U.S. Morning Call for Thursday, December 4, 2008
Dec 04, 2008

Overnight Global News

• The European DJ Stoxx 50 this morning is trading +0.79%. The European Central Bank today cuts its refinancing rate by 75 bpo to 2.50%, which was a bit less than market hopes for a 100 bp rate cut. The Bank of England today cut its benchmark base rate by 100 bp to 2.00%, which was in line with market expectations. Sweden's central bank today cut its benchmark interest rate by 175 bp to 2.00% to address economic weakness as the bank forecasts a decline of -0.5% in Swedens' GDP rate in 2009 after modest +0.9% growth in 2008. New Zealand today cut its benchmark interest rate by 150 bp today and Indonesia cut its benchmark rate for the first time in a year.
• Unemployment claims Today's weekly initial unemployment claims report is expected to show an increase of +10,000 to 539,000, reversing over half of last week's decline of 14,000 to 529,000. Weekly continuing claims are expected to rise +68,000 to 4.030 million, reversing all of last week's decline of 54,000 to 3.962 million. Initial claims are just mildly below the recent 16-year high and continuing claims are just below their recent 26-year high. The unemployment claims data indicates that businesses are laying off a large number of employees and those employees are piling up on the unemployment rolls. On the labor front, the market is looking ahead to a weak Nov unemployment report tomorrow. Nov payrolls are expected to show a sharp decline of 325,000, adding to October's decline of 240,000. The Nov unemployment rate is expected to rise +0.3 points to 6.8%, thus posting a new 14-year high.
• Factory orders Today's Oct factory orders report is expected to show a sharp decline of 4.5%, adding to the 2.5% decline seen in September. Expectations for a sharp decline in today's Oct factory orders report are based on the recent report that Oct durable goods orders fell 6.2%. Durable goods account for more than one-half of the durable goods orders series. The US manufacturing sector is falling fast due to weak domestic and export orders and the melt-down in the US auto sector.
• Chain store sales The markets are looking for a 1.1% y/y decline in Nov ICSC chain store sales following the 0.9% y/y decline in October. US retail spending has hit a wall due to the credit crisis that struck in mid-September and the deepening recession. The markets are hoping that shoppers during the holiday season will at least come out for some aggressive discounting by retailers, although the general outlook for consumer spending is grim.

Overnight U.S. Stock News

• December S&Ps this morning are trading slightly higher by +0.10 points on optimism about today's round of interest rate cuts by various central banks. The US stock market yesterday opened lower and zigzagged higher throughout the day and finished near its high (Dow +2.05%, S&P 500 +2.58%, Nasdaq Composite +2.94%).
• Bullish factors for stock prices yesterday included (1) the prediction from UBS that global stocks will withstand a "full-blown" recession and surge in 2009 with the S&P 500 rallying 53% to 1,300 by the end of next year as cheap valuations and efforts by governments to restore confidence in the financial system lure investors back to equities, (2) the rally in retailers after ComScore said that online spending at US retailers surged 15% on Dec 1 or (Cyber Monday), to the second-biggest amount on record as internet sites lured customers with discounts on clothing and electronics, (3) the rally in homebuilders after the 112% surge in weekly mortgage applications as the yield on a 30-year fixed-rate mortgage tumbled to a 3-1/2 year low of 5.47%, and (4) Treasury Secretary Paulson's comment that he is considering a new plan to lower mortgage rates by stepping up Treasury purchases of mortgage-backed securities issued by Fannie Mae and Freddie Mac.
• Bearish factors for stock prices yesterday included (1) the surge in Challenger job cuts for Nov to a 7-year high of +148.4% y/y, (2) a larger-than-expected decline in the the Nov ADP employment change to a 7-year high of -250,000, (3) the larger-than-expected contraction in the Nov ISM non-manufacturing index to its lowest level since the index was created in July 1997, and (4) the Fed's Beige Book which stated that the US economy weakened across all regions since mid-Oct as it became tougher to get loans and demand for credit continued to shrink.
• Merck this morning issued guidance for 2009 EPS ex-items of $3.51-3.30, which was well below the analyst consensus of $3.52.

Today's U.S. Market Focus

• March 10-year T-notes this morning are trading +25 ticks on today's round of rate cuts from oveseas central banks. March T-note prices yesterday traded lower early but then rallied the rest of the day and closed +22 ticks at a contract high settlement. Bullish factors for T-note prices yesterday included (1) the surge in Nov Challenger job cuts to a 7-year high of +148.4% y/y, (2) the larger-than-expected drop in the Nov ADP employment change (-250,000 versus expectations of -205,000), (3) the larger-than-expected decline in the Nov ISM non-manufacturing index to its lowest level since its creation in July 1997 (-7.1 to 37.3 versus expectations of -2.4 to 42.0), (4) the unexpected upward revision to Q3 nonfarm productivity (+0.2 to +1.3% versus expectations of -0.2 to +0.9%), and (5) the Fed's Beige Book that stated "Overall economic activity weakened across all Federal Reserve districts since the last report," raising concern the US economic slump may be worsening. The main bearish factor for T-note prices yesterday was the overbought status of the T-note market which has rallied over 6 points in the last week alone, leading to some profit-taking and long liquidation.
• The dollar is this morning is mixed with the dollar/yen down -0.57 yen and the euro/dollar down -0.82 cents. The euro is lower on expectations for an ECB rate cut today and sterling is down -1.61 cents on today's 100 bp rate cut from the Bank of England and 75 bp rate cut from the ECB. The dollar index yesterday closed higher. Bullish factors for the dollar yesterday included (1) the stronger-than-expected Q3 US nonfarm productivity with weaker-than-expected unit labor costs, and (2) the larger-than-expected decline in Oct Euro-Zone retail sales which showed the largest monthly decline in 22 months. Bearish factors for the dollar yesterday included (1) the action by Bank of America in raising its forecast for the yen to 96 per dollar by the end of March from a previous forecast of 100, citing apprehension from the Bank of Japan in lowering interest rates further, (2) the larger-than-expected fall in the US Nov ISM non-manufacturing index to its lowest level since the index was created in 1997, and (3) the somber Fed Beige Book that said the US economy weakened across all regions since the middle of October, raising concern the US recession may be deepening.
• January crude oil prices this morning are down -64 cents a barrel and January gasoline is trading down 2.88 cents a gallon. January crude oil prices yesterday fell to a 3-1/2 year nearest-futures low of $46.26 a barrel and closed down -17 cents. Jan gasoline yesterday closed -1.68 cents. Bearish factors for crude oil prices yesterday included (1) the stronger dollar, (2) continued global recession fears with Oct Euro-Zone retail sales declining by its largest amount (-0.8%) in 22 months and the US Nov ISM non-manufacturing index falling to its lowest level since the index began in July 1997, and (3) the unexpected 1.8 point drop in the refinery capacity rate to 84.8% versus expectations of a +0.4 rise to 86.6%, indicating refiners cut back on production due to weakening demand. Bullish factors for crude oil prices yesterday included (1) comments from Qatar's oil minister that OPEC will "definitely" cut output at its next meeting on Dec 17, and (2) the unexpected declines in crude oil and its products in yesterday's weekly DOE inventory report (crude oil -456,000 bbl versus expectations of +1.0 million bbl, gasoline -1.53 million bbl versus expectations of +900,000 and distillates -1.72 million bbl versus expectations of +350,000 bbl).

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): TOL-Toll Brothers (BEST earnings consensus -$0.32 per share), NOVL-Novell (0.06), GES-Guess? (0.63), CMTL-Comtech Telecommunications (0.75)

Global Financial Calendar