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Overnight Global News

• The European DJ Stoxx 50 this morning is trading -2.95% and Dec S&Ps are trading -19.20 points (-2.14%). Bearish factors include long liquidation pressure after the recent recovery rally, the -1.6% m/m decline in October German retail sales, the report that UK house prices fell -8.1% y/y in November, and weakness in oil company stocks with today's sell-off in oil prices. Russia's Micex index is down -4.8% this morning after a negative Russian manufacturing report. Japanese stocks were hurt by news that Japanese condomium builder Morimoto Co. became the second-largest Japanese bankruptcy this year. China's Nov purchasing managers manufacturing index fell to a record low of 38.8 from 44.6 in October, suggesting a major slowdown in China's manufacturing sector is in progress due to waker exports and falling construction. Asia-Pacific stocks today closed mixed today: Japan -1.35%, Hong Kong +1.59%, China +1.87%, Taiwan +1.30%, Australia -1.64%, Singapore -2.44%, South Korea -1.66%, Bombay -2.78%.
• Thanksgiving sales - US consumer spending over the Thanksgiving weekend was relatively strong at +7.2% y/y, according to BIGresearch, and there was a big +17% y/y increase in the number of people that visited stores and retail Web sites. However, consumers appeared to be attracted only by aggressive discounting and door-buster deals. Retailers are therefore still expecting a poor holiday shopping season.
• Market focus - Market attention this week will focus on (1) any fresh developments on the credit crisis after last week's news included the Citigroup bailout and the new program by the Fed and Treasury designed to direct capital flows to mortgages and consumer loans, (2) geopolitics after last week's terrorist attacks in Mumbai exposed the vulnerability of any major city to a new type of simultaneous terrorist attack on multiple soft-target civilian locations and raised tensions between India and Pakistan, (3) global stocks which rallied sharply last week with the MSCI World index closing +11.4% on the week and the S&P 500 posting its best week since 1974 as the markets rebounded higher on optimism about the aggressive global interest rate cuts and the plethora of government liquidity injections and bank guarantees, (4) T-note prices which extended the sharp month-long rally on expectations for a Fed rate cut this week and on the increasingly grim US economic news, (5) the dollar which has fallen back in the past week as the rally in stocks reduced the demand for dollar liquidity, and (6) crude oil prices which consolidated last week near recent lows as the market waits to see if OPEC will take more aggressive action to cut production.
• US Economic calendar - This week's key economic news will be (1) today's Nov ISM manufacturing index (expected 1.4 points to 37.5), (2) Tuesday's Nov total vehicle sales report, which is expected to sink to 10.4 million units from October's 10.6 million and carry additional bad news for the US automakers, and (3) Friday's Nov US unemployment report. Friday's Nov payroll report is expected to show a sharp decline of 323,000, adding to October's 240,000 report to indicate that businesses are aggressively reducing head counts to prepare for recession. The Nov unemployment rate is expected to rise +0.3 points to 6.8%, which would be a new 15-year high and would be within shooting distance within the next several months of the 24-year high of 7.8% posted in 1992.
• Fed policy The market last week slightly boosted expectations for Fed easing given the increasingly grim global economic data. The market is fully expecting the FOMC at its meeting in two weeks on Dec 15-16 to cut the funds rate target by 50 bp to 0.50% and is discounting about a one-third chance of a 75 bp rate cut at that meeting. The market is currently discounting the lowest monthly average funds rate in the cycle at 0.415% in Feb 2009 and is then discounting a slow rise in the average funds rate to 1.00% by late 2009. The market currently believes the funds rate will only rise to 1.70% by late 2010.
• ISM manufacturing index Today's Nov ISM manufacturing index is expected to fall 1.4 points to 37.5, adding to the 4.6 point decline to 38.9 seen in October. The October level was a 26-year low in the series, indicating the deep pessimism among executives in the US manufacturing sector. The record low for the series, which has history back to 1948, is 29.4 posted in May 1980. On the inflation front, today's Nov ISM prices-paid index is expected to fall 4.0 points to 33.0, adding to the sharp 13.5 point decline to a 17-year low of 37.0 seen in October. The manufacturing sector is expecting sharply lower prices due to the plunge in energy and commodity input prices and weak demand.

Overnight U.S. Stock News

• December S&Ps this morning are trading -19.20 points (-2.14%) due to lower European stocks, long liquidation pressure after last week's rally, and general gloom about the US economy and earnings. The US stock market last Friday extended the week's sharp rally (S&P 500 +0.96%, Dow Jones +1.17%, Nasdaq Composite +0.23%). Last week's 12% rally in the S&P 500 was the largest since 1974.
• Bullish factors for stock prices last week included (1) carry-over optimism from the Nov 23 news of the Citigroup bailout and the Fed/Treasury $800 billion package for supporting mortgages and consumer/small-business loans, (2) a rally in US auto stocks as the market hopes that Congress will at least provide the automakers with a bridge loan large enough to get through until January when the Obama administration takes over, (3) a sharp rally in US homebuilders after the Fed/Treasury plan to buy $600 billion of mortgage securities and $200 billion of Fannie/Freddie debt sparked a sharp drop in mortgage rates, which improved the affordability of US home purchases, and (4) the continued decline in the 10-year T-note yield last Friday to a record low of 2.92%.
• Bearish factors for stock prices last week centered on the dismal US and global economic data, which creates uncertainty about how deep the recession may be and how far earnings might drop. Weak US economic data last week included US existing home sales (-3.1%), Q3 GDP (revised to -0.5% from -0.3%), Oct durable goods (-6.2%), Oct personal spending (-1.0%), Nov US consumer confidence (55.3 vs 57.9), Oct new home sales (-5.3%).

Today's U.S. Market Focus

• March 10-year T-notes this morning are trading +21 ticks on lower US and European stocks and expectations for weak US economic data this week. March T-note prices last Friday closed +9 ticks and extended the sharp weekly rally to a total of 2-24/32 points. Bullish factors last week included (1) the weak US economic data, (2) expectations that the FOMC at its meeting in two weeks will cut its funds rate target by at least 50 bp to 0.50%, and (3) expectations for the ECB this Thursday to cut its benchmark rate by at least 75 bp and expectations for the Bank of England this Thursday to cut its target rate by 100 bp to 2.00%. Bearish factors included (1) the sharp rally last week in US and global stocks, which reduced the crisis environment and encouraged the flow of cash from bonds to stocks, (2) last week's continued decline in inter-bank lending rates which indicated a continued easing of the credit crisis, (3) last week's news of the Citigroup rescue and the latest Treasury/Fed $800 billion support package for the mortgage and consumer loan markets, and (4) concern about the huge issuance of Treasury securities in coming months.
• The dollar this morning is mixed with the dollar/yen down -1.60 yen and the euro/dollar down -0.18 cents. The yen is higher today on lower global stocks and the exit of carry trades, while the euro is weak on expectations for an aggressive ECB rate cut this Thursday. The dollar index last Friday rallied mildly to regain some of the losses seen early in the week on the Citigroup rescue. Bullish factors for the dollar last Friday included (1) expectations for at least a 75 bp rate cut by the ECB this Thursday, which would be euro-bearish, and (2) some short-covering. Bearish factors for the dollar centered on concern about the US economy with some analysts forecasting a 5% decline in US GDP in Q4.

• January crude oil prices this morning are trading -$2.35 per barrel (-4.32%) and January gasoline is trading -4.38 cents a gallon. Bearish factors include OPEC's decision over the weekend to wait until its December 17 meeting to decide whether to cut production another notch. OPEC called on non-OPEC producers such as Russia, Norway and Mexico to help with a production cut and to underpin crude oil prices. Jan crude oil prices last Friday closed -1 cent at $54.43 and Jan gasoline prices closed +0.88 cents at 120.96 cents. Bullish factors last week included (1) the sharp rally in global stocks, which reduced pessimism about the global economy, (2) the likelihood for an eventual OPEC production cut, and (3) some short-covering after crude oil prices were able to stabilize for a week. Bearish factors included (1) OPEC's dithering over a production cut, (2) OPEC President Khelil's comment that some OPEC countries can't find buyers for all their oil, and (3) continued expectations for weak global economic growth and fuel demand.

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): CDNS (BEST earnings consensus -$0.10 per share)

Global Financial Calendar