U.S., Mexico reach tomato deal to avert trade war

Tomatoes are displayed at a vegetable stall in La Merced market, downtown Mexico City January 31, 2013.

Credit: Reuters/Tomas Bravo

By Doug Palmer

WASHINGTON | Sat Feb 2, 2013 11:35pm EST

WASHINGTON (Reuters) - The U.S. government and Mexican tomato growers reached a tentative agreement on Saturday that reduces the threat of a costly trade war stemming from a U.S. decision last year to pull out of a 1996 bilateral tomato trade pact.

"I am pleased that we were able to come to an agreement on fresh tomato imports from Mexico that restores stability and confidence to the U.S. tomato market and meets the requirements of U.S. law,"? U.S. Commerce Under Secretary for International Trade Francisco Sanchez said in a statement.

The draft agreement substantially raises the minimum "reference" price at which Mexican plum, cherry and other tomatoes can be sold in the United States and accounts for changes that have occurred in the tomato market since the original agreement, Sanchez said.

For some Mexican tomatoes, the new reference price is more than double the current such price, Sanchez said. The deal is expected to take effect on March 4, after a public comment period, he said.

Mexican Economy Minister Ildefonso Guajardo said the deal guaranteed Mexican farmers access to the U.S. market under conditions that were "fair and competitive."

"We worked hand in hand with Mexican producers on this agreement to avoid damage to the sector," he said.

The U.S. Commerce Department made a preliminary decision in September to terminate the 1996 tomato agreement after Florida growers complained that the arrangement no longer protected them against Mexican tomatoes sold below the cost of production.

That angered Mexican growers, who argued the pact had benefited U.S. consumers and brought stability to the North American market.

Mexican officials said the U.S. move appeared designed to help President Barack Obama carry Florida in his election battle against Republican Mitt Romney. Obama won the state in the November contest.

Mexico exports about $1.9 billion worth of tomatoes to the United States each year. Varieties include common round, cherry, grape, plum, greenhouse and pear tomatoes. The industry says Florida producers have not kept pace with new growing techniques that produce tastier tomatoes and have propelled Mexican sales.

FOUR CATEGORIES

The proposed agreement spares Mexican growers from having to wage a costly legal battle against a new anti-dumping case brought by Florida producers.

It also averts the possibility of a broader trade war. U.S. business groups such as the U.S. Chamber of Commerce feared Mexico could retaliate if the United States slapped hefty duties on Mexican tomatoes.

Reggie Brown, executive vice president of the Florida Tomato Exchange, stopped short of endorsing the agreement but said it vindicated the U.S. industry's position that Mexican growers were "dumping" their tomatoes in the United States.

"Mexican growers and their government have tried to protect their interests with tremendous pressure on our government, threats to U.S. producers and a well-funded lobbying and media campaign," Brown said.

"The facts, however, were clear and could not be disputed. Mexican tomatoes were being sold in the U.S. market in rapidly increasing volumes at prices that did not reflect the cost of production," he said.

The new pact sets reference prices for four categories of tomatoes, instead of just one under the current pact. It also broadens coverage to include essentially all Mexican growers and exporters, the Commerce Department said.

The four categories, from least to most expensive, are "open field and adapted environment" tomatoes, "controlled environment" tomatoes, "specialty loose" tomatoes and "specialty packed" tomatoes.

The agreement sets winter and summer references prices for each category. The winter prices range from 31 cents per pound for open field and adapted environment tomatoes to 59 cents for specialty packed. The summer prices range from 24.6 cents to 46.8 cents per pound.

The single reference price for all Mexican tomatoes under the current agreement is 21.6 cents per pound in the winter and 17.2 cents in the summer.

(Reporting by Doug Palmer; Additional reporting by Dave Graham in Mexico City; Editing by Eric Beech)

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"Great Rotation"- A Wall Street fairy tale?

An exterior shot of the New York Stock Exchange in New York December 20, 2012.

Credit: Reuters/Andrew Kelly

By Edward Krudy

NEW YORK | Fri Feb 1, 2013 8:24pm EST

NEW YORK (Reuters) - Wall Street's current jubilant narrative is that a rush into stocks by small investors has sparked a "great rotation" out of bonds and into equities that will power the bull market to new heights.

That sounds good, but there's a snag: The evidence for this is a few weeks of bullish fund flows that are hardly unusual for January.

Late-stage bull markets are typically marked by an influx of small investors coming late to the party - such as when your waiter starts giving you stock tips. For that to happen you need a good story. The "great rotation," with its monumental tone, is the perfect narrative to make you feel like you're missing out.

Even if something approaching a "great rotation" has begun, it is not necessarily bullish for markets. Those who think they are coming early to the party may actually be arriving late.

Investors pumped $20.7 billion into stocks in the first four weeks of the year, the strongest four-week run since April 2000, according to Lipper. But that pales in comparison with the $410 billion yanked from those funds since the start of 2008.

"I'm not sure you want to take a couple of weeks and extrapolate it into whatever trend you want," said Tobias Levkovich, chief U.S. equity strategist at Citigroup. "We have had instances where equity flows have picked up in the last two, three, four years when markets have picked up. They've generally not been signals of a continuation of that trend."

The S&P 500 rose 5 percent in January, its best month since October 2011 and its best January since 1997, driving speculation that retail investors were flooding back into the stock market.

Heading into another busy week of earnings, the equity market is knocking on the door of all-time highs due to positive sentiment in stocks, and that can't be ignored entirely. The Standard & Poor's 500 Index .SPX ended the week about 4 percent from an all-time high touched in October 2007.

Next week will bring results from insurers Allstate (ALL.N) and The Hartford (HIG.N), as well as from Walt Disney (DIS.N), Coca-Cola Enterprises (CCE.N) and Visa (V.N).

But a comparison of flows in January, a seasonal strong month for the stock market, shows that this January, while strong, is not that unusual. In January 2011 investors moved $23.9 billion into stock funds and $28.6 billion in 2006, but neither foreshadowed massive inflows the rest of that year. Furthermore, in 2006 the market gained more than 13 percent while in 2011 it was flat.

Strong inflows in January can happen for a number of reasons. There were a lot of special dividends issued in December that need reinvesting, and some of the funds raised in December tax-selling also find their way back into the market.

During the height of the tech bubble in 2000, when retail investors were really embracing stocks, a staggering $42.7 billion flowed into equities in January of that year, double the amount that flowed in this January. That didn't end well, as stocks peaked in March of that year before dropping over the next two-plus years.

MOM AND POP STILL WARY

Arguing against a 'great rotation' is not necessarily a bearish argument against stocks. The stock market has done well since the crisis. Despite the huge outflows, the S&P 500 has risen more than 120 percent since March 2009 on a slowly improving economy and corporate earnings.

This earnings season, a majority of S&P 500 companies are beating earnings forecast. That's also the case for revenue, which is a departure from the previous two reporting periods where less than 50 percent of companies beat revenue expectations, according to Thomson Reuters data.

Meanwhile, those on the front lines say mom and pop investors are still wary of equities after the financial crisis.

"A lot of people I talk to are very reluctant to make an emotional commitment to the stock market and regardless of income activity in January, I think that's still the case," said David Joy, chief market strategist at Columbia Management Advisors in Boston, where he helps oversee $571 billion.

Joy, speaking from a conference in Phoenix, says most of the people asking him about the "great rotation" are fund management industry insiders who are interested in the extra business a flood of stock investors would bring.

He also pointed out that flows into bond funds were positive in the month of January, hardly an indication of a rotation.

Citi's Levkovich also argues that bond investors are unlikely to give up a 30-year rally in bonds so quickly. He said stocks only began to see consistent outflows 26 months after the tech bubble burst in March 2000. By that reading it could be another year before a serious rotation begins.

On top of that, substantial flows continue to make their way into bonds, even if it isn't low-yielding government debt. January 2013 was the second best January on record for the issuance of U.S. high-grade debt, with $111.725 billion issued during the month, according to International Finance Review.

Bill Gross, who runs the $285 billion Pimco Total Return Fund, the world's largest bond fund, commented on Twitter on Thursday that "January flows at Pimco show few signs of bond/stock rotation," adding that cash and money markets may be the source of inflows into stocks.

Indeed, the evidence suggests some of the money that went into stock funds in January came from money markets after a period in December when investors, worried about the budget uncertainty in Washington, started parking money in late 2012.

Data from iMoneyNet shows investors placed $123 billion in money market funds in the last two months of the year. In two weeks in January investors withdrew $31.45 billion of that, the most since March 2012. But later in the month money actually started flowing back.

(Additional reporting by Caroline Valetkevitch; Editing by Kenneth Barry)

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U.S. shale gas revolution throws down the gauntlet to Europe

By Alexandra Hudson

MUNICH | Sun Feb 3, 2013 6:51am EST

MUNICH (Reuters) - The United States is enjoying an energy bonanza thanks to shale gas, making it a magnet for industry, reducing import dependence and challenging Europe as it battles to dig itself out of recession, energy officials say.

Panelists at a weekend security conference in Munich warned Europe must develop a strategy on how to tap its own resources in order to keep energy costs competitive, or risk seeing power-intensive industries locate elsewhere.

"The shale gas and oil boom is already underway. As Europe continues to debate it, North America is reaping the advantages," said Jorma Ollila, Chairman of Royal Dutch Shell (RDSa.L).

Just a week ago Shell signed a $10 billion shale gas deal with Ukraine - the biggest contract yet in Europe - which could help Ukraine ease its reliance on Russian gas imports.

Ukraine is said to have Europe's third-largest shale gas reserves at 42 trillion cubic feet (1.2 trillion cubic meters), according to the U.S. Energy Information Administration.

Its reserves are dwarfed by those of France however, estimated to be Europe's largest at 180 trillion cubic feet.

France has banned the procedure, known as fracking which is used to extract shale gas and which involves pumping vast quantities of water and chemicals at high pressure through drill holes to prop open shale rocks.

Environmentalists fear it could increase seismic risks and pollute drinking water. U.S. officials question this and say that thanks to the higher proportion of gas use the United States has had its lowest carbon dioxide emissions in 20 years.

"Observing this from across the Atlantic it is really quite remarkable that there should be a ban or a go-slow on this development in Europe, really without any facts," said Daniel Yergin, Vice-Chairman of IHS Cambridge Energy Research.

Fracking is used to produce a third of U.S. natural gas he said, showing the environmental impact can be managed.

SHALE SCRAMBLE

World energy market flows already reflect North America's scramble to exploit shale oil and gas and highlight the potential prize Europe is ignoring.

"The U.S. internal energy revolution and the radical increases in production of oil and gas have boosted gas production by 25 percent and seen oil import dependence drop from 60 percent to 40 percent, and expected to decline further to 30 percent," said Carlos Pascual, the U.S. special envoy for energy affairs.

While Europe retains deep environmental concerns it also acknowledges that with the price of gas in the United States just a third of that in Germany, its industry is already suffering the effects.

German Economy Minister Philipp Roesler said: "Many German firms have opted for (relocation to) the United States, saying energy prices were the decisive factor...We are already seeing that we are suffering with our higher energy prices…it affects our own competiveness."

Addressing the panel in Munich European Union Commissioner Guenther Oettinger said Europe should be in a position to produce enough shale gas to replace its depleting conventional gas reserves, so as not to become more dependent on imports.

RUSSIA UNAFRAID

A greater abundance of gas could threaten the dominance of Russia's gas exports and pressure prices. The United States seized Russia's spot as the world's largest gas producer in 2012, and is due to produce significantly more from 2015.

"I believe that the shale revolution is something positive, a chance for all of us to launch technologies, intensify competitiveness, make our countries more energy secure, and reduce costs," said Russian Energy Minister Alexander Novak.

Russia is focusing on boosting exports to energy-hungry Asia and developing infrastructure to transport gas eastwards.

A recent confidential study by the German intelligence agency (BND) suggested the United States could turn from being the world's greatest energy importer into an oil and gas exporter by 2020, reducing its dependence on the Middle East and thereby giving it much more freedom in policy making.

China by contrast would become much more dependent on Middle East oil to fuel its rapid expansion.

Illustrating just how rapidly the shale revolution has taken hold, shale gas accounted for just 1 percent of gas production in 2005, whereas today it is a third, and by 2040 it will be 50 percent, U.S. special envoy Pascual said.

"Developing a greater capacity to reduce import dependence does not diminish our commitment to stability," he stressed.

"It will not affect our engagement for global security, peace and security in the Middle East."

(Additional reporting by Andreas Rinke; editing by Keiron Henderson)

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Iraq's $1.4 bln Asiacell share offer sold out: exchange

BAGHDAD | Sun Feb 3, 2013 4:15am EST

BAGHDAD (Reuters) - A $1.35 billion sale of shares in Iraqi mobile telephone firm Asiacell TASC.ISX, the country's first major public offer of equity since the U.S.-led invasion in 2003, was fully subscribed, the stock exchange said on Sunday.

Taha Abdulsalam, chief executive of the Iraq Stock Exchange, told Reuters that orders had been received for all 67.5 billion shares on offer, comprising 25 percent of the company's share capital.

The offer was one of the Middle East's biggest share offers in the last few years, and it was seen as a test of investor confidence in Iraq's economy as it recovers from years of war, political instability and financial sanctions.

Some major local shareholders in Asiacell are reducing their holdings through the offer.

By contrast, Qatar Telecom QTEL.QA, which owns 53.9 percent, was expected to use the offer to increase its stake, Layth Sulaiman, head of the exchange's board of governors, said last week.

The shares were sold at 22 Iraqi dinars ($0.02) each. Public trade in the shares had been expected to start on the exchange on Sunday, but it will begin on Monday, exchange officials said.

They said they could not immediately reveal details such as the total size of orders received for Asiacell shares, or how many of the shares had gone to foreign and local investors.

(Reporting by Aseel Kami, Writing by Matt Smith, Editing by Andrew Torchia and Erica Billingham)

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Japan finance minister Aso: weak yen result, not goal of anti-deflation policies

Japan's Finance Minister Taro Aso is seen in-between reporters while he speaks at a joint news conference with Bank of Japan Governor Masaaki Shirakawa and Economics Minister Akira Amari after their briefing to Prime Minister Shinzo Abe (not pictured) in Tokyo January 22, 2013.

Credit: Reuters/Kim Kyung-Hoon

TOKYO | Sun Feb 3, 2013 2:07am EST

TOKYO (Reuters) - Japan's Finance Minister Taro Aso on Sunday said it was not Tokyo's goal to weaken the yen and its policies were purely aimed at beating deflation, brushing off foreign concerns about currency wars ahead of a G20 meeting in Moscow.

Japanese Prime Minister Shinzo Abe's calls for aggressive action by the Bank of Japan (BOJ), which has prompted a slide in the yen, has raised alarm in Europe it could contribute to a "currency war" as other central banks adopt similar policies.

"We have launched policies aimed at ending deflation. As a result, the stock price has risen and the yen has weakened," Aso told Japanese public broadcaster NHK on Sunday. "(The yen weakness) is not the goal, the goal is to beat deflation," he said.

Japan may have to defend its actions at a Group of 20 meeting of financial leaders on February 15-16 to stem the criticism of its plan to revive the country's economic fortunes.

The BOJ last month agreed to double its inflation target to 2 percent and made an open-ended commitment to buying assets from 2014, measures intended to lift the economy out of its fourth recession since 2000 and years of deflation.

Aso also said that Japan "endured without complaining" when the yen strengthened as a result of the global financial crisis in 2008.

The yen on Friday skidded to its lowest level since May 2010. Last week the dollar rose 2 percent versus the yen and after 12 straight weeks of gains is up 16.6 percent on the Japanese currency.

(Reporting by Antoni Slodkowski; Editing by Jeremy Laurence)

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Argentina aims at bond "holdouts" ahead of court showdown

By Hugh Bronstein

BUENOS AIRES | Sat Feb 2, 2013 11:47am EST

BUENOS AIRES (Reuters) - Argentina has made its final written arguments ahead of a February 27 U.S. courtroom showdown against "holdout" bondholders demanding 100 cents on the dollar for debt that the South American country defaulted on more than a decade ago.

Oral arguments in the case, which could raise emerging market sovereign borrowing costs by complicating future restructurings, are set for the end of this month before the U.S. 2nd Circuit Court of Appeals in New York.

Argentina wants the court to overturn a finding in favor of creditors led by NML Capital Ltd and the Aurelius Capital Management funds, known as holdouts because they did not participate in restructurings under which most holders of Argentine bonds accepted reduced terms in return for payment.

The case, in which the holdouts are asking for $1.33 billion, stems from Argentina's $100 billion debt default in 2002. It has been pursued in U.S. courts because they have jurisdiction under Argentina's bond contracts.

NML and Aurelius call it unfair for Argentina to pay investors who accepted restructured terms without paying them as well. Argentina dismisses the argument.

"For all plaintiffs' talk about 'equal treatment,' what they really want is ... to enforce their contractual right to be paid a defaulted debt," Argentina said in a filing made just before midnight on Friday.

"Any actual claim to 'equal treatment' would be satisfied by treating all holdout creditors on the same terms as the participants in the republic's 2010 exchange offer," it said.

"Anything else is not equal treatment, but a preference that would violate Argentine law and public policy as well as fundamental principles of inter-creditor equity," it argued.

The case is seen as having broad reach. In court papers last year, the U.S. government said that to award full payment to the holdouts could harm the finances of emerging market countries and throw a wrench into the international capital markets by complicating future sovereign debt restructurings.

NML and Aurelius refused to take part in Argentina's 2005 and 2010 restructurings, in which about 92 percent of holders received between 25 cents and 29 cents on the dollar.

The 2nd Circuit issued a decision in October finding that Argentina must treat all bondholders equally, rather than allow holders of restructured debt to have priority.

That upheld earlier decisions by U.S. District Judge Thomas Griesa in Manhattan, who oversees much of the litigation.

Then in November, Griesa ordered Argentina to pay $1.33 billion into escrow for the holdouts when it paid restructured bondholders. The 2nd Circuit put that order on hold so Argentina could appeal, setting the stage for the February 27 hearing.

(Additional reporting by Daniel Bases and Nate Raymond in New York; Editing by Vicki Allen)

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Monte Paschi probe to widen as Italian election nears

Monte Dei Paschi bank headquarters is pictured in Siena January 25, 2013.

Credit: Reuters/Stefano Rellandini

By Philip Pullella

ROME | Sat Feb 2, 2013 11:23am EST

ROME (Reuters) - A plan by Italy's central bank to use bonds to bail out the troubled Monte Paschi bank can go ahead, a court ruled on Saturday, as a scandal surrounding the world's oldest lender looked likely to widen three weeks before a national election.

Magistrates in three cities investigating the Tuscan bank were poised to issue new summonses for more witnesses to give information next week following testimony by a raft of bankers in the past few days, leading newspapers said.

The bank is under investigation over an opaque series of derivatives and structured finance contracts between 2007 and 2009 that have left it facing losses of 720 million euros and dependant on the state lifeline.

Former prime minister Silvio Berlusconi, leading the centre-right's election charge, has tried to cash in on the bank's woes to attack both his centre-left rivals and outgoing prime minister Mario Monti, whose Treasury approved the Monte Paschi bailout.

A Rome administrative tribunal turned down a request by Italy's leading consumer group, Codacons, for the immediate suspension of the plan by the Bank of Italy to use 3.9 billion euros ($5.34 billion) in bonds to shore up the bank.

The court set a new hearing for February 20.

Tuscany is a traditionally leftist area and Monte Paschi has for decades had close ties to leftist parties such as the Democratic Party, the largest in the center-left opposition coalition.

"We are convinced that the Italian left has much to say about (Monte Paschi) and instead is not saying anything," Angelino Alfano, the center-right's candidate for prime minister, said on Saturday.

"People want clarity and want to know if there is a link between decisions by the Italian left and their disastrous effects on a such a large bank."

BANK SCANDAL A POLITICAL FOOTBALL

Opinion polls suggest the bank scandal has so far had only a slight effect on voting intentions for the February 24-25 election, which the center-left is still expected to win, although its lead is narrowing.

Monte Paschi is accused of having overpaid in a 9 billion euro ($12 billion) purchase of rival Antonveneta in 2007, stretching its finances to the limits, and of having made risky derivatives trades in 2006-2009 aimed at massaging its accounts.

Prosecutors are investigating whether bribes were paid at the time the bank bought Antonveneta. They also suspect fraud was involved in the derivatives deals, which could cost the bank 720 million euros.

The scandal has spread from the rolling hills of Tuscany to the skyscraper that houses the European Central Bank (ECB) in Frankfurt.

ECB head Mario Draghi was Bank of Italy governor at the time of Monte Paschi's risky operations and has been accused of lax oversight on his watch.

Despite being deeply concerned by Monte Paschi as long ago as 2009 and having specific and growing doubts about its operations and accounts, the Bank of Italy revealed that it did not summon the bank's management until late 2011 and applied no sanctions until after the executives stepped down last year.

Mario Borghezio, an outspoken member of the European parliament for the Northern League, said he had submitted a question to the European Commission on whether Draghi was now fit to become the supervisor for the entire euro zone.

After the court hearing on Saturday, Codacons called on the central bank's governor to resign and for an administrator to be appointed to run Monte Paschi.

Codacons has accused Bank of Italy supervisors of failing in their oversight when Monte Paschi undertook the complicated derivatives operations.

It had asked the court to block the central bank's plans to issue so-called Monti bonds to cover the losses run up by Monte Paschi. It is also suing the central bank for 3.9 billion euro ($5.34 billion), the same amount of bonds it wants blocked.

In a statement, the Bank of Italy said it would release the court documents concerning the bond issue ahead of the February 20 hearing and rejected Codacons' accusations as "unfounded and presumptuous". ($1 = 0.7301 euros)

(Additional reporting by Antonella Cinelli, Paolo Biondi and Gavin Jones; writing by Philip Pullella, editing by William Hardy)

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ANA in talks with Boeing to speed up 777 jet deliveries: Nikkei

Four All Nippon Airways' (ANA) Boeing Co's 787 Dreamliner planes (top) are seen behind another ANA plane at Haneda airport in Tokyo January 29, 2013.

Credit: Reuters/Toru Hanai

TOKYO | Sat Feb 2, 2013 10:59pm EST

TOKYO (Reuters) - Japan's All Nippon Airways (9202.T) is in talks with U.S. aircraft maker Boeing Co (BA.N) to speed up the delivery of three 777 jetliners as its fleet of 787 Dreamliner airplanes remains grounded with undiagnosed battery problems, the Nikkei newspaper said on Sunday.

All 50 Boeing 787s worldwide remain grounded as authorities in the United States, Japan and France investigate a battery fire in Boston on January 7 and a separate battery failure that forced a second 787 to make an emergency landing in Japan a week later.

ANA had planned to add the three Boeing 777 jets to its fleet in fiscal year 2013, but it will aim to get them delivered ahead of schedule to soften the negative impact from the Dreamliner grounding, Shinzo Shimizu, ANA's senior vice president told Nikkei. The airline is also considering keeping older Airbus 320 jets in service for longer, he said.

ANA, Asia's top airline by revenue, lost more than $15 million in revenue from having to cancel Dreamliner flights last month. Earlier this week it said it was unclear as to when Boeing's sophisticated new plane would resume commercial flights, making it harder to predict the longer-term financial impact of having the plane idle.

The Japanese airline has said it has no plans to change its growth strategy, but it conceded that a prolonged grounding of the plane would impact that strategy, and will delay issuing its mid-term business plan for several weeks.

ANA has canceled close to 850 flights until February 18, affecting over 82,000 passengers. The Dreamliner makes up around 7 percent of ANA's fleet, and the airline normally operates around 1,000 flights a day and carries 3.7 million passengers each month.

(Reporting by Antoni Slodkowski; Editing by Sanjeev Miglani)

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China services' slow uptick highlights mildness of recovery

By Jonathan Standing

BEIJING | Sun Feb 3, 2013 12:08am EST

BEIJING (Reuters) - Growth in China's increasingly important services sector rose for the fourth straight month in January, though the slim increase added to evidence that the recovery in the world's second-largest economy remains a modest one.

China's official purchasing managers' index (PMI) for the non-manufacturing sector rose to 56.2 in January from 56.1 in December, the National Bureau of Statistics (NBS) said on Sunday.

The figure follows the bureau's PMI for the manufacturing sector on Friday, which eased to 50.4 in January, missing market expectations. A reading above 50 indicates growth is accelerating, while one below 50 indicates it is slowing.

"This marginal rise of non-manufacturing PMI again casts doubt on the strength and sustainability of the recovery," said Zhang Zhiwei, chief China economist at Nomura in Hong Kong.

He noted that new orders declined, pointing to weaker demand, while a rise in input service prices suggested inflationary pressure.

"We believe the government cannot further loosen policies given inflationary pressure, as growth may weaken beyond Q1 as policy easing runs out of steam," Zhang said.

The NBS said in a statement that the retail, air cargo and shipping sectors all reported levels of activity above 60 in January, though the construction sector, one of the big drivers of growth in December, ticked down slightly to 61.6 from 61.9.

The new orders index fell to 53.7 from the previous month's 54.3, showing a slowdown in demand even though the overall figure remained well above the 50 mark separating growth from contraction.

The intermediate input price index jumped to 58.2 from 53.8 last month, indicating rising costs for enterprises, with a big rise in costs the construction sector.

MODEST RECOVERY

The marginal rise in the services PMI is consistent with the view of many economists that recent data signals a modest recovery for China and that steady policy support may well be needed to keep it on track.

A Reuters poll last month showed that China's economic growth is likely to edge up to 8.1 percent in 2013 from 7.8 percent last year, which had been the economy's slowest growth since 1999.

But the recovery could fizzle in 2014 as a pick-up in inflation forces the central bank to revert to modest policy tightening, the poll found.

The services sector generated 44 percent of China's GDP in 2011, up from 35 percent in 2000, and Beijing has acknowledged that greater consumer activity is needed to reduce the economy's reliance on exports and investment-led growth.

The services industry has so far weathered the global slowdown much better than the factory sector, with the PMI consistently signalling healthy expansion and hitting a 10-month high of 58.0 in March.

That is partly due to a maturing economy as well as a historic shift in the last decade leading a majority of Chinese to live and work in cities rather than the countryside.

The January index of expected activity also fell from December, but remained above 60, indicating that service sector enterprises continued to be optimistic, the bureau said.

(Editing by Sanjeev Miglani)

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Jobs, factory data point to steady economic growth

A job seeker fills out forms at a table while attending a career fair with prospective employers in New York City, October 24, 2012.

Credit: Reuters/Mike Segar

By Lucia Mutikani

WASHINGTON | Fri Feb 1, 2013 4:15pm EST

WASHINGTON (Reuters) - Employment grew modestly in January and job gains in the previous two months were larger than first reported, a counterpunch to recent data that suggested a tepid economic recovery had stalled at the end of last year.

Adding to that optimism, separate reports on Friday showed factory activity hit a nine-month high in January as new orders rebounded, while car and truck sales surged and consumer confidence perked.

The reports, which helped propel U.S. stock markets to their highest levels in more than five years, contrasted markedly with a government report earlier in the week that said the economy shrank unexpectedly in the final months of 2012, albeit for what most economists consider fleeting reasons.

"It is clear that the economy has a forward momentum. Most pistons in the economic engine are firing, pointing to sustained economic growth," said Sung Won Sohn, an economics professor at California State University Channel Islands.

Employers added 157,000 jobs last month and 127,000 more jobs were created in November and December than previously reported, the Labor Department said. Revisions performed each January to the prior year's data showed the labor market was healthier in 2012 than initially thought.

While the unemployment rate rose 0.1 percentage point to 7.9 percent, the closely watched report showed an increase in hourly earnings and solid gains in construction and retail employment.

Separately, the Institute for Supply Management said its index of national factory activity rose to 53.1 last month, the highest level since April, from 50.2 in December. A reading over 50 suggests expansion in the manufacturing sector.

Activity was boosted by a bounce back in orders and inventories, as well as gains in employment. That offered hope manufacturing will continue to support the economy.

The fairly upbeat reports sparked a rally on Wall Street, with the Dow Jones industrial average touching its highest level since mid-October 2007 and the Standard & Poor's index rising to a five-year high.

The dollar rallied against the Japanese yen, while U.S. Treasury debt prices fell marginally.

OUTPUT CONTRACTION SEEN AS A FLUKE

A third report on Friday showed consumer sentiment on the rise even as households faced up to smaller paychecks as some federal taxes rose on January 1.

The economic growth picture was also brightened by reports showing several automakers, including General Motors Co and Ford Motor Co scored better-than-expected sales in January.

The flurry of upbeat reports followed Wednesday's surprise contraction in gross domestic product in the fourth quarter, and as a group should ease worries that the United States was at risk for recession.

GDP contracted at a 0.1 percent annual rate in the fourth quarter, largely because of a plunge in defense spending and slowdown in the pace of inventory accumulation.

Superstorm Sandy, which hit the East Coast in late October, also weighed on output, a drag that should lift this quarter and could be replaced by new spending linked to rebuilding projects.

"Underneath the surface, the fourth-quarter economy was really pretty good despite all the defense cuts. I think the private sector is leading the way," said Jack Ablin, chief investment officer at BMO Private Bank in Chicago.

Still, the pace of job growth is too slow to absorb the roughly 22.7 million Americans who are either unemployed or working part-time while hoping for full-time work.

Economists say employment gains in excess of 250,000 a month over a sustained period are needed to make a significant dent in the jobless rate.

The Federal Reserve on Wednesday left in place a monthly $85 billion bond-buying stimulus plan, saying economic activity had "paused" in recent months.

"The report keeps the Fed clearly in play to continue their easy monetary policy," said Eric Stein, portfolio manager at Eaton Vance Investment Managers in Boston.

The Labor Department's annual benchmark revisions, going back to 2008, found the level of employment as of March 2012 was 422,000 higher than previously reported. That helped to push the average job growth for 2012 to 181,000 a month from 153,000 previously.

MODEST JOB GROWTH

Those steady gains, if sustained, could help the economy weather the headwinds of higher taxes and lower government spending. A payroll tax cut expired on January 1 and automatic spending cuts will kick in March unless Congress acts.

January's job gains all came in the private sector. Hiring was broad-based, as it was in December, and declines in public sector employment were small.

The goods-producing sector showed a third month of solid gains, and manufacturing employment advanced for a fourth straight month. Construction payrolls increased 28,000, adding to December's healthy 30,000 gain.

Since hitting a low in January 2011, construction employment has grown by 296,000. Fully one-third of those gains have taken place in the last four months alone.

Though the level of construction jobs remains about 2 million below its peak in 2006, further improvement is expected this year as the housing market recovery gains momentum.

Housing is expected to support the economy this year, taking over the baton from manufacturing, as many Americans buy and start to furnish and renovate houses.

Within the vast private services sector, retail jobs rose by a solid 32,600 jobs after rising 11,200 in December. Retail employment has now risen for seven straight months.

Education and health payrolls added 25,000 jobs in January after employment grew by the most in 10 months in December.

Government payrolls dropped by 9,000 last month after falling 6,000 in December. The pace of cuts is moderating as local government layoffs, outside education, subside.

Average hourly earnings rose four cents last month and were up 2.1 percent in the 12 months through January. That followed a similar gain in December.

"It may be that we are now getting to a point in the labor market where we are going to see an upward creep in average hourly earnings," said John Ryding, chief economist at RDQ Economics in New York.

"That's going to be good for the consumer and they need help because they are being whacked by the payrolls tax increase."

The length of the workweek for the average worker was steady at 34.4 hours for a third straight month.

(Additional reporting by Ellen Freilich, Steven C. Johnson, and Leah Schnurr in New York; Editing by Ros Krasny and Andrea Ricci)

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