After slashing its forecast for the region in March, the ADB reversed course in its updated Asian Development Outlook (ADO) 2009. The bank said developing economies in Asia would grow by 3.9% this year, up from its previous forecast of 3.4%.

“Despite worsening conditions in the global economic environment, developing Asia is poised to lead the recovery from the worldwide slowdown,” said ADB Chief Economist Jong-Wha Lee.

However, the growth will not be evenly distributed. Economic growth in East Asia will be driven largely by China’s dynamic economy. But economic growth in Southeast Asia will be sluggish, because the recoveries of Vietnam and Indonesia will not be enough to offset weakness in Malaysia, Thailand and Cambodia.

ADB boosted its outlook for annual economic growth in China to 8.2% from 7% earlier this year, and the bank believes China’s economic expansion will accelerate to 8.9% next year. That will help push economic growth in East Asia to an annual rate of 4.4%, compared to 0.1% growth in Southeast Asia.

ADB had underestimated China’s resilience in March when it predicted just 3.6% growth for East Asia.

“In the People’s Republic of China, aggressive monetary easing and the massive fiscal stimulus package rolled out by the government bolstered the region’s largest economy, which is now expected to grow by 8.2% in 2009 and 8.9% in 2010, up from the March forecast of 7% and 8% respectively,” said ADB.

Indeed, the potency of China’s $587 billion (4 trillion yuan) stimulus plan caught many analysts off guard.  Two of the world’s key global institutions – the World Bank and the Organization for Economic Cooperation and Development (OECD) – and a large swath of investment banks were forced to raise their 2009 and 2010 growth estimates for China’s economy after the country announced second-quarter gross domestic product (GDP) growth of 7.9%.

The OECD said it now expects China’s economy to grow by 7.7% this year and the World Bank boosted its projection to 7.2% growth.  GDP will expand by 9.3% in 2010, according to OECD estimates.

BNP Paribas SA (OTC: BNPQY), Barclays Capital, Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), UBS AG (NYSE: UBS), Morgan Stanley (MS), Standard Chartered Bank, and RBC Capital Markets all raised their forecasts for China’s economy as well.

China’s stimulus package gave the economy a big kick in the first half of the year, spurring bank lending and driving fixed asset investment. It even stimulated the oft-maligned Chinese consumer, boosting domestic demand while the market for exports remained dormant.

Chinese banks lent about $1.08 trillion (7.37 trillion yuan) in the first half of the year, nearly double the total loans extended throughout all of 2008.

Fixed-asset investment rose 33.5% in the first half year to $1.34 trillion (9.132 trillion yuan), according to the National Bureau of Statistics (NBS). Investment in infrastructure rose 57.4% year-over-year, with spending on railways up 126.5% and highway spending up 54.7%. Property sales were up 53% in the first six months from a year earlier.

Of course, fixed-asset investment has been consistently strong in China for the past decade. The real turnaround in the past six months has been that the frugal Chinese consumer has begun to spend more liberally.

China’s retail sales in the first half of the year rose 15% to $859.6 billion (5.87 trillion yuan).

Still, the ADB did warn Asian countries that their strong recovery is still uncertain and said they should continue to carry out stimulus measures until Western countries catch up.

“The improved regional outlook should not make developing Asian economies complacent,” said Lee. “A protracted global slowdown or the hasty withdrawal of stimulus packages can degrade the region’s ongoing recovery.”

Source: Asian Economies to ‘Lead the Recovery,’ Says ADB

Supply has outrun demand this year as a global recovery has yet to accelerate. Yet, oil prices more than doubled from February to August and are up about 50% from where they started the year.

Now, many traders are positioning themselves to profit from a pullback. The gap between prices of options betting on a decline in prices and those that would profit as a result of a rise in oil has widened to a record 10 percentage points, according to five years of data compiled by Banc of America Securities-Merrill Lynch.

Put options, which give traders the right to sell oil in December below current prices have an implied volatility of 54.3%, compared to 43.3% for options to call, Bloomberg News reported. Implied volatility is estimated volatility of a security’s price. Implied volatility generally increases when the market is bearish and decreases when the market is bullish.

Implied volatility is used in calculating an option’s premium and right now the premium for December and other put options shows “the market is worried,” Harry Tchilinguirian, a senior oil analyst at BNP Paribas SA (NYSE ADR: BNPQY) told Bloomberg.

“If puts are pricing higher than calls, we are looking at a situation where the market is more averse to the downside and is looking for more compensation” for the option, he said.

Perhaps the biggest reason the market is worried is that a generous supply of oil remains on the market, some of it piled up in offshore tankers. Meanwhile, the global economy is healing at a considerably slow pace with many analysts forecasting a so-called U-shaped recession for the United States – the world’s largest petroleum consumer.

U.S. stockpiles of crude are 14% higher than they were a year ago, according to the International Energy Agency (IEA). U.S. distillate fuel inventories – which include heating oil and jet fuel – stood at 167.8 million barrels as of Sept. 11 of this year, according to the Energy Information Administration (EIA). That’s the highest level since 1983.

As of Sept. 11, U.S. gasoline supplies are at 207.7 million barrels – 2.2% higher than they were in late May at the start of peak summer driving season, according to the EIA.

The story is much the same overseas where gasoil stockpiles – the European equivalent of heating oil -reached a record 23 million barrels on Sept. 10, according to PJK International BV, Bloomberg reported.

At the end of July, oil inventories in the 30 nations of the Organization for Economic Cooperation and Development (OECD) totaled about 2.8 billion barrels – 4.6% more than the same time last year, according to the IEA. More than 60 million barrels of oil are being held in tankers offshore.

The Centre for Global Energy Studies (CGES) in a monthly report that it expects high crude stockpiles will continue to constrain the market.

“The CGES expects little sustained upward pressure on oil prices over the remainder of this year and even next year prices are unlikely to rise much unless clear signals emerge that world is pulling out of recession in a sustainable fashion,” the CGES said. “High inventories, particularly of middle distillates, are putting a ceiling on oil prices at the moment … and this will only lift once those inventories start to be drawn down.”

The report also noted the Organization of Petroleum Exporting Countries (OPEC), which controls 40% of the world’s oil supply, sees promoting economic growth as being more important than the short-term pursuit of higher prices.

“OPEC signaled its broad satisfaction with the current level of oil prices when it met in Vienna earlier this month,” CGES said. “It recognized that sustainable upward price pressure will only come with economic recovery and rising oil demand.

Saudi Arabia’s oil minister, Ali al-Naimi weeks ago told reporters that the cartel is more concerned with reinvigorating the global economy than raising oil prices.

“Economic growth is the name of the game, that’s what’s going to drive the price,” said al-Naimi. “As long as economic growth is there, the price is going to go up.”

OPEC has last year lowered its production quotas by 4.2 million barrels per day (bpd) – about 5% of global demand – hoping to put a floor under prices that plunged more than 80% from their record high above $147 a barrel last summer. The reduction was effective in halting the fall in prices, but even with the cuts supplies continue to grow.

Additionally, some OPEC nations have not strictly adhered to the mandate. The cartel’s production exceeded its quotas by 1.2 million barrels a day in August, according to Bloomberg estimates.

The glut of oil on the market has some analysts wondering whether or not spooked speculators will hasten their retreat from the market.

“If ever there was going to be a retreat below $60 a barrel, it is now,” Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pa., told Bloomberg in a telephone interview.

Light, sweet crude for December delivery yesterday tumbled $2.33 a barrel, or 3.24% to settle at $69.71.

Source: Traders Anticipate a Drop in Oil Prices as Supply Outruns Demand

The momentum behind China’s economy is staggering.

“China is increasingly becoming a responsible citizen in the global community,” economist Allen Sinai of Decision Economics told The Associated Press. “No longer lawless, no longer difficult to deal with, much more responsible. It is now a powerhouse among economies and finance. And it’s a rich country.”

In just the past few weeks, two of the world’s key global institutions – the World Bank and the Organization for Economic Cooperation and Development (OECD) – and a large swath of investment banks raised their 2009 and 2010 growth estimates for China’s economy.

The OECD said it now expects China’s economy to grow by 7.7% this year and the World Bank boosted its projection to 7.2% growth.  GDP will expand by 9.3% in 2010, according to OECD estimates.

BNP Paribas SA (OTC: BNPQY), Barclays Capital, Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), UBS AG (NYSE:UBS), Morgan Stanley (MS), Standard Chartered Bank, and RBC Capital Markets all raised their forecasts for China’s economy as well.

So far, BNP Paribas SA is the most bullish on China’s prospective growth, as it boosted its prediction to 8.2% this year. That would top Beijing’s 8% target.  Barclays Capital, Goldman Sachs, and JPMorgan all raised their 2009 forecasts to 7.8% growth.

“The strong acceleration in underlying economic activity is now unmistakable,” Goldman Sachs economist Yu Song told TIME magazine.

China’s Homegrown Growth

China’s $585 billion (4 trillion yuan) stimulus package gave the economy a big kick in the first half of the year, spurring bank lending and driving fixed asset investment. It even stimulated the oft-maligned Chinese consumer, boosting domestic demand while the market for exports remained dormant.

Chinese banks lent about $1.08 trillion (7.37 trillion yuan) in the first half of the year, nearly double the total loans extended throughout all of 2008.  And even though the economy is clearly on the road to recovery, it’s not likely lending will let up for the rest of the year.

BNP Paribas chief economist Chen Xingdong told Bloomberg thathe expects new loans will reach 9.5 trillion yuan by the end of 2009.

“The growth recovery has been even stronger than our anticipation,” Chen said.  “Strong fixed-asset investment growth and retail sales have started to generate real demand for industrial production.”

Fixed-asset investment rose 33.5% in the first half year to $1.34 trillion (9.132 trillion yuan), according to the National Bureau of Statistics (NBS). Investment in infrastructure rose 57.4% year-over-year, with spending on railways up 126.5% and highway spending up 54.7%. Property sales were up 53% in the first six months from a year earlier.

Of course, fixed-asset investment has been consistently strong in China for the past decade. The real turnaround in the past six months has been that the frugal Chinese consumer has begun to spend more liberally.

China’s retail sales in the first half of the year rose 15% to $859.6 billion (5.87 trillion yuan).  Retail sales in June also rose 15% from May, said NBS spokesman Li Xiaochao.

“There were two highlights in promoting domestic demand: commercial apartments sales rose by 31.7% in the first half year from the same period last year; automobile sales expanded by 17.7% year on year,” Li said.

Auto sales reached 6.1 million vehicles in the first six months, helping China to supplant the United States as the world’s largest automarket. Sales could easily surpass 12 million this year.

“The rebound has been driven by the domestic economy,” Jing Ulrich JPMorgan Chase & Co.’s Chinese equities strategist told Fortunemagazine. “The consumer proved resilient – and the government acted as a catalyst.”

“China can still achieve 8% growth,” she said. “Everything is happening very fast there.”

The One Potential Hurdle for China’s Economy

There’s no question that China’s stimulus package has been an unequivocal success. In fact, the only problem may be that it is working a bit too well.

In the United States concern about inflation prompted Federal Reserve Chairman Ben S. Bernanke to outline an “exit strategy” for the withdrawal of liquidity from the financial system. Similarly, China’s biggest challenge going forward will be clamping down on lending to keep potentially hazardous bubbles from growing in its economy.

Inflation is a particular concern, as rising commodity prices have crept into imports.

“Commodity markets around the world have bottomed and are rebounding, raising imported inflation pressures,” the People’s Bank of China (BOC) said in a report analyzing second-quarter economic trends, issued by its Financial Survey and Statistics Department. “At the same time, domestic demand continues to rebound, liquidity remains flush and inflation expectations are surfacing.”

However, as in the United States, policymakers in Beijing have said they will remain committed to “proactive fiscal policy” until it is certain a recovery is underway. In fact, some analysts don’t expect to see a significant change in policy until November, when leaders and regulators meet for their annual conference on the economy.

“We must see that the economic recovery is not on a solid foundation, and the negative impacts from the international crisis have not eased,” said Chinese Premier Wen Jiabao. “An improvement in the economy does not mean the difficult period is over.”

Indeed, stimulus must be maintained until China’s all-important export sector has recovered. And while Chinese exports climbed 7.5% from May to June, they were still down 21.4% from a year ago.

Of course that doesn’t mean Beijing will just sit back and wait for lending to reach excessive levels.

“China has achieved impressive results in reviving economic activities,” Gao Shanwen, chief economist with Essence Securities, told Reuters. “The basic tone of the appropriately loose monetary policy is unlikely to change, but there will be fine-tuning.”

The BOC has traditionally used a quota system to control lending, telling banks not to exceed specific ceilings. It may continue to do so if the central bank does not see a sufficient drop in lending. It may also choose to provide banks with a less stringent lending guidance, or range, rather than an outright ceiling.

“The banks are highly responsive to government policy,” Ha Jiming, of China International Capital Corp. Ltd. (CICC), the nation’s largest investment bank, told The Financial Times.

Punitive bill issuances are another tool in the central bank’s toolkit. In September, the BOC will require banks to buy $15 billion (100 billion yuan) in special bills. The bills will be issued at punitively low interest rates and reduce the amount of money banks have on hand to lend out.

Regardless of what methods it chooses, the BOC is clearly ready to act. But it won’t jeopardize a recovery in a preemptive assault on inflation.

The central bank “will unswervingly continue to apply appropriately loose monetary policy and consolidate the economic recovery momentum,” said Su Ning, vice governor of the People’s Bank of China.

Source: With Its Economy Ignited by Stimulus Spending, China Is Leading the Global Recovery

The number was so big and the results beat Wall Street estimates by so much at a time when the credit crisis was wreaking havoc on so many other sectors that Oppenheimer & Sons (NYSE: OPY) oil analyst Fadel Gheit couldn’t help but quip that he didn’t think Exxon “will be lining up for any TARP money or government handout anytime soon.”

Exxon wasn’t the only heavyweight reaping the benefit of a zooming energy market that had seen crude oil climb to an all-time record of $147 a barrel in July. The combined revenue for Exxon and Chevron Corp. (NYSE: CVX) for all of last year actually exceeded the gross domestic product (GDP) of all but 16 of the world’s nations, Bloomberg News reported.

What a difference a few months can make.

If the name of the game is corporate profits, the global economic slowdown has transformed some of the world’s biggest oil companies from leaders to laggards.

Global-energy heavyweights Exxon and Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B) yesterday (Thursday) became the latest players to feel the one-two punch of dwindling demand and rising supplies, reporting profit drops of 66% and 67%, respectively.

Exxon’s net income fell to $3.95 billion, or 81 cents a share, compared to $11.68 billion, or $2.22 a share, in the same quarter a year ago. The results were well below Wall Street estimates for earnings of $1.02 a share. Shell’s bottom line fell to $3.82 billion, or 62 cents a share for the second quarter, compared to $1.87 per share in the same period last year.

“Global economic conditions continue to impact the energy industry both in the volatility of commodity prices and reduced demand for products,” said Exxon Chairman and Chief Executive Officer Rex Tillerson.

With consumers and companies alike slashing costs in any way possible in an environment of spiraling unemployment and the looming possibility of inflation as a result of government stimulus efforts around the world, Exxon, Shell and other Big Oil companies are feeling the squeeze and are cutting back in almost every way possible.

“Our second quarter results were affected by the weak global economy,” Shell CEO Peter Voser when the results were released. “This weakness is creating a difficult environment both in upstream and downstream” oil production.

Shell, for instance, said it’s embarked on a cost-cutting program that will pare billions of dollars in operating expenses. In one bright spot, however, The Netherlands-based oil giant did say that it had increased its second-quarter dividend 5% to 42 cents a share, and Chief Financial Officer Simon Henry said Shell will be able to keep raising the dividend to keep pace with inflation.

Exxon’s shares fell about 1% yesterday to close at $70.72 each. They’re down about 14% from their 12-month high of $84.76. Royal Dutch Shell’s “A” shares edged up 0.13% to close at $52.53; they’re down 29% from their 52-week high of $73.97.

“There’s a lack of follow-through on production” at Exxon, Macquarie Research analyst Jason Gammel told Barron’s in an interview. “The Street rewards companies that grow production, not those who are flat.”

Exxon’s combined oil and gas production dropped 3% in the quarter, and the company blamed the year-over-year decline on restrictions imposed by the Organization of the Petroleum Exporting Countries (OPEC). Shell’s production suffered more, falling 5.3%, placing part of the blame on a politically unstable Nigeria.

The heft that gave Big Oil companies the huge advantage of global scale last year is now working against them; with their large size, and against the backdrop of a global economic downturn, finding new revenue to bump up profits – and, ultimately, their share prices – will be a major challenge, analysts say.

“I think it’s generally going to be difficult for the Big Oils to move the needle,” Howard Weil analyst Doug Leggate told Bloomberg News. “Those companies that can move the needle in terms of adding value through exploration or other methods of improving their portfolios, they’re the ones who are going to win out.”

Profit at Exxon’s production and exploration unit fell to $3.81 billion in the second quarter, down $6.2 billion compared with a year earlier. In its refining business, its profit fell to $512 million, down $1.05 billion from a year ago. Profit in the same category at Shell dropped 77%, to $1.33 billion, from $5.9 billion a year ago, mostly on lower oil prices.

The grim oil earnings news yesterday followed Wednesday’s report from the Energy Information Administration (EIA) that U.S. crude stocks rose by 5.1 million barrels to 347.8 million barrels for the week ended July 24. Estimates by market research firm Platts were calling for a gain of just 1.1 million barrels, MarketWatch.com reported.

U.S. crude stocks are 29.8 million barrels above the five-year average and 52.6 million barrels above year-ago levels, according to Platts.

“The data has been bearish for most of the year, and the market may be ready to acknowledge that we are awash in crude oil and products, and demand is lower than last year despite the fact that oil and product prices are much lower,” WTRG Economics analyst James L. Williams told MarketWatch. “We will be well into the recovery from the recession before there is any appreciable increase in demand.”

As of yesterday afternoon, crude oil for September delivery was trading at $66.80, up $3.45 a barrel. But that’s down $55 a barrel from this time last year – a 45.16% decrease.

Those hoping for a rally may find that they’ve only engaged in a bit of wishful thinking, since a number of analysts say there aren’t any catalysts for higher prices in sight.

Take James Cordier, president of Liberty Trading Group, who says that the rally to prices in excess of $70 earlier this year was “well overpriced.” He expects prices to continue to fall in the weeks and months to come, Cordier said in an interview with Yahoo Inc.’s (Nasdaq: YHOO) Tech Ticker.

Cordier points to the speculative demand driven by government stimulus packages, notably the liquid commodities in China, a nation whose economy looks “a little bit like a bubble to us.”

Cordier’s firm, which trades commodity-based options, is “selling calls with both hands.”

If there’s an upside to any of this, Cordier says it will be lower gas prices, which he expects to fall 15-to-20 cents per gallon around August or September, a welcome relief for consumers.

The low demand and rising supply of oil is catching the eye of regulators worldwide, who are applying the heat to speculators who are believed to be behind the main force behind wild swings in the futures markets over the past two years.

Here in the United States, the Commodity Futures Trading Commission (CFTC) this week held the second of three hearings on energy trading. In the United Kingdom, the Financial Services Authority (FSA) will hold a special meeting on Aug. 5 with oil companies, banks, hedge funds and oil brokers to review regulation in the market.

“A lot of what we’ve seen in recent years has nothing to do with the underlying fundamentals of the market,” Tom Bentz, a senior energy analyst at BNP Paribas Commodity Futures Inc. (OTC ADR: BNPQY), told Bloomberg. “Something has to be done to reduce some of the speculation, no doubt about it.”

Indeed, the supply-and-demand fundamentals taught in high school and college have actually come under fire just because of how speculators have allegedly distorted the oil-price market in recent years.

This year’s volatility in the market defy the “accepted rules of economics,” French President Nicolas Sarkozy and U.K. Prime Minister Gordon Brown said in an opinion column published earlier this month in The Wall Street Journal.

“The surge in prices last year gravely damaged the global economy and contributed to the downturn,” the two statesmen said. “The risk now is that a new period of instability could undermine confidence just as we are pushing for recovery. Governments can no longer stand idle. Volatility damages both consumers and producers.”

Big Oil executives said it is doubtful the looming U.K.-based meeting would result in any substantial new initiatives, but added that it would discuss “whether the current arrangements [in the oil market] remain appropriate,” The Financial Times reported. “The question of position limits does not seem to have the same level of priority (in Europe) as it does in the United States,” Deutsche Bank AG (NYSE: DB) Chief Energy Economist Adam Sieminski told the FT.

Source: Global Slowdown and Plunging Profits Have ‘Big Oil’ Companies Searching for Ways to Rebound

Despite the disturbing news from Japan – the world’s second largest economy – some analysts are optimistic that the record gross domestic production (GDP) decline may be the low point, with business activity picking up from here.

“There was a collapse across the board,” Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo, told Bloomberg News. But there’s “light at the end of the tunnel,” he said, adding that he believes the economy will rebound this quarter as companies replace inventories and stimulus plans begin to take effect.

Prime Minster Taro Aso has set forth the largest stimulus plan in Japanese history, promising to pump $160 billion into the economy, mostly geared towards lifting consumer spending, which accounts for about 55% of GDP.

Japanese consumers were the biggest factor in the decline. Consumer spending fell 1.1%, trimming 2.6 percentage points off GDP – the most since 1974, Bloomberg reported.

Analysts say that declining exports are a big reason for the decline in consumer spending.

“The export plunge is spreading to domestic demand,” BNP Paribas SA (OTC: BNPQY) economist Hiroshi Shiraishi told Reuters. “As such, the Japanese economy may return to growth temporarily but it could suffer a contraction again afterwards.”

Net exports – the trade gap between exports and imports – shaved 1.4% off overall economic output.

Toyota Motor Corp (ADR NYSE: TM), Hitachi Ltd. (ADR NYSE: HIT), and Panasonic Corp. (ADR NYSE: PC) all projected mounting losses for fiscal 2009. Panasonic said last week it plans to close about 20 factories this year and cut 15,000 jobs. Hitachi will slash spending by $5.2 billion this year and shed 7,000 workers, Bloomberg reported.

Still, there are faint signs of recovery in both exports and consumer spending, triggering cautious optimism among some analysts and government officials. Consumer confidence jumped to a 10-month high in April and exports increased in March over the previous month.  Factory output also jumped for the first time since September as companies cut inventories.

The Wall Street Journal reported last week that Honda plans to increase production in Japan this quarter as dealers have begun clearing inventories.  Car sales may have “bottomed” in Japan and the U.S., Fuji Heavy Industries Ltd. (ADR OTC: FUJHY) President Ikuo Mori said in Tokyo, according to Bloomberg.

“While the economy will continue to be in a severe state, I expect less pressure from inventory adjustments and the stimulus package to provide support,” Economy and Fiscal Policy Minister Kaoru Yosano said after Wednesday’s report, Bloomberg reported.

Source: Japan GDP Falls to Record Low but May Have Bottomed

But in a concession to his need for bi-partisan support to pass any package, Obama promised “radical reforms” to impose more control over the federal budget in the future, The New York Times reported.

Republican leaders have already started voicing criticism of the recovery plan, offering their own ideas about what it should contain. Obama aides hope to soften the perception of the plan as an “open checkbook” by focusing more on tax cuts than on spending.

To firm up support among Congressional skeptics worried that Obama was too focused on government spending, Obama’s team revealed the package will devote about 40% to tax cuts, costing roughly $150 billion. The package will also include more than $100 billion in tax incentives for businesses to create jobs and invest in equipment or factories,

U.S. Sen. Mitch McConnell, R-KY, proposed that any money distributed to the states be provided as loans rather than outright grants.

“Nobody thinks we ought to be spending this money on things like mob museums and waterslides,” McConnell said on “This Week” on ABC. “And if the money were lent rather than just granted, states would I think spend it wisely, and the states that didn’t need it at all wouldn’t take any.”

Republicans were more likely to favor tax relief and tax credits as part of the economic measure, he said.

In a move to further assuage Republican fears about spending, Obama will use his public events this week to showcase his plans to put tight controls on the budget down the road.

Obama’s plans call for a new focus on controlling Pentagon contracting and aid to American corporations, among other areas. To insure a more efficient government, he will appoint a chief performance officer and a chief technology officer tomorrow (Wednesday), aides said.

But not matter what shape it takes, the package – dubbed the “American Recovery and Reinvestment Plan” – isn’t likely to land on Obama’s desk before mid-February. Obama had hoped to have Congress enact the recovery plan in time for him to sign when he takes office Jan. 20. But even his spokesman, Robert Gibbs, conceded Sunday night that this optimistic scenario was “very, very unlikely.”

“We don’t anticipate that Congress will have passed, both houses, an economic recovery agreement by the time the inauguration takes place,” Gibbs said.

But Obama’s team continued to press for swift action, saying the dismal state of the economy demands that Congress expedite the matter.

“There is no short run, other than keeping the economy from absolutely tanking. That’s the only short run,” Vice President-elect Joseph R. Biden Jr. said on “This Week.”

Added Biden: “We’ve got to begin to stem this bleeding here, and begin to stop the loss of jobs and [start] the creation of jobs.”

The Obama transition team is searching for the best way to get tax credits into Americans’ pockets quickly to help stimulate spending, but without using rebate checks like those that were issued last year as part of the Bush administrations stimulus package.

Instead, they are discussing a retroactive credit for the 2008 tax year and revised withholding formulas, meaning U.S. workers would see the actual benefits in their paychecks.

The package will likely include tax cuts of $500 to $1,000 for individuals and couples, as well as some $200 billion to help revenue-starved states pay for Medicaid programs for the poor. Major new spending would go to infrastructure projects – some on old-fashioned road-and-bridge repairs, and some going to Obama’s pet issue: Renewable energy.

In a related development yesterday, the dollar rose to a three-week high against the euro and rose versus the yen on speculation the fiscal stimulus will help the U.S. economy recover from recession sooner than others, according to Bloomberg News.

“I do expect the euro-dollar to fall further,” said Sebastien Galy, a currency strategist at BNP Paribas Securities SA (OTC ADR: BNPQY) in New York. “It’s really a question of where you will get most of the return for your money. It does seem that we’ll see stabilization in the economic downturn first in the U.S.”

Source: Obama’s Stimulus Plan Backed by Promises of Fiscal Restraint & Tax Cuts

Gross domestic product (GDP) in the 15-nation Eurozone probably contracted by 0.1% in the third quarter after shrinking 0.2% in the second, the European Commission said. The executive branch of the European Union also lowered its 2008 forecast 1.2% as the economy contracts another 0.1% in the fourth quarter.

For all 27 EU countries, the commission expects the economy to expand 0.2% next year.

“The economic horizon has now significantly darkened as the European Union economy is hit by the financial crisis that deepened during the autumn and is taking a toll on business and consumers,” EU Economic Affairs Commissioner Joaquin Almunia said in a statement. “In 2009, the EU economy is expected to grind to a standstill.”

The EC predicted economic growth in the region will be a paltry 0.1% in 2009.  However, many analysts – including those with BNP Paribas SA (OTC: BNPQY), Citigroup Inc. (C) and Royal Bank of Scotland PLC (RBS) – believe even that figure is generous.

“A recession in 2009 seems now unavoidable,” Jacques Cailloux, chief Eurozone economist at Royal Bank of Scotland, told Bloomberg. “Today’s new GDP forecast of 0.1% for 2009 by the European Commission still looks too optimistic to us.”

The Eurozone Purchasing Managers’ Index – a measure of manufacturing output, new orders and volume of new export orders – fell for the fifth consecutive month in October, hitting a record low 41.1. A reading below 50 for the index represents contraction.

Unemployment in the Eurozone remained stagnant at 7.5% in September, but the EC expects the jobless rate to soar as high as 8.4% in 2009.

It’s likely that Germany, France and Italy have already entered into a recession, as their second-quarter GDP fell 0.5%, 0.3% and 0.3%, respectively.

The EU acknowledged that its forecasts for the Eurozone, as well as the economy of the 27-member European Union, could worsen if the credit crunch continues unabated.

Even slightly higher borrowing costs could significantly restrict the amount of credit available to households and “trigger an outright recession, a decline of 1% of GDP in the euro area,” the EC said.

The only silver lining is what the EU predicts will be a marked cooling of inflationary pressures. Slackening demand has driven down the prices of commodities across the board, dampening inflation, at least for the short term.

The EC said yesterday that inflation would ease from 3.5% this year to 2.2% in 2009. With inflation on the decline the European Central Bank has the opportunity to cut interest rates to promote growth, which it is expected to do Thursday.

Analysts say the ECB, which raised rates in July, could cut its benchmark interest rate by a half a point Thursday. Should the economic downturn persist into next year, the central bank could cut the current 3.75% rate to 2.5% by April.

That would make for the fastest round of rate cuts in the central bank’s 10-year history. It would also mark a deviation from the ECB’s original mandate.

A New Role for the ECB

The ECB’s primary objective is “to maintain price stability,” and after that to “support the general economic policies of the Community.” However, as the global financial crisis has deepened, the role of the European Central Bank has expanded well beyond this initial mandate.

Like the Fed, the ECB has taken the opportunity presented by the financial crisis to broaden its role.

Last month, the ECB offered a $6.4 billion loan to Hungary and Hungarian Prime Minister Ferenc Gyurcsany said he’s lobbying policymakers to allow the ECB to provide liquidity outside the euro area.

The ECB has increased lending to Eurozone banks to more than $1 trillion.

The central bank also set up currency swaps with Denmark and Switzerland. The ECB gave Denmark access to about $15 billion (12 billion euros) in an effort to “improve liquidity in euro short-term markets.”

All of these measures lie outside of the ECB’s stated objectives.

“The ECB is at times playing the role of lender of last resort for the whole European financial system,” Guillaume Menuet, a senior European economist at Merrill Lynch & Co. (MER), told Bloomberg. “Its mandate is being implicitly expanded.”

While ECB President Jean-Claude Trichet clearly holds sway over the 15 nations that use the euro, no other institution or authority exists to offer financial assistance to the outlying members of the European Union.

However, given the steps taken by the ECB to assist countries such as Hungary, Trichet could soon find himself with authority and influence over a much larger territory. And perhaps a new mission.

“My dream is that the ECB gets a financial stability mandate, which is not the case so far,” Natacha Valla, a former ECB economist at Goldman Sachs Group Inc. (GS), told Bloomberg. “The ECB really has demonstrated it can fulfill such a mandate.”

Source: Likely EU Recession Paves the Way for Greater ECB Influence

The Dow Jones Industrial Average careened below 10,000 points for the first time since 2004 yesterday, after plummeting 500 points in the first hour of trading. The Dow closed down 369.88 points, or 3.6%, on the day at 9,955.50, after earlier surrendering as much as 800 points.

The Standard & Poor’s 500 Index shed 42.38 points, or 3.95%, to 1,056.85 and the Nasdaq Composite Index tumbled 137.52, or 7%, to close at 1,809.

The Dow has shed more than 1,100 points, or about 10% in slightly more than a week, and the S&P 500 has lost more than 15% in the same period.

Indices around the world suffered similar declines. London’s FTSE 100 index closed down 5.6% yesterday. Germany’s DAX was down 5.2%, and the CAC-40 in Paris lost 5.9%. In Asia, the Nikkei 225 stock average in Tokyo fell 4.3%, the Hong Kong’s Hang Seng index slid 5%, and China’s CSI 300 Index slumped 5.1% coming off a one-week holiday.

The credit crisis that originated in the United States last year has clearly infiltrated economies in Europe and financial institutions throughout the region are beginning to topple.

France’s BNP Paribas SA (OTC: BNPQY) became the Eurozone’s largest bank by deposits after agreeing to buy Fortis NV’s Belgium and Luxembourg divisions, just days after it was partially nationalized by the government of the Netherlands as part of a $16.4 billion resuce plan.

Trading of Fortis shares was suspended Monday after falling to $7.50 on Friday. The company’s shares have plunged roughly 70% this year.

Sunday, the German government was forced into a $68 billion (50 billion euro) rescue of Hypo Real Estate Holding AG – the nation’s second-biggest commercial property lender.
HRE was torpedoed by short-term financing struggles within its Dublin-based subsidiary, Depfa Bank PLC.

Hypo Real Estate fell as much as 76% in Frankfurt trading.

In Italy, shares in bank giant UniCredit SpA were suspended several times yesterday, after the company announced its decision to raise 6.6 billion euros in fresh capital – something the UniCredit’s board previously said it would not do.

“We made some mistakes in evaluating the market scenario, that’s absolutely clear to us,” Chief Executive Officer Alessandro Profumo told Bloomberg News. The company said “waves of market turbulence,” as well as an “unprecedented lack of trust among financial institutions” forced management’s hand.

The fresh round of European collapses was the second domino to fall behind an American contagion that claimed The Bear Stearns Cos. Inc. and Lehman Bros. Holdings Inc. (OTC: LEHMQ), and forced a bailout of mortgage giants Fannie Mae (FNM), Freddie Mac (FRE) and American International Group (AIG).

“Everyone is losing confidence,” Mark Tan, who helps manage about $20 billion of equities and bonds at UOB Asset Management in Singapore, told The Associated Press. “The problem now is that the lack of foreign confidence could affect the Asian consumer, which would lead to a bigger slowdown in Asia than expected.”

Central Bank Panic

A round of chaotic collapses over the weekend spurred central banks and policymakers around the world into action.

German Chancellor Angela Merkel guaranteed private deposit accounts in a desperate bid to restore confidence after the rescue of Hypo Real Estate. Austria, Denmark, Ireland, and Sweden have all raised the limits on guaranteed savings, and there is growing speculation that the United Kingdom will soon join them.

However, Germany’s decision, in particular, came as a surprise as it came just one day after Chancellor Merkel joined French President Nicolas Sarkozy, U.K. Prime Minister Gordon Brown, and Italian Prime Minister Silvio Berlusconi in condemning Ireland’s decision to offer blanket protection for its deposits.

In fact, EU competition authorities had already agreed to challenge Ireland’s decision as a competition distorting measure.

“It would have been advisable to properly consult other EU authorities on the envisaged legislative plans,” the European Central Bank said yesterday. The ECB is also concerned the guarantee provides the lenders covered by the scheme with “preferential treatment.”

The ECB, the Bank of England and the Swiss National Bank offered more than $60 billion to markets yesterday, hoping to ensure that the financial sector remains well oiled.

The ECB offered $50 billion in overnight money, while the Bank of England offered $10 billion.

Financial institutions borrowed $33.9 billion (24.6 billion euros) on Oct. 3 – the most since February 2001.

Meanwhile, back across the pond, the U.S. Federal Reserve said it would make hundreds of billions of dollars more available through its Term Auction Facility (TAF). The Fed said it would expand its 28-day and 84-day TAF operations to $150 billion each. The central bank will also begin paying interest on bank reserves.

Source: Global Markets Nosedive as Credit Crisis Washes Over Europe

More from today’s Money Morning:

Central banks around the world, including the European Central Bank (ECB), the Bank of England (BOE) and the People’s Bank of China, scrambled yesterday (Monday) to shore up liquidity and protect domestic markets against the fallout from the collapse of Lehman Brothers.

The Bank of England and the European Central Bank injected billions of dollars into global money markets and the Bank of China cut interest rates for the first time in six years and lowered capital reserve requirements for its smaller banks.

The ECB allotted roughly $43 billion (30 billion euros) in a one-day money-market auction that was more than three times oversubscribed, Bloomberg News reported. The ECB injected the funds at a rate of 4.25%. The bank also said it would be prepared to take further action if necessary and “stands ready to contribute to orderly market conditions.”

The infusion was virtually identical to action taken by the ECB in August 2007, when the bank offered up $56 billion (40 billion euros) to calm jittery markets. The ECB has put roughly $134 billion (95 billion euros) on the market in the past 13 months, fearful that banks would abandon the interbank lending market and cease lending to one another.

“Sunday’s events mark a turning point in the crisis, but the fundamental premise is the same as it’s been since last year,” Michael Schubert, an economist with Commerzbank AG (OTC ADR:CRZBY) in Frankfurt told The Wall Street Journal. “Banks still do not know how much liquidity they need themselves and there’s even more uncertainty regarding other banks.”

The Bank of England said that it would take necessary measures to boost liquidity as well, and lend out an additional $9 billion (5 billion pounds) at a 5% rate over the next several days.

“The Bank of England will be monitoring carefully the conditions in sterling money markets and will take appropriate actions if necessary to stabilize those markets,” the BOE said in a statement.

Like the ECB offer, the BOE loans were oversubscribed, as Banks bid for $42 billion (24 billion pounds). Of that, 20.75% was allocated.

“This is significantly oversubscribed,” Philip Shaw, chief economist at Investec Securities in London, told Bloomberg. “It largely reflects the tension in the money market after the announcements over the weekend. It’s very welcome to see the Bank of England respond with extra liquidity.”

Still, there’s a distinct possibility that the BOE will have to go a step further and cut interest rates if it hopes to restore confidence to the markets and revitalize growth.

The Confederation of British Industry (CBI) said yesterday that the BOE should cut its benchmark interest rate from to 4.5% by the end of this year, and to 4% in early 2009. The bank has held the rate steady at 5% since April, intent on taming inflation.  The European Commission said earlier this month that the United Kingdom has already entered a recession, its first since 1991, after gross domestic product (GDP) growth fell flat in the second quarter. The EC predicts GDP will shrink by 0.2% in both the third and fourth quarters.

The CBI said the U.K. economy contracted 0.2% between July and September compared to the same period last year, and would suffer a 0.1% decline in the final quarter of 2008. However, the group was upbeat on the economy’s 2009 prospects.

“Having experienced a rapid loss of momentum in the economy over the first half of 2008, the U.K. may have entered a mild recession that will hopefully prove short lived,” said CBI Director-General Richard Lambert. “This is not a return to the 1990s, when job cuts and a slump in demand were far more prolonged.”

Bank of China Cuts Rates

The Bank of China cut its interest rates for the first time in six years yesterday, and reduced the amount banks are required to keep in reserve as Lehman’s collapse roiled credit markets and a depleted global economy weakened the outlook for Chinese exports.

The BOC cut its one-year lending rate to 7.2% from 7.47% and lowered the reserve ratio for the nation’s smallest banks by one percentage point. However, for China’s largest banks (Bank of China Ltd. (PINK: BACHF), Industrial and Commercial Bank of China, Agricultural Bank of China, and others) the reserve requirement will remain at 17.5%.

The bank said the measures are intended to “help solve important problems in [the] economy for its continued stable and fast development.”

The People’s Bank has done nothing but raise rates for the past six years, as the economy routinely posted digit growth rates. But an economy that many were beginning to think of as impervious has shown some weakness as of late, and financial turmoil abroad further dampens its outlook.

China’s 10.1% second-quarter expansion was strong, but it was also a drop from the 10.6% growth posted in the first quarter and down substantially from 2007’s 11.9% growth. Standard Chartered Bank has said China’s rate of growth will slow to 9.9% in 2008 and 8.6% in 2009.

China’s statistics bureau said last week that export growth slowed to 21.1% year-over-year in August, down from 26.9% in July.

“There is an increasing pressure on central banks to act,” Ken Wattret, chief Europe economist at BNP Paribas SA (OTC ADR: BNPQY), told the New York Times.

Of course the BOC had room to act, as inflation eased to a rate of 4.9% in August – a 14-month low. The U.S. Federal Reserve and ECB may find the task of reducing rates slightly more difficult.

“The Fed is more likely to cut rates than the ECB,” said Wattret. “What the Fed doesn’t want is a sustained drop in house and equity prices at the same time. The ECB won’t be at the forefront of cutting rates because it remains focused on inflation.”

Source: ECB and BOE Inject Billions, Bank of China Cuts Rates as Central Banks Cope with Lehman Fallout

The pound fell to $1.8656 yesterday – its lowest level since October 2006 – from 1.8968 the day prior. The British currency has fallen 5.4% against the dollar so far this year, and 7.6% against the dollar since the end of July. The pound is down 7.5% against the euro this year.

The decline has been prompted by a perceived shift in BOE policy, as many analysts see the central bank as shifting its focus from inflation to declining growth.

“Inflation is yesterday’s story and UK growth is falling to pieces,” David Bloom of HSBC Bank (ADR: HBC) told the Financial Times. “The pound is going to get absolutely thrashed.”

The BOE has held its rates steady since April in an effort to subdue inflation, which hit a decade-high 4.4% in July. But the central bank struck an ominous chord when it lowered its growth forecast for the first quarter of 2009 and said inflation would be below 2% by 2010.

The BOE said the economy would grow 0.1% year-over-year in the first quarter of 2009, compared to its previous growth forecast of 1%.

Analysts at both BNP Paribas SA (OTC: BNPQY) and JPMorgan Chase & Co. (JPM) have moved up their predictions for an interest rate cut, and said the Bank of England could cut its benchmark rate as early as November of this year.

A sharp rise in unemployment, which rose for a sixth straight month in June, has emerged as the predominant threat to the British economy. The jobless rate hit 2.7% in June, up from 2.6% the month prior. Unemployment, as measured by International Labor Organization standards could rise by 25% to more than 2 million, Bloomberg News reported. ILO-based unemployment jumped to 5.4% in the second quarter, the highest level in close to a year.

The International Monetary Fund last week predicted U.K. economic growth would grow by 1.4% in 2008 and 1.1% in 2009, down from its previous estimate of 1.8% for 2008 and 1.7% for 2009.

“It may still be summer but there is a feeling of chill in economic air,” said BOE Governor Mervyn King. “The British economy is going through a difficult and painful adjustment.”

Source: Pound Sterling Plummets as the Chance for a BOE Rate Cut Improves