Investors Still Cautious Despite Positive Signs in the Economy

Bolstering hopes that the U.S. economy is stabilizing, Citigroup and General Electric on Friday posted better-than-expected results, and U.S. consumers reported more confidence, but the good news came packaged with warnings for the recovery.

The benchmark S&P 500 was on course for a sixth straight weekly gain, and oil prices rose above $50 a barrel on upbeat sentiment from consumers. But the boost was tempered by caveats from both Citigroup—worried about deteriorating consumer credit—and GE —worried about fallout from commercial real estate losses.

"The rate of deceleration in the economy is slowing," said David Lutz, managing director of trading at Stifel Nicolaus Capital Markets in Baltimore, who pointed to signs of improvements in credit markets.

At the same time, the European Central Bank said bold, unconventional measures are needed to ensure recovery in 2010.

Although the banking industry's problems are far from over, a smaller-than-expected loss from Citigroup , following good profit reports from Goldman Sachs , JPMorgan Chase , Wells Fargo and others gave investors reason to believe government efforts to jump-start the economy are helping.

Banks would be the focus of any unconventional measures the European Central Bank unveils next month, ECB President Jean-Claude Trichet said. He is expected to join others in moving beyond rate cuts to spur the economy and credit markets.

"Confidence today relies equally upon the audacity of our immediate decisions and upon the soundness of our exit strategies," Trichet said in a speech in Tokyo.

Central banks in the United States, Japan and Britain have said they will buy debt from lenders in "quantitative easing" aimed at freeing up banks to lend more to firms and households—a step some analysts fear will trigger future inflation.

U.S. consumer confidence showed a rebound in April to the highest level since September, yet consumers still expected any economic recovery to come slowly, according to a Reuters/University of Michigan survey.

Translation of the good consumer feeling into retail sales cannot come too soon for the beleaguered U.S. car industry.

General Motors Chief Executive Fritz Henderson said bankruptcy was more probable for the once-formidable automaker, although restructuring outside bankruptcy court was preferable.

GM, operating under U.S. government emergency aid, is under pressure to complete its turnaround quickly in return for that aid and additional support.

Citigroup, GE Boost

Citigroup's shareholder loss for the quarter narrowed to $966 million, or 18 cents per share, from $5.19 billion, or $1.03, a year earlier. Revenue roughly doubled to $24.79 billion. Analysts on average had expected a loss of 30 cents per share on revenue of $21.73 billion, according to Reuters Estimates.

"It was slightly better than anticipated, but we probably underestimated how much government support would be a wind at their back," said analyst Michael Holland, of Holland & Co in New York.

Viewed as a barometer of the economy because of the size and breadth of its operations, GE's better-than-expected quarterly profit was attributed to strong performance at its large energy operation, which offset declines at the GE Capital finance and NBC Universal units.

"The numbers are showing stabilization in the global economy and in the performance of GE stock," said Jim Hardesty, president of Hardesty Capital Management in Baltimore, which owns GE shares. "The result still wasn't good, though."

GE's net income attributable to common shareholders fell 36 percent to $2.74 billion, or 26 cents per diluted share, down from $4.3 billion, or 43 cents per diluted share a year earlier.

Analysts, on average, looked for profit of 21 cents per share, according to Reuters Estimates.

The largest U.S. conglomerate said its order backlog—a key indicator for sales of electricity-producing turbines, jet engines and other heavy equipment—held steady at $171 billion, and its finance arm was headed to a profitable year.

Global Action

IMF Managing Director Dominique Strauss-Kahn said a "coherent and coordinated" response by countries was vital to recovering from crisis in 2010 and warned that the global economy faced "deeply negative territory" this year.

"Until this is done, attempts to restore demand are likely to falter," he said in a speech late Thursday.

In a sign of how hard the economy has been hit by slumping global trade, euro-zone exports plunged by a quarter in February from a year earlier, and imports fell by more than a fifth.

The crisis threatens to create a "jobs crisis" in Britain this year, Danny Blanchflower, a member of the Bank of England's Monetary Policy Committee, wrote in a newspaper article published Friday.

"Unemployment is going to rise a lot during 2009," wrote Blanchflower, who has called for a further fiscal boost of close to $133.6 billion to tackle unemployment.

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In the U.S., in the most populous sate, California, unemployment rose to a record 11.2 percent in March, and analysts expected another six months of job losses. The state's rate was well above the national unemployment rate of 8.5 percent.

Mexico's central bank slashed its key interest rate by 75 basis points to 6 percent on Friday, the fourth cut this year, in an attempt to counter the country's deepest recession since the mid-1960s. Mexico's economy has been slammed by a collapse in U.S. demand for its exports.

Near-Term Pessimism

The central bank bosses of Japan and Switzerland underscored the tough months ahead as policy-makers tackle slowing economies and still-tight credit markets.

"Japan's financial environment remains severe as a whole with more companies, regardless of their size, saying funding conditions and banks' lending attitude are severe," BOJ Governor Masaaki Shirakawa said in a speech.

On Thursday, the head of the Atlanta U.S. Federal Reserve forecast a return to growth later this year, but the head of the San Francisco Fed warned of the potential for an even deeper contraction.

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