Bernanke to wave his magic wand soon
Futures traders today have now put the the odds of a 50 basis point rate cut later this month at 98 percent - some (even little guys like me) are even calling for an emergency rate cut before their EOM FOMC meeting: Why? - numerous reasons below:
Fed Emergency Rate Cut Odds Rise After ISM Drop, Analysts Say
The probability that the Federal Reserve will cut interest rates before policy makers are next scheduled to meet increased after manufacturing in the U.S. contracted at the fastest pace since the last recession.
``The data increase the odds of more Fed rate cuts, including the possibility of an inter-meeting cut,'' Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York, wrote in a note to clients. ``Extraordinary strains in the credit markets and the sharp plunge in commodity markets give the Fed additional leeway.''
Libor Rises, Commercial Paper Slumps as Credit Freeze Deepens
Oct. 2 (Bloomberg) -- Interest rates on three-month dollar loans rose to a nine-month high, short-term corporate borrowing fell by the most ever and leveraged loans tumbled, exacerbating the credit freeze that's paralyzing businesses around the world.
The London interbank offered rate that banks charge each other for loans rose for a fourth day, driving a gauge of cash scarcity among banks to a record. The biggest drop in financial short-term debt outstanding since at least 2000 caused the U.S. commercial paper market to tumble 5.6 percent to a three-year low, according to the Federal Reserve.
The crisis deepened after the worst month for corporate credit on record. Leveraged loan prices plunged to all-time lows, short-term debt markets seized up and even the safest company bonds suffered the worst losses in at least two decades as investors flocked to Treasuries. Credit markets have frozen and money-market rates keep rising even after central banks pumped an unprecedented $1 trillion into the financial system.
``The credit window is closed,'' Jim Press, president of Chrysler LLC, the third-largest U.S. automaker, said today at the Paris Motor Show. The financial rescue plan must be approved because ``it's important for us to restore credibility in our banking system.''
``It's going to get much, much worse,'' said Gregory Peters, head of credit strategy at Morgan Stanley in New York. ``The credit markets are effectively shut, the CP market, which there's not enough focus on, is under complete duress. That can't be sustained, as that's the lifeblood of corporations funding themselves.''
Fed Loans to Banks, Dealers, AIG Soar to $410 Billion
Oct. 2 (Bloomberg) -- Commercial banks and bond dealers borrowed $348.2 billion from the Federal Reserve as of yesterday, an increase of 60 percent from the prior week amid a worsening credit freeze.
Loans to commercial banks through the traditional discount window rose about $10 billion to $49.5 billion as of yesterday, the Fed said in a weekly report today. The total surpassed the previous record after the 2001 terrorist attacks.
AIG, the largest U.S. insurer, drew down $61.2 billion on its $85 billion credit line from the Fed, up from $44.6 billion as of Sept. 24, the central bank said.
The report reflects the Fed's expansion of credit and emergency-lending programs to halt a yearlong credit crisis that pushed interest rates on three-month dollar loans today to a nine-month high as short-term corporate borrowing fell by the most ever.
``The financial system is on a lifeline,'' said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York. ``The Fed will have to maintain this expansion of its balance sheet for quite some time.''
U.S. Stocks Decline on Concern Bank Rescue Won't Stop Slowdown
Oct. 2 (Bloomberg) -- U.S. stocks dropped for a second day as a jump in borrowing costs and reports showing a worsening economy spurred concern that the government's $700 billion bank bailout plan won't be enough to stimulate growth.
``If banks aren't willing to lend money to a bank, are they going to be willing to lend to an average person? No, they're not,'' said Frank Ingarra, money manager at Hennessy Advisors Inc., which oversees $1.1 billion in Novato, California. ``We could be at the start of a pretty bad recession.''
The Standard & Poor's 500 Index fell 46.78, or 4 percent, to 1,114.28. The Dow Jones Industrial Average declined 348.22, or 3.2 percent, to 10,482.85. The Nasdaq Composite Index slipped 4.5 percent to 1,976.72. Almost 14 stocks retreated for each that rose on the New York Stock Exchange.
``There's a liquidity crisis going on that's putting investors on edge,'' said Alan Gayle, the Richmond, Virginia- based senior investment strategist at Ridgeworth Investments, which oversees about $70 billion. ``Liquidity is like oxygen. Lack of it can cause serious damage in a very short time.''
Regarding the financial-market rescue legislation, which the House likely will act on tomorrow: ``If I were a congressman I would hold my nose and vote yes, but people shouldn't be under any illusions about what's going to happen,'' Charles Bobrinskoy, who helps manage about $13 billion as vice chairman of Ariel Investments in Chicago, told Bloomberg Television.