Gloomy US consumers cut spending

Japan cuts rates

Reuters

Grim reports showing American consumers tightening their belts and the US business outlook weakening deepened fears about global recession, while a Japanese rate cut on Friday did little to stem the bleeding.

British banking giant Barclays said it was raising $12 billion ($NZ20.69 billion) in capital, the latest move in the troubled world financial sector, which has been drastically reshaped by the crisis stemming from the bursting of the US housing bubble.

A US Commerce Department report showed consumers cut monthly spending for the first time in two years in September, evidently bracing for hard times as jobs continue to disappear and credit conditions tighten.

Another survey showed US consumer confidence in October suffered its steepest monthly drop on record.

"Consumers reported the most dismal assessments of their current financial situation ever recorded," the Reuters/University of Michigan Surveys of Consumers said.

Other reports showed business activity fell in the US Midwest and New York City.

But there was at least one hopeful sign, as the closely watched interbank lending rates fell, suggesting that the moves taken by central banks and others to remove blockages in the credit system were working to some extent.

That helped push US stocks higher, with financial stocks leading a rally as investors picked up bargains following recent heavy losses. European shares reversed losses and followed Wall Street higher.

Nevertheless, the Dow Jones Industrial average in October had its worst one-month percentage drop since August 1998, while the dollar was on pace for its best month in more than 17 years.

The Bank of Japan cut interest rates for the first time in seven years on Friday in a move that followed a rate cut by the US Federal Reserve on Wednesday. The European Central Bank and the Bank of England are expected to do the same next week.

In the euro zone, inflation fell to 3.2 percent year-on-year in October, data that was likely to ease any concerns at the ECB about rising prices.

JPMORGAN HALTS FORECLOSURES

The economy is dominating the final days of the US presidential campaign, which pits Republican John McCain against Democrat Barack Obama on Tuesday.

When the winner takes office in January, he will face the daunting task of overcoming the worst financial crisis in 80 years and guiding a $700 billion bailout that includes $250 billion of cash injections for banks.

US Treasury Secretary Henry Paulson has been in regular contact with both McCain and Obama during the implementation of the Treasury's $700 billion financial rescue plan, a Treasury spokeswoman said on Friday.

Meanwhile, the US housing crisis, which was the main trigger for the credit crunch, again was in the spotlight as Federal Reserve Chairman Ben Bernanke said US backing for debt issued by mortgage finance firms Fannie Mae and Freddie Mac in their current form must remain firm.

Uncertainty over how the US government might treat debt issued by the two government-sponsored-mortgage enterprises in the future has depressed investor appetite, keeping US mortgage rates elevated.

Bernanke's speech coincided with a new report showing that nearly one in five US mortgage borrowers owe more to lenders than their homes are worth.

Elsewhere on the housing front, JPMorgan Chase & Co, the largest US bank, said it would halt foreclosures for 90 days as it ramps up a programme to make it easier for homeowners to modify their mortgages.

JPMorgan received $25 billion under the capital injection programme and the powerful chairman of the US House of Representatives Financial Services Committee, Rep. Barney Frank, said companies receiving public money under the plan must use it for lending or they will be violating the law.

In the latest sign of the widening demands on the rescue programme, the Treasury said it will soon allow privately held banks to apply for government capital injections.

Meanwhile, fallout from the crunch continued to spread, with Barclays saying it planned to raise 7.3 billion pounds ($12.06 billion) in additional capital from outside investors, including Gulf states Qatar and Abu Dhabi.

Barclays had said earlier it wanted to raise capital but would raise it privately rather than take UK government cash, as rivals Royal Bank of Scotland, Lloyds and HBOS are doing.

Germany's Commerzbank is interested in a state capital injection, according to sources familiar with the situation.

Japan's two-largest banks, Mitsubishi UFJ Financial Group and Mizuho Financial Group, cut their earnings outlooks by more than half on on Friday, hit by growing bad-loan costs and a plunging local stock market.

US tech bellwether Intel Corp said the financial crisis could hurt its business, and Britain's BT Group Plc warned it would miss earnings forecasts, sending its shares crashing to a more than 20-year low.

In the troubled US auto sector, a deal to merge General Motors Corp and Chrysler LLC hit an impasse after the Bush administration ruled out funding for it, according to Reuters sources. In Japan, Nissan Motor and Suzuki Motor issued profit warnings.

CREDIT CRUNCH

There were mixed signs about the credit crunch. Interbank rates -- the cost banks charge to lend to each other -- fell.

But at the ECB, overnight deposits from banks soared to a record, suggesting banks still preferred to deposit money with the central bank rather than lend to each other.

The Bank of Japan cut its benchmark overnight call rate to 0.30 percent from 0.50 percent, a slightly smaller reduction than the quarter point many had expected.

A 4-4 vote on the policy board meant the central bank governor had to cast the deciding vote.

"At a time of extreme financial uncertainty and volatility, to have a policy board so evenly split is hardly reassuring," said Glenn Maguire, Asia Pacific chief economist with Societe Generale in Hong Kong.

The rate cut failed to reverse the rise in the low-yielding yen, which has soared on risk aversion.

Japan's Nikkei closed down 5 percent on disappointment at the size of the interest rate cut.

China's main stock index ended October with its biggest monthly fall since 1994.

Commodities and oil saw some of their biggest monthly price falls in October, piling pressure on many emerging market economies that depend on exports for much of their revenue.

"Oil is falling on a poor outlook for demand and the realisation that rate cuts will take a long time to lead to a recovery," said Christopher Bellew at Bache Commodities.

Ratings agency Standard & Poor's cut Argentina's foreign currency rating deeper into junk territory, citing economic and political concerns and fiscal pressure.

The economies of Britain, Europe, Canada, Japan and the United States are contracting. A German government official told Reuters the economy contracted for a second consecutive quarter in the July-September period, putting it in recession.