Need To Know News

August Chicago Purchasing Manager Index: 53.8 vs. 53.4 July   Consensus: 53.0

New Orders Index: 58.4 vs. 53.4 July

Prices Paid Index: 71.8 vs. 73.1 July

Employment Index: 53.7 vs. 61.6 July

Repo Collateral: $4.5 billion Treasuries, $500 million Agencies

Personal income rose 0.5% in July, better than the June reading of 0.4% and slightly better than analysts expected. Consumer spending rose 0.4% in July better than expected after a 0.2% increase in June . The PCE core price index rose 1.9%, the second month in a row below 2%. The headline PCE price index rose 2.1% from year ago levels, its smallest YOY increase since January 2007. In real terms, consumer spending rose 0.3% in July following no increase in June. Spending on durable goods increased 0.5% after a 1.8% decline in June. Nondurable goods spending rose 0.4% following a weak 0.1% increase in June. Spending on services rose 0.2% after adjustment for inflation. Disposable personal income in real terms rose 0.5%, slightly faster than the increase in real spending. The savings rate rose slightly in July to 0.7% of disposable income from 0.5% in June. This is a better base for third quarter spending than was expected implying a modest increase in PCE in the third quarter. However, this reflects spending behavior in July, prior to the credit market turmoil that may have changed plans.
Kathryn Kobe NTKN, Washington DC

In overnight trading the Nikkei was up 415 points or 2.6% to close at 16569 on the news that President Bush would be speaking this morning on help for homeowners with subprime mortgages. The news buoyed the Asian markets, which were also helped by strong earnings from Dell and other tech companies. July Housing Starts in Japan came in well below estimates with a 23.4% decline after a build of 6% the previous month. Construction Orders were also down 10.4% vs. an expected increase of 12.5%. The Hang Seng rose 500 points to finish at 23984.

European indices are also up about 1% across the board in anticipation that both speeches this morning will provide some relief for embattled lenders and homeowners. However, Eurozone Consumer Confidence for August fell to its lowest level in 6 months as the reading came in at -3, below the -2 market estimate. Industrial Confidence remained unchanged at 5 in spite of anticipated decline and the unemployment rate for the Eurozone remained unchanged as expected at 6.9%. German Retail Sales for July came in slight below projections at 0.3% vs. an upwardly revised 1.2% for June. The USD is currently down vs. the majors but up over 116 vs. the JPY as the carry trade resumes.

U.S. equity indices were higher overnight on anticipation Bernanke at 10am and Bush at 11am will provide a double-barreled market boost. Bernanke is unlikely to tip his hand on rates at the housing and monetary policy meeting in Jackson Hole, WY. Expect he will discuss both issues with an emphasis on regulating predatory lenders with existing laws. As for monetary policy, if Bernanke highlights perceived weakness within yesterday’s GDP data or suggests deeper fallout from subprime/credit crunch, the market will expect a rate cut. Realistically, Bernanke cannot cut rates in response to the hue and cry from Wall Street without finding some link to his inflation fighting mandate.

Bush is expected to announce some form of help for homeowners though he will stick to his guns on raising caps on Fannie and Freddie - he’s against it. Instead, it is expected he will allow changes in the Federal Housing Administration mortgage insurance program allowing those falling behind due to adjustable rate mortgages to refinance at lower rates because they will be insured by FHA, thus protecting the new lenders from default. The plan is expected to affect 80,000 homeowners, just a drop in the bucket of the anticipated 2 million ARMs that are expected to reset in the next year. DOW futures are currently trading up 104 points on anticipation that these two speeches will provide some relief to the markets. The NASDAQ and S&P are also up in pre-market trading.

McGraw-Hill replaced Standard & Poor’s President Kathleen Corbet amidst criticism for the company’s role in the subprime mess. Deven Sharma was named President as Corbet resigned to “pursue other opportunities.” Company executives claim Corbet’s departure has nothing to do with criticism over the ratings agency’s failure to foresee the crisis in the subprime paper; S&P shares have fallen 26% since the start of the year.

Barclays announced it will help rescue a $1.6 billion debt fund run by Cairn Capital after it was unable to raise money in the credit markets. Barclays’s securities unit will provide a loan to refinance the fund’s asset-backed commercial paper as it falls due, according to a statement this morning. Barclays announced yesterday that they were “flush with liquidity.”

This morning brings us a slew of economic data, but Bernanke and Bush will remain the focus of the markets. At 8:30am we’ll bring you July Personal Income from Commerce, the market is expecting a reading of 0.3% vs. a prior reading of 0.4%. Core PCE is expected to rise 0.2% vs. a reading of 0.1% for June and Personal Spending is expected to climb 0.3% vs. 0.1% in June. At 9:45 we’ll bring you the August Chicago Purchasing Manager Index; the market expects a slight drop to 53.0 vs. a reading of 53.4 for July. 10:00 brings a host of numbers along with Bernanke’s speech; Final numbers for August UMich Consumer Confidence are expected to read 82.5 following a prior reading of 83.3; Factory Orders from Commerce are expected to rise 3.3% for July after a build of 0.6% in June and August NAPM-Milwaukee is due after a reading of 57 in July. Regardless of the outcome, the reaction to Bernanke’s speech will likely be volatile due to thin volume before the holiday weekend; whatever movement the markets see today, they are unlikely to hold into next week.

Trading featured range-bound volatility as the DOW and S&P oscillated between positive and negative all day before selling near the close. Q2 GDP came in line with estimates at 4.0%, the highest level of growth in a year. Personal Consumption rose slightly to 1.4% and GDP Price Index held steady at 2.7%. The strong GDP leaves the US economy in a better position to deal with ongoing credit problems.

The House Price Index came in below estimates at a 0.1%, the lowest rate of growth in a decade. The report is further evidence of housing weakness; as rising inventories are likely to further deteriorate home values.

Thornburg raised $473 million from the offering of 20 million shares of 10% Series F cumulative convertible redeemable preferred stock. This helped the company’s stock price soar more than 15% before giving back some of the gains to close up around 7%. The company said the additional liquidity should help to return to normal operations. The firm resumed issuing new mortgages on Monday.

H&R Block plans to exit the subprime mortgage business, selling their subprime unit to Cerberus Capital by year-end. The firm says it intends to be out of mortgages by December 31 and if the Cerberus deal falls through,  it will likely shut its Option One Mortgage unit.

Freddie Mac, the nation’s second largest home lender, announced its second-quarter profits fell 45% from a year ago due to increasing defaults. The company was forced to set aside $320 million for losses due to the ongoing credit crunch. CEO Richard Syron says that the company “was not immune to market forces” and continues to “take a cautious view toward the housing market.”

Moody’s announced today that banks have sufficient capital and that the global bank threat was largely overstated.

The Fed added $10 billion to the banking system via 6- and 14-day Repos. Fed Funds traded at the Fed’s 5.25% target rate all day. Fed Fund Futures are higher implying an increased likelihood of a FED rate cut. T-bill yields dropped today on a flight to short-term safety in the midst of another turbulent day in equities.

Barclays said today that there are no liquidity issues in UK markets, saying that the bank is “flush with liquidity.” Barclays also said that the BOE standby facility “is there to facilitate market operations in such circumstances.”

The EIA Natural Gas Storage report came in right on analysts’ estimates at a build of 43 BCF. Natural Gas finished the day up a dime to $5.68, while other energies were all down less than 1%. Metals finished the day in the red across the board, but again the declines were modest and all below 1%.

All eyes tomorrow will be pointed towards Jackson Hole Wyoming, where FED Chairman Ben Bernanke speaks at the Kansas City Fed’s Economic Symposium.

Tomorrow we’ll bring you July Personal Income and Spending from Commerce at 8:30am, the market is expecting Income to come in at 0.3% following a reading of 0.4% for June. At 10:00am we’ll bring you July Factory Orders; analysts expect an increase of 3.3% after a reading of 0.6% in June. Tomorrow also brings us the August Chicago Purchasing Manager Index at 9:45am, it’s expected to see a slight decline to 53.0 after a July reading of 53.4. Final UofM Consumer Confidence for August comes out at 10:00am and NAPM-Milwaukee also is released at that time.

Foreign Central Bank US Debt Holdings up $3.36 billion to $1.983 trln - Aug 29

Foreign Central Bank Holdings of US Treasuries down $3.06 bln to 1.207 trln - Aug 29

FED Discount Window Borrowings Avg $1.58 bln/day- Aug 29 week vs $1.54 bln/day Prior

FED Primary Credit Borrowings AVG $1.32 bln/day- Aug 29 week vs. $1.2 bln/day Prior

FED reports No Secondary Credit Borrowings for Aug 22 week vs. $85 mln/day Prior

FED Discount Brokers Total $1.36 bln- AUG 29

Foreign Central Bank Holdings of US Agency Debt Increases $6.42 bln to $775.79 bln - Aug 29

US M2 UP $43.6 bln, M1 Down $6.1 bln- Aug 29

US Discount Window Borrowings Avg $1.577 bln/day- AUG 29

US Bank Free Reserves -$499 mln In Two Weeks Ended Aug 29

JPY is higher vs. all major currencies as the deteriorating ABCP market has led to an unwinding of assets funded with borrowed JPY in a flight to quality. USD/JPY is down 31 pips to 115.85; 1-month USD/JPY option volatility dropped 1.5 to 13.5; GBP/JPY is down 101 to 233.37 and EUR/JPY is down 81 pips 158.09. NZD/JPY is down 84 pips to 81.49 and AUD/JPY is down 91 pips to 94.56.

Q2 GDP came in at 4%, the largest increase in a year; however, the Home Price Index came in at 0.1%, the slowest pace of growth in over ten years. The USD traded within narrow ranges vs. all the major currencies, gaining 28 pips vs. the EUR to 1.3649. The USD Index is marginally higher on the day and has traded within a narrow range since Aug 24th. The FED added $10 bln to the banking system and FED Funds are trading at the 5.25% target. Tomorrow’s speech from FED President Ben Bernanke will be closely analyzed for transparencies and the FED’s take on the recent credit purge.

The BOE loaned £1.6 bln ($3.2 bln) in emergency funds at 6.75% to stem any potential liquidity shortage. GBP/JPY fell from a two-week high as high-yielding assets were shunned in favor of safety. UK Nationwide House prices for August increased more than expected at 0.6%, implying another BOE rate hike may be needed to restrain increases home prices; Dec interest rate futures imply a full BOE rate hike before year’s end. Some lenders in the UK will be tightening lending standards for home loans to borrowers with imperfect credit.

French President Sarkozy issued a statement saying he was told not to discuss the Euro’s exchange and he was told France was isolated on Euro policy. He nonetheless mentioned that the introduction of the Euro has led to a rise in prices and that forex dumping has led to undervalued currencies. He feels the ECB should use the 2nd world currency to its advantage, much like the FED. The EU’s Barroso followed with a statement saying central banks should not be pressured at the service of politicians and that forums such as Eurogroup meetings are more appropriate for such discussions.

Treasury sells $13 billion in 5-year notes @ high yield of 4.248%

18.43% of bids awarded @ high rate   Bid-to-cover ratio: 2.64

Non-comp bids: $197.9 million

Primary dealers took $9.85 billion of sale, Indirect took $2.92 billion

Q2 Annualized GDP came in at 4% just under the 4.1% estimate and ahead of the Q1 reading of 3.4%. Q2 GDP Price Index fell in line with expectations at 1.4% and Q2 Core PCE came in at 1.3%. A pickup in exports and business spending helped hasten US economic growth to its quickest pace in over a year. The focus now shifts to Q3 GDP inputs to determine the effect of downside risks to growth including credit issues. Strong Q2 growth should help protect the US economy from recession, though it remains to be seen the effects of recent credit market turmoil on growth.

The Q2 Home Price Index came in lower than expected at 0.1% vs. the prior revised reading of 0.6%. This 0.1% rise in home prices is the lowest increase in over ten years as housing demand remains weak. Thornburg Mortgage has raised $500 mln in cumulative redeemable preferred stock offerings with $473 mln in net proceeds to the troubled lender.
Freddie Mac’s CEO mentioned the company is “not immune to market forces”; though he says credit issues will likely subside in 18 months. Freddie and OFHEO are in agreement that lifting Freddie’s investment cap would provide a “public policy benefit”. Freddie’s Q2 net income dropped 45% mostly due to loan defaults.

H&R Block is reporting $302 mln in Q1 losses due to subprime. H&R plans to sell its Option One Mortgage Corp. to Cerberus Capital by the end of the year; H&R might shut the unit if the deal falls through.

Moody’s announced today that the risk of “thrombosis” in the market has diminished saying that banks have enough liquidity and that threats to the global banking system have been overstated.

The FED reported short term debt dropped $62.8 bln the prior week with ABCP dropping 5.6%. The FED added $10 bln to the banking system and FED funds are trading at the 5.25% target. T-bill yields are significantly lower across the board with the 4-week dropping 39 BPS to 3.60% and the 3-month down 39 BPS to 3.61%. This drop may be due to yesterday’s letter from Bernanke to senator Dodd saying that the FED is ready to act as needed. Sept FED Fund Futures indicate a full rate cut with a 56% chance of a cut to 5% and a 44% chance of a cut to 4.75%. The Dec contract shows an 80% chance of a cut to 4.5% by year’s end.
The USD is mixed on the day, up 29 pips vs. EUR. JPY is having across the board success gaining 43 pips vs. USD and 90 pips vs. EUR.

Crude is marginally lower to 73.45; Unleaded is down 2% to 205.87 and Heating Oil is down a quarter of a cent to 203.91. The EIA Natural Gas storage change showed a build of 43 BCF, in line with estimates. Natural Gas is higher by 19 cents to 5.76.

Gold is down 1.10 to 674.30; Silver is down 2 cents to 11.99; Platinum is down 4.30 to 1262.5 and Copper is up a quarter of a cent to 334.6.

ABC is reporting nerve gas was discovered in a UN office building near the UN’s Headquarters. Apparently the gas was used to calibrate instruments by weapons inspectors in Iraq and was supposed to have been destroyed.

ABC News is reporting on their website that 6-8 vials of nerve gas were found in a desk while cleaning out the offices at a U.N. office building near Headquarters. Federal authorities were evacuating the building and the White House had been notified at 10am. A U.N. spokesperson said a statement would be released shortly.

According to ABC News, the gas is phosgene and was being used by weapons inspectors in Iraq to calibrate air sampling instruments. The gas was believed to have been found in Iraq and manufactured prior to 1991. Authorities say that the gas was supposed to have been destroyed, but if properly sealed does not pose a threat.