Markets were again more focused on developments in the ongoing financial crisis than they were on Thursday's data releases. In the early morning, six major central banks announced a co-ordinated effort to provide U.S. dollars to private lenders, while reports circulated that Morgan Stanley is in merger talks with Wachovia. Late in the day, independent news reports said U.S. officials were considering creating a Resolution Trust Corporation-style institution, which would lessen the cost of the crisis to taxpayers.
The European Central Bank, the Bank of England, the U.S. Federal Reserve, the Bank of Japan, the Bank of Canada and the Swiss National Bank announced co-ordinated actions to be taken to ease elevated tension in the short-term U.S. money markets. The currency arrangement will inject $180 billion of overnight liquidity into money markets. The deal between the Fed and the Bank of Canada totals $10 billion and will be used if needed.
"These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets," an ECB press release said. "The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures."
Equity markets responded positively, surging at the open with the Dow Jones industrial average up more than 180 points, but fell back into negative territory by midday. The TSX surged more than 500 points at the open, but gave up about half of those gains by midday.
T.J. Marta, fixed income strategist at RBC Capital Markets, described the Fed's actions as, "Bringing garden hoses to a forest fire, Fed's behind the curve - again." He noted that the BOE's $40bn auction garnered only $14bn in bids, suggesting that parties do not have the required collateral to post. "This highlights a key issue," he said. "The credit crisis has spread from a liquidity problem to an insolvency problem. Far greater efforts will be required - calls are rising for concerted rate cuts, and expanding acceptable collateral would also help."
Meanwhile, reports surfaced that Morgan Stanley is in merger talks with Wachovia, and also other institutions. Shares in Morgan Stanley closed the day up 3.68% on Thursday, following a 23.8% decline on Wednesday.
Late in the day, independent news reports said U.S. Treasury Secretary Henry Paulson was considering a proposal to Congress that would create an RTC-style entity to deal with bad debt. Even without a confirmation from the Treasury, stocks soared on the news. CNBC later reported that Paulson would be meeting with Fed chairman Ben Bernanke later in the evening.
In an Op-Ed in the Wall Street Journal Thursday morning, former Federal Reserve Chairman Paul Volcker, former Comptroller of the Currency Eugene Ludwig and former Treasury Secretary Nicholas Brady supported the creation of such a body, which would buy up real estate debt in an effort to get credit markets flowing again.
In U.S. data releases, manufacturing in the region covering eastern Pennsylvania, southern New Jersey and Delaware surprisingly rebounded into growth mode in September, according to the Philadelphia Fed's Manufacturing survey. The rebound follows nine months of slowdown. The general activity index improved to +3.8 from August's -12.7, led by a rebound in new orders.
The Philly Fed's senior economic analyst Mike Trebing told reporters most of the survey results reflect sentiment in the first week of September, with some results trickling in as late as September 12. Some survey participants expressed concern regarding Fannie Mae and Freddie Mac, but the results do not capture developments in the last week, he said.
Economists from RDQ described the report as a "surprising improvement" in manufacturing sentiment in the Philadelphia area. "On an ISM basis, however, the Philly Fed index was still pointing to contraction in September at a reading of 47.9 (versus 46.7 in August), though this is largely due to plunging inventories," they wrote.
Also, initial claims for unemployment benefits in the U.S. were higher than expectations for the week ending Sept. 13, while the previous week's figure was unrevised, the Department of Labor said. Initial claims rose to 455k, just 2k below the cyclical high, while continuing claims fell 55k to 3.478 million for the week ending Sept. 6.
Ian Pollick, economics strategist at TD Securities, said "Surprisingly, the continuing claims were much lower than the market was expecting," adding that the decline "suggests that there could potentially be a decrease in the amount of time it is taking job seekers to find employment."
According to the Conference Board, the index of U.S. leading indicators deteriorated more than expected by 0.5% in August, following the previous month's 0.7% loss. Economists had expected a decline of 0.2%. Over the past six months, the leading index has fallen 2.1%, with four of the 10 components advancing. The leading index saw positive contributions from the consumer goods orders, stock prices, interest rate spread and consumer expectations.
Statistics Canada reported that the leading composite index increased 0.2% in August after remaining steady in July. Household demand has been the most consistent source of growth, the statistical agency said, while sales of durable goods slipped in the month due to slower auto sales.
A new economic forecast from the Conference Board of Canada says an "overdue" housing market correction will deliver a second straight year of declining profits for Canada's residential construction agency as demand slackens under the weight of a weaker economy and poor affordability. The think tank forecasts profits to fall by 3% in 2008 to $3.6 billion following a 16% decline last year. The CBOC also predicts profits to fall again in 2009, before beginning to improve in 2010 and beyond as the market stabilizes and demand recovers.
In overnight news, UK retail sales surprised to the upside in August, rising 3.3% on an annualized basis, the Office for National Statistics (ONS) reported. Economists had expected a growth rate of 1.6%, down from July's 2.0% rate, and revised down from 2.1%. In monthly terms, the retail sales growth rate jumped to 1.2%.
Following the decision of a global co-ordinated effort by central banks to provide USD liquidity, Bank of Japan Deputy Governor Kiyohiko Nishimura announced that the central bank had held an emergency meeting and decided to keep its overnight lending rate unchanged at 0.5%. Speaking in Tokyo on Thursday on behalf of central bank governor Masaaki Shirakawa, Nishimura stressed the need to be wary of both upside price risks and downside growth risks.
By Stephen Huebl, shuebl@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it and Patrick McGee, pmcgee@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , with contributions from Steve Stecyk, sstecyk@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , Sean McKibbon, smckibbon@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , Todd Wailoo, twailoo@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it and Erik Kevin Franco, efranco@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , edited by Sarah Sussman, ssussman@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it
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