Washington: An emerging US government plan to subsidize mortgages raised hopes for a recovery in the housing market, the source of the world credit crisis, but there was more bad news from Europe, where industrial output fell at a record rate.
The mortgage plan, first reported by Reuters, lifted stocks in their last hour. Earlier, a better-than-expected report on U.S. retail sales was outweighed by uncertainty and bad news, including Spain’s worst contraction in 15 years, heralding dire GDP data expected from Europe’s biggest nations on Friday.
For most of the day around the world, stocks were down on uncertainty over the Obama administration’s efforts to end the financial crisis and pull the world’s largest economy out of a 13-month recession.
On Wall Street, the Dow and S&P 500 indexes tumbled by as much as much as 3% but recouped their losses after Reuters reported that the government is putting together a plan to subsidize mortgage payments for homeowners having trouble.
Under the plan, mortgage companies would use a uniform eligibility test before a borrower becomes delinquent, sources familiar with the plan told Reuters. Soured US home purchases and mortgage delinquencies have led banks to recoil from lending, freezing economies around the globe.
US retail sales unexpectedly rebounded in January, likely boosted by post-holiday discounts, government figures showed - a hint that the economy might be beginning to stabilize. It was the first such rise in seven months.
US lawmakers worked on Thursday on last-minute details that would allow them to vote through a $789 billion package of tax cuts and new spending sought by the government to kickstart the economy.
But a rescue plan announced by Treasury Secretary Timothy Geithner on Tuesday that would use $2 trillion to mop up bad assets and restore credit was still being met with skepticism. Rescuing the banks is seen as crucial to an economic recovery.
The Dow Jones industrial average ended just 0.09% lower, at 7,932.76. The S&P 500 Index closed up 0.17%, at 835.19. The Nasdaq Composite Index gained 0.73%, closing at 1,541.71.
US Treasury debt prices pared gains to close near unchanged as stocks’ rebound helped sap some of the week’s safe-haven bid. The US dollar rose against the yen on news of the mortgage subsidy plan. The dollar also rose to a 10-day high against the euro on safe-haven bids.
More bad news to come
In Asia, Japanese wholesale prices fell 0.2% in the year to January, the first drop since December 2003. This could mark the start of a period of deflation, which the Bank of Japan has already forecast could last two years.
The Nikkei stock average slid 3% to post its lowest close in over two weeks.
European shares closed 1.45% lower, with banks hit by doubts about the US plan to prop up the financial system. The pan-European FTSEurofirst 300 index ended at 791.69 points.
Euro zone industrial production plunged a record 12% year-on-year in December, the EU statistics office Eurostat reported.
Spain’s economy shrank 1% quarter-on-quarter in the last three months of 2008, sending it into recession for the first time since 1993.
Germany, France, Italy and the wider euro zone report GDP figures on Friday that are all expected to show contraction. Overall, the economy of the 16-nation euro zone is expected to have shrunk 1.3% in the final quarter of last year, significantly more than a 0.2% drop in the previous three months.