That shattering sound you heard from stockmarkets around the world, especially in the US with the 9% fall in the Standard & Poor’s 500 index, was the sound of the last rose-coloured glasses falling from the noses of investors, commentators and investment analysts. They have finally accepted that the globe is heading into a recession, led by the teetering US, UK and European economies.

The US Fed said that economic activity had worsened in all of its 12 reporting districts across the country with falling activity in retail, financial services, housing, tourism and manufacturing.

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

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

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

In good and bad news, US producer prices fell for a second month in a row as oil and fuel costs fell, and demand eased. The US Labor Department reported that prices paid to U.S. producers fell 0.4%, while core price rose 0.4%. It’s a sign more and more American companies are finding it tougher passing higher costs on up the production chain.

The fall in retail sales was the third in a row, and the deepest: it was driven by that 27% fall in US car sales in the month and falling levels of demand caused by the credit freeze as consumers were refused credit, or stopped buying on the cards. Economists say that with retail sales down in the September quarter (and consumer spending and credit also lower) its looking certain that real consumption will fall for the first time in a quarter in the US for 17 years.

Ebay forecast that quarterly sales, fourth-quarter and annual earnings forecasts would fall as growth slows at its web sites. Ebay forecast fourth-quarter revenue of $US2.02 billion to $US2.17 billion, compared with $US2.18 billion in the final quarter of 2007. the company said the value of goods sold on its sites fell 1% in the third quarter, the first drop in the company’s history.

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

Reports indicated that economic activity weakened in September across all twelve Federal Reserve Districts. Several Districts also noted that their contacts had become more pessimistic about the economic outlook. Consumer spending decreased in most Districts, with declines reported in retailing, auto sales and tourism. Nearly all Districts commenting on nonfinancial service industries noted reduced activity. Manufacturing slowed in most Districts. Residential real estate markets remained weak, and commercial real estate activity slowed in many Districts.

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

Elsewhere, the news was not much better:

In Europe, new car sales 8.2% last month as the financial crisis put off potential buyers. The continent’s automakers association said in a statement:

The drop in registrations confirms the aggravating market circumstances, as the fall-out of the financial crisis hits auto manufacturers hard. Customers are increasingly hesitant to make large expenditures and find it more difficult to get their purchase financed.

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

In Moscow local bank Globex yesterday banned depositors from withdrawing their money as confidence in the Russian banking system began to show signs of ­evaporating. Globex is a mid-sized retail bank with assets of $US4 billion, according to the Financial Times. It’s the first Russian bank to experience a run on deposits during the crisis. It lost 28% of its deposits since the start of last month, according to local analysts.

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

Iceland. The Financial Times Lex column had this to say this morning in London:

Iceland’s balance sheet is as bleak as its landscape. The country has enough hard currency to pay for nine months of imports. After that stretches a trail of creditors, including unsecured depositors such as London’s police force, 108 UK local councils and Britain’s largest cat charity. Some, but not all, will get their money back. That sounds harsh, yet is as it should be.

The biggest problem is the yawning gap between the value of its now nationalised banks’ foreign assets (essentially loans) and foreign liabilities (such as deposits) that fall due in less than a year. Economist Willem Buiter estimates that shortfall is about $US10 billion.

In the UK unemployment is on its way to 2 million sometime in the next six months after another rise in August to 1.79 million, or 5.7%. As bad as that is, the rate is still well under America’s 6.1%. The official figures show that UK jobless rose 164,000 between June and the end of August. The higher-than-expected increase – of 0.5 percentage points to 5.7% was the largest since 1991 and the eighth successive monthly rise. (It’s nine in a row in the US). UK inflation hit an annual rate of 5.2%, a 16 year high. Our unemployment rate in September rose to 4.3%, where are a long way from the depths of the US and UK economies!

Hungary was plunged into deeper financial uncertainty overnight with its currency (the forint) and stock market falling sharply and bankers reporting credit shortages, as concern spread across eastern Europe about the impact of the global financial crisis.

In Budapest, the forint fell 5.3% to 266 to the euro and the BUX index of leading stocks closed down 12%, dragged down by a 15% fall of price of OTP, the country’s biggest bank. Currencies and stock markets also fell in Poland, the Czech Republic, Romania and Ukraine.

The Hungarian turmoil followed moves by leading banks to stop or curtail foreign currency lending, the dominant form of credit in Hungary in recent years. Analysts now say there’s a rising chance that the inflow of foreign currency will slow, reducing the funds available for financing the country’s current account and putting more pressure on the currency and on the solvency of banks and other financial groups.

Rio Tinto’s China warning in its third quarter production review. For more detail, read this Crikey item posted late yesterday. The Rio commentary saw the London market belted overnight. Rio’s shares plunged 17% to £23.57, a sizeable discount to rival BHP’s hostile all-share offer for the group. BHP, which fell 15%, has offered 3.4 of its shares for each Rio share, but Rio shares closed in London at just 2.57 times the value of BHP’s shares. Anglo American closed 20% lower in London. The FTSE 350 mining index was down 17.3% on the day.

Peter Fray

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