The results of the US Government’s stress tests of its 19 biggest banks dominated news overnight, but there were more signs that the recession and credit crunch are maintaining a powerful hold on economies, banks and consumers.

A rise in 10-year bond rates on both sides of the Atlantic, higher oil prices, and a troubled auction of 30-year bonds in the US by the Government were overshadowed by the stress test hullabaloo.

The European Central Bank cut its key rate and indicated it would buy corporate and mortgage bonds in a version of what’s known as Quantitative Easing: that sent German 10 year bonds (the key bond rate in Europe) to a three month high of 3.38%.

But in the US, the 10-year bond rate surged to a six month high of 3.33% (it was 3.15% on Tuesday) after the latest initial job claims fell again and now show a clear downward trend, and oil prices went close to $US57 a barrel, which meant a rise of 80% from the lows of last December.

Australia’s 10 year bond rate hit 4.82% on Tuesday, the highest since the middle of last November. The Australian dollar hit 75.54 cents this morning in early Asian trading, the highest “it’s been for eight months”. The AMP’s chief economist, Dr Shane Oliver, says a rise to 80-85 US cents by the end of the year is possible.

Worried markets are now starting to price in higher inflation more aggressively, even though the major economies remain recessed (and Europe will slide further this year). If oil prices and the cost of money continue to rise, then whatever spending power remains in the pockets of consumers will be drained away, business will face higher cost and mortgage rates will rise: that in turn could deepen the black hole in the US and European housing sectors.

General Motors lost $US5.9 billion, but used up over $US10 billion in cash in the March quarter, or around $US113 billion a day. Sales for the quarter almost halved to $US22 billion (it’s a stimulus package all by itself), US consumer credit plunged by the largest ever dollar amount in March, but retail sales for many US stories were a bit better than expected last month, until the 5% rise in same store sales for mighty Wal-Mart were deducted, then the industry figure was negative once again.

Once again the news and data flow emphasises how marginal the ‘green shoots’ of recovery that regulators, policymakers, analysts and investors are seeing: if the financial markets were a racecourse, the stewards would be swabbing horses, trainers and jockeys, plus the bookies, to find out the reasons for the resurgent optimism.

The Bank of England didn’t cut its rate, but the European Central Bank did, slicing 0.25% from its key rate and both central banks revved up ways of boosting liquidity in banks by revealing plans to either buy more $US75 billion in extra government securities in the case of the UK; or to lend banks unlimited amount of money for 12 months (instead of 6 months) and to buy around $US90 billion in corporate and mortgage bonds to try and get bank lending to business and consumers going in Europe.

Lending past 6 months for business and consumers has dried up and the latest figures for the eurozone countries showed a 0.4% rise in loans in February.

The most obvious point about the stress tests was made by fed chairman, Ben Bernanke who said on Wednesday night in a speech in Chicago that American banks were solvent. He was of course speaking with knowledge about the stress test which has resulted in regulators directing 10 of the nation’s 19 largest banks to secure an extra $US74.6 billion of new equity. Wells Fargo, which needs $US13.7 billion, revealed plans to raise $US6 billion even before the official results were released at 7am this morning, Sydney time.

The results come after a week of leaks which softened up the markets for the news that billions of additional dollars would be needed to bolster US banks. US analysts pointed out that this might be tough, even after the surge in confidence and sharemarkets since early March. The $US75 billion being sought is more than all the bond and equity issues in the US so far this year.

Bank of America needs $US33.9 billion, Wells Fargo, $US13.7 billion; Citigroup, $US5.5 billion, Third Fifth Bancorp, $US1.1 billion, KeyCorp, $US1.8 billion, PNC, $US600 million, Regions Financial, $US2.5 billion, Sun Trust Banks, $US2.2 billion, GMAC, $US11.5 billion and Morgan Stanley $US1.8 billion.

US analysts say the two with the biggest troubles are Bank Of America and GMAC.

But it was good news, as Dr Bernanke said. The US banking system and many of the big names are not insolvent, they just need more capital to withstand a prolonged and deep recession, which now seems slowly easing, but not going away.

Dr Bernanke said he was pleased with the results of the stress tests and that he thought they would restore confidence in the condition of the US banks; which is the whole point of why the stress tests were carried out by the Obama Administration.

So that was the good news: now perhaps the markets will focus on the worrisome news starting to creep back into thinking:

Consumer spending is supposed to be stronger: the same store retail sales for last month for America’s major stores was a touch better than expected, even when the Wal-Mart distortion is removed, but the Fed produced its monthly credit figures and they were not nice.

They showed that consumer credit fell by a record $US11.1 billion in March, the biggest dollar amount since record started in 1943. Credit also fell in February by a revised upwards $US8.1 billion as consumers cut credit card and other borrowings. In the year to March consumer credit is down 5.2%, the biggest fall since 1992 and a real sign of how deep the US recession is. Lending for car loans and for credit cards fell in March.

Offsetting that was another fall in the weekly jobless benefit figures: down 34,000 to 601,000 in the week ended May 2, the lowest figure since late January. US productivity rose at a 0.8% annual rate from January through March, rebounding from a 0.6% slump in the fourth quarter. That’s understandable given that the surge in unemployment has been greater this year than the fall in output.

But the number of applications for week to April 25 was bumped up to 635,000 from the 631,000 initially reported, and the number of people collecting benefits climbed to 6.35 million in the week to April 25, the 14th consecutive weekly record.

The Fed’s quarterly survey of senior loan officers at US financial institutions showed a larger share of banks reported tightening terms on residential mortgages compared with the previous survey, even as more domestic respondents saw increased demand for prime mortgages.

That survey indicated most banks anticipate loan delinquencies and losses to increase this year, and that more banks also made it tougher for consumers to get credit-card loans in the past three months.

Peter Fray

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