U.S. Morning Call for Wednesday, November 19, 2008
Nov 19, 2008

Overnight Global News

• The European DJ Stoxx 50 this morning is trading -1.66% lower on continued concerns about global economic growth and earnings. UBS is down -4.1% this morning after Morgan Stanley cut its 2009 earnings estimates for UBS to 1.41 francs per share from 1.83 francs due to the possibility of more writedowns. Mining stocks are generally lower today with lower metals prices. Rio Tinto is down -3.1% and BHP Billiton is down 2.6%. European automakers are trading lower today on concern about consumer demand with BMW down 6% and Peugeot Citroen down 4.7%. Exxon is down -1.2% and ConocoPhillips is down -0.9% on lower oil prices. Asia-Pacific stocks generally closed lower today: Japan -0.66%, Hong Kong -0.77%, China +6.16%, -0.49%, Australia -0.67%, Singapore -1.59%, South Korea -1.89%, Bombay -1.83%.
• CPI Today's Oct CPI report is expected to show a sharp decline of 0.8% m/m following the report of unchanged in September. The Oct core CPI is expected to show a small increase of +0.1% m/m, matching the +0.1% m/m increase seen in September. On a year-on-year basis, the Oct CPI is expected to drop to +4.0% from +4.9% in September and fall further from the 17-1/2 year high of +5.6% posted in July. The Oct core CPI is expected to decline slightly to +2.4% from +2.5% in September. The headline inflation statistics remain high at present, but will be dropping sharply in coming months as the effects feed through from the plunge in oil and commodity prices and from the recessionary economic conditions. Falling inflation will make it easier for the Fed to maintain an extremely easy monetary policy as it attempts to reboot the US economy.
• Housing starts Today's Oct housing starts report is expected to show a decline of 4.5% to 780,000, adding to the decline of 6.3% to 817,000 seen in September. Meanwhile, Oct building permits are expected to drop -3.7% to 775,000, adding to the decline of 6.1% to 805,000 seen in September. US housing starts hit a 17-year year low of 817,000 in September. The expected report today of 780,000 would push the series to a new record low, falling below the current record low of 798,000 posted in January 1991. The US credit crisis reached full stride in October and homebuilders were undoubtedly forced to slash their building plans even further to account for canceled contracts and the likelihood of a recession lasting well into 2009.
• Mortgage apps Mortgage applications were mixed today with the market index falling -6.2%, the purchases sub-index falling -12.6%, and the refinancing sub-index rising +2.6%. Today's decline in the purchases index pushed that index to a new 8-year low, indicating the lack of demand for home purchases. The 30-year mortgage rate has at least fallen in the last two weeks to 6.14% from the recent 3-month high of 6.46%.
• FOMC minutes The FOMC today will release the minutes of its meeting on Oct 28-29. The FOMC at that meeting cut its funds rate target by 50 bp to 1.00%, which was fully in line with market expectations, adding to the inter-meeting 50 bp rate cut to 1.50% made on October 8. The FOMC in its post-meeting statement said that, The pace of economic activity appears to have slowed markedly. The FOMC also said that it expects inflation to moderate in coming quarters to levels consistent with price stability. The statement indicated that the FOMC stood ready to implement further easing measures as necessary by saying, The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Overnight U.S. Stock News

• December S&Ps this morning are trading -11.60 points on lower global stocks and general concern about the economy and earnings. The US stock market yesterday rallied into the close to finish near its high (Dow +1.83%, S&P 500 +0.98%, Nasdaq Composite +0.08%).
• Bullish factors for stock prices yesterday included (1) the Oct PPI which had its biggest monthly decline (-2.8% m/m) since producer price records began in 1947, (2) the first time the S&P 500's dividend yield (3.57%) moved above the yield on 10-year T-notes (3.54%) since 1958, (3) the 14% gain in Hewlett-Packard after the computer maker reported Q4 earnings of $1.03 a share, ahead of analysts' estimates of $1 a share, signaling HP is withstanding the economic crisis that has hurt sales at other tech companies such as Cisco and Intel, and (4) Merrill Lynch's recommendation to buy "vice" stocks as alcohol, tobacco and casino companies have gained 11% on average during the last six recessions since 1970, compared with a 1.5% loss for the S&P 500, and have even outperformed "defensive" stocks such as consumer staples and health-care companies.
• Bearish factors for stock prices yesterday included (1) comments from Fed Chairman Bernanke that lending conditions in the US are "still far from normal," (2) the unexpected fall in the Nov NAHB housing market index to its lowest level since the index was created in Jan 1985, raising concern that the housing crunch is worsening, (3) comments from Treasury Secretary Paulson that he has no plans to use the second half of the $700 billion Troubled Asset Relief Program (TARP) and that the TARP program is not a "panacea" and should not be used as an economic stimulus or an economic recovery package, indicating it will be up to the incoming Obama administration to administer the remaining funds, and (4) the 6% fall in Citigroup to a 13-year low after Deutsche Bank predicted Citigroup may post a 30 cents per share loss next year compared with a previous estimate of a $1.50 profit as revenue declines and credit costs rise.
• GM is down 2.3% this morning in European trading. Detroit CEOs are scheduled to testify today before the House Financial Services committee on their request for a bailout after their testimony yesterday before a Senate committee.

Today's U.S. Market Focus

• December 10-year T-notes this morning are trading +16.5 ticks on lower S&Ps and global stocks. December T-note prices yesterday rallied to a 2-month high and closed +1-0.5/32 points. Bullish factors for T-note prices yesterday included (1) the biggest monthly decline in producer prices since records began in 1947 (Oct PPI -2.8% m/m versus expectations of -1.8% m/m) with the +5.2% y/y rise a 13-month low and well below expectations of +6.2% y/y, (2) the unexpected drop in the Nov NAHB housing market index to an all-time low (-5 to 9 versus expectations of unchanged at 14), (3) a continued lessening of inflation expectations as the yield between 10-year TIPS and conventional 10-year T-notes fell to 60 bp, a 10-year low, and (4) comments from Fed Chairman Bernanke that lending conditions in the US are "still far from normal," even after emergency programs expanding credit have helped reduce interest rates for some borrowers. Bearish factors for T-note prices yesterday included (1) the larger-than-expected increase in Oct PPI ex food and energy (+0.4% m/m and a 19-year high of +4.4% y/y versus expectations of +0.1% m/m and +4.0% y/y), and (2) supply fears after the prediction from Treasury Secretary Paulson that strains on the federal budget will require the US to sell $1.5 trillion in debt this fiscal year.
• The dollar this morning is trading lower with the dollar/yen down -0.19 yen and the euro/dollar up +0.24 cents. The dollar index yesterday added on to Monday's gains and closed slightly higher. Bullish factors for the dollar yesterday included (1) continued demand for US financial assets by international investors as the Sep net long-term TIC flows were larger-than-expected, and (2) the prediction by Bank of America that the US dollar will appreciate 12% against the yen by the middle of next year as expectations build that the Fed will start raising interest rates earlier than Japan's central bank. Bearish factors for the dollar yesterday included (1) the unexpected drop in the Nov NAHB housing market index to its lowest level since the index was created in Jan 1985, increasing concern that the housing market will remain depressed for longer than expected, and (2) strength in the yen as carry trades were unwound with the equity market continuing to slide.
• December crude oil prices this morning are trading -40 cents a barrel and December gasoline is trading -1.26 cents a gallon as concern continues about weak demand. December crude oil prices yesterday traded higher early but then retreated into the close and ended -$0.56 a barrel at a 21-month low. December gasoline closed -3.78 cents a gallon at a 3-3/4 year low. Bearish factors for crude oil prices yesterday included (1) the stronger dollar, (2) the prediction from the Centre for Global Energy Studies that global oil demand is set to contract in 2008 for the first time in 25 years as the economic slowdown slashes consumer spending, (3) JPMorgan's cut in its crude oil price forecast fo next year to $69 per barrel from a previous forecast of $75 per barrel and prediction that OPEC is unlikely to implement any further production cuts this year until it ensures that its members comply with the initial 1.5 million bpd production cut, and (4) expectations that today's weekly DOE inventory report will show crude oil supplies increasing for an eighth straight week. Bullish factors for crude oil prices yesterday included (1) short-covering after crude oil prices tumbled over $17 a barrel in the past two weeks, and (2) the possible delay of deliveries of crude oil to Europe and the US because shippers may divert their crude cargoes away from the Suez canal on fears of pirate attacks after a Suadi oil tanker was hijacked off the coast of Somalia. Expectations for today's weekly DOE inventory report are for a +1.0 million bbl build in crude oil inventories. a +500,000 bbl rise in gasoline stockpiles, a +600,000 bbl gain in distillate inventories and a -0.1 point drop in the refinery capacity rate to 84.5%.

Today's U.S. Earnings Reports

Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): INTU-Intuit (BEST earnings consensus -$0.12 per share), ROST-Ross Stores (0.43), LTD-Limited Brands (0.00), LDG-Longs Drug Stores (0.63), BJ-BJ's Wholesale (0.46), PETM-Petsmart (0.26), WGOV-Woodward Governor (0.50)

Global Financial Calendar