Worried Market Ignores Positive Earnings

123jump.com Staff
30 Nov, -0001
New York City

U.S. stocks extended their losses after the news that China would have its currency, the yuan, pegged to a basket of currencies rather than just tied to the greenback. It also vaulted the yuan 2% higher vs. the dollar. Greenspan repeated that growth was solid and interest rates will keep rising. Metals and Mining stocks rise in an otherwise broad weakness in the market. After the bell Google reports earnings of $1.19 jump of 400% on revenue increase of 98% from a year ago in the 2Q.

U.S. MARKET AVERAGES

U.S. stocks opened lower on Thursday after China moved away its yuan currency exchange rate versus the dollar, which could hit the profits of companies that source heavily from China, such as Wal-Mart Stores Inc, whose shares fell 1.4% percent.

Stocks tended to moved higher in the early trading after the news that China would no longer peg its currency to the U.S. dollar but later stocks declined on news of further blasts in London’s underground.

For a market that looks for troubled spots there were many to be found today. The declining oil price, Chinese revaluation, London bombing blasts and disappointing earnings from Nokia and Merck weighed on the market. The positive earnings news from UPS, Coca Cola, SBC, eBay, Qualcomm, and Allstate helped market in the early hour to rise. The strength in averages did not last for a long.

Microsoft reports its fiscal fourth-quarter earnings Thursday. Excluding stock-based compensation expenses, analysts see earnings at 31 cents a share, up vs. 28 cents a year ago.

Google is expected to post second-quarter earnings of $1.20 a share, excluding stock-based compensation, up vs. 58 cents a share last year.

Coca-Cola Co. was up 82 cents after posting 2Q that rose 8.8% on a 5% increase in unit case volume driven by strong international sales.

McDonald's dropped 28 cents after 2Q revenue rose more than expected but earnings declined.

Nokia Corp. declined $1.96 after the company's 3Q earnings estimate missed expectations.

eBay Inc. jumped $6.34 after 2Q earnings surged beyond expectations.

SBC Communications fell 15 cents to 23.65 after the company reported a drop in 2Q profit.

EMC Corp. fell 70 cents after the company projected lackluster 3Q earnings and revenue, despite a strong 2Q results.

ECONOMIC NEWS

China put an end to a decade-old fixed exchange rate to the dollar. The new yuan rate revalues the currency by 2.1% to 8.11 per U.S. dollar immediately. China will value the yuan against a number of currencies as the new system will allow it to rise or drop according to the fluctuations of the dollar versus other currencies.

The Federal Reserve Bank of Philadelphia released its survey of regional manufacturing activity, with the diffusion index of current activity rising to 9.6 for July. In June, the measure came in at negative 2.2.

The Conference Board announced its basket of leading economic indicators climbed 0.9% in June, beating expectations. The board also revised numbers for the two previous months upward.

The number of Americans filing new claims for unemployment benefits declined by the largest amount in 2 1/2 years last week, reflecting a slowdown in layoffs in the auto industry.
The Labor Department said that new benefit claims fell by 34,000 to a new total of 303,000 as the labor market continued to signal strength.

The drop of 34,000 was the largest one-week improvement since a decline of 35,000 in the week of Dec. 21, 2002. The decline was more than triple the 10,000 drop that private analysts had forecasted. The total of 303,000 claims last week was the lowest level in 16 weeks. The four-week moving average also declined last week to 318,000, the lowest level in more than four months.

INTERNATIONAL MARKET NEWS

European stocks dropped after the bomb explosions in London with shares giving up some of their earlier gains made on the news of China’s new currency revaluation system. Utilities and resource stocks were among the leaders and helped the German and French indices rise 1.01% and 0.2% respectively. London’s FTSE 100 lost 0.2%. The euro slipped 0.2%, while the pound was up 0.4%.

Asian-Pacific benchmarks ended mixed. Some markets were boosted by China’s economic news, the positive assessment of the U.S. economy and solid earnings reports. The Japanese stocks closed flat after early gains in tech, auto and bank shares, supported by gains in Wall Street. Australian stocks reached a record high of 1% on improved confidence in global growth and demand for commodities. Hong Kong’s Hang Seng rose only 0.1% on a decline in property shares after banks raised their prime rate. Taiwan’s Taiex closed down 0.5% dragged on by financial stocks. In currency markets the dollar lost ground against the yen and stood at 112.38.

European shares traded mostly higher at mid-day lifted by resource stocks, retail-sales data, and positive profit reports from Ericsson and SAP. Metal and mining shares were among the top gainers after China posted strong economic growth and a production update from Anglo-Australian miner Rio Tinto. U.K. stocks lost early gains from upbeat monthly sales data and earnings from top retailers and dropped 0.1% after reports of incidents and evacuations in London. German and French stocks gave up some of their early gains and added 1% and 0.6% respectively.

The Australian stock market reached a record high Thursday on growing confidence in global growth and demand for commodities, particularly from China. The benchmark S&P/ASX 200 index advanced 42 points, or 1% to 4,343.2, beating the previous high on June 17. The index also reached an intraday record of 4,351.7. Australian traders cheered the news that China's economy climbed 9.5% in the first half and Alan Greenspan's comments overnight that the U.S. economy should produce sustained growth with low inflation. Both China and the U.S. are major trading partners with Australia, and China is a big importer of Australian iron ore and coal.

ENERGY, METALS AND CURRENCIES MARKETS

The yen rose 2% versus the dollar and rallied against other currencies on China’s currency revaluation system. The yen traded 110.18 per dollar. The greenback reversed early losses against the euro and stood at $1.2115 per euro.

Oil prices eased after explosions were reported on London’s public transport system. Light sweet crude fell 35 cents to $57.67 a barrel. London Brent dropped 39 cents to $56.26. The fact that there were no injuries this time made for less impact on oil prices than the explosions on July, 7th exerted on the market. Losses were also limited by China’s modest currency revaluation.

The Japanese yen reached a three-year high against the dollar after China’s currency revaluation. The yen climbed to 110.74 at 9.30 a.m. in NY from 112.91 late yesterday. The dollar dropped to $1.2172 per euro, down from $1.2138.

EARNINGS NEWS

Sherwin-Williams, manufacturer of coatings and related products, reported 2Q net income growth of $1.08 per share compared with 87 cents a year ago on strong sales, acquisitions and division improvements. The quarterly results exceeded estimates of $1.03 a share. The company projected 3Q earnings between $1.06 and $1.10 per share.

Tidewater, shipping company, reported 1Q net income rise to 50 cents a share, up from 23 cents a year ago on $192.2 million revenue growth, beating estimates of 46 cents a share.
Midland Company, insurance services provider, reported 2Q profit growth of $1.06 per share vs. 58 cents for the year-earlier quarter. The company raised its 2005 earnings outlook to the range of $3.25 to $3.45 per share.

Reebok, sports and fitness products maker, posted 2Q net income rise of 60 cents a share compared with 35 cents a year ago on sales growth of $876.2 million, exceeding expectations by 2 cents.

New York Times, media group, posted 2Q income decrease of 42 cents a share, down from 50 cents a year earlier, citing charges and stock-based compensation expense.
Nucor, steelmaker, reported 2Q profit rise of $2.03 a share compared with $1.58 a year ago on revenue growth, beating estimates of $1.96 a share. The company expects 3Q earnings below 3Q of 2004 and this-year 2Q.

Weyerhaeuser, forest products group, reported 2Q profit rise of $1.71 per share, up from $1.57 last year on sales growth. For the second quarter the company took gains of 37 cents a share, excluding them it would have reported $1.34 a share, beating analysts’ estimates.

Horizon Financial, commercial & mortgage lending provider, posted 1Q net income increase of 37 cents a share vs. 31 cents a year earlier, reflecting net interest income rise.

Coca-Cola, beverage company, reported 2Q profit rise of 72 cents a share. Excluding special items it would have posted 68 cents a share, exceeding previous forecasts of 64 cents a share. In the quarter the company bought back $1 billion in shares and is planning to buy at least $2 billion in 2005.

Equifax, provider of credit-management services, posted 2Q profit drop of 47 cents a share vs. 55 cents a year ago on 15% revenue growth.

Danaher, industrial products manufacturer, posted 2Q earnings growth of 70 cents a share compared with 56 cents a year ago. Excluding special items it would have reported earnings of 67 cents a share.

Charlotte Russe Holding, retailer, announced 3Q income fall of 14 cents per share , down from 23 cents in the comparable last-year quarter, missing estimates of 17 cents a share. In 4Q the company expects to report mid single-digit positive same-store sales and earnings between 16 and 20 cents per share.

Provident Financial Holdings, financial services company, reported 4Q net income rise to 68 cents a share, up from 60 cents last year on increased net interest income.

Nokia, Finnish mobile-phone maker, reported 2Q earnings of 18 euro cents on sales of 8.09 billion, missing estimates by a penny. The company sees its 3Q earnings between 14 and 17 euro cents a share on sales in the range of 7.9 billion to 8.2 billion euros.

Groupe Danone, dairy products maker, announced first-half net income fall of $422 million, down from $665 million a year ago, citing 200 million-euro provisions for its HOD U.S. home and office water-delivery business. Same-store sales grew 6.5%.

Reynolds & Reynolds, software seller, posted 3Q profit growth of 37 cents a share, including 3 cents a share benefit from lower tax rates. The company projected 2005 earnings in the range of $1.37 to $1.41 a share.

Boots, U.K. drugstore chain, posted 2Q sales growth of 1.9%, but same-store sales dropped 0.8%, missing expectations of 2% rise.

CORPORATE NEWS

It was reported Thursday that several top executives and board members at Delta Air Lines have warned CEO Gerald Grinstein that a turnaround plan there isn't working and that a Chapter 11 bankruptcy filing for the nation's No. 3 airline is inevitable. Delta is also slated to post its quarterly results early Thursday.

Australian mining giant BHP Billiton ((BHP)) said Thursday it has reached a deal to sell more than $4 billion worth of iron ore to Japan's JFE Steel. Billiton also said Thursday it had reopened its Olympic Dam copper, gold and uranium mine in South Australia after an explosion Tuesday in which a worker was killed.

Dow Jones & Co. agreed to transfer its 50% equity interests in CNBC Europe and CNBC Asia, as well as its 25% interest in CNBC World, to General Electric's NBC Universal, ending its international television partnership with CNBC. Dow Jones will post a second-quarter charge of about $36.7 million on the move.


Chairman Greenspan presented identical testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, on July 21, 2005

In mid-February, when I presented our last report to the Congress, the economy, supported by strong underlying fundamentals, appeared to be on a solid growth path, and those circumstances prevailed through March. Accordingly, the Federal Open Market Committee (FOMC) continued the process of a measured removal of monetary accommodation, which it had begun in June 2004, by raising the federal funds rate 1/4 percentage point at both the February and the March meetings.
The upbeat picture became cloudier this spring, when data on economic activity proved to be weaker than most market participants had anticipated and inflation moved up in response to the jump in world oil prices. By the time of the May FOMC meeting, some evidence suggested that the economy might have been entering a soft patch reminiscent of the middle of last year, perhaps as a result of higher energy costs worldwide. In particular, employment gains had slowed from the strong pace of the end of 2004, consumer sentiment had weakened, and the momentum in household and business spending appeared to have dissipated somewhat.
At the May meeting, the Committee had to weigh the extent to which this weakness was likely to be temporary--perhaps simply the product of the normal ebb and flow of a business expansion--and the extent to which it reflected some influence that might prove more persistent, such as the further run-up in crude oil prices. While the incoming data highlighted some downside risks to the outlook for economic growth, the FOMC judged the balance of information as suggesting that the economy had not weakened fundamentally.
Moreover, core inflation had moved higher again through the first quarter. The rising prices of energy and other commodities continued to place upward pressures on costs, and reports of greater pricing power of firms indicated that they might be more able to pass those higher costs on to their customers. Given these considerations, the Committee continued the process of gradually removing monetary accommodation in May.
The data released over the past two months or so accord with the view that the earlier soft readings on the economy were not presaging a more serious slowdown in the pace of activity. Employment has remained on an upward trend, retail spending has posted appreciable gains, inventory levels are modest, and business investment appears to have firmed. At the same time, low long-term interest rates have continued to provide a lift to housing activity. Although both overall and core consumer price inflation have eased of late, the prices of oil and natural gas have moved up again on balance since May and are likely to place some upward pressure on consumer prices, at least over the near term. Slack in labor and product markets has continued to decline. In light of these developments, the FOMC raised the federal funds rate at its June meeting to further reduce monetary policy accommodation. That action brought the cumulative increase in the funds rate over the past year to 2-1/4 percentage points.
Should the prices of crude oil and natural gas flatten out after their recent run-up--the forecast currently embedded in futures markets--the prospects for aggregate demand appear favorable. Household spending--buoyed by past gains in wealth, ongoing increases in employment and income, and relatively low interest rates--is likely to continue to expand. Business investment in equipment and software seems to be on a solid upward trajectory in response to supportive conditions in financial markets and the ongoing need to replace or upgrade aging high-tech and other equipment. Moreover, some recovery in nonresidential construction appears in the offing, spurred partly by lower vacancy rates and rising prices for commercial properties. However, given the comparatively less buoyant growth of many foreign economies and the recent increase in the foreign exchange value of the dollar, our external sector does not yet seem poised to contribute steadily to U.S. growth.
A flattening out of the prices of crude oil and natural gas, were it to materialize, would also lessen upward pressures on inflation. Overall inflation would probably drop back noticeably from the rates experienced in 2004 and early 2005, and core inflation could hold steady or edge lower. Prices of crude materials and intermediate goods have softened of late, and the slower rise in import prices that should result from the recent strength in the foreign exchange value of the dollar could also relieve some pressure on inflation.
Thus, our baseline outlook for the U.S. economy is one of sustained economic growth and contained inflation pressures. In our view, realizing this outcome will require the Federal Reserve to continue to remove monetary accommodation. This generally favorable outlook, however, is attended by some significant uncertainties that warrant careful scrutiny.
With regard to the outlook for inflation, future price performance will be influenced importantly by the trend in unit labor costs, or its equivalent, the ratio of hourly labor compensation to output per hour. Over most of the past several years, the behavior of unit labor costs has been quite subdued. But those costs have turned up of late, and whether the favorable trends of the past few years will be maintained is unclear. Hourly labor compensation as measured from the national income and product accounts increased sharply near the end of 2004. However, that measure appears to have been boosted significantly by temporary factors. Other broad measures suggest that hourly labor compensation continues to rise at a moderate rate.
The evolution of unit labor costs will also reflect the growth of output per hour. Over the past decade, the U.S. economy has benefited from a remarkable acceleration of productivity: Strong gains in efficiency have buoyed real incomes and restrained inflation. But experience suggests that such rapid advances are unlikely to be maintained in an economy that has reached the cutting edge of technology. Over the past two years, growth in output per hour seems to have moved off the peak that it reached in 2003. However, the cause, extent, and duration of that slowdown are not yet clear. The traditional measure of the growth in output per hour, which is based on output as measured from the product side of the national accounts, has slowed sharply in recent quarters. But a conceptually equivalent measure that uses output measured from the income side has slowed far less. Given the divergence between these two readings, a reasonably accurate determination of the extent of the recent slowing in productivity growth and its parsing into cyclical and secular influences will require the accumulation of more evidence.
Energy prices represent a second major uncertainty in the economic outlook. A further rise could cut materially into private spending and thus damp the rate of economic expansion. In recent weeks, spot prices for crude oil and natural gas have been both high and volatile. Prices for far-future delivery of oil and gas have risen even more markedly than spot prices over the past year. Apparently, market participants now see little prospect of appreciable relief from elevated energy prices for years to come. Global demand for energy apparently is expected to remain strong, and market participants are evidencing increased concerns about the potential for supply disruptions in various oil-producing regions.
To be sure, the capacity to tap and utilize the world's supply of oil continues to expand. Major advances in recovery rates from existing reservoirs have enhanced proved reserves despite ever fewer discoveries of major oil fields. But, going forward, because of the geographic location of proved reserves, the great majority of the investment required to convert reserves into new crude oil productive capacity will need to be made in countries where foreign investment is currently prohibited or restricted or faces considerable political risk. Moreover, the preponderance of oil and gas revenues of the dominant national oil companies is perceived as necessary to meet the domestic needs of growing populations. These factors have the potential to constrain the ability of producers to expand capacity to keep up with the projected growth of world demand, which has been propelled to an unexpected extent by burgeoning demand in emerging Asia.
More favorably, the current and prospective expansion of U.S. capability to import liquefied natural gas will help ease longer-term natural gas stringencies and perhaps bring natural gas prices in the United States down to world levels.
The third major uncertainty in the economic outlook relates to the behavior of long-term interest rates. The yield on ten-year Treasury notes, currently near 4-1/4 percent, is about
50 basis points below its level of late spring 2004. Moreover, even after the recent widening of credit risk spreads, yields for both investment-grade and less-than-investment-grade corporate bonds have declined even more than those on Treasury notes over the same period.
This decline in long-term rates has occurred against the backdrop of generally firm U.S. economic growth, a continued boost to inflation from higher energy prices, and fiscal pressures associated with the fast approaching retirement of the baby-boom generation.1 The drop in long-term rates is especially surprising given the increase in the federal funds rate over the same period. Such a pattern is clearly without precedent in our recent experience.
The unusual behavior of long-term interest rates first became apparent last year. In May and June of 2004, with a tightening of monetary policy by the Federal Reserve widely expected, market participants built large short positions in long-term debt instruments in anticipation of the increase in bond yields that has been historically associated with an initial rise in the federal funds rate. Accordingly, yields on ten-year Treasury notes rose during the spring of last year about 1 percentage point. But by summer, pressures emerged in the marketplace that drove long-term rates back down. In March of this year, long-term rates once again began to rise, but like last year, market forces came into play to make those increases short lived.
Considerable debate remains among analysts as to the nature of those market forces. Whatever those forces are, they are surely global, because the decline in long-term interest rates in the past year is even more pronounced in major foreign financial markets than in the
United States.
Two distinct but overlapping developments appear to be at work: a longer-term trend decline in bond yields and an acceleration of that trend of late. Both developments are particularly evident in the interest rate applying to the one-year period ending ten years from today that can be inferred from the U.S. Treasury yield curve. In 1994, that so-called forward rate exceeded 8 percent. By mid-2004, it had declined to about 6-1/2 percent--an easing of about 15 basis points per year on average.2 Over the past year, that drop steepened, and the forward rate fell 130 basis points to less than 5 percent.
Some, but not all, of the decade-long trend decline in that forward yield can be ascribed to expectations of lower inflation, a reduced risk premium resulting from less inflation volatility, and a smaller real term premium that seems due to a moderation of the business cycle over the past few decades.3 This decline in inflation expectations and risk premiums is a signal development. As I noted in my testimony before this Committee in February, the effective productive capacity of the global economy has substantially increased, in part because of the breakup of the Soviet Union and the integration of China and India into the global marketplace. And this increase in capacity, in turn, has doubtless contributed to expectations of lower inflation and lower inflation-risk premiums.
In addition to these factors, the trend reduction worldwide in long-term yields surely reflects an excess of intended saving over intended investment. This configuration is equivalent to an excess of the supply of funds relative to the demand for investment. What is unclear is whether the excess is due to a glut of saving or a shortfall of investment. Because intended capital investment is to some extent driven by forces independent of those governing intended saving, the gap between intended saving and investment can be quite wide and variable. It is real interest rates that bring actual capital investment worldwide and its means of financing, global saving, into equality. We can directly observe only the actual flows, not the saving and investment tendencies. Nonetheless, as best we can judge, both high levels of intended saving and low levels of intended investment have combined to lower real long-term interest rates over the past decade.
Since the mid-1990s, a significant increase in the share of world gross domestic product (GDP) produced by economies with persistently above-average saving--prominently the emerging economies of Asia--has put upward pressure on world saving. These pressures have been supplemented by shifts in income toward the oil-exporting countries, which more recently have built surpluses because of steep increases in oil prices. The changes in shares of world GDP, however, have had little effect on actual world capital investment as a percentage of GDP. The fact that investment as a percentage of GDP apparently changed little when real interest rates were falling, even adjusting for the shift in the shares of world GDP, suggests that, on average, countries' investment propensities had been declining.4
Softness in intended investment is also evident in corporate behavior. Although corporate capital investment in the major industrial countries rose in recent years, it apparently failed to match increases in corporate cash flow.5 In the United States, for example, capital expenditures were below the very substantial level of corporate cash flow in 2003, the first shortfall since the severe recession of 1975. That development was likely a result of the business caution that was apparent in the wake of the stock market decline and the corporate scandals early this decade. (Capital investment in the United States has only recently shown signs of shedding at least some of that caution.) Japanese investment exhibited prolonged restraint following the bursting of their speculative bubble in the early 1990s. And investment in emerging Asia excluding China fell appreciably after the Asian financial crisis in the late 1990s. Moreover, only a modest part of the large revenue surpluses of oil-producing nations has been reinvested in physical assets. In fact, capital investment in the Middle East in 2004, at 25 percent of the region's GDP, was the same as in 1998. National saving, however, rose from 21 percent to 32 percent of GDP. The unused saving of this region was invested in world markets.
Whether the excess of global intended saving over intended investment has been caused by weak investment or excessive saving--that is, by weak consumption--or, more likely, a combination of both does not much affect the intermediate-term outlook for world GDP or, for that matter, U.S. monetary policy. What have mattered in recent years are the sign and the size of the gap of intentions and the implications for interest rates, not whether the gap results from a saving glut or an investment shortfall. That said, saving and investment propensities do matter over the longer run. Higher levels of investment relative to consumption build up the capital stock and thus add to the productive potential of an economy.
The economic forces driving the global saving-investment balance have been unfolding over the course of the past decade, so the steepness of the recent decline in long-term dollar yields and the associated distant forward rates suggests that something more may have been at work over the past year.6 Inflation premiums in forward rates ten years ahead have apparently continued to decline, but real yields have also fallen markedly over the past year. It is possible that the factors that have tended to depress real yields over the past decade have accelerated recently, though that notion seems implausible.
According to estimates prepared by the Federal Reserve Board staff, a significant portion of the sharp decline in the ten-year forward one-year rate over the past year appears to have resulted from a fall in term premiums. Such estimates are subject to considerable uncertainty. Nevertheless, they suggest that risk takers have been encouraged by a perceived increase in economic stability to reach out to more distant time horizons. These actions have been accompanied by significant declines in measures of expected volatility in equity and credit markets inferred from prices of stock and bond options and narrow credit risk premiums. History cautions that long periods of relative stability often engender unrealistic expectations of its permanence and, at times, may lead to financial excess and economic stress.
Such perceptions, many observers believe, are contributing to the boom in home prices and creating some associated risks. And, certainly, the exceptionally low interest rates on ten-year Treasury notes, and hence on home mortgages, have been a major factor in the recent surge of homebuilding, home turnover, and particularly in the steep climb in home prices. Whether home prices on average for the nation as a whole are overvalued relative to underlying determinants is difficult to ascertain, but there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels. Among other indicators, the significant rise in purchases of homes for investment since 2001 seems to have charged some regional markets with speculative fervor.
The apparent froth in housing markets appears to have interacted with evolving practices in mortgage markets. The increase in the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages are developments of particular concern. To be sure, these financing vehicles have their appropriate uses. But some households may be employing these instruments to purchase homes that would otherwise be unaffordable, and consequently their use could be adding to pressures in the housing market. Moreover, these contracts may leave some mortgagors vulnerable to adverse events. It is important that lenders fully appreciate the risk that some households may have trouble meeting monthly payments as interest rates and the macroeconomic climate change.
The U.S. economy has weathered such episodes before without experiencing significant declines in the national average level of home prices. Nevertheless, we certainly cannot rule out declines in home prices, especially in some local markets. If declines were to occur, they likely would be accompanied by some economic stress, though the macroeconomic implications need not be substantial. Nationwide banking and widespread securitization of mortgages make financial intermediation less likely to be impaired than it was in some previous episodes of regional house-price correction. Moreover, a decline in the national housing price level would need to be substantial to trigger a significant rise in foreclosures, because the vast majority of homeowners have built up substantial equity in their homes despite large mortgage-market-financed withdrawals of home equity in recent years.
Historically, it has been rising real long-term interest rates that have restrained the pace of residential building and have suppressed existing home sales, high levels of which have been the major contributor to the home equity extraction that arguably has financed a noticeable share of personal consumption expenditures and home modernization outlays.
The trend of mortgage rates, or long-term interest rates more generally, is likely to be influenced importantly by the worldwide evolution of intended saving and intended investment. We at the Federal Reserve will be closely monitoring the path of this global development few, if any, have previously experienced. As I indicated earlier, the capital investment climate in the United States appears to be improving following significant headwinds since late 2000, as is that in Japan. Capital investment in Europe, however, remains tepid. A broad worldwide expansion of capital investment not offset by a rising worldwide propensity to save would presumably move real long-term interest rates higher. Moreover, with term premiums at historical lows, further downward pressure on long-term rates from this source is unlikely.

THE WBLINK TO GET FOR THIS REPORT
http://www.federalreserve.gov/boarddocs/hh/2005/july/testimony.htm