U.S. Morning Call for Tuesday, December 2, 2008
Dec 02, 2008

Overnight Global News

• The European DJ Stoxx 50 this morning is trading +1.23% reversing an earlier decline. Bullish factors include better-than-expected Euro-Zone producer prices for October which helped drive the 10-year German bund yield down to a 3-year low. Also aiding stock prices in Europe today was the +6.7% jump in Tesco Plc as the largest UK supermarket company reported better-than-expected sales and on expectations for interest rate cuts from the BOE and ECB this Thursday. Asian markets tumbled today despite the unexpected 100 bp rate cut by the Bank of Australia. Most Asia-Pacific stock markets ended sharply lower: Japan -6.35%, Hong-Kong -4.98%, China +0.24%, Taiwan -3.57%, Australia -4.16%, Singapore -3.02%, South Korea -3.35%, Bombay -1.14%.
• US auto sales � Today�s Nov US total vehicle sales report is expected to fall to 10.4 million units from 10.6 million units in October. Nov domestic vehicle sales are expected to fall to 7.8 million units from 7.9 million units in October. The expected decline in total vehicle sales to 10.4 million units in November would match the current 25-year low posted in April 1991. US vehicle sales have fallen off a cliff this year to the 10.6 million level in October from the 16.0 million average seen last year and the average of about 17.0 million seen in 2000-05. US consumers are panicked with the credit crisis and the plunge in the stock market and are postponing a decision on buying a new vehicle. The plunge in US vehicle sales has created a crisis for US automakers, which are suffering from both high costs and plunging demand for their vehicles. US automakers this week are presenting a business plan to Congress to try to justify why they should receive a taxpayer-funding bridge loan to get them to the next stage of trying to fundamentally rationalize their business models. The US auto industry has large implications for the US economy since millions of jobs depend on the sector. The US economy could survive the bankruptcy of one automaker during normal economic times. However, with the US economy currently headed into its worst recession in decades, the US economy clearly has no resilience to absorb the melt-down of the entire US auto sector. Therefore, Congress and the incoming Obama administration are likely to provide funding to keep the industry alive for the time being until it can be determined whether there is any way for the US auto industry to restructure into a period of long-term competitiveness and profitability.
• European producer prices slowed more-than-expected in October as crude oil prices tumbled. Euro-Zone PPI fell -0.8% m/m in October, the biggest monthly decline in 22 years, and prices rose +6.3% y/y, a 6-month low. The diminishing inflation outlook gives the ECB ample room to lower rates further as the market fully expects a 50 bp rate cut at Thursday's policy meeting.
• The Bank of Australia unexpectedly cut its benchmark rate 100 bp to a 6-year low of 4.25% today as the market had been expecting a 75 bp rate cut. BOA Governor Glenn Stevens said monetary policy is now "expansionary" as the Aussie central bank has now lowered rates by a whopping 300 bp since September to ease the sting of the global financial crisis.
• The Bank of Japan will start accepting BBB or higher-rated corporate debt as of Dec 9 and the bank will start a new lending facility in January as Japanese businesses struggle to obtain funds. BOJ Governor Masaaki Shirakawa said after an emergency board meeting in Tokyo today that Japanese companies' access to funding is deteriorating "at an accelerating pace." Lending between Japanese banks has tightened even further despite the BOJ lowering its benchmark rate to 0.3% from 0.5% October 31. The 3-month Tokyo interbank lending rate, or Tibor, soared to a 10-year high of 0.893% today as banks hoard cash and remain wary of lending.

Overnight U.S. Stock News

• December S&Ps this morning are trading higher by +19.50 on short-covering and bargain hunting after yesterday's sell-off. The US stock market yesterday sold-off sharply and closed on its low (Dow -7.70%, S&P 500 -8.93%, Nasdaq Composite -8.95%).
• Bearish factors for stock prices yesterday included (1) concerns that the global economic slump is deepening as the US Nov ISM manufacturing index tumbled to a 26-1/2 year low while manufacturing indexes in China and Europe fell to record lows, (2) the prediction from Oppenheimer analyst Whitney that there are signs of "broad-based declines" in consumer access to capital and that credit-card companies will cut lending by more than $2 trillion over the next 18 months in a "dangerous and unprecedented" move for US consumer spending, (3) the assertion from the National Bureau of Economic Research (NBER) that the US economy entered a recession a year ago this month, (4) the 17% fall in the S&P 500 Financials Index for its biggest one-day decline since the index began 19-years ago, and (5) comments from Fed Chairman Bernanke that the US economy "will probably remain weak for a time," even if the credit crisis eases.
• Bullish factors for stock prices yesterday included (1) the assertion from research firm Spendingpulse that E-commerce sales in the US rose +11.8% y/y during the Nov 28-29 Black Friday weekend, (2) the tumble in yields on US Treasuries to all-time lows, buffeting stock valuations, and (3) the -$5.15 a barrel sell-off in crude oil prices

Today's U.S. Market Focus

• March 10-year T-notes this morning are little changed and down -0.5 tick. March T-note prices yesterday surged throughout the day and posted an all-time high before closing +1-18/32 points at a contract high settlement while the 10-year T-note yield fell to an all-time low yield of 2.64%. Bullish factors for T-note prices yesterday included (1) the larger-than-expected decline in the Nov ISM manufacturing index (-2.7 to a 26-1/2 year low of 36.2 versus expectations of -1.9 to 37.0), (2) deflation fears with the huge decline in the prices paid component of the Nov ISM manufacturing index (Nov ISM prices paid -11.5 to a 59-year low of 25.5 versus expectations of -5.0 to 32.0), (3) comments from Fed Chairman Bernanke that the Fed has "obviously limited" room to lower interest rates further and may use less conventional policies, such as buying long-term Treasuries, to revive the economy, (4) the prediction from JPMorgan Chase that Treasuries will rally into next year as the Fed cuts the funds rate to 0% to stimulate the US economy, (5) a flight-to-safety as the equity market plummeted, (6) carryover support from European debt prices as the yield on the 10-year German bund fell to a 3-year low, and (7) the assertion from the NBER that the US economy has been in a recession for the past year. A bearish factor for T-note prices is the prediction from Merrill Lynch that demand for Treasuries has reached the "bubble" phase seen among technology stocks in 2000 and in real estate six years later.
• The dollar this morning is slightly higher with the dollar/yen +0.12 yen and the euro/dollar +0.36 cents. The dollar index yesterday rallied and closed higher. Bullish factors for the dollar yesterday included (1) continued strong demand for dollars as the dollar Libor rate moved up to a 1-month high as banks hold on to dollars to strengthen their balance sheets before year-end, and (2) a flight-to-safety into the dollar as the Russian ruble dropped to a 2-3/4 year low against the dollar as concern grows of a run on Russian banks after Russia's central bank has already used one quarter of its foreign reserves, the third-largest in the world, to try to stem a 16% plunge in the ruble against the dollar since Aug. Bearish factors for the dollar yesterday included (1) the greater-than-expected decline in the Nov ISM manufacturing index to a 26-1/2 year low, (2) the assertion from the NBER that the US has been in a recession for a year already, (3) the prediction from JPMorgan Chase that the Fed will cut interest rates to zero next year to spur the shrinking US economy, and (4) the rally in the yen to a 1-month high against the dollar as the sagging equity market forced investors to abandon the yen carry trade, supporting the yen.
• January crude oil prices this morning are trading +3 cents a barrel and January gasoline is trading unchanged. Crude oil prices fell to a 3-1/2 year low today on carryover weakness from yesterday's rout and on concern the deepening global economic slowdown will crimp energy demand further. January crude oil prices yesterday sold-off and closed down -$5.15 a barrel and January gasoline closed -9.84 cents a gallon. Bearish factors for crude oil prices yesterday included (1) the inaction by OPEC on a decision to reduce crude output until its next cartel meeting in 2-weeks, (2) the stronger dollar, and (3) the prospects for continued weak energy demand with negative economic data from the US, Europe, UK and China that point to deepening recessions in each country. Bullish factors for crude oil prices yesterday centered on comments from OPEC Secreatry-General El-Badri who said that Russia "promised" to join OPEC in restraining oil supplies to prop up sagging prices and that "for sure there will be action" at the next OPEC meeting on Dec 17, signaling OPEC will cut crude oil production again

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): SPLS-Staples (BEST earnings consensus $0.41 per share), SHLD-Sears Holdings (-0.51)

Global Financial Calendar