Centrals banks in easing mood as stocks get crushed again

Dramatic interest rate cuts are becoming the norm, the latest coming from Switzerland. Reuters reports:

The Swiss National Bank made a surprise full percentage point cut in interest rates on Thursday, trying to stave off a recession as the global outlook worsens fast, and other central banks are seen following suit.

In a third cut in six weeks, the SNB lowered its target band for the 3-month Swiss franc LIBOR to 0.50-1.50 percent from a previous 1.50-2.50 percent range. The central bank would provide generous liquidity to bring the LIBOR rate down to the mid-point of the new range, or 1.00 percent, it added.

On Wednesday, Turkey had also cut interest rates despite a weak lira while on Thursday, ECB officials gave hints of further rate cuts to come from it.

If central banks appear desperate, Thursday's market action gave more reasons to feel so. From MarketWatch:

U.S. stocks nose-dived into the close Thursday, with the S&P 500 Index ending at its lowest level in more than 11 years, after it appeared unlikely Congress would quickly approve emergency loans for ailing automakers...

The Dow Jones Industrial Average fell 445 points, or 5.6%, to end at 7,552, collapsing below a low it had made on Oct. 10 to close at a fresh five-and-a-half year low...

The broad S&P 500 fell 54 points to 752, after crashing through its 2002 bear-market low to close at its lowest level in more than 11 years...

The Nasdaq Composite Index fell 70 points to end at 1,316...

Overseas, the pan-European Dow Jones Stoxx 600 lost nearly 4%, while the Nikkei 225 fell nearly 7% in Tokyo.

At the same time, crude oil fell to the lowest since May 2005 and Treasury yields tumbled to record lows.

Already, the US economy appears to be in a dire state, as Thursday's data indicate. From Bloomberg:

Initial jobless claims climbed to a higher-than-forecast 542,000 in the week ended Nov. 15, the Labor Department said today in Washington. The Conference Board's index of leading economic indicators declined 0.8 percent, and a measure of manufacturing in the Philadelphia region fell to an 18-year low.

Still, the economists at Morgan Stanley think that policy makers are doing enough to eventually pull the economy out of the rut.

Joachim Fels:

[I]t is important to emphasise that the G3 are in a severe recession that will last at least until mid-2009, possibly longer, and headline inflation will likely become negative at some stage next year in the US and Japan and drop below target in the euro area. However, the early and massive policy reaction will, in our view, prevent a replay of Japan in the 1990s or, worse, another Great Depression.

David Greenlaw:

[Quantitative easing], together with other policy measures already implemented and those now under consideration, represents powerful medicine. In fact, QE is aimed at restarting the intermediation of credit – which is precisely the objective of the bank recapitalisation initiative. Make no mistake, the US economy still appears headed for the deepest recession since 1982. However, macro policy is now moving in the right direction, and this should help to reduce the tail risk associated with an even more severe outcome.