If you’ve been watching currency exchange rates and yields, you can’t help but notice that world currencies seem locked in a a race to the bottom.

Central banks are slashing interest rates as if they were kudzu. The yen has yielded almost nothing since the 1990s. Then the Feds determined to punish savers for their foresight, thrift and prudence by making dollars yield absolutely nothing. The Brits have followed suit, and even the stodgy folks at the European Central Bank are slashing and burning their interest rates.

Looks like their concerns about inflation have been wrong all along.

Today, the Swiss central bank cut its interest rate close to zero and started buying up foreign currencies to keep the Franken from appreciating too much as deflation looms.

They bought euros and dollars. The Swiss currency dropped as much as 3.2% after the decision. That may sound like nothing to stock investors inured to 5%, 6%, 10% drops by now. But in view of currencies, such rapid devaluation is HUGE.

What does this mean?

The players of the global economy compete mainly on two levels: Cheap labor and cheap currencies. Just as a $8-a-week worker tightening bolts on an assembly line in China is more attractive to manufacturers than a $14-an-hour laborer doing the same job in Jersey, export goods priced in a currency of relatively lesser value are more attractive to international buyers than those that include an exchange-rate premium.

The major players in the global economy understand that… China, Europe, Japan. In times of crisis, they’re letting their currencies become cheaper, slash taxes on exports, and ease labor restrictions.

Unfortunately, the U.S. government still thinks the mechanics of the global economy don’t apply to the new order. Timothy Geithnert opined in January that “a strong dollar is in the interest of the United States” when he won the Senate Finance Committee’s backing to head the U.S. Treasury.

With the competitors out of the gate, we sure hope that the Obama Administration will finish re-arranging the patio furniture before the lights go out…

Source: Currencies: Race to the bottom

Well… Our Fantastico Friday was interrupted by that horrific Jobs Jamboree number that printed Friday morning… 651K jobs were lost in February, which let me remind you is a couple of days shorter than other months. So, it could have been worse! Hard to believe that could be the case, but it’s true. The unemployment rate rose to 8.1%, from 7.6% in January. The jobless rate is the highest since 1983. The economy has now shed 4.4 million jobs since the recession began in December 2007, with almost half of those losses occurring in the last three months alone.

Remember a year ago, when I kept harping that we had entered a recession, but the NBER hadn’t announced one yet, nor were the Un-dynamic duo of Paulson and Bernanke agreeing with me, as they kept denying what was right in front of them, for if little old me, could see that we had entered a recession, then why couldn’t these two? Oh, well, we now know that the recession began in December 2007… And now we know that 4.4 million jobs have been lost since that time. Of course if the Bureau of Labor Statistics (BLS) didn’t add jobs throughout the year that didn’t exist, we would be even more worse, so I don’t know whether to thank the BLS or curse them…

One thing to not let slip by you, is the fact that the previous months’ totals of -577K and -598K were revised upward by large amounts to -681K and -655K respectively… So, you’ve now got to ask yourself if the Feb figure will be revised to -700K… Of course it’s my opinion that the BLS would never dare print that figure on a first run printing, but only as a revision, that can be swept under the rug.

So… The currencies reacted a bit differently on Friday than we had seen recently when bad news printed in the U.S. Recall, that the Trading Theme that rewarded the dollar, whenever bad economic data printed, had held a grip on the markets for some time… But Friday morning, I mentioned that the trading looked different, with no Trading Theme in place, and that carried on even after the Jobs data printed.

The euro was stronger for most of the day on Friday, but as I left the office at the end of the day, it was beginning to look a little worn around the edges, and as I turn the currency screens on this morning, I see that the single unit has given back some ground.

I got a kick out a story that a reader sent me over the weekend… It was a story that appeared on the Bloomie regarding rate cuts… I told him, “yes, this is the stuff I keep harping on about how it’s not the cost of the credit that keeps banks from making loans, so why keep cutting interest rates?” So… Here’s a snippet of the report so you can see what it is that I’m talking about…

“European Central Bank Executive Board member Juergen Stark said cutting interest rates won’t remedy the financial crisis and pushing them too low may backfire. The financial crisis can’t be solved with rate cuts, Stark said in an interview to be published in Luxembourg’s Tageblatt newspaper on March 9. Too low a rate level can even be counter-productive.”

Hmmm… Finaly a Central Banker with the intestinal fortitude to stand up and say the right thing! Of course, that didn’t stop the European Central Bank (ECB) from cutting 50 BPS last week! UGH!

Recall last week I was talking about how fundamentally speaking, Australia was looking healthier than other countries, but then they posted a contraction in their GDP the next day… Some egg on my face with that one, but Hey! I still think they are poised to pull out of this global financil meltdown on the fast track. Apparently, I’m not the only person that thinks that… Derivatives show that the worst is over for the Aussie dollar… And the Royal Bank of Canada (RBC) is telling their customers to buy the Aussie dollar VS Canadian dollars / loonies… I read that this morning, you don’t think I make this stuff up do you? It was there in on the screen…

I mentioned to Chris Gaffney last week, that I had been seeing more yen selling coming across the trading desk than I had seen in a long time. I said that these people, if they had held it long enough, were probably taking profits. And why not? In this day an age with deflationary pricing pushing most assets downward, when you see a profit, you take it!

The guy known as “Mr. Yen”, Sakakibara, told the press last night that he believed yen may rise to a record 70 VS the dollar… WOW! He also said that it would range trade between 100 and 70… He believes that the yen will be afforded the same kind of love the dollar has received since the financial crisis began in the U.S. With Japan posting a large economic contraction last week, Mr. Yen, is of the opinion that it will help the currency gain to 70.

Hmmm… I just don’t know about all that… For one, I’m not convinced the flight to safety that has underpinned the dollar with buying of Treasuries, will be duplicated in Japan… And two… The only thing I saw pushing the yen stronger in 2008 was the unwinding of the Carry Trade, which I said had come to end about a month ago. So… There you have it… I don’t like yen’s chances to go to 70, but do agree that it could hold 100… It’s darn close to 99 as I type…

Recall last week I told you about my neighbor that stopped me in the driveway and was all concerned about what he had heard on the radio that day, regarding the FDIC going broke… I said then, not to worry about it, as the Fed will print more money and keep the FDIC from failing… If they kept AIG from failing, they certainly would do the same with the FDIC… Well, on Friday I saw this… “the FDIC wants a permanent increase in its line of credit with the Treasury Department to $100 billion from the current $30 billion. FDIC Chairwoman, Sheila Bair told key lawmakers in letters Thursday that such an increase “would leave no doubt that the FDIC will have the resources necessary to address future contingencies and seamlessly fulfill the government’s commitment to protect insured depositors against loss.”

OK… I told you on Friday morning about Gold’s rebound to $940, but it failed to add to that figure even after the horrific jobs data. I guess you would have to say that Gold traders had “priced in the jobs data already”, eh? Gold is off by about $4 this morning, as it gets pulled down by a report regarding global inflation… The Economic Cycle Research institute assesses that U.S. inflation pressures are at their lowest since 1958, and likely to decline further…

But for every report attempting to pull Gold down, there’s one attempting to push it higher… What I’m talking about here is the report that our friends, NOT! At OPEC are going to maintain their 13% cuts in production put in place since September 2008. They may consider more cuts. Oil is trading higher this morning at almost $47, and oil traders believe it will be back to $50 within two months…

Quietly making noise for the past 3 months has been the Brazilian real… The real has gained 4% in the past 3 months, as investors around the world look for yield… And Brazil’s interest rates have had the allure of the Sea Hag’s song to Pop-Eye! But… There’s word out of Brazil that the Central Bank will look to cut rates by 100 BPS / 1% when they meet, later this week. That’s too bad, but Shoot Rudy, Brazil’s rates will still remain higher than you can get in most ports of call… And… Their GDP will be positive…. And… If traders and investors reward the real for cutting rates aggressively like they did over currencies, then the real has nothing to worry about, eh?

OK… So, for the past month I’ve given you my ideas for the countries / currencies that could be on the fast track to recovery, given their ability to remain off the rosters of countries with failing banks. Norway leads the pack, with Canada, and Australia close behind… I even told you about how Paul Volcker thought we should shift to the way Canadian Banks operate. Well… It’s always nice to see someone else follow up on my ideas, not that they read the Pfennig and said, “Hey! Let’s write about what Chuck wrote about”… Nah… That wouldn’t happen… HA! But, seriously, BNP Paribas’ research team has issued a report advising their clients to buy… You guessed it… Norway, Canada and Australia…

BNP said, “we remain friendly on commodity currencies like Norway, Canada, and Australia, and view today’s oil price rally as an indication for other commodities to follow. We are bullish on the Canadian dollar, Norwegian krone, and Australian dollar, but unlike last week we like trading these currencies long against the dollar.”

So… There you go! It’s not just me!

There is no scheduled data to print today, but the rest of the week is chock-full-0-data. On Wednesday, when I board a plane to Florida, we’ll see the Monthly Budget Deficit… That should be a doozy! On Thursday, we get the usual Weekly Initial Jobless Claims, and Retail Sales for Feb… I can tell you right now, that the BHI (Butler Household Index) tells me this report for Retail Sales is going to be very disappointing! Friday the 13th, we’ll see the Trade Deficit, Import Prices, and U. of Michigan Confidence. There are other 2nd Tier reports sprinkled in all week…

I really do think that the Retail Sales for Feb, is going to be bad… And that may weigh on the dollar, that is, if the Trading Theme keeps to the back of the room!

OK, as I head to the Big Finish, I see the euro has lost more ground than when I first came in… It just can’t stand prosperity!

Currencies today 3/9/09: A$ .6360, kiwi .4980, C$ .7735, euro 1.2590, sterling 1.3890, Swiss .8595, rand 10.5930, krone 7.1125, SEK 9.2050, forint 247.90, zloty 3.77, koruna 22.02, yen 99.15, sing 1.5515, HKD 7.7550, INR 51.88, China 6.8410, pesos 15.28, BRL 2.3750, dollar index 89.20, Oil $46.74, Silver $13.22, and Gold… $937.90

Source: A Horrific Jobs Report!

This dismantling of the so-called “New Federalism” will be readily apparent again this week as the federal government is once again at the forefront of the most-closely watched  crisis-fighting initiatives at hand: With Congress pushing forward on an $827 billion stimulus plan and the Treasury Department planning to unveil its new banking bailout blueprint on Tuesday, economists and other experts say the federal government is taking its biggest role in the economy in a generation.

States that once pushed away from the federal government as part of the New Federalism are now essentially begging it for financial support, banks and Big Business that once viewed near-total deregulation as Corporate America’s Holy Grail are now seeking federal financial aid and new regulatory protections (and in many cases are becoming actual business partners with the government), and individuals are asking for tax relief.

Alan Viard, a Bush administration economist now at the American Enterprise Institute, may well epitomize this reversal of thought: He’s one of the economists who initially rejected the need for a fiscal stimulus, stating that the right size for a government spending bill was “probably zero,” believing that federal interest rate cuts and existing unemployment benefits would be enough to do the trick. But he now sees the package as necessary.

“Things have gotten so bad so quickly,” Viard told The Washington Post. “We have now lost 3.6 million jobs, a stunning loss. But what’s more horrifying is that half that loss has occurred in the last three months. This is a severe recession.”

The exact shape and size of the package matters less than the timing, and any delay will be very damaging, economists say.

“Most of the things in the package, the big dollar amounts, are things that are pretty quick stimulus and need to be done,” Alice Rivlin, who was former president Bill Clinton’s budget director and a critic of aspects of the proposed stimulus, told The Post. “Is it a perfect package? Of course not. But we’re past that. Let’s just do it.”

Signs of the Stimulus

The U.S. Senate late Friday reached agreement on the estimated $827 billion stimulus bill, setting the stage for what’s expected to be some tough negotiations with the House of Representatives over tens of billions of dollars in aid to states and local governments, tax provisions, and programs focusing on education, health and renewable energy.

Congress is pushing hard to complete the legislation this week. But that figures to be a challenge. The House bill was passed without any Republican support, while the Senate version passed Friday night between Democrats and three moderate Republicans.

During a rare floor session on Saturday, Republican opponents continued to criticize the entire stimulus proposal – even though they clearly don’t have the votes to stop it. The bill is expected to be passed in the next few days.

The price tag for the Senate plan is only slightly more than the $820 billion measure adopted by the House late last month. Both plans seek to resuscitate the U.S. economy with similar one-two punch strategies:

• Fast-acting tax cuts designed to jump-start consumer and business spending.
• And longer-term – albeit slower-acting – spending on public works programs and other projects that are projected to create more than 3 million jobs.

Despite these seemingly similar philosophies, the two plans rely on approaches that are very different. The higher-priced House bill emphasizes help to states and municipalities that would otherwise be facing major cuts in services and layoffs of public employees, while the Senate slashed $40 billion of that kind of funding from its version of the bill.

The Senate plan focuses more on tax cuts, lowers a proposed increase in food stamps and provides health-care subsidies for the unemployed that are much less generous than the House version. The Senate plan also creates $30 billion in tax incentives to encourage Americans to buy homes and cars within the next year.

House Speaker Nancy Pelosi, D-Calif., said the emerging Senate cuts to the stimulus program “very damaging” and that she was “very much opposed to them.” But after the Senate reached a deal, Pelosi expressed resolve to complete the legislation in the days ahead.

U.S. President Barack Obama has made the economic recovery effort the centerpiece of his agenda since even before he officially took office. But President Obama now intends to get much more involved, and much more aggressive: He will conduct a “town-hall-style” meeting in Indiana today (Monday), followed by a formal “prime time” White House news conference – the first of his term – tonight.

The president will then pitch the plan again in Florida tomorrow (Tuesday) and again in Virginia on Wednesday.

Senate Majority Leader Harry Reid, D-Nev., said final passage of the Senate bill is expected Thursday, after which congressional leaders say they will hurry to get the House and Senate versions into conference with the hope that a passed bill can be sent to the White House by the end of week, the San Francisco Chronicle reported.

Banking Plan Overhaul Unveiling Tomorrow (Tuesday)

Busy new U.S. Treasury Secretary Timothy F. Geithner last week promised that the Obama administration would unveil its new blueprint for rescuing the U.S. banking system today. Over the weekend, however, the administration said the rollout would be delayed until Tuesday, so that the focus could remain on passage of the stimulus package, Bloomberg News reported.

But that doesn’t mean the banking bailout plan isn’t key.

According to a recent analysis, the Obama administration has a multi-pronged strategy for quelling the financial crisis, including:

• A program to insure banks against extreme losses on mortgages and other loans.
• A new round of investments in banks.
• Help for homeowners facing possible foreclosure.
• The broadening of a U.S. Federal Reserve program to ramp up lending.
• The Treasury Department could also look at purchasing toxic assets from banks – possibly with the aid of private-sector financing.

This would represent an overhaul of the $700 billion Troubled Assets Relief Program (TARP) initiated by the Bush administration. As the name implies, TARP was initially concerned with buying troubled assets – but it quickly evolved into a direct-government investment into the banks.

This new Obama plan reflects Geithner’s personally held view of how governments should respond to financial crises. Geithner believes all available financial tools should be used – and used aggressively. Any such effort would include direct efforts to deal with the financial sector’s massive losses, since that would help renew public confidence in the financial system.

Too small a government response during a crisis poses more risk than too much response, he said during his confirmation hearing.

Many of the details of what Geithner will announce remained in flux, although the broad outlines were becoming clear, published reports state. But one thing is certain: Even the ideas that are continuations of the initiatives started by former Treasury Secretary Henry M. “Hank” Paulson Jr. will have a unique Geithner twist.

One example: The government will almost certainly continue to invest in banks. But past investments consisted of a form of “preferred stock” that granted the federal government no say in how the bank was run, or how the money would be used.

As a Money Morning investigation revealed, that lack of control allowed banks to use taxpayer-provided TARP money as financing for buyouts. And then the banks refused to detail how they spent the money – and why not? They weren’t required to.

Under the new plan, there will still likely be new government investments in banks. But Geithner will likely call for those new investments to be convertible into common stock after some fixed period of time, perhaps seven years. If the banks are unable to raise private capital in that span, government control would escalate.

Banks receiving money also will probably have to report to the government and to the public, and the government is likely to insist that the new capital be used to expand lending.

Geithner has also been looking for a way to bring back the original TARP concept, which Congress passed on Oct. 3. Paulson pitched the plan to Congress as a program to buy troubled assets off of banks’ books, then shifted the plan and opted to invest directly into the banks instead.

Paulson’s chief worry – and the reason that he changed direction – was that asset purchases would involve too many technical complications, meaning it would take too long to enact. And that delay could be costly to a system where banks were teetering on the precipice of failure.

After struggling with those same issues, Geithner and his team appear to have settled on an approach that amounts to financial triage, meant to give investors confidence that banks will not encounter vast new losses so that they are willing to invest private money, The Post reported.

In addition to buying bad assets, the Fed and Treasury in the next few weeks are expected to expand a program that should jump-start lending outside the banking system. In November, the agencies launched a program – the “Term Asset-Backed Securities Loan Facility” – that would devote $200 billion for credit card, auto, student and small-business loans.

That program will be extended to include residential real-estate mortgages and into the commercial real estate sector. Geithner may also announce an initiative that would inject government money into companies known as mono-line insurers. These firms are key players for states and municipalities when it comes time for those state and local government bodies to borrow money. With the implosion of the housing bubble, and the subsequent implosion of the commercial real estate business, mortgage-related losses by the insurers have made it harder for states to issue the municipal bonds that would help them ride out the recession without aggressive tax increases or budget cuts.

Geithner is likely to roll out a plan, worth $50 billion to $100 billion, to encourage the modification of mortgages for homeowners who would otherwise likely face foreclosure. It could be based loosely on a strategy for foreclosure relief engineered by Federal Deposit Insurance Corp. (FDIC) Chairman Sheila C. Bair, when the FDIC took control of the failed bank IndyMac Bancorp Inc. (IDMCQ) last year.

Market Matters

On the corporate front, United Parcel Service Inc. (UPS) posted a profit (though revenue declined) and then announced new cost-cutting measures.  Motorola Inc. (MOT), The Walt Disney Co. (DIS), Time Warner Inc. (TWX), and Costco Wholesale Corp. (COST) reported disappointing results.  Visa Inc’s (V) earnings jumped by 35%, though management warned of tougher times ahead.

Bailout plan recipients have tried to cut back excessive spending (and the associated bad PR) as Goldman Sachs Group Inc. (GS) (Miami) and Well Fargo & Co. (WFC) (Las Vegas) canceled huge boondoggles. Bank of America Corp. (BAC) is selling off corporate jets, and Citigroup Inc. (C) may be attempting to get out of the $400 million marketing deal with the New York Mets.

C-SPAN must be enjoying stellar ratings as investors seem obsessed with the inner-workings of Congress and their debates on the stimulus and bailout.  The markets disregarded much of the dire earnings and economic data (terrible unemployment report…see below) and focused on the newfound optimism that politicos can work together to get the country moving in the right direction.

Economically Speaking

Just how long until a stimulus package starts creating jobs?  That answer can’t come soon enough for the almost 600,000 people who moved to the unemployment line in January, the most devastating month for job losses since 1974.  The unemployment rate climbed to 7.6%, forcing many economists to (upwardly) revise their projections for the rest of the year (and beyond).

Since the recession “officially” began in December 2007, the country has lost more than 3.6 million jobs, with most of the losses coming in the past three months.  The rest of the data released during the week did little to contradict the lousy unemployment picture.  Factory orders fell for the fifth straight month and the ISM index revealed that purchasing managers still look for contraction in the manufacturing sector. Though the services sector showed a slight rebound in its ISM survey, the index reported a fourth consecutive month of declining activity.  Residential construction spending experienced its worst annual decline ever recorded (since 1993), though optimists are hopeful that a stimulus package that focuses on infrastructure growth will prompt a renewal in non-residential building.

With the Fed stuck looking for creative ways to get involved (now that the benchmark Federal Fund rate stands at about 0%), its international counterparts took action (or inaction) of their own. The Bank of England (BOE) cuts its primary lending rate to a record low 1.0%, while the European Central Bank chose to leave its rate unchanged (for now) at 2.0%.

Weekly Economic Calendar

Source: As Stimulus-Package Debate Continues in Congress, New-Look Bank Bailout Plan is Set to Debut This Week

This from Money Morning:

In a surprise to many, India’s central bank has cut its base-lending rate four times since October, going from 9% to its current rate of 5.5%. After all, isn’t India’s economy growing nearly as fast as China’s? And isn’t that growth already being fueled by an unprecedented level of middle-class spending?

The answer to both questions is a resounding “yes.”

But there’s a pesky asterisk here – and that’s the global financial crisis, the cash drought that has sapped nearly every country directly through their banking systems, or indirectly through fluctuations in exchange rates and gyrations in revenue received from key trading partners.

And the Reserve Bank of India’s rate cut proved two things:

First, its new governor, Duvvuri Subbarao, is less afraid of inflation than he is a global slowdown.

“A 100-basis-point cut is an indirect admission that not all is ‘hunky dory’ with the India growth story,” Nandkumar Surti, chief financial officer at JPMorgan Asset Management India Pvt. Bank in Mumbai (JPM), told Bloomberg News. “One way to look at it is that the global problem has begun to affect us.”

For years, India doggedly raised rates to keep widespread inflation in check. It even went as far as subsidizing food and forcing the state-owned oil companies to sell gasoline to domestic consumers below cost.

And second, Subbarao believes India should taper its economic growth outlook for 2009.

This installment of “Outlook 2009,” report will chart India’s growth next year – its headwinds, tailwinds and possible factors that could turn the direction of either.

It will also reveal the two best ways investors can ride along with India’s economic growth, and take home profits from India’s bullet-proof industries – and in the process, perhaps even offset some of the losses they’ve incurred here in the U.S. market.

India’s Headwinds

India’s economy logged an annual growth rate of 7.6% for the quarter ended Sept. 30 – its slowest rate of growth in nearly four years.

India’s farm sector employs about 60% of India’s 1.14 billion people. That was great during last year’s run-up in commodity prices, but those prices have subsequently fallen, and so has the ag sector’s rate of growth – 2.7% in the quarter ended Sept. 30, which is well below the 4.7% pace of a year ago, according to The Wall Street Journal.

Manufacturing – also a powerful economic engine – has also stopped chugging as hard. That sector advanced 5.0% in the last year, a significant drop from the 9.2% growth from the same period the year before.

The global deceleration bears much of the blame for those drop-offs, as the United States far and away, remains India’s top trading partner.

But India is now dealing with a major share of homegrown problems – issues that have become ever more glaring as India’s economy grows in size.

The biggest problem of all: India’s domestic infrastructure is sorely deficient.

The country’s roads and highway systems are a mess, and its power grid is grossly insufficient for an economy of India’s size and rate of growth. That’s an observation that Money Morning guest columnist and well-known India-investment expert Karim Rahemtulla observed firsthand in India last year, when he lead an investor’s field trip around the country.

And while India has a prosperous and growing middle class, more than 200 million people living there are living in poverty. The government has taken many measures in the past decade to reduce poverty, but Rahemtulla says that the nation’s poor are “mostly against reform because they see little benefit from it.”

In a way, that, too, is an infrastructure issue. India’s poor don’t feel any kind of real connection to the country’s financial system. Indeed, many work day-by-day in the thousands of farming villages. A wave of government reform won’t affect them because they are living at such a far distance – physically, socially and culturally – from the parts of India that would benefit from any changes, new programs, or financial-stimulus efforts.

Even with those obstacles, the World Economic Forum (WEF) and Confederation of Indian Industry predict India will grow 7.4% to 7.8% in the 2008-2009 fiscal year.

But not everyone agrees with that assessment.

“Not going to happen,” Rahemtulla said. “There will be positive growth because India will reduce rates and devalue the rupee in order to stave off economic contraction which it can ill afford.”

But Rahemtulla was just as quick to credit the Reserve Bank of India for taking action as the global financial crisis spread across the world.

“They have explicitly stated they will aggressively promote fiscal and monetary stimulus to promote growth,” Rahemtulla said.

India’s Tailwinds

No question, the global financial crisis has crippled economic growth around the world. But the malaise – combined with the significantly reduced inflation that’s resulted from the downturn – has opened up a straightaway into which India can shift its cautionary policies, refuel its economic engine, and ultimately re-accelerate growth.

“Taking note of the downturn in the inflation rate, RBI has lowered the policy rate as well as the reserve requirements. RBI’s policy is now biased towards stimulating growth,” India’s former finance minister, Palaniappan Chidambaram, said in reference to the steps taken by the Reserve Bank of India.

“If the rate of inflation continues to decline, the policy rates may also moderate and the bias in favor of growth may deepen,” he told economic editors during a meeting late last year, Reuters reported.

India’s annual inflation fell near a 10-year low of 6.38% in December, a dramatic drop from the 13% growth rate in August. The trend is expected to continue, with inflation slowing to 5% or less by March, Pronab Sen, secretary at the ministry of statistics and program implementation, told Reuters.

That could open a door for the Reserve Bank of India to cut interest rates further, encouraging banks to lend money. And though lower rates may weaken the rupee, Rahemtulla says that will make India’s exports more appealing – especially as countries around the world tighten their belts amid the global financial crisis.

Low inflation isn’t the only tailwind that’ll rebound India’s economy back to its high speed.

India’s overall economy sputtered, but a pair of critical sectors posted promising numbers: Construction is up 9.7% from a year earlier, while India’s service sector has advanced at a robust 10.8% in that same span.

Credit goes to India’s middle class, which, like China’s, is growing in both numbers and overall strength.

Also very promising: Only $1 billion of the Reserve Bank of India’s $510 billion loan portfolio is in toxic Western assets.

That explains why – at a time when the global turmoil has claimed several major U.S. banks – none of India’s banks have gone bust.

India is unmistakably frugal. And its monetary policy proves that it is willing to accept a reputation for being a stifler of growth – instead of being known as being clumsy, overzealous and even reckless, as many U.S. banks are now accused of being.

Two Ways to Play India… for Cheap

Like every major economy, India is falling short of previous economic forecasts in large part because of the global financial crisis.

But make no mistake: Next to China, India’s economy will grow four-to-five times faster than most of the world’s other major economies – many of which are stuck in recession.

For now, investors should target the companies in India that are internationally competitive and are active exporters. That’s because any budget or inflationary difficulties will probably be reflected in a weakening of the rupee, which will help countries exporting from India.

Infosys Technologies Ltd. (ADR:INFY) is India’s premier exporter of software. The company carries almost no debt, and its shares are trading at a current Price/Earnings (P/E) ratio of 12.6, with a dividend yield of 1.48%. That P/E is quite low for a company in a high-growth market such as software.

Dr. Reddy’s Laboratories Ltd. (ADR:RDY) is India’s premier manufacturer of generic pharmaceuticals, and is positioned to benefit in the 2008-2012 period as many popular drugs lose their patent protection and are opened to international competition. In the near term, too, as household and corporate budgets tighten around the world, people will more likely opt for generic prescription drugs, instead of high-price name brands.

Dr. Reddy’s has moderate debt (about 50% of equity), and is trading at 19 times forward earnings – not at all pricey, given the high promise of the generic-drug sector. The stock also features a modest dividend yield of right around 1.0%.

Both stocks are down nearly 50% from their 52-week highs, suggesting value.

This is the eleventh installment of Money Morning’s”Outlook 2009” series, which looks at the global investing outlook for the New Year.

Source: India’s Economy Standing Firm Amid the Growing Global Financial Crisis

Well, front and center this morning is a rally in the currencies that began yesterday mid-morning, and has carried through the Asian and European markets. I’d tell you why the euro is 2.5 figures above yesterday morning’s level, but you’d laugh at me… No wait! That’s what you’re supposed to do, Chuck, tell the people what’s going on! HA! Seriously though… I don’t think you’d laugh at me, maybe the dolts that run trading floors around the world, or the pundits that write stories about the markets, but not me!

Here’s the skinny… Yesterday, I told you about how the markets were convinced the European Central Bank (ECB) was going to follow the Fed and reduce interest rates this week on Thursday. I also told you that I DID NOT believe the ECB would cut rates, right? OK… Well, yesterday, and I don’t believe for one minute that these guys read the Pfennig and said, “Hey, that Chuck Butler says the ECB won’t cut rates, we had better change gears”… But, yesterday, the thought that the ECB would lag the Fed with interest rate cuts began a whispering campaign, and before you know, there’s a headline story on the Bloomberg, say just that!

Fickle dudes, eh? One day they think this, the next day they think that. To think it is one thing but to spew it all out for everyone to read, is another! I know, I know, I change my mind sometimes, and I’m always reminded of the saying by John Maynard Keynes…”When the facts change, I change my mind. What do you do, sir?”

So… Anyway, back at the ranch, the euro is rising again, and the Aussie dollar is trading above 72-cents for the first time in three months! I’ve explained why this is going on, but in case you missed class that day… The Obama bounce, is giving a warm and fuzzy to the risk takers, and when risk comes back on board, the high yielders get a huge boost… Aussie, kiwi, reals, rands, they, even though their interest rates have been cut off at the knees, are still considered “high yielders”, and therefore, get all the love and attention, when the risk takers come on board…

U.S. stimulus spending is all the rage in the high yielders and the emerging markets, who have been beaten about the head and shoulders for far too long now! Yes, stimulus spending could be the key master to all that ails the world’s economic engine here in the U.S…. But at what cost?

I know, I know, you don’t want me getting on my soapbox and carrying on about the rising debt in the U.S. and our national debt going into the stratosphere, so I won’t… Not today…

There’s been a particular pattern going on in Gold that I think is worthy of mention. You see, yesterday a saw a story about Gold, and I decided to run a graph on what I thought had been happening, and the chart confirmed my thoughts… You see, Gold has been in a pattern of rising to fresh highs, and then falling back, but the falling back sees the lows at higher levels each time… A stair step if you will… Here’s a look at what I’m talking about…

In the past 3 months… Gold hit a low of $712.30 on Nov. 12, and rose to $821 to Nov 25
Then fell to $$756 on Dec 5, and rose to $852 on Dec 18.
Then fell to $846 on Dec 25, and rose to $882 on Dec 31.
The fell to $859 on Jan 5…

Where will it rise to this time? $900? Difficult to call, but this type of pattern usually indicates that each fall back in price (but to a higher low) creates a new base from which an asset can move higher. So, with that in mind, the outlook for a higher price in Gold in this pattern is possible.

Of course, $900, is a far cry from those that believe that Gold will get to $2500. But, I like small steps in assets, that way, it allows investors to still jump in without the asset getting away from them and then they chase the price higher and higher. Again, though, I shiver at $2500 Gold, because, if Gold is $2500, I can’t imagine the condition of the U.S. economy and the dollar…

The data yesterday in the U.S. was a mixed bag of bad stuff for the economy… The most important print was the ISM (non-manufacturing) Index. Recall yesterday I told you that the most important component of this report is the Employment component, which is my “secret” indicator of the National Jobs report (Jobs Jamboree). So… A quick look at the employment component indicates that the Jobs Jamboree, on Friday, will be close to negative -500K… This is what the “experts” are forecasting right now, and for once in a Blue Moon, I agree with them… Although, to me, I want to see the color of the November revision, which I explained all about the other day… Will it be -600K?

Factory Orders printed worse than expected yesterday… Factory Orders for November, collapsed 4.6% (remember the “experts” forecast -2.3%), and the prior was revised lower from -5.1% to -6.0%. I think that the back to back decline represents the biggest since data began in 1992.

The mixed bag part came in the form of the ISM (non-manufacturing) Index which measures the pulse of the Services industry, and for the first time in 4 months it did not contract. The index rose to 40.6… However, this is the 3rd month of below 45, which I’ve explained in the manufacturing side of this report indicates recession…

The Labor picture in Germany took a hit this morning, as the unemployment rate ticked up to 7.6% in December. You see, the Germans don’t have the Bureau of Labor Statistics (BLS) to help them out each month with “cooked books”… If the U.S. unemployment rate was accurately calculated it would be much higher than the 6.7% the BLS gives us, and wants us to believe…

Anyway… I didn’t mean to have that turn into a discussion about the BLS, I wanted to point out that even with a sour report like that in Germany this morning, the euro is rallying…

Speaking of unemployment… Did you see that ALCOA announced that they would cut its work force by about 15,000, or roughly 14.5% of its current employees and contractors. It also plans salary and hiring freezes, more plant closures and production cuts, and a 50% cut in capital expenditures? I did, and if that right there doesn’t illustrate the dark clouds over the global economic picture, nothing does!

One currency in Europe that rallied like there was no tomorrow, yesterday was the British pound… Before I knew it, the pound was taking names and pushing higher. This has to be a “cross thing”, because there’s nothing, nada, zero, zilch, in the way of good news from the U.K. economic and financial problems… So, when I talk about a “cross thing” I’m simply talking about how the currency “pairs” get crossed against other currencies, and in the end, a particular currency, which is a part of a lot of “pairs” gets marked up… Or down… It can go both ways… But in the pound’s circle, it got marked up yesterday… But, I just don’t think the pound can hold these gains… The Bank of England (BOE) WILL cut rates tomorrow, and before you know it… Voila! A weaker pound once again.

Here lately, it seems that I’ve highlighted a “Currency of the day”… I don’t want to keep going with that, because it could become a real pain to come up with a “currency of the day”… For now, I’m highlighting currencies that have BIG moves in a day… If I carried on with a “Currency of the day” I could be stuck highlighting a currency that moved .1%! UGH! So, I’ll steer clear of that one…

So, the latest on the Madoff scandal as reported by the Wall Street Journal… “Ten days before his arrest, Bernard Madoff received $250 million from a man who helped give him his start on Wall Street, a move that shows how the investment manager tried to raise cash to stave off his firm’s collapse.”

Geez Louise, how’d you like to be the guy that gave Madoff $250 Million and watch it go away, and the guy get carted off to jail? (well not yet) I guess if you have $250 Million to “give away” there’s more where that came from, eh?

Currencies today 1/7/08: A$ .7210, kiwi .5965, C$ .8455, euro 1.3630, sterling 1.4955, Swiss .9090, rand 9.40, krone 6.9350, SEK 7.7975, forint 195.50, zloty 2.9120, koruna 19.25, yen 93.20, sing 1.4715, HKD 7.7525, INR 48.76, China 6.8335, pesos 13.35, BRL 2.2070, dollar index 82.29, Oil $48.29, Silver $11.38, and Gold… $864.25

Source: A Trading Pattern For Gold

As a result, gold has started to shine again as a stable source of value at a time when the dollar and other commodities – like oil and copper – have fallen hard. The spot price of gold has climbed above $870 an ounce on the New York Mercantile Exchange, up about 20% from its October lows.

Gold has been on roller coaster ride in 2008, moving from its all time high of $1035 in March, to as low as $681 an ounce. Some of that decline occurred during the recent stock market plunge. Many investors were forced to liquidate profitable gold positions in order to raise money to cover their paper losses.

Its decline was then accelerated by the recent onslaught of financial bailouts, as many investors held a preference for liquidity and safety in the form of cash holdings guaranteed by the U.S. government.  That was reflected in the skyrocketing prices of government bonds and investments in government-backed banks, which also lowered yields.

But with the Fed’s recent decision to cut its target interest rate to a range of 0% to 0.25%, the dollar has suffered a significant decline. Suddenly, foreign investors who were scooping up dollars have cut back on their flight to safety, knocking the dollar index (NYBOT: DX) down 10% in the last month.  The index reflects the dollar’s value against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc.

The Fed’s interest rate cut may also have given gold a comparative boost in the eyes of investors. Gold, which never pays interest, suddenly doesn’t look so bad when compared to T-bills, which also are paying zero interest lately.

Volatility has risen this year compared to previous years, and the last few months have been the most volatile of all – an indication of investor ambivalence. But any uncertainty about the increasing price of gold may have been waylaid by the Fed’s recent rate cut and its dampening effect on the dollar and Treasuries.

Consequently, don’t expect this rally to be short-lived. As we pointed out in our 2009 Outlook Report on Gold, the fundamentals in the market hold the promise of more gains ahead.

It appears unlikely central bankers around the world will stop stimulating economies, printing money and doing whatever it takes until growth and confidence are restored – even if the cost is rampant inflation.

Consider these wild card inflation indicators that Money Morning Contributing Editor Martin Hutchinson believes will carry gold prices to $1,500 an ounce by the end of 2009:

• Over $7 trillion of freshly minted U.S. dollars are now in circulation with the aim of saving the global financial system.
• The incoming Obama administration has promised another $1 trillion or so stimulus package is on the way.
• It’s likely the Fed’s interest rate cuts will soon be followed by central banks around the world.

These economic stimuli are designed to do one thing – get the consumer spending again.

The bailout of the banks was the first step, but the banks are still keeping a tight rein on credit. Now the government is trying to get easily available, cheap money back into the hands of the consumer by running the printing presses around the clock.

“The government is pumping money in so many banks, and that money has to come out somewhere,” said Hutchinson.

Some of that money will “come out” into the economy in the form of higher stock prices. That will make consumers wealthier, and could give them more confidence in the economy. More confidence means more spending. As that happens, prices for goods should begin ticking upward, giving another booster shot to gold prices.

For instance some of that money is already going into gold bars and coins. In fact, the U.S. Mint was forced to suspend sales of the popular American Eagle and Buffalo gold coins for extended periods twice in the last year. The mint was unable to secure enough gold blanks from suppliers to match demand.

“I’ve never seen a case where demand was so high and supply was so short,” Chicago coin dealer Harlan Berk told the Associated Press.

With massive amounts of capital floating around, the time it takes to re-inflate the global economy will be far shorter than most analysts expect. Governments fear deflation more than anything.  It appears they will only fight inflation when they are assured they have won the first battle, which is growth at any cost.

When inflation kicks in, the dollar’s buying power will suffer long-term.  In fact, we expect a decline in all the world’s paper money, over time.  Historically, investors in gold have prospered during periods of weakening fiat currencies.

That leaves gold as a bright light in the investment world, making it an odds-on favorite to open a new leg of a long-term uptrend

Gold Bugs Have Fed to Thank for Recent Rally

Industry sources say the rise in retail demand for gold may turn Japan into a net importer again, but that may not happen immediately as many players are still looking to unload their gold holdings when prices recover.

Japan was a net importer of gold in October for the first time this year as investors bought on a plunge in prices, but exports exceeded imports again in November, finance ministry data showed on Friday.

In the eleven months to November, Japan’s exports of unwrought solid gold, gold bars and sheet totalled 393.9 tonnes, up from 174.9 tonnes in 2007.

In November alone, Japan exported 47 tonnes of gold, rising more than five-fold from October, while imports more than halved to 4.1 tonnes from the previous month.

A Tokyo-based trader said the rise in exports last month may have been related to spot gold prices rebounding above $800 an ounce after falling to near $680 in late October.

“There were still many people who hadn’t sold,” the trader said, referring to a wave of selling after spot gold prices hit a record high of $1,030.80 an ounce in March.

But he noted that in Japan, premiums on spot gold rose by as much as about $2 when gold prices dipped below $700, reflecting strong demand from Japanese individual investors.

That compared with discounts deepening by as much as around $3 when the gold market was rallying.

The global financial turmoil has prompted many Japanese retail investors to reassess gold as a long-term investment rather than just a safe haven at times of crises, industry sources say, adding that a wider array of investors are now attracted to metal.

Other overseas assets have lost their appeal as central banks around the world slash interest rates close to zero, wiping out huge yield differences and on the yen’s appreciation to 13-year highs against the dollar.

“Although the principal is not guaranteed and it’s does not bear interest, gold does not fail,” said Osamu Ikeda, general manager at Tanaka Kikinzoku Kogyo, Japan’s biggest bullion retailer.

Tanaka Kikinzoku saw a record number of new customers signed up for its online gold savings plan in November, which allowed customers to start from a purchase of a minimum of 1,000 yen worth of gold each month.

Tanaka does not report actual volumes or value, but it said its sales of gold exceeded its purchases for the fourth month in a row in November.

“Given the lack of a key, strong currency, the importance of gold as an alternative to the dollar has been heightening,” said Takeo Okuhara, market economist at Daiwa SB Asset Management.

“Gold is an asset with value more than zero and is also regarded as a type of savings in times of economic deterioration,” he said.

Some of the gold individual investors sell to bullion houses is recycled for industrial and jewellery use in Japan, but the remaining bulk is sold via Singapore and other trading centres to the rest of the world.

Chikako Mogi, TOKYO, Dec 26 (Reuters)

Good day…and welcome to another week, hopefully the currency markets can continue their assault on the dollar which began a few weeks ago. The dollar index peaked back on November 21, and with the exception of a few days around the beginning of December, the greenback has consistently fallen vs. most of the major currencies. Friday was no exception, and the dollar continued to give back gains over the weekend with the Euro climbing back over $1.35 for the first time in two months.

This morning the markets are focusing on the Fed’s Open Market Committee meeting and rate announcement which will come tomorrow. It is widely expected that Bernanke and his compatriots will push US interest rates close to just 0.5%, the lowest on records dating back to July 1954. From everything I’ve read over the weekend, this 50 basis point cut is pretty much a done deal, and currency traders are actually more interested in what the Fed’s statement will say about ‘alternative easing measures’. The rate announcement will come tomorrow at around 2:15 pm EST after a two day meeting. The FOMC meeting had originally been scheduled for just one day, but was extended so policy makers could study options for unusual steps to spur the economy. I guess they finally figured out that they are running out of room with the interest rate cuts!

The Feds newest weapon against the falling economy is ‘quantitative easing’, which the Bank of Japan used in the 1990’s. This non-traditional method of easing centers around pumping money back into the financial markets as quickly as possible. The Fed has already started down this path by allowing its balance sheet to more than double in size after pumping over $1 trillion into financial markets. The markets are now expecting the Fed to announce it will start purchasing private sector mortgages to drive down home loan costs. By purchasing these bonds, the Fed would narrow the spread between their yields and yields on US Treasuries, and theoretically allowing banks to offer home loans at lower rates.

But the Fed has already pumped trillions into the banks in an effort to get them to start lending, so I’m not sure having the Fed narrow mortgage spreads will get these same banks to open up their lending windows. And even if the banks lower mortgage rates, they won’t be lowering credit standards. Unemployment continues to rocket upward as more and more firms lay off workers. Do you think these banks are going to be willing to refinance someone who has just lost their job?

And what will be the long term impact of all of this ‘quantitative easing’? The Fed is mashing on the money supply accelerator, totally ignoring the inflationary results which all of this will bring down the road. Ben Bernanke is smart enough to know the risks of the path he is speeding down, but right now he is choosing to ignore the consequences in an attempt to keep the economy from falling off the abyss. Some at the Fed believe they will be able to pull all of this added liquidity back out of the markets as soon as the economy starts to recover. But this is a very difficult thing to do, as the Fed would have to start pulling liquidity and increasing rates just as the economy is starting to turn. I think it is pretty obvious the ‘experts’ have a tough time calling the turning points, as it took them almost a year to call the recession!! And the consequence of missing the timing on pulling the liquidity back out of the market is much more drastic than mistiming the entry into the recession. Hyperinflation is waiting on the other side of this short term deflationary pause, and the Fed is currently looking the other way.

This weekend, President Bush announced that he is thinking about spending some of the TARP money which was set aside to stabilize the financial system to bail out the auto industry. This announcement caused a further sell off of the dollar as it is quickly losing its status as a safe-haven currency. Chuck was busy this weekend, but still found time to send me his thoughts:

“Well… We went to cut down our tree today, then watched Alex’s basketball team get smoked! Put the tree up in a spiffy, with one of the greatest inventions of man kind, the swivel stand… And now I’m off to tell you what I’ve read about this weekend…

First though… A quote from Ronald Reagan… “The most terrifying words in the English language are: I’m from the government and I’m here to help”

OK, with that in mind, I wanted to discuss the bailout for the automakers, GM and Chrysler.

First of all, I know it will be tough for the autoworkers should they be laid off, especially at this time of the year. But, the problem here is the fact that the automakers have run their respective companies very badly, and now they expect the taxpayer to bail them out.

It was reported on Friday that the Gov’t is “looking into” using TARP money for the automakers bailout since the Senate voted “no” to the $14 Billion plan.

First of all… Congress said nothing about helping carmakers, or any other non-financial business, in October when it authorized the $700 billion Troubled Asset Relief Program, or TARP. But yet, it is being discussed as the “funding source of funds”…

That fund was never designed to rescue manufacturing companies with long-term operational issues. It was designed to shore up confidence in the banking system in order to thaw the world’s credit markets.

Our own David Nicklaus of the St. Louis Post Dispatch has this to say, which makes a whole lot of sense to me! “The Detroit Three have been losing market share for decades, and their bloated cost structure makes it difficult for them to turn a profit even in good times. They have too much debt, too many models, too many dealers and, sad to say, too many workers.

Congress seemed to view an auto bailout as a jobs program, and TARP is nothing of the sort. In fact, the Treasury has invested in Bank of America, which is eliminating 35,000 jobs, and Citigroup, which is slashing 52,000.

The Treasury program, as it’s been used so far, at least lacks one of the worst features of the failed auto bill. Nothing in the TARP legislation allows the government to name a car czar.”

Yes, a Car Czar… Those Czars worked out well for the Russians, eh?

But the thing that really gets my blood boiling folks, is the fact that if bailout had gone through with the Car Czar, it would have been one more nail in the free markets / business coffin, just another opportunity for those that want to run the country toward the socialist side of the ledger…”

That is one of the things I love about Chuck, you don’t ever have to wonder where he stands on something!

As I started to say before I went off on my FOMC tangent, the dollar continued to give back ground vs. just about all of the major currencies over the weekend. The Euro was up over 1.2% vs. the dollar, and broke through the $1.35 handle. The only two currencies which sold off over the weekend were the South African rand and Brazilian real, which were down just slightly. In addition to the FOMC meeting and announcement, we will get the TIC flows, Empire manufacturing number, Industrial Production, and Capacity Utilization numbers today. Tomorrow will bring the CPI numbers along with housing starts, building permits, and ABC Consumer confidence. Wednesday will be a light data day with just the Current Account Balance reported, and Thursday will close out the data with the weekly jobs numbers along with Leading indicators.

The Australian and New Zealand dollars rose on speculation the FOMC will be cutting US interest rates. These two currencies will benefit from their higher rates with the US cutting rates to near zero. The currency markets have started to move back toward trading on fundamentals over the past few weeks, and interest rate differentials are one fundamental which favors the NZD and AUD. If the Fed’s statement makes it known that interest rates will remain low for a long time, the dollar would likely fall further vs. the Aussie dollar, as the RBA has signaled that it is close to the end of its rate cutting cycle. Benchmark rates are nearly 400 basis points higher in Australia and New Zealand when compared with the same rates here in the US.

In a break with the recent trading pattern, the Japanese yen rallied along with the New Zealand and Australian dollars. A former Deputy Governor of the BOJ said Japan is probably not going to lower rates further; “with the interest rate already so low, a further reduction would have only limited impact.” The central bank’s Tankan survey today showed confidence among large manufacturers fell the most in 34 years as a deepening global financial crisis crimped export demand, forcing companies to pare production and fire workers. The yen’s recent surge to a 13 year high has compounded woes for manufacturers.

Gold continued to rise over the weekend, pushing back up to an eight week high in London. The dollar’s fall has spurred investors to move back into gold as an alternative investment. News that President Bush was looking to tap the bank bailout fund to keep GM and Chrysler out of bankruptcy spurred further purchases of gold. With the tremendous growth in the US money supply, and the FOMC turning their back on inflation concerns, precious metals should continue to gain ground. Gold is traditionally one of the best hedges against rising inflation.

Currencies today 12/15/08: A$ .6635, kiwi .5523, C$ .8138, euro 1.3473, sterling 1.4969, Swiss .8534, ISK 218, rand 10.1985 krone 6.9051, SEK 7.9963, forint 197.97, zloty 2.9644, koruna 19.428, yen 90.79, baht 34.88, sing 1.4773, HKD 7.75, INR 48.0512, China 6.85, pesos 13.5138, BRL 2.387, dollar index 83.15, Oil $48.52, Silver $10.36, and Gold… $827.60

Source: Waiting on the FOMC Meeting

China’s consumer price index for November climbed 2.4% for the year, a sharp drop from the 4.0% posted in October and the fourth consecutive month-to-month drop, its National Statistics Bureau said today (Thursday).

Though not ideal for China’s overall economic growth, the silver lining is that falling consumer prices open a window to take a hatchet to the 5.58% benchmark interest rate, which would pump billions back into the economy and encourage banks to boost lending.

“A worst-case scenario for deflation would see producers cutting prices, suffering lower margins and slashing wages, which would eventually damp consumption,” Li Wei, an economist at Standard Chartered Bank Plc in Shanghai, told Bloomberg.

Clothing prices fell 1.7%, and transportation and communication prices fell 0.7% (lead by a 14.3% drop in fuel).

Food prices increased the most of all things measured, rising 5.9%, lead by higher prices for grain, fish and produce. That’s an encouraging sign, as food prices are a large part of China’s inflation dynamics.

China Quick to Act

What’s perhaps most striking about China’s slowing inflation is that it’s 180-degree turn from earlier this year, when consumer prices were rising as fast as 8.7% and officials were doggedly trying to temper one of the sharpest commodity run-ups in history.

Now, domestic demand has cooled – though not nearly as drastic as other major economies – and Chinese officials are pulling out all stops to prevent prices from trending into deflationary conditions.

Its most recent push: An ambitious economic stimulus that will pour $585 billion into housing, water-and-energy projects, airports, disaster relief and railroad construction over the next two years.

Other recent examples include its litany of Olympics investments, such as stadiums and arenas, hotels, restaurants, roads, and tourist attractions that also serve as new income streams.

This focus on developing jobs and infrastructure, or “new material product” – absent in any similarly focused U.S. stimulus so far – should keep China’s economy on the fast track, while also helping boost the Red Dragon’s ailing stock market.

Stocks have responded very well since the stimulus was announced Nov. 10, with the Shanghai index up nearly 19%.

Source: China Inflation Hits 22-Month Low, Slows to 2.4%

A tentative rebound in global stocks spluttered on Wednesday while euro zone government bond yields hit a three-year low as gloomy economic news highlighted the case for more aggressive interest rate cuts in Europe this week.

The euro stayed on the backfoot and oil held near a 3-1/2 year low a day before the European Central Bank, Bank of England and Sweden’s Riksbank are all widely expected to cut borrowing costs.

Supporting those expectations, economic reports on Wednesday showed the euro zone’s services economy fell deeper into recession in November than initially thought and inflationary pressures eased.

“This is a horrible survey across the board, showing that the euro zone service sector is being hit ever harder by the financial crisis, muted consumer spending and markedly weaker activity in key export markets,” said Howard Archer, economist at IHS Global Insight.

Australia’s economy grew at its slowest pace in eight years in the third quarter as gathering recession abroad and evaporating equity wealth at home curbed spending by consumers and businesses.

Central banks worldwide are cutting rates to fight recession. They are also considering more measures to stabilise financial markets and restore battered consumer and investor confidence, including help for struggling U.S. auto makers.

The FTSEurofirst 300 index of top European shares fell 1.5 percent in early trade with Britain’s FTSE 100 index down 0.9 percent and Germany’s DAX  shedding 1.7 percent.

MSCI world equity index eased 0.4 percent.

“The markets are still looking very tender,” said Justin Urquhart Stewart, investment director at Seven Investment Management.

“Markets are not focusing on any of the good news and the good news is rates are being cut, commodity pries are coming down, stimulus packages are being put together and banks are being supported. But the market’s feeling very depressed.”

Japan’s Nikkei managed to eke out a 1.8 percent gain following a rebound on Wall Street on Tuesday, but MSCI’s measure of other Asian stock markets put on just 0.2 percent.

EURO PRESSURED AS ECB CUT EYED

Also under pressure, the euro fell 0.7 percent against the dollar on the day to $1.2626 and was also weaker against the yen , while the dollar climbed 0.6 percent against a basket of major currencies.

But demand for less risky assets continued to mount, helping to push government bond yields lower.

The 10-year euro zone government bond yield plumbed a low of 3.004 percent — a level last seen in Sept. 2005, while the benchmark 10-year yield for U.S. Treasuries was at 2.727 percent, not far off a five-decade low of around 2.651 percent set on Monday.

“Economic indicators are plunging like there is no tomorrow and central banks are gearing up for significant easing,” said Elwin de Groot, a strategist at Rabobank, noting 100 basis point rate cuts from Australia and Thailand this week.

The ECB meets on Thursday and most economists expect an interest rate cut of 50 basis points, while the Bank of England is forecast to cut rates by an aggressive 100 basis points.

Sweden’s central bank is likely to slash rates by a record 100 basis points, or possibly more, on Thursday when it announces the result of its meeting, which it brought forward by almost two weeks.

Meanwhile, U.S. crude edged up 41 cents to $47.37 but was within striking distance of Tuesday’s trough of $46.82 — a low last seen in May 2005.

Gold slipped to $774.80 an ounce, down $6.70 from New York’s notional close on the back of a broadly firmer dollar.

By Ian Chua
LONDON, Dec 3 (Reuters)