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European Central Bank President Jean- Claude Trichet is struggling to convince investors that the euro region shouldn’t be punished for Greece’s budget problems.

As Greece tries to control a record deficit and stem a slide in its bonds, Trichet said the economy of the 16-nation euro area is solid and its budget shortfall will probably be smaller than those of the U.S. and Japan this year. The comments yesterday didn’t stop Spanish and Portuguese stocks from dropping on concern they are in a similar predicament to Greece or the euro from tumbling to a nine-month low against the dollar.

Trichet “did not convince me,” said Stuart Thomson, who helps manage $100 billion at Ignis Asset Management in Glasgow, Scotland. “Where does he think the Greek, Spanish and Portuguese economies will be three years from now? Their austerity measures will weigh on the euro area as a whole.”

Trichet has been forced to fend off questions about the survival of the euro as investors doubt Greece’s ability to cut its deficit from 12.7 percent of gross domestic product to below the European Union’s 3 percent limit. As concern spreads to Spain and Portugal’s rising debt burdens, Trichet will try to stress the need for fiscal prudence without inflaming skepticism that it can be achieved.

“Something has to happen to turn credibility around,” said Paul Mortimer-Lee, head of Market Economics at BNP Paribas in London. “The market’s just saying it’s not believable. It might have to get worse before it gets better.”

Markets Shudder

Spanish stocks dropped the most in 15 months yesterday and Portugal led declines in government bonds. Increasing concern about sovereign creditworthiness contributed to a rout in shares that spread across the globe, with the Standard & Poor’s 500 Stock Index closing down 3.1 percent and the MSCI Asia Pacific Index losing 2.5 percent as of 1:53 p.m. Hong Kong time.

The euro fell as low as $1.3669 today and traded at $1.3706 at 2:54 p.m. in Tokyo. It has declined about 9 percent since Nov. 25.

Greek bonds have tumbled in the past two months, pushing the yield on the country’s 10-year debt above 7 percent, the highest since 1999, the year the euro was introduced. The premium investors charge to hold Greek 10-year bonds over the benchmark German bund has widened to 356 basis points, about 10 times what it was two years ago.

No Rush at ECB

The ECB yesterday left its benchmark rate at a record low of 1 percent and Trichet signaled the bank is in no rush to raise borrowing costs as the economy recovers gradually from its worst recession since World War II.

Still, Trichet said the “solidity” of the euro area “is not necessarily very well known” and its situation compares “very flatteringly with a number of other industrialized countries.”

The euro-area economy will grow 0.8 percent this year and 1.2 percent in 2011, according to the ECB’s December forecasts. It contracted 4 percent last year, the European Commission estimates.

“Trichet is still trying to persuade markets that they should be looking at the euro area as a whole, which does not look that bad, rather than at individual countries, some of which look extremely fragile,” said Marco Annunziata, chief economist at UniCredit SpA in London.

Ballooning Debt

Spain’s public debt will rise to 74 percent of GDP by 2011 from 54 percent last year, according to European Commission forecasts. Greece’s debt will increase to 135 percent of GDP from 113 percent, and Portugal’s will increase to 91 percent from 77 percent, the EU estimates.

Greece’s consolidation plans, which call for about 10 billion euros ($13.7 billion) of spending cuts and revenue increases this year, are more ambitious than any budget reduction achieved by euro-region countries since the 1970s, according to ING Group.

Papandreou told reporters today in New Delhi that Greece has no plans to put in place new measures to cut its budget deficit. He said the steps already announced are “credible,” adding that the nation has substantial funds available from the European Union.

Greece’s biggest union yesterday approved a second mass strike this month to protest the spending cuts and tax collectors began a 48-hour walkout, illustrating the difficulty Prime Minister George Papandreou faces in implementing his plan.

“We expect and we are confident that the Greek government will take all the decisions that will permit them to reach that goal,” Trichet said. Additional proposals announced by Greece this week to freeze public-sector wages and revamp the pension system “are steps in the right direction,” he said.

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WASHINGTON — President Barack Obama said in his State of the Union speech Wednesday that "1 in 10 Americans still cannot find work." But in nine states the figure is much worse — closer to 1 in 5, according to Labor Department data released Friday.

The figures are a stark illustration of how tough it is to find a full-time job, even as the economy has grown for two straight quarters. The official unemployment rate of 10 percent doesn’t include people who are working part time but would prefer full-time work, or the unemployed who have given up looking for work.

When those groups are included, the devastation in many parts of the nation is clear: Michigan’s so-called "underemployment" rate was 21.5 percent in 2009, highest in the nation. California’s was 21.1 percent, while Oregon’s was 20.7 percent.

Many companies and state governments have cut back on workers’ hours during the recession. And in the last six months, nearly 2 million unemployed workers have given up on their job hunts. Nationwide, the underemployment rate was 17.3 percent in December, just below the 17.4 percent reached in October, the highest on record dating from 1994.

In another three states — South Carolina, Nevada and Rhode Island — the underemployment rate is above 19 percent. And in three more — Arizona, Florida and Tennessee — it’s above 18 percent.

The figures also illustrate how much higher the official unemployment rate could go in these states. Many of the discouraged workers are likely to start looking again as the economy improves. That would have the effect of raising the unemployment rate.

But in many states, people are still dropping out of the labor force, which might keep a lid on official unemployment but still adds to the underemployed population.

South Carolina, for example, saw more than 6,700 people leave its labor force in December, as its unemployment rate rose to 12.6 percent.

That is a "very disturbing trend," said Don Schunk, an economist at Coastal Carolina University. "We haven’t even reached the point yet … when people get encouraged and come back in. That suggests … we still have quite a ways to go with rising unemployment."

Michigan’s economy is still struggling from the downturn in its battered automotive sector. The state lost 15,700 jobs in December, according to government data released last week, but the unemployment rate dropped slightly to 14.6 percent from 14.7 percent.

That’s because 31,000 people left the labor force. Michigan has the nation’s highest unemployment rate.

Tim Bartik, senior economist at the Upjohn Institute for Employment Research in Kalamazoo, Mich., said the state is seeking to diversify its manufacturing base beyond autos and is exploring new sectors, such as biotech. But the job loss from the auto industry’s decline is too steep.

"If the auto sector would just stay stable for the next five years … then Michigan might be able to start growing employment again," he said.

California, meanwhile, was hit hard by the housing slump, and its ports have suffered from last year’s downturn in international trade. Its unemployment rate is 12.4 percent.

Jerry Nickelsburg, senior economist at the UCLA Anderson Forecast, said the state probably won’t add enough jobs to drive down unemployment until late this year. He estimates the official jobless rate won’t fall below 10 percent until 2012.

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Microsoft Corp. said Thursday that its earnings in the second quarter jumped 60 percent, as a rebound in the PC industry drove sales of the company’s latest Windows operating system.

But Microsoft said the division that makes Office software and other business programs, the company’s other cash cow, saw revenue slip 3 percent, while revenue from its typically fast-growing server software group edged up just 2 percent.

Microsoft said it saw no signs yet that big corporations had resumed spending on technology.

Net income rose to $6.7 billion, or 74 cents per share, from $4.17 billion, or 47 cents, a year ago. Revenue increased 14 percent to $19 billion.

In the Windows division, revenue leapt 70 percent and net income nearly doubled to $5.4 billion.

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January’s surprise rally in Treasuries may prove fleeting, as options traders bet on bigger price swings in bonds and waning volatility in stocks for the first time since 2006.

Barclays Capital indexes show interest-rate volatility rose from a six-month low in November on speculation borrowing costs will increase as the improving economy allows the Federal Reserve to remove the unprecedented cash it pumped into the financial system. At the same time, confidence in the outlook for profits helped push the Chicago Board Options Exchange Volatility Index to an almost two-year low this month.

The correlation was negative in 2006, the last time policy makers were increasing the target rate for overnight loans between banks. Yields on 10-year Treasuries increased 0.75 percentage point in the first half of that year, sparking a loss of 3.9 percent, according to Bank of America Merrill Lynch indexes, while the Standard & Poor’s 500 Index rose 1.8 percent. Fed officials meet this week to discuss monetary policy.

“We’ve probably seen the great secular bull low in yields,” said Mitchell Stapley, who helps oversee $13 billion of debt as chief fixed-income officer for Fifth Third Asset Management in Grand Rapids, Michigan. “Earnings don’t seem to be a concern on anyone’s plate right now. The level of rates, what happens in the housing market, that’s on the forefront of people’s minds and why we are getting fixed-income volatility spikes that haven’t made it over to the equity markets.”

Bond Rally

The benchmark 10-year note rallied last week, driving the yield down to 3.61 percent from 3.68 percent on Jan. 15 and 3.84 percent at the end of 2009, according to BGCantor Market data. The 3.375 percent security due November 2019 rose to 98 3/32 on Jan. 22 in New York from 97 16/32 a week earlier. The yield rose to 3.62 percent at 1:05 p.m. in New York.

This month’s gains run counter to forecasts by the 18 primary dealers of U.S. government securities that trade directly with the Fed. In a survey by Bloomberg News at the end of last year, they predicted yields would rise to 4.14 percent in 2010.

Bonds rose after government reports showed retail sales and housing starts unexpectedly declined in December, calling into question the strength of the recovery. President Barack Obama’s plan to limit the size of banks also raised concern that growth may not accelerate as forecast.

Boosting Forecasts

Investors “sensing a lot of market and regulatory uncertainty, have felt compelled to seek the safety of U.S. government debt,” Kevin Giddis, head of fixed-income sales, trading and research at brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a note to clients last week.

Signs of weakness didn’t prevent the World Bank in Washington from raising its forecast for global growth this year to 2.7 percent, from a June estimate of 2 percent. The economy may expand 3.2 percent in 2011, the bank said.

“Is 2010 the year you are going to get the shift from stagnating growth to growth? I don’t know, but I am going to position myself for that,” said William Larkin, a fixed-income manager at Salem, Massachusetts-based Cabot Money Management, which oversees $500 million.

Some Fed policy makers are more confident, giving urgency to discussions about how and when to pull back from record-low interest rates. Government data show business inventories are increasing as companies try to keep up with rising sales.

Market ‘Healing’

Kansas City Fed Bank President Thomas Hoenig said Jan. 11 the central bank should end purchases of mortgage-backed securities because the market is “healing.” Philadelphia Fed Bank President Charles Plosser said the next day that the recovery is “sustainable even as the fiscal and monetary stimulus programs eventually wind down.”

Fed officials, who start a two-day meeting on Jan no fax payday loan. 26, repeated a pledge last month to keep rates near zero for “an extended period” and said more stimulus “might become desirable.”

The central bank will keep its target rate for overnight lending among banks unchanged at its current range of zero to 0.25 percent through September and raise it to 0.75 percent in the fourth quarter, according to the median forecast in a Bloomberg News survey of economists.

‘Complete the Symmetry’

“We are looking for a quiet first half volatility story for bond yields to be shattered by a relatively early and potentially erratic start to the Fed tightening cycle some time around mid-year,” said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “The Fed brought down short-term rates with record speed in this recession, and is likely to complete the symmetry on the upside raising rates potentially as fast as they came down.”

Stock investors may see higher Fed rates as a signal the banking system and consumers are on more solid footing, said Tim Freeman, head of U.S. equity derivative sales in New York at Capstone Global Markets LLC, which specializes in volatility trading.

“You could see interest rate volatility continue to go higher as expected rate hikes are priced into the marketplace, while in the equity market you might not see any uptick in volatility,” Freeman said. “You could actually see the equity market react very positively to the Fed raising rates.”

Volatility Correlation

Volatility in options on U.S. interest-rate swaps as measured by the Barclays Swaption Volatility Index rose as high as 114.55 basis points after touching a six-month low of 104.49 on Nov. 25. The index finished last week at 108.05 basis points. The VIX, as the Chicago Board Options Exchange Volatility Index is known, fell as low as 16.86 this month, from 31.84 in November, before rising last week to 27.31.

The correlation between the daily percentage changes in each index was minus 0.11 on Jan. 21, based on the most recent data available. That compares with a peak positive correlation in the last five years of 0.5976 in March 2007, just before credit markets began to seize up.

“As speculation on the Fed mounts, as you get into the third and fourth quarter, it will result in even higher interest rate volatility,” said Moorad Choudhry, head of Treasury at Europe Arab Bank Plc in London and the author of “Structured Credit Products: Credit Derivatives and Synthetic Securitisation.” “We expect the Fed, when they begin, will raise rates relatively quickly.”

Swap Rates

In a swap, two parties agree to exchange fixed for variable-rate interest payments based on a benchmark index such as the London interbank offered rate, or Libor, over a set period. Swaptions are options on those swaps. Movements in swap rates, usually higher than Treasury yields, typically mirror trends in Treasuries.

The end of the Fed’s purchases of mortgage bonds, scheduled for March, should create more volatility and boost Treasury yields, said Carl Lantz, an interest-rate strategist in New York at primary dealer Credit Suisse Group AG.

The program was designed to keep longer-term rates down to support a rebound in the housing market. Ten-year Treasury yields were less than 3.2 percent in October, when the central bank completed a $300 billion Treasury purchase program.

“That hand-off has everyone in the bond market quite concerned,” Lantz, who forecasts 10-year yields will rise to 4.25 percent before falling again, said in a Bloomberg Radio interview on Jan. 5. “Animal spirits will swing back and forth. This will be a very choppy year for yields.”

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NEW YORK–The new proposals from U.S. President Barack Obama to limit the size and trading capabilities of big banks sent shares of major financial institutions plummeting Thursday.

From the White House, Obama vowed to fight big banks with tougher regulations that he believes would head off the cascading failures that required billions in bailout funds for Wall Street.

He wants new rules that would restrict banks in the use of depositor money and also limit how big financial institutions can become.

"The market certainly perceives this can only have a negative impact on big bank profits," said Hal Reichwald, co-chair of the banking and specialty finance practice group at the law firm Manatt, Phelps & Phillips LLP.

The new rules could mean national banks would lose the tools that have helped offset huge loan losses over the past year, but they are also some of the same tools that got them into trouble in the first place.

"The devil is in the details," said Brian Gardner, a senior vice-president of Washington research at Keefe, Bruyette & Woods Inc. If the legislation just restricts trading by the big banks and doesn’t outright ban it, the exact effect will depend on the limits put in place, he said online cash advance.

Shares of regional banks, which don’t have big trading desks, actually strengthened on the news. They could become more competitive with their larger counterparts.

An exchange-traded fund that tracks financial stocks in the Standard & Poor’s 500 index fell 1.9 per cent. The KBW Bank Index, which tracks 24 regional and national banks rose 1 per cent.

Big banks under new rules may have a limited ability to court new customers aggressively because they would not be able to offer better pricing on the retail side with as much revenue from trading, said Bill Hampel, chief economist at the Credit Union National Association.

Citigroup shares fell 17 cents, (U.S.) to $3.29. Bank of America shares declined 97 cents to $15.52 and shares of JPMorgan Chase dropped $2.77 to $40.63.

All three warned that their retail banking would face problems in 2010 due to uncertainty over the economic recovery.

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National Grid's new corporate center in Waltham has received increasingly important, albeit rare, certification from the U.S. Green Building Council.

The building at Reservoir Woods received the group's LEED Platinum certification — the highest distinction the organization confers on a project.

"We are delighted to have earned this prestigious distinction," said Tom King, president of National Grid in the U.S. "Our state-of-the art green workspace reflects our passion and commitment to developing innovative energy conservation and efficiency initiatives. We hope this building will inspire others to join us in responding to one of the most important challenges of our time — environmental sustainability and mitigating the effects of global climate change."

Partners joining National Grid in the effort were Davis Marcus Partners, John Moriarty & Associates; AHA Consulting Engineers Inc.; Jones Lang LaSalle and Sasaki Associates.

“We are thrilled with the designations from the USGBC and applaud the teamwork that it took to get to this point,” Paul Marcus, CEO of Marcus Partners, said in a prepared statement. “We know that even in these challenging economic times, the extra effort to design and build to this standard is still extremely important and the right thing to do. We are very lucky to have such a committed financial partner in PREI and an outstanding tenant in National Grid. Both firmly believe, like us, in the importance of an energy-efficient future and consider environmental responsibility a cornerstone of their respective business models.”

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Starbucks Corp. said it will close a Seattle call center later this year and move the operations to Albuquerque, N.M., affecting 130 people.

The Seattle coffee giant (NASDAQ: SBUX) said it will outsource the call center to a third-party vendor, Sitel, which has headquarters in Nashville, Tenn. The Seattle call center employs 78 Starbucks employees and 52 contract workers guaranteed high risk personal loans.

According to a Starbucks spokeswoman, the company is contracting with a call-center vendor because it “has the infrastructure, technology and capabilities to better manage the high volume of calls.”

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Canadian companies have been picking up their spending on computers, software and other technology, but they still lag the U.S., according to an annual study.

Businesses spending on information and communication and technology, called ICT for short, rose by 6.2 per cent in 2008, according to research by the Centre for the Study of Living Standards.

That outpaced the 4.4 per cent rate of growth in the U.S., which was much harder hit by the recession and unemployment that year.

On average, Canadian firms boosted their spending 16.8 per cent for communications equipment and 11.3 per cent for software.

In contrast, investment in computers fell by 10 per cent, though part of the decline can be attributed to a stronger Canadian currency and falling prices, the study said.

When inflation and currency fluctuations are taken into account, real investment in ICT went up 12.3 per cent in 2008, much higher than the 5.9 per cent growth in the U.S.

But the average U.S. worker is still much better equipped than the average Canadian when it comes to technology, the study found.

"Canada has long had a significant ICT investment gap with the United States and this gap has been identified as a key factor behind Canada’s lower level of labour productivity relative to the United States," the report noted.

Canada’s rate of technology investment per worker in 2008 was about two-thirds, or 62.1 per cent, of that of the U.S.

The gap has increased slightly from 2007’s 62.5 per cent, but is down significantly from 2000, when Canada’s tech spending was 49.7 per cent of U.S outlays.

The disparity, which has persisted for more than a decade, is what most concerns the Information Technology Association of Canada, which commissions the annual study.

"The world has turned into a global economy. The competition isn’t the person across the street from you anymore. It’s the company in India or China," said ITAC chair Tom Turchet.

"The companies and countries that understand this will compete better in the future. If you accept that better technology will help your organization compete and that innovation is important, then you will move forward successfully," said Turchet, who is also vice- president, software, general business, for IBM Corp.

The lobby group is calling for a national strategy to boost education and business spending on technology. The ICT sector employs 572,000 workers and generates annual revenues of $149.4 billion, ITAC said.

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An unexpectedly strong report on manufacturing activity Monday bolstered confidence that the nation’s factories will help sustain a recovery.

The report by a private trade group signals that industrial production is likely to keep expanding in coming months, economists said. That could lead, in turn, to increased hiring and job creation.

The Institute for Supply Management, a trade group of purchasing executives, said its manufacturing index read 55.9 in December after 53.6 in November. A reading above 50 indicates growth.

It was the fifth straight month of expansion and the highest reading since April 2006. Analysts polled by Thomson Reuters had expected a reading of 54.3.

The ISM said its index of new orders, a signal of future production, jumped last month to 65.5 from 60.3 in November, the highest level in five years. That indicates the overall index should keep climbing and could near 60 in coming months, economists said.

"Overall, this was a very strong report," Millan Mulraine, an economist at TD Securities, wrote in a note to clients business cards.

The ISM’s employment index rose last month to 52 from 50.8, the third straight month it has topped 50.

"When orders are increasing and inventories are going down, that could push up one major weak spot: employment," said Tim Quinlan, an economic analyst at Wells Fargo Securities

A separate report on construction spending sounded a more cautionary note.

Construction activity fell in November for a seventh straight month as spending on both residential and commercial projects declined. The 0.6 percent drop was bigger than the 0.4 percent decline that economists had been expecting.

Increased spending on federal construction projects, fueled by stimulus spending, was largely canceled out by lower state and local construction spending.

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Federal Reserve officials are considering a proposal to schedule limited sales of bonds from the central bank’s $2.2 trillion balance sheet as part of a range of tools for withdrawing record monetary stimulus.

The Federal Open Market Committee discussed asset sales at its November meeting, with some members in favor and others warning that it would cause “sharp increases” in longer-term interest rates, according to minutes of the meeting released Nov. 24. A middle route now being studied would allow small amounts of bonds to be unloaded at announced times.

“The attitude toward asset sales is changing in terms of more in favor and more open minded, and doing it very gradually,” said former Fed Governor Laurence Meyer, vice chairman of Macroeconomic Advisers LLC in Washington. Devising a plan for pulling back stimulus “is under way intensively on the Federal Open Market Committee,” he said.

Chairman Ben S. Bernanke is trying to wind down emergency stimulus programs that helped avert a second Great Depression, while alleviating concerns that inflation will accelerate as the economy picks up. U.S. Treasury securities posted their worst performance since the 1970s after the Obama administration borrowed record sums to help drive the rebound from recession. Yields on 10-year notes are close to their highest level since June, rising to 3.84 percent at 4:45 p.m. in New York.

Loss of Control

Without first reducing or locking up the $1 trillion Bernanke pumped into financial markets, policy makers may raise their target for the benchmark interest rate only to watch it trade below that level. The Fed cut the main rate, the federal funds rate, to between zero and 0.25 percent in December 2008 and kept it there at the last FOMC gathering on Dec. 15-16.

“Here is the worry: What if they try to tighten and they lose control of the federal funds rate?” said Mark Spindel, chief investment officer of Potomac River Capital LLC in Washington, which specializes in inflation-linked bonds. “The challenge they have is to articulate how they are going to tighten and make sure all these tools work together.”

The Fed has expanded reserves through emergency programs purchasing $1.7 trillion in bonds. As of Dec. 30, the central bank held $776.5 billion of U.S. Treasury securities, $160 billion of bonds issued by federal agencies and $908 billion of agency mortgage bonds guaranteed by companies such as Fannie Mae and Freddie Mac.

Best Performance

Mortgage-backed securities returned 4.8 percentage points more than Treasuries this year, their best performance in at least 20 years, according to Barclays Capital index data. The Fed’s program to buy $1.25 trillion of the securities ends as soon as March.

The Fed is developing tools that can help take reserves off the market. This week, the Fed proposed selling term deposits to banks, which would remove reserves from the day-to-day trading market, locking them up for as long as six months.

The New York Fed began this month testing reverse repurchase agreements as another way to pull cash out of banks. In a reverse repo, the Fed contracts to sell and repurchase securities over a set period, draining cash from the banking system.

By making small, publicly announced sales of bonds, the central bank would permanently drain excess reserves while limiting investor concerns about an increase in the supply of such securities, economists said.

Hit Target

The federal funds market underscores how the Fed may need to use several tools to hit its interest-rate target. While the Fed promises to pay banks 0.25 percent to keep excess funds on deposit at the central bank, the so-called effective rate, or market rate, has averaged 0.12 basis points this month.

Fannie Mae and other government-sponsored enterprises that are ineligible to deposit money at the Fed “have pulled down” the fed funds rate by selling funds in the market, New York Fed researchers said in a paper this month.

Fed officials must be cautious in how they manage reserves and raise interest rates, economists said. Even small amounts of bond sales could nudge up the cost of home loans.

Freddie Mac, the McLean, Virginia-based mortgage company, said that the average 30-year fixed rate rose to 5.14 percent for the week ended today, the highest since August. A rise in short-term rates would boost the cost on floating-rate loans for consumers and businesses.

“If they get this wrong, volatility is going to be through the roof,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. LLC in New York. “Investors are over- discounting the difficulty that is coming our way when the Fed begins the process of raising interest rates.”

Path of Decline

The Fed will increase the benchmark rate in the third quarter of 2010, according to the median forecast of economists surveyed by Bloomberg News this month. Vice Chairman Donald Kohn is among officials who have said the recovery needs to be self- sustaining, with the unemployment rate declining, before the Fed tightens. The rate will probably stay at 10 percent in December, according to the median estimate in a separate Bloomberg survey of economists before a Labor Department report on Jan. 8. Unemployment soared to a 26-year high of 10.2 percent in October.

Fed officials are considering the sequence for using their various tools for withdrawing monetary stimulus. They may start by raising the interest on reserves rate and draining reserves, followed by asset sales, Meyer said in a Dec. 15 research note.

A second possible sequence would be first draining off excess reserves, then raising the interest on reserves rate later, followed by asset sales, he said.

“They are going to have to sell assets” to maintain control over the benchmark lending rate, said Brian Yelvington, director of fixed income strategy at bond broker Knight Libertas LLC in Greenwich, Connecticut. “The volatility of the effective federal funds rate around the target is probably going to be a lot greater than it has been in the past.”

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