By Emily Kaiser (Reuters)
Starbucks is starting to sell more coffee. Companies are once again finding buyers for their short-term debt. Money is beginning to flow back into emerging markets.
Maybe this is not the second Great Depression after all.
While there is no doubt the global economy is hurting — perhaps sliding into the worst recession since the 1970s — investors seem to be concluding that comparisons to the dark days of the 1930s are a bit overdone.
A news database search turned up 16,095 articles that included the phrase "Great Depression" in the past three months, nearly triple the number of times it appeared in the previous three months.
But there are promising signs central banks are gaining some traction with their efforts to stabilize financial markets and reopen the lending taps, and the panic-selling that gripped stock markets for much of October seems to be abating.
Since Oct. 7, the day before major central banks announced coordinated interest rate cuts, the rates banks charge each other for overnight lending have fallen dramatically.
On Oct. 7, the London interbank offered rates for U.S. dollars jumped to nearly 4 percent. As of Friday, it was down to 0.4 percent. Libor is the benchmark used to set borrowing costs on trillions of dollars worth of lending worldwide.
"It's certainly moving in the right direction," Jay Bryson, global economist with Wachovia, said on a conference call as he discussed the bank's economic outlook. Bryson expects a global recession, probably deeper than the most recent one in 2001.
"Our underlying assumption is that the steps that the governments around the world have taken to date, and potentially ones that haven't been announced yet … will ease the global credit crunch. There could be hiccups along the way but you won't see a complete lock-down in credit markets."
PERKING UP
On Thursday, both the European Central Bank and the Bank of England hold interest rate-setting meetings, and both are expected to reduce short-term borrowing costs. The U.S. Federal Reserve, Bank of Japan and People's Bank of China all lowered interest rates last week. [nGLOBAL]
With the rate cuts, government steps to shore up banks and guarantee loans, and programs to get hard currency into emerging markets, credit is starting to flow again.
Issuance of commercial paper, a form of debt that companies use to finance day-to-day business, grew last week after six consecutive weeks of declines. To be sure, that was largely because the Federal Reserve launched a new program to buy the paper, and private investors have yet to show much enthusiasm.
The U.S. central bank and the International Monetary Fund also opened up new lending channels last week to get dollars and other hard currencies into key emerging economies. That helped to lift stock markets in countries such as Brazil.
There were also some reassuring comments from the corporate world. Starbucks Corp <SBUX.O> said sales at its established stores edged up in October, and it was hopeful that it had weathered the worst of the slowdown.
UGLY PRICED IN?
As of Friday, nearly two-thirds of the companies in the U.S. Standard and Poor's 500 index had reported quarterly earnings, and 60 percent of them posted results that were better than analysts expected, according to Thomson Reuters data. Of course, earnings were down 11.7 percent on average.
The message from those companies was that the U.S. economy is tilting into a recession that some CEOs say will be the worst since the 1970s. But they do not expect catastrophic job losses and bank failures on a par with the Depression era.
"For the time being, investors appear to be more focused — and cheerful — over the slate of global policy announcements and the ensuing impact of breaking the logjam in the money and credit markets than on the continuous set of very weak incoming economic data, not just here but abroad," said Merrill Lynch economist David Rosenberg.
"Either a deep and prolonged recession has already long been discounted, or financial market participants are going to be in for a very big surprise because the economic data, as ugly as they are, are likely to get a lot uglier in coming months and quarters," he said.
The next unpleasant surprises may come this week. Euro-zone retail sales for September are expected to show a decline, and the global manufacturing sector probably contracted last month. U.S. retailers are expected to report weak sales for October, and the U.S. October employment report may show job losses nearing the 200,000 mark.
As depressing as those figures may sound, they are consistent with a recession, not a depression. The commonly cited rule of thumb for determining when a garden variety recession becomes something much worse is a 10 percent drop in GDP. Not even bearish economists are predicting that.
