US economy shrinks, Spain in recession

We are entering the year-end festive season but there is little to cheer about in the economic data. Reuters reports:

Existing U.S. home sales and prices both fell at a record pace last month, according to a report released on Tuesday, further evidence that the financial turmoil which intensified in September was driving consumers deeper into retreat...

Sales of newly built U.S. homes slowed to the weakest level since 1991, according to separate figures from the Commerce Department...

The U.S. economy shrank at an unrevised 0.5 percent rate in the third quarter, official data showed. Consumer spending plunged 3.8 percent, the biggest drop since 1980...

An economist at the San Francisco Federal Reserve Bank said the U.S. recession would likely last 18 months, making it the longest since World War Two, with unemployment peaking at a 25-year high of 8.4 percent...

The British economy shrank 0.6 percent in the third quarter, the worst quarterly decline since 1990 and a deeper drop than the earlier 0.5 percent estimate.

New Zealand's economy declined a seasonally adjusted 0.4 percent in the third quarter, the biggest drop in eight years, following a 0.2 percent fall in the previous quarter.

Spain succumbed to recession for the first time in 15 years. Spain's ISA activity indicator, which tracks gross domestic product, contracted 1.5 percent year-on-year between October and December, according to Economy Ministry data.

China cuts rates as forex reserves shrink

China cut interest rates on Monday. Bloomberg reports:

China cut interest rates for the fifth time in three months after trade growth collapsed because of recessions in the U.S., Europe and Japan.

The one-year lending rate will drop by 0.27 percentage point to 5.31 percent and the deposit rate by the same amount to 2.25 percent from tomorrow, the People’s Bank of China said on its Web site. The central bank also reduced the proportion of deposits lenders must set aside as reserves by 0.5 percentage point.

However, the cut wasn't as big as expected.

“The surprise is how small the move is,” said Mark Williams, an economist with Capital Economics in London. “There’s been a sudden very rapid deterioration in all China’s economic data over the last 8 to 12 weeks.”

Interestingly enough, China also indicated on Monday that its foreign exchange reserves have fallen. From Reuters:

China's foreign exchange reserves, the world's largest stockpile, shrank in October to less than $1.89 trillion, their first monthly fall since December 2003, a source familiar with the situation said on Monday.

The reserves stood at $1.906 trillion at the end of September, the last date for which official figures have been reported, meaning they fell by at least $16 billion during October.

The source, who wished not to be identified, declined to say whether the reserves continued to fall in November. The only other month since the start of 2000 during which the reserves fell was Dec. 2003.

Cai Qiusheng, an official with the State Administration of Foreign Exchange (SAFE), acknowledged in a speech on Saturday that the reserves had fallen from their level above $1.9 trillion, but gave no further details on the extent or timing of the fall.

What is behind the shift?

Economists said lack of transparency about the nature of capital flows in China made it just as hard to to explain the fall in October as it had been to account for stunning rises earlier in the year.

They listed a range of possible reasons behind the fall. One was that export firms and banks could be choosing to hold more dollars given their broad strength through November, another that more Chinese investments overseas could have been booked during that time.

Some economists cautioned, however, that it could also signal a potentially worrying reversal in capital flows.

Japanese economy takes a turn for the worse

It is looking quite bleak for the Japanese economy.

The Japanese economy entered a recession after the economy contracted in the second and third quarters of this year by 1.0 percent and 0.5 percent respectively. A recovery is not likely to come soon.

More recent economic data show the economy probably contracted again in the fourth quarter. Industrial production fell 3.1 percent in October. The composite coincident index fell to 97.7 in October from 100.1 in September.

In fact, the deterioration in the economy may be accelerating. The composite leading index fell sharply to 85.2 in October from 89.2 in September. Exports fell 26.7 percent in November from a year earlier, leaving the export-dependent economy with a trade deficit of 223.4 billion yen.

Certainly, the Japanese government is not expecting an imminent recovery. On Friday, it released a forecast of zero growth for the economy in the year to March 2010. Its December economic report described the economy as "worsening".

The Bank of Japan has the same view. Its latest monthly report on the economy released today said that economic conditions are "deteriorating".

Policy-makers are responding to the deterioration accordingly. On Friday, the Bank of Japan cut the overnight call rate to 0.1 percent from 0.3 percent and announced that it would be buying commercial paper to help ease the credit crunch. Over the weekend, the Japanese government announced that it had prepared an extra 4.79 trillion yen budget to finance its economic stimulus package.

While these steps will be of some help, there is I think little doubt now that the Japanese economy will have to go through a considerable period of contraction.

Back to ZIRP

Well, almost. Bloomberg reports the BoJ's decision on Friday.

The Bank of Japan cut its benchmark interest rate to 0.1 percent, increased purchases of government debt and announced plans to buy commercial paper for the first time as the deepening recession starves companies of funds.

Governor Masaaki Shirakawa and his colleagues lowered the target for the overnight lending rate from 0.3 percent, the central bank said in a statement today in Tokyo, a decision that was predicted by futures traders after the Federal Reserve reduced U.S. rates this week. Government bonds rallied on the plan to buy more debt.

Friday also saw a surprise cut from Denmark. Bloomberg reports:

The Danish central bank unexpectedly reduced its benchmark interest rate by half a percentage point to weaken the krone and defend its peg against the euro.

The lending rate was cut to 3.75 percent, Copenhagen-based Nationalbanken said in a statement today. The bank uses policy to target a krone rate of 7.46038 to the euro, meaning policymakers change rates when currency swings require, rather than holding scheduled meetings.

The Fed has practically no more room for rate cuts but that doesn't mean there won't be any more easing. Bloomberg reports the latest Fed move.

The Federal Reserve revised its $200 billion program aimed at reviving credit to consumers and small businesses, extending the term of loans to three years from one year.

Under the Term Asset-Backed Securities Loan Facility, or TALF, the Fed will also loan to all eligible borrowers rather than through an auction process, the central bank said today in a statement in Washington. The change is designed “to provide more certain investor access,” the Fed said.

Another rate cut and more gloomy economic data

Rate-cutting continued on Thursday, this time in the Philippines. AFP/CNA reports:

The Philippine central bank on Thursday cut its benchmark lending rates by 50 basis points as it switched tack from fighting inflation to boosting growth.

Its first rate cut in 11 months brought the overnight rate to 5.50 per cent for borrowing and to 7.50 per cent for lending – their lowest levels since June.

With global economic data still looking poor, there appears to be no end to rate cuts in sight -- apart from those already at zero.

Like in the US, which will have to rely on quantitative easing after Thursday's data showed how weak the economy is. From Bloomberg:

A gauge of the economy’s future performance posted its biggest annual drop since 1991 in November as the declines in housing and job markets accelerated, showing little sign the U.S. contraction will ease in early 2009.

The Conference Board’s index of leading indicators dropped 0.4 percent from October, and 3.7 percent from a year before. Other reports showed first-time claims for unemployment benefits held close to a 26-year high and manufacturing in the Philadelphia region contracted for the 11th time this year.

The Canadian economy is also deteriorating. Bloomberg reports:

Retail sales fell 0.9 percent in October to C$35.9 billion ($29.8 billion), the most since February, Statistics Canada said today in Ottawa, after a 0.9 percent gain the month before. Sales of furniture, home furnishings and electronics fell 2.1 percent, the third straight decline.

The leading economic index fell 0.7 percent in November as the agency’s gauge of housing starts and sales fell 5.9 percent and stock prices plummeted 8.2 percent. Economists surveyed by Bloomberg anticipated the index would drop 0.4 percent.

Meanwhile, German business confidence dropped to the lowest in more than a quarter century in December. Bloomberg reports:

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, fell to 82.6 from 85.8 in the previous month. That’s the lowest reading for Ifo’s main index since November 1982. Economists expected a drop to 84, the median of 39 forecasts in a Bloomberg News survey shows.

But amid the gloomy data, there was a surprisingly positive report on UK retail sales. From Reuters:

The Office for National Statistics said sales volumes rose 0.3 percent last month, confounding forecasts for a 0.6 percent decline and flying in the face of anecdotal evidence that consumers are tightening their belts.

Interest rates fall

There already appears to be some favourable impact from the Fed's latest actions.

Bloomberg reports that LIBOR was sharply down on Wednesday.

The cost of borrowing in dollars in London for three months tumbled after the Federal Reserve chopped its key interest-rate target to as low as zero and said it will flood the economy with cash.

The London interbank offered rate, or Libor, that banks say they charge each other for such loans fell 27 basis points to 1.58 percent today, the lowest level since July 2004, according to British Bankers’ Association data. It was the largest decline since Oct. 22. The one-month and overnight dollar rates also dropped and rates in Asia slid. The Libor-OIS spread narrowed.

And US long-term securities rallied.

The yield on the 10-year note lost nine basis points, or 0.09 percentage point, to 2.17 percent at 4:44 p.m. in New York, according to BGCantor Market Data. It touched 2.0711 percent, the lowest level since the Fed’s daily data on the securities began in 1962. The price of the 3.75 percent security due in November 2018 rose 27/32, or $8.44 per $1,000 face amount, to 114 1/32.

The 30-year yield dropped seven basis points to 2.65 percent after touching 2.5816 percent, the lowest since sales of the security began in 1977. Two-year yields gained seven basis points to 0.72 percent. They fell earlier to 0.6044 percent, the lowest level since the note’s sales began in 1975.

Equity investors, however, had second thoughts about the Fed's move, pushing stock prices lower.

U.S. stocks fell and the Standard & Poor’s 500 Index retreated from a five-week high on concern the Federal Reserve has few tools left to combat the recession after cutting its benchmark interest rate to a record low...

The S&P 500 lost 1 percent to 904.42. Technology and energy shares were the biggest drag on the index as Apple tumbled and oil slid below $40 a barrel for the first time in four years. The Dow Jones Industrial Average declined 99.8 points, or 1.1 percent, to 8,824.34. The Russell 2000 Index of small U.S. companies added 0.8 percent.

And oil traders are still playing the deflation trade, pushing oil prices below US$40 to the lowest in more than four years.

Furthermore, oil prices are falling despite a weakening US dollar.

The dollar traded near a 13-year low versus the yen and at the weakest level against the euro since September as the Federal Reserve’s near-zero interest rate policy reduces the appeal of holding U.S. assets.

The fall in the US dollar occurred despite the US current account narrowing by more than expected in the third quarter. But then, we already know from the yen's experience that current accounts matter less for a currency when interest rates fall to zero.

Still, if other central banks follow in the footsteps of the Fed, the latter's low interest rates might look less unattractive. And don't underestimate the speed with which other central banks are going to cut rates. Just look at Norway's latest rate cut, as reported by Bloomberg.

Norway’s central bank cut its benchmark interest rate by 1.75 percentage points and signaled it will cut borrowing costs further next year, forecasting that the economy will slip into recession in the fourth quarter.

The overnight deposit rate was reduced to 3 percent, the Oslo-based Norges Bank said on its Web site today. All 17 economists surveyed by Bloomberg had forecast a smaller cut, with five estimating the rate would fall to 3.25 percent.

Looks like "basis points" is becoming redundant in describing rate cuts.

ZIRP it is

The fed funds rate is officially zero now. Bloomberg reports:

The Federal Reserve cut the main U.S. interest rate to as low as zero for the first time and shifted its focus to the amount and type of debt it buys, seeking to revive credit and end the longest slump in a quarter- century.

The Fed “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Federal Open Market Committee said today in a statement in Washington. “Weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

... The Fed said today it will target a federal funds rate of between zero and 0.25 percent, a reduction from the 1 percent level that the Fed failed to hit.

Data released on Tuesday provided additional justification for the move, if any is needed. From Reuters:

The Labor Department said its closely watched Consumer Price Index dropped 1.7 percent after falling 1 percent in October -- back-to-back record drops since the department started keeping monthly data in 1947. Core prices, which exclude food and energy items, were flat in November after declining 0.1 percent in October...

The Commerce Department said housing starts dropped 18.9 percent to an annual rate of 625,000 units from 771,000 units in October, the lowest since the department started collecting monthly starts data in 1959, and well below the 740,000-unit pace that Wall Street analysts had expected.

Wall Street took its cue from the Fed move. Again from Reuters:

Stocks rallied on Tuesday after the Federal Reserve rewrote its playbook by slashing borrowing costs to a record low, even zero, and pledging more unconventional steps to fight the deepest recession in generations...

The Dow Jones industrial average rose 359.61 points, or 4.20 percent, to 8,924.14. The Standard & Poor's 500 Index jumped 44.61 points, or 5.14 percent, to 913.18. The Nasdaq Composite Index climbed 81.55 points, or 5.41 percent, to 1,589.89.

And predictably, Treasury yields fell. From Bloomberg:

Treasuries surged, pushing yields to record lows, after the Federal Reserve cut the main U.S. interest rate to near zero percent and said central bankers will buy debt to ease the longest recession in a quarter-century...

The yield on the 30-year bond tumbled 24 basis points, or 0.24 percentage point, to 2.717 percent at 5:44 p.m. in New York, according to BGCantor Market Data. That’s the lowest since regular sales of the bond began in 1977. The price of the 4.5 percent security due in May 2038 rose 5 21/32, or $56.56 per $1,000 face amount, to 135 30/32.

Among economic data reported elsewhere on Tuesday, the UK reported that consumer prices fell 0.1 percent in November to bring the annual inflation rate down to 4.1 percent from 4.5 percent in October while in the euro area, manufacturing and service industries contracted in December at the fastest pace in at least a decade according to Markit's purchasing managers' survey.

In other central bank news, Saudi Arabia cut its main repurchase rate to 2.5 percent from 3 percent but the ECB appears reluctant to cut interest rates further, President Jean-Claude Trichet saying that it wants to “concentrate at this stage on getting what we already decided to be really operational”.

More gloom for manufacturing, housing

AFP/CNA reports that Japanese manufacturers are becoming increasingly gloomy.

Business confidence among big Japanese manufacturers plunged at the fastest pace in more than three decades as the economic crisis deepened, a central bank survey showed Monday.

Confidence tumbled to minus 24 in December from minus three the previous quarter, hitting the lowest level since early 2002, according to the Bank of Japan's Tankan survey of more than 10,000 firms.

Meanwhile in China, AFP/CNA reports that industrial production is slowing dramatically.

China's industrial output growth slowed to 5.4 per cent in November from a year earlier, official data showed Monday, providing the latest evidence that the nation's economy is quickly losing steam.

In the first 11 months of the year, industrial output increased by 13.7 per cent from the same period in 2007, according to the National Bureau of Statistics.

Industrial output growth has slowed steadily this year, coming off a peak of 17.8 per cent in March and falling to 8.2 per cent in October, according to previously announced government figures.

In the US, industrial production fell in November, according to Bloomberg.

Manufacturing in the U.S. slumped further in November as exports tumbled and automakers slashed their assembly rate to the lowest level in more than 18 years.

Industrial production fell 0.6 percent, the third drop in four months, the Federal Reserve said today in Washington...

The nationwide industrial output report showed factory output, which accounts for four-fifths of industrial production, decreased 1.4 percent...

But perhaps there is hope for an end to the gloom.

The New York Fed said its Empire State index fell to minus 25.8 from minus 25.4 in November. Its measure of new orders rose to minus 20.8 from minus 22.2 the prior month. A measure of the manufacturing outlook for six months from now rose to 19.5 from 13 the prior month.

Meanwhile, there is no end yet to the gloom in the US housing market. From Bloomberg:

The National Association of Home Builders/Wells Fargo index of builder confidence held at 9 this month, the Washington-based association said today. A reading below 50 means most respondents view conditions as poor.

And in the UK, Reuters reports that house prices fell again in December, albeit at a slower rate.

Property website Rightmove said asking prices fell an unadjusted 2.3 percent this month to 217,808 pounds, after November's 2.9 percent fall.

The annual rate improved slightly to show prices down 6.3 percent in December, compared with 7.1 percent in November.

Stocks to rally following writedowns?

Bloomberg has a report today saying that it may be about time to buy stocks.

Just when U.S. companies are about to report their biggest writedowns, the losses may be the strongest signal yet that it’s time to buy stocks.

Companies in the Standard & Poor’s 500 Index are marking down assets at the fastest rate in six years, leaving operating profits 46 percent higher than net income in the third quarter, a level last seen in 2003 when the previous bull market began...

A widening gap heralded the end of the dot-com crash. S&P 500 operating earnings exceeded net profit by 67 percent in the final three months of 2002, a period when stocks dropped to the lowest level since 1997. The index then doubled through October of last year.

The article isn't very accurate in its account though.

The quarterly gap between operating and net profit for S&P 500 companies was widest in 2001 during the recession. That didn't herald the end of the bear market.

The gap for the four-quarter rolling average, which the accompanying graphic depicted, continued to widen after that. Stocks continued to fall.

The four-quarter gap was widest at the end of 2002. That did finally herald the end of the bear market, but this was about a year after the end of the recession.

The last time I checked, the economy is still in recession.

US retail sales fall, Japanese consumer pessimism deepens

The US economy may be in recession but not all the economic news is bad, or as bad as expected. From Bloomberg:

U.S. retail sales fell for a record fifth consecutive month in November and wholesale prices tumbled as the deepening recession pulls inflation down.

The 1.8 percent decline in sales was smaller than forecast because discounts drew in more shoppers at department stores and electronic retailers, Commerce Department figures showed in Washington...

The Labor Department said its producer-price index fell 2.2 percent in November from the previous month, led by energy and food costs. The PPI was up 0.1 percent excluding those two items...

Consumer sentiment rose this month from a 28-year low, stoked by gas-price declines. The Reuters/University of Michigan preliminary index of consumer sentiment rose to 59.1 from 55.3 in November.

But the economic gloom is spreading elsewhere.

To Japan, for example. From Bloomberg:

Japan’s consumers became the most pessimistic in at least 26 years, indicating their weaker spending may deepen the recession.

The confidence index dropped to 28.4 last month from 29.4 in October, the Cabinet Office said today in Tokyo. It’s the lowest since the government began compiling the figures in 1982.

And Europe. From Reuters:

Industrial output in the 15 countries using the euro fell 1.2 percent on the month for a 5.3 percent annual drop, the sixth straight fall in annual terms and the deepest decline since July 1993, when it fell 5.5 percent, European Union statistics office Eurostat said on Friday.

Even supposedly fast-growing emerging economies are not immune to the slowdown.

Bloomberg reports slowing Chinese retail sales growth.

China’s retail sales grew at the slowest pace in nine months as the economy and inflation cooled and the global financial crisis damped consumer confidence.

Sales rose 20.8 percent in November from a year earlier to 979.1 billion yuan ($143 billion), the National Bureau of Statistics said today, after gaining 22 percent in October. That was more than the 20.5 percent median estimate of 17 economists surveyed by Bloomberg News.

AFP/CNA reports that Indian industrial production has shrunk for the first time in 15 years.

Industrial production contracted by 0.4 percent in October after expanding by 12.2 percent in the same month a year earlier, government figures showed. Output grew by a revised 5.45 percent in September.

ZIRP around the world

The rate-slashing continues.

Swiss interest rates are moving quickly towards zero. From Bloomberg:

The Swiss central bank cut its interest rate to a four-year low of 0.5 percent and said further measures are possible as the economy faces a recession that may be the worst since 1982.

The Swiss National Bank’s Governing Board in Zurich, led by Jean-Pierre Roth, lowered the three-month Libor target by 50 basis points, matching the median of 18 estimates in a Bloomberg survey. The rate for borrowing francs for three months in London was at 1.14 percent yesterday. It fell to 0.86 percent today...

The SNB’s decision takes it closer to being the first central bank in Europe to reduce its benchmark to zero as the financial crisis saps growth across the Swiss economy...

The SNB’s options are narrowing after it also cut the one- week rate it uses to steer three-month borrowing costs to 0.05 percent from 0.1 percent.

Records are also being broken in Asian interest rate cutting. Bloomberg reports:

The Bank of Korea reduced its key rate to a record low of 3 percent from 4 percent. Taiwan’s central bank cut its benchmark by the most in 26 years to 2 percent from 2.75 percent...

Taiwan cut its rate for the fifth time in two months, as faltering exports tip the economy into recession...

South Korea’s reduction was its fourth in eight weeks.

And South Africa has decided to join the rate-cutting club. From Bloomberg:

South Africa’s central bank cut its benchmark interest rate by half a percentage point, the first reduction in more than three years, as inflation slowed and the economy grew at the weakest pace in a decade.

The repurchase rate was lowered to 11.5 percent, Governor Tito Mboweni said in a televised speech from Pretoria today. The decision was forecast by 14 of 21 economists surveyed by Bloomberg.

Falling inflation around the world has helped remove inhibitions about such aggressive monetary easing. AFP/CNA reports that China's inflation rate has plunged.

China's inflation rate dropped abruptly to a 22-month low of 2.4 per cent in November from 4.0 per cent in October, the government said Thursday, as cost increases for food and other items slowed.

Falling inflation is also apparent from US import prices, which plunged 6.7 percent in November.

However, rate cuts in the US have been mainly driven by the weakening economy, and there are few signs that the weakness is ending soon. From Bloomberg:

U.S. exports slid to a seven-month low and the number of Americans filing claims for unemployment benefits surged to the highest level since 1982, signaling the economy is shrinking even faster than previously estimated.

The export slump, caused by recessions spreading through U.S. trading partners, spurred a widening in the trade deficit to $57.2 billion in October, a Commerce Department report showed in Washington today. Initial jobless claims rose more than forecast to 573,000 in the week ended Dec. 6, the Labor Department said...

American exports dropped 2.2 percent to $151.7 billion as foreign purchases of U.S. aircraft, automobiles, chemicals and food waned...

Imports declined 1.3 percent to $208.9 billion, the lowest level since March.

Yields on government securities have fallen in response to the rate cuts and deteriorating economy. From Bloomberg:

Government debt is on pace for a sixth consecutive week of gains after the 10-year note sale attracted stronger-than- average demand and drew a yield of 2.67 percent...

The yield on the benchmark 10-year note dropped nine basis points, or 0.09 percentage point, to 2.61 percent at 5:14 p.m. in New York, according to BGCantor Market Data... The yield touched 2.505 percent on Dec. 5, the lowest level since at least 1962, when the Federal Reserve’s daily records began.

The two-year note yield fell seven basis points to 0.78 percent. It touched 0.7688 percent, the lowest level since regular sales began in 1975.

Even LIBOR is falling. From Bloomberg:

The cost of borrowing in dollars for three months in London fell to the lowest level since September 2004 on speculation the Federal Reserve will cut interest rates next week to revive an economy battered by the collapse in lending.

The London interbank offered rate, or Libor, that banks say they charge each other for such loans slid 10 basis points today to 2 percent, the biggest decline since Nov. 6, British Bankers’ Association data showed...

Today’s drop in the three-month dollar rate takes its decline in the past three days to 19 basis points. Last week, the rate fell by three basis points and the previous week it rose five basis points.

China's exports, FDI fall

There is no escaping the worldwide economic downturn. Not even for China. From Bloomberg on Wednesday:

China’s exports fell for the first time in seven years, more evidence that recessions in the U.S., Europe and Japan are driving the world’s fourth-largest economy into a slump.

Exports declined 2.2 percent in November from a year earlier, the customs bureau said in a statement on its Web site today. Imports plunged 17.9 percent, pushing the trade surplus to a record $40.09 billion.

Bloomberg also reported on Wednesday that producer price inflation is fast vanishing.

China’s producer-price inflation slowed to half the pace estimated by economists as commodity and energy costs fell, raising the possibility that the country will slide into deflation as demand wanes at home and abroad.

Prices at the factory gate rose 2 percent in November from a year earlier, the statistics bureau said today, after gaining 6.6 percent in October. That was the slowest pace in two years and less than the 4.5 percent median estimate of 15 economists surveyed by Bloomberg News.

And foreign direct investment is collapsing.

Foreign direct investment in China fell 36.5 percent in November from a year earlier, the commerce ministry said today, as economic growth cooled and gains by the yuan stalled against the dollar. Investment was $5.3 billion, the least in 14 months.

Canada cuts rate, entering recession

Canada is falling into recession. From Bloomberg on Tuesday:

The Bank of Canada lowered its benchmark interest rate by more than anticipated to a half- century low and signaled more action may be needed as economic growth sputters amid a “broader and deeper” global slump.

Governor Mark Carney and his rate-setting panel slashed the target rate for overnight loans between commercial banks by three-quarters of a point to 1.5 percent, the lowest since 1958. Two of 23 economists surveyed by Bloomberg predicted the move, with 20 calling for a half-point cut and one calling for a quarter of a point.

Canada’s economy “is now entering a recession,” the central bank said in a statement from Ottawa today, the first time it has made that assessment outright. “The Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required.”

The UK economy may also be entering a recession. Reuters reports:

Factory output shrank sharply in October, property sales are at a record low and the Christmas season is failing to ignite retail sales as evidence grows that Britain is entering a long and painful recession...

The Office for National Statistics said industrial output fell 1.7 percent on the month, more than three times the rate predicted by analysts and the biggest fall since January 2003...

The Royal Institution of Chartered Surveyors said the extent of house price falls eased slightly in November but home sales hit their lowest level since the RICS survey began in 1978 -- at an average of just 10.6 per surveyor and 55 percent down on a year ago...

Like-for-like retail sales fell 2.6 percent on the year in November, the biggest decline for more than three years, according to the British Retail Consortium.

And from another Reuters report:

Britain's economy shrank by a full percentage point in the three months to November and the pace of contraction looks set to accelerate into the end of the year, a leading think-tank said on Wednesday.

We already know that Japan is in recession, but Tuesday brought news that it is worse than we thought. From AFP/CNA:

Japan's economy shrank 0.5 per cent in the three months to September - 1.8 per cent on an annualised basis - entering its first recession in seven years with a second straight quarter of negative growth, the government said.

An initial estimate last month had shown the Japanese economy shrank 0.1 per cent in the third quarter, and 0.4 per cent on an annualised basis.

And it is not about to get better soon. Japan's leading index plunged in October, as did machinery orders.

Germany, though, had good news for once, the ZEW index of investor confidence rising to minus 45.2 in December from minus 53.5 in November. However, exports from Germany -- as well as France -- were down in October.

Even China may be seeing falling exports. From Bloomberg on Tuesday:

“Things are not so good,” Fan Gang, an adviser to the central bank, said at a Beijing forum today. “November figures will come out soon, and industrial growth will be something around 5 percent and export growth will be negative.”

With the global economy looking so gloomy, no wonder there is a flight into US Treasuries. Again from Bloomberg:

Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression.

The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001...

The National Association of Realtors’ index of signed purchase agreements, or pending home resales, fell a less-than- forecast 0.7 percent to 88.9 from a revised 89.5 in September, according to a report from the group today in Washington.

Stocks, commodities surge

The stock market rally from the October low proved short-lived. The rally from the November low is proving stronger, especially after Monday's gains. From Bloomberg:

Stocks rose around the world, sending the Dow Jones Industrial Average to a one-month high, as President-elect Barack Obama pledged to boost the economy with the biggest public-works spending package since the 1950s.

The Standard & Poor’s 500 Index extended its gain from an 11-year low last month to 21 percent. U.S. Steel Corp. and Alcoa Inc. climbed at least 17 percent, while Chevron Corp. added 4.9 percent, as Obama’s plan to improve infrastructure triggered gains in commodities. General Motors Corp. jumped 21 percent as lawmakers agreed in principle with the White House to provide funds to shore up the car industry...

The S&P 500 surged 3.8 percent to 909.7, with all 10 industry groups advancing. The Dow added 298.76 points, or 3.5 percent, to 8,934.18 and earlier rose above 9,000 for the first time in a month. The Nasdaq Composite Index increased 4.1 percent to 1,571.74. Five stocks gained for each that fell on the New York Stock Exchange...

Benchmark indexes in Germany and France added 7.6 percent and 8.7 percent respectively, while Tokyo’s Nikkei 225 climbed 5.2 percent.

Commodities joined in the rally on Monday. Bloomberg reports:

Oil, copper and corn rose for the first time in seven days after President-elect Barack Obama pledged the biggest U.S. public works program in half a century to revive the economy...

Crude oil for January delivery rose $2.90, or 7.1 percent, to settle at $43.71 a barrel on the New York Mercantile Exchange...

Copper futures for March delivery rose 12.45 cents, or 9.1 percent, to settle at $1.498 a pound on the Comex division of Nymex, the biggest one-day increase since Oct. 29. Corn futures for March delivery rose 20.75 cents, or 6.7 percent, to settle at $3.30 a bushel on the Chicago Board of Trade.

The Reuters/Jefferies CRB Index of 19 raw materials climbed 5.2 percent to 219.36. The gauge lost 54 percent since reaching a record in July as the credit crunch choked worldwide growth.

And with risky assets up, the US dollar and yen were predictably down, falling 1.9 percent and 1.8 percent respectively against the euro.

US in recession, end not looking imminent

There is now practically no doubt that not only is the United States economy in a recession, it is in one of the most severe recessions in many decades.

On 28 November, the National Bureau of Economic Research confirmed that a peak in US economic activity occurred in December 2007, meaning that a recession started then.

Over the next week, indicators released for the US economy showed that the recession was not coming to an end, at least not in November.

The decline in manufacturing activity accelerated in November. On 1 December, the Institute for Supply Management (ISM) reported that its manufacturing PMI fell from 38.9 in October to 36.2 in November, the lowest reading since May 1982. According to the ISM, this level of PMI corresponds to a 1.5 percent decrease in real GDP annually. The new orders index fell from 32.2 in October to 27.9 in November, the lowest reading for this index since June 1980.

The contraction in economic activity was not restricted to manufacturing. On 3 December, the ISM reported that its non-manufacturing index fell from 44.4 in October to 37.3 in November. The non-manufacturing business activity index fell from 44.2 in October to 33.0 in November, the lowest reading for this index since it was first reported in 1997. The new orders index fell from 44.0 in October to 35.4 in November, also the lowest level since the index was first reported in 1997.

The job numbers reported on 5 December by the Labor Department made it even clearer that the US economy is in bad shape. According to the report, the US economy lost 533,000 jobs in November, the biggest one-month loss in 34 years. The unemployment rate rose to 6.7 percent, the highest level since 1993.

Probably more than any other single report, the employment report has been instrumental in getting many economists to declare that this will be the worst recession in the US since the Great Depression.

For all the obsession over the job numbers, however, it should be remembered that employment is not a leading indicator of the economy. The latest job numbers may be telling us that the recession did not end recently but it cannot by itself tell us whether the recession is about to end soon.

To tell us that, we have recognised leading indicators. Unfortunately, these are mostly not showing us an optimistic picture either.

The Conference Board's leading index decreased 0.8 percent in October and 2.4 percent in the six-month span through October.

The Economic Cycle Research Institute's weekly leading index rose to 109.9 in the week ending 28 November from 106.9 in the previous week but this still left its annualised growth rate at minus 28.5 percent compared with the previous week's minus 29.2 percent. According to Lakshman Achuthan, managing director at the institute, the index is "suggesting that the recession will deepen further in the coming months".

This means that the recession looks likely to last over a year, making it worse, at least in terms of duration, than the last two recessions in 1990-91 and 2001.

Still, if you look far enough into the tunnel, you may be able to see a bit of light.

In "US economy shrinks, time to revisit the yield curve", I had suggested using the yield curve to get an early read on where the economy is headed. Usually, this is done by comparing the yield on the 10-year Treasury note with a short-term Treasury yield, for example, the 3-month Treasury yield. This spread usually reflects how accommodative monetary policy is. The larger the spread, the better the prospect for economic growth.

At the moment, this spread is looking relatively large. According to Bloomberg, as at the end of last week, the 10-year Treasury yields 2.7 percent while the 3-month Treasury yields practically nothing.

However, in today's conditions, impaired bank balance sheets and risk aversion mean that the zero yield on short-term Treasuries currently being seen is a gross exaggeration of how accommodative monetary conditions are. Rather, the London interbank offered rate (LIBOR) for three-month US dollar loans may provide a better indicator.

The spread between the 10-year Treasury yield and the 3-month US dollar LIBOR shows a less optimistic picture. The latter was fixed at 2.19 percent on Friday, so the spread is only about 50 basis points.

Nevertheless, the spread is positive and an improvement over October when it was negative, suggesting at least some degree of stabilisation in the economic outlook. If and when we see the spread widening beyond current levels in a sustained manner, there is a good chance that the recession could be coming to an end.

However, continued widening of the spread cannot be taken for granted. Financial markets remain volatile and the spread has actually begun to narrow again recently.

Still, it is possible that the outlook may improve even without much further widening of the spread. The Federal Reserve now appears to be embarking on a policy of quantitative easing. This would add yet another layer of monetary easing, one that may not be fully captured by the spread between the 10-year Treasury yield and 3-month LIBOR or other term spreads.

Recent Federal Reserve announcements indicate that quantitative easing is indeed becoming part of its policy. On 1 December, Fed Chairman Ben Bernanke said in a speech that he was considering buying longer-term Treasuries on the open market in substantial quantities. This followed an announcement the previous week that the Federal Reserve planned to buy hundreds of billions of dollars' worth of debt and mortgage-backed securities from government-sponsored enterprises over the next few quarters.

However, for the moment, the US economy looks to be firmly in recession. While the actions being taken by policymakers will eventually help the economy recover, it still looks too soon to say that such a recovery is imminent.

US economy loses half a million jobs

US economic data on Friday were awful. Bloomberg reports:

U.S. companies slashed payrolls last month at the fastest pace in 34 years as the economy headed for its deepest and longest recession since World War II.

Employers cut 533,000 jobs, bringing losses so far this year to 1.91 million, the Labor Department said today in Washington. November’s drop exceeded all 73 forecasts in a Bloomberg News survey. The unemployment rate rose to 6.7 percent, the highest level since 1993...

Revisions for September and October increased job losses by 199,000. The October figure was revised to 320,000 from the previous estimate of 240,000. November was the 11th consecutive drop in payrolls...

The foundering job market is also aggravating the three-year housing slump. One in 10 American homeowners fell behind on mortgage payments or were in foreclosure during the third quarter, the Mortgage Bankers Association reported today. The share of mortgages 30 days or more overdue rose to a seasonally adjusted 6.99 percent while loans already in foreclosure rose to 2.97 percent, both all-time highs in a three-decade survey.

The job losses suggest that the recession isn't going to be short and shallow.

“It’s unbelievable,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts. “We’re well on our way to the worst recession of the postwar period.”

He could be right; investors don't seem to believe it. US stocks were up strongly by the end of the day, the S&P 500 gaining 3.7 percent. An 8.6-percent surge in financials after Hartford Financial Services increased its profit forecast seems to have been a key factor though.

Rate-slashing hits new heights as interest rates hit new lows

Central banks all seem to be trying to outdo each other in slashing rates.

Australia's rate slashing on Tuesday was followed on Wednesday by Thailand’s central bank cutting its benchmark interest rate by 1 percentage point to 2.75 percent, its biggest cut ever.

Then came the avalanche of rate cuts on Thursday.

Indonesia reduced its benchmark rate to 9.25 percent from 9.5 percent despite a weakening rupiah.

Then New Zealand cut its benchmark rate by a record 1.5 percentage points to 5 percent.

Europe provided a storming finish to the day. Bloomberg reports:

The European Central Bank delivered a 75 basis-point reduction in its main refinancing rate, the most in its 10-year history, while the Bank of England cut its benchmark rate to 2 percent, the lowest level since 1951...

Sweden’s Riksbank lowered its key rate by 1.75 percentage points, the biggest reduction in 16 years. The Danish central bank matched the ECB, cutting by 75 basis points.

Stocks shrug off gloomy data

Wednesday's economic data continued to be gloomy.

Bloomberg reports the dismal figures from the euro area.

European services shrank at a record pace and retail sales fell more than forecast, increasing pressure on the European Central Bank to cut interest rates further this week.

Royal Bank of Scotland Group Plc’s services index dropped to 42.5 in November from 45.8 in October, remaining below the expansion-threshold of 50 for a sixth straight month. Separate figures show retail sales declined 2.1 percent in October from a year earlier, the biggest drop since June.

It was a similar picture in the UK. From Reuters:

Britain's dominant services sector shrank in November at its fastest pace since the series began in 1996 as new business, employment and confidence fell at record rates, a survey showed on Wednesday...

The Chartered Institute of Purchasing and Supply/Markit purchasing managers' index for the sector fell to 40.1 last month from 42.4 in October. That was below the consensus forecast of 41.2 and marked the seventh month below the growth threshold of 50.

UK consumer sentiment is also weak. Reuters reports:

The Nationwide Building Society's consumer confidence index fell six points last month to 50, the lowest reading since the survey started in May 2004.

And it is also the same picture across the Atlantic. From Bloomberg:

Service industries in the U.S. contracted the most in at least 11 years, and a measure of private payrolls showed job losses accelerated, signaling the economy’s decline deepened last month.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, fell to 37.3 in November, the lowest level since records began in 1997. ADP Employer Services said companies eliminated 250,000 jobs, the most since November 2001...

The Federal Reserve’s regional economic survey showed the economy weakened across all its 12 districts as it became tougher to get credit. Retail sales, tourism spending and manufacturing declined in most places, housing markets were “weak” and commercial real estate “weakened broadly,” the Fed said today in its Beige Book release, published two weeks before officials meet in Washington to set interest rates...

Challenger, Gray & Christmas Inc., a Chicago-based placement firm, said today the number of announced firings surged 148 percent last month from November 2007, led by a jump at financial firms.

But stocks are proving resilient in the face of such gloomy data. Bloomberg reports that stocks rose in Europe on Wednesday.

European stocks rose for a second day as speculation central banks will step up efforts to revive the economy outweighed concern a deepening recession will stifle profit growth...

The Dow Jones Stoxx 600 Index added 0.6 percent to 198.29, erasing earlier declines of as much as 2.5 percent...

National benchmarks rose in 14 of the 18 western European markets today. The FTSE 100 added 1.1 percent. France’s CAC 40 gained 0.4 percent, and Germany’s DAX climbed 0.8 percent.

And in the US:

U.S. stocks rose for a second day as a jump in online spending and a record increase in mortgage applications lifted retailers and banks, overshadowing concern the worsening recession will reduce demand for commodities...

The Standard & Poor’s 500 Index climbed for the seventh time in eight days, rallying 2.6 percent to 870.74 after earlier sliding as much as 2.5 percent. The Dow Jones Industrial Average added 172.6, or 2.1 percent, to 8,591.69. The Nasdaq Composite increased 2.9 percent to 1,492.38. Almost three stocks rose for each that fell on the New York Stock Exchange.

However, crude oil continued on its downtrend. Bloomberg reports:

Crude oil fell after an Energy Department report showed that U.S. refineries curbed operating rates as the recession crimps fuel demand...

Crude oil for January delivery fell 17 cents, or 0.4 percent, to $46.79 a barrel at 2:42 p.m. on the New York Mercantile Exchange, the lowest settlement since Feb. 9, 2005. Futures have tumbled 68 percent since reaching a record $147.27 on July 11.

And copper fell to the lowest since July 2005, according to Bloomberg.

Copper futures for March delivery tumbled 4.6 cents, or 2.9 percent, to $1.5545 a pound on the Comex division of the New York Mercantile Exchange. Earlier, the price touched $1.516, the lowest for a most-active contract since July 7, 2005.

Stocks rebound, RBA slashes rates again

There must have been some relief in markets on Tuesday that there was no follow-through selling after the plunge on Monday. From Bloomberg:

U.S. stocks rallied, rebounding from the market’s worst tumble since October, after General Electric Co. announced plans to maintain its dividend and the Federal Reserve extended terms of three emergency loan programs...

The S&P 500 added 32.6 points, or 4 percent, to 848.81. The Dow Jones Industrial Average surged 270 points, or 3.3 percent, to 8,419.09, with 28 of its 30 companies rising. The Nasdaq Composite Index climbed 3.7 percent to 1,449.8. Seven stocks increased for each that fell on the New York Stock Exchange...

Europe’s Dow Jones Stoxx 600 Index advanced 1.7 percent, reversing an earlier drop of 2.3 percent. The MSCI Asia Pacific Index decreased 4.5 percent as China Petroleum & Chemical Corp. dropped 5.6 percent.

Still, central banks are taking no chances. The Reserve Bank of Australia kicked off Tuesday's policy actions by slashing rates again. AFP/CNA reports:

Australia's central bank slashed interest rates by 100 basis points Tuesday in the latest in a series of aggressive cuts sparked by the global financial crisis.

The bigger-than-expected cut by the Reserve Bank of Australia (RBA) dropped the official cash rate to 4.25 per cent, the lowest in more than six years, as the bank predicted that inflation could soon begin to fall.

There were no rate cuts from the Bank of Japan's emergency meeting but officials there were not exactly complacent. From Bloomberg:

The central bank will begin accepting BBB or higher-rated corporate debt on Dec. 9 and will start a new lending facility for commercial banks in January, it said in a statement after an emergency meeting today in Tokyo. The policy board kept its overnight lending rate at 0.3 percent...

The steps are aimed at encouraging banks to purchase and underwrite a wider range of corporate debt that they would then use as collateral for borrowing from the central bank. Lending to banks will increase by about 3 trillion yen ($32 billion) once both measures take effect, [Governor Masaaki] Shirakawa told reporters today.

Meanwhile, the Federal Reserve is extending its war against the credit crunch. From Bloomberg:

The Federal Reserve extended the term of three emergency-loan programs to April 30 from January 30, aligning their expiration dates with other central bank efforts to mitigate the credit crisis.

The Primary Dealer Credit Facility and Term Securities Lending Facility, created in March, and the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, begun in September, were lengthened “in light of continuing strains in financial markets,” the Fed said today in a statement in Washington.

US in recession, global manufacturing and stock markets collapse

Finally, we have official confirmation that the US economy is in recession. From the National Bureau of Economic Research:

The Business Cycle Dating Committee of the National Bureau of Economic Research met by conference call on Friday, November 28. The committee maintains a chronology of the beginning and ending dates (months and quarters) of U.S. recessions. The committee determined that a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months.

Incidentally, the ISM manufacturing index had dipped below 50 in December 2007. And if it is anywhere close to being reliable, it looks like the recession is deepening. From Bloomberg on Monday:

American manufacturing contracted in November at the steepest rate in 26 years, leading Europe and Asia into an industrial slump as a recession that began in the U.S. in December 2007 spread around the globe.

The Institute for Supply Management’s factory index dropped to 36.2, below economists’ forecasts, and its gauge of raw- material costs plunged to the least in six decades, intensifying concern over deflation...

The U.S. ISM’s purchasing managers’ gauge of new orders for factories decreased to 27.9, the lowest since 1980, from 32.2 the prior month. The production measure fell to 31.5 from 34.1...

The index of prices paid dropped to 25.5, the lowest level in six decades, from 37. That adds to concern that the U.S. economy may be at risk of deflation...

There was bad news in construction too.

A report from the Commerce Department also showed construction spending fell 1.2 percent in October, a bigger drop than forecast, as a slump in homebuilding spread to non- residential projects such as power plants, churches and highways.

For manufacturing, the weakness was pretty much global. From Reuters on Monday:

The Markit Eurozone Purchasing Managers Index (PMI) for the manufacturing sector slumped to 35.6 in November, a low not seen in the survey's 11-year history and well below the 36.2 flash reading and economists' forecasts...

Britain's manufacturing PMI tumbled to a record low of 34.4, well below the Reuters consensus for 40.0. It was also the biggest one-month fall in the series, which began in 1992, at the tail end of Britain's last recession.

It was the same story even in supposedly fast-growing China. Bloomberg reports:

China’s manufacturing shrank by the most on record and export orders plunged, adding to evidence that recessions in the U.S., Europe and Japan are dragging down the world’s fastest-growing major economy.

The Purchasing Managers’ Index fell to a seasonally adjusted 38.8 in November from 44.6 in October, the China Federation of Logistics and Purchasing said today in an e-mailed statement. A second PMI, released by CLSA Asia-Pacific Markets, also showed a record contraction.

Last week, Japan had released a similarly gloomy manufacturing report. From Reuters:

Japanese manufacturing contracted for a ninth straight month to a new record low in November, the Japan Purchasing Managers Index showed on Friday, in yet another sign of the toll the global financial crisis is taking on the economy...

The Nomura/JMMA Japan Purchasing Managers Index (PMI), which gives an early snapshot of the health of manufacturing, fell to seasonally adjusted 36.7 in November from 42.2 in October.

And another survey reported today confirms the weak outlook for Japanese manufacturers. Again from Reuters:

The yen's rise against major other currencies and worsening demand both at home and abroad helped push manufacturers' sentiment down to minus 42 from minus 25 in October in the Reuters Tankan, the biggest monthly drop on record...

The Reuters Tankan showed sentiment in the service sector at its lowest point since August 2003, with the index down seven points at minus 16.

Stock markets around the world were pummelled by the avalanche of bad news. From Bloomberg:

U.S. stocks slid the most since October, wiping out more than half of last week’s rally, on growing concern the global economic slump is deepening and consumers’ access to credit is shrinking...

The S&P 500 sank 8.9 percent to 816.21, with financial stocks in the index tumbling a record 17 percent as a group. The Dow Jones Industrial Average plunged 679.95 points, or 7.7 percent, to 8,149.09 with all 30 companies declining. The Nasdaq Composite Index declined 9 percent to 1,398.07. Almost 38 stocks retreated for each that rose on the New York Stock Exchange.

It was the same in Europe. Bloomberg reports:

European stocks dropped, sending the Dow Jones Stoxx 600 Index to its first retreat in six days, as record declines in European and Chinese manufacturing signaled the global economic slump is worsening...

The Stoxx 600 declined 6 percent to 193.91, the steepest slide since Oct. 15...

National benchmark indexes decreased in all 18 western European markets. The FTSE 100 dropped 5.2 percent. Germany’s DAX lost 5.9 percent as ThyssenKrupp AG declined for the first time in seven days. France’s CAC 40 slipped 5.6 percent.

Earlier in the day, Asian markets had given a hint of what was to come elsewhere by mostly falling, ignoring Friday's gains in the US. From AFP/CNA:

Asian stocks were mainly lower Monday as dealers remained cautious ahead of a slew of economic data from the United States, while also awaiting decisions on interest rates across the world...

Japan's Nikkei was down 1.35 per cent, while Sydney and Seoul each lost 1.6 per cent and Singapore fell 2.44 per cent.

However, Hong Kong added 1.6 per cent, Shanghai 1.25 per cent and Taipei 1.3 per cent.