• Fed takes major steps to loosen money supply
• U.S. data show growth still slowing, inflation in check
• Nissan to sell $1.3 billion in auto-backed debt
• IMF, OECD cut growth forecasts
• BOJ boosts bond purchases

U.S. stocks and Treasuries gained ground this week as investors cheered the U.S. Federal Reserve Board’s plan to buy $1 trillion of bonds in an effort to lower consumer borrowing costs and bring an end to the recession. The upward equity move was blunted by week’s end as the Fed’s plan rekindled concerns of inflation, and those worries drove the dollar sharply lower and the price of gold higher.

U.S. economic news

Fed to buy long bonds
On Wednesday, the Fed announced that it would purchase up to $300 billion of long-term U.S. Treasury securities over the next six months and hundreds of billions of dollars more of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac. The move is an effort to push up the prices of the securities, which should in turn help bolster the housing market and hasten the end of the recession. While the action sent U.S. Treasury and stock prices higher, it put pressure on the U.S. dollar. The Fed also kept its target federal funds rate in a 0% to 0.25% range and said it would continue to use credit programs financed by the expansion of the Fed’s balance sheet to stabilize markets. With rates near zero, the Fed is essentially printing money to increase the supply of credit in the economy.
Factories hit by cutbacks, falling exports
Industrial production fell in February for the fourth consecutive month as auto company cutbacks and collapsing exports hurt the broader economy. Output at factories, mines, and utilities dropped 1.4% last month, and the amount of factory capacity fell to 70.9%, matching the lowest level on record.

U.S. inflation in check
In February, U.S. consumer prices increased for the second month in a row. However prices hardly rose – 0.2% – from a year ago. The numbers suggest that neither deflation nor inflation is an issue for the economy. During the same period, producer prices rose 0.1% as the cost of energy products, cigarettes, light trucks, and household appliances increased. Compared with a year earlier, prices fell 1.3%. Housing starts unexpectedly surged in February from a record low. Work began on 583,000 homes, a 22% increase from January and the biggest jump since 1990.

Current account deficit narrows
The U.S. current account deficit narrowed more than forecast in the fourth quarter, to $132.8 billion, the smallest shortfall since 2003. The trade gap, which accounted for most of the current account imbalance, narrowed to $140.4 billion in the fourth quarter from $180.9 billion in the previous three months. The decline reflected the drop in the cost of imported oil.

U.S. and global corporate news

Nissan to sell ABS
The finance arm of Nissan Motor said it planned to sell $1.3 billion of securities backed by auto loans in one of the first debt offerings eligible for a U.S. government program to boost consumer lending, Thus far in the first quarter, about $2.3 billion of auto-backed debt has been issued – a third of the amount issued in the first quarter of 2008. Nissan’s deal will increase by 50% the size of the market for asset-backed securities collateralized by autos.

Alcoa’s stock fell 11% on Tuesday after the company said it would sell stock and convertible notes as it braces for its second consecutive quarterly loss in a row.

General Mills reported lower profit for its fiscal third quarter. The company said it was hurt by input costs, the strong dollar, and the impact of weak consumer spending on its food service business.

Global economic news

IMF, OECD, World Bank cut growth forecasts
The International Monetary Fund forecast that the world economy would shrink between 0.5% and 1% this year, the first global contraction in 60 years. It also forecast that advanced economies would suffer a decline in output of between 3% and 3.5% in 2009 and barely grow in 2010. The head of the Organisation for Economic Co-operation and Development also said this week that the world economy is likely to shrink this year.

The World Bank cut its 2009 forecast for China’s growth to 6.5%, below Beijing’s target of around 8%, and cautioned that China should be careful about expanding its stimulus as it may need to save its ammunition for 2010. The bank lowered its forecast from its previous estimate of 7.5%, mostly because of the worsening global economy.

BOJ boosts bond purchases, keeps rate unchanged
Like the Fed, the Bank of Japan moved this week to spur its economy and loosen financing conditions when it boosted its purchase of Japanese government bonds to pump more funds into the market. At the same time, the bank held its benchmark interest rate at 0.1%. In a statement announcing its decision, the bank said that economic conditions in Japan have deteriorated significantly and are likely to continue deteriorating.

Iceland cuts rate
Iceland cut its interest rate by one percentage point to 17%. It was the first cut since Iceland agreed to a $10 billion financial aid package with the International Monetary Fund. The country’s economy is expected to shrink by almost 10% this year.

U.K. and eurozone economies remain under pressure
The number of those unemployed in the United Kingdom rose above 2 million for the first time since 1997.

European industrial production dropped by the most on record in January as the recession forced companies to cut output and curb investments. Production in the eurozone region fell 17.3% from a year ago.

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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times.