Archive for May, 2011

Wages high on central bank radars

Sunday, May 1st, 2011 | Finance News

NEW YORK (Reuters) – Central bankers around the world are at different stages when it comes to combating price pressures, but all of them are keeping a close watch on wages for early warning signs of future inflation.

Brazil's central bank last week expressed growing concern about above-inflation wage deals and said interest rates will remain high for a long time to counter the inflation threat.

In the United States, meanwhile, wages have been largely stagnant due to stubbornly high unemployment. That's one reason Federal Reserve Chairman Ben Bernanke thinks the oil-related jump in inflation will be fleeting and interest rates can stay at record lows.

On Friday, the United States releases its employment report for April. The world's largest economy is expected to have added 190,000 jobs, according to a Reuters survey, not nearly enough to make much of a dent in the jobless rate, which is expected to hold at 8.8 percent.

"We are watching for this coming Friday whether any signs of wage inflation are starting to pick up, because that is, in my view, at the center of the Fed's radar screen," said Torsten Slok, international economist at Deutsche Bank in New York.

Average hourly earnings are expected to rise just 0.2 percent in April after being flat in March, hardly the stuff of an inflationary spiral.

"It's still very suppressed," said Slok. Without a pick-up in wages, he said, it is hard to see troubling inflation taking hold unless the U.S. dollar took a larger hit.

So far, there is no evidence higher prices have lifted wage demands, according to researchers at the New York Federal Reserve Bank.

The open question is how much pressure there will be on wages in the future once slack in the U.S. economy subsides, said Michael Gapen, an economist at Barclays Capital.

In the past couple of decades, inexpensive labor from emerging markets helped keep a lid on U.S. wage pressures, but those times may have changed.

"It's not clear that those dynamics will be in our favor going forward," Gapen said. "The big unanswered question is: Are we likely to get globalization contributing to low price pressures in the next 20 years as we did in last 20 years?"


Global inflation pressures are prompting other countries to let their currencies appreciate against the dollar, which analysts see as a reason the dollar's slide has accelerated.

Developing countries in particular have complained that the weak dollar has stoked inflation in their economies.

Brazil's inflation is close to breaking through the 6.5 percent ceiling of the government's target range and the fight against higher prices is dominating the early months of President Dilma Rousseff's administration.

Inflation data from Brazil and Chile, due on Friday, will be a test of how effective their central banks have been with different approaches to combating price growth.

India's central bank is also battling surging price pressures. It is widely expected to lift interest rates by a quarter-percentage point when announcing its annual monetary policy on May 3. Some economists are even calling for a half-point rise.

Price pressures are complicating policy for some developed countries as well, though both the Bank of England and European Central Bank are expected to hold rates steady at meetings this week.

Investors will listen carefully, though, for any signals that the ECB is mulling another rate hike in June or July. The ECB raised rates for the first time since 2008 in April.

In the UK, a patchy run of economic data -- culminating in tepid first quarter growth of 0.5 percent -- suggests the economy's recovery may be faltering, which should keep the BoE on hold.

In the United States, economic data has also been choppy, another reason the Fed is in no hurry to lift borrowing costs.

Growth slowed sharply in the first three months of the year and a report on Thursday showing a surprise jump in the number of Americans claiming unemployment benefits cast a shadow on expectations for a significant second-quarter pick-up.

"It's more on people's minds now -- is it just a minor bump in the road or is it a soft patch?" said Slok.

(Reporting by Kristina Cooke; Editing by Dan Grebler)


U.S. mulls making more firms pay corporate tax: group

Sunday, May 1st, 2011 | Finance News

WASHINGTON (Reuters) – The Obama administration is considering a plan to force more businesses to pay the corporate income tax, an industry group said, in an overhaul package that could be unveiled as early as this month.

Under the proposal, entities with more than $50 million in gross receipts would pay the corporate income tax, instead of the individual income tax they now pay. Partnerships like law firms and hedge firms would likely be the most affected.

"Treasury Department staff are working on a tax reform proposal that reportedly would include corporate taxation of any pass-through entity with gross receipts of $50 million or more," said a letter to members of the National Association of Publicly Traded Partnerships from its executive director Mary Lyman sent on Friday, obtained by Reuters.

Pass-through entities are those in which the income and tax liability "passes through" to the individual rather than being taxed at the company level.

The top corporate tax rate is now the same as the top individual tax rate -- 35 percent. Still, many firms such as private equity and hedge funds have certain income taxed at lower capital gains rates.

Lyman's group represents publicly traded partnerships investing mostly in energy companies. Such partnerships, also called Master Limited Partnerships, pay no tax themselves. Instead the tax is paid by individual owners.

The Obama administration is drawing up a plan to trim the top 35 percent corporate tax rate, among the highest in the world, while cutting deductions, credits and other breaks. Details could emerge as early as this month, according to a source familiar with the proposal.

Corporate America backs a lower rate, but is wary about what breaks it could lose.

White House spokeswoman Amy Brundage said the process is still unfolding.

"No decisions have been made about the content of any specific reform proposal or the timing or manner in which the administration will move this dialogue forward," Brundage said.

Many lawmakers object to reforming corporate taxes alone, because simply cutting the corporate rate excludes many businesses that pay tax through the individual tax code.

Treating more business income in the same fashion is one way to address this concern.

Many businesses would object to a plan that subjects them to the corporate tax.

"We believe that if this proposal is released in its current form, the fact that it sweeps so broadly will ensure widespread opposition from business groups and many in Congress," Lyman said in her email to members.

Treasury Secretary Timothy Geithner has suggested that changes to how types of business are taxed would be considered.

"Congress has to revisit this basic question about whether it makes sense for us as a country to allow certain businesses to choose whether they're treated as corporations for tax purposes or not," Geithner said at a congressional hearing this year.

(Additional reporting by Rachelle Younglai; editing by Mohammad Zargham)


Buffett believes reputation after Sokol still intact

Sunday, May 1st, 2011 | Finance News

OMAHA, Nebraska (Reuters) – Warren Buffett still believes his reputation is intact after his former top lieutenant David Sokol pitched for a takeover of Lubrizol Corp (LZ.N) after Sokol had purchased shares in the chemicals company.

"Everything I do is out there for the people to judge," Buffett said during his company's annual shareholder meeting on Sunday.

"I don't hold myself to a standard of perfection or I'd have committed suicide a long time ago."

He said that with 260,000 people working for his company, Berkshire Hathaway Inc, something is going to go wrong.

Buffett, the "Oracle of Omaha" and one of the world's richest men, attracts about 40,000 people a year to the city for the annual meeting of his ice-cream-to-insurance conglomerate Berkshire Hathaway Inc (BRKa.N).

This weekend he was under the microscope, facing global media as well as shareholders, regarding the Sokol incident.

And yet, Buffett's feelings toward Sokol are neither protective, nor violent.

"I know what's happened and perhaps investigative authorities will develop it more fully over time," he said.

In more than five hours of questioning from shareholders on Saturday, Buffett gave his most public comments yet on the resignation of Sokol, his one-time presumed successor who resigned in March amid a growing scandal over stock trading.

Buffett called Sokol's behavior -- allegedly misleading Berkshire about the nature of a $10 million investment in Lubrizol Corp (LZ.N) before suggesting Buffett buy the company -- "inexplicable and inexcusable."

Sokol's lawyer slammed Buffett in a statement for making his client a scapegoat.

Buffett also addressed a share buy back program and said it would be self-defeating to buy back shares. He said he would buy back stock if Berkshire were well below the bottom range of intrinsic value.

(Reporting by Ben Berkowitz in Omaha, writing by Jennifer Saba in New York; Editing by Bernard Orr)