US: Credit Market

Jobs Growth Buoys Market, But Credit Fallout Lingers


Two major U.S. financial firms warned of more fallout from recent credit turmoil Friday, but resilience in the the jobs market bolstered investor sentiment.

The U.S. economy created 110,000 new jobs in September, more than economists had forecast, and the previous month's contraction in the jobs market was unexpectedly revised to a gain.

This took the sting out of news that Merrill Lynch, the world's biggest brokerage, would post a third-quarter loss after writing down $4.5 billion in collateralized debt obligations and subprime mortgage holdings.

Washington Mutual, one of the largest U.S. mortgage lenders, said it expects a 75 percent drop in third-quarter net income because of adverse housing market and credit conditions.

Still, U.S. stocks advanced, heartened by the stronger-than-expected employment report, which relieved investors' worries about the outlook for growth and profits.

Shares in Washington Mutual and Merrill were among the gainers. Investors have sought encouragement from the notion that financial firms are dealing with the effects of the credit turmoil sooner rather than later.

"I think the big news with the jobs report was the revision of the month before. The report shows the economy is slowing a bit but not too much, so that should help corporate profits," said Giri Cherukuri, head trader at OakBrook Investments in Lisle, Ill. "Merrill is just another warning in a string of bank warnings on losses," he said.

Far From Over

Despite the sunny day for stocks, the global credit crisis is far from over and may unfold in waves, a source close to the Basel Committee on Banking Supervision said.

Regulators from around the world will meet next week to discuss what the source described as the "hard-core liquidity crisis" that has forced central banks to inject billions of dollars in emergency liquidity into the banking system.

Federal Reserve Vice Chairman Donald Kohn said moderate growth should return to the U.S. economy after a period of weakness due to a prolonged housing slump and higher borrowing costs. But companies and consumers will feel the tightening credit conditions in the meantime.

"It would not be surprising to see less-generous credit for a wide variety of loans to businesses and households," Kohn said.

Across the Atlantic, euro-zone businesses and households also can expect access to bank loans to be tougher. A European Central Bank survey showed banks have already tightened credit standards in the past three months and plan to be more choosy in their lending in the next quarter, especially for loans to big business.

British Finance Minister Alistair Darling said in an interview published on Friday that the global credit squeeze will affect the British economy, but did not say whether he will lower his growth forecast for 2008.

Short-Term Lending Far From 'Normal'

Closer to 'Normal'?

The short-term lending markets for euro and sterling looked no closer to entering "normal" territory, despite a modest easing in rates, as banks remain wary of their lending counterparties.

London interbank offered rates for three-month euro deposits dipped to 4.76438 percent at Friday's fixing, from 4.77375 percent on Thursday, just below this week's six-year high at 4.79188 percent.

Libor sterling rates touched eight-week lows, thanks in part to injections of liquidity by the Bank of England, which on Thursday held a regular one-week repurchase operation after leaving British base rates at 5.75 percent, as expected.

U.S. money markets had generally been better behaved recently, though rates had pushed higher this week. On Friday, however, overnight federal funds rate for lending between banks was at 4.75 percent, matching the target rate the Fed sets.

The New York Federal Reserve confirmed that it took no action in the open market on Friday at its usual time for open market operations of 9:30 a.m.

Still, banks borrowed less at the Federal Reserve's discount window in the latest week, according to data published on Thursday.

Analysts had noted signs of some strains in the U.S. short-term interbank lending market on Monday, when the fed funds effective rate rose to 4.92 percent, well above the 4.75 percent target rate set by the Federal Reserve.