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Overnight Global News

• Global stock markets are tumbling today on renewed fears that the worldwide recession is deepening. The European DJ Stoxx 50 this morning is down -4.36% at a 5-3/4 year low and March S&Ps are down -18.80 points (-2.56%) at a 12-year low. The Asia-Pacific stock markets today closed mostly lower with Japan (-3.81%), Hong Kong (-3.86%), China (+1.13%), Taiwan (-2.88%), Australia (-2.82%), Singapore (-3.85%), South Korea (-4.06%), India (-3.20%). Europe's manufacturing industry shrank at a record pace in Feb as export demand collapsed and companies cut back production, The Feb Euro-Zone PMI manufacturing index was revised lower to a record low 33.5 (originally reported 33.6) from 34.4 in Jan. Market consensus is unanimous for the ECB to cut its benchmark refinancing rate by 50 bp to 1.50% at this Thursday's monetary policy meeting. AIG, the world's biggest insurer first saved from collapse in Sep with a government rescue package that grew to $150 billion last year, will get as much as $30 billion more in US government capital in a revised bailout after posting a record Q4 loss of -$61.7 billion. HSBC Holdings Plc tumbled 21% after Europe's largest bank by market value said it plans to raise 12.5 billion pounds ($17.7 billion) in a rights offer and Commerzbank, Germany's second-largest bank, slumped almost 7% after its CEO said that although the bank is fine now it may need additional capital later. In Asia, Mitsubishi UFJ, Japan's biggest bank, fell nearly 7% while its second-biggest bank, Mizuho Financial, lost over 4%. Japan's Mainichi newspaper reported today that the BOJ may buy as much as 10 trillion yen ($102 billion) in corporate bonds held by banks in an attempt to unfreeze credit markets. South Korea's Samsung Electronics, the world's biggest memory-chip maker, sank 3% after South Korean exports fell -17.1% in Feb after a record -33.8% drop in Jan while in Australia bank stocks tumbled after Moody's Investors Service lowered its ratings outlook for the nation's three biggest banks.
• Market attention this week will focus on (1) this weeks key economic reports which include Mondays Feb ISM manufacturing index (expected 1.8 to 33.8) and Fridays Feb unemployment report (Feb payrolls expected 615,000 and Feb unemployment rate expected +0.3 points to a new 25-year high of 7.9%), (2) testimony by Fed Chairman Bernanke before the Senate Budget Committee on Tuesday on the economic outlook and budget situation, (3) Treasury Secretary Geithner's testimony before the House Budget Committee on Thursday on the Treasury's budget, (4) the US stock market where the S&P 500 last Friday fell to a new 12-year low on the dismal Q4 GDP report of 6.2%, (5) the T-note market which is being weighed down by the huge supply of new Treasury supply although T-notes rallied last Friday on the poor US GDP report, (6) the dollar which edged to a new 3-year high last Friday on continued emergency liquidity demand for the dollar, and (7) crude oil prices which have rallied moderately in the past two weeks on indications of a pickup in fuel demand and on some short-covering. In central bank policy meetings this week, the market is expecting the Bank of Canada and the Bank of England to both cut their respective policy rates by 50 bp to 0.50%. The market is expecting the European Central Bank to cut its refinancing rate by 50 bp to 1.50%.
• Core PCE Deflator Today's Jan personal income report is expected to show a 0.2% decline, matching the 0.2% decline seen in December. Jan personal spending is expected to show a rise of +0.4% following the sharp 1.0% decline seen in December. The Jan PCE deflator is expected to ease to +0.5% y/y from +0.6% y/y in December, edging closer to the zero inflation mark. The Jan PCE core deflator is expected at +0.1% m/m following December's report of unchanged m/m. On a year-on-year basis, the Jan PCE core deflator, which is the Fed's preferred inflation measure, is expected to ease to +1.6% y/y from the 5-year low of +1.7% seen in December. December's core inflation level of +1.7% means that US economy is still a long way away from experiencing deflation on a core ex-food and energy basis.
• ISM manufacturing index Today's Feb ISM manufacturing index is expected to fall 1.8 points to 33.8. The ISM manufacturing index posted a 28-1/2 year low of 32.9 in December and then rebounded higher by +2.7 points to 35.6 in January. The ISM index in January was just 6.2 points above the record low for the series (which has history back to 1948) of 29.4 posted in 1980. The ISM manufacturing index has been below the boom-bust level of 50 since February 2008 and is currently near a 3-decade low, illustrating the depth of the current recession in the US manufacturing sector.
• Fed policy The market last week did not significantly change expectations for the average funds rate in 2009 but boosted expectations for 2010 by about 5-10 bp. The Fed is currently targeting the funds rate at zero to 0.25%. The market is expecting the funds rate to remain below 0.25% through April 2009. The market is then expecting a slow rise in the average funds rate to 0.50% by December 2009, to 1.00% by May 2010, and to 1.50% by October 2010.

Overnight U.S. Stock News

• March S&Ps this morning are down -18.80 points at fresh contract and 12-year nearest-futures lows as global economic concerns intensify. The US stock market last Friday moved lower and closed near its low (Dow -1.66%, S&P 500 -2.36%, Nasdaq Composite -0.98%). The S&P 500 Index posted a 12-year low and the Dow Jones Industrial Index fell to an 11-1/3 year low.
• Bearish factors for stock prices last Friday included (1) the larger-than-expected decline in US Q4 GDP which contracted by the biggest amount since 1982, (2) the 39% plunge in Citigroup which help drag most bank shares lower after the US Treasury announced it will convert as much as $25 billion of Citigroup preferred shares into common stock, thus diluting other shareholders, in the government's third attempt to bail out the bank, (3) the prediction from Goldman Sachs that the S&P 500 Index may sink as low as 650 because home prices haven't stabilized and losses for financial institutions have yet to end, (4) the 23% plunge in MetLife after S&P downgraded the biggest US life insurer and nine other companies in the insurance industry on the prospects for further investment losses, and (5) the 6.5% drop in General Electric after the company slashed its dividend to 10 cents a share from 31 cents to save the company about $9 billion annually.
• Bullish factors for stock prices last Friday included (1) the unexpected rise in the Feb Chicago purchasing managers index, (2) the 3.9% gain in Dell after the second-largest personal computer maker reported Q4 profit of 29 cents a share, 2 cents better than analysts' estimates of 27 cents, along with its announcement that it will shed an additional $1 billion in annual costs by 2011, and (3) value buying after the S&P 500's valuation slid to a 23-year low

Today's U.S. Market Focus

• June 10-year T-notes this morning are up +27 ticks as tumbling global equity markets support a flight-to-safety into Treasuries. June T-note prices last Friday closed lower by -1.5 ticks. Bearish factors for T-note prices last Friday included (1) the unexpected rise in the Feb Chicago purchasing managers index (+0.9 to 34.2 versus expectations of -0.3 to 33.0), and (2) the proposal by the FDIC to expand the Temporary Liquidity Guarantee Program (TLGP) with plans to guarantee new debt sold by banks that would later convert into common shares, meaning more issuance of paper that will compete with Treasuries for investor cash. Bullish factors for T-note prices last Friday included (1) the larger-than-expected drop in US Q4 GDP that showed US growth contracting by the largest amount since 1982 (-6.2% versus expectations of -5.4%), (2) comments from San Francisco Fed President Yellen that the Fed's attention to inflation should help moor price expectations amid signs of disinflation and should help "reinforce inflation expectations of around 2%," and (3) increased demand for Treasuries after the stock market tumbled when the US government announced a third rescue plan for Citigroup, bolstering the safety appeal of Treasuries.
• The dollar index is sharply higher this morning at a 2-3/4 year high as fears the global recession is deepening are increasing safe-haven demand buying of dollars. The dollar/yen is -0.42 yen and the euro/dollar is -1.04 cents. The dollar index last Friday rose to a 2-3/4 year high and finished higher on the day. Bullish factors for the dollar last Friday included (1) increased risk aversion and safe-haven demand for the dollar after the stock market sold off after the US government announced a third bailout attempt of Citigroup, (2) JPMorgan's cut in its dollar/yen forecast to 105 yen in the "next couple of weeks" as the Japanese currency's appeal as a haven diminishes amid its nation's deepening economic slump, and (3) the prediction from Goldman Sachs that it sees risks for increased sovereign defaults in Eastern Europe if international organizations don't increase their support. Bearish factors for the dollar last Friday included (1) the larger-than-expected drop in US Q4 GDP, and (2) the prediction from Barclays that the dollar's strength will prove "unsustainable" as it comes under renewed selling pressure in the second half of this year and falls to $1.45 per euro by year-end.

• April crude oil prices this morning are off sharply by -$2.43 a barrel and April gasoline is -4.62 cents a gallon as concerns rise that energy demand will weaken as the global recession intensifies. April crude oil prices last Friday moved lower and closed down -$0.46 a barrel and April gasoline closed -1.70 cents a gallon. Bearish factors for crude oil prices last Friday included (1) the surge in the dollar index to a 2-3/4 year high, reducing the appeal of commodities as an inflation hedge, (2) the much weaker-than-expected US Q4 GDP which raises concern that US energy demand will continue to decline, (3) the record drop in Jan Japanese industrial production, stoking fears the global recession may be deepening, and (4) carryover weakness from natural gas prices which plunged to a 6-year low. Bullish factors for crude oil prices last Friday included (1) the better-than-expected Feb Chicago purchasing managers index and (2) the prediction from the energy consulting firm Cameron Hanover that with OPEC compliance at record levels, gasoline demand turning positive, seasonal factors and the failure of crude oil prices to break through their Dec 4-3/4 year low, a rally in crude oil prices will be forthcoming.

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $5.0 bln listed by mkt cap): EIX-Edison International (BEST earnings consensus $0.64 per share), AIG-American International Group (-0.37)

Global Financial Calendar