimulus, and expects Beijing will continue to rely on pump-priming to meet its official economic growth targets, adding to the debt overhang.


Moody’s also is waiting to see how some of the announced measures, such as reining in local government finances, are actually implemented, Diron, associate managing director of Moody’s Sovereign Risk Group, told reporters in a webcast.

China may no longer get an A1 rating if there are signs that debt is growing at a pace that exceeds Moody’s expectations, Li Xiujun, vice president of credit strategy and standards at the ratings agency, said in the same webcast

“If in the future China’s structural reforms can prevent its leverage from rising more effectively without increasing risks in the banking and shadow banking sector, then it will have a positive impact on China’s rating,” Li said.

But Li added: “If there are signs that China’s debt will keep rising and the rate of growth is beyond our expectations, leading to serious capital misallocation, then it will continue to weigh on economic growth in the medium term and impact the sovereign rating negatively.”

“China may no longer suit the requirement of A1 rating.”

Li did not give a specific target for debt levels nor a timeframe for further assessments.

Moody’s expects China’s growth to slow to around 5 percent in coming years, from 6.7 percent last year, compounding the difficulty of reducing debt. But Diron said the economy will remain robust, and the likelihood of a hard landing is slim.

After Moody’s downgrade, its rating for China is on the same level as that on Fitch Ratings, with Standard Poor’s still one notch above, with a negative outlook.

On Friday, Fitch said it is maintaining its A+ rating. Andrew Fennel, its direct of sovereign ratings, noted China’s “strong macroeconomic track record”, but said that its growth “has been accompanied by a build-up of imbalances and vulnerabilities that poses risks to its basic economic and financial stability”.


Government-led stimulus has been a major driver of China’s economic growth over recent years, but has also been accompanied by runaway credit growth that has created a mountain of debt – now at nearly 300 percent of gross domestic product (GDP).

Some analysts are more worried about the speed at which the debt has accumulated than its absolute level, noting much of the debt and the banking system is controlled by the central government.

UBS estimates that government debt, including explicit and quasi-government debt, rose to 68 percent of GDP in 2016 from 62 percent in 2015, while corporate debt climbed to 164 percent of GDP in 2016 from 153 percent the previous year.

A growing number of economists believe that a massive bank bailout may be inevitable in China as bad loans mount. Last September, the Bank for International Settlements (BIS) warned that excessive credit growth in China signaled an increasing risk of a banking crisis within three years.


The Moody’s downgrade was seen as largely symbolic because China has relatively little foreign debt and local markets are influenced more by domestic factors, with many companies enjoying stronger credit ratings from home-grown agencies than they would in the West.

Still, the rating demotion highlighted investor worries over whether China has the will and ability to contain rising risks stemming from years of credit-fueled stimulus, without triggering financial shocks or dampening economic growth.

China has vowed to lower debt levels by rolling out measures such as debt-to-equity swaps, reforming state-owned enterprises (SOEs) and reducing excess industrial capacity.

In recent months, regulators have issued a flurry of measures to clamp down on the shadow banking sector while the central bank has gingerly raised short-term interest rates.

But moves so far have been cautious, especially heading into a key political leadership reshuffle later this year.

The autumn’s Communist Party Congress is President Xi Jinping’s most important event of the year, where a new generation of up and coming leaders will be ushered into the Standing Committee, China‚Äôs elite ruling inner core.

But party congresses are always tricky affairs, as different power bases compete for influence, so the government will be keen to ensure there are no distractions like financial or economic problems or diplomatic confrontations.

(Additional reporting by Ben Blanchard and Elias Glenn; Editing by Kim Coghill and Richard Borsuk)

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Exclusive: Fidelity may back climate resolutions, a milestone for activists

BOSTON Fidelity Investments may support shareholder proxy proposals calling on companies to report on sustainability matters this year, a major shift by the Boston asset manager as climate activists gain more traction at large U.S. corporations.

While Fidelity will generally vote as company managers recommend on environmental or social issues, “Fidelity may support shareholder proposals calling for reports on sustainability, renewable energy and environmental impact issues,” states a new section of its proxy voting guidelines.

The guidelines were put in place in January for this spring’s annual meeting season and have not previously been reported.

Fidelity spokeswoman Nicole Goodnow said Fidelity’s new policy comes as client interest grows in how companies approach environmental, social and governance issues.

Other big fund companies including BlackRock Inc (BLK.N) and State Street Corp (STT.N) have also lent support lately to calls for U.S. companies to account for how climate change could affect their business.

Shareholders passed such resolutions at Occidental Petroleum Corp (OXY.N) and at utility holding company PPL Corp, (PPL.N) this month, and a high-profile test is due at Exxon’s annual meeting on May 31.

Fidelity’s new language marks a milestone since the family-controlled Boston fund manager, the fourth-largest U.S. fund firm with about $2.1 trillion under management, had given little indication its climate stance was also changing.

During the last two proxy seasons Fidelity funds opposed or abstained on every one of 30 shareholder proposals related to climate questions at U.S. companies, according to researcher Proxy Insight. BlackRock had a similar record but made clear in March that climate risk would be a top priority in its outreach to companies this year.

The new stance by the Boston firm shows “Fidelity doesn’t want to be sidelined from some of the most consequential decisions being made on climate risk,” said Shanna Cleveland, a director at Ceres, an advocacy group in Boston that helped coordinate the resolutions.

Filings that will show the fund managers’ votes are not due for months. Fidelity’s change may not have a major impact at Exxon because its funds following the new policy own about 17 million shares or about 0.4 percent of the company, ranking it 19th among investors.

Goodnow declined to say how Fidelity will vote at Exxon.

Fidelity also recently created an investment office to follow environmental, social and governance issues and signed on to the United Nations-backed Principles for Responsible Investment. Signatories pledge to consider environmental, social and governance factors and to seek disclosures.

(Reporting by Ross Kerber; Editing by Cynthia Osterman)

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Linde board to vote on Praxair merger on June 1: sources

MUNICH German industrial gases group Linde’s (LING.DE) supervisory board is due to vote on a merger agreement with U.S. peer Praxair (PX.N) on June 1, two people close to the matter told Reuters on Friday.

The companies said on Wednesday that they had reached a deal in principle on a Business Combination Agreement for the proposed $70 billion merger, but some unanswered questions will be addressed at Thursday’s meeting, one of the sources said without elaborating.

Linde declined to comment on the matter.

The all-share merger of equals, intended to create a market leader that will overtake France’s Air Liquide (AIRP.PA), had fallen behind schedule because of the complexity of talks to forge a formal agreement.

Labor representatives at Linde fiercely oppose the merger, mainly because plans to move the headquarters outside Germany would dilute their influence, which currently gives them an effective veto over strategic decisions.

The first source told Reuters that the supervisory board members’ positions had not changed but that a final decision is expected nonetheless.

For the deal to go through it must gain approval from the supervisory board, on which investors and workers are equally represented.

Linde Chairman Wolfgang Reitzle told Reuters this month that he would be reluctant but prepared to use his casting vote as in the event of a stalemate with labor representatives.

(Reporting by Irene Preisinger; Writing by Maria Sheahan; Editing by David Goodman)

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Japan’s big insurers expand their appetites for U.S. Treasuries

TOKYO Big Japanese life insurers, who are major bond investors globally, are primarily focusing on U.S. bonds while staying cautious on European bonds, earning reports and comments from industry executives show.

U.S. bonds have become more attractive as some Japanese insurers have been able to earn extra income by lending these to Japanese banks, which in turn use Treasuries as collateral to raise dollars in repo markets.

Nippon Life [NPNLI.UL], Dai-ichi Life (8750.T), Meiji Yasuda Life [MEIJY.UL], Sumitomo Life [SMTLI.UL] and formerly state-owned Japan Post Insurance (7181.T) collectively manage more than $2 trillion of financial assets.

Earnings disclosures published in the past two weeks showed U.S. bonds accounted for a large part of the increase in their foreign bond holdings during the financial year that ended on March 31.

The five insurers increased foreign bond holdings by a combined 6.3 trillion yen ($56 billion). Of the total, they increased dollar bonds by 4.8 trillion yen ($43 billion), to 26.8 trillion yen.

Euro bond ownership increased at only one-tenth the pace that U.S. bonds did. Euro bonds rose 488 billion yen (3.9 billion euros), with outstanding in March 2017 at 7.0 trillion yen.

In early 2016, French bonds were popular among Japanese investors, especially banks. But early this year, worries about the coming presidential election triggered a sell-off in French paper bonds, causing big losses among investors.

Motohiko Sato, manager of investment planning at Meiji Yasuda Life, said his firm will continue to invest largely in U.S. bonds because French bond yields are not attractive.

To be sure, investors also suffered losses on U.S. bonds when Donald Trump’s surprise victory in November’s presidential election sparked a sell-off. But the subsequent recovery in U.S. bond prices has helped whet appetites.


While Japanese insurers getting extra income by lending U.S. Treasuries to Japanese banks is not new, it used to involve only small amounts and short periods such as overnight.

“Our lending has already reached to several hundred billion yen. We may consider increasing the amount further in the future,” said Ryosuke Fukushima, general manager of investment planning at Japan Post Insurance.

Japanese banks, which are constantly short of dollars, benefit from this because they can re-cycle the Treasuries to borrow dollars in the U.S. repo market at costs lower than those in the traditional dollar/yen swap market.

The dollar/yen basis swap spread, or the costs of swapping yen to dollar, rose sharply in 2016 because of ballooning dollar financing needs of Japanese banks, which sharply stepped up lending and investment overseas in recent years.

The three-month basis swap spread JPYCBS=TKFX rose to almost 1.0 percent in November, meaning Japanese borrowers need to pay extra one percentage point on top of the benchmark interest rate to borrow dollars while using yen as collateral.

The three-month spread has shrunk to around 0.3-0.4 percentage point in the past month, the lowest level in more than a year.

While there are a few reasons behind the fall in the spread, such as reduced foreign bond buying by Japanese investors and increased dollar funding through deposits by Japanese banks, some market players say insurers’ lending also played a role in narrowing the gap.

A lower spread reduces the cost of currency hedging when Japanese investors make foreign bond investments, thus bringing additional benefits to Japanese investors.

“It is a win-win situation for both U.S. Treasuries’ lenders and borrowers. And if the hedge cost falls, that is even better,” Fukushima said.

($1 = 111.77 yen)

(1 euro = 124.90 yen)

(Writing and additional reporting by Hideyuki Sano; Editing by Richard Borsuk)

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