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Fear Central Banks’ Grip Is Slipping?

Only a few days ago, the leading Wall Street debate was whether central banks had too much control over the financial markets. Suddenly, the nagging notion is whether central banks are losing, or surrendering, control.
Since Federal Reserve Chairman Ben Bernanke on Wednesday set out the likelihood of curtailed “quantitative-easing” bond purchases late this year, interest rates have shot higher, with the 10-year Treasury yield surging above 2.5% Friday from 2.17% before he spoke, sparking a 560-point tumble in the Dow Jones Industrial Average in two days.
This is popularly viewed as a simple re-pricing of bonds in anticipation of the Fed backing away from its current $85 billion monthly purchase of Treasury and mortgage debt. Yet, it’s not clear the Fed wished for rates to whistle higher at this pace, given all of Bernanke’s caveats that economic data alone will steer his course.
After the Fed meeting, Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, reiterated his view that “2013 will be the high-water mark of the ‘liquidity era.’” If so, a central belief that investors have grown accustomed to has been badly disturbed.
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For sure, the liquidity will drain slowly, but Hartnett notes the rallying dollar suggests it’s underway. He thinks ultimately money will be reallocated into stocks, but until global asset markets settle down a bit, it appears this adjustment could be messy and nervous.
Stirring further worry, the Fed is not the only central bank that appears at risk of having its grasp on market action loosen. The People’s Bank of China has so far declined to act forcefully to ease severe stress in the interbank-lending market there, which has at times seen overnight rates shoot above 20% this week. The European Central Bank, while it has calmed fears of an outright debt meltdown, has consistently been less active than the Fed in pumping cash into the system to revive a stagnant economy. The Bank of Japan, which has been maximally aggressive in printing yen to push inflation and growth higher, has largely refused to respond as Japanese bond and stock markets are tossed around in turbulence.
Finally, emerging-market central banks are scrambling to defend against further steep declines in their currencies — a flip side of the resurgent dollar — for fear they will worsen inflation. This hampers their ability to cut interest rates to support struggling economies.
The velocity of the backup in rates and anxious selloff in stocks seems in part related to a fear that the Fed is growing not only less friendly, but perhaps is losing or ceding control of markets now beholden to whippy economic data and the liquidation of a crowded, complacent collection of global bond owners. A key accomplishment of the Fed and other central banks since last year has been to suppress volatility. As they potentially move toward a less-dominant role in markets, it makes sense that volatility eruptions would occur more often.
The fact that Bernanke declined perfectly good excuses to sound a more soothing tone — by citing moribund inflation trends and the overhang of federal spending constraints — without dramatically or convincingly raising his view of growth prospects, spread plenty of unease. He conveyed his seriousness about summoning the inflection point when the Fed can step back. And markets have so far taken him seriously.
The coming tone
When things calm down is a matter of how much baseless froth was in assets, and whether some sort of “financial accident” is triggered by all the jumpiness in huge markets packed with ill-positioned fast money. While not the likeliest scenario, there is a dark thought occurring to some investors that the Fed might implicitly say, by the middle of next year, “we’ve done all we can, or want to, do” at a moment when the economy is not obviously performing all that well. Put another way, investors are not comfortable with policy makers who are acting as if they’re more confident in the growth outlook than they are.
The comments Friday that St. Louis Fed President James Bullard objected to Bernanke’s detailing of possible plans for phasing out bond-buying at a time when the Fed wasn’t lifting its economic sights could mean a change in tone from Fed speakers to come, especially if Treasury yields don’t settle back.
True, the stock market can tolerate higher rates for the “right reason,” meaning better confidence in the economic picture. Yet at minimum, the bond-like dividend stocks such as consumer staples, real-estate investment trusts and utilities, which dragged the market to new highs early this year, are being enduringly re-valued lower. That said, a Wall Street Journal report Friday emphasizing that the Fed is sensitive to negative market interpretations suggests officials don’t want investors to extrapolate the hints of less-easy policy too far.
If the indexes are to prove resilient and rebuild upside momentum, either before a full-fledged correction washout or not, stocks more attuned to the economic pace will need to find plausible reason in the data to take the lead.
The Fed and other central banks likely got too much credit as the “only” reason stocks galloped higher early this year, and perhaps will get more blame than merited on the downside. But this is now becoming a real-world test of just how much they’ve been responsible for.

Wall St. drops after Bernanke hints at slowing stimulus

NEW YORK – Stocks fell more than 1 percent on Wednesday after Federal Reserve Chairman Ben Bernanke said the central bank would start to reduce its stimulus measures later this year if the economy is strong enough.
Equities have been closely tethered to ultra-loose monetary policy, which has been key to the S&P’s climb of more than 14 percent so far this year. Benchmark 10-year U.S. bond yields jumped to a 15-month high on expectations the Fed will reduce its bond buying.
Bernanke said at a news conference the Fed may reduce its bond-buying program with the goal of ending it in mid-2014. While investors have expected the Fed to pull back on its stimulus, Bernanke’s comments gave the most explicit timeline to markets, causing stocks to tumble on heavy volume. In the days leading up to the Fed announcement, stocks had swung between modest losses and breakeven.
“I was surprised he addressed the issue of tapering, since last time he did we saw a fairly significant market hiccup,” said Randy Bateman, chief investment officer of Huntington Asset Management in Columbus, Ohio.
The Dow Jones industrial average (.DJI) was down 205.96 points, or 1.34 percent, at 15,112.27. The Standard & Poor’s 500 Index (.SPX) was down 22.89 points, or 1.39 percent, at 1,628.92. The Nasdaq Composite Index (.IXIC) was down 38.98 points, or 1.12 percent, at 3,443.20.
Shortly before Bernanke spoke at a news conference, Fed policymakers said in a statement the Fed would keep buying $85 billion in bonds per month and gave no explicit indication that it was close to scaling back the stimulus program.
About 6.65 billion shares changed hands on the New York Stock Exchange, the Nasdaq and NYSE MKT, above the daily average so far this year of about 6.36 billion shares.
“If the economic growth we have is sustainable without the Fed, that’s good news,” added Bateman, who helps oversee $15 billion. “But it is hard to wean the system off the easy money.”
The benchmark 10-year U.S. Treasury note fell 1 9/32, with the yield rising to a 15-month high of 2.3325 percent.
The S&P 500 rose for the two days before the Fed decision on confidence that current stimulus would be left in place even if Bernanke nods at the need to begin reducing bond purchases later in the year.
The stimulus helped the stock market reach a record high on May 21, one day before Bernanke said the Fed could reduce its bond-buying in the “next few meetings” if the economy gained momentum. His comments rocked markets, boosting bond yields and halting stocks’ rally.
Despite the increased volatility of the past month, the market has moved largely sideways. The S&P 500 is about 2.4 percent below its record high of 1,669.16, reached May 21.
More than four-fifths of stocks traded on the New York Stock Exchange fell while 70 percent of Nasdaq-listed shares ended lower.
Real estate investment trusts, whose dividends attracted investors during the low interest-rate period, were among the hardest hit on Wednesday. The benchmark MSCI US REIT index (.RMZ) was down 3.1 percent, with Pennsylvania Real Estate Investment Trust (PEI.N) off 2 percent to $19.19 and Simon Property Group (SPG.N) down 2.9 percent to $162.52.
REITs are exempt from corporate-level income tax if the companies distribute at least 90 percent of their taxable income in the form of dividends to shareholders. Since Bernanke began to signal the possible end of the policy, the index is down 12 percent.
Shares of Adobe Systems Inc (ADBE.O) rose 5.6 percent to $45.78 a day after the maker of Photoshop and Acrobat software reported a higher-than-expected adjusted quarterly profit.
FedEx Corp (FDX.N) reported higher quarterly profit than expected as its ground shipment business improved. Shares were up 1.1 percent at $100.54.
After the market closed, Jabil Circuit Inc (JBL.N) fell 1.6 percent in extended trading after it reported a steep drop in quarterly profits, while Micron Technology Inc (MU.O) lost 1.5 percent to $13.76.
Red Hat Inc (RHT.N) rose 3.9 percent to $48 after the closing bell. The company posted a strong jump in earnings and revenue.
On the downside, Sprint Nextel (S.N) was both the most heavily traded stock on the New York Stock Exchange and one of the biggest decliners on the S&P 500, down 4.4 percent to $7.
Japan’s SoftBank (9984.T) cleared a major hurdle in its attempt to buy Sprint as rival bidder Dish Network (DISH.O) declined to make a new offer after SoftBank sweetened its own bid last week.
(Additional reporting by Ilaina Jonas; Editing by Nick Zieminski and Kenneth Barry)

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Fed meeting keeps markets in check

LONDON (AP) — Stocks edged higher Tuesday ahead of a two-day policy meeting of the U.S. Federal Reserve that could have a huge influence on how investors see the future path of the country’s monetary policy.

For weeks now, markets have been gripped with uncertainty over whether the Fed will start reducing the amount of financial assets it is buying. For much of the past few years, the Fed’s super-easy and super-cheap monetary policy has helped drive sentiment in the markets. Any reduction — so-called tapering — could spook investors who have been accustomed to seeing much of the money generated by the policy ending up in financial markets.

The uncertainty was caused by comments made by Fed chairman Ben Bernanke in May and investors will be hoping that a clearer line is evident at the end of this month’s meeting on Wednesday. Though a change is not expected on Wednesday, investors will be looking for a clearer line in the accompanying Fed statement and in Bernanke’s post-meeting press conference.

The nervousness surrounding the Fed was evident Monday when an opinion piece in the Financial Times about the Fed’s intentions spooked investors and prompted some selling in U.S. markets.

“The entire sorry episode signifies how reliant on central bank stimulus markets have become,” said Michael Hewson, senior market analyst at CMC Markets.

In Europe, the FTSE 100 index of leading British shares was up 0.9 percent at 6,384, while Germany’s DAX rose 0.1 percent to 8,228. The CAC-40 in France was 0.1 percent higher too at 3,868.

Wall Street was poised for modest gains at the open, with Dow futures and the broader S&P 500 futures up 0.3 percent.

How Wall Street performs when it opens could also hinge on U.S. inflation numbers an hour before the bell. Inflationary pressures have been relatively benign in the U.S. so any sign that they are rising may impact upon expectations over the Fed — one of the great fears over a monetary stimulus is that it may push up inflation in the long-run. The consensus in the markets is that the annual rate for May will rise to 1.4 percent from the previous month’s 1.1 percent.

“Any signs that inflation is overheating would certainly add weight to calls for a tighter monetary policy to be implemented quickly,” said Fawad Razaqzada, market strategist at GFT Markets.

The dollar’s near-term outlook, particularly against the euro, rests on the Fed too. Europe’s single currency was up 0.1 percent at $1.3381. Against the yen, the dollar has been buffeted by Japan’s own monetary stimulus. Following recent losses, the dollar was back in favor, trading 0.9 percent higher at 95.37 yen.

Earlier in Asia, Japan’s Nikkei stock average shed early gains to fall 0.2 percent to 13,007.28. Trading volume was the lowest for the year. Elsewhere, Hong Kong’s Hang Seng index was nearly flat at 21,225.88, while South Korea’s KOSPI index gained 0.9 percent at 1,900.62.

Oil prices fell ahead of the Fed’s meeting, with the benchmark New York rate down 23 cents at $97.54. The contract fell 8 cents to finish at $97.77 a barrel on the Nymex on Monday.

In currencies, the euro rose to $1.3388 from $1.3340 late Monday in New York. The dollar rose to 95.11 yen from 94.86 yen.

Market FuturesUP on Fed hope- Week Ahead

 

U.S. stock market futures made a strong push north on Monday, with investors getting hopeful that this week’s Federal Open Market Committee meeting will soothe anxieties over when and how the central bank will pull back the throttle on stimulus.

Data on deck includes a manufacturer’s report and a home builders’ index. Gains for futures came against a backdrop of strong overseas markets, with the Nikkei Stock Average(TYO:JP:NIK)  retaking 13,000.

Extending earlier gains, futures for the Dow industrials (CBE:DJU3)  rose 125 points, or 0.8%, to 15,112, while those for the Standard & Poor’s 500 index (GLC:SPU3)  rose 13.9 points, or 0.9%, to 1,632.30. Futures for the Nasdaq 100 index (GLC:NDU3)  rose 29.25 points, or 1%, to 2,966.25.

The week’s main event, the two -day FOMC meeting, concludes Wednesday with a press conference held by Federal Reserve Chairman Ben Bernanke.

“We suspect that this week Bernanke will continue to say tapering will happen at some point, could happen this year but will be data-dependent, and that we are still a long way off from removing the very easy policy stance the Fed has in place,” said Jim Reid, strategist at Deutsche Bank.

“We still think that the Fed will struggle to taper very much and very early, but the debate is now going to be around for a while,” said Reid.

Fawad Razaqzada, market strategist at GFT Markets, said in a note that “ultimately what was perceived as an imminent event just a few days ago — the beginning of the end of QE — does seem to have been pushed to the back-burner.”

The Wall Street Journal’s Jon Hilsenrath, who last week reported that the Fed will likely push back on market expectations of a rate rise, said in a blog post on Sunday that investors should be focusing on the Fed’s projections for growth, inflation and unemployment, due at the conclusion of that meeting.


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What the Fed says “about the economy will send important signals about what they expect to do in the future. If they maintain confidence in their economic forecasts, it could signal they think they’re on track to begin pulling back the program later this year,” Hilsenrath wrote.

Ahead of that meeting, the Empire State manufacturing survey is expected to come in flat, after falling into negative territory in May for the first time since January. That report is due at 8:30 a.m. Eastern Time.

At 10 a.m. Eastern, the home builders’ index for June will be released.

The rebound for stock futures on Monday comes in the wake of a third weekly loss in four forWall Street, as investors grew more cautious over whether the economy can bear a tapering of the Fed’s stimulus program, notably bond buying worth $85 billion a month.

The Dow industrials (DJI:DJIA)  fell 1.2% for the week, losing 105.90 points, or 0.7%, to 15,070.18 on Friday. The S&P 500 index (SNC:SPX)  retreated 9.63 points, or 0.6%, to 1,626.73, ending the week with a 1% drop.

In overseas markets, most Asian markets extended gains, with Japan stocks rebounding in particular as the yen retreated. Gold turned lower and oil moved up.

 

By Barbara Kollmeyer, MarketWatch

Fed’s Bond-Buying Wild Card

Many investors have lowered their expectations for future inflation, a shift that could get the attention of Federal Reserve officials as they consider the course of their bond-buying program at a policy meeting next week.
The Fed has a 2% inflation goal and doesn’t want consumer prices to veer too much above or too much below that number over time. Some recent inflation measures have dropped below that level this year, but Fed officials haven’t been too worried because expectations of future inflation were stable.
Now that expectations show signs of shifting, too, Fed officials could feel pressed to rethink their view that consumer prices will return to their target. If the fall in inflation expectations persisted and deepened, it could cause some Fed officials to argue for continuing their bond-buying program at the current $85 billion-a-month pace for longer than otherwise.
“It is no longer clear that inflation expectations are so stable,” Jan Hatzius, chief economist at Goldman Sachs Group Inc., said in an interview. Market-based measures of inflation expectations are now on “the low side of comfortable.” In a note to clients June 10, he predicted that expectations of lower inflation are likely to make Fed officials less willing to pull back on the bond-buying programs out of fear it could destabilize those expectations about future inflation.
Fed officials are now in their self-imposed premeeting blackout period in which they don’t speak publicly. Their public comments before this period have largely suggested they aren’t deeply concerned about inflation getting too low.
Expectations matter so much to Fed officials because they believe businesses and households act today based on what they expect for the future. If they expect consumer prices to fall a lot in the future, they might cut back on spending today.
In that context, the Fed launched its bond-buying program to bolster economic growth by pushing down long-term interest rates and pushing up asset prices, hoping that would spur spending, hiring and investment. If officials believe the economy is on track to gain strength in coming months, they might start to reduce the size of the bond purchases. But if they thought low inflation and falling expectations signaled new weakness in the economy, they might want to continue the program at its current level for longer.
Analysts will be looking to see if the Fed makes any changes to its formal policy statement at the end of next week’s meeting that reflect the softening expectations, or if Fed Chairman Ben Bernanke addresses them during his news conference after the two-day meeting concludes Wednesday.
After its May 1 meeting, the Fed said while inflation “has been running somewhat below” its 2% target, “[l]onger-term inflation expectations continue to remain well anchored.”
One closely watched indicator of market inflation expectations shows how expectations are softening. The so-called breakeven rate—or the difference between yields of conventional Treasury securities and Treasury Inflation-Protected Securities—widens when investors expect higher inflation and narrows when they believe inflation is headed lower. TIPS pay investors a return adjusted for changes in the consumer-price index.
In recent weeks, the gap has narrowed: It shows investors’ expect inflation in five years to be 2.459% as of Tuesday, down from the 2.7% they expected at the end of April and the nearly 2.9% expected at the beginning of the year, according to Fed data.
To be sure, despite these drops, inflation expectations by this and other measures remain above the Fed’s 2% inflation target, which is one reason the Fed may not be too worried.
But if investors’ expectations of future inflation continue to fall it could become a growing issue for Fed officials. They became worried about expectations softening too much in 2010 when these measures were near 2.2%, and responded by launching a second round of bond buying.
The latest shifts in expectations are happening against a backdrop of sharp declines in measures of actual inflation. The Labor Department reported Thursday that prices paid for U.S. exports of consumer goods, excluding autos, fell 1.3% over the last year, the biggest drop since the agency started keeping track in 1983. Prices of goods imported into the U.S. also fell.
The Fed’s preferred inflation gauge, the Commerce Department’s price index for personal-consumption expenditures, has come in well below 2% recently. In April, the latest month for which there are data, it was up just 0.7% from a year ago, and the “core” index—which strips out volatile food and energy costs—was just 1.1% higher than a year earlier.
On an unrounded basis, the April core reading—1.05%—was at the lowest level ever recorded in the history of the index, which goes back to 1959.
Minutes of Fed officials’ May 1 meeting show they are keeping a close eye on inflation. “A number of participants expressed concern that inflation was below the Committee’s target and stressed that future price developments bore careful watching,” the minutes said.
There are some obvious benefits to falling inflation. Lower energy and food prices mean consumers have more money to spend on other things. In general, though, the Fed tries to keep inflation stable near 2%, a level that central-bank officials believe supports steady economic growth and hiring. Big moves either above or below that make it hard for businesses and households to plan for the future.
“Keeping inflation expectations anchored at levels consistent with the central bank’s medium-term inflation objective—2% on the personal consumption expenditures deflator in our case—is vitally important,” New York Fed President William Dudley said in a recent speech reflecting on lessons learned from Japan’s experience with deflation, or falling prices. “Once deflation expectations become well entrenched, it is very difficult to change them. And, because inflationary expectations are an important driver of actual inflation outcomes, deflationary expectations can be self-fulfilling in driving actual deflation outcomes.”
Jon Hilsenrath contributed to this article.
Write to Victoria McGrane at victoria.mcgrane@wsj.com

Stock futures tumble

MADRID (MarketWatch) — U.S. stock futures fell on Tuesday, tracking losses across global markets after the Bank of Japan disappointed some market watchers by holding its policy steady, and worries about Federal Reserve tapering continued to haunt the market.

A handful of U.S. data numbers are due, including job openings and wholesale inventories.

Global stocks were also rattled as a German constitutional court began to consider the legality of the European Central Bank’s pledge last year to buy the government bonds of weaker euro-zone countries to prevent the single currency from breaking up.

The Next 24: Lululemon drops as CEO steps down

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Deep in negative territory, futures for the Dow Jones Industrial Average (CBE:DJM3) fell 115 points, or 0.8%, to 15,113, while those for the Standard & Poor’s 500 index(GLC:SPM3)  fell 14.80 points, or 0.9%, to 1,627.30. Futures for the Nasdaq 100 index(GLC:NDM3)  fell 24.50 points, or 0.8%, to 2,962.50.

“Equity markets continue to push lower amid a wide range of disappointing factors,” said Mike McCudden, head of derivatives at Interactive Investor. “The Fed will call time on bond buying at some point, Chinese economic data is showing further signs of a slowdown, and the Bank of Japan continues to — in the mind of many traders — punch below its potential.“

Along with Asia and Europe stocks, the dollar fell sharply against the Japanese yen after the Bank of Japan decided to stay put on its policies, dashing some hopes that the central bank would extend the duration on its ultra-low-interest rates to banks. The dollar (ICAP:USDJPY) sank to ¥97 from a level of ¥98.64 seen late Monday in North America.

• Need to Know: Crucial gut checks before the U.S. markets open

Henrik Drusebjerg, senior strategist with Nordea Bank, said there is also some delayed reaction to disappointing weekend export numbers from China. “If we really should believe in equity markets going up from now, it’s extremely important that we see global growth, otherwise it’s not very likely corporates will be able to raise their earnings,” he said.

On Tuesday, the National Federation of Independent Business said small-business sentiment rose in May to the highest level in a year. Later on Tuesday, the Labor Department will release job openings data for April at 10 a.m. Eastern Time, while the Commerce Department will publish wholesale inventories for May at that time as well.

Within that data, the job openings numbers will likely draw the most attention as Federal Reserve Vice Chair Janet Yellen has said it’s one of the indicators she’s watching for signs of a labor improvement.

Wall Street stocks finished Monday’s session little changed after Standard & Poor’s revised its U.S. credit-rating outlook to stable from negative. In choppy trading, the Dow Jones Industrial Average (DJI:DJIA)   finished down 9.53 points, or 0.06%, to 15,238.59. The S&P 500(SNC:SPX)  dipped 0.57 point to end at 1,642.81.

Drusebjerg said in places like China, stocks are beginning to look quite cheap, but globally stocks are at fair value. “Given that we’ve now seen two years of increasing equity prices and stable-to-slightly-decreasing earnings in corporates, it has made equity markets overall close to fair value,” he said.

Within corporate news, shares of Dole Food Co. (NYSE:DOLE)  jumped 18% in premarket trading after David H. Murdock, the company’s chairman and CEO, made a bid for the rest of Dole. Murdock controls almost 40% of Dole Food, and the $12-per-share cash offer represents an 18% premium to Dole Food’s closing price on Monday of $10.20 per share.


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Mario Draghi, ECB President

Shares of Lululemon Athletica Inc. (NASDAQ:LULU)  tumbled 14% in premarket trading after the yoga clothing retailer announced quarterly results the prior day and said its Chief Executive Officer Christine Day will step down.

U.S. investors will be keeping an eye on Germany on Tuesday, where the country’s supreme court will be scrutinizing whether ECB President Mario Draghi was within his legal limits when he last year announced a new policy — Outright Monetary Transactions — where the bank could buy bonds to keep a euro-zone government and the euro from collapse.

“The primary fear is that (OMT) could be capped to a certain amount and that would definitely hurt Draghi’s words when he said, ‘We will do whatever it takes’,” Drusebjerg noted.

Losses built for Europe stocks throughout the morning, with the Stoxx Europe 600 index(STX:XX:SXXP)  dropping 1.6%.

Asia stocks fell after that no-change stance from the Bank of Japan, with the Nikkei Stock Average (TYO:JP:NIK)  closing down 1.5%. Nikkei futures were pointing to losses of 4%.

Gold also fell sharply, and other precious and base metals followed suit. Gold for August delivery (CNS:GCM3)  dropped $12.80, or 1%, to $1,373.30 an ounce

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Economy Growth outlook lifts shares and the dollar

By Richard Hubbard

LONDON  – The dollar jumped higher against the yen and Japanese stocks led a rise in world shares on Monday as signs of economic momentum in the United States and Japan outweighed worries about a slowdown in China.

A central bank forecast that the French economy will grow slightly in the second quarter and a pickup in euro zone investor sentiment for June also added to the positive outlook.

But markets are still fixated on the timing of a potential slowdown in the Federal Reserve’s bond-buying program and are likely to remain volatile after U.S. data last week, including the key jobs report, did little to change expectations.

“(The jobs data) hasn’t changed the market’s view much on the timing of Fed tapering,” said Kasper Kirkegaard, currency strategist at Danske Bank.

With the United States continuing to drive a world economic recovery, the dollar rose 1 percent to 98.56 yen, recovering some 3.5 percent from Friday’s low of 94.98, which was its weakest level since April 4.

The yen weakness and data showing Japan’s economy grew 1.0 percent in January-March, revised up slightly from a preliminary estimate, lifted the Nikkei index (.N225) 4.9 percent for its biggest one-day gain since March 2011.

The Nikkei has now swung by more than 3 percent on all but two of the last 11 sessions, five of those by more than 4 percent, making it one of the most volatile periods since the height of the financial crisis at the end of 2008.

Analysts and traders will now scrutinize forthcoming U.S. data for clues on the timing of the potential tapering. The Bank of Japan’s policy meeting this week will meanwhile be watched for any signs of further stimulus measures.

CHINA DISAPPOINTS

Weak industrial output and trade data from China over the weekend dented sentiment across other Asian markets outside Japan and undermined gains in European shares in early trade.

MSCI’s broadest index of Asia-Pacific shares <.miapj0000pus> ended down 0.35 percent while Europe’s FTSEurofirst 300 index (.FTEU3), which initially fell on the Chinese data, recovered to be little changed by mid-morning.

The combination of solid U.S. data and soft Chinese figures also gave investors an incentive to sell higher-yielding, growth-linked currencies like the Australian dollar, which hit a 20-month low against the greenback of 93.93 U.S. cents.

Key commodity prices also suffered from the signs of weaker Chinese demand. Brent crude dipped toward $104 per barrel and copper touched a three week low of $7,146 a tonne.

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China Trade Data Underscores Growth Worries

China’s exports posted their lowest growth rate in almost a year in May while imports unexpectedly fell, government data showed on Saturday, underlining concerns that growth in the world’s second-largest economy could slow anew in the second quarter.

Evidence has mounted in recent weeks that the economy is fast losing growth momentum as sluggish domestic demand fails to make up for lethargic export sales.

The latest figures, shorn of the hot money speculation and exports to warehouses but booked as sales that had inflated previous months’ data, more accurately reflect the grim reality facing China’s exporters.

“The trade data reflects the sluggish domestic and overseas demand, signaling a slower-than-expected recovery in the second quarter,” said Shen Lan, an economist at Standard Chartered in Shanghai.

Data for May retail sales and industrial output, as well as investment and inflation, are due on Sunday and could provide more evidence of the slowdown.

Exports edged up 1 percent in May from a year earlier, the lowest growth since last July and against a median forecast in a Reuters poll of a rise of 7.3 percent. Data was even worse for imports – they fell 0.3 percent against expectations of a 6 percent rise.

The trade surplus was $20.4 billion for the month, compared with market expectations of $19.3 billion.

Exports to the United States, China’s top export destination, fell 1.6 percent in May, the third straight month of declines, while those to the European Union, the second most important market, fell 9.7 percent, also the third straight month of declines.

However, in one bright sign, separate customs data showed that China’s imports of major commodities rose in May compared with the previous month, helped by lower prices on world markets and pointing to resilient demand.

TESTING TIMES

It has been an uncomfortable few months for China’s leaders as a raft of data has pointed to a lack of traction for growth.

“The domestic economy is facing great downward pressure and the stable development of foreign trade still faces great challenges,” Vice-Minister of Commerce Zhong Shan said in a statement on the ministry’s website (www.mofcom.gov.cn).

China’s overseas demand had not recovered obviously while exporters faced more fierce competition in the global market, Zhong said.

However, Premier Li Keqiang struck a more upbeat note, being quoted by state television as saying that China’s economy was generally stable, growth was within a “relatively high and reasonable range” and the employment situation was stable.

“There are increasingly intricate and complicated factors in the economy and we should strictly monitor the changes in the economic situation,” said Li.

China needs to make use of liquidity already in the economy to support real economic development and curb over-capacity in certain industries, he added.

Surveys this month showed that China’s factory activity shrank for the first time in seven months in May, with export orders falling, while growth in the services sector cooled.

A Reuters poll taken before Sunday’s retail and industrial data shows industrial output is seen up 9.3 percent, unchanged from April, while growth in fixed-asset investment, one of the two main drivers of China’s economy in 2012, likely rose 20.5 percent in the first five months of this year.

That would be equivalent to investment rising 20.2 percent in May from a year ago, Reuters’ calculations showed, the slackest pace in at least three months.

Growth in retail sales is forecast at 12.9 percent in May, little changed from April’s 12.8 percent and below last year’s monthly average expansion of 14.2 percent.

The IMF and OECD last month cut their forecasts for China’s 2013 economic growth to 7.75 percent and 7.8 percent, respectively.

China’s annual economic growth had slowed to 7.7 percent in the first quarter from 7.9 percent in the previous quarter. The full-year annual growth of 7.8 percent in 2012 was the weakest since 1999.

However, China’s leaders have adopted a greater tolerance for a slowdown and are likely to allow quarterly growth to slip as far as 7 percent before triggering fresh stimulus to lift activity, sources told Reuters this week.

NO SMOKE AND MIRRORS

One of the reasons the May export data was so grim is that the government had cracked down on the speculative activities that had created double digit rises in export growth every month this year, even as China’s main markets slowed.

“The dramatic slowdown in yoy (year-on-year) export growth in May in part reflects the impact of a clamp down by the government on firms dressing up financial inflows as exports,” Louis Kuijs, an economist at RBS, said in an emailed note.

China’s customs also acknowledged the lack of extraneous factors, reflected in the fact that exports to Hong Kong, the main centre for currency arbitrage and warehouse storage, grew only 7.7 percent in May, down from a 57 percent surge in April.

“The arbitrage trade to Hong Kong has basically been curbed and the trade between mainland and Hong Kong dropped sharply,” it said on its website, www.customs.gov.cn.

By Xiaoyi Shao and Jonathan Standing

Economist: Labor Market Just Not That “Healthy,” Beware the Lost Generation

The jobs report shows that the economy added 175,000 jobs in May and the unemployment rate rose a bit to 7.6%.

Economist Maria Ramirez tells Yahoo Finance’s Daily Ticker: “The reality is that labor market is not as healthy as what the unemployment rate tells you. Most importantly, it’s the younger generation that is worst off because they have the hardest time getting a job and they have the lowest participation rate. So many are continuing to go to school and building up debt to finance it.” Others are weighing in too…

Mohamed El-Erian, CEO and co-CIO of PIMCO, writes: “Today’s numbers will cause the Fed to think again about its desire to taper its buying of securities — and this despite the fact that central bankers are increasingly recognizing that the hoped-for ‘benefits’ of unconventional measures come with ‘costs and risks’ (that is, collateral damage and unintended consequences) — in other words, they are stuck with imperfect policy tools.”

Nigel Gault of IHS Global Insight says: “January payroll employment growth was close to expectations, but upward revisions to history gave today’s payroll report a positive glow. Fourth-quarter employment growth now stands at a 201,000 average (up from 151,000 previously), a solid increase despite all the fiscal-cliff fears, which underscores that the Q4 GDP contraction isn’t giving the right picture.”

So overall consensus on Wall Street seems to be that this was a good number, but not too good, which to the Street… is good.

Doomsday Poll: 87% Risk Of Stock Crash By Year-End

In “Stocks for the Long Run,” economist Jeremy Siegel researched all the “big market moves” between 1801 and 2001. Bottom line: 75% of the time, there is no rationale for “big moves.” No one can predict them. Maybe technicians and traders can pick short-term moves the next second. Maybe tomorrow. But the long-term “big market moves?” No way.

So why predict an “87%” chance of another meltdown in 2013? Because in the real world of statistical probabilities, historical facts and expert opinions danger signals are flashing wild. In mid-2008 we summarized the predictions of 20 experts over several years. Predicted a meltdown in a few years — markets crashed two months later. Fast.

In retrospect, it was inevitable, thanks in part to the hype, arrogance and incompetence of Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson who failed to prepare America.

The warnings are again accelerating. And so is the happy talk from Wall Street casino insiders, about rallies, housing recoveries, perpetual cheap money. Don’t listen. The next crash will happen by year-end.

Yes, there’s a 13% chance the next Fed chairman will keep printing cheap money into 2014. But on New Years Eve our aging bull will be 4½ years old, well past Bill O’Neill’s “average” 3.75 years for putting this bull out to pasture.

So unless you’re shorting, all bets on Wall Street casinos for 2014 are megarisk, like 2008. Like a Stephen King horror film, you feel it coming. Could happen anytime, even tomorrow, says Siegel’s research, or the unpredictable logic in Nassim Taleb’s “Black Swan.”

Here are 10 other predictions adding credibility to a crash by the end of 2013:

1. Warren Buffett ‘guaranteed’ new bubble, new recession four years ago

Actually he saw it coming early. Shortly after the 2008 crash Warren Buffett was asked: “Do you think there will be another bubble leading to a huge recession?” Yes, “I can guarantee it.” Cycles happen.

Next question: “Why can’t we learn the lessons of the last recession? Look where greed has gotten us.” Then with the impish grin of a Zen master, Uncle Warren replied, “Greed is fun for a while. People can’t resist it.” But “however far human beings have come, we haven’t grown up emotionally at all. We remain the same.”

Yes, one of world’s richest men was personally guaranteeing another bubble, another “huge recession.” Now, four years later, that time bomb is ticking louder, closer.

2. Federal Reserve’s Council: ‘Unsustainable bubble in stocks, bonds’

The International Business Times just reported on the minutes of the Federal Reserve Board Advisory Council’s mid-May meeting. Members expressed “strong concerns over the Fed’s low-interest-rate policies and its bond-purchase program, which they say could trigger unmanageable inflation and an ‘unsustainable bubble’ in the stock and bond markets.” Some “pointed out that near-zero interest rates could not be sustained in the long run.”

Why? “A spike in inflation could force the Fed to hike interest rates, hurting business confidence and consumer spending, and prove disastrous to the U.S. economy, which is still clawing its way back from the debilitating effects of the 2008 financial crisis.”

Get it? The Fed and Wall Street insiders hear something’s dead ahead.

3. Peter Schiff is ‘doubling down’ on his ‘doomsday’ prediction

Euro Pacific Capital CEO Peter Schiff, author of “The Real Crash: America’s Coming Bankruptcy,” is “not backing away from doomsday predictions about the U.S. economy,” wrote MarketWatch’s Greg Robb last week. He sees the no-win scenario: “Either the Fed stops QE and starts selling the Treasurys and mortgage-related assets on its balance sheet, thus triggering a recession, or else faces an inevitable, even-worse, currency crisis.”

The “idea that the U.S. economy is in recovery is based entirely on rising asset prices … Asset prices are only rising because rates are low. As soon as rates go back up, asset prices will” fall.

Last year on Fox Business Schiff warned: “We’ve got a much bigger collapse coming.” Then last week: “I am 100% confident the crisis that we’re going to have will be much worse than the one we had in 2008.” His 100% beats our 87%.

4. Bill Gross: ‘Credit supernova’ turning 2013 bull into big bad bear

Yes, Gross sees a ‘credit supernova’ dead ahead. His firm has $2 trillion at risk when the Federal Reserve cheap money finally explodes in America’s face, brings down the economy, again. Gross warns: “Investment banking, which only a decade ago promoted small-business development and transition to public markets, now is dominated by leveraged speculation and the Ponzi finance.”

Bernanke’s Ponzi finance is self-destructive, lethal and massive. Endless cheap money upsets the balance between credit expansion and real economic growth, resulting in diminishing returns. Very bad news.

5. Gary Shilling predicts the ‘grand disconnect’ will trigger ‘shocker’

Yes, economist Gary Shilling predicts a “shocker” before the end of the year. Worse because investors are “paying little attention to weak and declining economies around the world, and concentrating on the flood of money being created by central banks.”

The “grand disconnect” is driving up stocks “while the zeal for yield, amidst low interest rates, benefited junk bonds and other low-quality debt.” Wall Street’s blowing a nasty new bubble, repeating the run-up to the 2008 crash.

6. ‘Kaboom ahead,’ an ‘ominous third phase’ of 2008 Meltdown

“Bond guru buying stocks. Sees ‘Kaboom’ Ahead,” shouted the Bloomberg Market headline about Jeffrey Gundlach, CEO of Doubleline Capital. Earlier he predicted the 2008 meltdown. But now he says the real damage is yet to come.

“The first phase of the coming debacle consisted of a 27-year buildup of corporate, personal and sovereign debt. That lasted until 2008.” Then cheap money “finally toppled banks and pushed the global economy into a recession, spurring governments and central banks to spend trillions of dollars to stimulate growth.” Next, an “ominous third phase,” a bigger crash, whose impact will far exceed the damage of 2008.

What’s he buying? Hard assets. Plus “sitting on cash,” waiting to scoop up more at “fire-sale” prices, “it’s worth waiting.”

7. ‘Tick, tick … boom!’ InvestmentNews sees bond crash dead ahead

A few months ago InvestmentNews front page is so powerful you can hear sirens on a flashing, warning in huge bold type: “Tick, tick … boom!” Their readers: 90,000 professional advisers who trust INews forecasts.

This was the biggest warning since 2008: “What will your clients’ portfolios look like when the bond bomb goes off?” Not “if” but “when.” Yes, they expect the bond bomb to explode soon.

Wake up, INews sees extreme dangers for millions of Americans who have “no idea what’s about to happen to them … Tick, tick … boom!”

8. Reagan’s budget director sees an ‘apocalypse … get out now’

Recently David Stockman warned of an economic “apocalypse” dead ahead, “arising from a rogue central bank that has abetted the Wall Street casino, crucified savers on a cross of zero interest rates and fueled a global commodity bubble that erodes Main Street living standards through rising food and energy prices … get out of the markets and hide out in cash.”

Stockman’s not merely warning of a crash ending the bull rally since 2009. This “grand bubble” has been building for 32 years since the Reagan revolution. He’s atoning for a generation of politicians with no moral compass: “Capitalism has morphed into a monopoly ruled by politicians who are serving a wealthy elite. Competition is a joke.”

9. Nouriel Roubini: ‘Prepare for the perfect storm’ in an unstable world

Yes, prepare, prepare, prepare. Roubini told Slate.com: Our world is a game of dominos, any one of which could put in motion a global collapse: “Sooner or later, another ugly fight” over debt, markets will “become spooked” with “a significant amount of drag … on an economy that has grown at barely a 2% rate.”

Scanning the world’s hot-button triggers in the euro zone, China, BRICs, Iran, Middle East, Pakistan, oil markets, Dr. Doom warns, the “drums of actual war will beat harder.” Any one of these trends “alone would be enough to stall the global economy and tip it into recession.”

10. Jeremy Grantham: America’s growth and prosperity ‘gone forever’

Grantham’s GMO firm manages $100 billion. He focused on Richard Gordon’s disturbing research: “Is U.S. Economic Growth Over?” Yes, says Grantham, “the U.S. GDP growth rate … is gone forever.”

For centuries before the Industrial Revolution growth was under 1%. Then the growth trend till “1980 was remarkable: 3.4% a year for a full hundred years,” driving the American dream. “But after 1980 the trend began to slip,” says Grantham,“ by over 1.5% from its peak in the 1960s and nearly 1% from the average of the last 30 years.” By 2100, America’s GDP growth will fall back to where it started before the Industrial Revolution, to an annual rate less than 1%.

Buffett guarantees … Schiff doubles down … Gross sees supernova … Shilling’s grand disconnect … Gundlach’s ominous third phase … Stockman’s apocalypse … InvestmentNews tick, tick, boom … Roubini’s perfect storm … Grantham’s growth gone forever … place your bets at Wall Street’s casinos … the risk’s only 87% … or is it 100%?

By Paul B. Farrell