Friday, 31 October 2008

US economy shrinks, stocks gain

The US economy contracted in the third quarter. MarketWatch reports:

The U.S. economy contracted at a 0.3% annualized rate in the third quarter, as consumer spending declined at the fastest rate in 28 years, the Commerce Department estimated Thursday...

The drop was close to economists' expectations that the economy would shrink at a 0.5% annual rate.

Still, investors were able to shrug off the news. Again from MarketWatch:

U.S. stocks rallied Thursday, pushing the Dow Jones Industrial Average back above the 9,000 level, after the government said the economy shrank less than forecast in the third quarter.

The rampant market volatility continued. After rising 270 points, the Dow Jones Industrial Average gave much of it back, only to then pick up steam again as the afternoon progressed to close 189.73 points ahead, or 2.1%, to 9,180.69.

Some of the biggest moves of the day, however, had occurred earlier in Asia. From Bloomberg:

Asian stocks, bonds and currencies surged after China, Taiwan and the U.S. cut interest rates to boost bank lending and economic growth. The MSCI Asia Pacific Index headed for a record three-day gain.

South Korea's Kospi index climbed a record 12 percent, led by Samsung Electronics Co. and Posco, after the U.S. Federal Reserve agreed to provide the nation with $30 billion in a currency swap. The won surged the most in 11 years...

Japan's Nikkei 225 Stock Average climbed 10 percent to 9,029.76 as Softbank Corp. gained by its daily limit.

Hong Kong's Hang Seng Index jumped 13 percent, led by Ping An Insurance (Group) Co. after China lowered its one-year lending rate. The measure is on course for its biggest three-day advance since April 1973.

Gains in European stocks were relatively muted, the DJ Stoxx 600 rising by just 1.2 percent. It didn't help that business and consumer confidence in the euro area fell to a 15-year low in October.

Credit markets continued to improve on Thursday at the expense of Treasuries. Bloomberg reports:

Treasuries dropped, pushing 10-year yields to the highest in two weeks, amid concern U.S. efforts to unfreeze credit markets and prop up the financial system will swell sales of government debt...

The yield on the benchmark 10-year note climbed 11 basis points, or 0.11 percentage point, to 3.97 percent at 4:56 p.m. in New York...

The two-year note's yield gained 2 basis points to 1.56 percent...

Banks' cost of borrowing dollars overnight fell to a record low, according to the British Bankers' Association. The London interbank offered rate, or Libor, that banks charge each other for overnight loans in dollars tumbled 41 basis points to 0.73 percent, 27 basis points below the Fed's target rate.

Yields indicate banks are more willing to lend than they were almost three weeks ago. The difference between what they and the Treasury pay to borrow money for three months, the so- called TED spread, narrowed to 2.82 percentage points from a high of 4.64 percent Oct. 10.

Corporate borrowing in the U.S. commercial paper market soared the most on record, the first gain in seven weeks, after the Fed began buying the debt directly from issuers this week. The amount of corporate IOUs outstanding rose by $100.5 billion, or 6.9 percent, to a seasonally adjusted $1.55 trillion for the week ended Oct. 29, according to Fed data.

Thursday, 30 October 2008

More rate cuts

The Federal Reserve cut interest rates by 50 basis points on Wednesday. Bloomberg reports:

The Federal Reserve cut its benchmark interest rate by half a percentage point to 1 percent, matching a half-century low, in an effort to avert the worst U.S. economic downturn in the postwar era.

"Downside risks to growth remain," the Federal Open Market Committee said today in a statement in Washington. "Recent policy actions, including today's rate reduction, coordinated interest-rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth."

Earlier in the day, China had also announced a rate cut. From Bloomberg:

China cut interest rates for the third time in two months to stimulate growth in the world's fourth-largest economy after the global financial crisis curbed exports and production.

The key one-year lending rate will drop to 6.66 percent from 6.93 percent, the People's Bank of China said on its Web site today. The deposit rate will fall to 3.60 percent from 3.87 percent. The changes are effective tomorrow.

And Norway's central bank also did its part. Again from Bloomberg:

Norway's central bank cut the benchmark interest rate by half a percentage point for the second time this month and forecast further reductions as it slashed its forecast for economic growth next year.

The bank reduced the overnight deposit rate to 4.75 percent, the lowest in a year, it said on its Web site today. The decision was expected by 10 of 14 economists surveyed by Bloomberg. Two expected a quarter-point cut and two forecast no change.

The Bank of Japan could be the next to cut. Bloomberg reports:

Speculation the Bank of Japan will cut interest rates for the first time in seven years jumped after the Nikkei newspaper reported that the central bank may halve its target rate this week.

The chance that the central bank will lower the benchmark lending rate to 0.25 percent from 0.5 percent on Oct. 31 rose to 62 percent from 8 percent yesterday, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps.

The Nikkei reported that central bank policy makers are leaning toward lowering borrowing costs this week, without citing any sources. The bank came under pressure to cut rates after the yen surged to a 13-year high, driving the stock market to its lowest since 1982. The policy board will make its decision taking market moves into account, the Nikkei said.

In reporting the expected BoJ move, Paul Davies at FT Alphaville says that "US stock markets saw a late surge on Tuesday when the speculation first emerged and Asian markets rallied strongly Wednesday followed by European and UK stocks."

Japan may be Asia's biggest economy and stock market but it is not always representative of what happens elsewhere on the continent. Here is the actual performance of Asian stock markets on Wednesday.

Index% change
Nikkei 2257.7
Hang Seng0.8
CSI 300-2.8
Sensex 300.4
Straits Times0.3

The US stock market ended down on Wednesday after diving near the end of trading. The S&P 500 closed 1.1 percent lower despite the Fed's rate cut and better-than-expected economic data. Bloomberg reports the latter.

Orders for U.S. durable goods, excluding cars and aircraft, fell for a second straight month in September as the credit freeze and a slump in sales caused businesses to cut back on investment.

The 1.1 percent drop in bookings of goods meant to last several years was less than forecast and followed a 4.1 percent decrease in August. A rebound in aircraft orders, a volatile category, and an increase in defense bookings unexpectedly pushed total orders up 0.8 percent.

Wednesday, 29 October 2008

Hang Seng, Dow surge over 10 percent

A big turnaround in stocks on Tuesday. Again, it started in Asia. From Bloomberg:

Asian stocks climbed, snapping four days of declines, as investors speculated recent losses were overdone and the yen dropped.

Hong Kong's Hang Seng Index rallied 14 percent, rebounding from its biggest decline in a decade...

The Nikkei 225 gained 6.4 percent. Finance Minister Shoichi Nakagawa said restrictions on short-selling of shares will take effect today to bolster the stock market.

US stocks started out hesitantly but finished the day with a flourish. Bloomberg reports:

Stocks rallied and the Dow Jones Industrial Average posted its second-best point gain as the cheapest valuations in 23 years lured investors and increased commercial paper sales signaled credit markets are thawing...

The Standard & Poor's 500 Index gained 91.59 points, or 11 percent, to 940.51 after sliding to the lowest level since March 2003 yesterday. The Dow climbed 889.35 points, or 11 percent, to 9,065.12...

Like Monday, Europe again showed the least movement, the DJ Stoxx 600 rising 2.3 percent.

Meanwhile, there were further signs that credit conditions are improving. From Bloomberg:

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars fell 4 basis points to 3.47 percent today, its 12th straight drop, according to the British Bankers' Association. The comparable euro rate slid 5 basis points to 4.85 percent, the lowest level since April 28.

And investors continue to move out of safe havens. US bonds fell, the yield on 10-year notes rising 18 basis points to 3.86 percent and the two-year yield increasing 5 basis points to 1.58 percent, while the yen fell sharply against both the US dollar and the euro.

But Iceland couldn't wait for a return of risk appetite. From Bloomberg:

Iceland's central bank unexpectedly raised the benchmark interest rate by six percentage points to the highest level in at least seven years to boost the currency after reaching a loan agreement with the International Monetary Fund.

The rate was lifted to 18 percent, the Reykjavik-based bank said in a statement today, taking it to the highest since the bank began targeting inflation in 2001.

Tuesday, 28 October 2008

Stocks fall again, Hang Seng sinks

Stocks were down again on Monday and Asian stocks again bore the brunt of the sell-off. From AFP/CNA:

Markets across the region were in freefall as traders went into a massive sell-off as fears over a global recession continued to weigh on sentiment.

Hong Kong's Hang Seng Index ended that day 12.7 percent down -- its biggest single day percentage drop since 1991 -- while Tokyo shed 6.36 percent to its lowest level since 1982.

Sydney fell 1.6 percent, Manila reeled from a 12.3 per cent plunge to its lowest in three years and Taipei dropped 4.65 per cent, while Shanghai shed 6.32 per cent.

And the Thai bourse was suspended for 30 minutes after it dived more than 10 per cent, triggering an automatic shut-down. It closed 10.50 per cent lower.

Bucking the trend, the Seoul market recovered from heavy early losses to end 0.8 per cent higher after South Korea's central bank cut its key interest rate by 75 basis points, its largest reduction yet.

The fresh turmoil came despite a pledge by the Group of Seven major economies to cooperate to bring stability to the ailing financial system.

US stocks held up better but a late sell-off left the S&P 500 down 3.2 percent for the day.

European stocks proved to be the outperformer, the DJ Stoxx 600 falling only 1.9 percent for the day.

Global deleveraging and the unwinding of carry trades were clearly driving markets as oil fell too and the yen traded near highs.

The flight from risky assets didn't help the usual safe havens though. US Treasuries also declined as the Federal Reserve launched its programme to buy commercial paper directly.

In economic news, US new home sales rose 2.7 percent in September but German business expectations continued to deteriorate in October as the Ifo index fell to 90.2 from 92.9 in September.

Saturday, 25 October 2008

Global stock markets plunge

So much for a bounce in stocks.

Markets quickly moved sharply lower in Asia on Friday after the opening despite the previous day's gains in the US. The sell-off subsequently spread to Europe. As it turned out, it was during US trading that the decline came to a halt and stocks in the US eventually got off relatively lightly by the end of the day.

Bloomberg reports the market performances.

The Standard & Poor's 500 Index lost 3.5 percent, a smaller decline than European and Asian equities, even after futures on the U.S. measure fell so far that trading was curbed. The U.K.'s FTSE 100 Index sank 5 percent and the pound had the biggest drop versus the dollar since 1971 following a government report showing the economy shrank for the first time in sixteen years. South Korea's economy grew at the slowest pace in four years, driving the Kospi Index down 11 percent...

The MSCI World Index of developed markets declined 4.3 percent to 871.64. MSCI's emerging-markets benchmark fell 7.8 percent to 473.98, completing eight straight weeks of losses, the longest stretch since 1998. The MSCI index covering both regions slumped to the lowest since August 2003. Russia's Micex Stock Exchange halted trading until next week following today's 14 percent retreat...

Europe's Dow Jones Stoxx 600 Index slid 4.7 percent. The MSCI Asia Pacific Index fell 5.7 percent.

The turmoil wasn't limited to stock markets.

Oil tumbled 5.4 percent to $64.15 a barrel even after OPEC's decision to slash production by 1.5 million barrels a day...

The yen climbed to a 13-year high against the dollar as stock-market losses prompted investors to dump higher-yielding assets funded by low-cost loans in Japan.

Economic data yesterday showed that there's good reason for investors to be worried. The UK economy contracted 0.5 percent in the third quarter while the Royal Bank of Scotland's composite index for the euro area dropped to 44.6 in October, the lowest since the survey began in 1998, from 46.9 in September.

While most central banks are likely to cut interest rates in the face of weakening economies, some are being forced to raise rates instead. From Bloomberg:

Denmark's central bank unexpectedly raised the benchmark lending rate by half a percentage point to an eight-year high, showing policymakers will defend the krone even as the economy teeters on the brink of recession.

Copenhagen-based Nationalbanken lifted the rate to 5.5 percent, it said today. The bank's mandate is to keep the krone pegged to the euro in a 2.25 percent band. In the past week, the krone slid 0.1 percent and on Oct. 13 fell as much as 0.7 percent...

Today's Danish rate increase tracks moves in other economies defending small currencies, such as Hungary, which raised the benchmark by 3 percentage points to 11.5 percent on Oct. 22.

Friday, 24 October 2008

Economies weak but central banks ready to cut rates

The yen's recent strength certainly hasn't been the result of strong demand for its exports. From AFP/CNA:

Japan's trade surplus plunged 94 per cent in September from a year earlier due to weak exports and soaring energy import costs, official figures showed Thursday.

The surplus of 95 billion yen (US$973.14 million) was much lower than predicted...

In September, imports rose 28.8 per cent to 7.27 trillion yen, while exports edged up only 1.5 per cent by value to 7.37 trillion yen, weighed down by falling shipments to the United States and western Europe, the ministry said.

Demand for Europe's industrial goods also didn't look very strong in August. From Eurostat:

In August 2008 compared with July 2008, the euro area (EA15) industrial new orders index fell by 1.2%. In July the index increased by 2.0%. In the EU27 new orders decreased by 1.4% in August 2008, after growing by 2.9% in July. Excluding ships, railway & aerospace equipment industrial new orders increased by 0.6% in the euro area and by 2.0% in the EU27.

In August 2008 compared with August 2007, industrial new orders declined by 6.6% in the euro area and by 6.7% in the EU27. Total industry excluding ships, railway & aerospace equipment dropped by 7.5% in both zones.

Meanwhile, retail sales in the UK fell in September. From Reuters:

The Office for National Statistics said retail sales fell 0.4 percent last month, taking the annual rate of growth down to 1.8 percent, its weakest since February 2006.

The retail malaise didn't seem to affect the French though.

French household spending on manufactured goods including cars and clothes rose 0.6 percent in September, its biggest monthly gain since May, and well above the 0.1 percent fall expected by economists polled by Reuters.

But in any case, central banks are ready to lend support to the economy.

[BoE] Governor Mervyn King said the bank was ready to alter its key rate to offset the shocks of the global credit crunch.

Indeed, that was exactly what Sweden's Riksbank did yesterday. From Bloomberg:

Sweden cut its key lending rate by a half-point for the second time in two weeks and forecast another similar reduction within six months to cushion the economic slowdown. It also lowered forecasts for growth and inflation.

The Riksbank cut the repo rate to 3.75 percent, according to a statement today on its Web site in Stockholm. The cut was forecast by two of 21 economists surveyed by Bloomberg. Twelve forecast a quarter-point cut and seven no change.

Thursday, 23 October 2008

Markets fall again but no capitulation yet

Markets tumbled again yesterday. Bloomberg reports:

Stocks fell around the world, the pound sank the most against the dollar since 1992 and commodities retreated as the economic slump deepened and corporate profits declined...

The Standard & Poor's 500 Index lost 6.1 percent to 896.78, the lowest since April 2003. Europe's Dow Jones Stoxx 600 Index declined 5.1 percent. The MSCI World Index of developed markets slid 6.4 percent.

The slump in oil, gold and copper dragged down Brazilian stocks, sending the Bovespa Index to a 10 percent retreat. Argentina's Merval fell 10 percent. The MSCI Emerging Markets Index lost 8.4 percent, falling to the lowest level since 2005.

The MSCI Asia Pacific Index decreased 5.4 percent...

The euro fell below $1.28 for the first time since November 2006 on speculation Europe's central banks will cut interest rates as the global economy heads for a recession. The U.K. currency dropped as much as 3.4 percent to a five-year low of $1.6139...

The Reuters/Jefferies CRB Index of 19 raw materials fell 4.5 percent to the lowest level since July 2004. Crude oil for December delivery declined 7.3 percent to $66.90 a barrel, a 16- month low, in New York. Copper, gold, wheat and soybeans slumped.

The improvement in LIBOR made little impact.

The London interbank offered rate, or Libor, for three-month loans in dollars fell for an eighth day as central banks offered cash to revive lending. The measure, which banks use to charge each other for loans, dropped to 3.54 percent. It's still 2.04 percentage points more than the Federal Reserve's target rate for overnight loans.

That's because there are other problems to worry about.

The next leg of losses may be fueled by collateralized debt obligations tied to corporate credit. Investors are writing down as much as 90 percent in the $1.2 trillion market following failures of Lehman Brothers Holdings Inc. and Icelandic banks.

So the panic-selling may not be over.

Indeed, Mark Hulbert says that what we have been seeing is investor panic, not capitulation. And a final low in the stock market is likely to come only when investors have capitulated, something he is not seeing yet.

Certainly there doesn't seem to be capitulation among bloggers, if Ticker Sense's blogger sentiment poll is an accurate indication. According to the latest poll, bloggers are showing "overwhelming bullishness".

Well, bloggers may be bullish but central bankers aren't taking any chances. This morning saw another big easing on the monetary front. From Bloomberg:

New Zealand's central bank cut its benchmark interest rate by a record 1 percentage point to 6.5 percent and foreshadowed further reductions to limit damage from the worldwide financial crisis and a slump in the global economy.

Wednesday, 22 October 2008

Central banks act again, markets mixed

The Bank of Canada has cut interest rates again. Bloomberg reports:

The Bank of Canada reduced its main interest rate by a quarter of a point, less than economists predicted, saying it will probably need to act again to fend off the effects of a credit crisis and global recession.

Governor Mark Carney and his five deputies trimmed the target rate for overnight loans between commercial banks to 2.25 percent, the lowest since October 2004. Canada's six biggest banks passed the relief on to customers by lowering their prime rates to 4 percent. Canada's dollar fell to the lowest in more than three years as traders bet on more reductions in the central bank's benchmark.

Meanwhile, the Fed continues to come up with new initiatives to address the financial crisis. Reuters reports:

In the latest move to bolster credit availability, the U.S. Federal Reserve cooked up another program to complement its menu of cures for the credit markets.

On Tuesday, the U.S. central bank said it created a $540 billion funding facility that finances money market mutual funds' purchase of short-dated investments like certificates of deposit and commercial paper.

And credit markets are continuing to improve.

Three-month dollar Libor was set lower at 3.83375 percent, and the premium for these funds over Overnight Index Swap rates, the expected three-month rates on the Fed's policy target, fell to around 270 basis points, the narrowest in about three weeks.

Euro and sterling Libor rates and spreads also fell on Tuesday but at a slower pace.

Stocks mostly fell though, as Bloomberg reports.

U.S. stocks slid as companies from Texas Instruments Inc. to Freeport-McMoRan Copper & Gold Inc. reported profit and revenue that failed to meet analysts' estimates...

The Standard & Poor's 500 Index lost 30.35 points, or 3.1 percent, to 955.05. The Dow Jones Industrial Average tumbled 231.77, or 2.5 percent, to 9,033.66. The Nasdaq Composite Index decreased 73.35, or 4.1 percent, to 1,696.68. More than five stocks fell for each that rose on the New York Stock Exchange.

This is probably a timely reminder that despite the large falls in stock prices in recent weeks, the risk for equity investors is that prices have still not fully discounted the negative impact of the economic downturn on corporate earnings.

Tuesday, 21 October 2008

China's growth slows, India cuts rate

Even China cannot escape an economic slowdown. From AFP/CNA:

China's economic growth slowed to 9.0 per cent in the third quarter as global financial woes started taking a toll, the government said Monday, signalling it would respond with new stimulus measures.

It was the first time since late 2005 that quarterly growth slipped into single digits, providing the most powerful indication yet that China was not insulated from the international economic downturn.

India sees a slowdown too, and acted accordingly yesterday. From Bloomberg:

The Reserve Bank of India cut its overnight lending rate to 8 percent from 9 percent, according to a statement in Mumbai today. The action came after the bank reduced the cash reserve ratio by 2.5 percentage points to 6.5 percent effective Oct. 11.

However, financial markets were in relatively positive mood on Monday as credit conditions eased. From Reuters:

Short-dated U.S. government debt prices fell on Monday as signs of an incipient thaw in the biggest credit crisis in decades curbed safe-haven demand...

The three-month Treasury bill rate rose to 1.10 percent, its highest late-session level since investment bank Lehman Brothers filed for bankruptcy on Sept. 15 and up from 0.81 percent late on Friday. The Treasury Department sold $25 billion of 3-month bills at a high rate of 1.25 percent...

Interest rates on three-month dollar funds in London tumbled to 4.05875 percent on Monday from 4.41875 percent on Friday. This was the biggest single-day drop in three-month Libor or London interbank offered rates in the absence of a Fed rate cut since late January.

Stocks did well too, as Bloomberg reports.

The S&P 500 rallied 44.85, or 4.8 percent, to 985.40. The Dow surged 413.21, or 4.7 percent, to 9,265.43, with all 30 of its companies increasing. The Nasdaq Composite Index rose 58.74, or 3.4 percent, to 1,770.03. More than five stocks advanced for each that fell on the New York Stock Exchange...

Benchmark indexes extended gains this morning after the Conference Board's index of leading economic indicators unexpectedly rose in September and Bernanke said lawmakers should consider new measures to improve access to credit for consumers, homebuyers and businesses...

Europe's Dow Jones Stoxx 600 Index added 3.6 percent, while the MSCI Asia Pacific Index rose 3.8 percent after ING Groep NV received a 10 billion-euro ($13.4 billion) lifeline from the Dutch government and South Korea guaranteed $100 billion of lenders' foreign-currency debts.

Monday, 20 October 2008

US and Japan still headed towards recession

Financial markets stabilised somewhat last week. Nevertheless, there are still significant challenges ahead, with the world's biggest economies looking more like they are headed for recession next rather than recovery.

Stock markets mostly gained last week. The Standard & Poor's 500 Index rose 4.6 percent, the Dow Jones Stoxx 600 added 4.5 percent and the MSCI Asia Pacific Index rose 1.5 percent.

Meanwhile, credit markets eased. The London interbank offered rate for three-month US dollar loans fell 40 basis points to 4.42 percent over the past week.

On 15 October, Federal Reserve chairman Ben Bernanke made a speech to the Economic Club in New York in which he mentioned the challenges to the United States economy posed by the ongoing financial crisis and outlined the actions taken by the government so far (see the full text).

While Bernanke was ultimately optimistic that the actions taken by the Treasury and the Fed "will lead to a much stronger financial system over time" and "help credit flow more freely, thus supporting economic growth", he also warned that "the turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth", pointing out that economic activity "had been decelerating even before the recent intensification of the crisis".

Actually, Bernanke may have understated the weakness in economic activity. US employment is not just decelerating but has been on a steady decline since the beginning of the year. The housing market peaked in 2005 and both sales and prices of homes are now in declining trends.

Numbers reported last week show that this trend is continuing. The Commerce Department reported that housing starts fell 6.3 percent in September while the National Association of Home Builders/Wells Fargo housing market index fell from 17 in September to 14 in October, the lowest since the index started in 1985.

And declining numbers are no longer limited to employment and housing. Other indicators have recently joined the trend.

The beginning of this month saw the Institute for Supply Management report that its manufacturing index plunged to 43.5 in September from 49.9 in August.

Then last week, the Federal Reserve reported that industrial production in September fell by 2.8 percent, the biggest decline since 1974. This decline was not as conclusive as it might first appear though, since hurricanes and a strike at Boeing made significant contributions to it.

Still, following declines in the previous two months, it means that industrial output fell at an annualised rate of 6.0 percent in the third quarter.

And industrial production was not the only indicator that saw a big drop last week. Another ominous development has been the capitulation of the long-resilient US consumer.

Last week, the Commerce Department reported that retail sales fell 1.2 percent in September. It was the third consecutive monthly drop and the biggest since August 2005.

Such trends indicate that the US economy will probably enter a recession soon, if it is not already in one.

In his speech, Bernanke also said that even if government actions to stabilise the financial markets work, economic recovery "will not happen right away" mainly because credit markets "will take some time to unfreeze" but also because exports could slow as well "with the economies of our trading partners slowing".

The latter, though, appears to be another understatement. Both the euro area and Japan saw real gross domestic product decline in the second quarter by 0.2 percent and 0.7 percent respectively.

The latest data from Japan indicate that the decline will continue in the third quarter.

Last week, the Ministry of Economy, Trade and Industry reported that Japanese industrial production fell 3.5 percent in August, confirming the preliminary figure reported earlier. Separately, it also reported that its tertiary industry index fell by 1.4 percent in August. Both are now below second quarter levels.

The previous week, the Cabinet Office had released its composite indicators. Both leading and coincident indicators fell in August, the former to 89.3 from 91.4 in July and the latter to 100.7 from 103.5, maintaining their longer-term downtrends.

On Friday, Bank of Japan Governor Masaaki Shirakawa said in a speech that downside risks for the economy are rising and that it will remain "sluggish for the time being".

In other words, like the US economy, the Japanese economy is not looking like recovering very soon.

Saturday, 18 October 2008

Stocks fall but so does LIBOR

Stocks fell on Friday, as Bloomberg reports.

U.S. stocks fell, capping a day that sent the Standard & Poor's 500 Index swinging between gains and losses at least 28 times, as worsening consumer confidence and housing data overshadowed Warren Buffett's advice to buy shares...

The S&P 500, which rose as much as 4 percent, ended down 5.88 points, or 0.6 percent, at 940.55, trimming its best weekly advance since February. The Dow retreated 127.04, or 1.4 percent, to 8,852.22 to cap its best week since 2003. The Nasdaq Composite Index slipped 0.4 percent to 1,711.29. Four stocks fell for every three that gained on the New York Stock Exchange.

Despite the fall, the S&P 500 ended the week up 4.6 percent.

But perhaps more significantly, LIBOR also fell, both for the day as well as for the week.

The London interbank offered rate, or Libor, for three- month loans in dollars dropped for a fifth day, sliding 8 basis points to 4.42 percent, the British Bankers' Association said. It declined 40 basis points this week. The overnight rate for dollars slid 27 basis points to 1.67 percent, the lowest level since September 2004. Asian rates also fell...

Rates for one-month commercial paper fell to a three-week low. The average yields offered on the highest-rated commercial paper placed by dealers slid 48 basis points to 3.45 percent today, according to data compiled by Bloomberg. Rates dropped 83 basis points in the week to the lowest level since Sept. 26. Yields reached a nine-month high of 4.28 percent on Oct. 10.

In the meantime though, US economic data continue to come in negative.

The Reuters/University of Michigan preliminary index of consumer sentiment fell to 57.5 this month from 70.3 in September. The measure averaged 85.6 last year. Construction of single-family homes dropped 12 percent last month to a 544,000 annual rate, the Commerce Department said in Washington...

Starts on all residential properties, including condominiums, slid to a 817,000 annual pace, below all 74 forecasts in a Bloomberg News survey...

Building permits, a sign of future construction, dropped 8.3 percent to a 786,000 pace, matching the lowest level since November 1981.

And the annualized growth rate of ECRI's Weekly Leading Index fell to a 33-year low last week.

Friday, 17 October 2008

US stocks jump despite more bad news on economy

The Nikkei 225 fell 11.4 percent yesterday, its biggest one-day fall since the 1987 stock market crash.

The fall in Japan was mainly a reaction to the previous day's fall in the US though and made little to no impact on yesterday's US trading as stocks there jumped. From Bloomberg:

U.S. stocks rose for the first time in three days as oil's retreat below $70 a barrel sparked a rally in consumer companies and prospects of a government bailout of bond insurers reversed a slide in financial shares.

Ambac Financial Group Inc., the second-largest bond guarantor, jumped 48 percent after saying it will present a rescue plan to the Treasury Department...

The S&P 500 advanced 38.59 points, or 4.3 percent, to 946.43. The Dow rallied 401.35 points, or 4.7 percent, to 8,979.26. The Nasdaq Composite jumped 5.5 percent to 1,717.71. About four stocks gained for each that fell on the New York Stock Exchange...

Oil fell and gasoline tumbled after a U.S. government report showed stockpiles increased more than twice as much as forecast. Crude for November delivery fell $4.69, or 6.3 percent, to $69.85 a barrel in New York, the lowest settlement since August 2007. It touched $68.57 a barrel, the lowest since June 27, 2007.

This time, the stock market ignored continuing negative news on the economy. From Bloomberg:

Industrial output fell 6 percent in the third quarter, the most since 1991...

Shutdowns caused by hurricanes and a Boeing Co. strike caused production at U.S. factories, mines and utilities last month to decline 2.8 percent, the most since 1974, after a 1 percent drop...

The Fed Bank of Philadelphia's general economic index plunged to minus 37.5 this month, worse than forecast and the lowest reading since October 1990, from 3.8 in September, the bank said today...

Homebuilder confidence slid this month to the lowest level since record-keeping began in 1985... The National Association of Home Builders/Wells Fargo index of builder sentiment decreased to 14, less than forecast, from 17 in September, the Washington-based association said today.

Separately, the Labor Department said initial jobless claims fell last week as job losses related to the Gulf Coast hurricanes subsided, while total benefit rolls rose to the highest level in five years. First-time applications declined by 16,000 to 461,000 in the week that ended Oct. 11.

Consumer prices were restrained by declines in fuel costs, automobile prices and airline fares, Labor Department figures showed. The consumer price index was unchanged after a 0.1 percent drop in August. So-called core prices, which exclude food and energy, rose 0.1 percent, also less than forecast.

But markets know that the Fed is shoving cash into financial institutions at a pace never seen before. From Reuters:

Banks and dealers' overall direct borrowings from the Fed averaged a record $437.53 billion per day in the week ended October 15, topping the previous week's $420.16 billion per day.

No wonder that Morgan Stanley's Joachim Fels says that there are long-term inflation risks.

While decisive fiscal, monetary and regulatory action is likely to prevent a 1930-style depression, we think that a recession in the industrialised world is still in the cards...

With oil prices down sharply, headline inflation in the US and in the euro area is likely to drop significantly towards and below 2% over the next 6-12 months. However, longer-term inflation risks beyond the next two years or so have risen, in our view. This is because the global monetary stance now looks likely to be more expansionary in the foreseeable future than previously thought...

Thursday, 16 October 2008

LIBOR falls, stocks plunge

LIBOR continued to ease yesterday. Bloomberg reports:

The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans dropped for a third day, its longest sequence of declines in seven weeks, according to the British Bankers' Association. It slid 9 basis points to 4.55 percent today. The comparable euro rate declined to 5.18 percent. Asian rates also decreased.

But stock markets went back into turmoil. From Bloomberg:

U.S. stocks plunged the most since the crash of 1987, hammered by the biggest drop in retail sales in three years and growing doubt that plans to bail out banks will keep the economic slump from deepening...

The Standard & Poor's 500 Index sank 90.17 points, or 9 percent, to 907.84, with nine companies declining more than 20 percent. The Dow Jones Industrial Average retreated 733.08, or 7.9 percent, to 8,577.91, its second-biggest point drop ever. The Nasdaq Composite Index lost 150.68, or 8.5 percent, to 1,628.33. About 37 stocks fell for each that rose on the New York Stock Exchange.

And it wasn't just US markets.

Stocks in Europe and Asia fell for the first time in three days, helping push the MSCI World Index, a benchmark for 23 developed countries, to a 7.3 percent decline. Brazilian stock trading was briefly halted after the Bovespa index plunged 10 percent. The index closed down 13 percent after trading resumed.

For the first time in a while, the real economy moved back into focus. Reuters reports Wednesday's US economic data.

Retail sales fell 1.2 percent in September, the Commerce Department said on Wednesday. The decline, the third consecutive monthly drop, was the sharpest since August 2005 and far greater than the 0.7 percent dip economists had expected...

The Labor Department said the producer price index, a gauge of prices received by farms, factories and refineries, dropped 0.4 percent in September, as a further fall in energy costs eased price pressures...

A separate report from the Commerce Department showed business inventories rose a modest 0.3 percent in August as retailers trimmed inventory to cope with consumers cutting back on all but the essentials...

Separately, the New York Fed's "Empire State" index of general business conditions tumbled in October to the lowest since its inception in 2001, hitting minus 24.62, This was below September's minus 7.41 and well under economists' median expectation of minus 10.0.

Meanwhile, the Fed's Beige Book reports that "economic activity weakened in September across all twelve Federal Reserve Districts" while Fed officials speaking on Wednesday all sounded gloomy to varying degrees.

Wednesday, 15 October 2008

LIBOR falls

US stocks gave up some gains yesterday but the good news is that LIBOR is pulling back. Bloomberg reports:

Money-market rates in London fell after the U.S. joined the U.K., Germany and France in offering to buy stakes in banks to restore confidence in the global financial system.

The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans slid 12 basis points to 4.64 percent today, the biggest drop since March 17, according to the British Bankers' Association. It was at 4.82 percent on Oct. 10, the highest level since December. The three- month euro rate fell 7 basis points to 5.23 percent, the largest decline since Dec. 28.

In the meantime, Treasury yields are rising.

Treasuries fell, sending two-year yields up by the most in two weeks, as the U.S. government prepared to buy stakes in banks battered by the credit-market crisis.

The fifth straight daily decline for 10-year notes pushed their yields to the highest level since Aug. 6 as corporate bonds gained, led by financial firms, reducing demand for the safety of government debt. Three-month bill rates rose 9 basis points to 0.27 percent as investors sold shorter-maturity debt.

That's despite expectations for further rate cuts from the Fed.

Futures on the Chicago Board of Trade show 100 percent odds the Fed will cut its 1.5 percent target rate for overnight bank loans by at least a quarter-percentage point at its Oct. 29 meeting.

The Bank of Japan, though, still hasn't moved on interest rates despite yesterday's extraordinary meeting.

The BOJ board held the key overnight lending rate at 0.5 percent in a unanimous vote. The bank didn't participate in last week's joint rate cut by central banks in North America and Europe, saying Japan's borrowing costs are already "very low."

But it did announce other measures to alleviate the financial crisis.

The Bank of Japan said it will offer lenders as many dollars as they want, joining European counterparts in attempting to lower borrowing costs in money markets and freeing up credit worldwide.

The central bank will provide dollars at fixed interest rates for an "unlimited amount against pooled collateral," it said in a statement late yesterday. It also announced measures to improve companies' access to cash, expanded the range of Japanese government bonds it accepts from lenders, and suspended a program of selling shares it bought from banks between 2002 and 2004.

Alternatively, those who desperately need US dollars can always try asking the Chinese. From Bloomberg:

China's foreign-exchange reserves rose to a world record $1.906 trillion, helping to strengthen the nation's finances as the credit crisis threatens to trigger a global economic slump.

Currency holdings rose 32.9 percent at the end of September from a year earlier, the People's Bank of China said on its Web site today. The increase of about $97 billion over the quarter was down from a $126.6 billion gain in the previous three months.

Tuesday, 14 October 2008

Market melt-up

Stocks markets surged yesterday, as Reuters reports.

The Dow Jones industrial average rallied 936.42 points or 11.08 percent, to close at 9,387.61. The Standard & Poor's 500 Index also scored its largest single-day point gain ever -- surging 104.13 points, or 11.58 percent, to 1,003.35. The Nasdaq Composite Index advanced 194.74 points, or 11.81 percent, at 1,844.25.

Crude oil prices jumped more than 4.0 percent along with other commodities, and euro-zone government debt prices fell as the European banking system rescue, designed to shake a global credit crunch out of a deep freeze, removed a flight-to-safety bid...

MSCI's all country world index surged 9.52 percent, its biggest one-day percentage gain in at least two decades. The index's market value increased by $1.7 trillion...

The FTSEurofirst 300 index of top European shares closed 10.1 percent higher at 937.41...

Asian stocks jumped more than 7.0 percent, according to MSCI's index of Asia-Pacific stocks outside Japan, after tanking more than 20 percent last week to the lowest since December 2004.

The government rescue plans are coming in thick and fast now.

Britain, Germany, France, Italy and other European governments pledged hundreds of billions of dollars to recapitalize ailing banks and boost flagging confidence in the world's wobbly financial system.

The U.S. Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank also said they would lend commercial banks as much U.S. dollar liquidity as they needed at fixed rates to restart interbank lending.

In the United States, Treasury Secretary Henry Paulson said Washington was developing plans to buy equity in financial institutions to halt the prolonged market turmoil.

All looking promising for markets.

However, some are beginning to ask how all these programmes will be funded.

As Brad Setser points out: An unlimited guarantee requires unlimited access to financing.

And Willem Buiter asks: Are the fiscal pockets deep enough to save the banks?

The tension between spare fiscal capacity and the funding gap or solvency gap of the national financial system may be such that it can only be resolved either by government default or by international financial support - aid. We will know before the year is over which nations’ governments will have to be bailed out if their national financial systems are to be bailed out.

Monday, 13 October 2008

A bloody week for stocks

Last week was a tumultuous one for global stock markets, with many markets seeing record-breaking losses.

The MSCI World Index of 23 developed markets lost 20.1 percent, the most since records began in 1970. In Europe, the Dow Jones Stoxx 600 Index fell 21.5 percent, its worst weekly loss on record. The MSCI Asia Pacific Index fell 17.8 percent, also its worst weekly loss on record.

National stock indices also saw record-breaking declines. The Standard & Poor's 500 Index lost 18.2 percent, its worst loss since it was reconstituted as a 500-stock index in 1957. Japan's Nikkei 225 Stock Average lost an even-greater 24.3 percent, the worst weekly decline since its creation in 1950.

Most of the other major world stock markets fell around the same order of magnitude last week. In fact, last week's losses constituted a very substantial proportion of the declines in stock markets this year so far.

It is, of course, all the consequence of the credit crisis.

The development of this credit crisis last week can be seen in the movement in the London Interbank Offered Rate (LIBOR). LIBOR for three-month US-dollar loans rose to 4.82 percent on Friday, up from 4.33 percent the previous week. With three-month US Treasury yields falling to 0.18 percent on Friday from 0.47 percent the previous week, the difference between the two rates, or the TED spread, is now at 464 basis points, the highest since Bloomberg began tracking the data in 1984.

The rise in the LIBOR occurred despite coordinated rate cuts by some of the most important central banks in the world. The Federal Reserve, the European Central Bank, the Bank of England, the Bank of Canada and Sweden's Riksbank each reduced their benchmark rates by half a percentage point on 8 October while the Swiss National Bank lowered its target range for the Swiss franc three-month LIBOR. The People's Bank of China also made a contribution by cutting its official rate by 0.27 percentage point while a day earlier, the Reserve Bank of Australia had cut its benchmark rate by a full percentage point.

Apart from the rate cuts, steps taken by governments so far include guarantees of bank loans and deposits and capital injections into banks. There is also of course the United States' controversial Troubled Asset Relief Program, which aims to relieve banks of troubled mortgage assets.

While the steps taken thus far have largely been unilateral, uncoordinated and ad hoc, there is a clear movement towards changing this. At the Group of Seven meeting at the end of last week, government finance ministers agreed to, in their own words, "take all necessary steps to unfreeze credit and money markets". Then on Sunday, leaders from the 15 countries that share the euro currency announced a plan to address the financial crisis that included state guarantees for bank debt and injections of state capital into banks.

At some point, all the government actions being taken will eventually stem the financial crisis. Markets will then bottom and, eventually, recover as well.

However, the recovery may take some time. While some market commentators have asked whether the past week represents a capitulation by investors, thus marking a bottom in the market, I think this question is premature. While a short-term bottom is possible, even probable, a longer-term bottom is more likely some way off.

The government actions being taken are designed primarily to slow the financial deleveraging process, not stop it. With continued deleveraging, financial institutions and investors will remain under pressure to sell assets, which will in turn put continued downward pressure on prices.

Continued deleveraging also means that we will still have an economic recession to go through. With a recession, corporate earnings are going to be depressed. This will hurt stock valuations that currently may look attractive after the recent fall in prices.

In any case, even if a recovery is imminent, investors may have relatively limited upside potential from stocks at current price levels. The financial crisis surely means the end of the credit bubble. This in turn means that earnings growth once the economic recovery is underway is unlikely to match that of the past decade or so. It also means less money will be available to fuel another bull market in stocks, especially with governments likely to be competing for money to deal with the effects of the recession.

Still, even if the bloodbath in stock markets last week turns out not to be the capitulation that market-timers have been looking for, there is little doubt that there has been a large shift in the psychology of stock investors. The sense of crisis that has pervaded credit markets for some time has finally hit stock markets with full force.

So even if stock markets did not hit bottom last week, they probably took a large step towards it.

Sunday, 12 October 2008

G7 to take all necessary steps as global financial system faces meltdown

Not too much came out of the G7 meeting. Bloomberg reports:

Group of Seven finance chiefs, meeting after stocks plunged and as a global recession looms, vowed to prevent the collapse of major banks while failing to unveil new initiatives for thawing credit markets.

"The current situation calls for urgent and exceptional action," the finance ministers and central bankers said in a statement after talks in Washington yesterday. They pledged to "take all necessary steps to unfreeze credit and money markets" without detailing how that would be accomplished.

Instead, we have the IMF warning of a financial meltdown. Reuters reports:

The IMF warned on Saturday that the global financial system was on the brink of meltdown, while France and Germany pushed ahead with a pan-European crisis response to try to prevent the worst global downturn in decades...

"Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown," IMF chief Dominique Strauss-Kahn said.

Friday, 10 October 2008

Credit markets remain stressed, US stocks plunge

It turns out that the coordinated rate cuts aren't helping markets very much. From Bloomberg:

The cost of borrowing in dollars for three months in London soared to the highest level this year as coordinated interest-rate reductions worldwide failed to revive lending among banks for any longer than a day...

The London interbank offered rate, or Libor, for three-month loans rose to 4.75 percent today, the highest level since Dec. 28... The overnight rate fell to 5.09 percent, still 359 basis points more than the Fed's 1.5 percent target rate...

The Libor-OIS spread, the difference between the three-month dollar Libor and the overnight indexed swap rate, climbed 23 basis points to an all-time high of 348 basis points. The average was 8 basis points in the 12 months to July 31, 2007, before the credit squeeze began. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, exceeded 400 basis points for a second day.

US stocks took another pummelling on Thursday. Bloomberg reports:

U.S. stocks slid and the Dow Jones Industrial Average fell below 9,000 for the first time since 2003 as higher borrowing costs and slower consumer spending spurred concern carmakers, insurers and energy companies will be the next victims of the credit crisis...

The Standard & Poor's 500 Index retreated for a seventh day, losing 75.02 points, or 7.6 percent, to 909.92 to cap its longest streak of daily declines since 1996. The Dow Jones Industrial Average declined 678.91, or 7.3 percent, to 8,579.19. The Nasdaq Composite Index decreased 5.5 percent to 1,645.12. Twenty stocks fell for each that rose on the New York Stock Exchange.

And the forex market's key measure of risk aversion, the Japanese yen, soared. Again from Bloomberg:

The yen rose against the dollar, headed for its biggest weekly gain in a decade, on speculation a global stock market rout will prompt investors to pare holdings of higher-yielding assets funded with the Japanese currency...

The yen rose to 98.90 per dollar at 8:49 a.m. in Tokyo from 99.82 late yesterday in New York, headed for a 6.5 percent gain this week. It earlier touched 98.51, the strongest since March 20. Japan's currency was at 135.04 versus the euro from 135.83 yesterday and 145.11 at the end of last week. It earlier touched 134.02, the strongest since August 2005. The euro fell to $1.3559 from $1.3604, on course for its second weekly decline.

The financial markets are clearly in turmoil. But if traders are feeling too stressed out from it all, perhaps they should follow the advice of Iceland's prime minister. From Bloomberg:

Iceland Prime Minister Geir Haarde has some advice for his fellow citizens after the country's banking system imploded: Go fishing.

"We are too small a country to sustain such a big banking system," he said in an interview. "We have fantastic resources and an abundance of green energy and we will now utilize that and the other resources we have, the ocean and human capital."

The advice came a bit late for Iceland.

Over the past decade, Iceland's banks backed a buying binge that saw local investors take stakes in retailers such as Saks Fifth Avenue, jeweler Mappin & Webb, and the parent of American Airlines, while the nation's banks snapped up financial services firms abroad. That foreign adventure came to an end this week with the government seizure of Iceland's top three banks, including Kaupthing Bank hf, the nation's biggest lender.

The good news for Iceland is that it isn't going to have Zimbabwe's inflation rate, which hit 231 million percent in July.

Thursday, 9 October 2008

Altogether now

Markets got their coordinated rate cuts, although Japan sat out. Bloomberg reports:

The Federal Reserve, European Central Bank and four other central banks lowered interest rates in an unprecedented coordinated effort to ease the economic effects of the worst financial crisis since the Great Depression.

The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each reduced their benchmark rates by half a percentage point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. China's central bank separately cut its key rate 0.27 percentage point...

The Fed reduced its benchmark rate to 1.5 percent. The ECB's main rate is now 3.75 percent; Canada's fell to 2.5 percent; the U.K.'s rate dropped to 4.5 percent; and Sweden's rate declined to 4.25 percent. China cut interest rates for the second time in three weeks, reducing the main rate to 6.93 percent.

Stock markets had been plunging throughout Wednesday before the rate cuts, but the move didn't completely save markets.

The Standard & Poor's 500 Stock Index fell 1.1 percent to 984.94 at the close in New York, capping a 16 percent loss in six trading days. Europe's Dow Jones Stoxx 600 Index slumped 6 percent. Japan's Nikkei 225 Stock Average lost 9.4 percent to 9,203.32 earlier today, before the announcement.

In falling, the US market also seemingly ignored what could be a hopeful sign for the housing market. From MarketWatch:

Despite the credit crunch gripping the U.S. economy, the National Association of Realtors reported Wednesday that an index of sales contracts on previously owned homes rose 7.4% in August from the prior month.

Such a response -- or lack of response -- provides another confirmation that we are in a bear market.

Wednesday, 8 October 2008

RBA slashes, BoJ dashes

The Reserve Bank of Australia apparently doesn't believe in timid moves. From Bloomberg:

Australia's central bank cut its benchmark interest rate by one percentage point, the most since a recession in 1992, triggering a rebound in Asian stocks on speculation other countries will follow to unlock credit markets...

Today's reduction, twice as much as economists forecast, took the overnight cash rate target to 6 percent, the lowest since November 2006...

Reserve Bank Governor Glenn Stevens said in Sydney today that "an unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers."

The large cut initially raised hopes of coordinated rate cuts by global central banks.

"Rumors are now circulating that today's aggressive move by the Reserve Bank of Australia is the precursor for coordinated rate cuts by global central banks," said Katie Dean, a senior economist at Australia & New Zealand Banking Group Ltd. in Melbourne.

Those hopes may have been dashed. From AFP/CNA:

The financial crisis will delay Japan's economic recovery but coordinated global interest rate cuts are not the answer, the country's top central banker said Tuesday...

[Bank of Japan governor Masaaki Shirakawa] said central banks should set monetary policy based on the health of their own economies.

Joint action may result in one country doing something that is not favourable for its own economy, he said, adding: "Each country will make its own decision considering its own conditions."

The BoJ itself left interest rates unchanged yesterday despite signs of a deteriorating economy.

Meeting amid fresh turmoil on world markets, the Bank of Japan left its super-low interest rates unchanged at 0.5 per cent - the lowest among major economies - where they have been since February 2007...

"We are now forecasting that an economic recovery will come a little bit later than we had originally anticipated," [Shirakawa] told a news conference...

The composite index of coincident economic indicators...fell 2.8 points from July to 100.7, the cabinet ministry said.

It was the largest drop since comparable records began in January 1980.

Meanwhile, Fed Chairman Ben Bernanke doesn't appear averse to a rate cut. From Bloomberg:

Federal Reserve Chairman Ben S. Bernanke signaled policy makers are ready to lower interest rates as the credit freeze poses an escalating danger to the economy.

The world financial system is under "extraordinary stress" and history shows that severe instability "can take a heavy toll on the broader economy if left unchecked," Bernanke said in a speech in Washington. "The Federal Reserve will need to consider whether the current stance of policy remains appropriate."

But Bernanke also has other tricks up his sleeves. From Bloomberg:

The Federal Reserve will create a special fund to buy U.S. commercial paper, seeking to unblock the financing tool that drives everyday commerce for American businesses.

The Treasury will make a deposit with the Fed's New York district bank to help set up the new unit. The central bank will also lend to the program at policy makers' target rate for overnight loans between banks, the central bank said in a statement released in Washington. Fed officials said they intend to set up the fund soon, while declining to specify a date.

Whenever this latest initiative gets going, it's unlikely to be too soon. There are concerns enough on the consumer side. Bloomberg reports:

Borrowing by U.S. consumers unexpectedly fell in August by the most on record as banks shut off access to loans, a report from the Federal Reserve showed.

Consumer credit fell by $7.9 billion, the most since statistics began in 1943, to $2.58 trillion, the Fed said today in Washington. In July, credit rose by $5.2 billion, previously reported as a $4.6 billion gain. The Fed's report doesn't cover borrowing secured by real estate.

Meanwhile, indications are that the ECB is also prepared to lower rates. Bloomberg reports:

European Central Bank policy makers said inflation risks are waning as the credit crunch bites, giving the bank more room to cut interest rates.

"We face a global financial crisis of enormous proportions," ECB council member Miguel Angel Fernandez Ordonez told Spanish lawmakers in Madrid today. His Belgian colleague Guy Quaden said in Brussels that in the "new circumstances, a reduction of the official interest rate is no longer ruled out."

But at least there was some positive economic news coming out of the euro area in the form of a 3.6 percent increase in German factory orders in August.

In contrast, the newsflow from the UK has been gloomy. Industrial production fell a sharper-than-expected 0.6 percent in August and UK banks are looking wobbly, making it likely that the Bank of England will cut interest rates on Thursday.

Tuesday, 7 October 2008

Stocks surge from intraday lows

That's the positive take anyway. Bloomberg reports a fuller picture of Monday's markets.

The Standard & Poor's 500 Index retreated 3.9 percent, extending the worst weekly slump since 2001. The Dow Jones Industrial Average lost 370 points, led by plunges in Alcoa Inc., Boeing Co. and Walt Disney Co. Both gauges pared declines of more than 7.7 percent in the final hour as traders increased bets on a Federal Reserve interest rate cut. The MSCI Emerging Markets Index headed for the biggest loss in its 21-year history and exchanges in Russia and Brazil halted trading. Europe's Dow Jones Stoxx 600 Index had its steepest decline since 1987...

Two-year Treasury yields plunged 0.14 percentage point to 1.45 percent as investors sought the relative safety of government bonds...

The euro tumbled as bank failures in the region increased, dipping 5.4 percent to 137.22 yen, the weakest since September 2005. All the world's most-traded currencies declined against the yen, which strengthened 15 percent against the Australian dollar...
Money market rates climbed as investors lost confidence in financial markets. The interest rate that banks charge each other for overnight loans in dollars jumped to 2.37 percent from 2 percent, the British Bankers' Association said.

Yields on overnight U.S. commercial paper jumped 0.94 percentage point to 3.68 percent, according to data compiled by Bloomberg. That's the highest since Sept. 30, the day after the U.S. House of Representatives first rejected the bank bailout.

Investors are growing increasingly concerned that higher borrowing costs will worsen a slowdown in world economies, reducing demand for metals and fuel. The Reuters/Jefferies CRB Index of 19 commodities slipped 5.2 percent.

The primary trigger for the latest bout of turmoil was the increasing realisation of the fragility of the banking system in Europe, not just in the US. From Bloomberg:

European governments from Brussels to Copenhagen to Berlin rushed to shore up their faltering banks as the credit crunch worsened in Europe.

BNP Paribas SA agreed to buy Fortis's units in Belgium and Luxembourg for 14.5 billion euros ($19.8 billion) after a government rescue failed, while the German state and financial institutions put together a 50 billion-euro rescue package for Hypo Real Estate Holding AG. Denmark and Germany said they will guarantee all their countries' bank deposits.

But there was also action in the US from the Fed. Bloomberg reports:

The Federal Reserve will double its auctions of cash to banks to as much as $900 billion and is considering further steps to unfreeze short-term lending markets as the credit crunch deepens...

Implementing part of last week's emergency legislation to shore up the financial industry, the Fed said today it will begin paying interest on the cash reserves banks hold at the central bank. The step should give Fed officials greater power to inject cash into banks without interfering with their benchmark interest rate, which stands at 2 percent.

What many are looking for, however, is easing of monetary policy. India set the ball rolling for this week. From Bloomberg:

India allowed banks to set aside smaller reserves for the first time in five years to boost cash in the financial system and calm markets after the collapse of Lehman Brothers Holdings Inc. and the sale of Merrill Lynch & Co.

The Reserve Bank of India reduced its so-called cash reserve ratio to 8.5 percent from 9 percent effective Oct. 11, according to a statement in Mumbai. The cut will add 200 billion rupees ($4.2 billion) to the financial system, the bank said.

Monday, 6 October 2008

Signs of US recession are spreading

The debate over whether the United States economy is in or entering a recession is now almost over. The latest data show that the economy is weak on all fronts.

Market attention over the past week had been largely focussed on the package designed by the Treasury Department to rescue financial institutions by relieving them of troubled assets. That package was approved and signed into law at the end of the week.

Meanwhile, though, there were also a number of economic reports released last week that showed how much the economy is already weakening.

On 3 October, the Labor Department reported that non-farm payrolls fell 159,000 in September, the ninth consecutive month of job losses and the most in five years. The unemployment rate was at 6.1 percent, unchanged from August.

This pattern of persistent job losses has, in the past, been indicative of a recession (see "Surely a recession now").

Until recently though, most other indicators had not exhibited clear signs of a recession. The latest data show, however, that this is beginning to change.

Consumer spending is weak. On 29 September, the Commerce Department reported that consumer spending was flat in August. Although the Conference Board reported the next day that consumer confidence rose to 59.8 in September from 58.5 in August, it is still at a low level.

Businesses also appear to be increasingly reluctant to spend. On 2 October, the Commerce Department reported that factory orders fell 4.0 percent in August with orders for capital goods excluding defence and aircraft, a measure of future business capital spending, falling 2.4 percent.

That report was consistent with the numbers from the Institute for Supply Management (ISM). On 1 October, the ISM reported that its manufacturing PMI plunged to 43.5 in September, the lowest level since October 2001, from 49.9 in August. The new orders index plunged to 38.8 in September from 48.3 in August. The employment index plunged to 41.8 from 49.7.

The plunge in the ISM PMI in September in particular may be a signal that the US economy has entered or is about to enter a recession. In the months before September, the PMI had stayed relatively resilient, holding up around the 50 mark that indicates a flat performance for manufacturing. The plunge in the PMI to 43.5 in September decisively breaks that holding pattern.

As the accompanying chart shows, not since the 1960s has the PMI fallen to such a level without the economy entering a recession.

Doubts over a possible recession cannot be totally dispelled though. The ISM's report on non-manufacturing business on 3 October turned out somewhat better. The non-manufacturing index fell marginally to 50.2 in September from 50.6 in August. The reading indicates that the services sector is not contracting yet.

Credit markets, though, are showing so much distress that even if the economy has not entered a recession, it could do so soon.

According to Bloomberg, yields on Treasuries fell sharply last week, with the yield on the three-month bill falling 38 basis points to 0.47 percent, the yield on the two-year note falling 51 basis points to 1.58 percent and the yield on the ten-year note falling 25 basis points to 3.60 percent.

Interest rates on interbank loans, however, have gone in the opposite direction. The London Interbank Offered Rate (LIBOR) rose 47 basis points to 4.33 percent. The TED spread -- the difference between the three-month Treasury bill yield and the three-month LIBOR -- has now widened to 3.87 percentage points, the most since Bloomberg began compiling the data in 1984.

Meanwhile, yield spreads over benchmark rates on US speculative-grade bonds widened to 1,200 basis points last week, the highest on record, and 175 basis points more than last week, according to Merrill Lynch's US High Yield Master II index.

The turmoil in credit markets is hurting corporate bond sales. The value of such sales has declined to US$14.2 billion over the past four weeks, the slowest such period since borrowers issued US$12 billion of debt in the four weeks from 13 December 1999 to 17 January 2000. Sales were just US$1.25 billion last week.

So while reports on US gross domestic product have so far shown positive growth, this may not last for much longer. On 26 September, the Commerce Department had released the latest estimate of real GDP for the second quarter showing a quarter-on-quarter seasonally-adjusted annualised growth rate of 2.8 percent. However, the third or subsequent quarters could see the growth rate follow in the footsteps of the ISM PMI and turn decisively downward.

Little wonder then that the US government felt compelled to rush a rescue package for financial markets.

Saturday, 4 October 2008

Bailout approved but US stocks and employment fall

The US Congress approved the financial rescue package yesterday but US stocks fell anyway. From Bloomberg:

U.S. stocks slid, capping the worst week for the Standard & Poor's 500 Index since the 2001 terrorist attacks, on concern the $700 billion bank bailout isn't enough to unlock credit markets and prevent a recession...

The S&P 500 declined 15.05 points, or 1.4 percent, to 1,099.23. The Dow Jones Industrial Average lost 157.47 points, or 1.5 percent, to 10,325.38. The Nasdaq Composite Index slipped 29.33, or 1.5 percent, to 1,947.39. More than three stocks decreased for each that rose on the New York Stock Exchange.

There are good reasons for investors to fear a recession, not least the continuing deterioration in nonfarm payrolls. From Bloomberg:

The U.S. lost the most jobs in five years in September and earnings rose less than forecast as the credit crisis deepened the economic slowdown.

Payrolls fell by 159,000, more than anticipated, after a 73,000 decline in August, the Labor Department said today in Washington. The jobless rate, the last one reported before the presidential election, remained at 6.1 percent. Hours worked reached the lowest level since records began in 1964.

Fortunately, the services sector kept its head above water in September. Bloomberg reports:

The Institute for Supply Management's index of non-manufacturing businesses, which make up almost 90 percent of the economy, decreased to 50.2, higher than forecast, from 50.6 in August, the Tempe, Arizona-based group said today. A reading of 50 is the dividing line between growth and contraction.

Still, the prognosis for the US economy is not good. The ECRI's Weekly Leading Index edged up to 122.2 in the week to 26 September from 122.1 in the previous period but its annualized growth rate fell from minus 12.3 percent to minus 13.3 percent, the lowest since 25 February 1975. From Reuters:

"With WLI growth plunging to its lowest reading since the severe 1973-75 recession, the 2008 recession is set to get noticeably worse," said Lakshman Achuthan, managing director at ECRI.

And it's no better in Europe.

In the UK, the services sector contracted at the fastest rate for at least 12 years, the Chartered Institute of Purchasing and Supply/Markit purchasing managers' index for services companies falling to 46.0 in September from 49.2 in August.

It was little better in the euro area. Markit's eurozone services purchasing managers' index slipped to 48.4 in September from 48.5 in August. However, retail sales rose 0.3 percent in August, although that still left it 1.8 percent lower than a year earlier.

Friday, 3 October 2008

ECB discusses rate cut, IMF looking at sharp US downturn

The ECB has moved to an easing bias. Bloomberg reports:

European Central Bank President Jean-Claude Trichet indicated the bank is poised to cut interest rates for the first time in more than five years as the credit crunch hurts the economy and damps inflation.

Investors are betting the ECB will lower borrowing costs as soon as next month after Trichet told a press conference in Frankfurt that policy makers discussed a rate reduction today. While leaving the benchmark at a seven-year high of 4.25 percent, Trichet said financial-market turmoil is damping economic growth and inflation risks "have diminished."

Markets are certainly giving Trichet reasons to worry about the credit crunch. Again from Bloomberg:

The London interbank offered rate that banks charge each other for loans rose for a fourth day, driving a gauge of cash scarcity among banks to a record. The biggest drop in financial short-term debt outstanding since at least 2000 caused the U.S. commercial paper market to tumble 5.6 percent to a three-year low, according to the Federal Reserve...

Stocks dropped for a second day as reports showed a worsening economy, and Treasury yields fell as traders speculated central banks will have to cut interest rates to prevent a global recession. The Standard & Poor's 500 Index slid 46.78, or 4 percent, to 1,114.28. The yield on two-year notes tumbled 19 basis points, or 0.19 percentage point, to 1.62 percent, according to BGCantor Market Data.

And how badly is the US economy worsening? Quite badly, it seems. From Bloomberg:

Orders to U.S. factories fell in August by the most in almost two years, signaling that business spending slowed down even before the recent worsening of the credit crunch.

The 4 percent drop in bookings was larger than forecast and followed a 0.7 percent increase in July that was smaller than previously estimated, Commerce Department figures showed today in Washington...

Excluding demand for transportation equipment, which tends to be volatile, factory orders decreased 3.3 percent, the most since September 2001...

Bookings for all durable goods, which make up just under half of total orders, fell 4.8 percent in August, more than the Commerce Department estimated last week. Non-durable goods orders, including those for food, petroleum and chemicals, dropped 3.3 percent after.

Today's revision also made the outlook for business investment even dimmer. Bookings for capital goods excluding defense and aircraft, a proxy for future business spending, fell 2.4 percent in August compared with the 2 percent decline estimated last week.

Shipments of such goods, which the government uses to calculate gross domestic product, decreased 2.1 percent, also worse than previously estimated and the biggest drop since January 2007.

Meanwhile, the labour market continues to deteriorate.

The number of people collecting jobless benefits rose to 3.59 million in the week ended Sept. 20, the most since 2003, the Labor Department reported today. First-time claims jumped to 497,000 in the week ended Sept. 27, reflecting job losses in the aftermath of the Gulf Coast hurricanes.

And James Hamilton points out that auto sales in the US deteriorated further in September, "which is consistent with the view that the U.S. economy has been in recession and took a sharp turn for the worse last month".

Even the IMF has joined the gloomy bandwagon. From Bloomberg:

The U.S. may fall into a recession as the financial rout deepens, the International Monetary Fund said in its most pessimistic outlook for the world's largest economy since the credit crisis began last year.

"The financial turmoil that began in the summer of 2007 has mutated into a full-blown crisis," the fund said in a section of its semiannual World Economic Outlook released in Washington today. There is "a substantial likelihood of a sharp downturn in the United States," the fund said.

It was slightly more optimistic though about the euro area.

The 15 countries that use the euro may be able the weather financial shocks and slowing growth, the IMF said. "In the euro zone, by contrast, the relatively strong position of households offers some protection against a sharp downturn," the report stated.

Thursday, 2 October 2008

US economy looking gloomy too

Thursday was the US economy's turn to look gloomy. From Bloomberg:

Manufacturing in the U.S. contracted in September at the fastest pace since the last recession as the credit crisis spread beyond Wall Street.

The Institute for Supply Management's factory index dropped to 43.5, the lowest level since October 2001...

Other reports today signaled the U.S. continues to lose jobs. ADP Employer Services said companies in the U.S. cut an estimated 8,000 workers from payrolls in September after a 37,000 decrease in August, according to figures based on payroll data...

Firing announcements increased 33 percent in September from that same month last year, Chicago-based Challenger, Gray & Christmas Inc. said in a statement.

The Commerce Department also reported that construction spending stalled in August after a revised 1.4 percent drop the previous month that was more than twice as large as previously estimated. Private residential building increased for the first time since March 2007 and work on commercial projects fell for a fourth month.

Morgan Stanley's Richard Berner says that "the issue now is not whether a recession is likely, but how deep it will be and how long it will last".

And perhaps how widespread too. Europe is not faring any better, as Bloomberg reports.

European manufacturing contracted more than initially estimated and unemployment rose to the highest in a year as the deepening credit crisis slowed growth.

Markit Economics's manufacturing index dropped to 45 in September from 47.6 in August, lower than the 45.3 published on Sept. 23. Unemployment in the euro region rose to 7.5 percent in August, the highest since April 2007, from a revised 7.4 percent in July, according to a separate report.

And in the UK, the Chartered Institute of Purchasing and Supply/Markit PMI fell to 41.0 in September from a downwardly revised 45.3 in August.

China bucked the trend in manufacturing though. The official CFLP PMI rose to 51.2 in September from 48.4 in August.

Wednesday, 1 October 2008

US stocks rebound but it's looking gloomy in Japan

US stocks surged yesterday on renewed hopes for the bailout plan. Bloomberg reports:

U.S. stocks jumped the most in six years as growing expectations that lawmakers will salvage a $700 billion bank-rescue package helped the Standard & Poor's 500 Index recover more than half of yesterday's 8.8 percent plunge...

The S&P 500 rose 58.35 points, or 5.3 percent, to 1,164.74, its biggest rally since July 2002. The Dow Jones Industrial Average jumped 485.21, or 4.7 percent, to 10,850.66 and earlier gained more than 500 points. The Nasdaq Composite Index added 5 percent to 2,082.33. More than five stocks climbed for each that fell on the New York Stock Exchange.

On the whole, economic data, although not the focus for investors, also didn't hinder the recovery too much.

Consumer confidence unexpectedly rose in September in a survey taken before the recent worsening of the credit crisis and plunge in stocks. The Conference Board's confidence index rose to 59.8, a third consecutive increase, from 58.5 the prior month. A separate report showed home prices fell in July at the fastest pace on record from a year earlier.

A measure of U.S. business activity slowed for the first time in seven months as new orders and inventories weakened. The National Association of Purchasing Management-Chicago said its business index decreased to 56.7 this month from 57.9 in August. Fifty is the dividing line between growth and contraction.

But the credit crisis is certainly not over.

The London interbank offered rate, or Libor, that banks charge each other for overnight loans jumped 431 basis points to an all-time high of 6.88 percent, the British Bankers' Association said today.

Meanwhile, the economic reports coming out of Japan have been pretty gloomy. From AFP/CNA:

Japan's unemployment rate rose to 4.2 per cent in August from 4.0 per cent in July with only 86 jobs on offer for every 100 job seekers, the lowest since September 2004, official figures showed...

Separate government data showed industrial production dropped by 3.5 per cent in August from the previous month, the steepest fall since comparable records began in 2003...

Official figures said household spending tumbled by 4.0 per cent in August from a year earlier, a much bigger drop than an expected decline of about 1.4 per cent.

Other reports corroborate the weakness in manufacturing. From Reuters on Monday:

Manufacturing activity in Japan fell to its lowest point in 6-½ years in September as companies recoil amid an uncertain economic outlook and financial market turmoil...

The PMI declined to a seasonally adjusted 44.3 in September from 46.9 in August, pushing it further below the 50-point mark that points to a contraction in manufacturing.

And from Bloomberg today.

Japan's largest manufacturers turned pessimistic about the prospects for business for the first time in five-years as a deepening U.S. financial crisis stifled demand in the country's export markets.

The Tankan index of confidence among big makers of cars and electronics slid to minus 3 points in September from 5 in June, a fourth quarterly drop, the Bank of Japan said today in Tokyo. The first negative reading for the index since 2003 indicates pessimists outnumber optimists.