Market Rumours

2010/07/29 22:07=DJ WORLD FOREX: Euro Near 11-Week High; US Data Weigh On Dollar-3-
NEW YORK -The euro rose against the dollar Thursday to its highest level since early May after improving euro-zone economic data contrasted with festering worries that the U.S. economy is slowing. The dollar traded at its lowest point since April against a trade-weighted basket of its competitors as investors worried the pace of U.S. growth would not keep up with its major competitors. A better-than-expected reading of U.S. weekly jobless claims failed to extinguish the worry, as the previous week's claims were revised upward, signaling little improvement in the labor sector and keeping the dollar under pressure. 'We're seeing a questioning of the U.S.'s health and recovery,' said Phil Streible, senior market strategist at Lind-Waldock in Chicago. The upward revision in last week's jobless claims figures 'just shows you the recovery is not going to be as quick as what was thought,' he said. Thursday morning, the euro was at $1.3077 from $1.2988 late Wednesday, according to EBS via CQG. The common currency ticked as high as $1.3092. The dollar was at Y87.13 from Y87.44, while the euro was at Y113.98 from Y113.54. The U.K. pound was at $1.5610 from $1.5585. The dollar was at CHF1.0433 from CHF1.0569. The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 81.648 from 82.132. The index in early morning New York trading hit its lowest level since late April. Strong euro-zone economic data helped the euro brush against $1.31 before it eased slightly in early New York trading. German labor sector figures came in better than expected and euro-zone economic sentiment strengthened in July to its highest level in more than two years. The euro continues to benefit from easing concerns over the region's sovereign-debt crisis. The worst of that crisis has likely passed, and there are signs of confidence returning, though some countries will still face deficit-related problems, a senior sovereign analyst for Moody's Investors Service said Thursday. 'There's a lot of optimism building on the euro zone,' Streible at Lind-Waldock said. 'They pulled themselves out of a dire situation,' though he noted the region still faced stiff challenges. Meanwhile, the U.S. government needs to articulate clearly a credible plan to tackle its own bulging debt profile in order to keep its triple-A credit rating, Moody's lead sovereign analyst for the country said Thursday. 'The euro's outperformance against the dollar...reminds us that the dollar can no longer rely on the sovereign risks of others to bolster its fortunes,' said Sacha Tihanyi, currency strategist at Scotia Capital in Toronto. On Thursday, the Labor Department announced initial claims for jobless benefits declined by 11,000 to 457,000 in the week ended July 24. The decline beat economists' expectations that claims would fall by only 4,000. But the previous week's level of claims was revised upward, from 464,000 to 468,000, tempering the better-than-expected news. 'For the time being it is too early to sound the all clear for the dollar,' said analysts at Commerzbank in Frankfurt. 'Markets still see a small possibility that the U.S. might go back into recession. Bad data increases the possibility of this scenario, even if it remains low,' they said. Separately, the Reserve Bank of New Zealand Thursday lifted the Official Cash Rate by 25 basis points to 3.0% after a similar increase last month, but the cautious tone of the statement has firmed up expectations there will be a pause in the hiking cycle later in the year. The New Zealand dollar fell slightly against the greenback on the cautious tone of the statement. Canada Morning The Canadian dollar is moderately higher against its U.S. counterpart Thursday morning as that currency struggles with broadly based selling pressure. The U.S. dollar is trading at C$1.03550 from C$1.0384 late Wednesday. 'The Canadian dollar also benefited from a decline in the value of the greenback while commodity prices generally firmed,' said Andrew Wilkinson, senior market analyst at Interactive Brokers. The Canadian dollar gained slightly and then ceded its gains after the release of U.S. initial jobless claims and news that Canada's industrial product price index dipped 0.9% in May, weaker than the expected 0.2% increase. The raw materials price index slipped 0.3%, also weaker than expectations.

2010/07/29 21:34DJ Worst Is Over In Europe's Debt Crisis - Moody's Analyst
SYDNEY -The worst of Europe's debt crisis has likely passed and there are signs of confidence returning, though some countries will still face deficit-related problems, a senior sovereign analyst for Moody's Investors Service said Thursday. Europe's debt crisis has gripped the world in recent months, as heavily indebted nations across the continent struggled with soaring deficits and rising borrowing costs, prompting unprecedented rescue provisions from the European Union. Steve Hess, senior credit officer in the sovereign risk group at Moody's, told Dow Jones Newswires in an interview it looks as though the crisis has peaked, but individual countries such as Spain remain under scrutiny. Asked if the worst of the crisis has passed, Hess said: 'The indications for Europe...it looks as though confidence is improving, at least maybe not rapidly, but perhaps the worst is over.' 'Spain is still looking weak, we have it on review for downgrade, we'll have to see about a few other countries, but perhaps the sovereign debt crisis, as it is called in Europe, is going to get a little better,' Hess said. However, he cautioned the outlook remains far from certain. 'That doesn't mean there won't be problems for individual governments but overall I think confidence is improving, but it's early to say,' Hess said.

2010/07/29 20:56=DJ DATA SNAP:US Jobless Claims -11K To 457K In July 24 Week-2-
WASHINGTON (Dow Jones) --The number of U.S. workers filing new claims for unemployment benefits fell slightly last week, but that followed a big rise the previous period, signaling little improvement in the job market. Initial claims for jobless benefits declined by 11,000 to 457,000 in the week ended July 24, the Labor Department said in its weekly report Thursday. The decline beat expectations of economists polled by Dow Jones Newswires, who had predicted claims would fall by only 4,000. However, the previous week's level of claims was revised upward, from 464,000 to 468,000. The four-week moving average -- which aims to give a better idea of the trend by smoothing volatility in the data - fell by 4,500 to 452,500 in the week ended July 24. The prior week's average was revised to 457,000. Claims lasting more than one week, meanwhile, increased. Claims haven't demonstrated any marked improvement for much of this year, leaving many concerned about the pace of the recovery in the job market. With so many people out of work, Congress last week moved yet again to extend federal unemployment benefits to provide some temporary relief. Despite some drops in claims earlier in the month due primarily to seasonal distortions in the manufacturing sector, claims rebounded again in the week ended July 17 to a level they've been stuck at now for months. 'The recent figures have been helped by an unusually small number of auto plant shutdowns in early July, but they have also been hurt by layoffs in housing,' analysts at J.P. Morgan recently opined. 'Overall, jobless claims do not show any recent diversion from trends that had been established earlier in the year.' The job market has been a major soft spot in the economy, and only modest improvements were noted by the Federal Reserve on Wednesday in its latest beige book report. Signs that U.S. growth may be slowing led the Fed to trim its economic outlook last month, and the unemployment rate stands at 9.5%. Last month the U.S. economy shed jobs for the first time this year. In the Labor Department's report Thursday, the number of continuing claims -- those drawn by workers for more than one week in the week ended July 17 - increased by 81,000 to 4,565,000 from the preceding week's revised level of 4,484,000. The unemployment rate for workers with unemployment insurance for the week ended July 17 was 3.6%, an increase of a 0.1 percentage point from the prior week's unrevised rate of 3.5%. The largest decrease in claims occurred in New York, which saw claims fall by 19,552 in the week ended July 17 due to fewer layoffs in the transportation and service sectors. Other states with large decreases included Indiana, Michigan, Pennsylvania and Florida. The largest increase in claims for the week ended July 17 occurred in California, which saw claims rise by 19,809 due to layoffs in the service sector. Other states with large increases included South Carolina, North Carolina, Illinois and Tennessee. The Labor Department report on jobless claims can be accessed at: http://www.dol.gov/opa/media/press/eta/ui/current.htm

2010/07/29 20:39=DJ INTERVIEW: U.S. Needs To Articulate Credible Fiscal Consolidation Plan - Moody's
SYDNEY -The U.S. government needs to articulate clearly a credible plan to tackle its bulging debt profile in order to keep its triple-A credit rating, Moody's Investors Service's lead sovereign analyst for the country said Thursday. In contrast to the U.S., the credit health of Asian countries remains broadly positive and their resilience has been highlighted by Europe's debt crisis, which looks to have peaked, Steve Hess, senior credit officer in the sovereign risk group at Moody's told Dow Jones Newswires in an interview. Hess is the rating's agency's top sovereign analyst for the U.S., East Asia and Australasia. The comments indicate Moody's views on the U.S. have changed little since the ratings agency warned in March on the need for action, and hints a sense of urgency is required from the U.S. government to deal with its rising borrowing needs and interest costs. Hess said if U.S. government budget projections for debt as a percentage of national output and interest payments as a percentage of revenue are realized in coming years, the Aaa rating of the world's largest economy will come under scrutiny. 'If the projections materialize, then at some point we would have to at least think about whether this is Aaa,' Hess said, adding such a move would not necessarily lead to an automatic downgrade--and ultimately Moody's expects the U.S. to take the required steps. The U.S rating remains on a stable outlook. He said the U.S. appears to have 'no plan' to deal with its fiscal situation and much will depend on the domestic political reaction to recommendations due by December from President Barack Obama's commission on fiscal responsibility. Measures which could be proposed include cuts to social security and medicare and the possible introduction of new taxes, Hess said. 'The question then is can they get the votes in Congress to implement any of them, so there is political uncertainty over the ability of the government to actually stabilize the debt levels or reverse the debt trajectory,' he said. He cited examples such as New Zealand, Sweden, Ireland and Canada which in previous decades succeeded in pulling down their debt levels. 'Can the United States do it is the big question right now and we are not sure either way. We will wait and see what happens in the next couple of years on this front.' For Japan, the most heavily indebted developed economy, mitigating factors such as a current account surplus and a large internal savings pool mean Moody's is comfortable with its current rating on that country, but if political upheaval counters efforts to lower the government's borrowing needs Japan too could run the risk of a rating review at some stage, Hess said. 'Over time that's something which could cause us to consider the rating,' Hess said. On the threats to Asia's economic outlook, Moody's doesn't expect a major slowdown in China, though if one does occur on the back of a real estate slow down or surge in bad debts, the Chinese government is well equipped to deal with it. 'We think that the risk of a severe Chinese slowdown is not too great,' Hess said. The spillover effect from Europe's financial crisis into Asia has been a positive one, helping to illustrate the relatively strong fiscal positions in the region where bank and government balance sheets remain sound, Hess said. 'What's going on in Europe now puts (Asia sovereigns) in a relatively good position,' he said. For individual government credits in Asia, there's some possibility Indonesia could be upgraded in the future, while the new Philippines government will have to prove its metal in its plans to raise revenues and cut spending. 'If they succeed in really improving their fiscal position, certainly that would be a positive from a ratings point of view,' Hess said of the new Philippines government. South Korea could move into the Aa rating range, though the threat of war and possible aid costs to North Korea are acting as counterweights. 'How high (Korea's rating) might go is still open to question, but you can see we are beginning to think some factors affecting the rating are moving in a positive direction,' Hess said. For Australia, which enjoys one of the lowest debt profiles in the developed world, there is little threat to its gilt edged credit Aaa rating although the country is vulnerable to external vulnerabilities due to its reliance on offshore funding, Hess said. Plans by the Australia government to return to budget surplus by fiscal year beginning July 1, 2012 look achievable and its economic forecasts are reasonable, Hess said. Likewise, New Zealand's Aaa credit rating is in firm shape, notwithstanding the country also has a large dependence on foreign funding, Hess said.

2010/07/29 20:09DJ Fed Call:No Liquidity Operation Due; Fed Funds At 0.2000%
NEW YORK -The Federal Reserve has no liquidity operations scheduled for Thursday. Fed funds were last quoted at 0.2000%, compared to the federal-fund target range of 0 to 0.25%, according to Tullett Prebon data.

2010/07/29 17:54=DJ DATA SNAP: Euro-Zone Economic Sentiment Improves In July
LONDON -Euro-zone economic sentiment strengthened more than expected to above its long-term average in July, fueled by markedly positive numbers in Germany and improved confidence in the industrial sector, the European Commission said Thursday. In a monthly survey, the commission's headline Economic Sentiment Indicator, or ESI, rose to 101.3 in July from an upwardly revised 99.0 in June, topping the long-term average of 100.0. Economists were expecting the ESI to rise to 99.0 in July, according to a Dow Jones Newswires survey last week. June's figure was revised up from 98.7 reported last month. The commission said an improvement in sentiment in industry was the main contributor to the overall improvement. Industry sentiment strengthened to -4 from -6, beating economists expectations of -5. 'Most respondents in this sector reported substantial improvements in their order books,' the commission said in a statement. 'However, managers were cautious on their production expectations.' Growing optimism about the general economic situation in the euro zone as a whole and a very significant easing in unemployment fears in Germany also contributed to the increase in the ESI, it said. The commission said the euro zone's business climate indicator rose to 0.66 in July from 0.40 in June. That marks the highest reading since March 2008, although the data were reclassified in May this year causing a potential break in the series. Economists were expecting the business climate indicator to reach 0.38 in July. The consumer confidence indicator recovered to -14 in July from -17 the previous month, while sentiment in services firmed to +6 from +4.

2010/07/29 17:43=DJ DATA SNAP: UK Money Growth Weak, M4 Lending Lowest On Record
LONDON -The Bank of England's preferred measure of broad money supply marked a softer pace of growth in June, while M4 lending marked its weakest annual rate on record, underscoring the challenges facing the U.K. economy. Figures released by the BOE Tuesday showed money supply, excluding financial institutions whose activities distort underlying trends, edged up 0.2% in June after a 0.9% increase in May. In three-month annualized terms, money supply expanded 6.0%, also slower than in May, when the measure rose 8.9%. Broad money lending contracted 0.3% on the month after a 0.2% decline in May. In annual terms, money lending fell 0.2%, after rising 0.5% in May, marking the slowest rate since records began in the fourth quarter of 1998. The BOE has highlighted growth in broad money supply as a key indicator of the effectiveness of its GBP200 billion quantitative-easing policy of buying bonds with freshly created central-bank money. The policy was suspended in February but the bank has left open the possibility of extending it if conditions deteriorate. The BOE has kept its key interest rate at an all-time low of 0.5% for 17 straight months. Historically, broad money supply has expanded by around 6% to 9% in year-on-year terms.

2010/07/29 17:36=DJ DATA SNAP: UK Consumer Confidence Weakest For More Than A Year
LONDON -U.K. consumer confidence slumped to its weakest level in over 12 months in July, a survey by the European Commission showed Thursday. The U.K. consumer sentiment index declined to -17 in July from -11 in June in the wake of the strict austerity budget which detailed sharp government spending cuts and tax increases. The data also comes ahead of the latest U.K. Gfk consumer confidence survey which will be published overnight and is expected to show a further decline in July. The European Commission survey also includes confidence readings for business sectors. It showed a rise in industrial confidence to -4 in July from -9 in June, while the overall economic sentiment index also improved in July to 100.8 from June's 99.4.

2010/07/29 17:12=DJ DATA SNAP: UK June Mortgage Approvals Lowest Since February
LONDON -U.K. mortgage approvals slipped to their weakest level since February and net consumer lending remained tame in June, data from the Bank of England showed Thursday. Mortgage approvals, a good leading indicator of activity in the housing market, fell to 47,643 in June from a downwardly revised 49,461 in May. That was the weakest level since February and was below the 49,000 forecast by economists in a Dow Jones Newswires survey last week. Meanwhile, net lending to individuals in June was just GBP567 million from a downwardly revised GBP1.13 billion in May. That was far below the GBP1.4 billion expected by economists. Net mortgage lending edged down to GBP665 million in June from a downwardly revised GBP838 million in May. That was below economists expectations of GBP1.0 billion in mortgage lending. Consumers repaid a net GBP98 million of their unsecured loans in June, after borrowing a net GBP287 million in May. Economists had expected net consumer credit loans of GBP300 million in June. The government has upped its focus on bank lending in recent weeks. Officials are considering a range of carrots and sticks to prompt an increase in lending, to businesses in particular but also to consumers. Website: www.bankofengland.co.uk

2010/07/29 16:33=DJ DATA SNAP: German Seasonally-Adjusted Jobless Down In July
FRANKFURT -The number of unemployed in Germany continued to fall in seasonally-adjusted terms in July, although seasonal factors pushed the overall jobless rolls up slightly, the Federal Labor Office said Thursday. The seasonally-adjusted jobless total fell by 20,000, close to a consensus forecast decline of 19,000. As a result, the jobless rate fell to 7.6% from 7.7% in June. 'The German recovery is continuing,' said Frank-Juergen Weise, head of the Labor Office, in a statement. 'The situation on the labor market has improved further.' In unadjusted terms, the number of jobless rose by 39,000 to 3.192 million due to the start of the summer lull in employment. The unadjusted jobless rate was 7.6%, up from 7.5%. The resilience of Germany's labor market has been one of the few bright spots of the European economy in the period after the financial crisis. A widely expected surge in unemployment toward the 4 million mark failed to materialize, owing to the extensive use of shortened shifts and other measures. The economy is now recovering quickly, with most economists forecasting as much as 2% growth this year. A welcome side effect of this from the government is that the Labor Office's need for money from the federal budget has turned out to be much smaller than expected. Its cumulative deficit in the first seven months of the year was only EUR1.66 billion, rather than the EUR5.20 billion originally budgeted. Peter Clewe, a Labor Office board member, told Dow Jones Newswires reccently that it expects to need transfers of only EUR9 billion this year from the government, rather than the EUR16 billion originally forecast. Web site: http://www.arbeitsagentur.de

2010/07/29 15:29=DJ DATA SNAP: French June Producer Prices Unchanged On Month
PARIS -French producer prices were flat on the month in June and rose 3.5% on year, slightly below economists' expectations, data Thursday from national statistics agency Insee showed.Economists had predicted that prices would rise 0.3% on the month in June and by 3.8% on the year, according to a Dow Jones Newswires survey.Insee noted in particular that manufactured goods prices were flat on the month in June, after rising 0.4% in May.Prices of imported industrial products rose 0.7% in June on the month as the falling euro against the dollar pushed up the price of oil and manufactured goods, Insee said.

2010/07/29 15:27DJ German Economic Upswing Unsustainable Says Govt Advisor - Report
BERLIN -Germany's economic upswing isn't yet sustainable, an economic advisor to the German government told Passauer Neue Presse's Thursday edition. 'This is a temporary high. Many states have boosted their economy with fiscal stimulus packages,' Peter Bofinger said. 'This is in particular helping the export country Germany and its different industries. This temporary high is lacking, however, a sustainable basis.' His comments contrast with the view of the German Economics Minister Rainer Bruederle who said Wednesday that Germany has 'indeed a sustainable upswing.' Bruederle has said the economy will probably grow by over 2% this year, which is more optimistic than the 1.4% forecast in April for 2010. Newspaper Website: www.pnp.de

2010/07/29 15:10DJ JGBs Rise On Weak Stocks; Econ Data, 10-Year Auction Awaited
TOKYO -Japanese government bonds ended higher Thursday as weak stock markets increased demand for safe-haven assets, but buying was limited due to caution before the release of key economic indicators over coming days. "JGB players are waiting to examine domestic economic data tomorrow, such as industrial output, and overseas data next week to see if the economic recovery is leveling off as many expect," Makoto Yamashita, a strategist at Deutsche Securities . "Economic indicators at home and abroad are unlikely to show much upside...they are expected to support the pessimistic economic views already priced in by the market," Yamashita added. In that case, the benchmark 10-year cash JGB yield may fall to as low as 1.05%-1.06%, compared with 1.075% as of 0600 GMT, Yamashita said. But further yield downside is unlikely as players don't want the coupon on new 10-year JGBs to be cut back to 1% from the current 1.1% at an auction next Tuesday. Japan's Ministry of Finance is scheduled to sell Y2.2 trillion worth of 10-year JGBs at the tender. RBS Securities chief rates strategist Akito Fukunaga said the 10-year sale is very important to test if investor demand remains strong on dips despite low yields. "While JGBs may remain top-heavy against external factors until the auction, the market's solidity will likely strengthen once demand is confirmed at the tender," Fukunaga said.

2010/07/29 10:37=DJ US Senator Landrieu Develops New Oil-Spill Liability Plan
WASHINGTON -Sen. Mary Landrieu (D., La.) is attempting to overcome partisan debate over oil-spill liability caps by developing a proposal that could serve as an alternative to plans floated by Republicans and Democrats as they try to put together an energy bill.Under Landrieu's proposal, an existing liability cap on economic damages resulting from an oil spill would be raised from $75 million to $250 million, according to an aide.The proposal would also set up a $10 billion mutual insurance fund that energy companies would collectively pay for. Each company would contribute different amounts, based on their oil and natural gas production, as well as bonus bids.'The senator is working with her colleagues to find a third way on the liability cap,' a spokesman for Landrieu said.As a Democrat and a senator from a Gulf Coast state, Landrieu plays a pivotal role in the debate over energy legislation.In crafting this liability scheme, Landrieu's goal is to ease the liability burden on small to medium-sized energy companies, which say that unlimited caps--which Senate Democrats have proposed--would be prohibitively expensive.If an oil spill causes economic damages worth more than $10.25 billion, Landrieu's plan shifts responsibility to the companies that are responsible for the spill.Congress began to look at liability caps after the Deepwater Horizon oil spill. Under the Oil Pollution Act, energy companies have to pay for the full value of spill-related cleanup costs, but their liability for economic or environmental damages are capped.BP PLC (BP, BP.LN) has said it will pay for all damage claims, but Democrats said they wanted to seal those promises into law and ensure energy companies would be held to the same standards in the future.Senate Majority Leader Harry Reid (D., Nev.) has said he wants to pass an energy bill before members leave for a summer break in August. But it is becoming increasingly unclear whether Reid will be able to do that, Senate aides said.If the Senate doesn't pass the bill before the recess, Landrieu wants to continue to pursue her liability plan as an alternative to existing proposals, a spokesman said.

2010/07/29 08:23DJ Japan June Overall Retail Sales Up 3.2% On Year
TOKYO -Japanese retail sales rose 3.2% in June from a year earlier to mark the sixth straight month of gains, data from the Ministry of Economy, Trade and Industry showed Thursday.The steady increases in retail sales mean that despite lackluster wage growth, Japan's consumer spending is holding out on the back of stop-gap government measures such as subsidies for buyers of less energy-consuming cars and electronics.Thursday's data came after retail sales rose a revised 2.9% in May, 4.9% in April and 4.7% in March. Website: http://www.meti.go.jp/english/statistics/index.html

2010/07/29 05:31=DJ US Small-Cap Stocks Underperform Large Peers, Beige Book Weighs -2-
NEW YORK -U.S. small-capitalization stocks significantly underperformed their large-cap peers Wednesday as a downbeat economic reading from the Federal Reserve inspired investors to shy away from riskier assets.The Fed's latest beige book report added more pessimism to the fragile recovery as the central bank said economic activity rose only modestly in June and the first half of July. The weak report came on the heals of a second straight monthly drop in demand for manufactured goods, which casts more doubts about the recovery's sustainability.The Russell 2000 index of small-capitalization stocks dropped 11.41 points, or 1.72%, to 650.76, its second straight decline, although the index is still up 6.77% in July.The Standard & Poor's SmallCap 600 index dropped 6.01, or 1.69%, to 349.21, also its second consecutive drop.The small-cap declines come as the broader S&P 500 only dropped 7.71, or 0.7%, to 1106.13. Small caps are considered riskier investments because of their more-volatile trading and smaller cash positions."Small caps have more to lose in a pullback like this," said Doug Cannon, president and chief investment officer of Texas First Investment Management Company. He noted larger companies have been posting better-than-expected earnings and have record amounts of cash on their balance sheets, while small caps still have a difficult time getting credit. Smaller companies have also outperformed their larger counterparts in 2010, meaning they are likely to get hit harder when the broader market declines, Cannon added.Small-cap technology stocks fell the most Wednesday. Hutchinson Technology dropped 59 cents, or 13%, to 3.82 after the company, which makes disk-drive assemblies for computers and other devices, reported fiscal third-quarter earnings and revenue that fell well short of analysts' expectations. Websense declined 2.67, or 12%, to 18.71 after the provider of Web content security posted weaker-than-expected second-quarter revenue and lowered its full-year earnings and revenue outlooks.Material stocks were also hit hard. Century Aluminum (CENX), which owns primary aluminum capacity in the U.S. and Iceland, reported weaker-than-expected second-quarter results. Shares dropped 98 cents or 9.3%, to 9.57. Penford (PENX), a maker of ingredients systems for food and industrial uses, dropped 41 cents, or 6.9%, to 5.56.

2010/07/29 04:25=DJ SF Fed Official: US Economy Suffering From Temporary Weakness
NEW YORK -The recent slowdown in the U.S. economy should prove transient, although it will take years for the nation's unemployment rate to fall toward more acceptable levels, an official at the Federal Reserve Bank of San Francisco said Wednesday."The recent softness in the economic data looks much more like a bump in the road of what we already thought would be a gradual recovery, rather than a swerve into the ditch," said John Williams, the bank's executive vice president and director of research. He noted that "monetary policy remains highly supportive of recovery" and "interest rates are extraordinarily low."While he holds a prominent position at the San Francisco Fed, Williams isn't a policy maker on the interest-rate-setting Federal Open Market Committee. He spoke as his current boss, Janet Yellen, awaits a confirming vote by the full Senate to become the Fed's second in command, having gotten approval of the Senate banking committee on Wednesday. The San Francisco Fed has already launched a search to find a replacement for the veteran policy maker.Williams' comments came from a speech before a local group in Portland, Ore. He didn't comment on the interest-rate outlook in his prepared remarks. The official doesn't expect the economy to slide back into recession, and he doesn't believe deflation, a broad-based retreat in prices, will take hold either. He noted that U.S. housing activity is again moribund, and consumer spending has weakened.Williams tied much of the recent weakness to trouble in Europe, coupled with the volatile stock market, soft housing and ugly conditions in labor markets."Unemployment will come down with agonizing slowness," Williams said, according to a transcript of his remarks. "I expect unemployment to end 2010 at about its current level of 9 1/2%," and "once growth picks up to a more robust pace, the unemployment rate should gradually decline, but only to about 8 1/2% by the end of next year," he said."I expect inflation to remain low, dipping to around 1%, but not get stuck in negative deflationary territory," Williams said. "Inflation should move gradually back to about 2% as the economy fully recovers," he added.