Need To Know News

S&P/CS Composite-20 (YoY): -2.8%

Survey: -2.9% Prior: -2.1%

S&P/CS Composite-20 Home Price (May): 200.04

Prior Revised : 200.51

Redbook Chain Store Sales rise 2.9% in July 28th week vs. year-ago

After this morning’s releases the DEC FED Funds implied rate gained 5 BPS to 5.10% and now shows a 60% chance of a rate cut before years end

Risk aversion has retreated this morning, with equities up and bond prices down, a tentative return of the carry trade, and a narrowing in credit spreads. The iTraxx Crossover index (European credit spreads) was down about 50bp, to about 400bp this morning; it had risen to a high of 505bp yesterday. Risk repricing does not last forever and usually happens in bursts so if that is all we are facing it should wind down in coming days, at least for awhile. Still, there will be fallout among financial firms from the decline in the prices of assets on their balance sheets; that could again spook markets when the news comes out. Liquidity is also reduced, so we are not out of the woods yet. So far markets have handled the damage fairly smoothly; today three French and one US hedge fund announced that they would close. And thus far there have not been any major revisions to the healthy economic growth outlook. The repricing of risk has been positive for the longer term growth outlook as mis-priced risk is one of the poison-pills for sustained economic expansion.

The dollar is steady against the euro this morning, while the yen is weaker and the high yielders, such as the AUD and sterling are firmer, as is the Canadian dollar. Strong data from Australia make a RBA rate hike next week to 6.5% likely, with a continued hawkish stance.

Government bond yields retreated sharply as risk aversion waned and profits booked on this rally. Yields in Europe were up about 6bp in 10’s at 7:00 this morning, and about the same in 2’s. The curve steepened a bit in the UK as the short-end underperformed; yields on 2’s were up 9bp. Yields in Japan were fractionally lower in 10’s, mirroring the NIKKEI.

Equity markets were solidly higher in most markets, with Japan the outlier, where markets were marginally softer. The DAX and CAC40 were both up almost 1.8% at 7:00am, with the FTSE up just over 2.0%.

Oil prices rose this morning on forecasts of another decline in US crude stocks last week — crude stocks normally drop at this time of the year. The US light crude contract was up 48 cents, to $77.31, nearing last years record high. Talks between Nigerian rebels and the government continue to progress, raising the chances of a resumption in normal Nigerian output, which would be a significant increase in global supplies.

On the data front, the Japanese labor market tightened a bit further in June, with the jobless rate falling 0.1 point to 3.7% and jobs to applicants at 1.07, up from 1.06. Cash earnings were weak however, falling 1.1% Y/Y in June on softness in overtime earnings. Housing starts surged 6.0% in June, more than expected, with construction orders up 26.4% Y/Y. Small business confidence remained unchanged at 48.4%.

Eurozone confidence indicators were softer than anticipated, with the business climate indicator falling to 1.35 from 1.54. Industrial confidence eased 1 point to -5 while consumer and services confidence were steady. The Flash HICP slipped to 1.8% Y/Y for July, down from 1.9%. This will not stop the ECB from raising rates in September, in part because of the tightening labor market. The June unemployment rate was 6.9%, with May revised down to 6.9%.

Australian private sector credit jumped 1.8% in June to be up 15.4% Y/Y. This will be a red flag for the RBA, adding to the arguments for a rate hike.

For the second month in a row, personal income rose 0.4% in June slightly less than the 0.5% increase that analysts expected. After increasing 0.6% in April and May, personal consumption expenditures rose 0.1% in June, in line with expectations. Both core and headline inflation were modest, increasing 0.1% from May. On a year-over-year basis core inflation was up 1.9%, the first time it has been below 2% since early 2004. Since its high point of 2.5% in February, the year-over-year core inflation rate has moved lower for four consecutive months; moderating as the FOMC has been expecting. After adjusting for inflation, personal consumption expenditures showed no increase between May and June, the smallest gain since March. Real durable goods expenditures declined 1.6%, nondurable goods expenditures were unchanged and expenditures on services rose 0.2%. After declining for two months, real disposable income rose 0.3% as income growth outpaced inflation. This release marks the annual revision to the income and outlays numbers and impacted estimates going back through 2004. Disposable personal income was revised down in 2004 but revised up in 2005 and 2006. Personal outlays were revised down for all 3 years. The negative savings rates in 2005 and 2006 have been revised to positive numbers. The savings rate was 0.6% of disposable personal income in June.

www.bea.gov

Kathryn Kobe, NTKN, Washington DC

Total compensation costs for civilian workers increased a seasonally adjusted 0.9% from March to June 2007. This figure was in line with analyst’s expectations and ahead of last quarter’s increase of 0.8%. Wages and salaries rose 0.8%, a decrease from the previous figure of 1.1% Benefit costs rose 1.3% after remaining largely flat (+0.1%) in the previous three-month period.

Annual compensation costs for civilian workers rose 3.3% for the year ended June 2007, that’s above the 3.0% figure for the year ended June 2006. Wages and salaries drove the increase, as they rose 3.4% vs. a prior reading of 2.8%, while benefit costs remained level at 3.4%. State and local government benefits showed the biggest increase at 6.6% vs. a 5.5% prior reading.

http://www.bls.gov/ect

Gautham Nagesh for Need to Know News at Labor

Up 1.1% in July 28th week vs. -0.2% prior

Up 3.2% (YoY) July 28th week vs. 3.0% prior

In Japan JUNE Housing Starts came in at 6%, beating the -3.5% forecasted. Tokyo Electric Power Company has announced that its earth quake damaged nuclear power plant profits will be off by 75% at the Japanese FISCAL YEAR end in March 2008 owing to purchases of fossil fuels to fill the void. Credit fears are also mounting in Japan as Mitsubishi UFJ and Mizuho Financial Group Inc, Japan’s two largest banks, project lower profits this year. The Nikkei 225 is currently down 40 points to 17,248; the Hang Seng is up 445 points to 23,184. The carry trade is back in swing today with JPY down across the board, losing 163 pips to GBP, and 40 pips vs. the USD at 119.46.

In the EU Euro-Zone Economic confidence came out at 111, worse than the expected 111.2. Also, the Euro-Zone business indicator came out worse than expected at 1.35 vs. the estimated 1.46. Estimated Euro-Zone CPI came in at 1.8%, lower than the 1.9% expected. However, the Euro-Zone is still expected to grow at an annualized 2.6% rate. Higher energy prices and an appreciating Euro are starting to take effect in the Euro-Zone. The DAX is currently up 146 points 7603. The EUR is mixed on the day, up ten pips vs. the USD at 1.3708 and down 53 pips vs. the GBP at 1.4835.

In the UK a GfK Consumer Confidence Survey came in worse than expected at -6 , Nationwide consumer confidence is scheduled to come out later and is also forecasted to drop in July. Recent rate hikes appear to be taking hold, as the BOE is expected to leave its benchmark unchanged at 5.75% when it meets on Thursday. The FTSE 100 is up 140 points to 6346 lead by GlaxoSmithKline. The GBP is up across the board gaining 90 pips vs. the USD at 2.0337.
In the states ICSC US Chain Store Sales increased 1.1% in July 28th week vs. .2% decrease in the week prior.

A bunch of economic data to color markets today:
8:30- Personal Income Est: 0.5% Prior: 0.4%
Personal Spending Est: 0.1% Prior: 0.5%
PCE Deflator (YoY) Est: 2.3% Prior: 2.3%
PCE Core (MoM) Est: 0.2% Prior: 0.1%
PCE Core(YoY) Est: 1.9% Prior: 1.9%
Employment Cost Index (2Q) Est: 0.9% Prior: 0.8%

9:45- Chicago Purchasing Manager Est: 58.4 Prior: 60.2
10:00- Construction Spending (MoM) Est: 0.2% Prior: 0.9%
Consumer Confidence Est: 105 Prior: 103.9
NAPM-Milwaukee Prior 66

With no economic data to speak of equities were able to reverse course after extensive losses last week. Treasury yields gained on an increased exposure to risk as credit fears were briefly muted. The current yield on the 10-yr is 4.182%; the yield on the 2-yr is 4.592%. DOW futures were choppy in both early and premarket trading and are now maintaining strength late in the day trading up 143 point to 13427.

The dollar is mixed on the day, gaining 30 pips vs. the yen and losing 64 pips to the Euro. Crude was above $77 dollars, however, ended the day down 29 cents to 76.73.
Unleaded is down 1.61 cents to $2.0856, Heating Oil is also lower. Natural gas is up 5% to $6.52 as August Natural gas futures expired today; it was also helped by a forecast for higher temperatures at the start of hurricane season.

Gold is higher $5.30 to $677.60 and Silver is higher 24 cents to $12.95 as a weaker dollar increased their appeal as a hedge against the greenback. Platinum is down $1.20 to $1285.50; Copper is up 4.3 cents to $3.59.

Dec FED funds now indicate an implied rate of 5.07%, indicating a 72% likelihood of a FED rate cut before year’s end.

A slew of economic data to paint markets tomorrow:

8:30- Personal Income Est: 0.5% Prior: 0.4%
Personal Spending Est: 0.1% Prior: 0.5%
PCE Deflator (YoY) Est: 2.3% Prior: 2.3%
PCE Core (MoM) Est: 0.2% Prior: 0.1%
PCE Core(YoY) Est: 1.9% Prior: 1.9%
Employment Cost Index (2Q) Est: 0.9% Prior: 0.8%

9:45- Chicago Purchasing Manager Est: 58.4 Prior: 60.2

10:00- Construction Spending (MoM) Est: 0.2% Prior: 0.9%
Consumer Confidence Est: 105 Prior: 103.9
NAPM-Milwaukee Prior 66