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.

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