TOKYO (Reuters) – Asian shares fell on Monday as uncertainty remained over how euro zone leaders would respond to mounting funding difficulties for European banks, and an apparent failure by U.S. politicians to agree on deficit reduction hurt sentiment.

The U.S. congressional deficit-reduction committee was set to formally announce its three-month-long effort to bridge partisan differences over taxes and spending has failed, aides told Reuters.

Automatic spending cuts of $1.2 trillion over a decade are due to start in 2013, after elections in 2012, if the “super committee” of six Democrats and six Republicans cannot agree.

MSCI’s broadest index of Asia Pacific shares outside Japan extended its losses to fall 1.5 percent on Monday after posting its biggest weekly loss in about two months last week. Japan’s Nikkei stock average (.N225) fell 0.1 percent.

“It is a minor negative, there is a few questions to be asked — do Moody’s and Fitch for example move to downgrade the U.S.,” said HSBC’s head of global equity strategy Garry Evans.

Market expectations for a deal were low, but a failure of the committee could remind investors of the risks posed by a dysfunctional U.S. government.

The committee was created after a battle over the federal government’s debt ceiling nearly shut it down and led to a first-ever cut in the United States’ AAA credit rating by Standard & Poor’s in the summer, roiling financial markets.

While there is no immediate market pressure on the United States, focus will turn to the budget, and a failure to deliver effective measures could result in a fairly significant contraction in the United States next year, fuelling concerns about a growth slowdown as well, HSBC’s Evans said.

CRUSHING VICTORY

Europe’s messy politics appeared to be heading in the direction of carrying out vital fiscal reforms, offering some relief to investors.

In Spain, the center-right opposition People’s Party won a crushing election victory and is expected to push through drastic austerity measures to try to prevent Spain being sucked deeper into the debt storm threatening the euro zone.

“Those policies would undoubtedly be welcomed by markets, yet may not be enough to stabilize the Spanish sovereign,” Barclays Capital analysts said in a research note. “Ultimately, we think it is likely that the ECB will need to step up its support.”

In Italy, Prime Minister Mario Monti won an overwhelming vote of confidence on Friday after warning politicians against sabotaging a sweeping package of fiscal reforms.

But political wrangling in Greece, which has teetered on the brink of default and set off the panic selling now widespread in bonds of other highly-indebted euro zone members, threatened the new prime minister’s bid to win vital bailout funds from European leaders.

The euro drifted up to $1.3525 on Monday from $1.3519 late in New York on Friday, but was well below Friday’s peak of $1.3614. The dollar index measured against six key currencies was down 0.1 percent.

PRESSURE ON ECB RISING

Italian and Spanish government bond yields eased on Friday, after the European Central Bank intervened in markets to alleviate pressure from investors demanding higher premiums for bonds issued by highly-indebted countries.

The ECB has resisted rising pressures to step up purchases of euro zone sovereign debt, or the idea of lending to the International Monetary Fund to bail out troubled euro zone economies, despite a growing market perception of the bank as the last hope to stop the debt crisis from spreading globally.

Reflecting worsening dollar funding strains for European banks, euro/dollar three-month cross-currency basis swaps widened further on Friday to -138.50 basis points, the most since the height of the Lehman crisis in 2008.

The difference between the three-month dollar offered interbank Libor rate and overnight index swaps hit 38 basis point, the largest since June 2009.

“The probability is quite high that European woes will further shrink global capital markets, aggravating interbank funding strains and drying up investment flows,” said Bob Takai, general manager of Sumitomo Corp’s energy division.

Sentiment remained cautious in Asian credit markets, with spreads on the iTraxx Asia ex-Japan investment grade index widening around 3 basis points on Monday.

In a sign of risk-aversion, investors put fresh cash into U.S. equities, bonds and precious metals funds, along with a big allocation to inflation-protected bond funds to 80-week high of $512 million in the week ended November 16, data from EPFR Global showed on Friday.

(Editing by Alex Richardson)

NEW YORK (Reuters) – A brutal year for global investors may get even worse this week if Congress proves yet again it is too bitterly divided to deliver on its promise to reduce the gaping U.S. budget deficit.

The congressional “super committee” created to slash $1.2 trillion in federal spending over 10 years was likely to concede failure in its efforts on Monday, congressional aides said.

While a breakthrough could still happen before the committee’s Wednesday midnight deadline, it was considered unlikely that the group could bridge deep partisan differences over taxes and spending.

How financial markets will react to such a lack of progress is a tough call, partly because investors have been distracted by Europe’s more immediate debt crisis.

For one thing, expectations could hardly be lower, especially with an election year looming and memories of this summer’s ugly debate over raising the country’s debt ceiling.

Also, any budget cuts would not take effect until 2013, so a failure would not trigger an immediate government shutdown or interrupt important services.

“I never expected they were going to reach an agreement and the market is clearly going to be disappointed but I think … the market will find support at 1,200 because in the end the market really never thought they were going to do it,” said Ken Polcari, managing director at ICAP Equities in New York, referring to the benchmark S&P 500 index.

“Therefore, as long as there is no news out of Europe, we will see a disappointed market but we won’t implode,” he said.

But a sharp sell-off in U.S. markets on Thursday afternoon was blamed in part on vague rumors that the talks to trim federal spending had stalled. After the impasse over raising the country’s debt ceiling, the United States lost its triple-A credit rating, an event that is still fresh in investors’ minds.

While Moody’s Investors Service has said a failure by the committee to reach an agreement would not by itself lead to a rating change, Fitch Ratings has not ruled out a “negative rating action” on the United States if the economy grows less than expected or if the super committee fails to agree on at least $1.2 trillion in deficit-reduction measures.

Such an action would most likely be a revision of the U.S. rating outlook to negative from its current stable position. When Standard & Poor’s downgraded the United States in August, it said at the time that U.S. fiscal plans fell short of what was necessary to stabilize debt dynamics.

“This thing is incredibly difficult to handicap,” said Jacob Oubina, senior U.S. economist at RBC Capital Markets. “But the last thing you want is to introduce another element of volatility into the markets, and that’s exactly what these guys are going to do because they can’t get their act together.”

The biggest concern is not the cuts as such but the sense that Democrats and Republicans are simply unwilling or unable to compromise and make the tough decisions required to bring a deficit that’s near 10 percent of gross domestic product under control.

“There are two diametrically opposed groups here, each against what the other side is trying to do, and both see benefit to failure because they can campaign on that,” said Gregory Whiteley, who helps manage $19 billion at DoubleLine Capital in Los Angeles. “So expectations are pretty low.”

Clashes between Democrats and Republicans over the right mix of spending cuts and tax hikes almost scuppered a deal to lift the debt ceiling in August, raising the threat of default and spurring Standard & Poor’s to cut the United States’ credit rating.

THREAT TO GROWTH

Some investors do fear that deadlock may imperil White House efforts to extend a temporary payroll tax cut and jobless benefits for the long-term unemployed, and that would be another negative for growth at a time when the economy can least afford it.

RBC economists said that if those measures, along with some investment tax credits, expire at the end of this year, it could shave 1.2 percent from U.S. growth in 2012.

That could roil Wall Street stocks, which have been on a roller coaster ride since August and were on target Friday for their worst weekly showing in two months.

Stocks could lose 5 to 10 percent in the short run if anxiety about Washington policy gridlock really takes hold, said David D’Amico, president and chief strategist at Braver Capital in Boston.

“If they don’t come out with anything and they force cuts and it becomes a political sideshow and the public and consumers become somewhat disgusted again with Washington, you could have a real sell-off in the marketplace,” he said.

LOW EXPECTATIONS

While not expected, a deal to cut the full $1.2 trillion would probably provoke a relief rally in markets, investors said.

Marc Doss, regional chief investment officer at Wells Fargo Private Bank in San Diego, said that could be a green light for hedge funds and other money managers who are underinvested in stocks because of recent market turmoil to kick off a year-end rally.

“Expectations are low after the debt ceiling debacle, but if they get to $1.2 trillion, it would instill some confidence in the political process,” he said.

Bond investors say deadlock probably won’t hurt the bond market, either, since Europe’s problems should sustain a safe-haven bid for Treasuries.

Jack McIntyre, who helps manage a global fixed income portfolio at Philadelphia-based Brandywine Global, said that’s why he remains overweight the dollar relative to the euro even as he favors currencies from faster-growing emerging markets over the greenback.

The 10-year Treasury note was yielding 2.01 percent on Friday. Among major developed markets, that was above comparable yields only in Germany and Japan.

And if stocks do wobble, another round of monetary easing from the Federal Reserve, which has toyed with the idea of pumping more money into the system by doing additional purchases of mortgage-backed debt, could help support asset prices.

LONG RUN RISKS

In the long run, though, the parallels with Europe’s most troubled countries becomes more striking and harder to ignore.

Harm Bandholz, chief U.S. economist at UniCredit said America is treading a path similar to the one that led Italy, Greece and others into trouble: borrowing money at low interest rates to boost short-term growth and swelling the debt burden.

As governments in Rome, Madrid and elsewhere found out in recent days when their borrowing costs spiked to euro-era highs, that can only go on for so long. “The U.S. is still running at full speed in the wrong direction,” Bandholz said.

Additionally, about 71 percent of marketable U.S. debt will mature in the next five years, said Lawrence Goodman, president of the Center for Financial Stability in New York. That’s well above the historical average and makes the country vulnerable to refinancing risk.

“Markets continue to give the U.S. a pass on its excessive deficit,” he said. “But what’s happening in Europe should be a powerful lesson, especially given our maturity profile.”

(Additional reporting by Sam Forgione, Chuck Mikolajczak and Ryan Vlastelica in New York and Stella Dawson in Washington)

NEW YORK (Reuters) – A brutal year for global investors may get even worse next week if Congress proves yet again it is too bitterly divided to deliver on its promise to reduce the gaping U.S. budget deficit.

How financial markets will react if a committee created to slash $1.2 trillion in federal spending over 10 years fails to strike a deal is a tough call, partly because investors have been distracted by a Europe’s more immediate debt crisis.

For one thing, market expectations could hardly be lower, especially with an election year looming and memories of the summer’s ugly debate over raising the country’s debt ceiling and the resulting loss of the nation’s triple-A credit rating still fresh in investors’ minds.

Also, any budget cuts wouldn’t take effect until 2013 and failure would not trigger an immediate government shutdown or interrupt important services.

But a sharp, out-of-nowhere sell-off in U.S. markets on Thursday afternoon was blamed in part on vague rumors that talks to trim federal spending had stalled.

“This thing is incredibly difficult to handicap,” said Jacob Oubina, senior U.S. economist at RBC Capital Markets. “But the last thing you want is to introduce another element of volatility into the markets, and that’s exactly what these guys are going to do because they can’t get their act together.”

The biggest concern is not the cuts as such but the sense that Democrats and Republicans are simply unwilling or unable to compromise and make the tough decisions required to bring a deficit that’s near 10 percent of gross domestic product under control.

“There are two diametrically opposed groups here, each against what the other side is trying to do, and both see benefit to failure because they can campaign on that,” said Gregory Whiteley, who helps manage $19 billion at DoubleLine Capital in Los Angeles. “So expectations are pretty low.”

Clashes between Democrats and Republicans over the right mix of spending cuts and tax hikes almost scuppered a deal to lift the debt ceiling in August, raising the threat of default and spurring Standard & Poor’s to cut America’s credit rating.

THREAT TO GROWTH

Some investors do fear that deadlock may imperil White House efforts to extend a temporary payroll tax cut and jobless benefits for the long-term unemployed, and that would be another negative for growth at a time when the economy can least afford it.

RBC economists said that if those measures, along with some investment tax credits, expire at the end of this year, it could shave 1.2 percent from U.S. growth in 2012.

That could roil U.S. stocks, which have been on a roller coaster ride since August and were on target Friday for their worst weekly showing in two months. (.SPX)

Stocks could lose 5 percent to 10 percent in the short run if anxiety about Washington policy gridlock really takes hold, said David D’Amico, president and chief strategist at Braver Capital in Boston.

“If they don’t come out with anything and they force cuts and it becomes a political sideshow and the public and consumers become somewhat disgusted again with Washington, you could have a real sell-off in the marketplace,” he said.

LOW EXPECTATIONS

While not expected, a deal to cut the full $1.2 trillion would probably provoke a relief rally in markets, investors said.

Marc Doss, regional chief investment officer at Wells Fargo Private Bank in San Diego, said that could be a green light for hedge funds and other money managers who are underinvested in stocks because of recent market turmoil to kick off a year-end rally.

“Expectations are low after the debt ceiling debacle, but if they get to $1.2 trillion, it would instill some confidence in the political process,” he said.

Bond investors say deadlock probably won’t hurt the bond market, either, since Europe’s problems should sustain a safe-haven bid for Treasuries.

Jack McIntyre, who helps manage a global fixed income portfolio at Philadelphia-based Brandywine Global, said that’s why he remains overweight the dollar relative to the euro even as he favors currencies from faster-growing emerging markets over the greenback.

The 10-year Treasury note was yielding 2.01 percent on Friday. Among major developed markets, that was above comparable yields only in Germany and Japan.

And if stocks do wobble, another round of monetary easing from the Federal Reserve, which has toyed with the idea of pumping more money into the system by doing additional purchases of mortgage-backed debt, could help support asset prices.

LONG RUN RISKS

In the long run, though, the parallels with Europe’s most troubled countries becomes more striking and harder to ignore.

Harm Bandholz, chief U.S. economist at UniCredit said America is treading a path similar to the one that led Italy, Greece and others into trouble: borrowing money at low interest rates to boost short-term growth and swelling the debt burden.

As governments in Rome, Madrid and elsewhere found out in recent days when their borrowing costs spiked to euro-era highs, that can only go on for so long. “The U.S. is still running at full speed in the wrong direction,” Bandholz said.

Additionally, about 71 percent of marketable U.S. debt will mature in the next five years, said Lawrence Goodman, president of the Center for Financial Stability in New York. That’s well above the historical average and makes the country vulnerable to refinancing risk.

“Markets continue to give the U.S. a pass on its excessive deficit,” he said. “But what’s happening in Europe should be a powerful lesson, especially given our maturity profile.”

(Additional reporting by Sam Forgione in New York and Stella Dawson in Washington. Editing by Martin Howell)

NEW YORK (Reuters) – Bill Gross, manager of the world’s largest bond fund, apologized to his investors late Friday for his poor performance, saying “I’m just having a bad year.”

In a Special Edition letter posted on PIMCO’s website, Gross, who runs the $242 billion PIMCO Total Return portfolio, wrote that he underestimated the contagion effect from the Europe debt crisis and the U.S. debt ceiling debacle.

“As Europe’s crisis and the U.S. debt ceiling debacle turned developed economies toward a potential recession, the Total Return Fund had too little risk off and too much risk on,” said Gross, who also shares the title of co-chief investment officer at Pacific Investment Management Co. with Mohamed El-Erian.

Gross, known as the “bond king”, came under heavy criticism earlier this year when he bet heavily against U.S. Treasuries which have turned out to be one of the biggest outperformers of 2011.

His fund’s poor performance led Gross to simply call his open letter to investors, “Mea Culpa.”

It is up only 1.06 percent year to date versus the benchmark BarCap U.S. Aggregate Index which is up 3.99 percent.

Gross, who helps manage more than $1.2 trillion at PIMCO, said late Friday the Total Return fund had positions in German bonds and Canadian Treasuries to counter the U.S. underweight position, “but not enough.”

He added that minor percentages of emerging market corporate and sovereign debt, effectively denominated in their local non-dollar currencies, did not perform well either.

“The simple fact is that the portfolio at midyear was positioned for what we call a “New Normal” developed world economy – 2.0 percent real growth and 2 percent inflation,” Gross said.

That’s all changed, of course. Gross said PIMCO’s internal growth forecast for developed economies “is now zero percent over the coming several quarters and the portfolio more accurately reflects this posture.”

Last week, Reuters reported that Gross ramped up buying of mortgage-backed securities in September, albeit by using leverage, on the likelihood the Federal Reserve’s reinvestment program in those securities will boost prices significantly.

Gross increased mortgage debt to 38 percent of assets in September, from 32 percent in August, as the U.S. central bank announced last month that it “will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.”

His move into mortgage-backed securities also comes as the PIMCO Total Return fund’s cash equivalents and money-market securities fell to negative 19 percent September, from negative 9.0 percent in August.

In having a so-called negative position in cash equivalents and money-market securities, it is an indication of using derivatives and short-term securities as collateral in order to boost the fund’s buying power with leverage.

Gross’ move to seek more yield by putting more money into mortgage bonds is yet another bold bet which many will be watching after Gross’s call on Treasuries cost his fund’s performance. In doing so, he is effectively extending the average duration of his fund’s investments, making them potentially more exposed to a rise interest rates.

Clearly, Gross is betting interest rates will remain low for some time as the world economy continues to struggle.

In his “mea culpa” letter, Gross resorted to baseball analogies and metaphors. He closed his letter by saying: “This is big league ball, where your ticket holders come to the park expecting not a circus-Willie Mays-catch but more wins than losses and a year-end performance that places your bond assets near the top of the standings.”

He added, “Baseball metaphors aside, we know why PIMCO Total Return is arguably the largest and hopefully the greatest bond fund in the world.”

WASHINGTON (Reuters) – The U.S. budget gap widened slightly in fiscal 2011, staying above $1 trillion for a third straight year and providing fodder for a political battle over taxes and spending ahead of next year’s presidential election.

The Treasury Department report on Friday comes just over two months after an epic showdown over the nation’s debt ceiling that pushed the United States close to a debt default and led to a downgrade of America’s prized AAA credit rating.

The shortfall in September, the final month of the fiscal year, widened to $64.57 billion compared to the same month a year earlier, although it came in at a few billion dollars less than economists had projected. The annual deficit was $1.299 trillion, up from 1.294 trillion in fiscal 2010.

The U.S. economy, the world’s largest, has escaped the painful sovereign debt crisis the euro zone is now suffering, although the deterioration in its fiscal stance has roiled domestic politics.

Many experts argue anemic U.S. growth and a dire job market call for near-term fiscal stimulus or, at the very least, restraint in implementing spending cuts.

President Barack Obama has proposed a $447 billion plan to create jobs, but it was rejected by the Senate this week and now lawmakers are trying to pick up the pieces.

Republicans in Congress have been pushing hard for deep spending cuts to address the budget gap.

While the budget deficit widened in dollar terms in the latest fiscal year, it narrowed to 8.7 percent of U.S. gross domestic product from 9 percent in fiscal 2010. Economists say the GDP gauge is a more meaningful metric than the size of the budget shortfall measured in dollars.

U.S. GDP expanded under 1 percent in the first half of the year while unemployment has remained stuck above 9 percent for several months, raising fears of a new recession. Such concerns recently prompted Ben Bernanke, Chairman of the Federal Reserve, to warn lawmakers during testimony earlier this month that sharp reductions in government spending at a time of fragile recovery could be dangerous.

“(A) factor likely to weigh on the U.S. recovery is the increasing drag being exerted by the government sector,” Bernanke told the Joint Economic Committee of Congress.

Even as he called for steps to bring the long-term deficit under control, the Fed chief urged legislators to “avoid fiscal actions that could impede the ongoing economic recovery.”

After the debt ceiling fiasco in August, Congress created a special deficit panel charged with reaching a deal to cut $1.2 trillion over the next decade by November 23. If they fail, automatic budget cuts will be triggered starting in 2013 that would cut funding to selected agencies and programs across the board and hit defense spending hard.

(Reporting by Pedro Nicolaci da Costa; Editing by Chizu Nomiyama)

WASHINGTON (Reuters) – The budget gap widened slightly in fiscal 2011, staying above $1 trillion for a third straight year and providing fodder for a political battle over taxes and spending ahead of next year’s presidential election.

The Treasury Department report on Friday comes just over a month after an epic showdown over the nation’s debt ceiling, which pushed the United States close to a debt default and led to a downgrade of America’s prized AAA credit rating.

The shortfall in September, the final month of the fiscal year, widened to $64.57 billion compared to the same month a year earlier, although it came in at a few billion dollars less than economists had projected.

The U.S. economy, the world’s largest, has escaped the painful debt crisis the euro zone is now suffering, although the deterioration in its fiscal stance has roiled domestic politics.

Many experts argue anemic U.S. growth and a dire job market call for near-term fiscal stimulus or, at the very least, restraint in implementing spending cuts.

President Barack Obama has proposed a $447 billion plan to create jobs, but it was rejected by the Senate this week and now lawmakers are trying to pick up the pieces.

Republicans in Congress have been pushing hard for deep spending cuts to address the budget gap.

While the budget deficit widened in dollar terms in the latest fiscal year, it narrowed to 8.7 percent of U.S. gross domestic product from 9 percent in fiscal 2010. Economists say the GDP gauge is a more meaningful metric than the size of the budget shortfall measured in dollars.

(Reporting by Pedro Nicolaci da Costa; Editing by Neil Stempleman)

(Reuters) – Spooked by the United States’ recent budget standoff in Washington and the European debt crisis, U.S. chief executives’ view of the economy deteriorated sharply in the third quarter, a survey released on Thursday found.

Corporate chieftains told the Business Roundtable that they had become more likely to cut jobs over the next six months, and fewer expected to boost their companies’ sales and capital spending over that time.

The group’s CEO Economic Outlook index dropped for a second consecutive quarter to 77.6, its lowest reading since the fourth quarter of 2009. It remained above 50 — which separates forecasts of growth from decline — and a bit below the index’s average of 79.2 over its near-decade history.

“This past quarter was a challenging one for our economy,” said Boeing Co (BA.N) CEO Jim McNerney, who chairs the Roundtable. “It brought high oil prices, continuing European sovereign debt crisis, our own debt-ceiling debate and the S&P downgrade in the U.S., which in sum added to an already uncertain economic and business environment.”

A quarterly survey by the Business Roundtable found that 24 percent of CEOs expected to cut jobs in the U.S. over the next six months, more than double the 11 percent who had forecast that in the second quarter. Thirty-six percent expected to add jobs, down from 51 percent in the second quarter.

Persistently high U.S. unemployment, which hovers around 9 percent, is blamed for the nation’s prolonged economic sluggishness and is shaping up as a key issue in next year’s presidential election.

The number of CEOs who expected their companies’ sales to rise over the next six months fell to 65 percent from 87 percent and the number who expect to boost capital spending fell to 32 percent from 61 percent.

Overall, CEOs look for real U.S. gross domestic product to rise 1.8 percent this year, sharply lower than the 2.8 percent growth forecast in March.

Their worry stood in contrast to a report from the Commerce Department that found U.S. GDP rose 1.3 percent in the second quarter, up from a previously reported 1 percent.

WORRIED “CHEERLEADERS”

The darkening collective view from the 140 CEOs surveyed from August 29 through September 16 is at odds with the rosier picture that individual executives present to investors and the media.

Even as investor worries have sent the broad Standard & Poor’s 500 index (.SPX), down 14 percent since mid-July, some CEOs have insisted publicly that they are not worried that the nation’s economy is at risk of slipping back into a downturn.

“In the U.S., we’re still seeing economic expansion,” Ford Motor Co (F.N) CEO Alan Mulally told a small group of reporters in Bangkok on Thursday. “We’re very encouraged by the recovery even though it is slower than in the past.”

Likewise, the chief financial officer of Nationwide Mutual Insurance Co (NMUIC.UL), one of the country’s largest home and auto insurers, said: “Any kind of continued economic slowdown will put pressure on the business, but for us we’ve seen some pretty positive trends in the third quarter.”

Other CEOs have urged people to tune out the recession worries that have contributed to market volatility.

“My advice to you is that your life would be better if you didn’t watch TV or read the paper,” General Electric Co (GE.N) CEO Jeff Immelt told students at Dartmouth College in August. The line has become a regular feature of his public comments since the largest U.S. conglomerate sold a majority stake in its NBC Universal media business.

The mismatch is to be expected from a group whose jobs include trying to drive up their companies’ stock prices, said one investor.

“They have to be cheerleaders, that’s part of their jobs. And it’s part of our jobs to be professional skeptics,” said Peter Klein, a senior portfolio manager at Fifth Third Asset Management in Cleveland. “There’s a lot of denial that goes on until there’s no more denial … As an investor you have to really discount a lot of that stuff as you hear it.”

Boeing’s McNerney said the contrast reflects executives’ view that the economy is not as weak as investors believe.

“When we’re interviewed a lot of times, because the employment situation is so difficult and because the political environment is so difficult, a lot of the questions come from a very negative place,” he told reporters. “So we end up sounding a little positive because our companies are in fact expanding.”

PULLBACK FROM RECORD HIGH

For most of the past two-and-a-half years, the CEO Outlook index had been recovering from the record low of negative 5 hit in the first quarter of 2009, in the immediate aftermath of the financial crisis that brought down Bear Stearns and Lehman Brothers. Early this year, it reached 113, its highest since the group started taking the survey in December 2002.

Regardless of the mismatch, investors will get a more detailed view of corporate America’s health in the next few weeks when a wave of big public companies begin reporting third-quarter results.

(Reporting by Scott Malone in Boston, additional reporting by Ben Berkowitz in New York and Ploy Ten Kate in Bangkok, editing by Dave Zimmerman)

LONDON (Reuters) – Europe’s biggest defense contractor BAE Systems said it will cut up to 3,000 jobs in Britain as smaller global defense budgets hit orders for its fighter jets.

The company, which is Britain’s biggest manufacturer, said the four partner nations in the Eurofighter Typhoon program — the UK, Germany, Italy and Spain — were slowing production rates to help ease their budget pressures, affecting the workload at a number of sites.

Weapons makers globally are bracing for more cuts in defense spending sparked partly by this summer’s debt-ceiling deal in the United States — the world’s biggest arms market.

“Pressure on the U.S. defense budget and top level program changes mean the anticipated increase in F-35 production rates will be slower than originally planned, again impacting on our expected workload,” said BAE in a statement on Tuesday.

The job cuts are a blow to the Conservative-led coalition government which is seeking to rebalance the economy away from an over-reliance on financial services jobs in the overheated south-east of England.

Latest figures show unemployment rose at its fastest pace in two years, totaling 7.9 percent of the workforce.

Critics of the government say its austerity program is choking off growth and risks plunging the country back into another recession.

Unite, the biggest trade union representing BAE workers, vowed to fight the lay-offs.

“The government cannot sit on its hands and allow these highly skilled jobs to disappear,” it said.

“BAE Systems have dealt a hammer blow to the UK defense industry and Unite is determined to fight the cuts.”

Most of the job losses will come at two of BAE System’s plants in northern England — one in Warton, Lancashire and the other in Brough, East Yorkshire.

BAE said it had begun consultation on ending manufacturing capability at Brough.

The company, which has already laid off around 15,000 employees worldwide over the last two years, reported a decline in first half pretax profit in July.

The U.S. defense department is cutting at least $350 billion from previously projected spending, and additional cuts could kick in if Congress fails to find more deficit reductions by year-end.

Britain, meanwhile, slashed its defense budget by 8 percent last year to help reduce its deficit, hitting BAE, which makes around a fifth of its revenue in the UK.

BAE Systems has a 33 percent stake in the Eurofighter joint venture company alongside EADS and Finmeccanica and had received orders for 550 planes from the four partner nations involved.

The company is continuing to pursue Typhoon sales in India, Japan, Oman and Malaysia and has said exporting the fighter aircraft remains a priority.

British and U.S. arms suppliers have been battling to win new business in emerging defense markets as they look to offset the belt-tightening at home.

BAE shares were up 1.3 percent to 275 pence at 0920 GMT, underperforming a 2.2 percent rise in the blue-chip FTSE index.

(Additional reporting by Keith Weir and Stephen Addison, Editing by Chris Wickham and Sophie Walker)

(Reuters) – The global economy was supposed to be better by now.

Just a few months ago, the prevailing wisdom was that growth was going through a “soft patch” caused by a combination of Japan’s earthquake and unrest in the oil-producing Middle East. Once global supply chains got back to normal and oil prices receded, the second-half recovery could begin.

Judging from the tone among world finance leaders who gathered in Washington over the weekend, no one is buying that theory any more.

“The global economy has entered a dangerous phase, calling for exceptional vigilance, coordination and readiness to take bold action from members and the IMF alike,” the International Monetary Fund’s steering committee warned on Saturday.

Australian Treasurer Wayne Swan spoke of a “somber mood” among policymakers. Financial markets priced in a growing risk that Greece may default, which could touch off a panic worse than what followed the Lehman Brothers bankruptcy.

“The Lehman crisis was about rescuing a company. Now it involves a country’s sovereign debt so in a sense, the situation is more severe,” said Japanese Finance Minister Jun Azumi.

Yet the strongest statement Group of 20 officials could offer was a promise that, by November, euro area leaders will find a way to “increase the flexibility” of a financial stability fund widely considered inadequate to cope with a crisis which could engulf Italy or Spain.

“If a generous sovereign from Mars came down and paid off every penny of Greece’s debt tomorrow, the fundamentals of the European crisis would not be altered,” said former White House economic adviser Lawrence Summers.

J.P. Morgan economists blamed the renewed global weakness on a “crisis of competency.” In a note to clients entitled, “Yes we can; no we won’t,” they argued that the economy was indeed shaking off the Japan quake effects — until August, when Europe’s debt strains intensified and the U.S. debt ceiling drama cast doubt on Washington’s political will to address its own long-term budget needs.

Europe came under fresh pressure on Sunday to ramp up its crisis response when a top IMF official said the ECB was the only player big enough to “scare” financial markets, which have punished several euro zone countries.

The United States is having enough trouble solving its short-term budget problems. The next act could come as early as Monday, when Congress debates another spending bill. If lawmakers fail to act, a program that assists disaster victims could run out of money by Tuesday.

As for Europe, J.P. Morgan now expects a mild recession — and this forecast assumes policymakers “move aggressively to provide a huge amount of support for banks and sovereigns.”

If they don’t, the downturn could be far more severe and no region would be immune.

LOSING TRACTION

There is already evidence the global economy is losing traction. A private survey of China’s manufacturing sector, released last week, showed it probably contracted in September for a third consecutive month.

Official government data on factory activity is due on Saturday, and if it confirms a decline, that would deepen concerns about China’s capacity to help prop up the world.

The latest batch of data from China points to still-strong domestic growth, although the global slowdown has taken a significant toll on exports.

Indeed, the August purchasing managers’ survey showed overall orders increasing even as export orders contracted, suggesting China is still generating solid demand at home. If those figures deteriorate in Saturday’s report, it may signal a sharper-than-expected slowdown in domestic activity.

Germany, which joins China atop the list of the world’s biggest exporters, is looking even shakier. Its economy barely grew in the second quarter from the three months before, and confidence is fading fast.

The closely watched Ifo business climate index, due on Monday, is expected to record another decline after a precipitous drop in August.

OXYMORONS AND MORONS

With the G20 offering no promise of coordinated action, investor attention returns to what officials in the United States and Europe might do.

The next significant step may come in early October, when the European Central Bank holds a policy-setting meeting. Some economists are predicting a rate cut, which would mark an abrupt about-face for a central bank that was warning about inflation risks just a couple of months ago.

“It seems bizarre that the Fed has been easing monetary policy, partly on concerns about Europe, and yet the ECB, in the midst of a sovereign debt crisis, has hiked rates twice since April,” said Nomura economist Paul Sheard.

As for fiscal policy, that looks likely to stay tight in both Europe and the United States — much to the dismay of some economists who question how the economy can possibly pick up speed when the public sector is applying the brakes.

“The notion of expansionary fiscal contraction is oxymoronic and a bit moronic as well,” said Summers, who the former White House economic adviser.

(Reporting by Emily Kaiser in Singapore)

NEW YORK (Reuters) – Consumer sentiment in the United States rose in early September, but Americans remained very gloomy about the future with their expectations for the economy falling to the lowest level since 1980.

The Thomson Reuters/University of Michigan’s survey showed consumer sentiment edged up to 57.8 from 55.7 in August, creeping back up after a nearly three-year low last month and stronger than economists’ expectations.

Even so, the expectations gauge in the preliminary survey inched lower, and three out of four consumers expected bad times for the economy in the year ahead.

Only half of respondents said the same at the beginning of the year.

Consumer spending is a linchpin of the U.S. economy, but confidence has been badly hit as unemployment remains high and wages stagnate. Acrimonious political debate over the United States’ debt ceiling dampened sentiment over the summer. So did worries the U.S. economy could fall back into recession.

“The consumer is still very frustrated with virtually everything — 9 percent unemployment, still very tepid jobs creation and heightened job destruction,” said Lindsey Piegza, economist at FTN Financial in New York.

The survey’s index of consumer expectations dipped to 47.0 from 47.4, hitting the lowest level since May 1980. The economic outlook for the next 12 months fell to 38 from 40, the lowest since February 2009 when the world economy was gripped by the credit crisis.

Only 17 percent of those surveyed expected their finances to improve, the lowest rate ever recorded.

“Consumers are going to be very hesitant to spend with such negative views of their personal finances,” survey director Richard Curtin told Reuters Insider.

Still, the survey’s barometer of current economic conditions rose to 74.5 from 68.7, better than a forecast of 68.0.

“It was certainly nice to see the current conditions index rise again, but all we did was retake some ground to where we were in July,” said Tom Porcelli, senior U.S. economist at RBC Capital Markets in New York.

Separately, a report from the Federal Reserve showed the level of U.S. household debt compared with after-tax income fell in the second quarter to the lowest since 2004, a trend that could lay the groundwork for greater consumer spending.

At the same time, corporate cash hoarding rose to a record high during the period, a sign companies remain leery about the future.

Investors are now turning their attention to next week’s Fed meeting. The central bank is expected to unveil new measures to bolster growth, though analysts expect the Fed will only be able to take modest steps.

The economy is struggling to regain momentum after barely growing in the first half of the year.

“I don’t think this report is important for the Fed meeting next week, but I do think the overall lack of consumer confidence will be very important,” said Porcelli.

Data earlier in the week emphasized the view that the Fed will take a modest track. New claims for jobless benefits unexpectedly rose last week, and factory activity along much of the Eastern seaboard contracted in September, but industrial output and consumer prices rose last month.

A new jobs-creation package from President Barack Obama is also facing opposition, suggesting it is unlikely to emerge from Congress in its current form.

There was muted reaction in financial markets immediately following the data with U.S. stocks little changed in a choppy session.

Two bellwether U.S. companies expressed confidence in the economy on Thursday.

United Parcel Service Inc said the company was on track for record results this year despite the economy’s “bumpy ride”. General Electric Co’s chief executive said he sees “good, decent economic growth everywhere.

The survey’s one-year inflation expectation rose to 3.7 percent from 3.5 percent, while the survey’s five-to-10-year inflation outlook was at 3.0 percent from 2.9 percent.

Separate data showed a measure of future U.S. economic growth was little changed in the latest week, while the annualized growth rate fell to its lowest level in a year.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index dipped a hair to 122.4 in the week ended September 9 from 122.5 the week before. That was originally reported as 123.0.

The index’s annualized growth rate slumped to minus 7.1 percent from minus 6.6 percent to fall to its lowest level since mid-September 2010.

(Additional reporting by Emily Flitter in New York and Jason Lange in Washington; Editing by Padraic Cassidy and Diane Craft)