the day ahead - april 17th 2013

7/28/2019 The Day Ahead - April 17th 2013

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THE DAY AHEADREUTERS NEWS North American Edition For Wednesday, April 17, 2013

Stocks bounced back on Tuesday following strong corpo-rate earnings, while Treasuries fell. The yen tumbledacross the board, reversing the previous session's sharpgains. Oil reversed earlier losses and edged up as an earth-quake in Iran ignited supply concerns. Gold recovered onbargain hunting.

MARKET RECAP COMING UP

Bank of America, the second-largest U.S. bank, reports first-quarter earnings, and investors will be looking for signs that thebank is growing revenue and loans as it looks to put mortgage-related losses in the past. For a related Reuters Insider video,click here

Abbott Laboratories reports its first quarterly earnings since split-ting off its prescription drugs business at the beginning of the year

into AbbVie, a new publicly traded company.

Bank of New York Mellon is expected to report results and take abig charge against earnings after losing a taxbattle with the IRS. Investors will look for anupswing in asset management fees and forwhether the world's No. 1 custody bank experi-enced any rebound with its forex trading busi-ness.

American Express's results have been affected in recent quartersby slower growth in card member spending as businesses look tocut down on expense accounts. So when the company reports re-sults, investors will look for details on the company's plan to tackle

the slowdown, a quarter after it said it would cut 5,400 jobs. Amex,which raised its dividend by 15 percent and announced a $4 billionbuyback after the latest Fed stress test, is looking to expand itspresence in the credit card market by targeting lower-incomegroups and widening its offerings.

Quarterly results fromMattel, the world's largest toymaker, will giveinvestors a good read of commodity prices and demand for discre-tionary items. The company, home to brands such as Barbies andHot Wheels, is expected to report a rise in sales and earnings.

Federal Reserve Bank of St. Louis President James Bullard andBoston Fed President Eric Rosengren speak on the U.S. economyand monetary policy at a conference in New York. Also the Fed

issues its anecdotal Beige Book of economic conditions.

U.S. Treasury Secretary Jacob Lew speaks at the J ohns HopkinsSchool of Advanced International Studies about "The State of theGlobal Economy" ahead of upcoming IMF/World Bank annualmeetings in Washington.

Brazil's central bank meets to decide on its benchmark Selic in-terest rate, currently at a record low of 7.25 percent. A rate in-crease this year seems almost certain after inflation pierced theofficial target ceiling but economists and investors are dividedabout the timing of such a move. Most economists believe thebank, led by Alexandre Tombini, will leave rates unchanged thismonth to avoid aborting a fragile economic recovery but some think

the sooner it acts against rising prices the better.

STOCKSClose Change % Chng Yr-high Yr-low

DJ IA 14755.17 155.97 1.07 14887.50 12035.10

Nasdaq 3264.63 48.14 1.50 3306.95 2726.68

S&P 500 1574.50 22.14 1.43 1597.35 1266.74

Toronto 12119.92 115.04 0.96 12904.71 11209.55

Russell 923.44 16.26 1.79 954.00 729.75

FTSE 6304.58 -39.02 -0.62 6533.99 5897.81

Eurofirst 1165.86 -8.74 -0.74 1209.05 1132.73

Nikkei 13221.44 -54.22 -0.41 13568.25 10398.61

Hang Seng 21672.03 -100.64 -0.46 23944.74 21612.05

TREASURIES Yield

10-year 1.7275 -12 /32

2-year 0.2299 -1 /32

5-year 0.7034 -4 /32

30-year 2.9138 -30 /32

Price FOREX Last % Chng

Euro/Dollar 1.3182 1.14

Dollar/Yen 97.59 0.87

Sterling/Dollar 1.5372 0.58

Dollar/CAD 1.0206 -0.47

COMMODITIES Price $ change % change

May crude $ 88.79 0.08 0.09

Spot gold (NY/oz) $ 1372.50 19.75 1.46

Copper U.S. (front month/lb) $ 3.3065 0.0265 0.81

Reuters/Jefferies CRB Index 283.73 2.30 0.82

BIG MOVERS Price $ change % change

Suntech Power 0.66 0.08 13.79

Acorda Therapeutics 39.78 4.28 12.06

Alaska Air Group 61.12 4.49 7.93

Frontline 2.06 0.14 7.29

Zoom Technologies 0.57 -0.11 -15.56

Pep Boys 10.61 -0.64 -5.69

Barrick Gold 19.24 -1.06 -5.22

Daqo New Energy 5.08 -0.25 -4.69

KEY ECONOMICS EVENTS ET/GMT REUTERS POLL PRIOR SOURCE

Mortgage Index for w/e 04/12 0700/1100 -- 826.1 Mortgage Bankers Association

Refinancing Index for w/e 04/12 0700/1100 -- 4453.9

Fed's Beige Book 1400/1800 -- -- Federal Reserve Board of Governors

For The Day Ahead - Canada, click here
http://reut.rs/YQzfyKhttp://reut.rs/YQzfyK


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COMING UP (continued)

The Bank of Canada is expected to hold its benchmark inter-est rate steady at 1 percent at its policy announcement, soinvestors will focus on the possible toning down or eliminationof hawkish language that has differentiated it from Group ofSeven peers. The central banks quarterly Monetary PolicyReport, released the same day, is expected to chop growth

forecasts following a string of weak data. Governor Mark Car-ney, leaving in J une to head up the Bank of England, alsoholds a press conference in which he is expected to focus onthe Canadian outlook.

After releasing aggressive revenue forecasts at a recent ana-lyst day in late March, eBay is expected to report solid resultsfor the first quarter. This is typically a slow quarter for e-commerce, but expectations are still pretty high for eBay,which has been recovering in recent years and catching upwith Amazon.com. Investors and analysts will be looking for

growth of eBay's Marketplaces business to be at or higherthan that of the overall e-commerce sector. The most impor-tant metrics for PayPal will likely be profit margins.

MARKET MONITOR

Click on the chart for full-size imageStocks jumped more than 1 percent on Tuesday, a day aftertheir worst decline since November, as earnings from Coca-Colaand J ohnson & J ohnson improved the outlook for first-quarterresults. Coca-Cola shares rose 5.66 percent and J ohnson &

J ohnson shares shot up 2.11 percent. Goldman Sach's sharesfell 1.73 percent. The Dow rose 1.07 percent, the S&P 500 In-dex gained 1.43 percent and Nasdaq added 1.50 percent.

Treasury prices slid as a safety bid in the previous sessionfaded, though yields remained low as investors weighed theFederal Reserve's easing options for the rest of the year. 10-year Treasury notes traded down 12/32 in price to yield 1.72percent. Thirty-year bonds fell 31/32 in price to yield 2.91 per-cent. Investors shied away from riskier assets such as stocks onMonday after gold posted a record one-day drop and explosionsat the Boston Marathon fed a flight to safety. "We're just seeingthe unwind of that today," said Kim Rupert, managing director ofglobal fixed income analysis at Action Economics LLC. "Butyields are still on the lower end; 10 years are just barely above

1.70" percent, she pointed out. That, in turn, suggests the mar-ket still expects more easing from the U.S. Federal Reserve thisyear, she said.

The yen tumbled against the dollarand the euro, reversing theprevious session's sharp gains as investor anxiety triggered by arecord plunge in gold prices eased, denting demand for the safe-haven J apanese currency. The dollar rose to a session peak at98.15 yen, before pulling back to 97.59 yen, still up 0.87 percenton the day. "The fundamental picture still remains supportive ofa weaker yen going forward as the recent rebound over the lastcouple of days is unlikely to prove sustainable," said LeeHardman, currency economist at BTMU, which forecasts thedollar at 109 yen in 12 months. The euro rallied 2.02 percent to

128.64 yen. Against the dollar, the euro rose 1.13 percent to$1.3181.

Oil edged up in choppy trading, paring losses after an earth-quake in Iran raised concerns about oil production and put afloor under prices. May crude settled up 0.08 percent at $88.78a barrel after hitting a low of $86.06. A powerful earthquake thatstruck southeast Iran, sending strong tremors across the regionraised concerns it might damage oil production, which put a floorunder oil prices, traders said.

Gold recovered after buyers of physical bullion jumped in atcheaper prices following Mondays historic plummet, but themarket had trouble sustaining gains and there was little confi-dence that gold was out of the woods. "We still believe that theprice has further to fall the fundamental (non-speculative)value of gold is still a fraction of the current price," Alan Miller,

CIO of SCM Private, an investment management firm said in anote. Spot gold was up 1.45 percent at $1,372.40 an ounce.June gold futures was up 0.9 percent to $1,373.30 an ounce.

THE DAY AHEAD For April 17, 2013
http://link.reuters.com/naj47t


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TOP NEWS

U.S. inflation, factory data favor continued Fed easingU.S. consumer prices fell in March for the first time in fourmonths and factory output slipped, strengthening the argumentfor the Federal Reserve to maintain its monetary stimulus tospeed up economic growth. The Labor Department said its Con-sumer Price Index edged down 0.2 percent last month as gaso-

line prices tumbled, unwinding some of February's 0.7 percentincrease. Economists had expected a flat reading. A separatereport from the Fed showed output at the nation's factoriesdecreased 0.1 percent after advancing 0.9 percent in February.A third report from the Commerce Department showed housingstarts rose 7.0 percent last month to a 1.04 million-unit annualrate, the highest in nearly five years. Separately, the influentialchief of the New York Fed, William Dudley, said that he expects"sluggish" economic growth of 2 to 2.5 percent this year andonly a modest decline in unemployment. Meanwhile, ChicagoFed President Charles Evans said he sees "moderate" growththis year of 2.5 percent and a "terrific" 2014.

Coca-Cola profit surprises, announces U.S. bottler dealCoca-Cola reported a slightly higher-than-expected quarterlyprofit and announced a deal to unload some distribution territoryto five independent U.S. bottlers. As for performance in the firstquarter, the company said net income was $1.75 billion, or 39cents per share, down from $2.05 billion, or 45 cents per share,a year earlier. Excluding one-time items, earnings were 46 centsper share, topping analysts' average estimate of 45 cents. Reve-nue slipped 1 percent to $11.04 billion, hurt by currency ex-change rates and sales lost through the refranchising of someother bottler assets. Sales by volume rose 4 percent.

J&J tops estimates as prescription, OTC drugs shineJohnson & Johnson beat Wall Street's quarterly profit esti-mates on sharply lower taxes, strong sales of prescription drugsand a revival of over-the-counter medicines that had been re-

called over quality control problems. J &J earned $3.5 billion, or$1.22 per share, compared with $3.91 billion, or $1.41 pershare, in the year-earlier quarter. Excluding special items, in-cluding litigation expenses of $529 million, J &J earned $1.44 pershare. Analysts, on average, expected $1.40 per share. Globalcompany sales rose 8.5 percent to $17.50 billion, slightly higherthan the $17.42 billion expected by Wall Street.

Goldman profit up but revenue from client trading dropsGoldman Sachs Group said revenue from bond trading withclients fell 7 percent in the first quarter, raising questions aboutthe health of the bank's biggest money maker and the prospectsfor fixed-income trading profits on Wall Street. The bank's equi-ties trading revenue fell 15 percent, but the decline in fixed in-

come trading was the bigger concern for many analysts. Overallfirst-quarter profit rose thanks to both the Investing and Lendinggains and sharp increases in stock and bond underwriting fees.Net income rose to $2.19 billion, or $4.29 per share, from $2.07billion, or $3.92 per share, a year earlier. Analysts on averagehad expected earnings of $3.88 per share before unusual items.Goldman's first-quarter revenue totaled $10.09 billion.

Icahn agrees to limit Dell stake, can team up on bidBillionaire investor Carl Icahn has agreed to limit his investmentin Dell and in return can team up with other shareholders on apotential bid for the personal computer maker, Dell said. Anagreement with activist investor Icahn prevents him from buyingshares that would bring his Dell ownership to more than 10 per-cent or signing deals with other shareholders that would bringtheir collective ownership to more than 15 percent, Dell said.

IMF trims global growth forecast, sees bumpy recoveryThe International Monetary Fund trimmed projections forglobal economic growth for this year and next to take into ac-count sharp government spending cuts in the United States andthe latest struggles of recession-stricken Europe. The IMF cut its2013 forecast for global growth to 3.3 percent, down from its

J anuary projection of 3.5 percent. It also trimmed its 2014 fore-cast to 4.0 percent from 4.1 percent. A more subdued outlook forthe United States and for the euro zone led it to lower itsgrowth forecast for advanced economies to 1.2 percent for 2013while it kept its 2014 forecast at 2.2 percent. While it lowered itsprojections for growth in emerging economies to 5.3 percent

for this year, it also said growth was already accelerating andwould hit 5.7 percent in 2014. Growth has returned to a healthypace in China and activity is expected to recover in Brazil nextyear, the IMF said.

Target warns current-quarter profi t will miss forecastsTarget warned earnings for the first quarter would miss its ex-pectations on weaker-than-expected sales of seasonal andweather-sensitive items. The discount retailer said adjustedearnings per share for the current quarter would come in slightlybelow the low end of its prior outlook of $1.10 to $1.20. Targetnow expects same-store sales to be about flat. It had earlierforecast same-store sales to be flat to up 2 percent. Targetstood by its full-year forecast for adjusted earnings of $4.85 to

$5.05 per share.

BlackRock profit jumps 10.5 percent on shift into stockfundsBlackRock said that first-quarter net income rose 10 percent asinvestors increasingly turned to the money manager's higher-feestock funds. BlackRock said net income increased to $632 mil-lion, or $3.62 per share, from $572 million, or $3.14 per share, ayear earlier. Assets under management rose to a record $3.94trillion at the end of the quarter, including new money and mar-ket gains. BlackRock's $25.6 billion of long-term net inflows intoits iShares exchange-traded fund family shifted from emergingmarkets products into U.S. broad market and large-cap equities,reflecting more confidence in the economy, the company said.

PIC OF THE DAY

A woman is comforted by a man near a triage tent set up for the BostonMarathon after explosions went off at the 117th Boston Marathon inBoston.



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TOP NEWS (continued)

U.S. Bancorp profit up , but net interest margin narrowsU.S. Bancorp reported a first-quarter profit that met analysts'expectations but the lender's net interest margins narrowed andmortgage-banking revenue fell. U.S. Bancorp's net interest mar-gin fell to 3.48 percent from 3.60 percent a year earlier. Netprofit rose to $1.43 billion, or 73 cents per share, for the first

quarter, from $1.34 billion, or 67 cents per share, a year earlier.The results were in line with analysts' expectations.

TD Ameritrade profit rises 5 pct on asset gatheringTD Ameritrade Holding, the biggest U.S. discount brokerageby client trading volume, said that continued double-digit growthin client assets helped its quarterly profit rise 5.1 percent. Thecompany reported net income of $144 million, or 26 cents ashare, for the fiscal second quarter, up from $137 million, or 25

cents a share, a year earlier. The results were down 2.7 percentfrom its fiscal first quarter but were in line with the average fore-cast of analysts. TD Ameritrade reported net revenue of $679million for the quarter, 55 percent of which came from asset-based fees.

Company Name Action

AppleMizuho cut target price to $550 from $575, expecting March results to be slightly below consensus primarily due to

weaker iPhone shipments.

M&T BankBMO cut target price to $109 from $111 on weaker first-quarter revenues due to softer loan growth and lowermortgage banking fees.

SanDiskWedbush raised target price to $66 from $55 expecting first-quarter revenue above high end of range as muteddemand is offset by healthy uptick in NAND pricing.

Sprint NextelJ P Morgan raised rating to overweight from neutral and raised target to $8 from $6 on long term strategic value, afterDish submitted a merger proposal to Sprint offering $7/share including $4.76 in cash plus 0.05953 dish shares.

Walmart StoresUBS starts coverage with buy and set target price of $89, saying the company is entering a long-term positiveproductivity cycle that can take its share price beyond its all time highs

ANALYSTS RECOMMENDATIONS

KEY RESULTS vs. THOMSON REUTERS I/B/E/S ESTIMATESCompany Name Quarter EPS Estimates Year Ago Rev Estimates (mln)

Abbott Q1 $0.41 $1.03 $5,411

American Express Q1 $1.12 $1.07 $8,033

Bank of America Q1 $0.22 $0.03 $23,409

BNY Mellon Q1 $0.47 $0.52 $3,607

Quest Diagnostics Q1 $1.03 $1.07 $1,861

Dover Q1 $1.08 $1.00 $2,074

eBay Q1 $0.62 $0.55 $3,765

Huntington Bancshares Q1 $0.16 $0.17 $696

Mattel Q1 $0.09 $0.06 $986

Noble Corp Q1 $0.51 $0.47 $980PNC Financial Services Group Q1 $1.57 $1.44 $3,977

SLM Corp Q1 $0.60 $0.55 $755

SanDisk Q1 $0.79 $0.63 $1,307

St. J ude Medical Q1 $0.91 $0.86 $1,360

Textron Q1 $0.45 $0.41 $2,886

** Includes companies on S&P 500 index. Estimates may be updated or revised.



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THE DAY AHEAD - CANADA For April 17, 2013

COMING UP MARKET MONITOR

The Bank of Canada is expected to hold its benchmark inter-est rate steady at 1 percent, so investors will focus on thepossible toning down or elimination of hawkish language that

has differentiated it from Group of Seven peers. The centralbanks quarterly Monetary Policy Report, released the sameday, is expected to chop growth forecasts following a string ofweak data. Governor Mark Carney, leaving in J une to head upthe Bank of England, will hold a press conference in which heis expected to focus on the Canadian outlook.

Canada's main stock index rose almost 1 percent on Tuesday,recovering some of its losses due to Monday's dramatic selloff,as positive U.S. economic data lifted sentiment and spurred arally in financial and energy shares. The Toronto Stock Ex-change's S&P/TSX composite index was up 0.96 percent at12,119.92. First Quantum Minerals jumped 9.31 percent.BlackBerry shares rose 1.43 percent.

The Canadian dollarwas down 0.51 percent at $1.0202BIG MOVERS Price C$ % Change

First Quantum Minerals 17.03 1.45 9.31

Winstar Resources 1.97 0.11 5.91

Aquila Resources 0.10 -0.01 -9.09

Romarco Minerals 0.50 -0.05 -9.09

TOP NEWS

Canada February factory sales surge, new orders fallCanadian factory sales surged in February at the fastest pacein 20 months, an encouraging sign for the economy after adownturn in J anuary, although the number of new orders fell inthe month, Statistics Canada said. Manufacturing sales

jumped 2.6 percent due to strength in auto assembly, food proc-essing, petroleum and coal and miscellaneous sectors, theagency said, noting that higher prices explained much of thegain in the energy industry. The performance beat market ex-pectations of a 0.9 percent increase and was the biggest since

J uly 2011. A separate report showed that foreigners sold C$6.3

billion ofCanadian securities in February, mainly the result ofthe biggest divestment of Canadian equities since October 2007.

BlackBerry returns not abnormally high JefferiesNo abnormally high return rates have been seen for the new Z10touchscreen device that underpins BlackBerry's attempt to rein-vent itself, and demand appears to be positive in Asia, J efferies& Co analyst Peter Misek said in a report. BlackBerry has al-ready said it will ask regulators to investigate a report from Bos-ton-based Detwiler Fenton of high return rates for the new de-vice, which is the first BlackBerry to use the new BlackBerry 10operating system. Misek, a long-time bear on BlackBerry, turnedbullish on the stock late last year. He said BlackBerry, whichchanged its name from Research In Motion when it launched theZ10, was increasing its build plan for new devices powered by

the Blackberry 10 operating system.

Canada finance minister to raise Keystone pipeline withLewCanadian Finance Minister Jim Flaherty will raise Tran-sCanada Corp's proposed Keystone XL pipeline when he meetsnew U.S. Treasury Secretary Jack Lew this week, a senior Ca-nadian finance ministry official said. Canada's Conservative gov-ernment strongly backs the project, which would take crude fromAlberta's oil sands to refineries in Texas. President Barack

Obama, who will ultimately decide the pipeline's fate, is underpressure from environmentalists to block the project. Flahertyand Lew will be in Washington later this week for a meeting ofthe Group of 20 leading and emerging nations. Their face-to-face talk will be the first since Lew was sworn in on Feb. 28.

Click on the chart for full-size image
http://link.reuters.com/nem27s


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ANALYSIS AND INSIGHT

FED FOCUSWorkforce dropouts loom as Fed weighs tighter policyBy J onathan Spicer

The droves of Americans who have abandoned hope of finding ajob should make the Federal Reserve hesitant to remove itssupport for the U.S. economy, according to a study that makes a

bold argument for a sustained easy monetary policy.The findings of the study were the buzz of a high-profile confer-ence at the Boston Federal Reserve Bank last week on howbest to return U.S. employment to pre-recession levels.

The share of working-age Americans who either have a job orare looking for work has fallen to its lowest in 34 years.For Fed policymakers, that's a sharp reminder that the labormarket remains ill despite a gradual decline in the unemploy-ment rate since the Great Recession ended in 2009. Indeed, thedropouts are the main reason the jobless rate has declined.

This depressed "participation rate" - and the fact that it takeslonger than other labor market indicators such as unemploymentto recover from deep recessions - should probably get moreattention as the U.S. central bank weighs when to withdraw itsmonetary stimulus, the study suggests.Authors Christopher Erceg and Andrew Levin, both officials ofthe Fed now doing research at the International Monetary Fund,argue the central bank should aim not just for full employmentwith a jobless rate between 5 percent to 6 percent. Instead, itshould use its powers to drive unemployment even lower todraw people back into the workforce.

The U.S. jobless rate stood at 7.6 percent in March."A policy of allowing the unemployment rate to overshoot is con-sistent with a much faster economic recovery," Erceg, an IMFresearch fellow, told the conference on Friday.

This very dovish idea could amplify the notion gaining traction,from the United States to Europe to Japan, that central banksshould pull out all the stops to spur growth even if it means toler-ating a bit more inflation.

At the conference, Lars Svensson, a deputy governor at Swe-den's central bank, and Bank of England policymaker DavidMiles called the work important and requested more detail.At the Fed, officials will soon have to decide how much the de-pressed participation rate will figure into their decision on whento wind down asset purchases and, later, to finally raise interestrates.

They have held rates near zero since December 2008 and arecurrently purchasing $85 billion in bonds per month in a furthereffort to keep borrowing costs low and spur stronger growth."The paper did a nice job highlighting that we need to look at awide variety of labor market indicators," Boston Fed PresidentEric Rosengren said in an interview.BEYOND DEMOGRAPHICS

In March alone the labor force shrank by 496,000 people, thevast majority of them too young to retire. That depressed theparticipation rate to 63.3 percent, a level last seen in 1979, andled the unemployment rate lower."That doesn't indicate stronger labor markets," Rosengren said.

To be sure, labor force participation began a gradual decline in2000 as baby boomers started to retire. But it shot lower whenthe economy fell into recession in 2007 and remains therethanks to a 2 percentage point drop in the participation of adultsbelow the retirement age.Erceg and Levin suggest this cyclical shortfall can be reversedby monetary policy, but they warn it will take time.

The worry is that the economy will improve and monetary policywill tighten, leaving behind millions of Americans."How do we draw those people back into the labor market?"asked Levin, who until last year assisted Fed Chairman BenBernanke and Vice Chair J anet Yellen on communicating policy

strategy. "The possibility that having a target (for unemployment)that is temporarily below the (natural rate of unemployment) maybe the right policy prescription."Fed officials estimate the so-called natural rate, which serves astheir long-term target, is around 5.6 percent.Brandeis University finance professor Catherine Mann warned

that pursuit of the Levin-Erceg strategy could lead the centralbank to overlook the risk its easy policies could fuel asset pricebubbles."The recipe is for more QE but this strategy ignores the buildingfinancial disruptions of the policy," she said.More centrally, in the view of former European Central Bankpolicymaker Athanasios Orphanides, is the risk Fed hubrisunleashes the inflation genie."The ... challenge at present is not to let over-confidence abouthow low monetary policy can guide the rate of unemploymentlead to a repetition of the second-greatest policy error of the20th Century, and create inflation," he said.

COLUMNGold's fall not a harbinger of happy daysBy J ames Saft

J ust as gold's rise never showed the policies of central banks tobe a failure, so its fall cannot show they have succeeded.

Yes, the attraction to gold is driven by mistrust, its principal vir-tue being that, unlike currencies, it can't be created at will. No,the massive sell-off over two days in gold is not a sign that trustis back and policy-makers can soon declare victory over thecrisis and make plans for restoring a more normal balance ofpolicy.Monday marked the second day of gold's worst two-day tumblesince 1983, as it fell more than 9 percent amid huge volumes,taking its total losses since Friday to 14 percent.Because the rise in the price of gold is associated with distrust inthe global financial system and its minders, there is a temptation

to reason that its very abrupt fall shows confidence that curren-cies won't be debased, and that growth with mild inflation willshortly be back. Unfortunately, the movement of most other fi-nancial markets on Monday was consistent with splutteringgrowth and a rising risk of deflation rather than a new-found andsudden belief that the fiscal and monetary medicine is working.It isn't simply that equities are falling, but more importantly thatgold's swoon has come at the same time as steep falls in a num-ber of economically sensitive commodities. Oil is down nearly 6percent since last week, copper fell to its lowest in a year and ahalf and aluminum touched 3.5-year lows. Even the prices ofwheat, corn and soybeans are down.What's more, 10-year Treasury bond yields are just over 1.7percent and have been falling steadily for more than a month,

hardly a vote for growth, inflation and a tapering off of quantita-tive easing.You could make a better argument that trying to use the price ofgold as an indicator of the health of anything much is bound tobe futile. While greed and fear, trust and mistrust have an influ-ence over the price of many assets, like houses and stocks,those ultimately produce some income which provides a funda-mental base from which markets can infer prices. Gold, on theother hand, neither toils nor spins, but just sits there lookingpretty.

That means gold is far more volatile, with emotion and short-term supply and demand driving sharp swings in prices. Don't,then, be too impressed that Monday's tumble should only hap-pen once every two million years or so if gold trading followed anormal bell-shaped distribution (a calculation courtesy of J ohnKemp at Reuters). Like someone who spends too much time inbars late at night, the unlikeliest things keep happening to gold



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The Day Ahead - North American Edition is compiled by Karan Khemani, Benny Thomas and Chandrashekhar Modi in Bangalore; Franklin Paul and Meredith Mazzilli inNew York.

THE DAY AHEAD - North American Edition is produced by Reuters News

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ANALYSIS AND INSIGHT (continued)

over and over again.POOR RUN OF ECONOMIC DATARather than worrying about the histrionics of gold, we should bepaying close attention to the economic data. It has not beenencouraging.China, particularly, is no longer quite the engine of growth and

demand it once was. Economic growth fell unexpectedly to 7.7percent in the first quarter, a figure which perhaps looks better atfirst glance than on close examination.Industrial production particularly has been crimped, growing atan 8.9 percent clip in the month but missing estimates of 10 per-cent growth, in part due to falling demand from Europe and else-where. Power generation, 90 percent of which is used by indus-try, rose just 2.1 percent in March, which may give a more accu-rate reading on the industrial sector.Chinese imports of coal used for power generation may even fallin 2013 for the first time since 2007-2008, according to GoldmanSachs.Neither are things humming very convincingly along in the U.S.,as shown by poor industrial and jobs data recently. Inflation tooseems tame globally, with little signs that central banks will soonbe forced to tighten conditions.

The assumption by many, at least in the U.S., has been thatgrowth is slowly recovering and that the summer and last part ofthe year will be spent in preparing for a tapering of quantitativeeasing.If we reach summer and growth looks to be faltering, the FederalReserve will be in a difficult position. Will it redouble its efforts tostimulate? Chairman Bernanke seems as convinced as ever thatQE helps and that Fed activism has been justified. The longerextraordinary policy goes on, however, the harder new versionsbecome to justify.If in J uly or August we are talking again about new and looserFed policy, gold may have yet another of its one-in-two-million-year events.

(J ames Saft is a Reuters columnist. The opinions expressed arehis own. At the time of publication, he did not own any directinvestments in securities mentioned in this article. He may be anowner indirectly as an investor in a fund.)

BREAKINGVIEWSGoldman gets a bit more generous with investorsBy Antony CurrieGoldman Sachs is getting a bit more generous with its inves-tors. The Wall Street firm posted first-quarter net income of al-most $2.3 billion on Tuesday, handily beating consensus esti-

mates. Better revenue than expected accounted for some of theperformance including record results in debt underwriting. ButGoldman also squeezed some extra juice for shareholders bycutting how much it set aside for pay.

The bank hived off 43 percent of its revenue in the first threemonths of the year to cover compensation and benefits. That'sstill far higher than J PMorgan, which put around a third of theinvestment bank's top line in the vault for employees. For Gold-man, though, it's a small but significant change to what hadstarted to look like a stubborn commitment to stashing away 44percent of revenue in each quarter except the final one of theyear.At times, that kept the annualized quarterly return on equity insingle digits and thus below the cost of capital. Granted, Gold-man usually takes less for the staff pot in the final three monthsof the year. In 2011, though, employees came out way on top,getting 42.4 percent of the revenue pie while shareholders wereleft with a measly 3.7 percent return on equity.

The practice appears to have changed. In the final quarter of lastyear, for example, Goldman set aside an unusually small portionof the top line to cover pay. That cut its annual compensation billto 38 percent of revenue and pushed its return on equity to 10.7percent.Combined with today's move, it seems Goldman is finally ac-knowledging its shareholders' needs. The firm could still domore. Let's assume last year's 38 percent of revenue is the newpay benchmark but allow Goldman to create a buffer by deposit-ing 40 percent of first-quarter revenue into the bank. That wouldhave boosted the annualized return on equity for the three

months to March from a fair 12.4 percent to a decent 14 percent.These are baby steps for Goldman. But at least they're going inthe right direction.CONTEXT NEWSOn April 16 Goldman Sachs reported first-quarter net income of$2.26 billion, or $4.29 a share. The consensus estimate of sell-side analysts was for earnings of $3.88 a share.

(The author is a Reuters Breakingviews columnist. The opinionsexpressed are his own.)


the day ahead - april 17th 2013

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