Russia raises rates amid more signs of economic weakness in Europe and Asia

Russia raised interest rates on Friday. Bloomberg reports:

Russia’s central bank raised its main interest rates for the second time this month in a bid to make the weakening ruble more attractive to investors, cap capital outflow and damp “inflationary trends.”

The refinancing rate will rise to 13 percent from 12 percent on Dec. 1, Bank Rossii said in an e-mailed statement today. The interest rate for one-day and seven-day loans from the bank in repurchase auctions will climb to 10 percent from 9 percent.

The mention of inflation looks out of place in today's environment. Inflation is already fast receding in much of the rest of Europe. From Bloomberg:

Europe’s inflation rate fell by the most in almost two decades and unemployment increased, adding to pressure on the European Central Bank to continue cutting interest rates to battle the recession.

Inflation in the euro area slowed to 2.1 percent in November from 3.2 percent in October, the European Union’s statistics office in Luxembourg said today. The drop is the biggest since at least 1991 and puts the inflation rate at the lowest in more than a year.

The fall in the inflation rate is consistent with a deteriorating economy and rising unemployment.

A separate report today showed the euro-region unemployment rate rose to 7.7 percent in October from 7.6 percent in September, the highest level since January 2007. That follows data yesterday that showed European economic confidence dropped to a 15-year low in November, while retail sales fell the most in at least five years.

Meanwhile, the Japanese economy may be set for a bigger slump than expected. From AFP/CNA:

Japanese factory output slumped and consumers tightened their purse strings in October as recession took a tighter hold on Asia's largest economy, official figures showed Friday.

Japan's industrial production tumbled 3.1 per cent from the previous month as manufacturers slowed their factory lines to cope with the worst financial crisis since the Great Depression, the government said.

The drop was bigger than market forecasts of a 2.6 per cent decline. Manufacturers said they expected output to tumble 6.4 per cent in November and a further 2.9 per cent in December.

Consumer spending dropped 3.8 per cent in October from a year earlier as Japanese households grew more reluctant to splurge following months of grim news on the economy and the plunging stock market...

One bright spot in an otherwise dismal batch of reports on the world's second-largest economy was an unexpected reduction in the unemployment rate to 3.7 per cent in October from 4.0 per cent in September.

But there were only 80 job opportunities for every 100 job seekers, suggesting that it is becoming more challenging to find work...

Core inflation slowed to 1.9 per cent in October as oil prices fell and a stronger yen reduced the cost of imports, adding to concerns that Japan may slip back into deflation.

South Korean industrial production was also down in October, falling 2.3 percent.

European economy looks bad but stocks gain

The European economy is likely to continue deteriorating. Bloomberg reports:

European confidence in the economic outlook fell to a 15-year low this month even after radical interest-rate cuts and government stimulus measures aimed at battling the impact of the financial crisis.

An index of executive and consumer sentiment dropped to 74.9 from 80 in October, the European Commission in Brussels said today. The November decline was bigger than economists had forecast and takes the index to the lowest since August 1993. Separate figures showed European retail sales fell the most in at least five years in November.

For the UK, Reuters reports:

House prices fell 0.4 percent this month as the credit crisis continued to hit the housing market, but the annual rate of decline eased slightly from October's record drop, a survey showed on Thursday.

If that suggests possibly some deceleration, perhaps there is some corroboration from this Bloomberg report on consumer confidence:

U.K. consumer confidence stayed close to the lowest level in more than three decades in November as gloom about the recession deterred spending, GfK NOP said.

An index of sentiment, based on a survey of 2,000 people between Nov. 7 and Nov. 16, rose one point from the previous month to minus 35. A gauge measuring the general economic situation in the past year rose one point to minus 71, still 39 points lower than in the same month last year.

It's probably still too early to call a bottom in the economy. Nevertheless, European stock markets did finish in positive territory on Thursday. Bloomberg reports:

European stocks climbed, sending the Dow Jones Stoxx 600 Index to its fourth straight gain, as investors speculated government efforts to shore up banks and the economy will support profits...

The Stoxx 600 added 2.4 percent to 203.62, extending this week’s gain to 12 percent. The index is still down 44 percent in 2008, headed for its worst year since records began in 1987, as economies from Germany and the U.K. to the U.S. slip into recession.

China slashes rates as global economic data remain gloomy

It's China's turn to get aggressive on the monetary policy front. AFP/CNA reports:

China's central bank announced on Wednesday a steep cut in its interest rates -- by four times the usual margin -- in a signal that it would pull out all the stops to boost weakening economic growth.

The benchmark one-year lending and deposit rates will both be reduced on Thursday by 108 basis points, compared with the usual 27 basis points in Chinese rate cuts, the People's Bank of China said...

It was China's fourth interest rate cut since mid-September, and the deepest rate cut since October 1997...

After the rate cut, one-year lending rates in China will be 5.58 per cent, while one-year deposit rates will drop as low as 2.52 per cent...

The central bank also announced cuts in the amount of money banks must keep in reserve.

Beginning from December 5, large banks will see their required reserve ratio drop by one percentage point, while it will go down by two percentage points for smaller financial institutions.

The monetary stimulus will probably be needed as the economies of China's top export markets are looking dreadful. From Bloomberg:

Americans cut spending by 1 percent in October, the biggest drop since the last recession in 2001...

Adjusted for inflation, spending fell 0.5 percent, a fifth consecutive decrease...

The U.S. spending report showed incomes rose 0.3 percent after a 0.1 percent gain in September, and measures of inflation decelerated. The price gauge tied to purchases fell 0.6 percent in October and was up 3.2 percent from the same month in 2007. Stripping out fuel and energy, prices were unchanged on the month and up 2.1 percent from a year before...

In the U.S., the Reuters/University of Michigan final index of consumer sentiment dropped to 55.3 in November, the lowest level since 1980...

U.S. orders for durable goods, which are meant to last several years, slid 6.2 percent last month after a 0.2 percent drop in September, the Commerce Department reported...

Excluding demand for transportation equipment, which tends to be volatile, orders dropped 4.4 percent, also more than anticipated and the biggest decline since January 2002...

Bookings for non-defense capital goods excluding aircraft, a measure of future business investment, decreased 4 percent, the biggest decline in almost two years. Shipments of those items, used in calculating gross domestic product, fell 2.4 percent following a 1.6 percent gain in September...

The number of Americans filing first-time claims for unemployment benefits fell to 529,000 last week, while remaining close to the highest level since 1992, Labor Department figures showed. The four-week moving average for claims reached a 26- year high...

Purchases of new houses dropped 5.3 percent to an annual pace of 433,000, lower than forecast and the fewest since January 1991, the Commerce Department said today in Washington. The median sales price decreased to a four-year low.

Europe is not looking any better.

The inflation rate in Germany, Europe’s largest economy, slowed more than forecast this month to 1.5 percent, the Federal Statistics Office said...

In Britain, government figures showed consumer spending fell 0.2 percent and fixed investment dropped by 2.4 percent in the third quarter from the previous three months. Europe’s second-largest economy suffered a 0.5 percent contraction in the period, the first decline in 16 years...

Italian business confidence fell to the lowest in more than 15 years in November amid a recession in Europe’s fourth-biggest economy.

Fed throws more money at markets as economy looks worse

The Fed's ever-increasing participation in financial markets shows no sign of slowing. From Bloomberg on Tuesday:

The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion.

The central bank will purchase as much as $600 billion of debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the Fed said in statements today in Washington.

That should be good news for markets. How much it helps the real economy remains to be seen.

Tuesday's economic data were not encouraging. Again from Bloomberg:

The decline in U.S. house prices accelerated in September and the economy shrank in the third quarter at a faster pace than first estimated as the grip of the credit crunch tightened.

The S&P/Case-Shiller home-price index fell 17.4 percent from a year earlier. The Commerce Department said gross domestic product dropped an annual 0.5 percent as household spending slid the most since 1980. While consumer confidence rose this month, the Conference Board’s gauge remained near the lowest on record.

Elsewhere, Germany confirmed it is in recession. Bloomberg reports:

Germany’s economy, Europe’s largest, fell into recession in the third quarter after a global credit crunch and the euro’s gain to a record stifled foreign demand.

Gross domestic product declined a seasonally adjusted 0.5 percent from the previous quarter, when it dropped 0.4 percent, the Federal Statistics Office in Wiesbaden said today, matching an estimate from Nov. 13. Exports fell 0.4 percent. With imports rising 3.8 percent, net trade dragged down growth for the first time since a year earlier.

And the outlook for the Japanese economy is worsening. From Bloomberg:

The Bank of Japan downgraded its assessment of the economy for the first time in three months, saying growth is becoming “increasingly sluggish.”

“The increased sluggishness in Japan’s economic activity will likely persist over the next several quarters as the slowdown in overseas economies becomes more evident,” the central bank said in a report in Tokyo today. Exports have been falling because of the yen’s advance and slower global growth, and the declines will continue, the bank said.

Not to be outdone, the OECD is painting the economic outlook in stark terms. Bloomberg reports:

The world’s largest economies need further interest-rate reductions and tax cuts to limit the impact of the worst recession since the early 1980s, the Organization for Economic Cooperation and Development said.

“In normal times, monetary rather than fiscal policy would be the instrument of choice for macroeconomic stabilization,” the Paris-based organization said in a report today. “But these are not normal times.”

The U.S., Japanese, U.K. and euro-area economies will all shrink next year as the global financial crisis takes its toll on the broader economy, according to the OECD. While policy action has limited a “period of panic,” the economic uncertainties are “exceptionally large” and growth will recover only gradually from the second half of 2009.

The OECD also cut its forecast for global growth in 2009. The economy of the organization’s 30 members will contract 0.4 percent in 2009 after expanding 1.4 percent this year. Earlier this month, it predicted a 0.3 percent contraction next year.

Stocks get big boost from Citigroup bailout

Citigroup got its rescue from the US government and stock markets got a spectacular rally.

US stocks surged on Monday, the S&P 500 jumping 6.5 percent to add to Friday's 6.3 percent gain.

UK stocks did even better yesterday, the FTSE 100 surging 9.8 percent, its biggest rise on record.

Other European markets also performed similarly and helped push the Dow Jones STOXX 600 up 8.4 percent.

But while equity investors celebrated, economic data continue to look dismal.

The US housing market continued to deteriorate in October. Bloomberg reports:

Home resales in the U.S. dropped in October and prices fell by the most on record, signaling a deepening housing recession going into 2009.

Purchases of existing homes slid to an annual rate of 4.98 million, lower than forecast, a National Association of Realtors report showed in Washington. The median price fell 11.3 percent from a year earlier, the most since the group began collecting data in 1968.

Meanwhile, Europe's economy is showing no sign of recovery. Eurozone industrial new orders fell 3.9 percent in September while in Germany, the Ifo business climate index declined to 85.8 in November, its lowest level since February 1993, from 90.2 in October.

No Inflation, no growth?

The good news from last week's economic data is that inflation is gone, at least for now, in the United States. The bad news is that economic growth has probably gone with it.

On 19 November, the Labor Department reported that the consumer price index (CPI) fell 1.0 percent in October. Consumer prices excluding food and energy -- the so-called core prices -- also fell, though by a smaller 0.1 percent.

From a year ago, overall CPI was higher by 3.7 percent in October, well down from a peak of 5.6 percent in July. Core CPI was higher than a year ago by 2.2 percent in October, but this rate is down for the second consecutive month after exceeding 2.5 percent in August.

The fact that consumer prices fell in October could be an indication that the US economy is already in recession. In the past, a declining trend in the inflation rate, especially the core rate, has often been triggered by a recession. Indeed, core inflation, which lags overall inflation, usually falls only after several months into a recession. In the 2001 recession, the year-on-year core inflation rate actually peaked right at the end of the recession.

Therefore, the decline in both overall and core consumer prices in October may be a sign that the US economy has already been in recession for several months.

Such a conclusion would be consistent with the gross domestic product (GDP) figures from the Commerce Department. According to the department's advance estimate, US GDP had shrunk at an annualised rate of 0.3 percent in the third quarter. This followed a 2.8 percent growth rate in the second quarter.

More recent economic data indicate that the third quarter contraction probably continued into the fourth quarter.

On 14 November, the Commerce Department reported that retail sales in the US fell by 2.8 percent in October, reflecting weak consumer demand. Weak consumer demand goes a long way in explaining the decline in consumer price inflation.

The underlying trend in industrial production also looks weak, notwithstanding a strong headline number for October. A Federal Reserve report on 17 November showed that industrial production was up 1.3 percent that month. However, the increase was mainly due to a rebound from a hurricane-induced 3.7 percent plunge in September output. Excluding the effect of the hurricanes as well as a strike at Boeing, the Federal Reserve said that output shrank by 0.7 percent in each of the past two months.

If the US economy is indeed in recession, it would be joining other major global economies.

On 14 November, Eurostat reported that in the third quarter, GDP in the euro area shrank 0.2 percent from the previous quarter. This followed a similar 0.2 percent contraction in the second quarter, thus marking two consecutive quarters of contraction and confirming a technical recession.

On 17 November, it was Japan's turn to confirm a recession after the Cabinet Office reported that GDP shrank 0.1 percent in the third quarter after having shrunk 0.9 percent in the second quarter.

We are only half way through the fourth quarter but if the data released so far are any indication, we could soon be seeing a second consecutive quarter of GDP decline in the US too.

Global economy looking worse

The outlook continues to worsen in the global economy.

Bloomberg reports that the Japanese government has cut its evaluation of the economy for a second straight month.

"The economy has weakened further," the Cabinet Office said in a monthly report in Tokyo today. "Amid a further slowdown in the global economy, the downward pressure on the Japanese economy is increasing rapidly."

The Bank of Japan didn't feel compelled to cut rates on Friday though. From Bloomberg:

The Bank of Japan held its benchmark interest rate at 0.3 percent and said it will consider pumping more money into the financial system to prop up an economy that fell into a recession last quarter.

Governor Masaaki Shirakawa instructed his staff to study new ways of making money available for lending, such as accepting corporate debt as collateral, the central bank said in a statement in Tokyo today. The unanimous rate decision followed a cut from 0.5 percent last month, the first in seven years.

Meanwhile, Europe's economy is also deteriorating. Again from Bloomberg:

Europe's manufacturing and service industries contracted in November at the fastest pace in at least a decade, putting pressure on the European Central Bank to step up the pace of interest rate cuts.

A composite index of both industries dropped to 39.7, the lowest since the survey began in 1998, from 43.6 in October...

Markit's manufacturing index dropped to 36.2 from 41.1 in October, while the services gauge fell to 43.3 from 45.8. Separate figures today showed that French consumer spending on manufactured goods slipped the most in four months in October.

And it's the same in the US. From Reuters:

The Economic Cycle Research Institute, a New York-based independent forecasting group, said the annualized growth rate of its Weekly Leading Index slid in the week ending Nov. 14 from a revised negative 27.1 percent to minus 28.2 percent, a new low according to ECRI data recorded since January 1949...

The WLI level fell to a 13-year low of 108.0 from a downwardly revised 110.1, to match a number not seen since Aug. 25, 1995.

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.

US consumer prices fall

This should really get the deflation worries going. From Bloomberg:

The cost of living in the U.S. fell by the most on record...last month...

The consumer price index plunged 1 percent last month, the most since records began in 1947, the Labor Department said in Washington...

Prices dropped last month as fuel costs plummeted and retailers used discounts for cars and clothing to entice consumers hobbled by job losses and sinking home values...

Excluding food and energy, so-called core prices unexpectedly fell 0.1 percent for the first decline since 1982.

Consumer prices are not the only things falling.

... Commerce Department figures showed housing starts tumbled to an annual rate of 791,000, indicating the industry's contraction may extend into a fourth year...

A slump in building permits signaled residential construction is likely to keep falling in the next couple of months. Permits dropped 12 percent to a 708,000 pace, the lowest since at least 1960, the report from Commerce showed.

The Fed has acknowledged that the US economy in general looks in bad shape.

Fed policy makers last month forecast the U.S. economy will contract through the middle of 2009, with some officials prepared to cut interest rates further in response, according to a record of the group's meeting.

So have financial markets.

Treasuries advanced, and stocks plunged. Yields on benchmark 10-year notes fell to 3.36 percent as of 4:24 p.m. in New York, from 3.52 percent late yesterday. The Standard & Poor's 500 Stock Index closed down 6.1 percent at 806.58, extending its 2008 retreat to 45 percent.

The European economy also does not look in good shape. From Bloomberg:

Construction in the 15-nation euro region fell 3.8 percent from a year earlier, the biggest decline since December, the European Union's statistics office in Luxembourg said in a statement today. Output dropped 1.3 percent from the previous month.

And in the UK, the Confederation of British Industry is piling on the bad news. Monday saw this report from Reuters:

Britain will suffer its sharpest economic contraction in almost two decades next year and the number of people out of work could rise to nearly 3 million by 2010, the Confederation of British Industry said on Monday.

It said it expects the economy to contract by 1.7 percent in 2009 and blamed the fallout from global financial turmoil for the massive revision to the 0.3 percent growth forecast it had issued in September.

As if to back that up, on Wednesday came this Reuters report:

Factory orders continued to fall sharply in November and manufacturers are their most gloomy about future output in nearly 30 years, a survey showed on Wednesday.

The Confederation of British Industry's monthly Industrial Trends survey showed the factory orders balance picked up slightly to -38 from -39 in October.

No bottom yet in US housing

The US housing market is still not seeing a bottom. Bloomberg reports:

Confidence among U.S. homebuilders in November dropped to the lowest level since record-keeping began in 1985, a sign that the deepening credit crisis is preventing prospective buyers from purchasing new homes.

The National Association of Home Builders/Wells Fargo index of builder confidence decreased to 9, lower than forecast, from 14 in October, the Washington-based association said today. A reading less than 50 means most respondents view conditions as poor...

Home prices fell in four out of every five U.S. cities in the third quarter, a record spurred by distressed foreclosure sales across the country, the Chicago-based National Association of Realtors also said today. The median price of a U.S. home fell 9 percent from a year earlier and sales of properties with mortgages in default accounted for at least a third of all transactions.

Home prices are not the only ones falling. So are producer prices. Again from Bloomberg:

Prices paid to U.S. producers plunged in October by the most on record as the faltering global economy caused demand for commodities to dry up.

The larger-than-forecast 2.8 percent drop followed a 0.4 percent decline in September, the Labor Department said today in Washington. So-called core producer prices that exclude fuel and food rose 0.4 percent, indicating that the declines in raw- material costs have yet to feed through to other products.

Meanwhile, in the UK, consumer price inflation is slowing.

The U.K. inflation rate fell more than economists forecast in October, recording the steepest drop in at least 11 years, the Office for National Statistics said today in London. Consumer prices rose 4.5 percent from a year earlier, compared with 5.2 percent the previous month.

US industrial production rebounds but recession to persist

The fourth quarter may have started on a positive note for the US economy, at least as far as industrial production is concerned. From Bloomberg:

Industrial production rebounded in October after refinery shutdowns from Gulf Coast hurricanes caused the biggest drop since 1946 the month before.

The 1.3 percent gain wasn't enough to make up for the 3.7 percent September plunge, and output shrank by 0.7 percent in each of the past two months after excluding the effect of the hurricanes and a Boeing Co. strike, the Federal Reserve said...

Other data released on Monday weren't as positive.

The New York Fed's general economic index fell to minus 25.4, the lowest since records began in 2001, from minus 24.6 percent in October. Readings below zero for the so-called Empire State index signal manufacturing is shrinking.

For the day, investors chose to focus on the negative.

The Standard & Poor's 500 Stock Index fell 2.6 percent to close at 850.75. Yields on benchmark 10-year Treasury notes fell to 3.66 percent at 4:17 p.m. in New York from 3.73 percent at last week's close.

The same can be said of economists of late. Again from Bloomberg:

The U.S. has entered a recession that will persist into next year, and economies around the world will follow suit, according to a survey of business economists.

After growing 1.4 percent this year, the U.S. will contract 0.2 percent in 2009, according to the median estimate in a poll taken by the National Association for Business Economics. A majority of respondents said the U.K., euro area, Japan, Canada and Mexico are either now, or will soon be, in a recession...

Economists surveyed by Bloomberg News from Nov. 3 to Nov. 11 were more pessimistic about the U.S. economy than the NABE group. The economy will probably contract 0.3 percent next year, prompting central bankers to lower the key rate to a record-low 0.5 percent by March, the Bloomberg survey showed.

Japan in recession

Japan has joined the ever-growing list of countries entering recession. Bloomberg reports:

Japan's economy, the world's second largest, unexpectedly shrank in the third quarter, confirming it entered the first recession since 2001 as companies cut spending.

Gross domestic product fell an annualized 0.4 percent in the three months ended Sept. 30, the Cabinet Office said today in Tokyo. Economists predicted the economy would grow 0.1 percent after contracting a revised 3.7 percent in the previous period...

Quarter-on-quarter, Japan's economy shrank 0.1 percent, today's report showed. Capital spending fell 1.7 percent from the previous three months, compared with economists' expectations of a 2 percent drop...

Net exports subtracted 0.2 percentage point from growth after imports outweighed an increase in shipments abroad. Exports rose 0.7 percent, less than the 1.2 percent expected. Imports climbed 1.9 percent as oil surged to a record in the quarter. Economists predicted a 1.5 percent gain.

And things are expected to get worse.

"It's only going to get worse," said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. "Japan may be entering its deepest recession in a decade as the global financial crisis cools demand overseas."

It wasn't all negative though.

Consumers are getting some relief as inflation abates and Prime Minister Aso prepares to provide households with at least 12,000 yen ($125) each as part of a 5 trillion yen stimulus plan. Consumer spending increased 0.3 percent last quarter, more than the 0.1 percent economists expected, today's report showed.

Euro area in recession, US probably too

The euro economy is in recession. Bloomberg reports:

Europe's economy fell into its first recession in 15 years in the third quarter, paving the way for deeper cuts to interest rates and taxes amid the worst financial crisis since the Great Depression.

Gross domestic product in the 15 euro nations shrank 0.2 percent from the previous three months, when it also contracted 0.2 percent, the European Union's Luxembourg-based statistics office said today. The two quarters of contraction -- the result of this year's surges in the cost of credit, the euro and oil prices -- mark the first recession since the single currency was introduced almost a decade ago...

The German economy, Europe's largest, contracted by a bigger-than-expected 0.5 percent in the third quarter, confirming it has entered its worst recession in at least 12 years, its government said yesterday. Ireland and Italy have also slipped into recession this year, while Spain's economy contracted in the third quarter for the first time in 15 years. Growth in the Netherlands and Portugal stagnated.

Bucking the trend, French GDP unexpectedly expanded 0.1 percent from the second quarter, when it shrank 0.3 percent. Economists had forecast a contraction of 0.1 percent...

Separate figures today showed that inflation in October eased to 3.2 percent from 3.6 percent in September, matching an initial estimate on Oct. 31. Energy-price inflation cooled from 13.5 percent to 9.6 percent, the lowest since December.

The US economy looks like it is in recession too. From Reuters:

The Commerce Department said on Friday that retail sales slumped 2.8 percent in October to a seasonally adjusted $363.7 billion, the largest decline since the department's current methodology was adopted in 1992, as mounting unemployment hit shoppers' appetites...

Sales excluding autos fell a record 2.2 percent in October versus a forecast of a 1.2 percent decline.

Lower gasoline prices, as crude oil retreated sharply from a July peak around $147 a barrel, helped depress sales at gas stations by a record 12.7 percent in October. As a result, a closely watched core measure of retail sales excluding autos and gasoline fell 0.5 percent in October.

There is a silver lining, faint though it may be.

A separate Reuters/University of Michigan November survey of consumers showed that confidence unexpectedly rebounded from a record October drop as tumbling gas prices offset worries about the economy...

The Reuters/University of Michigan Surveys of Consumers said its confidence index edged up to 57.9 in November from 57.6 in October. Despite the rise, sentiment remains at depressed levels, with the index below the lowest levels hit during the depths plumbed during the last two recessions.

Economic data dismal, US stocks surge

Thursday's US economic reports were gloomy. Reuters reports:

The number of workers filing new claims for jobless benefits rose by an unexpectedly steep 32,000 last week to 516,000, the highest since the weeks following the September 11, 2001 attacks on the United States, the Labor Department said.

The number of workers still on the benefit rolls after drawing an initial week of aid hit 3.9 million in the week to November 1, the highest since January 1983...

Worried U.S. consumers also cut back on retail purchases for the second consecutive month in October, according to SpendingPulse data, which excludes auto sales.

Consumer spending fell 1.5 percent last month, after a 2.4 percent drop in September that was the largest since SpendingPulse started the data series in 2003...

A report from the Commerce Department showed a record drop in the price of imported oil and the lowest auto imports since February 2004, factors that helped trim the monthly trade gap to $56.5 billion, slightly below the $57 billion expected on Wall Street...

U.S. goods exports fell by a record $10.4 billion, with all major categories showing a decline. A sharp drop in exports of capital goods was led by civilian aircraft, after posting big numbers in the two prior months.

But the dismal data didn't stop investors from driving up stock prices. From Bloomberg:

U.S. stocks rallied the most in two weeks, with the Standard & Poor's 500 Index jumping 6 percent in the final hour, as investors snapped up the cheapest energy shares on record and real-estate companies gained after CB Richard Ellis Inc. raised cash in a share sale...

The S&P 500 added 6.9 percent to 911.29, reversing a slide of 3.9 percent. The Dow increased 552.59 points, or 6.7 percent, to 8,835.25. The Nasdaq Composite Index jumped 6.5 percent to 1,596.7. More than 14 stocks rose for each that fell on the New York Stock Exchange, where almost 2 billion shares changed hands in the busiest trading session since Oct. 16.

Industrial production faltering around the world

Yesterday, Bloomberg reported that industrial output in the euro area declined in September.

European industrial production declined the most in almost seven years in September, capping a third quarter that probably saw the economy enter a recession.

Output in the 15 nations that use the euro fell 2.4 percent from a year earlier, the biggest year-on-year decline since February 2002, the European Union's statistics office in Luxembourg said today. From the previous month, production fell 1.6 percent, led by Germany, the region's biggest economy.

Today, Bloomberg reports that industrial output in China slowed in October.

China's industrial output grew at a slower pace than any economist forecast in October, stoking concern that the biggest contributor to global growth is running out of steam.

Production rose 8.2 percent from a year earlier, the smallest gain in seven years, the statistics bureau said today. None of 18 economists surveyed by Bloomberg News predicted such a small increase. Output grew 11.4 percent in September.

Also today, Japan's September industrial production growth was revised down to 1.1 percent month-on-month by the Ministry of Economy, Trade and Industry from 1.2 percent in the preliminary report.

China posts record trade surplus, Japan faring less well

China announced a big stimulus plan on Sunday but its trade performance in October provides just a hint of a looming slowdown. From AFP/CNA:

China said on Tuesday its trade surplus hit a monthly all-time high of 35.2 billion dollars in October, as exports remained strong despite the global economic turmoil.

The surplus, up 29.9 percent from a year ago, reflected demand for China's exports outside the United States and Europe, but it was also the result of a marked slowdown in imports...

Exports in October rose 19.2 percent from a year ago to 128.3 billion dollars, compared with 21.5 percent growth in September, according to the data from the Customs Administration...

A slowdown in import growth, rising 15.6 percent in October from a year earlier to 93.1 billion dollars, was another important factor.

Meanwhile, China had good news on the inflation front, with the CPI rising 4.0 percent in October, the lowest rate since May last year, compared with 4.6 percent the previous month, giving it greater scope for interest rate cuts.

The deterioration in Japan's trade performance has been more apparent recently and the trend continued in September, with the current account surplus narrowing in September as exports edged up just 2.1 percent from a year earlier.

Japan's leading indicators have also been weak at best lately.

Core private-sector machinery orders were up 5.5 percent in September. However, they were down 10.4 percent for the quarter as a whole.

Meanwhile, sentiment among Japanese merchants deteriorated in October as the Economy Watchers Index fell to 22.6, the lowest since the survey started in August 2001.

Japanese bank lending did accelerate in October, as Bloomberg reported yesterday.

Loans, excluding those by credit associations, rose 2.5 percent in October, the fastest pace since August 1992, the Bank of Japan said today. Lending grew by 1.8 percent in September.

But this is not necessarily a positive sign.

"Because of turmoil in the markets, companies are turning to banks for funds as they can't issue bonds and commercial paper," said Michio Kitahara, associate director-general of the central bank's surveillance department. "Banks are now receiving a lot of requests for funds from large companies."

Still, the Japanese economy is estimated to have grown in the third quarter, but barely. From Bloomberg:

Gross domestic product rose an annualized 0.1 percent in the three months ended Sept. 30, economists predicted a Cabinet Office report will show Nov. 17. The world's second-largest economy contracted 3 percent in the second quarter...

"Marginally positive real GDP growth in the third quarter should probably be viewed as the calm before the storm," said Kyohei Morita, chief economist at Barclays Capital in Tokyo.

It's a recession -- and it's global

After more than a year of uncertainty over whether the developing economic slowdown in the United States would turn into an outright recession and drag the rest of the world economy down with it, the situation has largely cleared up. Unfortunately, it looks like an affirmative to both.

On 7 November, the US Labor Department reported that employment in the US fell by 240,000 in October. Job losses over the last 3 months totalled 651,000. The unemployment rate rose from 6.1 percent in September to 6.5 percent in October.

Earlier in the week, the Institute for Supply Management reported that its manufacturing PMI fell from 43.5 in September to 38.9 in October. The ISM also said that based on past patterns, the PMI reading for October corresponds to a 0.7 percent annualised rate of decrease in real GDP.

The latest data practically confirm that the US economy is in recession. The rate of contraction in employment and the level of the PMI seen currently have only been seen in the past half a century or so during recessions.

And it is not just the US economy facing recession; it looks like the recession will be global. The purchasing managers' indices for the manufacturing sectors of other major economies were also below 50 in October.

National manufacturing PMIs

	September	October	Change
US	43.5	38.9	-
Eurozone	45.0	41.1	-
Japan	44.3	42.2	-
UK	41.2	41.5	+
China	47.7	45.2	-

The acceleration in the rate of contraction in global manufacturing brought the JPMorgan global manufacturing PMI down from 44.7 in September to 41.0 in October, the lowest reading since data were first compiled in January 1998.

The service sectors in the leading economies also contracted in October. In the US, the ISM's non-manufacturing index fell from 50.2 in September to 44.4 in October. In the euro area, the Markit eurozone purchasing managers' index for the service sector fell from 48.4 in September to 45.8 in October. In the UK, the Chartered Institute of Purchasing and Supply's service sector index fell from 46.0 in September to 42.4 in October.

The JPMorgan global services business activity index fell from 50.2 in September to 44.2 in October, its second-lowest reading since data were first compiled in July 1998.

The JPMorgan global all-industry output index fell to 43.1 in October. Other all-industry indices also fell in the month.

JPMorgan global all-industry indices

	September	October	Change
Output	48.6	43.1	-
New Orders	47.5	41.6	-
Input Prices	65.1	53.5	-
Employment	45.9	43.6	-

On 7 November, the Organisation for Economic Co-operation and Development released its composite leading indicators for September which told the same story: continued weakening of the major economies.

Indeed, the latest economic forecasts released by the International Monetary Fund on 6 November see advanced economies slowing from a combined 2.6 percent growth rate in 2007 to 1.4 percent in 2008 and then shrinking by 0.3 percent in 2009.

Projected growth rates in percent by IMF

	2008	2009
United States	1.4	-0.7
Euro area	1.2	-0.5
Japan	0.5	-0.2
United Kingdom	0.8	-1.3

The current financial market turmoil may have its origins in the US but the recession that is developing is looking like it will be a global one.

US economy deteriorates but financial markets improve

Friday's US economic data were lousy.

Bloomberg reports a surge in unemployment.

The U.S. unemployment rate rose to the highest level since 1994 as companies slashed payrolls, setting the stage for the steepest economic decline in decades and a tough start for Barack Obama’s presidency.

The jobless rate rose to 6.5 percent in October from 6.1 percent the previous month, the Labor Department reported today in Washington. Employers fired 240,000 workers after a loss of 284,000 in September. Revisions to the previous month added 125,000 more to the jobless lines than previously reported.

And continuing weakness in the housing market.

The index of signed purchase agreements, or pending home resales, fell 4.6 percent, more than forecast, to 89.2, the National Association of Realtors said today in Washington.

As if that's not bad enough, a Reuters report indicates that the prognosis for the economy may be deteriorating.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 110.9 in the week to Oct. 31, down from 112.9 in the previous period. The index is now at its lowest level since April 12, 1996, when it stood at 110.7.

The index's annualized growth rate slid from minus 21.9 percent to negative 24.6 percent, its lowest ever, according to ECRI data.

But there was better news in financial markets.

Bloomberg reports that stocks were up on Friday.

The Standard & Poor's 500 Index added 26.11 points, or 2.9 percent, to 930.99. The gauge trimmed its weekly decline to 3.9 percent. The Dow Jones Industrial Average climbed 248.02, or 2.9 percent, to 8,943.81 after losing almost 10 percent in the previous two days. The Nasdaq Composite Index increased 2.4 percent to 1,647.4. Three stocks advanced for each that fell on the New York Stock Exchange.

While LIBOR was down.

The cost of borrowing dollars for three months in London fell to a four-year low after central banks around the world cut benchmark borrowing costs and kept the financial system flooded with cash to restore lending.

The London interbank offered rate, or Libor, that banks say they charge one another for loans fell 10 basis points to 2.29 percent today, the lowest level since November 2004, the British Bankers' Association said. The overnight rate held at a record low of 0.33 percent and the TED spread, a gauge of bank cash availability, dropped under 200 basis points for the first time since the day before Lehman Brothers Holdings Inc. collapsed...

South Korea's central bank, led by Governor Lee Seong Tae, lowered the seven-day repurchase rate by a quarter of a percentage point to 4 percent in Seoul today, extending cuts since Oct. 9 to 1.25 percentage points, the most aggressive sequence of reductions since the bank started setting a policy rate in 1998.

Stocks were still down over the week but the decline in LIBOR since late October has been pretty dramatic.

Europe slash rates

There was a time when Bank of England governor Mervyn King said that central banking should be boring. Well it certainly isn't boring at the moment. From Reuters yesterday:

The Bank of England made a shock 1.5 percentage point cut in interest rates on Thursday to just 3 percent, their lowest level in more than half a century, as it seeks to prevent Britain from sliding into a deep recession.

That was the biggest official interest rate cut since the 1981 slump and completely wrong-footed analysts who had mostly been predicting a half-point reduction. Not one in 62 polled by Reuters had expected such a massive move.

The Bank said the economic outlook had got a lot worse and drastic action was now needed. Economists said more rate cuts would still follow and it was possible Britain could soon have rates the same level as in the United States -- 1 percent.

Large as it is, the rate cut is probably commensurate with the rate of decline in the economy and asset prices. From Reuters:

Britain's biggest mortgage lender, Halifax, said house prices fell 2.2 percent in October, the ninth successive decline. That took house prices down 14.9 percent compared with a year ago, the steepest fall since records began in 1983...

And official data on Thursday showed new construction orders fell 19 percent in the three months in September compared with a year ago, with orders for private housing 53 percent down in that period.

And another Reuters report indicates that UK GDP is shrinking.

The country's economy shrank 0.5 percent in the three months to October, and lower interest rates are unlikely to help boost growth, a leading think-tank said on Thursday.

In its monthly survey, the National Institute of Economic and Social Research also said that economic output in October alone fell on the year, the first time that had happened since the recession of the early 1990s.

The BoE wasn't the only central bank on the move yesterday. From Reuters:

The European Central Bank cut interest rates by 50 basis points on Thursday and signaled another reduction was possible next month, as inflation pressures ease and the euro zone faces its first recession.

"I didn't exclude a further cut in December, depending on the data, depending on the information that will be gathered, depending on the (economic) projections that we could examine at the time, including of course the staff projections," ECB President Jean-Claude Trichet told Reuters Television in an interview...

Thursday's widely expected move, the second such cut in just under a month, took the ECB's benchmark rate to a two-year low of 3.25 percent...

The Swiss National Bank also cut its interest rates on Thursday by ... 50 basis points.

Denmark and the Czech Republic also cut interest rates yesterday.

The rate cuts come as more record-breaking economic news came out from Europe. From Bloomberg:

Manufacturing orders in Germany, Europe's largest economy, dropped by a record in September, led by a slump in foreign demand for factory machinery.

Orders, adjusted for seasonal swings and inflation, fell 8 percent from August, when they rose 3.5 percent, the Economy Ministry in Berlin said today. That's the biggest drop since records for a reunified Germany began in 1991. Economists expected a decline of 2.3 percent, the median of 35 forecasts in a Bloomberg News survey showed.

Stocks plunge as service sector shrinks

The US electorate has decided on its new president but the market still doesn't seem to have decided on where to go. From Bloomberg:

The stock market posted its biggest plunge following a presidential election as reports on jobs and service industries stoked concern the economy will worsen even as President-elect Barack Obama tries to stimulate growth...

The S&P 500 tumbled 5.3 percent to 952.77, erasing yesterday's 4.1 percent rally. The Dow retreated 5.1 percent to 9,139.27. The Russell 2000 Index of small U.S. companies fell 5.7 percent to 514.64. The MSCI World Index of 23 developed markets decreased 2.5 percent to 982.98...

The market's decline came a day after the biggest presidential Election Day gain since the New York Stock Exchange first opened for trading on a voting day in 1984.

It's a bit clearer where the economy is headed though. From Reuters:

The service sector accounts for about 80 percent of U.S. economic activity. The Institute for Supply Management said its non-manufacturing index came in at 44.4 versus 50.2 in September, below the level of 50 that separates expansion from contraction and worse than economists' expectations for 47.5...

U.S. private employers cut a larger-than-expected 157,000 jobs in October in a deteriorating labor market that will get worse in the months ahead, according to a report by ADP Employer Services...

A report by outplacement firm Challenger, Gray & Christmas showed job cuts announced in October totaled 112,884, up 19 percent from September, citing evidence of widespread economic malaise as troubles that began in housing and banking infect the rest of the economy.

The data from Europe point in the same direction.

Markit's eurozone purchasing managers' index for the service sector fell to 45.8 in October -- the lowest in the survey's 10-year history -- from September's 48.4.

Year-on-year growth in retail sales in the euro zone fell 1.6 percent in September, the fourth straight month of decline.

In the UK, the service sector shrank at a record pace in October while manufacturing output fell for the seventh month in September to mark the longest stretch of monthly declines in 28 years.

The good news is that LIBOR fell yet again on Wednesday.

Australia cuts interest rate

One of the central banks most aggressive in raising rates previously is now being even more aggressive in cutting them. From Bloomberg:

Australia's central bank cut its benchmark interest rate by a larger-than-expected three quarters of a percentage point, the third reduction in as many months, amid evidence global financial turmoil is buffeting the economy.

Governor Glenn Stevens lowered the overnight cash rate target to a 3 1/2-year low 5.25 percent in Sydney today, adding to last month's 1 percentage point reduction. Fifteen of 16 economists surveyed by Bloomberg News forecast a half-point cut and one tipped a quarter-point drop.

The world economy may need more of such rate cuts; economic data from the US on Tuesday continue to show weakness. Again from Bloomberg:

U.S. factory orders fell in September as demand for petroleum, chemicals and durable goods excluding cars and aircraft tumbled.

Total orders declined 2.5 percent after a 4.3 percent drop in August, the Commerce Department said today in Washington. Non- durables fell 5.5 percent, the most in two years. Excluding transportation equipment, bookings dropped by the most on record.

But the good news is that credit conditions are easing, as Bloomberg reports.

The cost of borrowing dollars for one month in London fell to the lowest level in almost four years as central-bank cash injections and interest-rate cuts worldwide showed signs of thawing the freeze in lending.

The London interbank offered rate, or Libor, that banks charge each other for such loans slid 18 basis points to 2.18 percent today, the lowest level since November 2004, and the 17th straight decline, according to British Bankers' Association data. The three-month rate dropped 15 basis points to 2.71 percent, the lowest level since June 9, according to BBA figures.

Manufacturing contracts

For those who are still wondering whether the US economy is in recession, the ISM tries to make things a little easier. From Bloomberg:

The Institute for Supply Management's factory index fell to 38.9 from 43.5 in September; 50 is the dividing line between expansion and contraction...

The reading for October was the lowest since September 1982...

October's ISM reading corresponds to a 0.7 percent annualized drop in GDP, the group said today. The export gauge dropped to 41, the lowest reading since records for this component began in 1988...
The U.S. purchasing managers' gauge of new orders for factories decreased to 32.2, the lowest level since 1980, from 38.8 the prior month. The production measure fell to 34.1 from 40.8.

The index of prices paid dropped to 37 from 53.5...

Job losses accelerated, today's report also showed. The employment index decreased to 34.6 from 41.8 in September...

The ISM report wasn't the only source of gloom on Monday.

... The Commerce Department said separately that construction spending fell for the eighth time in 10 months in September...

A record share of U.S. banks made it harder for companies to get loans in the past three months as they tried to avert losses from the financial crisis, Federal Reserve also said today based on results of a survey of loan officers at domestic and foreign banks conducted Oct 2 to Oct. 16.

Meanwhile in Europe, officials are making it a bit easier to recognise the recession. From Bloomberg:

The European Commission said the region's economy probably entered a recession this year and will stagnate in 2009, increasing pressure on political leaders to collaborate on measures to tackle the financial crisis.

Economic growth in the euro area will slump to 0.1 percent next year, the worst performance since 1993, the Brussels-based commission said today. It also estimated that gross domestic product will shrink for three consecutive quarters this year and cut its forecast for full-year 2008 growth to 1.2 percent from 1.3 percent previously.

This forecast comes as manufacturing in the euro area contracted at a record pace in October. Bloomberg reports:

Royal Bank of Scotland Group Plc's manufacturing index dropped to 41.1 in October from 45 in September. That's lower than an initial estimate of 41.3 published on Oct. 24 and the worst reading in the survey's 11-year history. The index is based on a survey of purchasing managers by Markit Economics in London and a reading below 50 indicates contraction.

Manufacturing also continued to contract in the UK, where the Chartered Institute of Purchasing and Supply/Markit purchasing managers' index came in at 41.5 in October, though this was slightly up from 41.2 in September.

And following a Chinese government release over the weekend showing manufacturing contracting in October, there was confirmation on Monday from another survey. Bloomberg reports:

China's manufacturing contracted by the most on record last month as the global financial crisis cut demand for exports, a second survey showed.

The CLSA China Purchasing Managers' Index fell to a seasonally adjusted 45.2 in October from 47.7 in September, CLSA Asia-Pacific Markets said today in an e-mailed statement...

The output index fell to 43.4 in October from 46.7 in September, while the index of new orders declined to 43.8 from 45.8. The index of export orders dropped to 44.3 from 45.9, CLSA said.

US economy shrinks, time to revisit the yield curve

The long-anticipated United States recession may finally be upon us.

On 30 October, the Commerce Department reported that the US economy contracted at a 0.3 percent annualised rate in the third quarter. According to the report, which is an advance estimate, the US consumer finally capitulated in the third quarter, with consumer spending falling by 3.1 percent, the biggest drop in 28 years.

The fall in real gross domestic product has been widely expected. The Institute for Supply Management's manufacturing index had plunged to 43.5 in September from 49.9 in August, 50 being the usual dividing line between expansion and contraction in the manufacturing sector. Employment has been falling since the beginning of the year. The yield curve had inverted in 2006. And various measures of the housing sector had been falling since 2005.

The fall in real GDP, assuming that the GDP is not subsequently revised upward, may or may not result in the National Bureau of Economic Research (NBER) declaring a recession beginning in the third quarter. The NBER normally looks at a wider range of indicators than just the GDP.

Still, the third quarter now looks like a good candidate for the beginning of the recession.

Assuming that the recession has begun, we next need to know how long the recession will last.

Historically, one of the earliest and most reliable leading indicators of the economy is the yield curve. In the current cycle, this indicator did indeed give a very early signal of recession. The term spread -- I focus on the spread between the 10-year Treasury yield and the 3-month Treasury yield here -- turned negative in the middle of 2006. This inversion of the yield curve is usually seen by economists as indicating tight monetary policy and signalling an impending recession.

In fact, assuming that the recession just started in the third quarter of 2008, the yield curve actually gave an unusually early signal. For the 1990 and 2001 recessions, the spread turned negative about a year or less before the onset of recession and turned positive just a few months before the recession began. This time around, it may have turned negative two years before the start of the recession and turned back positive about a year before the recession began.

Of course, there is always the possibility that the NBER eventually declares that the recession actually began in late 2007, as many economists in fact already think. That would make the yield curve signal conform closer to the norm.

The other possibility noted by economists is that the yield curve back in and around 2006 had been distorted by global capital flows and the shadow banking system, which allowed the yield on Treasury notes to remain unusually depressed even as short-term rates were raised by the Federal Reserve. In other words, monetary conditions were actually not as tight as the yield curve implied.

For all its possible flaws, however, the yield curve remains one of the more reliable leading indicators of the economy. So what is it telling us now?

According to Bloomberg, the yield curve has steepened considerably in recent months. As of Friday's close, the 10-year Treasury note yielded 3.96 percent while the 3-month Treasury bill yielded 0.38 percent. Therefore, the spread is a massive 3.58 percentage points. Historically, such a large spread often precedes a strong economic recovery.

Unfortunately, again, a simplistic interpretation of the spread may be wrong. In recent months, the yields on Treasury bills have been driven down by a flight to safety. In direct contrast to 2006, where the high short-term rate might not have accurately reflected easy monetary conditions, the low short-term rate today is not accurately reflecting the actual tight monetary conditions.

A better indicator of the tightness of monetary conditions today is the London interbank offered rate (LIBOR) for three-month US dollar loans. This rate has been driven up by credit concerns over the past few months and was well over 4 percent for much of October.

In fact, based on the LIBOR, the yield curve was inverted again in October. The spread between the 10-year Treasury yield and the 3-month US dollar LIBOR turned negative in late September and stayed so for most of last month, signalling possibly that a recovery in the economy is not imminent.

Still, things could change.

Policy makers continue to work actively to ease credit conditions. Just last week, the Federal Reserve cut the federal funds rate by 50 basis points to 1.0 percent. Several other central banks also cut interest rates last week, including the Bank of Japan. And over and above easier monetary policies, most of the major central banks have programmes to inject capital or liquidity directly at the areas considered most in need of them.

These actions will take time to bear fruit but there are already some encouraging signs.

The 3-month US dollar LIBOR fell back to 3.03 percent on Friday, down from 3.52 percent the previous week and well below its high of 4.82 percent for October. It is now below the yield on the 10-year Treasury note.

In other markets, global stock markets recovered strongly last week after suffering a pummelling earlier in the month. In the US, the Standard & Poor's 500 Index rose 10 percent last week to reduce its loss for October to 17 percent. In Europe, the Dow Jones Stoxx 600 rose 12 percent last week to finish the month down 13 percent. The MSCI Asia Pacific Index rose 7 percent last week and was down 20 percent for the month.

A recovery in the economy, however, will probably not be imminent until we see a sustained steepening of the yield curve and an upturn in stock markets.

India cuts interest rate, China calls for demand boost

India eased monetary policy on Saturday. AFP/CNA reports:

The Reserve Bank of India, citing "unsettled" financial conditions, reduced its key short-term lending rate, the repo, by 50 basis points to ease a credit crunch and inject liquidity into financial markets. The repo is the rate at which it lends funds to commercial banks...

As part of a triple-prong move, the bank also cut the amount commercial banks must keep in reserve, easing the cash reserve ratio to 6.5 per cent from 5.5 per cent -- pumping billions of dollars into the financial system.

And in another stimulus step, it cut the statutory reserve ratio -- the amount banks must hold in government securities -- to 24 per cent from 25 per cent to boost liquidity...

The steps came after India's inflation rate earlier in the week fell below 11 per cent for the first time since May to hit 10.68 per cent. Analysts forecast it will fall to single digits by November or December as a result of falling global commodity prices and slowing economic growth.

The other Asian giant is also trying to boost its economy. From AFP/CNA:

China's President Hu Jintao has called for a boost in domestic demand to maintain the nation's economic growth in the face of the global financial crisis, state media reported Saturday.

Hu said that governments at all levels should "strive to expand domestic demand, especially consumer demand," as he visited farmers in the northern province of Shaanxi, the official People's Daily newspaper reported.

There was evidence yesterday that China's economy is slowing dramatically. From Bloomberg:

China's manufacturing contracted as the worst financial crisis since the Great Depression eroded export demand.

The Purchasing Managers' Index fell to a seasonally adjusted 44.6 last month from 51.2 in September, the China Federation of Logistics and Purchasing said today in an e-mailed statement. That was the lowest since the gauge was launched in July 2005. A reading below 50 reflects a contraction, above 50 an expansion.

BoJ cuts interest rates

The Bank of Japan cut interest rates yesterday. Bloomberg reports:

The Bank of Japan cut its benchmark interest rate to 0.3 percent to help stave off a prolonged recession.

Governor Masaaki Shirakawa cast the deciding vote to lower the key overnight lending rate from 0.5 percent after four of the eight board members dissented, the central bank said in Tokyo today. Three wanted to cut the rate to 0.25 percent, and one voted to leave it unchanged, Shirakawa said.

Apparently, the rate cut was not big enough for some.

The yen rose to 96.87 per dollar at 5:54 p.m. in Tokyo, from 98.43 before the decision... The Nikkei plunged 5 percent today, capping a record 24 percent monthly decline.

But the economy is expected to slow anyway.

The central bank slashed its growth forecast for the year ending March to 0.1 percent from 1.2 percent predicted in July. The economy will expand 0.6 percent next fiscal year and 1.7 percent in the period starting April 2010, it said in a twice- yearly outlook published after the rate decision...

Inflation will evaporate next fiscal year, the bank said. Core consumer prices will rise 1.6 percent in the current fiscal year and fail to increase in the following 12 months, it said. Prices will gain 0.3 percent in the year starting April 2010.

The trend is already apparent in September economic data released yesterday. Again from Bloomberg:

Consumer prices excluding fresh food climbed 2.3 percent from a year earlier, after rising 2.4 percent in August, the statistics bureau said today in Tokyo. The unemployment rate fell to 4 percent from 4.2 percent as job seekers stopped looking for work amid the economic slowdown...

Household spending fell for a seventh month in September and the ratio of jobs to applicants slid to a four-year low, separate reports showed...

The number of people in the workforce shrank by 200,000 from August, today's report showed, causing the decline in the jobless rate. The number of people employed fell by 110,000, the report said, the fourth drop in five months.