U.S. Economic News Week Ending May 13, 2011

Financial markets rode waves of mixed economic news and lacked direction this week. For the second consecutive week, oil futures sold off sharply, prompted by a U.S. Department of Energy report of falling fuel consumption. However, oil prices climbed back later in the week. Gasoline stockpiles grew as squeezed consumers, leery of $4-per-gallon prices, pumped less fuel. In general, commodity trading ─ including silver and gold ─ was highly volatile as bulls and bears battled. Stock indices and bond yields also lacked a clear direction as reports of higher inflation competed for attention with renewed economic growth in France and Germany, a resurgence of mergers and acquisition activity and share buyback announcements in the United States, and a number of disappointing earnings announcements.

Global economic news

U.S. inflation above 3%
U.S. consumer prices rose a seasonally adjusted 0.4% in April from March, the U.S. Department of Labor reported, with the core consumer price index ─ excluding food and energy ─ climbing just 0.2% for the month. Year over year, prices rose 3.2%, the largest 12-month gain since October 2008. Core inflation has risen just 1.3% since April 2010. Gasoline prices jumped 3.3% in April and more than 33% over the past year.

Producer prices also rose in April, a seasonally adjusted 0.8% increase after a 0.7% increase in March. Core prices, stripping out food and energy components, climbed 0.3% in both months.

Consumer sentiment up
The University of Michigan-Thomson Reuters preliminary consumer sentiment index climbed to 72.4 for May from 69.8 in April. The increase surpassed economists’ expectations of a 71.0 reading.

Inflation rises in China, Germany
China and Germany both reported an increase in consumer-price inflation in April. In China, the consumer price index rose 5.3% last month from a year earlier after a 5.4% rise in March. Food prices were 11.5% higher annually. China’s government responded swiftly, raising bank reserve requirements for the eighth time since last October. China’s largest lenders must now keep a record 21% of their assets in reserve. German consumer prices were 2.4% higher in April than a year earlier, driven mainly by energy prices.

Import prices higher in U.S.
U.S. imports cost 2.2% more in April than March, according to the U.S. Department of Labor. Higher prices for imports of commodities, including oil, metals, and grains, were the key factor. Import prices rose 11.1% from April 2010, behind a 36.8% surge in petroleum import prices.

Chinese trade surplus, U.S. trade deficit both grow
China’s trade surplus grew to 11.43 billion in April, according to the country’s General Administration of Customs. While imports rose 22% from a year earlier, the country’s exports increased by almost 30%. The larger-than-expected surplus may add pressure on China to allow its yuan currency to appreciate more quickly.

The U.S. trade deficit widened in March, rising 6.0% from February to $48.18 billion, the U.S. Department of Commerce reported. While exports grew to a record, surpassing $172 billion, imports climbed to more than $220 billion. The U.S. trade deficit with China shrank slightly in March.

U.S. retail sales rise
U.S. retail sales rose by 0.5% in April from the previous month, the U.S. Commerce Department reported, slightly lower than economists’ expectations. March sales were revised to a 0.9% increase from the initial estimate of 0.4%. Rising energy prices were a large component of the increase.

U.S. first-time jobless claims ease
The number of Americans filing first-time claims for unemployment insurance fell 44,000 in the week ended May 7. Applications totaled 434,000. The four-week average rose by 4,500 to 436,750.

S&P downgrades Greek debt
Standard & Poor’s lowered its rating on long-term Greek government debt to "B" from "BB-." S&P said Greece might have to resort to a partial debt default. Greece’s debt is now rated lower than that of Angola, Senegal, Nigeria, and Zambia.

Economies in France, Germany surpass expectations
The eurozone’s two largest economies, Germany and France, both grew more than forecast in the first quarter of 2011. The German economy expanded 1.5% over the fourth quarter of 2010, while economic activity in France was 1% greater than in the previous quarter. Overall economic output in the eurozone grew 0.8% in the first quarter.

Industrial output falls in Eurozone, rises in UK
Eurozone industrial production fell in March, as Germany, Italy, France, and other countries experienced slower growth. It was the first such decline in activity for the Eurozone in six months. U.K. industrial production grew in March, but at a slower rate than expected. The U.K. Office for National Statistics reported that industrial production rose 0.3% in March from February and 0.7% on an annual basis.
Global corporate news

Microsoft to buy Skype
Microsoft announced its plan to purchase Skype, the Internet telephone company that provides free online video and voice communication. The stunning announcement is seen as an indication that the powerhouse software firm plans to expand into the mobile phone and Internet markets.

A year-long car rental company takeover battle is finally being resolved, as Hertz announced it will offer Dollar Thrifty shareholders $72 a share, significantly higher than the $42 a share originally offered a year ago April, before a bidding war last summer between Hertz and Avis resulted in a stalemate.

Buybacks make comeback
Corporate share buybacks resumed, with Philip Morris and AT&T among the firms taking advantage of favorable borrowing conditions after holding onto cash since the financial crisis began in late 2008.

Toyota profit plunges
Toyota Motor announced a 77% decline in its quarterly net profit and gave no annual forecast, as it continued to struggle in assessing the scope of disruption to its production following Japan’s March 11 earthquake. Toyota is expected to fall behind General Motors and possibly Volkswagen to the third position in global vehicle sales in 2011.

Nissan posts profit
Nissan Motor said it turned a profit in its fiscal fourth quarter, swinging to net earnings of 30.8 billion yen ($380 million) from a loss of 11.6 billion yen in the same quarter a year earlier. Japan’s second-largest carmaker by volume grew sales by 10%, and its operating profit rose 7.2% from a year earlier. While Nissan was affected by the Japanese earthquake, it was not hit as hard as Toyota and Honda, and its factories in Japan and North America have recovered more quickly from damage and supply interruptions.

NEC earnings drop
NEC reported a 36% drop in net profit for its fiscal fourth quarter and a full-fiscal-year net loss, as the impact of the March 11 earthquake and tsunami compounded existing weakness in NEC’s technology-services business.

Disney disappoints
The Walt Disney Company’s quarterly earnings fell shy of expectations and last year’s results as revenues dropped in its studio entertainment and parks and resorts segments.

Cisco earnings drop
Cisco Systems reported a decrease of 18% in earnings for its fiscal third quarter. The networking equipment giant faces tough competition and a slowdown in its core routing and switching businesses. Cisco also lowered its guidance for its fourth quarter.

Citigroup executes reverse stock split
A 1-for-10 reverse stock split of Citigoup common stock, announced in March, was carried out this week, reducing the number of outstanding shares of Citigroup common stock to 2.9 billion from roughly 29 billion. Price per share went from $4 to above $40. Citigroup said it aims to reduce volatility and broaden its base of potential investors. Some institutional investors are barred from buying shares with single-digit prices.

RBC retreats from U.S. banking
In a dramatic about-face, Royal Bank of Canada is giving up on its long-term quest to establish a strong presence in the U.S. banking industry and is seeking buyers for its U.S. operation, known as RBC Bank. RBC’s move to retrench stands in contrast to its Canadian rivals, Bank of Montreal and Toronto-Dominion Bank, and their recent large acquisitions.