Wall St falls on euro zone recession worries (Reuters)

NEW YORK (Reuters) – Wall Street stocks declined on Monday as euro zone data signaled the region could be facing a recession, adding to worries about Europe's debt crisis.

Initial optimism about prospects of pro-growth reforms under new governments in Italy and Greece gave way to caution over the huge debt problems still plaguing the euro, which fell against the U.S. dollar.

Industrial production in the euro zone fell in September, the most since early 2009, adding to fears of a sharp contraction by industry and a probable recession. Output at factories in the 17-nation group fell 2.0 percent for the month.

"We are not an island. We are dependent ... and Europe's not likely to escape a recession," said Steve Goldman, principal at Goldman Management in Short Hills, New Jersey.

"You're seeing further weakness in the banks, and that's acting as a drag," he said.

Financials led the decline on the S&P 500, with the S&P financial index down 1.8 percent. Bank of America shares were down 2.3 percent at $6.07.

Stocks have traded choppily and in tandem with the euro recently in a sign U.S. investors are taking cues from the euro zone's mushrooming debt crisis as bouts of risk aversion are followed by periods of relative optimism.

The Dow Jones industrial average was down 103.80 points, or 0.85 percent, at 12,049.88. The Standard & Poor's 500 Index was down 15.46 points, or 1.22 percent, at 1,248.39. The Nasdaq Composite Index was down 26.79 points, or 1.00 percent, at 2,651.96.

Limiting losses on the Dow, Boeing Co shares rose 1.9 percent to $68.20 after the U.S. planemaker announced an order worth at least $18 billion and said the Middle East will need to recruit and train tens of thousands of new pilots to sustain a massive expansion in long-haul fleets.

(Reporting by Caroline Valetkevitch, additional reporting by Edward Krudy; Editing by Kenneth Barry)

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Yields fall to 60-year lows on Europe worries (Reuters)

NEW YORK (Reuters) – Treasury debt prices rose on Friday, taking benchmark yields to the lowest in at least 60 years as investors looked for a safe haven on revived worries a European debt crisis could have a significant global impact.

Stocks plunged on Friday, losing over 2.5 percent and bolstering the safe-haven allure of U.S. government debt, with few investors looking to go into the weekend short Treasuries due to the uncertainty surrounding the European debt crisis.

The worries over Europe were sparked by the planned resignation of European Central Bank (ECB) Executive Board Member Juergen Stark. The ECB confirmed a Reuters report that said Stark was quitting because of a conflict over the central bank's bond buying program.

"The Stark resignation just kind of raises an eyebrow at a time when there's already concerns about what's going to happen next," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.

A debt swap meant to help Greece avoid default and win time to repair its tattered public finances hung in the balance Friday, with expectations of take-up by private creditors slipping amid fierce European pressure on Athens.

"There is a real danger that a European default or bank failure would lead to a global banking crisis akin to that seen after the fall of Lehman Brothers," said Paul Dales, U.S. economist at Capital Economics in Toronto.

Benchmark 10-year notes were trading 19/32 higher in price to yield 1.91 percent, down from 1.98 percent late Thursday. Benchmark yields touched 1.896 percent, marking the lowest since at least World War II.

"Stocks certainly took a brutal push there and we've had an awful lot of buying accumulate this morning on all of the bad news about Europe, so when we come in for a little more buying (of Treasuries) this morning there's just nowhere for prices to go -- they've got to keep going up," said Jim Vogel, is head of fixed income research at FTN Financial in Memphis.

The drop in yields stirred some concerns about Treasury debt auctions next week.

The Treasury will sell $32 billion of three-year notes, $21 billion of reopened 10-year notes and $13 billion of reopened 30-year bonds next Monday, Tuesday and Wednesday.

Some investors felt the Treasury may have a difficult time successfully auctioning the debt with yields at current low levels.

Longer-dated Treasuries have found support in recent days on expectations the Fed could announce a bond purchase program, which the markets have dubbed Operation Twist, at the conclusion of its policy meeting September 20-21.

A speech by Fed Chairman Ben Bernanke Thursday was generally seen as leaving the door open to the possibility of Operation Twist arriving soon. Bernanke said the U.S. central bank would spare no effort to boost weak growth.

Thirty-year Treasury bonds were trading 1-10/32 higher in price to yield 3.25 percent, down from 3.31 percent late Thursday.

(Additional reporting by Emily Flitter; editing by Andrew Hay)

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Consumer spending data allays recession worries (Reuters)

WASHINGTON (Reuters) – Consumer spending rose at its fastest pace in five months in July, a further sign the economy is not falling back into recession, although manufacturing activity in Texas almost stalled this month.

Consumer spending increased 0.8 percent on strong demand for motor vehicles as Japan-related supply restraints faded, a Commerce Department report showed on Monday. Spending had slipped 0.1 percent in June

The size of the bounceback in spending, which accounts for about 70 percent of U.S. economic activity, beat economists' forecasts for a 0.5 percent advance. When adjusted for inflation, spending was up 0.5 percent last month, the largest gain in 1-1/2 years and the first increase since April.

"It's a little far-fetched to truly believe that we are headed into another recession. This data doesn't support that view at all," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

The spending data was the latest to suggest the economy started the third quarter with some strength after growth slowed to a near halt in the first half of the year.

But the risks of a new recession have risen this month as stock prices plunged and consumer sentiment eroded.

The spending report showed inflation-adjusted after-tax incomes fell in July, while data from the Dallas Federal Reserve Bank indicated factory output in Texas ground to a near halt this month.

The Texas factory index dropped to 1.1 from 10.8 in July, while a business confidence gauge slid to -11.4 from -2.0. The decline in sentiment was in line with other recent regional manufacturing surveys. In these indexes, zero is the dividing line between growth and contraction.

Separately, the number of contracts signed for purchases of previously owned homes fell 1.3 percent last month. The housing market is being choked by an oversupply of properties.

Pending home sales usually lead existing home sales by a month or two and the decline in contracts signed pointed to a fall in August sales.

Investors focused on the spending data and bought U.S. stocks. Prices for U.S. government debt fell, while the dollar eased against a basket of currencies.

ECONOMY NOT FALLING APART

So far data from industrial production to retail sales and employment have been consistent with a slow-growth scenario rather than an outright contraction in economic output. Data for August will give an idea of how much damage the stock market turmoil inflicted on the already wounded economy.

The economy grew at a tepid 1 percent annual rate in the second quarter, with consumer spending rising at its weakest pace since the fourth quarter of 2009. The economy only expanded 0.4 percent in the first three months of the year

Some economists were skeptical the rise spending last month would be sustained, given the 0.1 percent decline in real disposable income, weak consumer confidence and still-sluggish job growth.

"My expectation is that August spending number retreats and income likewise will be flat due to very weak job creation," said Robert Dye, chief economist at Comerica in Dallas, Texas.

U.S. nonfarm payrolls likely increased 75,000 in August after rising 117,000 in July, according to a Reuters survey. The unemployment rate is seen unchanged at 9.1 percent.

Fed Chairman Ben Bernanke left the door open for further monetary stimulus in a speech on Friday in which he said bringing down the high level of joblessness was crucial to ensuring the economy's long-term health.

Although the spending report showed core inflation moving higher, analysts did not think this would tie the U.S. central bank's hands.

The core personal consumption expenditures price index, which strips out food and energy costs -- rose 0.2 percent for a second straight month, taking the year-on-year reading to 1.6 percent, the highest since May 2010, from 1.4 percent in June.

Overall inflation jumped 0.4 percent in July after dropping 0.1 percent in June.

"This does not rule out additional Fed stimulus when policymakers meet in September. But it doesn't exactly rule it in," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

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Wall Street drops as economic, European worries weigh (Reuters)

NEW YORK (Reuters) – Stocks sank on Thursday as data fueled worries the economy was weakening and bank shares tumbled on fears the European financial crisis could spread havoc to other parts of the world.

The losses extended a slide in stocks that began in late July, with the S&P 500 now off 15.7 percent from its April 29 highs, as economic worries both here and abroad have caused investors to exit risky assets.

Factory activity in the Mid-Atlantic region as surveyed by the Philadelphia Federal Reserve Bank plummeted in August, falling to the lowest level since March 2009. For details, see

Bank shares contributed to the market's slide. While a Federal Reserve official said the Fed scrutinizes U.S. banks and the American units of European banks equally, a Wall Street Journal report said regulators are questioning the U.S. units of Europe's lenders more closely.

In the broad selloff, sectors associated with growth were also hit hard. Top drags on the Dow included shares of IBM, down 4.8 percent at $163.25 and United Technologies, down 5.3 percent at $68.21. On the Nasdaq, shares of Oracle fell 7.8 percent to $25.34.

"Europe is dealing with an escalating fiscal crisis," said Robert Van Batenburg, head of equity research at Louis Capital in New York.

"In the United States the momentum is slip-sliding. You've got a lot of corporations that also came out with very worrisome comments that by the end of the quarter things really started to slow down."

The Dow Jones industrial average was down 398.55 points, or 3.49 percent, at 11,011.66. The Standard & Poor's 500 Index was down 48.11 points, or 4.03 percent, at 1,145.78. The Nasdaq Composite Index was down 110.18 points, or 4.39 percent, at 2,401.30.

As the Dow fell more than 520 points early in the session, U.S. Treasury debt prices soared and spot gold rallied to a record $1,825.29 an ounce, evidence investors were headed for safer assets.

Traders were on the defensive, paying more for protection as U.S. stocks tumbled on disappointing economic data and renewed bank worries. The CBOE Volatility Index, Wall Street's favorite pulse of investor sentiment, rose 29.4 percent to 40.87.

"This jump in the VIX has caught people off guard and they are now scrambling for protection," said optionMonster analyst Chris McKhann. Although risk perceptions rose Thursday, Wall Street's "fear gauge" is still below the 15-month high set at the close of trading on August 8.

Puts on the SPDR S&P Trust were active, with more than two trading for every call. The fund fell 3.8 percent to $115.01. In SPY options, the soon-to-expire August out-of-the money $110 puts were among the most popular as 77,566 contracts traded. The August $115 SPY strike was the busiest, with 178,500 contracts traded, Trade Alert data showed.

Among banks, Citigroup Inc was off 7.7 percent at $27.54 and Morgan Stanley was down 6.4 percent at $15.92.

Shares of luxury retailer Tiffany & Co dropped 7.4 percent to $59.52.

Economists at Morgan Stanley lowered the outlook for global growth and said the United States and euro zone are "dangerously close to recession."

(Reporting by Caroline Valetkevitch, additional reporting by Doris Frankel; Editing by Kenneth Barry)

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Analysis: Worries on debt ceiling bubble beneath surface (Reuters)

By Steven C. Johnson Steven C. Johnson – Wed?Jul?6, 2:38?pm?ET

NEW YORK (Reuters) – As the standoff over raising the government's borrowing limit enters its final month, it's becoming harder for investors to avoid thinking the unthinkable: the world's most trusted borrower could soon renege on its debt.

The U.S. Treasury says it will be forced to default on its obligations if Congress does not raise the $14.3 trillion debt ceiling, which caps how much it can borrow, by August 2.

The Treasury has not specified which bills it wouldn't pay, but the prospect of its missing interest or principal payments on any outstanding debt is a terrifying one for Wall Street.

Even a temporary default would erode the United States' status as the world's most powerful economy and the dollar's role as the dominant global currency.

"It would be catastrophically bad to tell the world that the United States is willing to default on its obligations," said Gregory Whiteley, who helps manage $12 billion in assets at DoubleLine Capital in Los Angeles. "Even if the default only lasted a few days, the precedent would be set."

A default would undermine confidence in Treasuries, the world's safest asset and the benchmark for the global bond market, particularly if ratings agencies were to cut the United States' prized AAA credit rating.

If investors start demanding higher returns for holding riskier U.S. debt, the rise in bond yields would crank up borrowing costs for consumers and businesses. This in turn could tip a still fragile economy back into recession.

QUANTIFYING THE UNTHINKABLE

Republicans in Congress want the White House to commit to deep spending cuts before lifting the ceiling while Democrats favor adding tax increases on the wealthy. Talks collapsed two weeks ago, and compromise seems far off.

Even so, investors are not panicking. The benchmark 10-year Treasury yielded 3.09 percent on Wednesday. While above its 2011 low of 2.84 percent hit last week, that was still far below where it would be if markets felt default was imminent.

"I don't think the majority of Congress is so stupid as to visit an actual default on the United States," said David Kelly, chief market strategist at JPMorgan Asset Management. "Their constituents would never forgive them for playing fast and loose with the credit-worthiness that it took 230 years to build up."

But as the deadline nears, markets may grow more restive.

Standard and Poor's told Reuters last week it would waste no time cutting the top-notch U.S. credit rating if Treasury missed a $30 billion debt payment on August 4.

Robert Tipp, chief investment strategist at Prudential Fixed Income, with $240 billion in assets, said long-term interest rates could swiftly rise by up to 50 basis points.

Based on the projected budget deficit, that amounts to an extra $70 billion in interest costs -- a fairly hefty price to pay for a country already facing a large debt burden.

Robert Brusca, chief economist at Fact and Opinion Economics, reckons a default could be a lot more costly, knocking Treasury prices down 5 to 10 points in a day -- a violent and unusual move. "This could be a horror show."

DOLLAR AT RISK?

The turmoil would likely spread far beyond the bond market as Treasuries are the one asset invariably accepted worldwide as collateral. A downgrade could result in margin calls, unleashing a wave of selling in stock and other markets.

In a note to clients this week, Priya Misra, head of U.S. rates research at BofA-Merrill Lynch, suggested owning some S&P 500 "puts" in case the debt ceiling is not raised by August 2.

The dollar would be vulnerable, too. As the global reserve currency, it dominates world trade and is the one in which central banks store most of their savings.

But if the "full faith and credit" of the U.S. government comes under question, that would plant "a seed of doubt" for global investors, said Barclays chief currency strategist Jeffrey Young, and could erode the dollar's unique status.

Foreigners hold more than half of outstanding dollar-denominated U.S. government debt. China alone holds more than $1 trillion, according to Treasury data.

Even if Treasury were to make good eventually on missed payments, "there's no way to guarantee to foreign investors that the dollar, having sold off on a debt ceiling breach, will go back to where it was once things are resolved," said Steven Englander, who heads G10 FX strategy at Citigroup.

The short-term impact would likely boost the yen and Swiss franc, already up 10 percent against the dollar this year, short-circuiting a typical safe-haven bid for the greenback.

In the longer run, it could boost the euro.

"There have been plenty of warnings from around the world, notably China, that the United States is playing with fire," said Douglas Borthwick, managing director of Faros Trading.

"They wouldn't be able to dump $1 trillion in Treasuries overnight, but over time, they will probably prefer to hold European debt, given the Europeans look like they're willing to deal with deficit issues, while the United States does not."

PAINFUL BUT NOT A CATASTROPHE

Some contend failure to lift the debt ceiling need not end in catastrophe. Whiteley said Treasury tax revenues are sufficient to cover immediate interest and principal payments.

"But if you tell retirees we're not sending social security checks this month but we will be paying our Chinese debt holders, that makes for an uncomfortable situation," he said.

A few Republicans have even said a "technical" default that involves missing a few payments is manageable.

There's room for debate there. In 1979, Treasury was late in redeeming more than $100 billion of Treasury bills but that episode did not have a lasting effect on U.S. credibility.

However, that incident was the result of a freak printing problem, according to Richard Marcus, a finance professor at the University of Wisconsin-Milwaukee who later co-wrote a paper on the episode. Marcus' research did find it resulted in a 60-basis point interest rate premium on T-bills.

"People knew it was temporary, and I think that does make a difference," he said. "So it depends on how protracted it is. But I think it is a bad idea to miss payments, whether you are a homeowner, a company or a government."

(Additional reporting by Richard Leong in New York and Tim Reid in Washington; Editing by Chizu Nomiyama)

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