Today's Headlines

Bloomberg:

• Draghi Says Rate Cuts May Have 'Muted' Impact On Economy. European Central Bank President Mario Draghi said today’s cut in interest rates to a record low may have only a limited impact on the euro-area economy as it slides toward recession. “It’s clear that when demand is weak the transmission of price signals to the aggregated economy is muted,” Draghi said at a press conference in Frankfurt after lowering the benchmark and deposit rates by 25 basis points to 0.75 percent and zero respectively. The cuts will reduce the cost of central bank loans for struggling banks, Draghi said. China also lowered rates today and the Bank of England restarted its asset purchases, adding to a new round of global monetary stimulus. With Europe’s debt crisis curbing growth across the continent and damping the outlook for the world economy, the ECB was under pressure to ease monetary conditions, even though Draghi last month voiced misgivings about the effectiveness of a rate reduction. “The impact of today’s decision on the euro area will not be large” and “there is now little left for the ECB to do in terms of lowering interest rates,” said Julian Callow, chief European economist at Barclay’s Capital in London. “If the economy does not turn around during the second half, the Governing Council will have to address the case for outright large-scale asset purchases.”
• Spanish, Italian Bonds Slump as ECB Refrains From Extra Measures. Spanish and Italian bonds tumbled as the European Central Bank refrained from announcing any additional steps to cap debt yields in the two nations after cutting its benchmark interest rate to a record low. Spain’s 10-year yields climbed the most in the euro era after the nation’s borrowing costs increased at an auction amid concern the debt crisis is worsening. German two-year notes rose as the ECB also cut its deposit rate to zero to revive the region’s economy. Speaking in Frankfurt after the decision, ECB President Mario Draghi said the council didn’t discuss other non-standard tools. Spanish and Italian bonds jumped last week after euro-area leaders expanded steps to combat the turmoil. “The market was slightly disappointed as it hoped for the ECB to announce further steps to address the crisis,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “The ECB may want to keep pressure on politicians to do their jobs. Our preference remains on core bonds as we expect the situation in the peripheral markets to deteriorate in the next few months.” The Spanish 10-year yield climbed 37 basis points, or 0.37 percentage point, to 6.78 percent at 5 p.m. in London after rising 43 basis points, the biggest increase since August 1994. The 5.85 percent bond due in January 2022 dropped 2.45, or 24.50 euros per 1,000-euro ($1,240) face amount, to 93.59. Italy’s 10-year bond yield increased 21 basis points to 5.98 percent. It earlier climbed to 6.04 percent, the first time it has breached the 6 percent level since June 29.
• European Bond Risk Rises as Central Bank Lowers Interest Rates. The cost of insuring against default on sovereign and corporate debt rose after the European Central Bank cut interest rates to a record low, while refraining from announcing additional steps to boost the economy . The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments rose 10 basis points to 279.5 at 3:40 p.m. in London. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings rose 22 basis points to 665. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased six basis points to 165. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers climbed 13 basis points to 268 basis points and the subordinated index increased 16 to 437.
• Euro Money Market to Get Little Stress Relief From ECB Rate Cuts. Estimates of future interbank euro borrowing costs fell to a record after today’s European Central Bank rate cuts, heightening concerns that ultra-low returns will further dissuade banks from lending to their peers. Three-month swaps linked to the euro overnight index average, or Eonia, fell to as low as 12.6 basis points after the ECB lowered its deposit rate by 25 basis points to zero percent. The measure of overnight unsecured lending transactions, the so- called Eonia-OIS swap, has fallen from 39 basis points at the start of the year. “The Eonia-OIS is likely to fall lower, and that may kill the interbank market because you’re taking such a large credit risk relative to the revenue you’re getting,” said Robin Belec, chief operating officer at In Touch Capital Markets Ltd. in London. “Banks that are short of liquidity may become more dependent on the ECB despite the zero deposit rate.” The cost for European banks to borrow in dollars rose to the highest in four months. The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 69 basis points below the euro interbank offered rate, the highest cost since March 5, from 58 yesterday. The one-year basis swap was 55 basis points below Euribor from minus 52 yesterday. Prices in the forward market for three-month Euribor relative to overnight indexed swaps -- known as the FRA/OIS spread -- rose to 30 basis points from 28. An increase signals banks are less willing to lend.
• German Companies Face Increased Loan Costs, Handelsblatt Says. Banking regulation will increase financing costs for German companies by about 5 billion euros ($6.3 billion) as banks pass on increased expenses to clients, Handelsblatt reported citing a study by the Technical University of Munich and the Association of Bavarian Business. Germany’s small- and medium-sized companies, are more reliant on bank loans than publicly trading companies that can tap the markets for funds, Handelsblatt said.
• Euro to Fall to $1.15 by Year End, UBS's Yu Says. (video)
  
• Focus Media(FMCN) Leads Most Chinese ADRs Lower After PBOC. Most Chinese stocks traded in the U.S. fell after the nation cut the benchmark interest rates for a second time in a month as economists forecast the slowest economic growth in three years. “They often act preemptively when data is weak,” Erik Lam, the director of Asian equity sales at Auerbach Grayson & Co. in New York, said by phone today. “Beijing is set to publish lots of data next week.”
• China's New Rules May Curb Credit Growth, CBRC Official Says. China plans to retain a cap on loans at 75 percent of deposits and may add further requirements that constrain credit growth under draft rules, a senior official at the banking regulator said. The liquidity-risk management regulations may be more stringent than the loan-to-deposit ratio set by the nation’s commercial bank laws, the China Banking Regulatory Commission official said, asking not to be named because the discussions aren’t public. The comments refute a report in the Economic Information Daily, which said today that the ratio won’t be included in the new rules and may be scrapped.
• China Policy ‘Misinterpretation’ Fueled Home Prices, Yi Says. China’s home price increase was the result of a “misinterpretation” of the nation’s economic policies, a government think tank researcher wrote today. China’s new home prices rose for the first time in 10 months as the government eased its monetary policies to bolster the economy, SouFun Holdings Ltd., the nation’s biggest real estate website owner, said this week. “The current rise in house prices has to a large extent been a result of misinterpretation of the government’s policies to stimulate the economy, an increase in real estate speculation and excessive concerns among ordinary homebuyers that prices will continue to rise,” Yi Xianrong, a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences, wrote in a commentary in the China Daily today.
• Default Risk of CMBS Tenants Rises for 2nd Month, S&P Says. Weighted avg default risk of top 70 tenants in conduit/fusion CMBS rose slightly to end June at 20.4, up from 20.3 in May, 19.6 in April, S&P analyst James Manzi wrote in a note. A higher value of the CTI Index indicates more credit risk.
• ADP Says U.S. Companies Added 176,000 Workers In June. The 176,000 increase followed a revised 136,000 gain the prior month that was higher than initially estimated, according to figures released today by Roseland, New Jersey-based ADP Employer Services. The median forecast of economists surveyed by Bloomberg News called for a 100,000 advance.
• Budget Impasse May Cost 300,000 U.S. Non-Defense Jobs. At least 300,000 jobs in industries including computer services, tourism, package delivery and meat processing may be lost if Congress fails to avert $1.2 trillion in automatic federal spending cuts starting next year. Across-the-board reductions in non-defense spending will have a ripple effect over the next two years on companies that aren’t government contractors, according to the Bipartisan Policy Center in Washington, which made the forecast. Hundreds of thousands more jobs are at risk from additional Defense Department reductions, amid an 8.2 percent jobless rate in May. “You are going to see reductions, frankly, in every area of the American economy,” Dov Zakheim, a former Defense Department comptroller who worked with the policy center, said in an interview.
• Service Industries in U.S. Grew Less Than Forecast in June. Service industries in the U.S. expanded in June at the slowest pace since January 2010, a sign the biggest part of the economy is struggling to gain momentum. The Institute for Supply Management’s non-manufacturing index dropped to 52.1, less than projected, from 53.7 in May, the Tempe, Arizona-based group said today. The median forecast of 70 economists surveyed by Bloomberg News called for 53. Readings above 50 signal expansion. The ISM non-manufacturing survey’s measure of business activity dropped to 51.7, the lowest since November 2009, from 55.6. The gauge of new orders decreased to an eight-month low of 53.3 from 55.5. An index of prices paid decreased to 48.9, the weakest since July 2009, from 49.8. The employment gauge climbed to 52.3 from 50.8 in the prior month.
• Banks Pad Profits As U.S. Prolongs Refinancing Boom: Mortgages. The biggest U.S. mortgage lenders, whose first-quarter earnings were buoyed by gains on home-loan refinancings, are raking in more profits as record-low interest rates and government efforts prolong the boom. Revised federal programs making it easier for homeowners to lock in lower rates helped push the Mortgage Bankers Association refinancing index to a three-year high last month. That signals a windfall for banks including Wells Fargo (WFC) & Co. that renewed about 5 million loans in 2011 amid the Federal Reserve’s drive to keep borrowing costs near zero. Wells Fargo is the nation’s largest home lender.
• Wall Street Bank Investors in Dark on Libor Liability. Barclays Plc (BARC) investors, blindsided by the bank’s $451.4 million regulatory fine for trying to rig benchmark rates, saw the stock drop 16 percent a day later. Other bank shareholders may be just as surprised. Bank of America Corp., Citigroup Inc. (C), Royal Bank of Scotland Group Plc and UBS AG (UBSN) are among the lenders whose participation in setting the London and Europe interbank offered rates, known as Libor and Euribor, are under investigation. None of the banks would say if they set aside reserves to cope with potential liabilities and, if so, how much.
• Bye Bye Big Apple: Bank Jobs Leave New York. (video)
• Dimon Faces Image ‘Nightmare’ With Energy Probe at JPM(JPM). JPMorgan Chase & Co. (JPM) refusal to turn over e-mails in a federal probe of potential energy-market manipulation is the latest challenge for Chief Executive Officer Jamie Dimon as the bank faces multiple investigations. The U.S. Federal Energy Regulatory Commission sued JPMorgan July 2 to release 25 e-mails in an investigation of possible manipulation of power markets in California and the Midwest by J.P. Morgan Ventures Energy Corp., according to court filings by the Washington-based agency. FERC opened the probe in August after complaints from California and Midwest grid operators that JPMorgan’s bidding practices were abusive, the documents show. “He’s got a PR nightmare in front of him,” said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and analyst at FBR Capital Markets in Arlington, Virginia. “It’s another headline risk, which means more regulators, which means over-regulation, which will eventually hit their bottom line.”

Wall Street Journal:

• Euro Risks More Losses After ECB Move. The euro plunged after the European Central Bank cut interest rates to a record low to prop up the ailing euro-zone economy, and analysts said the depreciation was likely to continue now that the interest-rate incentive to hold the common currency had become negligible. The euro slumped to a one-month low against the dollar and extended its losses against a range of other currencies after the ECB cut its deposit rate to zero and its main policy rate to 0.75% in an effort to thaw lending markets and stimulate economic activity.
• Rate Scandal Set to Spread. Former Barclays CEO Lambasted in Parliament as Other Banks Brace for Fallout. A day after abruptly resigning amid a mushrooming scandal over interest-rate manipulation, former Barclays PLC chief Robert Diamond on Wednesday was assailed by British lawmakers for the bank's actions, in a preview of the scrutiny likely to lie ahead for other big lenders that are under investigation. Barclays last week agreed to pay $453 million to settle U.S. and British authorities' allegations that the British bank tried to manipulate the London interbank offered rate, or Libor, which is the benchmark for interest rates on trillions of dollars of loans to individuals and businesses around the world.
  

MarketWatch:

• Apple(AAPL) Said to Plan Smaller iPad for This Year. Apple Inc.'s AAPL +2.36% component suppliers in Asia are preparing for mass production in September of a new tablet computer with a smaller screen, people familiar with the situation said, suggesting that the Cupertino, Calif., company is close to launching a smaller tablet. Two of the people said that the new tablet will likely come with a screen smaller than 8 inches, compared with the 9.7-inch screen of Apple's latest version of the iPad, which was released in March. The iPad's screen size has remained the same since the first model was released in 2010.

Fox News:

• Countrywide made discount loans to buy influence with members of Congress, House report says. The former Countrywide Financial Corp., whose subprime loans helped start the nation's foreclosure crisis, made hundreds of discount loans to buy influence with members of Congress, congressional staff, top government officials and executives of troubled mortgage giant Fannie Mae, according to a House report. The report, obtained by The Associated Press, said that the discounts -- from January 1996 to June 2008, were not only aimed at gaining influence for the company but to help mortgage giant Fannie Mae. Countrywide's business depended largely on Fannie, which at the time was trying to fend off more government regulation but eventually had to come under government control.

CNBC.com:

• Greece Admits Veering From Bailout Obligations. Greece conceded on Thursday it had slipped "in some respects" in implementing the cuts and reforms demanded by lenders in exchange for saving Athens from bankruptcy, and tried to persuade them to cut the country some slack.
• Merkel Makes New Enemies, This Time at Home. With her insistence on deeply unpopular austerity measures, German Chancellor Angela Merkel has won few friends in debt-laden southern European counties. Many saw in her tough stance and refusal to make concessions an unwavering commitment to the interests of her own electorate. But suggestions that she bowed to pressure from other euro zone leaders at a key summit last week have left her with new enemies, this time closer to home.
• China's Fleet of 'Ghost' Ships Signals Worsening Slowdown. China's huge fleet of coastal ships, usually confined to plying the Chinese seaboard, has sailed out of the shadows to seek international business in yet another sign that China's economy is slowing. The fleet, previously unnoticed by the global market, is suffering from a slowdown in China's coastal trade amid weaker domestic demand from utilities and steel mills and a growing glut in Chinese coal and iron ore stockpiles. The vessels are now being forced to seek new business such as in the Indonesian coal trade, dealing a further blow to the depressed global dry bulk shipping market. "There are many more ships lying idle at Chinese ports now - the environment for making money is not so good," said a source at one of the big five coastal shippers, who asked not to be identified.
• Spanish Banks’ Tale of Woe to Drag On. There is still more agony to come for Spanish banks.

Business Insider:

• Obama Gloats On The Supreme Court Decision: 'The Law I Passed Is Here To Stay'.
• Iran Says It's Time For The US And Israel To 'Disappear From The World'.

Zero Hedge:

• The Socialization Of America Is Economically Impossible.
• ECB Margin Calls Surge And Basis-Swaps Plunge. (graphs)
  

Mish's Global Economic Trend Analysis:

• Record Number of Homes for Sale in Melbourne; Sub-Prime Collapse; "No End in Sight" for Arrears on Low-Doc Loans. Given the alleged housing shortage in Australia, it is interesting to note a Record number of houses for sale in Melbourne.

Reuters:

• US to file WTO complaint against China on auto duties. The United States will file a complaint against China on Thursday with the World Trade Organization for imposing duties on more than $3 billion worth of U.S.-made autos, a senior U.S. official said. The complaint comes as President Barack Obama campaigns in Ohio, an important election battleground state where auto plants have been affected by the duties.
• U.S. crop worry to fuel world food prices in July: U.N. Searing heat in the U.S. Midwest is expected to see global food prices snap three months of declines in July, the UN said on Thursday, as some international grain prices surged to highs last seen during the 2007-08 food crisis.
• Copper dips on strong dollar; shrugs off rate cuts. Copper dipped on Thursday on a stronger dollar, retreating from gains after a surprise rate cut by China and a similar move by the European Central Bank that had been widely expected. Three-month copper on the London Metal Exchange fell 0.89 percent to $7,656 a tonne by 10.34 a.m EDT after earlier rising as much as 0.8 percent to a session high of $7,790 after the Chinese rate cut. Aluminium fell 0.61 percent to $1,944 a tonne.
• "Stagnant" Economy Takes Toll On U.S. Retailers' June Sales. Costco Wholesale Corp (COST), Macy's Inc (M), Kohl's Corp (KSS) and Target Corp (TGT) all reported disappointing June sales at stores open at least a year. Stubbornly high unemployment and anxiety about the economy took a toll on top U.S. retailers' sales in June, raising concerns that shoppers are penny-pinching ahead of the back-to-school season. "In part, this was a function of a macroeconomic environment that is stagnant at best," Macy's Chief Executive Terry Lundgren said in statement. A steady stream of weak economic reports, stubbornly high unemployment and a volatile stock market hurt shoppers' morale last month, underscored by a tumbling Thomson Reuters/University of Michigan's consumer sentiment index. Lower-priced retailers, like TJX Cos Inc (TJX), which runs the T.J. Maxx chain, and Ross Stores Inc (ROST), reported some of the largest gains as shoppers looked for deals on designer-brand clothes and home goods.
• UN urges countries to impose global taxes to boost aid. The United Nations on Thursday urged countries to impose international taxes to raise more than $400 billion a year, such as a carbon tax, a currency transaction tax and a billionaires tax, to offset cutbacks in aid by many countries amid global economic turmoil. The U.N. World Economic and Social Survey found the needs of developing countries were not being met, more money was needed to fight challenges like climate change and new taxes would help "donor countries overcome their record of broken promises."
• Portugal Risks Missing Fiscal Goal: Monitor. Bailed-out Portugal is likely to miss the 2012 budget deficit target set by international lenders unless the recession-hit nation sees improved indirect tax revenues, a parliament body that monitors budget execution warned. The debt-laden country slid into its worst recession since the 1970s after imposing tough tax hikes and spending cuts to put its public finances in order. Unemployment is at record highs of over 15 percent, undermining tax revenues.
• U.S. Ethanol Output Falls to 10-Month Low.
  

Telegraph:

• Quantitative easing misery for pensioners and savers. The Bank of England is expected to pump billions of pounds more into the economy today. A decision to resume "quantitative easing" (QE) could also send inflation rising again – more bad news for pensioners and savers, who would struggle to make a "real" return on their cash.
• China 'uses state funds to stockpile rare earths'. China is using state funds to stockpile rare earths, metals which are key to making mobile phones and other modern items, according to reports from Beijing.

AFP:

• Greece default likely: Sweden's Borg. Attempts to help Greece avoid bankruptcy appear doomed to fail, Swedish Finance Minister Anders Borg said Thursday, adding however that Athens might still manage to cling to the euro.

Ansa:

• Prime Minister Mario Monti's government may postpone a 2 percentage points increase of the value-added tax planned for October to July 2013, citing a draft of a decree law that is being discussed at a cabinet meeting today.
  

Folha de S. Paulo:

• Brazil President Dilma Rousseff's aides are considering the possibility of the economy growing 2% this year, below the official estimate by the central bank of 2.5%, citing government officials.
  

Xinhua:

• Xinjiang Top Official Oversees Counter-Terrorism Drill. A top official of northwest China's Xinjiang Uygur autonomous region oversaw a counter-terrorism drill staged by special forces in Urumqi ahead of the anniversary of the July 2009 riots. Zhang Chunxian, secretary of the Xinjiang committee of the Communist Party of China, on Wednesday asked the soldiers to keep vigilant against all sorts of hostile forces and to strike "three forces" -- a term for separatists, extremists, and terrorists -- with "iron fists."