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Overnight Global News

• The European DJ Stoxx 50 this morning is down -0.57% and March S&Ps are down -6.60 points (-0,71%). Asia-Pacific stocks closed mixed today with Japan +1.74%, Hong Kong -3.37%, China -0.60%, Taiwan +1.32%, Australia +0.99%, Singapore -1.73%, South Korea +2.91%. European stock prices were hurt today as E.ON AG, Germany's biggest utility, fell 3.1% after Russian natural-gas exports through Ukraine were halted for the first time in 3 years. OAO Gazprom cut off all gas supplies to Europe today as the pricing dispute with the Ukraine enters a seventh day and threatens to create natural gas shortages in Europe just as freezing weather is increasing demand. Commerzbank is down 3.5% after JPMorgan Chase downgraded the bank to a "sell" saying Commerzbank's acquisition of Dresdner Bank may hurt its earnings and the bank may face further "capital erosion" until 2011. Also hurting European stock prices this morning is the 3.7% drop in Alcoa after the world's largest aluminum maker announced its third production cut in as many months, dragging down mining companies Rio Tinto (-4.1%) and BHP Billiton (-3.6%). On the positive side today, European inflation at the producer level had its biggest monthly decline since data began in 1981 as the Nov Euro-Zone PPI declined -1.9% m/m. Supporting Asia-Pacific stocks today is the yen holding near a 1-month low against the dollar, along with speculation that President-elect Obama's stimulus plan will restore US economic growth, sending Japan's Nikkei 225 higher for the seventh straight session to a 2-month high.
• Mortgage apps The latest weekly MBA mortggage applications fell -8.2% with the purchase index increasing +7.3% while the refinancing index declined -12,3%. The refinancing index is now moderately below the recent 5-1/2 year high, illustrating that refinancing activity is still very active. The refinancing activity is good for the US economy since low mortgage rates are allowing homeowners to reduce their mortgage payments, thus putting more cash straight into their pockets. The purchases index is moderately above the recent 7-year low but is still at a weak level that indicates dismal home buying activity. The 30-year fixed mortgage rate in the latest week (the week ended Dec 25) fell another 5 bp to a new record low of 5.14%. That is down by 132 bp from the 4-month high of 6.46% posted as recently as the end of October. US mortgage rates have fallen sharply in the past two months following the Fed's announcement of a $600 billion program to buy mortgage securities to help grease the pipeline of mortgage funding and also to buy the debt of Fannie Mae and Freddie Mac to reduce their financing costs.
• ADP employment change Today's Dec ADP employment change is expected to show a huge decline of 493,000, falling by even more than the 472,000 decline seen in November. The ADP employment figure has plunged by a total of 1.282 million in just the past four months (Aug-Nov), illustrating the alarming deterioration in the US labor market. That deterioration is likely to continue in early 2009 as businesses continue to lay off employees in order to defend against the sharp drop-off in US economic activity. The ADP and non-farm payroll reports have only a minor correlation, but today's report will nevertheless be taken as a hint of what is to come in Friday's December unemployment report. The market consensus is that Friday's Dec nonfarm payrolls report will show a plunge of -500,000, adding to the 533,000 decline seen in November. The market expects the Dec unemployment rate to rise by +0.3 points to 7.0%, posting a new 15-1/2 year high.
• 3-year T-note auction The Treasury today will sell $30 billion 3-year T-notes. The $30 billion size of today's 3-year T-note auction is up from the $28 billion size at the last auction in December. Today's 3-year T-note issue was trading at 1.14% in when-issued trading late yesterday afternoon. The 12-auction averages for the 3-year are as follows: 2.37 bid cover, $271 million in non-competitive bids, 3.1 bp tail to the median yield, 13.1 bp tail to the low yield, and 46% taken at the high yield. Indirect bidders, a category mainly comprised by foreign central banks, have taken an average of 30.0% of the last twelve 3-year auctions, which is mildly below the average of 32.6% across all recent Treasury coupon auctions.

Overnight U.S. Stock News

• March S&Ps this morning are trading down -6.60 points on earnings concerns and after Oppenheimer analyst Whitney predicted US banks will need to raise more capital this year. The US stock market yesterday traded in positive territory most of the session and finished the day mildly higher (Dow +0.69%, S&P 500 +0.78%, Nasdaq Composite +1.50%).
• Bullish factors for stock prices yesterday included (1) speculation that President-elect Obama's $775 billion package of tax cuts and government spending will revive the slumping US economy, (2) the prediction from Goldman Sachs that the S&P 500 Index will rise 22% this year to a year-end target of 1100, (3) the unexpected gain in the ISM non-manufacturing index for Dec, (4) the rally in consumer-staples and health-care companies after Goldman Sachs upgraded the sectors to "overweight," saying investors should favor US companies that generate most of their revenue at home rather than abroad, and (5) the rally in energy stocks along with big name oil companies and oilfield-service stocks after crude oil rallied to a 3-week high.
• Bearish factors for stock prices yesterday included (1) the weaker-than-expected US factory orders for Nov as factory orders have now declined for four consecutive months, (2) the weaker-than-expected US pending home sales for Nov, signaling no end in sight to the US housing slump, and (3) the minutes from the Dec 15-16 FOMC policy meeting as Fed members saw "substantial" risks to the US economy with unemployment rising "significantly" into 2010 and that the "downside risks to economic activity would be substantial."
• Alcoa (AA) fell 5.2% in after-hours trading yesterday and is down 3.7% in Germany this morning after the world's largest aluminum producer said it will cut 13% of its workforce or 13,500 jobs and announced its third production reduction in as many months.

Today's U.S. Market Focus

• March 10-year T-notes this morning are trading down -3 ticks before today's record $30 billion 3-year T-note auction. March T-note prices yesterday rallied for the first day in the last six sessions and closed up +6 ticks. Bullish factors for T-note prices yesterday included (1) the much weaker-than-expected US pending home sales for Nov with a large downward revision for Oct (Nov pending homes sales -4.0% versus expectations of -1.0% with Oct revised down to -4.2% from -0.7%), (2) the weaker-than-expected factory orders for Nov which have now fallen for four consecutive months (-4.6% versus expectations of -2.2%), (3) the stronger-than-expected demand for the Treasury's $8 billion 10-year TIPS auction, and (4) the dire-sounding FOMC minutes from the Dec 15-16 FOMC meeting in which policy makers believed "the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial." Bearish factors for T-note prices yesterday included (1) the unexpected gain in the ISM non-manufacturing index for Dec (+3.3 to 40.6 versus expectations of -0.3 to 37.0), (2) the rally in the stock market which lessens the demand for Treausries, and (3) comments from President-elect Obama that "potentially we've got trillion-dollar deficits for years to come, even with the economic recovery we are working on," signaling huge issuances of Treasury debt to fund the deficits.
• The dollar is weaker this morning with the dollar/yen -0.43 yen and the euro/dollar +0.84 cents. The dollar index yesterday rallied for the fifth straight session and closed at a 3-week high. Bullish factors for the dollar yesterday included (1) weakness in the euro on speculation that the ECB will lower interest rates again when they meet next week after the Euro-Zone CPI estimate for Dec came in at +1.6% y/y, a bigger fall than expected and the first time inflation fell below the ECB's 2% ceiling since Aug 2007, providing the central bank enough cover to continue its rate-cutting cycle, (2) the prediction from Bank of Tokyo-Mitsubishi that the dollar may extend its recent gains especially against the euro which appears "vulnerable" with the ECB likely to continue cutting interest rates, and (3) the unexpected rise in the US ISM non-manufacturing index for Dec. Bearish factors for the dollar yesterday included (1) the larger-than-expected decline in US factory orders for Nov which have now declined for four straight months, (2) the weaker-than-expected US pending home sales for Nov, signaling that the US housing market slump will continue, and (3) the prediction from Morgan Stanley that the yen will strengthen another 10% against the dollar to a 14-year high of 85 yen on concern over how quickly the US can recover from its worst recession in 25 years.

• February crude oil prices this morning are down 5 cents a barrel and February gasoline is down -0.13 cents a gallon. February crude oil prices yesterday rallied early up to a 3-week high but gave up all of their gains during the remainder of the day and closed lower by -$0.23 a barrel. However, February gasoline closed up +0.68 cents a gallon at a 5-week high. Bearish factors for crude oil prices yesterday included (1) continued strength in the dollar index which rallied up to a 3-week high, (2) the minutes of the Dec 15-16 FOMC meeting in which policy members believed "downside risks to the economy would be substantial," and (3) expectations for another increase in gasoline supplies in today's weekly inventory report which would be the 5th consecutive weekly gain. Bullish factors for crude oil prices yesterday included (1) indications from Kuwait and Qatar that both countries will adhere to supply cuts implemented by OPEC at the start of the year, (2) the ongoing pricing dispute between Russia and Ukraine over natural gas prices that is reducing gas shipments to Europe, and (3) the ongoing conflict between the Israeli army and Hamas in the Gaza Strip that has now entered its 11th day. Expectations for today's weekly DOE inventory report are for a +1.0 million bbl increase in crude oil inventories, a +1.0 million bbl increase in gasoline stockpiles, a +750,000 bbl rise in distillate inventories and an unchanged refinery capacity rate of 82.5%

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): MON-Monsanto (BEST earnings consensus $0.60 per share), BBBY-Bed Bath & Beyond (0.33), STZ-Constellation (0.59), FDO-Family Dollar Stores (0.40), SVU-Supervalu (0.60), BLUD-Immucor (0.21)

Global Financial Calendar