The Wall Street Journal-20080202-The Week Ahead - Our Take On Coming Events
Return to: The_Wall_Street_Journal-20080202
The Week Ahead / Our Take On Coming Events
Full Text (1464 words)Economy:
As U.S. Cuts Rates for Growth,
Europe Hesitates Over Inflation
----
By Joellen Perry
The European and British central banks won't join the Federal Reserve in aggressive interest-rate cuts even as European growth data disappoint. The reason: inflation.
Despite a welter of data suggesting growth could slump this year in the 15 countries that share the euro, inflation fears will probably keep European Central Bank policy makers from cutting their key rate from 4% Thursday and keep President Jean-Claude Trichet from signaling cuts are likely anytime soon.
In London, the Bank of England's Monetary Policy Committee is likely to lower its key rate Thursday by a quarter-percentage point to 5.25% -- the second cut since December -- to aid a struggling economy. But inflation fears likely will forestall a fatter cut and lead the bank to stress that price worries remain paramount.
Unlike the Fed, which is legally charged with maintaining growth and controlling inflation, the ECB and Bank of England have a single legal mandate: keeping prices steady. And there is plenty of inflation to worry about. Both focus on headline measures of inflation, now rising as food and energy prices soar. Mr. Trichet is sure to note at his postmeeting news conference that euro-zone inflation hit a high of 3.2% in January.
While Federal Reserve Chairman Ben Bernanke is concentrating on preventing or moderating a recession in the U.S., his European counterparts worry that recent commodity-driven price increases could spill over into other prices or push up public inflation expectations. Mr. Trichet is almost sure to talk tough about inflation: German public-sector workers want an 8% pay raise, while steel, energy and transport workers began warning strikes Friday ahead of wage talks.
ECB policy makers acknowledge euro-zone growth could stutter amid the U.S. downturn; that prospect has economists and investors pricing in two ECB rate cuts this year. Mr. Trichet likely will highlight solid euro-zone January manufacturing data to underscore that the bloc's economy remains sound. A major shift in ECB signals may not come until growth projections are put out by central-bank staff in March.
British manufacturing purchasing managers in January reported their bleakest view of the economy since August 2005, but said they intend to raise prices at the fastest pace since those data began to be recorded in 1999. Reducing such inflation expectations is probably high on Bank of England Gov. Mervyn King's to-do list. Investors expect five Bank of England rate cuts this year; Simon Hayes of Barclays Capital in London thinks the more likely scenario is three rate cuts. One reason: Mr. King, known for a propensity to resist lowering rates at times of inflation pressures, has a new five-year lease on the job.
All this will give the U.S., European and Japanese central bankers plenty to talk about when they gather with their countries' finance ministers in Tokyo on Feb. 9.
Soda:
How Flat Is Economy? Check Out Coke, Pepsi Profits
----
By Betsy McKay
Investors will be watching in the next two weeks to see how the slowdown in the U.S. economy and rising commodity prices are affecting two consumer titans: Coca-Cola Co. and PepsiCo Inc.
Beverage executives often paint their industry as less vulnerable to economic downturns than some other businesses, on the theory that penny-pinching consumers still allow themselves little indulgences like a Coke or a Gatorade as they are forced to cut back on buying new clothes and bigger-ticket items.
But weak traffic recently at McDonald's Corp. restaurants -- a major Coke customer and a bellwether of consumer spending -- shows the extent to which consumers are scaling back even on inexpensive purchases. Higher gas prices are keeping more people out of convenience stores, a highly profitable sales channel for the beverage industry, where consumers pay top dollar for cold drinks they might find more cheaply in 12-packs at the grocery store. And a continued rise in commodity prices is forcing companies to raise prices on their products and stepping up the pressure on them to find ways to absorb the extra costs.
PepsiCo reports its fourth-quarter earnings Thursday, followed by Coke's numbers on Feb. 13.
At the recent World Economic Forum in Davos, Coke and Pepsi's chief executives acknowledged the pressures their companies face. "Wheat prices have almost doubled in the last three years, and there's no question that there's commodity inflation," said Indra Nooyi, chairman and CEO of PepsiCo, which buys wheat, corn and other commodities for its snack and beverage businesses.
Meanwhile, Coke's chairman and CEO, E. Neville Isdell, predicted that there is "better than a 50% chance" of a U.S. recession.
Fourth-quarter results reported earlier this week by Pepsi Bottling Group Inc., PepsiCo's largest bottler, show the effects of the weakening U.S. economy, wrote Bill Pecoriello, an analyst with Morgan Stanley, in a research note. The bottler reported flat world-wide physical case volume. And U.S. sales in its profitable cold-drink channel -- such as convenience stores -- slipped 3%. Mr. Pecoriello said he is maintaining his equal-weight rating on Pepsi Bottling stock, but reduced his forecast for its 2008 earnings per share by eight cents to $2.36 a share. He also reduced his forecast for PepsiCo's 2008 earnings by two cents to $3.72 a share.
Commodity-price increases are creating a major headwind in particular for PepsiCo, which derives most of its profits from snack foods. But Mr. Pecoriello points out that international growth remains strong, the company's innovation pipeline is good, and it has been prudent both about pricing and productivity initiatives.
Ms. Nooyi said at Davos that PepsiCo is managing its cost pressures. "While we are concerned about commodity inflation, we feel pretty comfortable that we will find a way through it," she said.
Entertainment:
Ratings Fall,
Pressure Grows
In Writers Strike
----
By Peter Sanders and Sam Schechner
As the Hollywood writers' strike nears the three-month mark, issues simmering for the past few weeks may finally be coming to a boil, pressuring the writers and the major studios to move toward a resolution.
Noise from restless factions of the Writers Guild of America, a desire to save the looming Academy Awards and a downward drift in television ratings in the absence of much new programming could combine to precipitate action.
In an attempt to bring the two sides back to the bargaining table for formal talks, leaders of the WGA's West Coast branch, including Executive Director David Young and President Patric Verrone, have been meeting informally for two weeks with select studio executives such as Walt Disney Co. Chief Executive Bob Iger and News Corp. President Peter Chernin. Informal talks are expected to continue through the weekend.
The WGA has scheduled a negotiating-committee meeting and board meeting for Monday, but people familiar with the situation caution that those meetings weren't called as a direct response to the informal discussions.
Two weeks after the Directors Guild of America reached a tentative contract with the Alliance of Motion Picture and Television Producers, which negotiates on behalf of studios, it remains unclear whether the WGA would accept similar terms. The sticking points are said to largely revolve around compensating writers for use and reuse of their work on the Internet and other new media, according to people familiar with the talks.
As the WGA continues to make interim deals with TV production companies and independent movie studios, cracks have begun to appear within the ranks and fallout continues in the film and television industry.
Pressure from TV "showrunners" -- writers who also produce their own shows -- may be growing. Some outspoken showrunners, such as "ER" executive producer John Wells, have been agitating for resolution since the directors' guild hashed out its own deal. A larger number have made their feelings known as the guild quietly takes the showrunners' temperature, according to a showrunner who was contacted by the guild. Several have said they think the directors' template is the best that the writers are likely to get.
Meanwhile, with the prospect of a hobbled Oscars broadcast, TV networks may be on the verge of seeing the strike damage the performance of their prime-time schedules for the first time -- which would give them a much greater incentive to settle, too. So far the networks' reality- and rerun-heavy strike schedules haven't exacted a big toll on ratings. But the lack of new episodes of big series could have a much stronger effect during the February sweeps ad-rating period.
The Screen Actors Guild -- whose contract expires June 30 -- has been rattling its own saber. In a message to members this week, SAG President Alan Rosenberg and Executive Director Doug Allen took issue with several elements of the directors' agreement, saying "no one should assume this new deal is a template for anyone else, certainly not for actors."
