G-20 Takes Harder Line on Currencies

Group of 20 finance chiefs sharpened their stance against governments trying to influence exchange rates as they sought to tame speculation of a global currency war without singling out Japan for criticism.
Two days of talks between G-20 finance ministers and central bankers ended in Moscow yesterday with a pledge not to “target our exchange rates for competitive purposes,” according to a statement. That’s stronger than their position three months ago and leaves Japanese officials under pressure to stop publicly giving guidance on their currency’s value.
With the yen near its lowest level against the dollar since 2010, policy makers are attempting to soothe concern that some countries are trying to weaken exchange rates to spur growth through exports. The risk is a 1930s-style spiral of devaluations and protectionism if other countries retaliate to safeguard their own economies.
“Politically-motivated devaluations can’t sustainably improve competitiveness; they don’t solve structural problems and they set off reactions,” Bundesbank President Jens Weidmann said yesterday. “The clear language in the communiqué underlines this unity and will allow the debate in the future to take place with a less excited tone.”
The new commitment is probably aimed at telling the Japanese that while they can stimulate their economy, they shouldn’t point to specific yen levels as desirable, said Chris Turner, head of foreign-exchange strategy at ING Groep NV in London. While the currency may initially climb this week, it will soon resume its slide toward 100 per dollar from 93.50 as the Bank of Japan keeps easing policy, he said.

‘Talking’ Policies

“It makes it harder for the Japanese to talk down the yen, but they will let their policies do the talking,” said Turner.
Japan has faced suspicion it’s trying to depreciate its currency, which lost about 7 percent this year as Prime Minister Shinzo Abe, who took office in December, campaigns for looser monetary policy to end 15 years of deflation.
Japanese officials in Moscow denied driving down their currency, arguing its fall was a byproduct -- not a focus -- of their effort to revive the world’s third-largest economy.
“The Bank of Japan’s measures have been and will remain targeted at achieving a robust economy through stable prices,” Bank of Japan Governor Masaaki Shirakawa said yesterday. The G-20 statement is “absolutely in the same spirit as our monetary policy,” he said. Finance Minister Taro Aso said a stronger Japan would “have a positive impact on the global economy.”

‘No Censure’

That stance won support in Moscow.
“There was no censure of the Japanese attitude, which was considered a policy to develop its economy and not to intentionally devalue,” said Brazilian Finance Minister Guido Mantega, who popularized the term “currency war” in 2010.
“Talk of currency wars is overblown,” said International Monetary Fund Managing Director Christine Lagarde. “People did talk about their currency worries.”
The Japanese defense echoes comments by U.S central bankers, who have run into criticism from emerging market officials such as Mantega for embracing stimulus, which has then undermined the dollar and strengthened other currencies.
In a nod to such complaints, the G-20 members agreed to monitor and minimize any “negative spillovers” and said that monetary policy should always be aimed at domestic needs, according to the statement.

‘Pay Attention’

Developed nations should “pay attention to the effects their monetary policies have on external markets,” Chinese Vice Finance Minister Zhu Guangyao told the state-run Xinhua news service from Moscow.
Federal Reserve Chairman Ben S. Bernanke said Feb. 15 in Moscow that the U.S. has deployed “domestic policy tools to advance domestic objectives,” adding that bolstering the U.S. economy will support world growth.
Unlike their American counterparts, Japanese officials including Abe have commented publicly on their exchange rate’s level, fanning speculation that they welcome its fall and that the yen’s weakness plays a part in their recovery strategy.
Japanese ruling-party lawmaker Kozo Yamamoto, who is close to Abe, said in a Feb. 14 interview it would be “appropriate” for the yen to trade at about 95-100 to the dollar. Deputy Economy Minister Yasutoshi Nishimura said on Jan. 24 that it wouldn’t be a problem if the yen reached 100.
U.S. Treasury Undersecretary Lael Brainard used a speech in Moscow to criticize “loose talk about currencies.”

Profit Shifting

The G-20 also pledged to work together to curb multinational companies’ leeway to shift profits to low-tax countries, endorsing an initiative spearheaded by the U.K, France and Germany.
“We are determined to develop measures to address base erosion and profit shifting, take necessary collective actions and look forward to the comprehensive action plan” the Organization for Economic Cooperation and Development will present in July, the G-20 said.
The Moscow meeting finished after a week of volatility in financial markets that started when the Group of Seven rich nations said on Feb. 12 that its members won’t use policies to “target exchange rates” and would focus on domestic needs. Confusion then broke out as G-7 officials bickered over whether their first joint comment on currencies since 2011 implied irritation with Japan.

‘More Rapidly’

The yen fell on Feb. 15 for the first time in four days as early drafts of the G-20 statement failed to echo the G-7’s vow. Part of the pledge was added following all-night talks in the Russian capital as the club of the largest developed and emerging economies also reiterated they will move “more rapidly” toward market-determined exchange rates and “refrain from competitive devaluation.”
The G-20 also said that while the risks to the world economy have receded, its growth remains too weak and unemployment is too high in many countries. That requires more work to create a stronger monetary and economic union in the euro area, resolve uncertainties surrounding the budgets of the U.S. and Japan and boost domestic demand in economies with large trade surpluses.
Advanced nations accepted the U.S.’s position by not setting new fiscal targets to replace those they agreed on in 2010 and which many of them are on course to miss. They pledged instead to develop “credible medium-term fiscal strategies.”

Japanese officials aren’t alone in accepting a cheaper currency as good for growth.
Bank of England policy maker Martin Weale said in a speech yesterday that although U.K. central bankers don’t “target the exchange rate,” there is reason to tolerate any inflation resulting from the pound’s six-year decline.
Not all G-20 policy makers want a weaker currency. Weidmann said in a Feb. 13 interview that “the exchange rate of the euro is broadly in line with fundamentals” and “you cannot really say that the euro is seriously overvalued.”


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Apple erases $17 billion from stock market

Apple Inc.’s near 4% drop wiped out $17 billion from the U.S. stock market on Monday, pushing two of the three benchmark indexes into negative territory.

Apple AAPL +0.15% shares fell $18.55, or 3.6%, to end at $501.75 after the Wall Street Journal and Japan’s Nikkei reported that the company had cut iPhone production plans because sales had come in below expectations.

The S&P 500 index SPX -0.09%  shed 1.37 point, or less than 0.1%, to 1,470.68, with telecommunications hardest hit and consumer staples faring best among its 10 industry groups.

“It would be positive without,” Apple, said Howard Silverblatt, senior index analyst at the S&P Indices, the stock’s impact on the index of 500 public companies.

The Dow Jones Industrial Average DJIA +0.14%  rose 18.89 points, or 0.1%, to 13,507.32, with Hewlett-Packard Co. HPQ +4.89%  leading the gains after J.P. Morgan upgraded the personal-computer maker to neutral from underweight. H-P also reclaimed the top PC-maker ranking from Lenovo Group Ltd.

International Business Machines Corp. IBM -0.14%  dropped 0.9% after J.P. Morgan downgraded it to neutral from overweight.

Shares of Dell Inc. DELL +12.96%  rallied 13% after Bloomberg News reported that the company was in buyout talks with private-equity firms.

Sprint Nextel Corp. S -3.89%  dropped 3.9% after the stock was downgraded by some brokerage firms. Read more about Monday’s biggest gaining and declining stocks.

The Nasdaq Composite COMP -0.26%  lost 8.13 points, or 0.3%, to 3,117.50.

Apple has a significant impact on the major stock indexes. It has a 3.8% weight in the S&P 500 and a 10% weight in the Nasdaq Composite, and is the largest stock on both. It’s not a member of the Dow average. Read more about the decline in Apple’s share price.

“In terms of the general negative sentiment, it’s a combination of Apple and a bit of poor industrial production number out of Europe. That was a pretty ugly wake-up call,” said Bill Stone, chief investment strategist at PNC Wealth Management. Industrial output for the 17-nation euro zone dropped 0.3% in November.

Decliners and advancers ran in a virtual dead heat on the New York Stock Exchange, where 590 million shares traded.

Composite volume approached 3 billion.

“As the week wears on, we’ll have a much more robust earnings calendar. Of those 27 S&P 500 companies reporting so far, they’ve lowered estimates significantly in the last three months,” said Art Hogan, market strategist at Lazard Capital Markets.

Companies reporting so far have managed to “squeeze out some sort of beat of lowered expectations,” said PNC’s Stone.

Of the first 27 companies in the S&P 500 to report fourth-quarter results, 67% exceeded earnings-per-share growth expectations, 15% were in line and 18% missed, according to Nick Raich, director of research at Key Private Bank. Of those companies, which represent 5% of the 500 that will eventually report, 11% raised their first-quarter 2013 guidance; 19% maintained and 70% lowered their outlooks.

“The new consensus expectation for fourth-quarter 2012 earnings growth is only 2%,” said Raich. “The guidance companies are providing after reporting results is still very weak.” 

In Washington, President Barack Obama talked about efforts to reduce the U.S. deficit at a Monday news conference in which he urged lawmakers not to use the debt ceiling as leverage in the political wrangling over government spending.

With a battle looming with Congress in the weeks ahead over hiking the $16.4 trillion debt ceiling, Republican lawmakers are mulling a government shutdown or default as a way to force cuts in government spending. Read a blog post on the U.S. Treasury thinking the unthinkable about the debt ceiling.

In separate statements, Senate Republican leader Mitch McConnell called the debt-ceiling debate the “perfect time” to confront government spending, and House Speaker John Boehner also indicated his intention to link spending cuts to hiking the debt ceiling.

The Treasury market did not signal distress over the danger of a government default, with yields on the benchmark 10-year note 10_YEAR +0.16%  off 1 basis point, or 0.01 percentage point, to 1.85%.

Federal Reserve Chairman Ben Bernanke spoke at 4 p.m. Eastern in Michigan, following comments delivered by Chicago Fed President Charles Evans that the central bank should continue to keep monetary policy accommodative as lawmakers cut U.S. spending.

“The market will be watching Bernanke to get a better take on when the Fed might start to take the punch bowl away,” said Stone of the Fed’s monetary policy.

Banks Find Promise Unfulfilled in China Forays

In June 2005, when Bank of America Corp.'s then-Chief Executive Ken Lewis flew to Beijing to sign a $3 billion pact to acquire a 9% stake in one of China's biggest state-run banks, he hailed the deal as "a long-term investment."

In Mr. Lewis's view, the money the bank put into China Construction Bank Corp. should have given the Charlotte, N.C., lender an entry into the world's fastest-growing economy and a clear shot at tens of millions of potential banking customers.

The Bank of America chief at the time was part of a parade of top international bankers who piled ...

Apple Cuts Orders for iPhone Parts

Apple Inc. AAPL -3.57% has cut its component orders for the iPhone 5 because of weaker-than-expected demand, people familiar with the situation said Monday, indicating sales of the latest smartphone haven't been as strong as anticipated.

Apple's orders for iPhone 5 screens for the first quarter, for example, have dropped to roughly half of what the company had planned to order, the people said.
The Cupertino, Calif., company also cut orders for components other than screens, one of the people said.

Customers stood outside a KDDI Corp. outlet prior to the launch of the Apple Inc. iPhone 5 in Tokyo in September.

Apple cut orders for iPhone 5 components on lower-than-expected demand. The WSJ's Juro Osawa talks about whether sales of Apple's latest smartphone are slowing. 

Apple has set the agenda for the smartphone market since it released its first iPhone in 2007.
But South Korea's Samsung, which sells Android-based models at various price points, has overtaken the U.S. company as the world's largest smartphone vendor by market share. Demand also is growing for inexpensive smartphones from Chinese makers such as Huawei Technologies Co.
While the popularity of iPhones and iPads has been boosting Apple's earnings and investors' expectations over the past few years, there have been concerns in recent quarters about how long the growth can continue. Apple's stock, which peaked at about $705.07 in September, was down 3.2% at $503.70 in midday trading Monday in New York.

Apple held 14.6% of world-wide smartphone shipments in the third quarter, down from a peak of 23% in the fourth quarter of 2011 and the first quarter of last year , according to IDC.
Samsung's market share, meanwhile, rose to 31.3% in the third quarter, compared with 8.8% in the third quarter of 2010. The Korean company said this month that it expects to report another record operating profit for the fourth quarter of last year, capping its best year ever amid strong sales of its Galaxy line of smartphones. The company expects an operating profit of between $8.1 billion and $8.5 billion for the quarter.

Analysts continue to cite multiple explanations for a potential trim to orders unrelated to demand, including the ebb of flow of Apple's supply chain and a strong holiday quarter.
Brian Blair, an analyst with Wedge Partners, says order cuts are typical after the holidays. He also noted that Apple uses multiple suppliers for individual parts making across the board cuts difficult to assess.

He estimates that Apple, which reports earnings for the December quarter on Jan. 23, sold 50 million iPhones during the quarter, ahead of average analyst estimates around 47 million.
Sanford Bernstein analyst Alberto Moe, said Apple may have made particularly large iPhone 5 orders to suppliers for the fourth quarter because of earlier concerns about manufacturing difficulties with some components such as screens.
Citigroup C -0.28% last month lowered its rating for Apple to "neutral" from "buy," citing concerns about cuts to iPhone orders. The brokerage noted that a sharp increase in iPhone 5 production during the fourth quarter may have left Apple with more inventory than expected. Still, it also said that "good not great" demand is likely a factor behind the order cuts.
"It is unlikely that Apple is cutting orders in a 'great' demand environment," Citigroup analysts said in the Dec. 16 report.
The iPhone 5, released in September, represents Apple's effort to maintain its strong position amid intensifying competition. The model comes with a longer, four-inch screen than the 3.5-inch screens in previous iPhone models.
Japan's Sharp Corp., 6753.TO +12.63% Japan Display Co. and South Korea's LG Display Co. 034220.SE -2.20% are the three suppliers of the screens, according to people with knowledge of the matter. When the iPhone 5 was introduced, there were concerns that suppliers might not be able to produce enough to keep up with demand.
Apple's cut in orders may affect first-quarter sales of component makers, some of which are largely dependent on the U.S. company. The fact that some iPhone components are highly customized makes it difficult for suppliers to find alternative buyers in a short time frame. Sharp, one of the screen suppliers, has been struggling with a cash crunch and losses from its television-set operations.
Japan's Nikkei reported Monday that Apple has slashed its orders for iPhone 5 components.

Obama Warns Republicans on Debt Limit

WASHINGTON—The next phase in the bitter, two-year-long battle between the White House and congressional Republicans began in earnest Monday, with President Barack Obama and GOP leaders digging in over spending and the debt limit.

Mr. Obama, speaking at a hastily called news conference, sought to blunt any momentum gathering around congressional Republican plans to use the vote on raising the debt limit as leverage in coming budget fights, saying it is "irresponsible" and "absurd" to even consider defaulting on U.S. debt in an attempt to extract spending cuts from Democrats.

The president said the threat of default already is harming ...

Will Obama Ruin the Economy to Ruin the Republicans?

With both the 14th Amendment and platinum coin options to defuse a debt-limit crisis (apparently) off the table, only two possible outcomes are left: a debt- ceiling increase or the government's missing required payments and economic chaos ensuing. This is exactly the choice President Barack Obama laid out in his news conference this morning.
Politico reported today that top Republican staff members believe “more than half” their conference is prepared to push the government into default on some payments rather than cave on their demands for further spending cuts.
This isn’t because Republicans are reckless, as such. Many conservatives are sincerely convinced that excessive government spending poses a dire risk to the U.S. economy, and that even if missed payments have severe negative short-term economic consequences, they will be worth it if the long-term outcome is a smaller government.
The conviction that everything is about to come apart in the U.S. if the government maintains its current economic-policy course -- through tremendous inflation, a debt crisis, and/or all of the productive members of society Going Galt -- animates the huge Republican resistance to anything Obama proposes, even if that’s just the government paying the bills it has already run up. They’re trying their very hardest to save the country from a madman.
This sincere outlook is also insane, as you can see from how the stock and bond markets have behaved in recent years in response to various policy actions. The markets like fiscal expansion, monetary expansion and deals that keep the government operating as usual without drastic policy change. They do not cry out for massive disruption in pursuit of smaller government.
But the conservative worldview is robust because of its imperviousness to evidence. Economic data, like polling data or climate data, cannot get in the way of the narrative. Conservatives are sure that the Obama presidency will lead to an economic calamity, and they will prove it, if necessary.
Mike Konczal of the Roosevelt Institute has a good rundown of the game theoretical implications of the White House’s choices to take the coin and the 14th Amendment off the table. By removing the options to hit the debt ceiling without economic disaster, maybe the White House will force Republicans to give the White House the policy it most wants: a clean debt-ceiling increase. Or maybe we’ll hit the debt ceiling anyway.
But there is another explanation for the White House’s choice that is missing from Konczal’s analysis. If Obama had minted the coin, he would have taken the blame for whatever problems ensued, real or imagined. He might have saved the economy while bearing the political cost of ruining it. Foreclosing that option has an indeterminate impact on the economy, but it will ensure that Republicans get all the blame for whatever bad economic events happen in the next few months.
By creating an object lesson of how unfit the Republican Party has become to govern, Obama can ensure himself a political “win.” But with a new recession sparked by a government payments crisis, the country would lose -- and Obama, whose second-term plans would be hampered by the need to manage yet another recovery, would lose, too.
(Josh Barro is lead writer for the Ticker. E-mail him and follow him on Twitter.)
Read more breaking commentary from Bloomberg View at the Ticker.

Bernanke: 'We're Not Out of the Woods' Despite 'Fiscal Cliff' Deal

Although the "fiscal cliff" deal made "some progress" in resolving the nation's debt problem, "we're not out of the woods yet," Federal Reserve Chairman Ben Bernanke said Monday.

"We are approaching a number of other fiscal critical watersheds," Bernanke told the University of Michigan's Gerald R. Ford School of Public Policy. "We have the funding of the government, we have the so called sequester…and we have the infamous debt ceiling which will come into play."

Echoing comments made earlier in the day by President Barack Obama, Bernanke said raising the debt ceiling merely gives the government the ability to pay its existing bills.

"It doesn't create new deficits, it doesn't create new spending," he said. He said it was like a family deciding that to save money, it won't pay its credit card bill.

"It's very, very important that Congress take necessary action to raise our debt ceiling to avoid a situation where our government doesn't pay its bills," Bernanke said.

(Read More: Geithner Letter Warns Congress: We Will Hit the Debt Ceiling Soon)
The Fed chairman also said it would actually be better if the country didn't have a debt ceiling.
"I don' think that's going to happen, I think it's going to be around," Bernanke added, "but I do hope Congress will allow the government to pay its bills, not raise the possibility of default , which would be very costly for our economy, and then address very seriously these fiscal issues."

While some progress was made in working out the country's fiscal problems with the tax deal beginning of January to extend tax cuts for all American families earning less than $450,000 a year, Bernanke said the big challenge remains finding long-run debt sustainability without unduly hampering the U.S. economic recovery.

He said that the fiscal cliff probably would have created a recession in the U.S. this year, but some of that risk has been avoided.

Bernanke downplays inflation risk of QE3

Worst thing Fed could do would be to hike rates prematurely

Federal Reserve Chairman Ben Bernanke played down fears on Monday from some more hawkish central bankers and investors that the Fed’s bond-buying program will lead to higher inflation.

“I don’t believe significant inflation is going to be the result of any of this,” Bernanke said in a speech at the University of Michigan. 

The Fed will watch closely to see whether the zero-interest rate policy that has been in place for four years could eventually lead investors to make unwise decisions, creating an asset bubble, he added.

Bernanke also said there is a continuing debate over whether Fed policy is a cause of asset bubbles. The Fed has an “open mind” on the issue, he remarked, and will continue to monitor markets and toughen bank supervision to guard against financial instability. 

But the worst thing for the central bank to do would be “to raise interest rates prematurely,” according to Bernanke. 

At their meeting in December, the Fed boosted its stimulus program by adding $45 billion of monthly Treasury purchases to an existing program to buy $40 billion in mortgage-backed securities a month.

Last week, several Fed officials expressed their concerns over the central bank’s loose policy. Read: Fed hawks get their day in the sun. 

Kansas City Fed Bank President Esther George noted that prices of assets such as bonds, agricultural land and high-yield and leveraged loans were at historically high levels.

In addition, Richmond Fed President Jeffrey Lacker dissented from all eight Fed policy statements in 2012, saying that the central bank might be undermining its ability to control inflation.

Most U.S. Stocks Fall as Apple Slump Tempers Dell’s Rally

Most U.S. stocks fell, after a two- week gain in the Standard & Poor’s 500 Index, as a slump in Apple (AAPL) Inc. tempered Dell Inc. (DELL)’s rally on buyout talks.

Apple, the most valuable company, sank 3.8 percent on reports it curbed iPhone production on weak demand. Dell surged 13 percent as two people with knowledge of the matter said the company is in discussions with private-equity firms.

Bernanke downplays risks from bond-buying

 Federal Reserve Board Chairman Ben Bernanke downplayed fears expressed by some more hawkish Fed officials and investors that the Fed's bond-buying program will lead to higher inflation or future asset bubbles in the future. "I don't believe significant inflation is going to be the result of any of this,"

 Bernanke said in an appearance at the University of Michigan. Whether Fed policy will lead to asset bubbles in the future is "a difficult question," Bernanke said. The Fed is monitoring markets and toughening supervision to guard against financial instability, he said. The worst thing for the Fed to do would be "to raise interest rates prematurely," he said.