There’s nothing more to be said about the markets last week except that we all survived, battered, bruised, shell shocked and worse if you were shareholders in some American companies no longer with us like Lehman Bros, Merrill Lynch, AIG, Macquarie, HBOS and a host of other financial stocks.This week events will be dominated by the shape of the rescue body announced Friday to bailout the dodgy securities.Here in Australia we have banned all short selling, not just the naughty naked kind, in a new development revealed last night by the financial regulator, ASIC. It starts from today and continues until further notice.It is a step up of the ban on naked shorting announced Friday.But the big issue is the $US700 billion bailout fund which is likely to provide an opportunity for ambitious and idiotic US congress representatives to try and add pet deals of their own to the bill.Markets around the world simply love the idea, but that affection will be hard to hold as the fund takes ages to have any lasting impact.The Standard & Poor’s 500 dropped by more than 4.7% twice last week after Lehman Brothers’ collapse; Bank of America Corp’s takeover of Merrill Lynch and the US government’s seizure of American International Group.But the S&P 500 ended the week by jumping 8.5% on Thursday and Friday on the US government’s plan to purge banks of bad assets, crack down on short sellers and to stand behind money market funds through support from the Federal Reserve.Shanghai surged 9.5%, in the biggest daily gain for seven years, to 2,075.091.Hong Kong’s Hang Sang gained 9.6% to 19,327.73, London’s FTSE 100 had its biggest daily gain in its 24-year history, jumping 8.8% and in Australia the ASX 200 was up 198 points or more than 4.2% on Friday.It was the biggest two-day global stocks rally in 38 years. Friday’s rallies in London and the US were partially fuelled by bans on short-selling in financial stocks announced on Thursday night.Besides the S&P 500’s gains the Dow added 929 points from Thursday’s low and markets from the UK, China, and Australia and elsewhere surged as investors appreciated the fact that the great panic had been halted for the time being.But it is short term, even the new fund being set up to help buy the so-called toxic securities by the US Treasury.The longer term issues will be the newly increased size of the US deficit and debt, the impact of this huge expansion of money supply on inflation, and most of all the slumping US economy and the disaster that is the US housing sector.The S&P 500 ended up 48.57 points to 1,255.08 on Friday, the Dow surged 368.75, or 3.4%, to 11,388.44 and Nada rose 74.8, or 3.4%, to 2,273.9.The MSCI World Index of 23 developed nations’ markets jumped 5.7% to 1,286.44 on Friday and rose 8% over Thursday and Friday. Europe’s main regional index (the Sox 600) rose a record 8.3% Friday and the MSCI Asia Pacific Index added 5.5% Friday.The S&P 500 actually erased its fall to close up 0.3% for the week, but it is still down down 15% this year.Market reports said a record 3 billion shares were traded on the NYSE on Friday: that was more than double the three-month daily average.Under pressure investment banks, Goldman Sachs and Morgan Stanley saw their shares leap more than 20% on Friday as shorts scrambled to cover themselves.Traders said that only consumer staples, the best performing group this year, fell led by Wal-Mart, the world’s largest retailer.Its shares fell almost 3% for the biggest decline in the Dow.That reaction has a touch of unreality because it won’t be too long before investors start worrying about the economy and banks again and go back into consumer staples.US and European government bonds tumbled; reversing gains made earlier in the week as investor sold equities and commodities and moved into bonds as quickly as possible.The proposal from Paulson and Bernanke (and strongly supported by president Bush over the weekend) is aimed at isolating devalued mortgage-linked assets at the root of the worst credit crisis since the Great Depression.US Congressional leaders said they aim to pass legislation soon, but some have started wondering about loans to US car companies like General Motors and a $US50 billion stimulatory package to follow the $US120 billion tax rebate which came and went from May to July of this year.That sort of grandstanding is going to be dangerous, and expensive.In Australia the major banks led the surge on Friday and today the market is forecast to be up by around 130 points, if Saturday morning’s overnight futures finish is any guide.The ASX200 index finished up 196.8 points, or 4.27%, to 4804.1, while the All Ordinaries index ended up 188.8 points, or 4.06%, to 4840.7.The National Australia Bank soared $3.40, or 17.35%, to $23.00; the Commonwealth jumped $2.62, or 6.54%, to $42.70; the ANZ rose $2.26, or 14.63%, to $17.71; and Westpac ended up $1.54, or 7%, at $23.54.But the focus was on Macquarie Group: after being belted up to the close Thursday, it rocketed $9.85, or 37.81%, to $35.90 after touching an intraday high of $38.55 just before noon.Suncor Metway leapt 75c to $9.10 as the company completed the underwriting on its dividend reinvestment plan two weeks early.In resources BHP Billiton ended up 40c at $35.40 and Rio Tinto jumped $3.10 to $101.50.Iron ore miner Fortescue Metals Group added 50c to $5.70 despite reporting an annual bottom-line net loss of $2.8 billion and saying it would not provide a forecast for the current year because it may prejudice “the interests of the company”.Oil and gas producer Woodside Petroleum was up $2.66 at $54.06, and Santos 53c to $18.28.Newmont dropped 55c to $4.92 and gold fell; Newcrest eased 65c to $23.85 and Lehar dropped 3c to $2.45.The Australian dollar finished higher in New York at 83.40, US cents after the US dollar lost ground as nervy investors sold the currency.Earlier, the Aussie had finished around 81.15 on Friday, up about 1.3 US from Thursday’s close of 79.88. That’s up 3.5c in two days, or almost 5%.And naked short selling will be banned on the Australian Stock Exchange from today.But in a dramatic decision the regulator, the Australian Securities and Investments Commission has banned ALL short selling for a month from today, not just the naked variety. ASIC said the widened ban would act as a circuit breaker to restore investor confidence.Short selling, where traders seek to profit by selling borrowed shares of companies to then buy them back, in the anticipation their prices will drop, has been partly blamed for the sharp falls of stocks such as Macquarie Group in recent days.Naked short selling, involves selling without first borrowing the stock, or even ensuring the shares can be borrowed.The Australian Securities Exchange (ASX) said on Friday it would remove all securities from its list of stocks approved for naked short selling from Monday.The ASX said the “The removal will remain in force until further notice.”"It will be reviewed when the government’s foreshadowed legislative amendments to the reporting of covered short selling activity take effect.”But last night the ASX ban was supplanted by the wider ban from ASIC.ASIC chairman, Tony D’Aloisio, said “To limit the prohibition to financial stocks, as has been done in the UK, could subject our other stocks to unwarranted attack given the unknown amount of global money which may be looking for short sell plays.”

IMPORTANT: AIR reports about financial markets and investment products in the widest sense possible. The AIR website and all its contents is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before making any investment decisions.

IMPORTANT: AIR reports about financial markets and investment products in the widest sense possible. The AIR website and all its contents is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before making any investment decisions.

The realistic one was Xstrata, the most acquisitive mining group in the world pulling its $US11 billion ($A12.6 billion) bid for Lonmin, the big platinum miner based in South Africa, but headquartered in London.

In Australia, BHP Billiton welcomed the decision by the competition regulator not to block its 3.4 share bid for Rio Tinto, and BHP and Rio shares stormed higher.

A case of desperate investors here not understanding the changes happening overseas, or eternal optimists, led by the BHP board?

Xstrata said it does not intend to make a takeover offer for Lonmin because of “extreme volatility and uncertainty in the financial markets”.

The “lack of clarity and certainty regarding the future availability of credit introduces significant risks” into financing for any bid, Switzerland-based Xstrata said in a statement.

Xstrata is believed to have lined up a $US15 billion (around $A19 billion) loan from a group of banks to finance its proposed 33 pounds ($A73-a-share) offer and refinance existing debt.

Xstrata had to commit to the bid by tonight, our time, or withdraw. It chose the latter staged a very prudent retreat.

After pulling the bid, it snapped up more than 14% of Lonmin for just over 19 pounds a share and now has an all but controlling 33%.

It’s not the only big international bid to have been killed off by the credit crunch and lending freeze.

Last month a private equity group called off a $A4.2 billion offer for UK events publisher, Informa and HSBC bailed out of a year-long effort to buy 51% of the Korean Exchange Bank for $A8 billion after failing to get the deal finalised and with worries about the global outlook.

Xstrata had built up a 10.7% in Lonmin, but refused to buy any more, even as its target share price sank under the proposed offer price, a good sign of the concern Xstrata was having about the outlook for finance and for commodities.

It snapped up the extra shares after the bid was withdrawn and Lonmin’s price fell.

Despite that Xstrata’s price fell 1.9% in London by the close.

Lonmin replaced its CEO on Monday without warning. Ian Farmer, formerly the chief strategic officer is the new boss and he will drive the company’s review of its existing operations and performance.

Bloomberg estimates that Xstrata has spent about $US28 billion in four years on acquisitions, boosting sales eightfold. It has also ended attempted transactions. The company broke off talks to buy Brazil’s CVRD (Vale), the world’s biggest iron-ore exporter, in April. Xstrata also terminated moves to buy Australia’s WMC Resources in 2005 and Canada’s LionOre Mining International last year after higher bids from rivals.

In Australia, the market was dragged higher by the news that the ACCC would not oppose the proposed BHP Billiton bid for rival Rio Tinto.

Rio shares surged, up $A10.50, or 12.43%, at $95.00, after hitting a high of $98.60. BHP Billiton shares were up $A1.75 or 5.6% at $32.75, after hitting a high of $33.40. The 3.4 BHP shares for every 1 Rio share offer was worth $111.35, a still substantial premium to the actual Rio price and a sign of continuing market scepticism.But BHP shares tumbled 4% in London on the Xstrata news and the worsening outlook for commodities and the global economy.

The ACCC noted that its review of the planned merger had raised “significant concerns”.

“While significant concerns were raised by interested parties in Australia and overseas, the ACCC found that the proposed acquisition would not be likely to substantially lessen competition in any relevant market,” chairman Graeme Samuel said in a statement.

BHP said in a statement:”BHP Billiton today welcomed the decision by the Australian Competition and Consumer Commission that it does not object to BHP Billiton’s proposed acquisition of Rio Tinto.”We are very pleased to have received notice that the ACCC will not object to our proposed acquisition of Rio Tinto.

“We have long believed in the benefits of the combination of BHP Billiton and Rio Tinto. Our strategic rationale has always been based on the combined company having an incentive to produce more products, more quickly, to deliver to customers.” BHP Billiton’s Chief Commercial Officer, Alberto Calderon, said.

“Confirmation that the ACCC does not object satisfies the Australian merger control pre-condition of BHP Billiton’s proposed offer for Rio Tinto. In July, the U.S. Department of Justice also announced it would not oppose the transaction. The offer remains subject to the pre-conditions as disclosed in Appendix 1 of the announcement on 6 February 2008.”

The ACCC said in August that market inquiries had raised concerns the merged entity might lessen competition for iron ore and drive up prices of the valuable commodity.

Rio Tinto is the world’s second biggest producer of iron ore, while BHP Billiton is the third largest.

“The ACCC’s inquiries indicated that the merged firm would be unlikely to limit its supply of iron ore given the uncertainty it would face in relation to the profitability of this strategy and the risk that limiting supply would encourage expansions by existing and new suppliers as well sponsorship of alternative suppliers by steel makers,” Mr Samuel said.

Strong opposition to the merger has emerged from steel makers in Asia and Europe amid concerns a combined entity could have enormous control over global iron ore and other resource commodity prices.

“In relation to the supply of iron ore in Australia, market inquiries indicated that steel makers in Australia are unlikely to face higher iron ore lump and iron ore fines prices, based on a move from export parity pricing to import parity pricing,” Mr Samuel said.

The European Commission, the EU’s antitrust regulator, resumed its assessment of the proposal late last month after suspending its investigation in August, to await further information from BHP Billiton.

The commission is expected to rule on the proposed transaction on January 15, 2009.

That is likely to be the deciding factor in whether the bid goes ahead.

BHP says it has a “committed banking financing facility” from a group of banks lead by Barclays Capital, BNP Paribas, Citigroup Global Markets, Goldman Sachs International, HSBC, Banco Santander and UBS.

UBS is a basket case, Santander is bedding down Alliance and Leicester and the parts of Bradford and Bingley it bought at the weekend, Citigroup is coping with taking over Wachovia in the US, Barclays Capital is swallowing most of the US business of Lehman Brothers and Goldman Sachs is coping with being a fully regulated bank and not an investment bank.

And on top of that, there’s hardly any lending going on and won’t be in the New Year if the bid gets the big tick and happens.

IMPORTANT: AIR reports about financial markets and investment products in the widest sense possible. The AIR website and all its contents is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before making any investment decisions.

The realistic one was Xstrata, the most acquisitive mining group in the world pulling its $US11 billion ($A12.6 billion) bid for Lonmin, the big platinum miner based in South Africa, but headquartered in London.

In Australia, BHP Billiton welcomed the decision by the competition regulator not to block its 3.4 share bid for Rio Tinto, and BHP and Rio shares stormed higher.

A case of desperate investors here not understanding the changes happening overseas, or eternal optimists, led by the BHP board?

Xstrata said it does not intend to make a takeover offer for Lonmin because of “extreme volatility and uncertainty in the financial markets”.

The “lack of clarity and certainty regarding the future availability of credit introduces significant risks” into financing for any bid, Switzerland-based Xstrata said in a statement.

Xstrata is believed to have lined up a $US15 billion (around $A19 billion) loan from a group of banks to finance its proposed 33 pounds ($A73-a-share) offer and refinance existing debt.

Xstrata had to commit to the bid by tonight, our time, or withdraw. It chose the latter staged a very prudent retreat.

After pulling the bid, it snapped up more than 14% of Lonmin for just over 19 pounds a share and now has an all but controlling 33%.

It’s not the only big international bid to have been killed off by the credit crunch and lending freeze.

Last month a private equity group called off a $A4.2 billion offer for UK events publisher, Informa and HSBC bailed out of a year-long effort to buy 51% of the Korean Exchange Bank for $A8 billion after failing to get the deal finalised and with worries about the global outlook.

Xstrata had built up a 10.7% in Lonmin, but refused to buy any more, even as its target share price sank under the proposed offer price, a good sign of the concern Xstrata was having about the outlook for finance and for commodities.

It snapped up the extra shares after the bid was withdrawn and Lonmin’s price fell.

Despite that Xstrata’s price fell 1.9% in London by the close.

Lonmin replaced its CEO on Monday without warning. Ian Farmer, formerly the chief strategic officer is the new boss and he will drive the company’s review of its existing operations and performance.

Bloomberg estimates that Xstrata has spent about $US28 billion in four years on acquisitions, boosting sales eightfold. It has also ended attempted transactions. The company broke off talks to buy Brazil’s CVRD (Vale), the world’s biggest iron-ore exporter, in April. Xstrata also terminated moves to buy Australia’s WMC Resources in 2005 and Canada’s LionOre Mining International last year after higher bids from rivals.

In Australia, the market was dragged higher by the news that the ACCC would not oppose the proposed BHP Billiton bid for rival Rio Tinto.

Rio shares surged, up $A10.50, or 12.43%, at $95.00, after hitting a high of $98.60. BHP Billiton shares were up $A1.75 or 5.6% at $32.75, after hitting a high of $33.40. The 3.4 BHP shares for every 1 Rio share offer was worth $111.35, a still substantial premium to the actual Rio price and a sign of continuing market scepticism.But BHP shares tumbled 4% in London on the Xstrata news and the worsening outlook for commodities and the global economy.

The ACCC noted that its review of the planned merger had raised “significant concerns”.

“While significant concerns were raised by interested parties in Australia and overseas, the ACCC found that the proposed acquisition would not be likely to substantially lessen competition in any relevant market,” chairman Graeme Samuel said in a statement.

BHP said in a statement:”BHP Billiton today welcomed the decision by the Australian Competition and Consumer Commission that it does not object to BHP Billiton’s proposed acquisition of Rio Tinto.”We are very pleased to have received notice that the ACCC will not object to our proposed acquisition of Rio Tinto.

“We have long believed in the benefits of the combination of BHP Billiton and Rio Tinto. Our strategic rationale has always been based on the combined company having an incentive to produce more products, more quickly, to deliver to customers.” BHP Billiton’s Chief Commercial Officer, Alberto Calderon, said.

“Confirmation that the ACCC does not object satisfies the Australian merger control pre-condition of BHP Billiton’s proposed offer for Rio Tinto. In July, the U.S. Department of Justice also announced it would not oppose the transaction. The offer remains subject to the pre-conditions as disclosed in Appendix 1 of the announcement on 6 February 2008.”

The ACCC said in August that market inquiries had raised concerns the merged entity might lessen competition for iron ore and drive up prices of the valuable commodity.

Rio Tinto is the world’s second biggest producer of iron ore, while BHP Billiton is the third largest.

“The ACCC’s inquiries indicated that the merged firm would be unlikely to limit its supply of iron ore given the uncertainty it would face in relation to the profitability of this strategy and the risk that limiting supply would encourage expansions by existing and new suppliers as well sponsorship of alternative suppliers by steel makers,” Mr Samuel said.

Strong opposition to the merger has emerged from steel makers in Asia and Europe amid concerns a combined entity could have enormous control over global iron ore and other resource commodity prices.

“In relation to the supply of iron ore in Australia, market inquiries indicated that steel makers in Australia are unlikely to face higher iron ore lump and iron ore fines prices, based on a move from export parity pricing to import parity pricing,” Mr Samuel said.

The European Commission, the EU’s antitrust regulator, resumed its assessment of the proposal late last month after suspending its investigation in August, to await further information from BHP Billiton.

The commission is expected to rule on the proposed transaction on January 15, 2009.

That is likely to be the deciding factor in whether the bid goes ahead.

BHP says it has a “committed banking financing facility” from a group of banks lead by Barclays Capital, BNP Paribas, Citigroup Global Markets, Goldman Sachs International, HSBC, Banco Santander and UBS.

UBS is a basket case, Santander is bedding down Alliance and Leicester and the parts of Bradford and Bingley it bought at the weekend, Citigroup is coping with taking over Wachovia in the US, Barclays Capital is swallowing most of the US business of Lehman Brothers and Goldman Sachs is coping with being a fully regulated bank and not an investment bank.

And on top of that, there’s hardly any lending going on and won’t be in the New Year if the bid gets the big tick and happens.

IMPORTANT: AIR reports about financial markets and investment products in the widest sense possible. The AIR website and all its contents is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before making any investment decisions.

That heavy thump you heard from stockmarkets around the world, especially in the US with the 9% fall in the Standard & Poor’s 500 index on Wednesday, was the sound of the last rose coloured glasses falling from the noses of investors, commentators and investment analysts who have finally accepted that the globe is heaving into a recession, led by the tottering US, UK and European economies.After falling Wednesday, European markets again fell heavily Thursday, but the selling wave in the US slowed as investors accepted the new reality. In fact Wall Street bounced strongly in late trading.

Resources were heavily hit as big investors abandoned their last defensive position.

Wednesday and Thursday saw a collection of figures, reports and comments that confirmed that the global economy will drop below the International Monetary Fund’s idea of a global recession in 2009: that’s global growth of 3%.

It is now clear that the US economy is sliding, nastily, but speedily into a slump the like of which we haven’t seen this side of World War 2. US consumers, who carry the US economy on their backs by generating 70% of annual activity, are being battered into submission.

Consumer spending, consumer credit and retail sales are all falling at levels not seen for decades. There is every chance that October’s and November will see declines even sharper than we have seen in August and September.

The monthly investment manager’s survey from Merrill Lynch, released overnight, says “Investors are waiting for the right conditions to return to equity markets amid the most pessimistic outlook yet recorded”

The survey, completed as global equity markets fell in value by 18.7%, shows that almost seven out of 10 respondents (69%) believe that the global economy has entered recession, up sharply from 44% one month ago.

Growing risk aversion has led to a record 49% of respondents who are overweight cash.

The number of respondents who believe equities are undervalued has reached a 10-year high, at 43%.

“Fund managers are waiting for the triggers that will give them the confidence to buy,” said Gary Baker, head of equity strategy at Merrill Lynch.

What they are looking for is a loosening of monetary conditions and for third quarter earnings to clarify where problems and opportunities lie across equity markets.”

But the survey showed that respondents appear to be placing little or no credibility in consensus earnings estimates for the year ahead. A net 92 % of respondents regard estimates as “too high,” and more than half say estimates are “far too high.”

At a time of global pessimism, the gloom is no more concentrated anywhere in the world than in Europe. A net 41%t of global asset allocators are underweight euro zone equities. Europe has now assumed the UK’s mantle as the world’s least popular destination for equity investment.

The survey also found U.S. fund managers are now much closer to fully accepting what they expect will be a deep and prolonged U.S. recession.

“In our view, however, it is too soon to say we have reached a bottom in equity markets given the current financial market turmoil,” said Sheryl King, senior US economist at Merrill Lynch.

Oddly enough, we should be relieved by this information because there’s something comforting by an acceptance of an impending or developing recession.

I’d much rather face that than the absolute fear and loathing we saw on markets last week in the global credit panic.

That’s not to say the pressures from the panic have gone: they are still with us, but Wednesday and yesterday’s weakness on global markets was more an old fashioned acceptance that economic activity is sliding and that there will be more pain and suffering before we get through it.

But not an absolute and stunning collapse.

We are not out of the woods by a long way, but if central banks and governments hold their nerves, we could get away with just a severe economic mauling instead of a replay of 1932-33.

So what happened?

The US Fed said that economic activity had worsened across all of its 12 reporting districts across the country with falling activity in retail, financial services, housing, tourism. The Fed’s beige book survey of economic conditions revealed pervasive weakness, with tight credit, deteriorating consumer spending and a weak labour market across the nation.

Fed chairman, Ben Bernanke and the head of the San Francisco Fed, Janet Yellen, both made it clear, in their own way, that there was no quick fix or early rebound for the slumping US economy.

That hopes of a recovery in 2009 were misplaced, and 2010 might see some improvement.

US industrial production fell sharply last month, hit by storms, slumping demand and the credit crunch. The Fed said the drop of 6% was the largest for 24 years and production would have dropped even if there hadn’t been storms in the Gulf and a strike at Boeing.

Another Fed survey in Philadelphia showed a sharp contraction in manufacturing in the area, while the commercial paper market again shrank, but the rate of decline is slowing as the Fed starts lending money to leading companies.

US retail sales fell 1.2% in September, almost double the fall forecast by economists as cars, food and every category saw weakness. Sales on internet auction site, eBay off 1% in the quarter, the first fall in history of the company.

The fall left retail sales 1% lower than a year earlier, signalling that consumers withdrew substantially from US shops and malls in the month.

A leading member of the US Federal Reserve, Janet Yellen, head of the San Francisco Fed describing the US economy as being in “appearing to be in recession” and worryingly warning of the chances of inflation falling away next year in the US to replaced by price deflation.

The New York Fed produced its general economic index that had its worst reading since it started back in 2001, when the last US recession was starting.

In good and bad news, US producer prices fell for a second month in a row as oil and fuel costs fell, and demand eased.

The US Labor Department reported that prices paid to US producers fell 0.4%, while core price rose 0.4%. It’s a sign more and more American companies are finding it tougher passing higher costs on up the production chain.

US consumer price inflation was better than forecast because of the fall in oil prices and slumping demand: they eased 0.1% for the second month in a row and rose 0.1% on a core basis. Inflation over the year to September was up 4.9% from 5.4% in August.

The fall in retail sales was the third in a row, and the deepest: it was driven by that 27% fall in US car sales in the month and falling levels of demand caused by the credit freeze as consumers were refused credit, or stopped buying on the cards.

Economists say that with retail sales down in the September quarter (and consumer spending and credit also lower) its looking certain that real consumption will fall for the first time in a quarter in the US for 17 years.

In Europe, Germany, the continent’s biggest economy, has slashed its growth forecast dramatically.

The German government says growth for 2009 from 1.2% 0.2%, reflecting the rising international risks for the economy, although it warned the precise extent of the slowdown would depend on the severity and duration of the financial crisis.

The new estimate matches the joint forecast published by the country’s leading economic institutes in their regular Autumn report on Tuesday. The institute also issued a worst-case scenario that could see Germany’s economy shrink by 0.8% in 2009..

The fall in retail sales is making US retailers and forecasters increasingly wary about the highly important Thanksgiving-Christmas retailing season: it could be a terrible holiday for consumers, retailers and the economy and analysts now say the US will have its second quarterly slump in economic growth in a row in the December quarter.

Growth this quarter may dip into the red, and that will produce an outright recession by conventional US definitions.

Ms Yellen said the US economy was likely to see “essentially no growth” in the third quarter and that the fourth quarter “appears to be weaker yet, with an outright contraction quite likely.”

“Indeed, the US economy appears to be in a recession,” Yellen said.

Ebay forecast that quarterly sales, fourth-quarter and annual earnings forecasts would fall as growth slows at its web sites.

EBay forecast fourth-quarter revenue of $US2.02 billion to $US2.17 billion, compared with $US2.18 billion in the final quarter of 2007. the company said the value of goods sold on its sites fell 1% in the third quarter, the first drop in the company’s history.

And late in the day the Fed produced its so-called Beige book.

 ”Reports indicated that economic activity weakened in September across all twelve Federal Reserve Districts. Several Districts also noted that their contacts had become more pessimistic about the economic outlook.

“Consumer spending decreased in most Districts, with declines reported in retailing, auto sales and tourism. Nearly all Districts commenting on nonfinancial service industries noted reduced activity. Manufacturing slowed in most Districts.

“Residential real estate markets remained weak, and commercial real estate activity slowed in many Districts. Credit conditions were characterized as being tight across the twelve Districts, with several reporting reduced credit availability for both financial and nonfinancial institutions.

“District reports on agriculture and natural resources were mostly positive, although adverse weather associated with hurricanes Ike and Gustav negatively affected the South and the Midwest. Inflationary pressures moderated a bit in September.”

It was a very gloomy snapshot of an economy heading lower at increasing pace.

The Fed said that shoppers are becoming more price conscious, credit was becoming even harder to come by and this was sapping sales at the nation’s retailers, the report said. Given this, retailers foresee a “weaker economic outlook, including a slow holiday season,” the Fed said.

The survey was released shortly after Fed Chairman Ben Bernanke, in a speech in New York, warned that it would take time for the country’s economic health to mend even if badly needed confidence in the US financial system returns and roiled markets stabilize.

In the UK unemployment is on its way to 2 million sometime in the next six months after another rise in August to 1.79 million, or 5.7%. As bad as that is, the rate is still well under America’s 6.1%.

The official figures show that UK jobless rose 164,000 between June and the end of August. The higher-than-expected increase – of 0.5 percentage points to 5.7% was the largest since 1991 and the eighth successive monthly rise. (It’s nine in a row in the US).UK inflation hit an annual rate of 5.2%, a 16 year high.

Our unemployment rate in September rose to 4.3%, where are a long way from the depths of the US and UK economies!

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In Europe, new car sales 8.2% last month as the financial crisis put off potential buyers.The continent’s automakers association said in a statement: “The drop in registrations confirms the aggravating market circumstances, as the fall-out of the financial crisis hits auto manufacturers hard.”

“Customers are increasingly hesitant to make large expenditures and find it more difficult to get their purchase financed.”

ACEA said a total of 1,304,583 new cars were registered in September in the 28 countries it reviewed – the 27 EU member states, minus Cyprus and Malta, plus Iceland, Norway and Switzerland.

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In Moscow local bank Globex yesterday banned depositors from withdrawing their money as confidence in the Russian banking system began to show signs of ¬evaporating.Globex is a mid-sized retail bank with assets of $US4 billion, according to the Financial Times. It’s the first Russian bank to experience a run on deposits during the crisis.

It lost 28% of its deposits since the start of last month, according to local analysts.

At least a dozen other Russian banks have reported a sharp rise in withdrawals and account closures.

—–

Hungary was plunged into deeper financial uncertainty overnight with its currency (the forint) and stock market falling sharply and bankers reporting credit shortages, as concern spread across eastern Europe about the impact of the global financial crisis. In Budapest, the forint fell 5.3% to 266 to the euro and the BUX index of leading stocks closed down 12%, dragged down by a 15% fall of price of OTP, the country’s biggest bank. Currencies and stock markets also fell in Poland, the Czech Republic, Romania and Ukraine.The Hungarian turmoil followed moves by leading banks to stop or curtail foreign currency lending, the dominant form of credit in Hungary in recent years.

Analysts now say there’s a rising chance that the inflow of foreign currency will slow, reducing the funds available for financing the country’s current account and putting more pressure on the currency and on the solvency of banks and other financial groups.

The European central Bank will lend 5 billion euros to Hungary to support the currency and the economy.

—–

So what does this mean for Australia?

Rory Robertson is an interest rate strategist at Macquarie Group; here’s his take on what lies ahead for Australia. It’s both positive and negativeBusiness investment is Australia’s “weakest link”

Prospects for business investment have deteriorated sharply across the globe in recent months, as equity prices have imploded, credit conditions have tightened sharply and commodity prices have slumped. Keynes’s famous “animal spirits” have been crushed, pretty well everywhere.

This is a big deal for Australia; because business fixed investment (BFI) is at a multi-decade record 16% of GDP, after having trended higher since the end of the early 1990s recession.

In the 2000s, the uptrend in BFI has been driven by spending buildings and structures, a chunk of it mining-related (see top left of p6 at http://www.rba.gov.au/ChartPack/output_expenditure_activity_fincon.pdf ).

With animal spirits, spending power and commodity prices having turning down as the global credit crunch intensified, BFI will be the weakest link in Australian GDP growth in coming years.

Indeed, if the Australian economy goes into recession, BFI will be the main driver, as always.

Household spending will be relatively strong, particularly now that fiscal and monetary policy are providing a large boost to household cash flows via lower mortgage rates, and income top-ups for families, pensioners and first-home buyers (see below; and note the heavy official focus on mortgage rates rather than business borrowing rates, to this point at least).

Four upbeat factors that give Australia a fighting chance in global downturnAs regular readers are aware, I’ve been a bit of a “doom and gloomer” all year. In a NZ conference call last week, I was asked to say something positive, to highlight any recent positive developments. I highlighted four factors that give the Australian economy a fighting chance in a global recession:• The RBA’s effective policy framework, and plenty of monetary ammunition. The RBA has cut its cash rate by 125bp in the past six weeks, and the standard-variable mortgage rate has fallen by 105bp. The Fed, the ECB and the BOE can only dream of that sort of powerful pass-through.

Moreover, the cash rate still is a relatively high 6%, so there’s plenty of room for lower rates as required. I’m guessing the RBA will cut to a “neutral” 5% by Christmas, dragging mortgage and business rates significantly lower (see further discussion below, and attached RBA Watch).

The dismal lack of co-ordination between Canberra and the States on immigration and housing long has been seen as a problem, putting upward pressure on home prices and rents, and reducing “housing affordability”. Now, Australia’s slow-moving housing-supply response suddenly is a good thing, limiting the size of any future home-price falls (see p4 of http://www.rba.gov.au/ChartPack/output_expenditure_activity_fincon.pdf ).

Immigration and home prices

As you know, falling home prices are a major problem in the US, the UK and parts of Europe. The damage done by falling home prices to banks’ balance sheets in these economies – and growing damage to consumer spending – obviously needs to be avoided in Australia. According, while largely unstated, maintaining Australian home prices near current levels now is a major policy priority for the RBA and Canberra.

Aggressive rate cuts obviously help, so too yesterday’s prodding of up-to 150k first-home buyers into action.

In this context, recent reports of growing pressure to reduce our immigration intake are somewhat disturbing.

Recall that, during the early-1990s recession, net immigration collapsed from 170k in 1989 to just 30k in 2003 (lowest four-quarters-ended figure), reinforcing the Australian economy’s tendency to stall.

From a macroeconomic perspective, cutbacks of that order this time around should be avoided like the plague (see Net overseas migration to Australia highest on record: ABS and SMH: Rudd flags cut in migrant numbers )

To recap, all the important policy efforts so far are counter-cyclical in nature: in particular, the RBA’s rate cuts, Canberra’s timely fiscal stimulus, as well as its guaranteeing of aspects of the financial sector, its promotion of mortgage lending and the ban on “short selling” (not to mention the big market-driven drop in the A$).

By contrast, reducing immigration is a pro-cyclical measure, essentially working against the policy initiatives listed above.

RBA policy, lower interest rates, and limiting falls in home pricesThose forecasting big falls in Australian home prices would do well to notice the recent dramatic drop in mortgage rates, with more to come.The correspondingly sharp drops in interest payments relative to household income render much less relevant the elevated debt/income ratios parroted by some.

Comparing stocks with flows typically tells us little worth knowing; comparing interest payments with income (flow/flow) and debt with assets (stock/stock) provides more meaningful information.

With the world economic and financial backdrop having turned so nasty, aggressive RBA easing was/is the most obvious policy response available to support ongoing economic growth.

And in six short weeks, the RBA has demonstrated that its interest-rate tools are far more powerful than those available the Fed, the BOE and most if not all other central banks. Despite much media focus, elevated inter-bank lending rates haven’t stopped big drops in mortgage rates in Australia.

To recap, the story so far:

In Australia, the 84% (105bp/125bp) pass-through so far from the cash rate to standard mortgage rates has greatly surprised the consensus, because when I wrote a note in August headlined “First 50bp of cuts to be ‘passed on’”, many/most were sceptical to say the least.

Importantly, the latest funding assistance provided by the RBA to major home lenders may mean that the next cash-rate cut will pass-through to headline mortgage rates in full.

That is, the RBA last Thursday announced the availability of six-month and one-year repos against “related party” collateral in the form of residential mortgage-backed securities (RMBS) and asset-backed commercial paper (ABCP).

On top of that assistance, Canberra’s announcement on Sunday helps with “term funding” for periods of up to five years (see Expansion Of Domestic Market Facilities and Guarantee of Wholesale Funding and Deposits ).

Critically, recent 1pp-plus drops in cash, BBSW and mortgage rates are gold for Australian home-buyers, providing major cash flow support to the household sector and home prices, something the Fed can only dream about.

That is, despite the funds rate being cut from 5.25% to 1.5%, the rate on (predominant) US 30-year fixed-rate mortgages has dropped by only around 50bp, to 6% or so, when credit is available.

IMPORTANT: AIR reports about financial markets and investment products in the widest sense possible. The AIR website and all its contents is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before making any investment decisions.

The failure of Lehman Brothers and the spate of rescues in the US and Europe in the last two and a bit weeks of September, should now be seen as the major dislocation of the credit crunch, which started as the US subprime mortgage debacle.

Not even the outbreak of the crunch in August 2007, nor the bailout of Bear Stearns in March of this year, have come close to causing the global economy, and its constituent economies around the world, the same sort of devastating blow.

Bear Stearns was a warning, but the Fed and JPMorgan pulled us through, but no one thought that when Lehman Brothers was tottering, that it would go. But go it did, down the tube to devastate financial markets, confidence and set off a chain reaction of events still clanging their way through financial markets.

US retail sales, new home starts and new home building permits all down by a record amount, or to record lows in October; US unemployment soared 254,000 (to be revised upwards) and still thousands of jobs are going every day across the US, and increasingly in Australia and Europe and parts of Asia.

Now Japan, which is already in recession, with two consecutive quarters of mild contractionary activity, faces a more damaging slump.

The engine for the country is its export machine, allied with the huge domestic manufacturing sector set up to arm and replenish the Toyotas, Nissans, Hondas, Canons, Fujitsus and other industrial giants.

If the engine splutters, the Japanese economy backfires: it’s what has been happening at increasing pace since mid year: a fall in August, a small recovery in September, and now the worst slump in almost seven years.

The Japanese Finance Ministry reported yesterday that exports fell 7.7% in October from October 2007.

That was the biggest drop since December 2001 as the US recession was deepening.

That was after a rise of 1.5% in September.

It follows the first effective deficit in 26 years, which was logged in August this year, when the economy was hit by high import prices and weak demand for Japanese goods overseas.The October figures were the first deficit for the month in 28 years, reflecting a fall in exports to the rest of Asia.

Shipments to China, which had supported demand even as shipments to the US and Europe had declined, fell 0.9%, marking the first decline since May, 2005.

Exports to the US and Europe posted double-digit declines year-on-year.

Slumping car exports, shipments of consumer electronics, industrial foods, trucks, computers: a wide range of products have been hit by the slump in the US and European economies in particular.

On top of this, the rising yen continued to hurt exports: it’s risen 22% against the euro since September and around 9% against the US dollar in the past couple of weeks.

Although the slump in US car sales is hurting, so too is falling demand in Japan, and in other markets.

That’s why Toyota is expecting to earn at best $US200 million in profits in the six months to next March (but that now looks like a loss). Nissan this week said its second half profit would be eliminated by the slump in the US and the higher yen.

Growth in China, Japan’s largest trading partner, is slowing (hence the huge reflation package revealed last week and three rate cuts in two months).

So it shouldn’t have been a surprise that the level of exports to China fell for the first time in three years, or that exports to Asia as whole fell 4% in the month.

Shipments to Europe plunged 17.2%, the biggest fall since December 2001 and by 19% to the US (although they were down 22.8% in August).

Imports rose 7.4% (despite the higher value of the yen and the continuing fall in oil prices).

That gave Japan a $US666 million trade deficit, the third this year, a rare event for the export machine.

The economics teams at Goldman Sachs JBWere and Merrill Lynch have slashed their estimates of 2008 and 2009 economic growth for Australia and are now predicting recession.

And ABN Amro reckons the economy is stalling right now and growth is close to zero.

They all agree that as a result the Federal budget will go into deficit, unemployment will rise to 7.5%, and the Reserve Bank will cut interest rates to a low of 3.5%, a point suggested late last week as well by Macquarie Bank interest rate strategist, Rory Robertson.

He and the two teams now say we will get a 1% cut in interest rates from the Reserve Bank at its meeting next Tuesday, which will take the cuts since September to 3%, a measure of how seriously the RBA views what is happening in the economy.

But debt futures market are tipping the RBA to cut the cash rate by a massive 1.25% next Tuesday, which if it happens, would be the largest official rate cut since the 1990 recession.

ABN Amro’s chief economist Kieran Davies said a shrinking Australian economy, falling asset prices and recession-like levels of business confidence will make the RBA more inclined to cut rates aggressively.

“The wealth effect of falling asset prices is snowballing and the Chinese economy is slowing very sharply. Also, we think the economy is contracting now. We are close to zero.”

A 1.25% rate cut in December would take the cash rate to 4%.

The cash rate was at 4.25% in late 2001 and has not been below that level since the RBA began publishing its cash rate target in 1990.

Economists point out that the debt futures market is signalling a cash rate low of around 3%, which would be the lowest level for rates since 1960, when the credit squeeze hit that year and

Federal Treasurer Wayne Swan still claims the budget won’t go into deficit: the forecasts reckon it will, and they were supported by the latest update from the well-connected Access Economics team in Canberra.(Source).

Goldman Sachs JBWere’s downgrade follows one in the US from their economics group there for the US on Friday:

Goldman Sachs said US GDP was shrinking at a 5 % annual rate in the current quarter and will drop 3% and 1% in the next two quarters.

It said in a note US unemployment will reach 9% by this time next year. In contrast the US Fed reckons unemployment will get to 7.6% next year (it’s 6.5% at the moment).

This morning in a note to clients sent out over the weekend, Goldman Sachs JBWere said:

“We have revised down our economic growth forecasts from 2.0% in 2008 and 1.7% in 2009, to 1.8% in 2008 and 1.0% in 2009.

The new forecasts incorporate a deeper recession through 2H08 than we first forecast in early October and a shallower recovery path through 2H09.

“We have also revised our interest rate forecasts, with the RBA now expected to cut the cash rate to 3.5% by March 2009 (75bp lower than our previous forecast).

“The combination of dramatic financial wealth destruction, debilitating tightness in money markets, rapidly slowing credit growth, sharp falls in commodity prices and evidence that Australian house prices are declining led us to formally adopt a recession in Australia as our base line view on 12th October.

“Since that time our conviction that Australia is poised for its first recession in 17 years has strengthened.

“The reduction in commodity prices by our resource strategy team suggests that Australia’s terms of trade will decline ~20% year on year by end- 2009, sufficient to strip around 3.0% from domestic demand growth.

“We now expect business investment to decline 7.0% in 2009 (was -1.7%) and domestic demand growth of just 0.6% in 2009 (was 1.8%). As such, we have also raised our estimate of the unemployment rate from 6.5% by end-2009 to 7.5%.

“We believe economic growth will contract -0.5% in the September quarter, -0.3% in the December quarter and -0.1% in the March quarter.

“This would be sufficient to see GDP decline -0.6%yoy in the March quarter 2009 and -0.3%yoy in the June quarter 2009 before an acceleration to +3.25%yoy by December 2009 as the combined effects of the interest rate cuts, A$ weakness and fiscal stimulus coagulate in 2H09 and drive a rebound in demand.

“We remain convinced that the Australian economy faces a debt-deflation cycle. The risk of deflation was brought home to all policymakers by the sharp fall in US inflation in October.

“In essence, we believe the threat of deflation (no matter how small) will accelerate plans of interest rate cuts and we now expect the RBA to cut interest rates 100bp in December, 50bp at its next meeting in February and a further 25bp in March. “This will take the RBA cash rate to 3.5% by March 2009, a 375bp cutting cycle since September 2008.

“We believe the government should worry less about protecting an underlying surplus and more about providing the conditions to promote aggregate demand growth.

“We have downgraded our Market Forecasts reflecting a reality check due to the current market turmoil as well as incorporating the recent revisions to our commodity forecasts and domestic economic growth forecasts.

“Reduced our Industrial top-down FY09 EPS forecast from -5.0% to -15.0% (bottom-up forecast is +3.3%). – Reduced our resources FY09 EPS growth forecast from 0.0% to -15.0% (bottom-up +4.4%) and our FY10 from +15% to -5.0% (bottom-up +20%).

“Our revised forecasts for the ASX200 are: Dec’08: 3400 (previously 4525; -25%) – Jun’09: 3780 (4975; -24%) – Dec’09: 4100 (5350; -23%). The ASX closed at 3374 yesterday , so it’s already under the 2008 forecast of GSJBW.”

Merrill Lynch wrote yesterday:The Australian economy is being overwhelmed by the global financial crisis and external growth shock, impaired credit markets, collapsing asset prices, and imbalances on the household sector balance sheet.

We are downgrading our 2009 GDP forecast to 0.2% (down from 1.7% previously).

We expect the economy to contract on a through the year basis over FY09.

In our view, the very substantial monetary and fiscal policy response and adjustment in the exchange rate will not be sufficient to avoid a recession over 1H2009.

Our business cycle analysis and leading indicator frameworks are pointing to a rapid deceleration in domestic demand growth over the next 3-4 quarters.

Lead indicators of employment (and income growth) have deteriorated significantly over the past quarter.

Our downgrade to GDP growth covers all components of private demand (household spending, housing and business investment) and export volumes.

Business investment in particular will be negatively impacted by the global recession, the fall in the terms of trade and the tightening in the supply of credit.

Global lead indictors have fallen deep into hard landing territory. ML is forecasting global growth of just 1.5% in 2009, down from 3.4% in 2008.

The commodity price and terms of trade decline in 2009 will sharply reduce gross domestic incomes (both directly and indirectly).

The steep decline in asset prices over the past 12 months and need for households to lift savings and de-lever reinforces a very weak outlook for household spending through 2009, despite the cash-flow relief coming from lower interest rates and petrol prices.

We expect the labour market to weaken significantly over the next 12-18 months with employment growth falling to -2.0% by late 2009 and the unemployment rate rising to 7.5%.

The household savings rate is assumed to rise to 3.75% (from 0.9% currently) as de-leveraging intensifies.

We are more optimistic about 2010, with substantial global and domestic policy stimulus expected to support a recovery in growth. We expect GDP growth of 2.2% in 2010, led initially by a cyclical recovery in housing activity and strengthening global growth.

We expect the RBA to lower the cash rate to 3.5% by Q1 2009 in response to the global downturn, the deep slump in domestic demand growth and reduced inflation pressures.

The main focus of policy over the next 6-9 months will be addressing falling corporate and household income growth, which run the risk of exacerbating the de-leveraging underway in the economy.

And on Friday:Citigroup’s global economic team issued its weekly update with these gloomy forecasts:Financial conditions in the United States continue to deteriorate, increasing downside risks.

Collapsing US bond yields reveal considerable scope and need for fiscal action. Fed officials seem poised for further aggressive steps.

With a deepening recession in the euro area, and inflation likely to undershoot the ECB’s target, we expect the ECB to lower rates to 1% by mid-2009.

The Japan economy is likely to contract further, and we expect the BoJ to lower rates again.

The UK economy faces a long, deep contraction. But substantial policy action should eventually generate a recovery.

Then overnight the US, Russia, UK and Europe produced surveys showing similar results.

All signs the slump in the respective economies is deepening.

Stockmarkets in the US and Europe fell by more than 5%, Wall Street was especially weak. Oil fell under $US50 a barrel, copper and other metals plunged, gold lost all of last week’s gains in a $US45 plunge and grains all fell.

US manufacturing contracted in November at the steepest rate in 26 years and the US economy was declared to be in recession officially, and had been since December 2007.

The Institute for Supply Management’s factory index dropped to 36.2, below economists’ forecasts, and its measure of raw- material costs plunged to the least in six decades, intensifying concern over deflation.

The report came as factory indexes in China, the UK, euro area, Australia and Russia all fell to record lows.

In the eurozone (covering the 15 nations sharing the euro) an index dropped to 35.6, the lowest since Markit Economics began the poll in 1998.

VTB Bank Europe’s index covering Russia fell to 39.8, and the Britain’s Chartered Institute of Purchasing and Supply’s factory index was at 34.4, the lowest since the survey began in January 1992.

Indexes for Poland, Hungary, Sweden and the Czech Republic also fell by record amounts as recession struck their export markets. South African manufacturing shrank at the fastest rate in at least nine years,

China’s Purchasing Managers’ Index fell to a seasonally adjusted 38.8 in November from 44.6 in October, the country’s Federation of Logistics and Purchasing said yesterday.

Export orders, output and new orders all contracted by the most since the survey began in 2005, which matches reports of slowing shipments, falling industrial production and easing new business as a housing crunch drags activity in other parts of the economy lower and the global slumps hits the external sector.

In Australia the Performance of Manufacturing Index from the Australian Industry Group/Price WaterhouseCoopers was bad news.

A sixth successive monthly decline in November, this time to the all time low of 32.7% from 40.4% in October. The November figure was the lowest since this measure started back in 1992.

The US Business Cycle Dating Committee of the National Bureau of Economic Research said overnight Monday that the US economy went into recession in December of last year.

The Chinese reading was bad news: it shows the gathering shape of the slowdown. Indexes measuring the service sectors of major economies are due for release later in the week and won’t make nice reading.

China last month announced a $US586 billion stimulus package and the biggest interest rate cut in 11 years to revive the economy and counter the risk of spiraling unemployment and social unrest.

We will get another 1% rate cut today from the Reserve Bank, if forecasts from market economists are right. The PMI for Australia increased the chances of the largest possible cut.

China’s export orders declined to 29 in November from 41.4 in October, the survey showed.

The output index fell to 35.5 from 44.3, while the index of new orders dropped to 32.3 from 41.7. All huge falls and suggesting that the economy slowed sharply in the past four weeks.

(A reading above 50 reflects an expansion, below 50 a contraction).

Chinese growth was 9% in the third quarter from a year earlier, the slowest since 2003. This quarter, growth may cool to 4%, according to JPMorgan Chase & Co and 8% from the Government.

The World Bank last week dropped its 2009 growth forecast for China to 7.5% from a 9.2% estimate in June. That would be the weakest since 1990.

In Australia new orders dropped by 14.4 points to 24.5 points in November, also an all-time low, with food, beverages, textiles, clothing and construction materials among the hardest hit.

Employment also dropped to 33.2 from 37.6 in October, a pointer to a set of bad employment figures next week?

And from South Korea, bad news on exports.

Figures out yesterday show that South Korean exports fell sharply in November compared to a year earlier, falling a massive 18.3% in the month, to $US29.26 billion compared with November, 2007.

It was the largest fall in percentage terms since December 2001.

Imports fell 14.6 percent to $US28.96 billion last month, resulting in a trade surplus of $US297 million.

The Government said ship exports surged 34.7% in November, but other major export items dropped by double digits with car parts and petrochemicals off 30.8 % and 36.6% and general machinery down 24.4%.

——–

Just as the October credit figures on Friday from the Reserve Bank lifted the chances of a big rate cut later today so yesterday’s business indicators from the Australian Bureau of Statistics have, if anything, increased the chances even more. A cut of 1% is now a very strong chance.

The Business Indicators for the September quarter came in around what the likes of Goldman Sachs JBWere suggested they might be; a bit misleading but strong hints of the sluggish domestic economy.

And that’s what the Reserve Bank has been worrying about. The survey on activity in the manufacturing sector was gloomier, which will suit the RBA’s intentions.

Goldman Sachs said in a preview yesterday morning: “We expect the September quarter Business Indicators report to highlight the speed of the slowdown in the Australian economy.”

The ABS reported that business inventories, the most important figure from the group of indicators (especially for Wednesday’s national accounts for the September quarter) rose by a seasonally adjusted 0.7%.

That’s what Goldman Sachs JBWere forecast and it said in a preview this morning that “given the moderation in demand we are forecasting a large involuntary build-up of inventories.

“While this will support growth this quarter, it will weigh on activity looking further ahead.”

The market forecast was for a rise of just 0.2%, so most analysts under estimated the extent of the slowdown in sales and a build up in stocks. That could be a positive for growth in the national accounts, but a temporary one.

That build up in stocks was strongly suggested by ABS figures which showed in volume terms sales of manufacturing goods and services fell 1.1% in the quarter and 0.1% for wholesalers’ goods and services.

Goldman said business profits would be up 5 (the market forecast a 4.0% rise) and the ABS reported that “The seasonally adjusted estimate for company gross operating profits rose 5.2% in the September quarter 2008.” And “The seasonally adjusted estimate for wages and salaries rose 1.4% in the September quarter 2008.”

Goldman commented:” While we have forecast a 5.0% jump in corporate profits, the majority of this is due to the lagged impact of the increase in bulk commodity contract prices earlier this year. Abstracting from this we expect profitability to soften.”

We have already seen that with a plethora of profit downgrades from some major banks, industrial companies like Goodman Fielder, retailers like Harvey Norman and property groups such as Lend Lease, Mirvac and GPT.

Goldman Sachs JBWere economists warned this morning that the Business Indicators revealed more deeper problems.

“The boost to profits from the lagged pass-through of higher bulk commodity contract prices was anticipated.

“The striking feature of the report is the broad-based weakness in non-mining sales volumes, particularly across Transport & Storage (-3.8%qoq), Property & Business services (-1.4%), Wholesale trade (-0.1%), Manufacturing (-1.1%), Construction (-5.2%).

“We suspect we have now passed-through the peak in the profit cycle, and it is worrying that a general downturn in real activity will coincide with a rapid unwinding in the commodity price gains of recent years.

“Our Q3 GDP forecast is unchanged and we continue to look for a 0.3%qoq contraction in aggregate activity in the September quarter.

“Such a quarterly outcome would be the weakest in almost 8 years and, we believe, kick-off a domestic recession,” Goldman’s said in a note to clients.

And inflation is easing, as it is in every major economy.

November’s TD Securities-Melbourne Institute monthly inflation gauge dropped 0.6%, adding to October’s 0.2% decline.

It was the largest drop in prices since TD Securities began the gauge in August 2002.

For the year to November, the prices rose 3%, down from a 3.9% annual pace in October and more than 5% earlier in the year.

IMPORTANT: AIR reports about financial markets and investment products in the widest sense possible. The AIR website and all its contents is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before making any investment decisions.

World markets have soared overnight; the Australian dollar has surged against the yen and the US dollar and our market is forecast to jump sharply this morning.

The Standard & Poor’s 500 Index jumped 91.56 points, or 10.79%, to 940.48 after sliding to the lowest level since March 2003 yesterday.

The Dow surged 889.35 points, or 10.88%, to 9,065.12 and the Nasdaq finished up 9.53%, or more than 140 points. Hong Kong’s benchmark index added 14%, its best advance in 11 years, while Germany’s climbed 11% and struggling Brazil’s jumped 13%.

London was up less than 2%: the surge in Germany was due to a sharp rise in the shares of Volkswagen as Porsche surprised the market by revealing it had assembled a controlling 7%% by market buying and playing the derivatives markets.

Hedge funds lost heavily as they had been shorting VW shares and got trapped as the value of the shares soared to the point where the car maker was the most highly valued company in the world a

The overnight futures market was signalling a 6% rise in the ASX 200, or more than 240 points..

That was after one of the most explosive last couple of hours trading ever seen on Wall Street. Therre was a gain of 500-600 points in the last hour.

The Dow posted its second-best point gain ever as the cheapest valuations in 23 years lured investors and increased commercial paper sales signaled credit markets are thawing.

In addition, there’s now a belief the Fed will announce a 0.50% rate cut after its current meeting ends tomorrow morning, our time.

The yen fell the most against the dollar since 1974 and posted its biggest decline versus the euro ever as global stocks rallied and speculation increased that the Bank of Japan will cut interest rates.

There were reports in Tokyo overnight of a plans to cut the key rate 0.25%, which would halve the Bank of Japan’s key rate. The central bank meets Friday in Tokyo.

That saw the yen crash, suffering its biggest loss against the greenback since 1974. It dropped 5% against the US currency in New York. It dropped 11% to 62.70 yen against the Aussie and 10.% to 55.19 against the New Zealand dollar.

The Aussie surged 7% to 64.28 US cents after touching 60.09 cents yesterday, the weakest level since April 2003.

The Reserve Bank of Australia bought dollars for a third day yesterday to stem losses and is now sitting on some nice profits as some of the first day’s intervention Friday night was around 55 Yen..

Sales of longer-term commercial paper soared 10-fold after the fed revealed that two days of backing the slumping US corporate commercial paper market, had revitalised it.

The Fed began buying the corporate paper and on Monday alone the market saw companies yesterday sold 1,511 issues totaling a record $US67.1 billion of the debt due in more than 80 days.

That compared with a daily average of 340 issues valued at $US6.7 billion last week. Dealers said the Fed accounted for $US60 billion of the total.

The Dow’s only larger point gain in a day was on October 13, when the 30-stock gauge jumped 936 points on the government’s plan to buy stakes in banks. We know it plunged several times after that, so this could be a one day wonder.

Now for the Fed’s rate cut, but as that is priced in, will markets fall again?

………….

Business confidence continues to fall, according to the latest survey from the National Australia Bank of monthly business conditions.

While that’s gloomy news, there were a couple of other worrying portents from the NAB survey and from other announcements yesterday.

Residential property prices are looking stretched and the NAB and Merrill Lynch see falls of 5% to 10% coming over the next couple of years, and not much joy after that.

That will be bad news for the likes of Boral, Wattyl, Brickworks, the banks, especially Suncorp and the CBA, and for retailers like Harvey Norman.

Retailing is definitely hurting more than it seems from the outside: even the likes of Billabong, a big name locally and internationally for high margin, very successful sportswear, is seeing fewer items sold, although the slumping Australian dollar is helping offset the slowdown.

Mining companies are reviewing operations because of sliding metal prices, and importers like McPhersons Ltd, are doing the same because of the sliding currency, which bounced around 60 USc after a third successive day of Reserve Bank intervention. (It got up to just under 63 US cents overnight).

Furniture retailer, Nick Scali cut its earnings forecast yesterday because of slumping demand.

According to the NAB, the slump in activity next year will see a surge in unemployment and a blow-out in the federal budget by a massive $30 billion “over the next couple of years”, and force residential house prices to fall by 5% to 10% over the next two years, according to the forecast from the bank, and from analysts at Merrill Lynch (See story below).

And while interest rates will fall further and inflation will follow next year, the slide in house prices will see them stagnating for three to five years: up to 2013 or longer, according to one of those forecasts.The NAB reckons the Australian economy has slowed to 2001 levels (when we almost tipped into recession after the GST boost and the US slump). It sees the Reserve Bank cutting interest rates to 4.5% next year, but has forecast a $10 billion budget deficit for the 2010 financial year.

“While the Government’s Mid-Year Economic and Financial Outlook is due in a couple of weeks, fiscal expansion together with the negative impacts of slower economic growth may well see the Federal Budget turn to small deficit of say around $10bn during the next couple of years.”

It was around $21.7 billion in the year to June 2008, so the turnaround would be of the order of $30 billion.

The NAB also forecast the unemployment rate to rise to 6% during 2009/10) compared with the current rate 4.3%) and “core inflation will return to the RBA’s 2%-3% range’ despite another “near term surprise”, and then fall further in 2010.

The NAB’s forecasts, contained in its latest survey of monthly business conditions, comes as analysts at Merrill Lynch in Sydney have forecast a 10% fall in house prices over the next two years, followed by three to five years of flat or no growth.

The NAB supported the Merrill Lynch contention that residential property prices will fall, but not by quiet as much as 10%.

“Our macro forecasts suggest that as the unemployment rate rises sharply through late 2009, the residential property market may deteriorate further into 2010 – notwithstanding improved affordability associated with significantly lower interest rates. Our forecasts are broadly based on unchanged housing prices in 2009 with a moderate further fall of around 5 per cent into 2010.”

And leading retailer, Harvey Norman, revealed for a third week in a row that it is experiencing ‘negative’ same store sales growth: in the seven days to Sunday October 26, same store sales across Harvey Norman’s Australian stores fell 3.6%, after falls of 5.7% and 4.8% in the preceding three weeks.

Harvey Norman’s experience was supported by an update from a smaller Melbourne-based competitor, Clive Peeters, which told the market last Friday that same store sales were off 10% to 14% in the three months of the September quarter and things are not improving. The company will provide a fuller update at its AGM later in the week.

And Nick Scali’s annual meeting in Sydney heard yesterday that the company first half sales and profit for 2009 will be affected by the slowing economy and weakening Australian dollar.

CEO, Anthony Scali said while there been encouraging signs over the past three months in “sales order intake”, sales for the first half were expected to be about $2 million below the corresponding period last year.

“The recent weakening of the Australian dollar in a very short period will cause a substantial one-off decline in our gross profit for the first half of 2008/09 and is expected to reduce earnings by $0.9 million to $1.4 million,” Mr Scali told the AGM.

“Our net profit after tax for the first half of the current financial year is now likely to be between $2.3 million to $2.8 million, against the $4.62 million earned in the December half of 2007.”

Harvey Norman has already revealed an 18% drop in earnings for the first two months of this financial year because of a slump in Ireland. But it hasn’t upgraded that forecast because of the slump over the past month to six weeks in Australia.

The NAB said it expects Australian economic growth to slow to 1.25% next year as the ” full effects of falls in share and key commodity prices fall and slow global growth weigh on prospects, notwithstanding expectations of stimulatory policy responses from both Governments and RBA.’

It said its local forecasts remain “unchanged on the bearish side of “consensus” view. Downside risks remain – at home & abroad – with much dependent on success of global financial rescue underway”.

The NAB said it expects the RBA cash rate cut from 6% to 4.5% by mid 2009 as well as aggressive cuts by central banks elsewhere;

It said the “Federal Budget is likely to go from surplus to deficit of around $10 billion”, which would be a $31 billion turnaround!

“Global GDP growth (on a broader definition) forecast lowered to only 2.5% in 2009 – including recessions in US, UK, Japan and Europe, together with slower growth in emerging economies;

“Business conditions to weaken significantly to mid 2001 levels – consistent with subdued current activity & annual growth in non-farm GDP slowing to 2% in Q3 2008; • Business confidence steadies for now – well above levels of 1990 recession.”

The NAB said its index of business conditions dropped 11 points to -4 index points in the three months to September, one of the biggest quarterly falls in the past two decades,

“The proportion of firms reporting the availability of labour as a constraint on current output has fallen from a recent record of 72% in early 2008 to 66% in the September quarter,” said NAB group chief economist Alan Oster in a statement.

“While the proportion of employers nominating labour shortages as the main constraint on their 12 month profit outlook has fallen from a recent record of 33% to 13% in the latest survey.”

Slumping consumer demand and slower lending activity pushed down all of the components of the gauge to levels seen in 2001, when business conditions stood at -11 index points.

Trading conditions contracted 11 points to -4 points, profits have also lost 10 index points to rank -8point, and employment – which was flat in the June quarter – edged down 3 points to -3 points.

Business confidence, a forward looking indicator, increased 1 index point to -7 index points for the December quarter, below their mid-2000 levels.

“Businesses expect conditions to slow significantly further in the December quarter of 2008,” Mr Oster said.

The bank said major economies would slow further “due to lags associated with negative wealth effects from lower equity and house prices”.

“Recessions are forecast for the US, Europe, Japan and UK, while growth moderates in developing economies,” the bank said in the statement.