U.S. Economic News Week Ending June 17 2011

Uncertainty over a possible second Greek bailout or a sovereign debt default loomed large over global markets through the week. Violence in the streets of Athens, a crippling strike by two major unions, and the potential toppling of Greek prime minister George Papandreou all heightened investors' concerns. A Greek sovereign debt default could mean huge losses for creditors and a potential new global credit crunch, depending on market reaction.

U.S. economic news was mixed. There were fewer new jobless claims, and May retail sales, while registering a slight decline, were still better than expected. Inflation rose, although core prices increased less than 2% annually. Housing activity picked up, but homebuilder confidence declined. The index of U.S. leading economic indicators rose, but consumer confidence fell. Regional gauges of manufacturing activity in the mid-Atlantic region and New York State turned negative for the first time since last fall. Volatility, as measured by the Chicago Board Options Exchange volatility index (VIX), reached a fresh three-month high amid heightened uncertainty. Oil prices eased on the prospect of an economic downturn and lower demand for energy.

Global economic news

Greek debt default concerns drive markets down
As the prospects of a Greek debt default rise, the repercussions are being felt globally, with stocks affected in Europe, Asia, and the United States. The cost of insuring Greek debt soared to new highs, the euro weakened, the price of crude oil futures dipped, and banks with significant exposure to Greek government debt were warned by ratings agencies. On Friday, worries eased somewhat as Germany appeared to be ready to avoid a confrontation that would force private investors to shoulder some of the debt burden. This weekend, European officials will hold critical talks on securing 12 billion in outside aid to avoid a Greek default.

U.S. CPI continues to rise; core prices still tame
U.S. consumer prices rose in May for the month and the year, according to the monthly report from the U.S. Department of Labor. Consumer prices rose by 3.6% from May 2010, but core inflation, after stripping out volatile energy and food prices, rose just 1.5% annually. The price rise from April to May was 0.2% overall, and 0.3% for core inflation. Driving inflation higher are rises in import prices, caused by higher commodity costs as well as wage inflation in emerging economies, including China, India, and Brazil. Most economic forecasters believe that the soft U.S. labor market will hold back inflation pressures.

U.S. leading economic indicators rise
The index of U.S. leading economic indicators rose 0.8% in May, after declining 0.4% in April, according to the Conference Board. Economists had forecast a rise of just 0.3%. Eight of ten leading indicators were higher. The report points to a pickup in economic growth by late in 2011.

Consumer confidence dips
The Reuters/University of Michigan preliminary estimate of U.S. consumer confidence in June fell to 71.8 from 74.3 in May. The gauge was expected to slip to 74.

Regional manufacturing gauges tumble
Gauges of manufacturing activity in New York State and the Philadelphia area were sharply lower in June. The Empire State Index fell to -7.8 from 11.9 in May, according to the Federal Reserve Bank of New York. Economists had expected a reading of 13.3. The Philadelphia Feds index of current activity fell to -7.7 in June from 3.9 in May, its lowest reading in 31 months.

U.S. housing data send mixed messages
U.S. housing starts rose 3.5% from a month earlier in May, according to the U.S. Department of Commerce. Newly issued building permits rose 8.7%, much higher than the 4.8% that had been forecast. However, confidence among U.S. homebuilders fell in June to its lowest level in nine months. The National Association of Home Builders/Wells Fargo sentiment index fell to 13 from 16 in May. It had reached a low of 8 in January 2009. Readings below 50 indicate poor economic conditions.

U.S. jobless claims ease, but remain elevated
Initial claims for unemployment benefits by U.S. workers fell by 16,000 to a seasonally adjusted 414,000 in the week ended June 11. The four-week moving average of new claims remained unchanged at 424,750. A weekly claims figure of below 400,000 is generally seen as an indication that the economy is adding more jobs than it is losing.

U.S. retail sales dip
Retail sales slipped in May for the first time in 11 months, declining 0.2%, the Commerce Department reported. However, the results were better than expected. Sales of big-ticket items, such as cars and appliances, declined. One reason for the decline in autos and parts was supply disruptions as a result of the March earthquake and tsunami in Japan. Excluding autos, retail sales climbed 0.3% in May.
Global corporate news

Honda forecasts sharp drop in profit
Honda Motor predicts that its annual profits will fall by more than half from last year as a result of the strong yen and production disruptions resulting from the March 11 earthquake in Japan. Hondas announcement follows one by Toyota Motor, which last week forecast a 31% drop in profit.

French banks warned by Moodys
Moodys Investors Service warned Frances three largest banks, BNP Paribas SA, Credit Agricole SA, and Socit Gnrale SA, that they could have their debt rating downgraded in the event of any Greek debt restructuring as a result of their exposure to Greek debt. Overall, Frances banking sector holds $56.7 billion worth of Greek sovereign bonds, according to the Bank for International Settlements (BIS).

Capital One to buy ING Direct USA
Capital One Financial will buy the online banking business of ING Groep NV, according to reports. The deal, which has not been announced officially, calls for Capital One to pay $6.2 billion in cash and $2.8 billion in stock for ING Direct USA. ING was ordered by the European Commission to sell the business by 2013 as part of a bailout package it received during the financial crisis in 2008.

Energy Transfer to buy Southern Union
Energy Transfer will create the largest natural gas pipeline company in the United States with its planned $4.2 billion acquisition of Southern Union. The deal would combine Energy Transfers strong position in natural gas production areas with Southerns access to markets.

Pandora IPO hits a sour note
Pandora Medias closely watched initial public offering rose at first on Wednesday but closed 17% below its IPO price on Thursday. The stock tumbled after a key analyst forecast that the Internet music firms earnings would be squeezed by high royalties, a loss of listeners to mobile devices, and tough competition from technology giants Apple, Google, and Amazon.

Research in Motion cuts profit forecast
Canadian Blackberry-maker Research in Motion slashed its annual profit forecast and said it would begin laying off employees as a result of losing market share and revenue to rivals in the competitive smartphone industry. For the quarter ended May 28, Blackberry sales declined for the first quarter since 2005.