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U.S. Morning Call for Thursday, July 17, 2008
Jul 17, 2008

Larry Swing

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The European DJ Stoxx 50 this morning is trading +2.50% on carry-over support from yesterday's rally in the US and on reduced concern about the banking sector after JPMorgan today reported stronger than expected earnings of 54 cents (veruss the expected 44 cents). UBS is up 6% this morning and BNP Paribas is up 4%. In addition, crude oil prices are down another $1.18 this morning, which boosted auto (e.g., Daimler +4%) and airline stocks (e.g., Ryanair +3.3%). Mobile-phone maker Nokia Oyj rallied 2.4% after reporting better than expected Q3 revenue and earnings. Asia-Pacific stocks today closed mostly higher on support from yesterday's US rally: Japan +1.00%, Hong Kong +2.41%, China -1.00%, Taiwan +3.93%, Australia +0.62%, Singapore +1.02%, South Korea +1.25%, Bombay +4.26%.

Claims� Today's weekly unemployment claims report is expected to show a sharp increase of +34,000 to 380,000, reversing part of last week's plunge of 58,000 to 346,000. Meanwhile, weekly continuing claims are expected to decline 22,000 to 3.180 million, reversing part of the last week's surge of +91,000 to 3.202 million. The unemployment claims figures last week were distorted by the annual July shutdowns at auto plants. In any case, the underlying picture is still one of poor employment situation where continuing claims are at a 4-1/2 year high and initial claims are near a 5-year high. The data indicates that layoffs continue at a relatively high pace and that the number of people on the unemployment rolls is piling up. The poor US labor market has already been seen in the Commerce Department's data showing that payrolls have dropped for six consecutive months (by a total of 438,000) and that the unemployment rate is at a 4-year high of 5.5%.

Housing starts� Today's June housing starts report is expected to show a decline of �1.5% to 960,000, adding to the �3.3% decline to the 17-year low of 975,000 seen in May. June building permits are expected to show a 1.3% decline to 965,000, adding to the 1.3% decline to 978,000 seen in May. Continued weakness in housing starts is certainly to be expected given that US homebuilders first need to work down the huge inventory of unsold new homes before they even think about new building plans. In May, the level of unsold new homes was at 10.9 months, which was just mildly below the recent 28-year high of 11.4 months and the record high of 11.6 months (posted in 1980). Moreover, that unsold new home inventory is likely to come down at a glacial pace, even at lower prices, given consumer caution at the moment with painfully high gasoline prices, the fading job market, the banking crisis, and the limited availability of mortgages.

Philadelphia Fed index� Today's July Philadelphia Fed manufacturing index is expected to show a +2.1 point increase to 15.0, more than reversing the small decline of 1.5 points to 17.1 seen in June. The Philadelphia Fed manufacturing index has been in negative territory for the past seven consecutive months, suggesting that the Philadelphia-area manufacturing sector is in a solid recession. However, the national manufacturing sector is in somewhat better shape considering that the national ISM manufacturing index in June rose +0.6 points to 50.2, poking back above the 50 mark for the first time since January. That suggested that the US manufacturing sector is showing growth near zero at the moment.

Overnight U.S. Stock News

September S&Ps this morning are trading +11.10 points on some follow-through momentum from yesterday's rally and on this morning's report of better-than-expected earnings from JPMorgan. The US stock market yesterday rallied throughout the day and closed sharply higher (Dow +2.52%, S&P 500 +2.51%, Nasdaq Composite +3.12%).

Bullish factors for stock prices yesterday included (1) the unexpected gains in Jun industrial production and capacity utilization, (2) the +5.1% gain in the S&P 500 Transportation Index after the -$4.14 a barrel sell-off in crude oil as crude oil prices have now fallen by more than $10 a barrel in the last two days, (3) the +33% surge in Wells Fargo after the bank posted Q2 profit of 53 cents a share, 3 cents higher than expectations as revenue rose to a record $11.5 billion (which led the bank to boost its dividend by 10%), and (4) the +12% rally in the S&P 500 Financials Index as every bank in the index rose at least 10% after an SEC plan that bans naked shorting of Fannie Mae, Freddie Mac and 17 US brokerages and banks.

Bearish factors for stock prices yesterday included (1) the larger-than-expected increase in Jun CPI to a 27-year high of +5.0% y/y, (2) the unexpected decline in the July NAHB housing market index to its lowest level since the index was created 23 years ago, (3) the minutes from the Jun 24-25 FOMC meeting in which some policy makers said an increase in the benchmark lending rate "would be appropriate very soon," and (4) comments from San Francisco Fed President Yellen that a potential for continued lower house prices will make it hard to limit foreclosures which will continue to hurt economic growth.

JPMorgan Chase today reported Q2 earnings at 54 cents per share, which was well above the analyst consensus of 44 cents. Still, earnings fell by 52% to $2 billion from $4.2 billion in the year-earlier quarter.

EBay is down 7% in European trading this morning after the company said that the average selling price fell 6% in Q2 and that the gross value of merchandise sold on its site rose only 8%, the smallest increase in 9 years.

Microsoft is down -0.7% in European trading this morning ahead of its earnings report today.

Freddie Mac is up +1% in European trading this morning after yesterday's 30% rally. However, Fannie Mae is down -1.5% in European trading this morning after yesterday's 31% rally

Today's U.S. Market Focus

September 10-year T-notes this morning are trading -7 ticks on higher S&Ps and European stocks and on somewhat reduced concern about the banking system after today's better-than-expected results from JPMorgan. September T-notes yesterday sold off sharply and closed down -27.5 ticks. Bearish factors for T-note prices yesterday included (1) the sharper-than-expected rise in Jun CPI (+1.1% m/m for the biggest m/m gain in 2-3/4 years and a 27-year high of +5.0% y/y versus expectations of +0.7% m/m and +4.5% y/y), (2) the unexpected gains in Jun industrial production and capacity utilization (Jun industrial production +0.5% versus expectations of unchanged and capacity utilization +0.3 to 79.9% versus expectations of unchanged at 79.4%, (3) decreased demand for the safety of Treasuries due to the rally in the stock market, and (4) the minutes of the Jun 24-25 policy meeting in which some Fed members said an increase in the funds rate "would be appropriate very soon." Bullish factors for T-note prices yesterday included (1) the unexpected decline in the July NAHB housing market index to a record low since the series began in Jan 1985 (-2 to 16 versus expectations of unchanged at 18), and (2) comments from San Francisco Fed President Yellen that the potential for further home price declines makes it hard to limit the surge in home foreclosures, which is hurting economic growth.

The dollar is mixed this morning with the dollar/yen up +0.51 yen and the euro/dollar up +0.11 cents. The dollar index yesterday slumped to a 2-1/2 month low but then recovered to close slightly higher. Bullish factors for the dollar yesterday included (1) the unexpected rise in US industrial production and capacity utilization in June, (2) the larger-than-expected rise in the June CPI up to a 27-year high of +5.0% y/y, (3) the minutes from the Jun 24-25 FOMC meeting in which some Fed policy makers said an increase in US interest rates "would be appropriate very soon," and (4) the action by the Bank of Japan in lowering their growth forecast for Japan this year saying growth is slowing "further" as rising energy and commodity prices are slowing spending by companies and households. Bearish factors for the dollar yesterday included (1) the rally in the yen to a 1-1/2 month high on risk aversion as investors flee the dollar on concern US bank losses and writedowns will continue, and (2) the unexpected decline in the July NAHB housing market index to an all-time low.

August crude oil prices this morning are trading -$1.18 a barrel and August gasoline is trading -1.59 cents a gallon. August crude oil prices sold-off sharply and closed down -$4.14 a barrel. August gasoline closed -10.54 cents a gallon after falling to a 1-1/4 month low. August crude oil fell to a 3-week low and has fallen -$10.58 in the last two days. Bearish factors for crude oil prices yesterday included (1) the unexpected increases in crude oil and gasoline inventories in yesterday's DOE inventory report (crude oil +2.95 million bbl versus expectations of a -2.2 million bbl drop and gasoline stockpiles +2.47 million bbl versus expectations of a -100,000 bbl decline), and (2) lessening concerns of an imminent attack on Iran by Israel or the US as a high-ranking US diplomat is scheduled to take part in nuclear negotiations with Iran. Bullish factors for crude oil prices yesterday included (1) the drop in the dollar index to a 2-1/2 month low, and (2) the unexpected rise in US industrial production and capacity utilization in June

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): MSFT-Microsoft (BEST earnings consensus $0.47 per share), IBM-International Business Machines (1.82), GOOG-Google (4.73), KO-Coca-Cola (.95), JPM-JPMorgan Chase (.44), UTX-United Tech (1.31), GILD-Gilead Sciences (.50), BAX-Baxter International (.82), BK-Bank of New York Mellon (.75), SYK-Stryker (.73), MER-Merrill Lynch (-1.91), DHR-Danaher (1.06), ITW-Illinois Tool Works (.97), NUE-Nocor (1.79), BLK-Blackrock (1.98), PNC-PNC Financial Services (1.17), JCI-Johnson Controls (.73), COF-Capital One Financial (1.31), SWY-Safeway (.52), BBT-BB & T (.70), TXT-Textron (.96), AMTD-TD Ameritrade Holding (.32), PPG-PPG Industries (1.55), CCE-Coca-Cola Enterprises (.54), HOG-Harley Davidson (.76), IGT-International Game Technology (.36)

Global Financial Calendar

Thursday 7/17/2008

United States
0830 ET	Weekly unemployment claims expected +34,000 to 380,000, previous �58,000 to 346,000. Weekly continuing claims expected �22,000 to 3.180 million, previous +91,000 to 3.202 million.
0830 ET	Jun housing starts expected �1.5% to 960,000, May �3.3% to 975,000. Jun building permits expected �1.3% to 965,000, May �1.3% to 978,000.
1000 ET	July Philadelphia Fed manufacturing index expected +2.1 to �15.0, Jun �1.5 to �17.1.
n/a	Treasury announces amount of 20-year TIPS to be auctioned Jul 22 (previous $8 billion).
Japan
0100 ET	Final revision May Japan leading index, previous 92.6%. Final revision May coincident index, previous 103.0%.
1950 ET	BOJ releases monetary policy meeting minutes for Jun 12-13 meeting.
2330 ET	BOJ Governor Masaaki Shirakawa delivers a speech at an economic forum in Tokyo.
Euro-Zone
0500 ET	May Euro-Zone construction output, Apr �0.8% m/m and �2.4% y/y.
Canada
1030 ET	Bank of Canada releases monetary policy report.

Morning Quote Board

US Stock Futures
Morning Quotes (ET)	Last	Chg	%chg	Updated
S&P (Globex) (U8)	1252.20	11.10	0.89%	07:05:12
DJIA (CBOT) (U8)	11298	92	0.82%	07:05:10

European Stocks
Europe DJ Stoxx 50	2783.55	67.93	2.50%	07:00:00
London UK FTSE Index	5253.00	102.40	1.99%	07:00:01
German Dax Index	6281.09	125.72	2.04%	07:00:11
French CAC 40 Index	4210.22	97.77	2.38%	07:00:00

Asian-Pacific Stocks
Japan Nikkei Index	12888	127	1.00%	03:00:16
Hong Kong Hang Seng	21735	511	2.41%	04:10:45
China CSI 300 Index	2718	-28	-1.00%	03:01:08
Taiwan TAIEX Index	6975	264	3.93%	01:46:01
Australian S&P 200	4901	30.4	0.62%	02:47:03
Singapore Str. Times	2864.1	28.78	1.02%	05:10:06
South Korea KOSPI 200	194.89	2.41	1.25%	02:02:33
Bombay Sensex 30	13112	536.05	4.26%	06:28:13
Karachi KSE-100	10213	-279	-2.66%	04:15:13

US Interest Rates
10yr T-notes (CBT)(U8)	114.210	-0.070	-0.19%	07:05:12
Cash 10yr T-note Price	99.110	-0.055	-0.17%	07:15:01
Cash 10yr T-note Yield	3.956	0.021	0.54%	07:14
5yr T-note (CBT)(U8)	111.100	-0.045	-0.12%	07:05:04
Cash 5yr T-note Price	100.220	-0.050	-0.15%	07:13:00
Cash 5yr T-note Yield	3.223	0.034	1.07%	07:12
30-yr T-bond (CBT)(U8)	115.14	-0.03	-0.07%	07:04:44
Cash 30yr T-bond Price	96.185	-0.010	-0.03%	07:15:01
Cash 30yr T-bond Yield	4.587	0.002	0.04%	07:14
Eurodollars (CME)(U8)	97.125	-0.020	-0.02%	07:04:46
Eurodollars (CME)(Z8)	96.955	-0.030	-0.03%	07:05:09

Asian & European Rates
10-yr JGBs (TSE) (U8)	136.40	-0.02	-0.01%	02:00:00
EuroyenTibor(SGX)(U8)	99.145	0.000	0.00%	06:12:33
Bunds (Eurex) (U8)	111.81	-0.49	-0.44%	07:00:12
Euribor (Eurex) (U8)	94.99	-0.01	-0.01%	06:37:49
UK Gilts (Liffe) (U8)	106.40	-0.20	-0.19%	07:00:09
Short Stlg (Liffe) (U8)	94.11	-0.01	-0.01%	07:00:11

Forex
US Dollar/Japanese Yen	105.65	0.51	0.48%	07:15:13
EuroFX / US Dollar	1.5838	0.0011	0.11%	07:15:13
SwissFranc/US Dollar	1.0198	0.0025	0.25%	07:15:06
British Pound (per USD)	1.9998	0.0007	0.07%	07:15:13
Canadian Dlr (perUSD)	1.0025	0.0006	0.06%	07:15:09
Yen (Globex) (U8)	0.9506	-0.0055	-0.55%	07:05:13
Euro FX (Globex) (U8)	1.5795	0.0036	0.23%	07:05:12
SwissFranc (Globex)(U8)	0.9822	-0.0009	-0.09%	07:04:50
British Pound(Glbx)(U8)	1.9929	0.003	0.15%	07:05:10
Canadian$ (Globex)(U8)	0.9982	0.0004	0.04%	07:05:10

Commodities
Gold (Comex) (Q8)	957.8	-4.9	-0.51%	06:45:11
Copper (Comex) (U8)	366.4	1.4	0.37%	06:43:13
Crude Oil (Nymex) (Q8)	133.42	-1.18	-0.88%	06:45:12
Gasoline (Nymex) (Q8)	326.35	-1.59	-0.48%	06:45:08
Heating Oil(Nymex)(Q8)	382.02	-2.08	-0.54%	06:45:00
NaturalGas(Nymex)(Q8)	11.423	0.025	0.22%	06:45:12