BBC News - Eurozone unemployment falls for first time since 2011

The eurozone's unemployment rate has fallen for the first time since early 2011, according to official data.

The ECB thinks an inflation rate of just under 2% is ideal for economic growth

The jobless rate across the 17 countries using the euro currency fell to 12.1% in October, the first fall since February 2011, the European Union's statistics office Eurostat said.

About 19 million people are out of work across the region.

Meanwhile, the annual rate of consumer inflation rose from 0.7% to 0.9%.

The European Central Bank (ECB) aims to keep inflation just below 2%. - the level it deems right for growth.

The data indicates that the fragile eurozone economy is gradually improving, although there are big disparities between individual countries.

Unemployment in Spain and Greece is at 27%, for example, while Austria's is at 5%.

In a surprise move earlier this month, the ECB cut its benchmark interest rate from 0.5% to a record low of 0.25%.

ECB president Mario Draghi said the decision reflected its view that low inflation and weak economic growth would be the dominant story in the region.

When inflation amongst the 17 countries using the euro currency fell to 0.7% in October - its lowest level since January 2010 - there were fears eurozone growth could be stalling and that some countries could even be moving into deflation.

Bloomberg News - Swiss Economy Grows More Than Forecast on Better Exports

Valentin Flauraud/Bloomberg

A Swiss national flag flies from a flagpole above Lake Geneva in Geneva, Switzerland.

Switzerland’s economy expanded more than economists expected in the third quarter, with exports helping it perform better than neighboring Germany.

Swiss gross domestic product rose 0.5 percent in the three months through September from the second quarter, when it expanded by the same amount, the Secretariat for Economic Affairs in Bern said in a statement today. That beats the 0.4 percent median estimate in a Bloomberg survey of 19 economists.

The Swiss National Bank (SNBN) set a cap on the franc of 1.20 per in September 2011, citing the risk of deflation and a recession. Since then, the Swiss economy has seen a single quarter of contraction, while the debt-plagued euro area only emerged from an 18-month slump in the middle of this year.

If the SNB were to tighten monetary policy reflecting better growth, “it would have immediate negative domestic effects,” said Christian Lips, an economist at NordLB in Hanover. “Looking forward, neither the cap nor the rates can be changed before year-end 2014,” given weak growth in the neighboring euro area, Switzerland’s top trading partner, he said.

The franc, which has slipped two percent against the euro since the start of the year as the bloc’s debt crisis has waned, was trading unchanged at 1.2324 per euro at 8:43 a.m. in Zurich, off an intra-day high of 1.2321.

Better Exports

In the third quarter of 2013, household consumption increased 0.2 percent from the second, construction investment climbed 1 percent and exports of goods increased 0.5 percent.

“Following an extended period of relative stagnation, exports of goods showed a strong increase,” the SECO said in the statement.

Combined with recovering euro area demand, less volatility in the exchange rate due to the currency cap has helped exporters, SNB President Thomas Jordan said in Biel this week.

The 17-nation currency bloc’s economy grew just 0.1 percent in the three months through September. Germany’s, the biggest economy of the region, expanded 0.3 percent in the third quarter

Jordan said this the cap on the franc was still “indispensable” and would stay in place. Jordan has in the past stressed the cap is not a tool for fine tuning -- remarks some economists have taken to mean the cap won’t be shifted to another level.

Jordan’s remarks were “a clear indication that the SNB is unlikely to touch their current monetary-policy framework” at the next policy review on Dec. 12, according to Reto Huenerwadel, senior economist at UBS AG in Zurich.

Manufacturing Output

Compared with a year ago, the Swiss economy grew 1.9 percent in the third quarter, down from a 2.5 percent year-on-year growth rate in the second, today’s data showed. Domestic demand is the biggest component of Swiss economic growth, accounting for about 57 percent of output last year, while exports made up 10 percent.

Switzerland’s manufacturing sector has improved in recent months, according to the forward-looking Procure.ch Purchasing Manager’s Index.

The Swiss economy is expected to outperform that of the euro-area next year too. The Organisation for Economic Cooperation and Development foresees Swiss growth of 1.9 percent this year, accelerating to 2.2 in 2014. That compares with a predicted contraction of 0.4 percent for the euro area in 2013, followed by an expansion of just 1 percent next year.

A high influx of skilled immigrants, many of them from the EU, has helped support Swiss aggregate demand in recent years. Swiss GDP is now 5 percent above its pre-crisis level, though -- contrary to Germany -- in per-capita terms output has not yet returned to its pre-crisis level, SNB board member Fritz Zurbruegg said last week.

Switzerland’s output gap remains negative, meaning there is little inflationary pressure, Zurbruegg said. Swiss consumer prices are expected to fall 0.2 percent this year, and  the central bank doesn’t see a threat to its 2 percent price-stability threshold in the medium term.

By Catherine Bosley

Reuters News - Independent Scotland would keep the pound and the queen, says Salmond

Scotland's First Minister Alex Salmond holds the referendum white paper on independence during its launch in Glasgow, Scotland November 26, 2013.

(Reuters) - An independent Scotland would keep the British pound, the queen and remain in the European Union but have its own defence force and collect its own taxes, First Minister Alex Salmond said on Tuesday.

In a 670-page blueprint aimed at convincing Scots they should vote on September 18 next year to end a 306-year union with England, Salmond said there would be no need to increase taxes if Scotland broke away.

With separatists lagging in opinion polls, his Scottish National Party is hoping the blueprint will win over the many sceptics, answering questions his Scottish National Party (SNP) has been accused of dodging.

"We know we have the people, the skills, and resources to make Scotland a more successful country," said Salmond, head of a devolved government in Scotland, which for now is still part of the United Kingdom.

He said Scottish taxes would not be spent on nuclear programmes and that the United Kingdom's nuclear missiles would be removed from Scotland for good.

"Independence will put the people of Scotland in charge of our own destiny" he added.

Nicola Sturgeon, the deputy first minister, has described the document as "the most comprehensive and detailed blueprint ever drawn up for a prospective independent country".

Scotland's bid for independence is being watched closely internationally, particularly in Catalonia where 80 percent of people favour a vote for independence from Spain.

"If it's feasible in the UK, it should be feasible in Spain," said Albert Royo, secretary general of Diplocat, the Public Diplomacy Council of Catalonia, a public-private body charged with building support for Catalan's independence vote.

WAVERING VOTERS

With 10 months to the Scottish vote, many of the 5 million Scots are still undecided.

The latest poll, published in the Sunday Times this week, suggested the gap had narrowed with 47 percent opposed to quitting the UK, 38 percent in favour and 15 percent undecided.

Britain's three main UK-wide political parties have argued against independence, saying Scotland would be worse off economically on its own and unable to defend itself or project power on the global stage as well as it can as part of the UK.

At stake are British oil reserves in the North Sea while debates over how Britain would split its national debt and the issue of the nuclear weapons are already fraught.

Pro-unionists have been helped in recent weeks by two reports from financial institutions. One warned Scotland would need to raise taxes and cut spending as North Sea oil revenues decline and its population ages and the second said independence would complicate cross-border pensions.

But Alistair Carmichael, the new Scotland secretary in the UK government, is aware of the power of wavering voters who gave the SNP a surprise landslide victory in Scotland two years ago.

New to the role, he has toughened up the rhetoric, saying nationalists cannot make assumptions such as being able to keep the British pound.

A report by the All-Party Parliamentary Group on Taxation, in the UK's parliament in London, said under SNP plans, the UK would dictate Scottish fiscal policy even after independence.

Researcher Marius Ostrowski said keeping the pound would make Scotland dependent on the Bank of England as a central bank and lender of last resort, and on the UK government's lead for its fiscal responsibility rules.

(Additional reporting by Fiona Ortiz in Madrid; Editing by Stephen Addison)

BBC News - Oil prices fall after Iran agrees nuclear deal

Oil prices have fallen after Iran agreed a deal to curb some of its nuclear activities in return for an easing of international sanctions.

The deal has helped ease tensions in the Middle East region

Iran holds the world's fourth-largest oil reserves, but its exports have been hurt by the tough sanctions against it.

Though Iran will not be allowed to increase its oil sales for six months, the deal has eased tensions in the Middle East - a key oil-producing area.

Brent crude fell more than 2% in early Asian trade on Monday.

It dropped by $2.42 to $108.63 per barrel, while US light sweet crude fell 84 cents to $93.64 per barrel.

Fuel-intensive companies, such as airlines and travel firms, received a boost on the stock markets as a result.

International Airlines Group, the owner of British Airways and Iberia, was up 2.87% in lunchtime trading, while Air France KLM rose 3.11%. Travel operator Thomas Cook lifted 3.68%.

"There are a lot of sanctions that have been eased, which will allow Iran to slowly re-enter the global economy," Jonathan Barratt, chief economist at Barratt's Bulletin told the BBC.

"And as for oil - it's a just a six-month waiting period. If they tick all the boxes during that time, they will be back in that sector as well."

Knee-jerk reaction?

World powers suspect Iran's nuclear programme is secretly aimed at developing a nuclear bomb - a charge Iran has consistently denied.

In an attempt to force Tehran to curb its programme, the US and other leading economies have imposed a series of tough sanctions aimed at Iran's oil exports - a key driver of its economy.

In November 2011, Washington threatened to shun foreign financial institutions that conducted oil transactions with Iran's central bank.

That prompted several countries including China, Japan, India and South Korea - some of the biggest buyers of Iranian oil - to cut their imports.

The European Union also imposed a ban on imports of Iranian oil.

"Working with our international partners, we have cut Iran's oil sales from 2.5 million barrels per day (bpd) in early 2012 to 1 million bpd today," afact sheet published by the White House said.

While the deal has raised hopes of a long-term agreement that may allow Iran to increase its oil sales eventually, some analysts believe oil prices are unlikely to fall further.

"This news is hot off the press, and so there is some knee-jerk reaction," said Ben le Brun, a market analyst at OptionsXpress in Sydney.

"The market will probably want to see the nitty-gritty details of the agreement before we see any further significant declines in prices," he added.

BBC News - Help to Buy: Thousands use scheme to buy new homes

The first phase of Help to Buy started in England in April, and later in Scotland

Some 5,375 new homes were bought in six months in England using the initial phase of the government's flagship Help to Buy scheme, figures show.

Of these, 92% were sold to first-time buyers, the Department for Communities and Local Government (DCLG) said.

Help to Buy was launched in April, initially helping those buying newly-built homes with a shared equity loan.

The average price of a property bought under the scheme was £194,167, with an average equity loan of £38,703.

The highest number of Help to Buy sales were in Leeds, Wiltshire, Milton Keynes and Reading, the DCLG said.

The figures cover the six months to the end of September. Since then, the government has begun the second phase of the scheme which is not restricted to new-builds and is UK-wide.

Under this second phase, up to 15% of the value of the home loan can be guaranteed by the Treasury. Critics have argued this could create a housing bubble.

Bricks and mortar

Many house builders have said that their business has been boosted by Help to Buy. A week ago, Taylor Wimpey said it had sold all the homes it was building this year.

The DCLG figures show that, in the first seven months of Help to Buy, 18,050 reservations were made for homes being built.

"Today's figures show we are building at the fastest rate since the crash in 2008, more people are securing a place on the housing ladder, and we are delivering tens of thousands of affordable homes across the whole country," said Housing Minister Kris Hopkins.

"But there's still more to do, and improving the housing market will remain a top priority. That means getting builders back on site, delivering new housing, more jobs and ensuring every hard working family has a place they can call home."

However, the number of new homes completed has been at extremely low levels in recent years. Last year was the lowest number since the 1940s.

Shadow chancellor, Ed Balls, in a speech to house builders, said Labour supported the first phase of Help to Buy, but had misgivings about the second phase. He said there was a danger in focussing on encouraging buyers.

"The fundamental flaw in the chancellor's current plan is to rely on securing lasting recovery by boosting housing demand, while failing to take any action to boost housing supply," he said.

"If Help to Buy merely boosts demand for housing without being matched by action to increase housing supply, then house prices will rise and rise."

Second movers

New homes still represent a fraction of house sales across the UK, which have topped one million in 2013 - the first time the total has reached six figures since 2007.

A report published by the Council of Mortgage Lenders (CML) said that the start of a housing market recovery had been prompted by greater mortgage availability, reinforced by government intervention in the market.

RBS and Lloyds Banking Group are already offering deals through the second phase of Help to Buy. On Thursday, HSBC announced it would join them with new deals on the table for buyers offering a 5% deposit from Monday. Earlier in the week, Yorkshire Building Society launched some products for those offering a 5% deposit, but outside of the Help to Buy umbrella.

Home loans are currently relatively cheap in a historical context. Consequently, there has been a pick-up in first-time buyers and buy-to-let investors in the market compared with the very low levels seen during the financial crisis and credit crunch.

However, the CML said there had been "negligible" signs of buying by those moving on to a second, larger home.

This was the result of the erosion of equity in their properties as house prices fell during the downturn years of 2008 and 2009, and the fact that their incomes were failing to keep pace with inflation.

Bloomberg News - Japan Trade Deficit Widens as Fossil Fuel Imports Surge: Economy

Yuriko Nakao/Bloomberg

A flare burns off excess gas from a stack nearby Cosmo Oil Co.'s refinery in Ichihara City, Chiba Prefecture, Japan. Fossil fuels contributed to nearly half of the gain in imports, with the value of petroleum shipments to Japan soaring 67.8 percent from the previous year, and liquefied natural gas rising 39.4 percent.

Japan posted its biggest October trade deficit on record, as a revival in exports to the U.S. and China was overwhelmed by the nation’s soaring costs for imported fuel in the wake of the nuclear industry’s shutdown.

The shortfall of 1.09 trillion yen ($10.9 billion) extended a record run of deficits to 16 months, and was larger than all 28 forecasts in a Bloomberg News survey, a finance ministry report showed today in Tokyo. Imports (JNTBIMPY) climbed 26.1 percent from a year earlier, while exportsgained 18.6 percent.

The yen’s slide has helped boost profit forecasts and pushed up stock prices of exporters such as Toyota Motor Corp, while at the same time raising the cost of imports. The deficits are likely to continue and may drag on growth in the world’s third-largest economy, according to economist Norio Miyagawa.

“Exports are rebounding on a pick-up in the overseas economy, while imports are likely to expand further before a sales-tax increase” in April, said Miyagawa, a senior economist at Mizuho Securities Research and Consulting Co. in Tokyo. “The deficits aren’t a good sign for Japan’s economy as they mean wealth is flowing out of Japan.”

The yen was 0.2 percent stronger at 99.96 per dollar at 11:17 a.m. in Tokyo, while the Topix stock index was down 0.3 percent.

Fuel Imports

Fossil fuels contributed to nearly half of the gain in imports, with the value of petroleum shipments to Japan soaring 67.8 percent from the previous year, and liquefied natural gas rising 39.4 percent. The large gain in October this year may partly reflect depressed imports a year earlier following a tax change for some fossil-fuel imports.

Exports to China increased 21.3 percent from a year ago when the two nations were embroiled in a row over islands in theEast China Sea. Shipments to the U.S. rose 26.4 percent, while those to the European Union climbed 27 percent.

The record stretch of 16 monthly deficits is the longest in comparable data back to 1979.

Gross domestic product grew at an annualized 1.9 percent in the three months through September after a 3.8 percent expansion the previous quarter. The economy will contract in the second quarter of next year following the April increase in the consumption levy.

Bernanke Comments

The U.S., Japan’s largest export destination, is displaying signs of picking up.

The labor market in the U.S. has shown “meaningful improvement” since the start of the Federal Reserve’s bond-buying program and the benchmark interest rate will probably stay low long after the purchases end, Fed Chairman Ben S. Bernanke said yesterday in a speech in Washington.

Data today are forecast to show U.S. retail sales rose in October after a decline in the previous month, while U.S. consumer prices remained unchanged from a month earlier after a gain in prior period, according to surveys of economists by Bloomberg News.

Elsewhere, Australia’s central bank would prefer the local dollar to be lower, Assistant GovernorGuy Debelle said today at a forum in Sydney.

By Keiko Ujikane

Reuters News - Analysis - As market bubbles form, investors may want to take cover

A screen displays the Dow Jones Industrial average as it rises over 16,000 just after the opening bell on the floor of the New York Stock Exchange, November 18, 2013.

(Reuters) - Five years of rapid-fire money printing at the U.S. Federal Reserve and easy money policies at other central bankshave left trillions of dollars sloshing around the world financial system, and some of it is ending up in some rather odd places.

The froth can be seen in everything from Pakistan's stock market to thoroughbred racehorses, rare paintings and gemstones, taxi licenses and the digital currency Bitcoin.

"When it gets like this, just pick your asset - a painting, a bottle of wine, whatever. It's almost always a sign that there's too much money floating around," said Howard Simons, a strategist at Bianco Research in Chicago.

Certainly, the risks don't look as great as they did in 2005-2007, when real estate prices in the U.S. and other countries skyrocketed, then collapsed, triggering the financial crisis. The most inflated prices are in smaller pockets of the markets than they were back then, so there is less systemic risk.

But if a series of smaller financial market bubbles deflate or even burst there will still be a lot of agony, investment strategists warn.

When the Fed does pull back from stimulating the economy by cutting back its quantitative easing program of bond buying - which is expected in the first half of 2014 - there could be some shocks for markets to withstand, said Win Thin, an emerging market strategist at Brown Brothers Harriman. "That could lead to some painful adjustments."

One toxic corner of the markets can infect stronger assets as investors seek to raise cash to cope with a plunge. "What I learned in the last two bear markets is that it doesn't matter if you own the crappy asset," said Simons. "If someone else does and starts panic selling, it takes your good stuff down too."

And a further bond market selloff, following the reversal this summer, could not only hurt investors but threaten a downturn - as mortgage rates and other borrowing costs climb.

ETERNAL BULLS

There is evidence of possible excess in many areas.

Getting into a taxi cab these days may no longer come with a menu of can't-miss stock tips from the driver but the cab's owner probably paid a steep price for the right to the license. At a New York auction last week, taxi medallions sold for more than $1 million (£621,118), about double the prices paid five years ago.

As for U.S. stocks, it's hard to find many bearish investors despite - or because of - the 26 percent gain in the S&P 500 index this year and the 166 percent rise since 2009.

In Europe, it often feels as if the continent-wide debt crisis that threatened the euro never happened. Price-to-earnings ratios have soared to 2007 levels even as earnings momentum has sputtered. Over the last month, short-selling has dropped to a seven-year low and top performers in the STOXX Europe 600 index .STOXX are shares that were once heavily shorted.

As hedge fund manager David Einhorn put it in a letter to investors in October: "When 'high short interest' becomes a viable stock-picking strategy and conventional valuation methods no longer apply for many stocks, we can't help but feel a sense of déjà vu," he said in reference to the dotcom stocks bubble and bust in 1998-2001.

IPO FEVER AT COMPANIES

That particular bubble turned investors, especially retail investors, into addicts for the latest stock offerings. And things are looking a bit frothy again. So far, 199 U.S. companies have gone public this year, the highest number since 2007, and some of the first-day gains have been huge.

Such a race to list is a sign that things are nearing a top, says Peter Atwater, president of Financial Insyghts, an investment advisory firm in Mendenhall, Pennsylvania.

While the broader U.S. market does not look particularly pricey - the S&P's forward P/E ratio of 15 is about bang in line with the long-run average - individual stocks certainly do.

Look no further than some of the biggest names coming to market in recent years, such as the social media star Twitter (TWTR.N) or electric car maker Tesla Motors (TSLA.O).

At current market prices, after almost doubling on its first day of trading, the micro-blogging site is valued at almost $24 billion despite being unprofitable. Tesla is trading at a P/E ratio of around 80 based on expected 2014 earnings.

Even the retailer Container Store Group Inc (TCS.N), which sells things to put things in, saw its shares double on its stock market debut on November 1.

Stephen Massocca, managing director at Wedbush Equity Management, said, "nobody in their right mind would make an all cash offer at current levels for a lot of these companies."

AND ON THE FOOTBALL FIELD

Even professional athletes are getting in on the action.

Arian Foster, a National Football League player with the Houston Texans, was the asset for a planned IPO based on 20 percent of his future earnings, which he had sold to San Francisco-based Fantex. The firm would then sell stocks based on Foster's economic performance.

"I thought it was a joke," said Daniel Morgan, senior portfolio manager at Synovus Trust Co. "They're not robots, they wear down. What's the life of an average guy in the NFL, four years?"

Fantex, though, had to postpone the Foster IPO after the running back suffered a season-ending injury, underlining just how risky an investment it would have been.

IT'S THE BOND MARKET, STUPID

By suppressing interest rates, central banks have yield-starved investors falling over themselves to lend money to companies with less-than-stellar credit records, as well as looking for some of those exotic investments.

Quite a few investors, frightened that super-low interest rates will start rising next year, have bought up floating-rate loans. The only problem: many have no covenants, which usually limit the amount of debt a borrower can take on and let lenders have a say in thebusiness if things start to go sour.

"People don't realize they're taking a lot of credit risk," said AllianceBernstein portfolio manager Gershon Distenfeld.

Meanwhile, high-yield bond issuers - companies with weak balance sheets and sub-investment grade ratings - are paying on average 5.8 percent to borrow, near record lows.

Default rates at around 2.5 percent are well below historical averages but Martin Fridson, head of FridsonVision, said recently he expects those default rates to spike to 8.4 percent between 2016-2020, which could cause a lot of forced selling.

POCKET MONEY

Perhaps one of the best ways to measure froth is to watch what the super-rich do with their pocket change. Lately, they seem to have developed an insatiable taste for fine art - a painting by Francis Bacon set a new high water mark when it fetched more than $142 million last week in New York. In Geneva, "Pink Star," a flawless pink diamond the size of a plum, sold for a cool $83 million, a record for a gemstone.

Even the market for thoroughbred racehorses is roaring away. In Europe, a one-year-old horse that had never been raced sold this year for 5 million pounds ($8.1 million), a record price.

"Most of the people involved in it are extremely rich, and lately they've had the money to spend," said Alastair Donald, a horse-buying expert at UK racehorse agent SackvilleDonald.

"There are ways of making money with racehorses, but mostly, it's a luxury, it's fun. It's about buying a dream."

CURRENCY FOR CRIMINALS?

Association with drugs, money laundering and other illegal activities has not tarnished the virtual shine of Bitcoin, the digital currency not backed by any government or central bank.

The currency, whose supply has been carefully controlled, on Monday soared above $600 from below $80 in early July. Societe Generale strategist Sebastien Galy said Bitcoin is an example of "how far and aggressively greed can push a deeply inelastic market."

And the casino approach isn't restricted to developed markets by any means. Pakistan is nobody's idea of a safe and predictable investment destination but one wouldn't know it from the nation's stock market. Pakistani stocks .KSE have nearly doubled since the start of 2012 and are well above their levels even before the financial crisis.

It's another instance of the reach for yield driving political risk considerations out the window, says GFT Forex managing partner Boris Schlossberg. "The Fed's QE," he said, "is having a spillover effect all over the world."

Consequences of the likely withdrawal of that support is the biggest issue for 2014. The risk is that even investors who have identified bubbles will wait too long to exit.

(Reporting by Steven C. Johnson and Luke Swiderski in New York, Blaise Robinson in Paris and Francesco Canepa in London; Editing by Martin Howell and Tim Dobbyn)

Bloomberg News - Yellen Signals Continued QE Undeterred by Bubble Risk

Andrew Harrer/Bloomberg

Janet Yellen, vice chairman of the U.S. Federal Reserve and U.S. President Barack Obama's nominee as chairman of the Federal Reserve, listens during a Senate Banking Committee confirmation hearing in Washington, D.C., U.S., on Thursday, Nov. 14, 2013.

Janet Yellen indicated she’ll press on with the Federal Reserve’s unprecedented monetary stimulus until she sees a robust recovery, downplaying risks the policy is inflating asset bubbles.

“I don’t see evidence at this point, in major sectors of asset prices, misalignments,” she said yesterday during her confirmation hearing to be the next Fed chairman. “Although there is limited evidence of reach for yield, we don’t see a broad buildup in leverage, where the development of risks that I think at this stage poses a risk to financial stability.”

Yellen signaled her determination to use bond buying to strengthen the economy and drive down the nation’s 7.3 percent unemployment rate. Testifying to the Senate Banking Committee as benchmark U.S. stock indexes rose to records, she sought to dispel concerns from senators that the central bank’s policy is pumping up the values of equities and housing to such an extent that it jeopardizes market stability.

“The possibility of there being a bubble isn’t going to keep her from doing more if she thinks that’s appropriate,” said Brian Jacobsen, who helps oversee $236 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin. “She sees no problem in doing more asset purchases” or even expanding them, he said.

Yellen, the Fed’s current vice chair, endorsed the strategies of Chairman Ben S. Bernanke, whose term at the central bank will expire in January. Bernanke has argued that the first lines of defense against instability in financial markets are regulatory tools, including the powers granted to the Fed under the Dodd-Frank Act whose final implementation would fall to Yellen if she’s confirmed.

Record Stocks

European stocks were little changed today, with the Stoxx Europe 600 Index at 322.56 as of 9:30 a.m. London time. Standard & Poor’s 500 Index futures rose 0.1 percent.

The S&P 500 advanced 0.5 percent to a record 1,790.62 at the close in New York yesterday. The Dow Jones Industrial Average also increased to a record and the Nasdaq Composite Index added 0.2 percent to the highest since September 2000.

A 26 percent rally in the S&P 500 this year puts it on pace for the best annual gain in a decade and made shares more expensive, with the equity benchmark trading at 16.9 times reported earnings, compared with about 14.2 in January.

‘Bidding Wars’

The S&P/Case-Shiller Composite Home Price Index climbed 12.8 percent in August from a year earlier for the steepest increase since February 2006. Blackstone Group LP, the world’s biggest alternative-asset manager, has spent $5 billion to acquire almost 30,000 U.S. single-family houses in a bet home prices will maintain gains.

“We’re now starting to see real-estate bidding wars just like the old days,” said Senator Mike Johanns, a Nebraska Republican. “We’re now starting to see private-equity firms, who I think are very good at looking where the economy is heading. And lo and behold, they are buying single-family houses.”

Yellen, 67, responded that many of those purchases are occurring in the hardest-hit housing markets such as Las Vegas and Phoenix where prices had collapsed. She said “we have to watch this very carefully, but I don’t see that as an asset bubble. I see that as a very logical response of the market to generate a recovery in very hard-hit areas.”

No Bubbles

Some Fed officials have voiced concern that those low interest rates are overheating prices for assets including farmland, which could heighten risks when they reverse their bond buying. Asked yesterday about stock prices, Yellen said she doesn’t see “bubble-like conditions.”

“Stock prices have risen pretty robustly but if you look at traditional measures,” such as price-earnings ratios, “you would not see stock prices in territory that suggests bubble-like conditions,” she said.

While Yellen downplayed the threat of asset bubbles, regulators this year have taken four actions to lean against excessive risk in the market for high-risk, high-yield loans.

The Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. in March issued an advisory with specific guidance on risk management and underwriting standards. That action was followed by a cross-sectional review of the loans in the banking system, and then letters to individual banks. Fed officials then warned banks that they would be looking at the performance of the loans in the annual stress test.

Policy Tools

Under questioning from Senator Robert Menendez, a New Jersey Democrat, Yellen said she would want to use tighter monetary policy to combat financial instability only as a last resort.

“That’s very much an argument that Bernanke has been making for a long time, that monetary policy is the wrong tool for dealing with bubbles,” said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore who worked at the Fed’s division of monetary affairs from 2004 until 2008.

The banking committee, consisting of 12 Democrats and 10 Republicans, plans to vote on Yellen’s nomination as early as next week, according to a banking committee aide. Her nomination would then move to the full Senate, where she’ll need the support of at least 60 senators to win confirmation.

“The committee seemed to bend over backwards, even the known critics of her and her boss’s policies, in their questioning,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “You could not see in the questioning any firm ‘no’ votes, and although there will be quite a few, it is looking more likely she will be confirmed.”

Vitter’s No

“I’ll be voting no,” Senator David Vitter, a Louisiana Republican on the Banking Committee, said in a statement after the hearing. Yellen made clear “she would continue the Fed’s current policies of continuing ‘Too Big to Fail’ and free money, quantitative easing, with no wind down in sight.”

Under two hours of questioning, Yellen said the benefits of the bond-buying program still outweigh the costs and said the best thing the Fed can do to combat income inequality is help the job market recover.

Tennessee Senator Bob Corker, a Republican who opposed Yellen’s nomination for Fed vice chairman in 2010 and has criticized the Fed’s policies as too stimulative, opened his questioning by highlighting Yellen’s record of supporting higher interest rates. Before becoming vice chairman, she served as San Francisco Fed president from 2004 to 2010 and was a Fed governor from 1994 to 1997.

‘Very Likable’

Corker said that while he has philosophical differences with her, Yellen is “a very qualified person, very likable and very transparent and I do appreciate all those characteristics, so we’ll see.”

No Democrat has voiced opposition to Yellen’s confirmation.

Yellen said it’s “imperative that we do what we can to promote a very strong recovery.” She said “it’s important not to remove support, especially when the recovery is fragile and the tools available to monetary policy, should the economy falter, are limited given that short-term interest rates are at zero.”

Yet she also reassured senators that she does not see the era of low interest rates and quantitative easing continuing indefinitely.

“This program cannot continue forever,” Yellen said. The Federal Open Market Committee “is focused on a variety of risks and recognizes that the longer this program continues, the more we will need to worry about those risks,” she said.

Yellen also said that policy makers could reconsider whether to cut the interest rate it pays on excess reserves, currently 0.25 percent.

“It certainly is a possibility,” Yellen said. So far, U.S. central bankers have been concerned that lowering the rate would damage the functioning of the money market, she said.

The FOMC has held its main rate near zero since December 2008 and pledged to keep it there as long as the unemployment rate remains above 6.5 percent and the outlook for inflation doesn’t rise above 2.5 percent.