New Overnight Developments Abroad: Australian Central Bank Rate Cut By 100 Basis Points

October 7, 2008

Iceland near default, accepts loan from Russia.  Government there seizes second largest bank and pegs crown at 131 per euro after sharp drop.

Several British bank shares tumbled.  There is talk that the government will inject $79 billion of capital into banks.

Reserve Bank of Australia slashed its cash rate to 6.0% from 7.0%, exceeding expected cut of 25-50 basis points.  RBA officials cited worsening global prospects following large-scale financial failures in several major countries.  A released statement also mentioned “much more difficult market conditions even for creditworthy borrowers.”

Bank of Japan left target rate at 0.5%.  Still expects “the economy in the longer run to return gradually onto a moderate growth path.”  Retains warning about upside risks to price expectations despite increasing downside risks to growth.  Bank’s inertia with no hint of a future rate cut contrasts with aggressive action in Australia.

The dollar is mixed, showing drops of 0.5% against the euro, 0.4% against the Swiss franc, and 0.2% against the yen but gains of 1.3% against the kiwi, 0.8% against the Australian dollar, 0.4% against the Canadian dollar and 0.1% versus sterling.

The yield on 10-year JGBs initially slid to 1.355% but then rose jumped 10 basis points net to 1.47%.  It did such despite another huge tumble in the stock market that saw the Nikkei fall under 10K briefly for the first time since December 2003 and close down 3.0%.  Shares elsewhere in Asia fell by 5.0% in Hong Kong, 4.5% in Vietnam, 4.2% in Thailand, 3.0% in the Philippines, 1.8% in Indonesia, 1.5% in India and 1.2% in China.  Shares rose less than 1% in Singapore and South Korea.  In Europe, the Ftse is off 0.2%, and the Dax is up 0.2%.

Oil recovered 2.8% to $90.23/barrel.  Gold climbed 2.4% to $887.20 per ounce.

In China, central bank operations suggested a possible further easing of monetary policy. In India, reserve requirements were cutBrazil adopted measures to insulate its banking system.  Japan’s Prime Minister Aso called on the BOJ to keep markets stable.  Ecofin met in Luxembourg.  The Bank of France president said no French bank is near bankruptcy.  Another ECB officials said emerging market demand should help prevent a deep global recession. S&P cut Iceland’s credit rating by two notches to BBB from A-.  Fisher of the Dallas Fed called capital markets in “semi-panic.”  Euribor rates climbed further to yet another high for the move.  In short, mayhem continues throughout the world’s short-term money markets .

Japan’s index of leading economic indicators posted a diffusion score below 50 for the 12th time in 13 months, a sub-50 reading on the coincident index for the 5th time in 6 months, and a sub-50 reading on the lagging index for the 6th consecutive month.  Commenting on the coincident index, the Cabinet Office said the economy is worsening, that is likely to be in recession.  But BOJ Governor observed that there is neither excessive capacity or labor in the economy.

British industrial production fell 0.6% m/m in August and posted a 2.3% drop from August 2007, the greatest 12-month drop since March 2005.  Factory output fell 0.4% m/m and 1.9% y/y, its biggest 12-month drop since May 2003.  These results are much worse than forecast.

On the other hand, German industrial orders convincingly broke a streak of eight declines in a row with a 3.6% increase in August.  A 0.1% dip had been anticipated by street analysts. 

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