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Overnight Global News

• Global stock markets are trading at 1-week highs this morning as details emerge about an Obama administration plan to absorb toxic bank assets. The European DJ Stoxx 50 this morning is up +1.79% and March S&Ps are up +19.20 points (+2.29%). The Asia-Pacific stock markets closed higher with Japan +0.56%, Australia +1.50%, Singapore +4.80%, South Korea +6.55%, India +2.81%. China, Hong Kong and Taiwan remain closed for the Lunar New Year Holidays. Bank stocks worldwide are sharply higher on speculation the US government will set up a so-called bad bank in an attempt to spur lending by absorbing toxic assets. The bad-bank plan may allow the government to rewrite some of the mortgages that underpin banks' toxic debt with the Federal Deposit Insurance Corporation (FDIC) running the operation. The FDIC would manage and sell the bad assets and could help finance the effort by issuing bonds guaranteed by the FDIC. An Obama administration official said outlines of its financial-rescue plan may be announced as early as next week. Deutsche Bank AG, Barclays Plc, Bank of America and Citigroup all surged at least 11% on the news. Also helping European share prices today is the 5.5% rise in Germany's SAP as the world's largest maker of business management software reported Q4 net income of 850 million euros, topping analysts' estimates of 746.5 million euros and the company said it will slash 3,000 jobs and freeze salaries to cut costs. In Asia, the world's largest makers of computer memory chips, Samsung and Hynix Semiconductor, rallied 11% and 15% respectively on analyst expectations that an industry wide glut of memory chips will ease after rival Qimonda AG filed for bankruptcy.
• MBA mortgage apps The weekly MBA mortgage applications index plunged -38.8% as the recent climb in mortgage rates deterred any new refinancings or home puchases. The refinancing sub-index plummeted 48% and the purchase sub-index fell -2.9%. The -38.8% fall in the mortgage applications index along with the -48% plunge in the refinance sub-index were the biggest weekly declines in 16 years. The refinancing index fell further from its recent 5-1/2 year high as homeowners may be holding off on trying to refinance until new government initiatives to lower borrowing costs prove more successful. That refinancing activity is good for the economy since it is providing consumers will lower mortgage payments and cash-out equity in some cases. By contrast, the MBA purchases sub-index is only moderately above the recent 8-year low, indicating that few applications are being filed for mortgages for home purchases. The 30-year mortgage rate in the latest week (Jan 22) rose by 16 bp to 5.12% from the previous week's record low of 4.96%. The latest mortgage rate of 5.12% is still sharply below the mid-6% area seen just several months ago, but the rise in the latest week suggests that mortgage rates may have bottomed out. The Fed was able to spark the 150 bp plunge in the 30-year mortgage rate seen from November through January through its $600 billion program of purchasing mortgage securities and buying the debt of Fannie Mae and Freddie Mac, thus reducing their financing costs.
• FOMC meeting The FOMC at its 2-day meeting that concludes today is expected to leave its funds rate target unchanged from its current range of zero to 0.25%. The FOMC at its last meeting in December surprised the market by cutting the funds rate straight to the zero to 0.25% range from the previous target of 1.00%. The Fed's move provided additional confidence that the Fed recognizes the seriousness of the situation and the need to move quickly and forcefully to provide liquidity to the banking system and financial markets. The market expects the average funds rate to remain below 0.25% through March 2009. The market is then looking for the funds rate to rise slowly to 0.50% by November 2008, to 1.00% by May 2010, and to 1.50% by October 2010. Now that the funds rate is near zero, the Fed's only recourse on the funds rate is to promise that it will remain at an extremely low level for an extended period of time. The FOMC is likely to repeat that promise in today's post-meeting statement. The Fed may also again refer to its willingness to expand current direct-liquidity programs such as buying commercial paper, mortgages, and securitized consumer and small-business loans. By buying those securities, the Fed is providing liquidity directly into borrowing channels, bypassing the nations' large banks, which are hamstrung by losses and weak capital bases. The markets will be listening carefully to see if the Fed is any closer to a quantitative easing involving the direct purchase of longer-term Treasury bonds. That would push long-term Treasury yields lower and help private long-term rates to fall as well, thus providing further benefits to corporate and mortgage borrowers.

Overnight U.S. Stock News

• March S&Ps this morning are trading sharply higher by +19.20 points on optimism over the Obama administration's bank-rescue plan. The US stock market yesterday rallied and added on to Monday's gains (Dow +0.72%, S&P 500 +1.09%, Nasdaq Composite +1.04%).
• Bullish factors for stock prices yesterday included better-than-expected earnings results from (1) Texas Instruments which rallied 3.7% after the second-largest US chipmaker said Q4 income, excluding reorganization costs, was 21 cents a share, well ahead of analysts estimates of 12 cents, and that the company will shed 12% of its workforce or 3,400 jobs to cope with a slowdown in orders, (2) the 6.2% gain in Travelers as the second-biggest US commercial insurer reported Q4 operating income of $1.58 a share, better than analysts' estimates of $1.46, and (3) the near 10% rise in American Express after the biggest US credit-card company reported Q4 profit of 21 cents a share, 1 cent below analysts' estimates but better than the most pessimistic forecasts, and said it sold $6.2 billion in certificates of deposit in Q4.
• Bearish factors for stock prices yesterday included (1) the unexpected decline in US Jan consumer confidence to a record low for the data series that goes back to 1967, (2) concerns the US housing crisis is deepening after the 23rd consecutive monthly decline in US home prices in Nov and the largest annual decline in home prices (-18.2% y/y) since the S&P/Case Shiller home price index began in 2001, (3) the prediction from the National Retail Federation that sales at US retailers may decline in 2009, the first annual drop in at least 14 years, as consumers continue to spend less and purchase only items that are discounted, and (4) the prediction from Goldman Sachs that large US banks risk becoming the "new utilities" as the government introduces greater regulation and forces lenders to increase capital ratios. Goldman also said that as US unemployment rises, "consumer and commercial real-estate problems are set to accelerate," which will hurt big US banks more because commercial real estate and consumer loans account for an average 39% of their total loans, compared with just 25% at regional US banks.
• Yahoo! (YHOO) is 4.6% higher in European trading today after reporting late yesterday that Q4 profit was 18 cents a share, 1 cent higher than estimates, and that Q1 revenue will be no less than $1.53 billion, well ahead of analysts' estimates of $1.30 billion

Today's U.S. Market Focus

• March 10-year T-notes this morning are down -1.5 ticks as the Treasury market awaits the outcome of today's FOMC meeting. March T-note prices yesterday rallied for the first time in the last seven sessions and closed up sharply by 1-2/32 points. Bullish factors for T-note prices yesterday included (1) the unexpected drop in US Jan consumer confidence to its lowest level since the index began in Feb 1967 (-0.9 to 37.7 versus expectations of +1.0 to 39.0), (2) the 23rd consecutive monthly decline in US home prices and the largest annual decline in home prices since the S&P/Case Shiller home price index began in 2001 (Nov S&P/CaseShiller composite-20 home price index -18.2% y/y), (3) better-than-expected demand seen for the Treasury's $40 billion 2-year T-note auction, and (4) speculation that the Fed will announce it will start purchases of long-term Treasuries at the conclusion of the 2-day FOMC meeting today. Bearish factors for T-note prices yesterday included (1) diminished demand for the safety of Treasuries as the stock market rallied, and (2) the prediction from Societe Generale that Treasuries will keep a "bearish bias" until at least the conclusion of the Treasury's quarterly refunding next month.
• The dollar is weaker this morning with the dollar/yen +0.30 yen and the euro/dollar +0.98 cents. The dollar index yesterday added on to Monday's losses and closed at a 1-week low. Bearish factors for the dollar yesterday included (1) the unexpected drop in Jan US consumer confidence to its lowest level since the index began in 1967, (2) fears that the US housing slump is deepening after the Nov S&P/CaseShiller home price index declined by its largest annual amount since the series began in 2001, and (3) strength in the euro due to the unexpected rise in the German Jan IFO business climate index. Bullish factors for the dollar yesterday included (1) comments from ECB Council member Quaden that the ECB may cut interest rates further after the Belgian newspaper La Libre quoted Quaden as saying "We are probably ready to go lower" with interest rates, and (2) the prediction from UBS thatthe euro may drop to $1.25 per dollar in three months as global trade declines and a "risk premium" weighs on the euro.

• March crude oil prices this morning are down -30 cents a barrel while March gasoline is up +0.13 cents a gallon. March crude oil prices yesterday tumbled and closed down -$4.15 a barrel and March gasoline closed down -4.71 cents a gallon. Bearish factors for crude oil prices yesterday included (1) concerns that the US economic slowdown is deepening after the US S&P/CaseShiller home price index fell by a record amount in Nov, (2) the unexpected fall in US consumer confidence in Jan to its lowest level since data began in 1967, and (3) expectations that crude oil inventories will rise for the 16th time in 18 weeks when they are released today. Bullish factors for crude oil prices yesterday included (1) the decline in the dollar index to a 1-week low, (2) the rally in the US stock market, (3) comments from Kuwait's Oil Minister that OPEC will lower crude oil output further if required when the cartel meets in March, and (4) the prediction from the Centre for Global Energy Studies that if OPEC's promised 4.2 million bpd output reduction is implemented in full, inventories may fall by seven days' worth of supply this year and push crude prices above $100 a barrel. Expectations for today's weekly DOE inventory report are for a +2.65 million bbl build in crude oil inventories, a +1.75 million bbl rise in gasoline stockpiles, a -1.38 million bbl fall in distillate inventories, and a -0.5 point drop in the refinery capacity rate to 82.8%

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $5.0 bln listed by mkt cap): T-AT&T (BEST earnings consensus $0.66 per share), COP-ConocoPhillips (1.25), WFC-Wells Fargo (0.33), QCOM-Qualcomm (0.45), BA-Boeing (0.78), GD-General Dynamics (1.59), WLP-Wellpoint (1.36), HES-Hess Corp. (0.38), PX-Praxair (0.96), BDX-Becton Dickinson (1.15), ALL-Allstate (1.35), PCU-Southern Copper (0.25), BSX-Boston Scientific (0.14), BEN-Franklin Resources (0.86), SYMC-Symantec (0.32)

Global Financial Calendar