New Overnight Developments Abroad: Markets Await Senate Vote on Revamped TARP Bill Today

October 1, 2008

Money market tensions remain severe.  Central Banks in Euroland, Switzerland, the U.K. injected $67.5 billion of dollar liquidity.  Central banks in Australia and Japan also added liquidity.  Bank of England and ECB drained some of their own currency liquidity following end of calendar quarter.  Libor rates very high.

The dollar began 4Q on its back foot, dropping 1.0% against the Australian dollar and kiwi, 0.5% against the Swiss franc, 0.4% against the Canadian dollar, 0.3% against the euro and yen and 0.2% relative to sterling.  Even the South Korean won, which had fallen 24% through the first three quarters of 2008, began the final quarter with a 1.5% rebound.

In stock market action, the bourses in Australia (4.2%), New Zealand (3.2%), India (1.6%), and Japan (+1.0%) rose sharply in Asia, but Sri Lanka (-2.0%), Indonesia (-0.7%), South Korea (-0.6%) and Vietnam (-0.5%) fell. Hong Kong and Taiwan gained 0.8%.  China and Singapore were closed. In Europe, the Ftse is up 0.9%, but the German Dax and Paris Cac show losses of 0.7% and 0.3%.  U.S. stocks are indicated somewhat lower at the open.

The 10-year JGB yield firmed 4.5 basis points to 1.525%.  Bund yields are softer.  Oil firmed 0.4% to $101.06/barrel, and gold edged up 0.2% to $882.90/ounce.

The Tankan survey of Japanese businesses, compiled quarterly by the Bank of Japan, produced even more disappointing results than expected, with the first sub-zero big manufacturers’ diffusion index since mid-2003 (-3 after +5), a drop in the diffusion index for all firms to -14 from -7 in June 2008, projections of further deterioration between September and end-2008, and downward revisions to planned investment and expected corporate earnings.

Euroland PMI-manufacturing scores were revised downward from their preliminary indications.  Euro area’s score is now 45.0, not 45.3, after 47.6 in August and 53.2 a year earlier.  Germany’s was revised to 47.4 from 48.1 and down from 49.7 in August and 54.9 in September 2007.  France was at 43.0 versus flash indication of 43.6; such fell from 45.8 in August and 50.5 a year earlier.  Italy reported a PMI of 44.4 after 47.1 in August.  Spain’s index was 38.3, lowest since at least February 1998, after 42.4 in August.  The Irish index fell 1.2 points to 43.7.  The Greek index (50.8) is just slightly above the bust-or-expansion line.

Unemployment in Euroland unexpectedly rose to 7.5% in August from 7.4% in July, ending a prolonged downward trend.  The jobless rate rose 0.3 percentage points each in Ireland and Spain, whose housing sectors are each suffering badly.  Only German unemployment eased further. 

German real engineering orders tumbled 10% y/y in August, but a 3.1% on-month rise of real retail sales in August was six times bigger than assumed.  Still real retail sales posted a 12-month decline of 3.0% in Germany.  Italy’s non-EU trade gap widened to EUR 2.07 billion in August.  French car sales recovered 8.4% in September but fell 1.4% y/y.

Core South Korean CPI inflation unexpectedly rose for a seventh consecutive month in September to 5.1%, dampening near-term rate cut hopes.  The Bank of Korea raised rates as recently as August, but core inflation had been expected to have crested that month.

PMI-manufacturing scores remained steady in South Africa at 47.0, but rebounded in China to a 3-month high of 51.2 in September from 58.4 in August.

Britain reported a devastatingly weak PMI-mf’g reading of 41.0 in September, down from 45.3 in August and 54.8 in September 2007.  Such was the weakest score since at least January 1992 and four points below the expected value.  Sub-components for production, orders, and jobs each set record lows.

French President Sarkozy will host an EU crisis meeting on October 4th.  The U.S. Senate is expected to vote on a banking crisis rescue plan today that still calls for $700 billion of bad loan purchases but also would raise FDIC insurance for depositors to $250K from $100K per account.

Switzerland’s PMI fell to 47.8 in September, lowest since February 2005, from 52.5 in August and 57.8 in September 2007.  Analysts had predicted only a 1-point drop.  Danish real retail sales fell 6.9% in the year to August.

Aside from the U.S. senate vote, the monthly ECB rate decision and press conference looms tomorrow.  Many market players look for Trichet to begin preparing for a possible rate cut by signaling diminishing, but still-upside, inflation risk bias.  Rhetoric by different ECB officials since the September meeting has not contained clues for an easing and instead has been rather hawkish in tone.


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