Need To Know News

US high-grade corporate bond Issuance up 10% y/y
Thompson Financial reports a 10% y/y increase in high-grade US corporate bond issuance to $772 bln, though high-grade issuance has recently dropped due to credit market turmoil. Junk bond sales grew 17% y/y to $104 bln.

Goldman lowers growth outlook

Economists at Goldman Sachs reduced their ’08 global growth forecast to 4.2% from 4.6% due to the extended US housing slump. Goldman also reduced its US ’08 growth forecast to 1.8% from 2.4%.

FED Speak

Dennis Lockhart mentioned his view of the economy going into the FOMC meeting was one that had “significant risk” of being weakened by recent financial market turbulence. Commenting in his outlook for the U.S. economy, Lockhart identified four risk factors that have the potential to dampen growth. First, he foresees that the housing downturn could last until the second half of 2008 or later; citing “the large inventory of unsold homes in many markets and current restraints on certain types of mortgage financing.” Second, he worries about the extent to which the housing downturn will affect consumer spending. Third, Lockhart is monitoring business investment, though he admits the credit market trouble has yet to spill over into this sector. Finally, Lockhart cites the risk of inflation, saying it is at the “upper bounds of his comfort zone” but notes that “long-term inflation expectations remain anchored.”

William Poole says financial markets appear to be recovering; however the consequences of recent credit turmoil are still unknown. He feels the U.S. economy will see moderate growth and low inflation in the near future. Poole admits he is mindful of not providing misinformation and of not committing to any viewpoint before any FOMC meeting. Finally, Poole speaks to the Fed’s dual mandate of ensuring sustainable economic growth and price stability, while emphasizing that price stability is not in conflict with high employment. Poole addressed “financial fragility” as a concern and the FED must keep a “very open mind” in determining policy. He says it would be a mistake for markets to bet on further rate cuts and that rates are determined on a meeting to meeting basis.

Fred Mishkin expressed his confidence in the FED, mentioning it is its job to limited economic damage from markets as opposed to preventing losses. He says central banks must consult each other on liquidity and that emergency loans should only be used in dire situations.

Economic Releases

Aug. Personal Income: 0.3% vs. 0.4% estimate and 0.5% prior
Personal Spending: 0.6% vs. 0.4% estimate and 0.4% prior
PCE Core m/m: 0.1%, in line with estimate and prior
PCE Core y/y: 1.8% vs. 1.8% estimate and 1.9% prior
PCE Deflator y/y: 1.8% vs. 1.7% estimate and 1.9% prior
Sept. Chicago Purchasing Manager: 44.2 vs. 53 estimate and 53.8 prior
Aug. Construction Spending: 0.2% vs. -0.3 estimate and -0.5% prior
Sept. NAPM Milwaukee: 70 vs. 84 estimate and 63
Sept. U of M Consumer Confidence: 83.4 vs. 84 estimate and 83.8 prior
ECRI US Leading Econ Index: 141.1 vs. 140.7 prior
ECRI US Index Annualized: 1% vs. 0.5% prior

Greenspan 50/50

Former FED Chief Alan Greenspan mentioned the likelihood of a recession has increased, however is less than 50/50. He sees a drop in consumer spending and continued housing weakness. He says the “wealth effect” is likely to contract, though he does not feel this will cause the US economy to shrink.

US Treasury/ Fixed Income

The FED added $4.75 bln in weekend REPOS; FED Funds are above the 4.75% target at 5%.
CBOT Oct. Binary Options at yesterday’s settlement show a 58% chance of a cut to 4.5%, a 15% chance of a cut to 4.25% and a 27% chance that rates will be unchanged. Currently, Oct. FED Fund Futures show an 84% likelihood of a 25 BPS cut in October.

A volatile day in treasuries, as bonds experienced buying and selling pressure before settling near flat on the day.

30-yr. yield: 4.824 %
10-yr. yield: 4.571%
2-yr. yield: 3.951%
6-month yield: 4.06%
3-month yield: 3.81%
4-week yield: 3.37%

Forex

The USD got shelled today
USD Index hits a new record low at 77.666
EUR/USD hits a record high at 1.4278
USD/CAD falls below parity at .9944
USD/JPY down .7% to 114.86
Cable up .9% to 2.0461
USD/CHF down .7% to 1.1637

Commodities

Energies sold off late in the day finishing lower across the board.

Crude down 1.3% to 81.53
Unleaded down 1.22% to 206.83
Heating Oil down .6% to 223.79
Natural Gas down .6% to 6.88

Metals finished the day higher except Copper.

Gold up 1.3% to $749.40
Silver is up 1.65% to 13.87
Platinum is up $26 to 1399
Copper is down .6% to 362.65

Next week’s economic releases

Monday October 1

SM mfg Index 10E

Tuesday October 2

ICSC-UBS Store Sales 7:45E
Redbook 8:55 E
Pending Home Sales 10E

Motor vehicle sales 4E

Wed. Oct. 3

MBA Purchase Applications 7E

Challenger Job-Cut 7:30 E 6

ADP Employment 8:15 E

ISM non manufact.10 E

Petroleum Status report 10:30 E

Thursday Oct. 4

Monster Employment Index 6E

Jobless Claims (at Labor) 8:30 E

Factory Orders (at Commerce) 10E

Friday Oct. 5

Employment Situation (at Labor) 8:30 E

RBC CASH index 9E

Consumer Credit (at Treasury) 3E

$
Aug. Construction Spending in the US showed an unexpected increase at 0.2%; however, Private residential construction fell for an 18th consecutive month as inventories continue to build. The USD was sold off in full force today, falling vs. all major currencies. The USD Index is down .75%, hitting a new record low at 77.723. Today’s tame PCE data led to increased speculation that the FED will cut rates in October. Oct. FED Funds Futures show an 86% chance the FED will cut 25 BPS on Halloween. EUR/USD is up .85%, hitting a new record high at 1.4278; Cable gained .9% to 2.04523; USD/JPY is down .8% to 114.72; USD/CHF is down .9% to 1.1629 and USD/Cad is now below parity at .9930.

£
The Sept. GfK Consumer Confidence Survey in the UK came in lower than expected at -7. The FT is reporting that troubled British Lender Northern Rock need to borrow and additional $10 bln in order to remain in business. December interest rate futures in the UK still factor in a full BOE rate hike before year’s end. GBP/EUR is marginally higher at 1.4337; GBP/JPY is up .15% to 234.74 and GBP/CHF is flat at 2.3795.

€
Sept. Euro-zone Consumer Confidence came in just lower than expected at -5; Industrial Confidence came in at 3 and the EU Business Climate Indicator came in lower than expected at 1.09. The EU’s Jean-Claude Jüncker addressed his concern in regards to the recent rise in EUR/USD, mentioning he would like the US to take more actions in favor of a stronger USD. EUR/JPY is flat at 1.6372 and EUR/CHF is flat at 1.66.

St. Louis Fed President William Poole says financial markets appear to be recovering, however the consequences of recent credit turmoil are still unknown. He feels the U.S. economy will see moderate growth and low inflation in the near future. Poole highlights the similarities between private sector and Fed forecasters, though he concedes Fed officials sometimes have access to confidential information that private forecasters do not and private forecasters have access to data the Fed does not, including credit card activity and prospective borrowing by major clients. An important difference between the two, however, is that “Fed policymakers do not continuously adjust the stance of policy in the same way managers adjust portfolio holdings.” Private forecasters constantly change their outlook based on the most updated data. Poole sees an important aspect of his job as controlling risk from both inflation and recession, but was careful to warn against being too vigilant against one at the expense of the other. Additionally, a crucial distinction between private bankers and the Fed is that the Fed is a price maker whereas private firms are price takers, meaning the Fed must be attentive to making their policy predictable so as to facilitate efficient planning. Poole admits he is mindful of not providing misinformation and of not committing to any viewpoint before any FOMC meeting. Finally, Poole speaks to the Fed’s dual mandate of ensuring sustainable economic growth and price stability, while emphasizing that price stability is not in conflict with high employment.

Economic Releases

Aug. Personal Income: 0.3% vs. 0.4% estimate and 0.5% prior
Personal Spending: 0.6% vs. 0.4% estimate and 0.4% prior
PCE Core m/m: 0.1%, in line with estimate and prior
PCE Core y/y: 1.8% vs. 1.8% estimate and 1.9% prior
PCE Deflator y/y: 1.8% vs. 1.7% estimate and 1.9% prior
Sept. Chicago Purchasing Manager: 44.2 vs. 53 estimate and 53.8 prior
Aug. Construction Spending: 0.2% vs. -0.3 estimate and -0.5% prior
Sept. NAPM Milwaukee: 70 vs. 84 estimate and 63
Sept. U of M Consumer Confidence: 83.4 vs. 84 estimate and 83.8 prior
ECRI US Leading Econ Index: 141.1 vs. 140.7 prior
ECRI US Index Annualized: 1% vs. 0.5% prior

FED Speak

Atlanta Fed President Dennis Lockhart discussed prospects of the U.S. economy following the credit crunch and the Fed’s September rate cut. He mentions his view of the economy he took into the FOMC meeting was one that had “significant risk” of being weakened by recent financial market turbulence. Commenting in his outlook for the U.S. economy, Lockhart identified four risk factors that have the potential to dampen growth. First, he foresees that the housing downturn could last until the second half of 2008 or later; citing “the large inventory of unsold homes in many markets and current restraints on certain types of mortgage financing.” Second, he worries about the extent to which the housing downturn will affect consumer spending. Third, Lockhart is monitoring business investment, though he admits the credit market trouble has yet to spill over into this sector. Finally, Lockhart cites the risk of inflation, saying it is at the “upper bounds of his comfort zone” but notes that “long-term inflation expectations remain anchored.” He dismissed Fed critics who argue that the rate cut created moral hazard, claiming that he “did not see the logic of subordinating the general welfare of our nation’s economy to the possibility that some participants in financial markets might draw tainted conclusions about the future landscape of risk.” Answering questions, Lockhart forecasted U.S. growth at around 2.5% in Q3 and below 2.5% in Q4.
FED Governor Michael Mishkin will speak at 1:00pm E and St. Louis FED president William Poole will speak at 1:30 pm E

Greenspan 50/50

Former FED Chief Alan Greenspan mentioned the likelihood of a recession has increased, however is less than 50/50. He sees a drop in consumer spending and continued housing weakness. He says the “wealth effect” is likely to contract, though he does not feel this will cause the US economy to shrink.

US Treasury/ Fixed Income

The FED added $4.75 bln in weekend REPOS; FED Funds are above the 4.25% target at 5.125% bid at 5.25%.

CBOT Oct. Binary Options at yesterday’s settlement show a 58% chance of a cut to 4.5%, a 15% chance of a cut to 4.25% and a 27% chance that rates will be unchanged. Currently, Oct. FED Fund Futures show an 88% likelihood of a 25 BPS cut in October.

The long end of the curve picked up some strength while the short end is showing weakness.

30-yr. yield: down .04 to 4.793 %
10-yr. yield: down .032 to 4.528%
2-yr. yield: down .033 to 3.92%
6-month yield: flat at 4.03%
3-month yield: up .08 to 3.77%
4-week yield: up .12 to 3.38%

Forex

August Construction Spending showed and unexpected increase, though Private residential construction fell for an 18th consecutive month. The USD is getting thrashed against all major currencies as the housing market shows few signs of improvement.

USD Index down .6% to a new record low of 77.876
EUR/USD up .5% to a new record 1.4234
USD/JPY down .6% to 114.90
Cable up .55% to 2.0385
USD/CHF down .55% to 1.1675
USD/CAD down .65% to .9953

Commodities

A mixed day for energies

Crude down 60 cents to 82.29
Unleaded down 1.9% to 205.34
Heating Oil down 1% to 223
Natural Gas down .6% to 6.88

Metals are higher except Copper

Gold is up 1.5% to $751
Silver is up 2.25% to 13.96
Platinum is up $25 to 1398
Copper is down 1 cent to 364

The value of new construction in August rose 0.2% after a 0.5% decline in July. The small increase was better than the 0.3% decline analysts expected. Private construction was unchanged in August after falling 1.1% in July. Private residential construction fell 1.5%, its 18th consecutive monthly decline. Private nonresidential construction increased by 2.3% after a 0.2% decline in July. Private construction of office, commercial, lodging and health care buildings remained strong. The only two sectors showing declines in private construction were religious buildings and construction of power facilities. Public construction rose 0.7% in August following a 1.2% increase in July. The value of state and local construction showed a smaller 0.5% gain but federally funded construction rose 4.2%. Spending on education buildings rose 1.3% and highway and street construction rose 0.8%. However the value of newly constructed transportation facilities fell 2% and public construction of power facilities was down 8.8%.

Kathryn Kobe, NTKN Washington DC

Personal income rose 0.3% in August, slightly below the 0.4% increase expected, following a 0.5% increase in income in July. Personal consumption rose 0.6%, more than the 0.4% increase expected. That follows a 0.3% increase in July. With consumption increasing at a faster pace than income, the savings rate fell to 0.7% disposable personal income, down from 0.9% in July. The headline price index declined 0.1%, while the core price index rose 0.1% for the month. On a year-over-year basis the core price index rose 1.8% from last August, its slowest increase since February 2004. The headline price index also showed a 1.8% increase from last August’s level. After adjustment for inflation, consumer spending rose 0.6% in August, following a 0.3% increase in July. On average, July and August, real spending is up at a 2.8% annual rate from the second quarter average. If the September number sustains that pace, PCE will provide more support for third quarter GDP than did its 1.4% rate of increase in the second quarter. In real terms, consumer spending was supported by a strong increase in durable goods purchases and moderate gains in spending for services. Consumer purchases of nondurable goods were unchanged in August.

Kathryn Kobe NTKN, Washington DC

Economic data - Japanese August Housing Starts fell 14.2% to 729k, well below the 1.086mln expected and down 43% on a y-o-y basis. Add this to sharply falling prices reported in JPN CPI data late yesterday and recession talk is kick started. JGB fell 4 bps overnight to 1.665, the NIKKEI was off 46 and change while JPY remained within recent ranges.

German data included August Retail Sales which fell 1.4% on a m-o-m basis and 2.2% on a y-o-y basis. German 10yr rates are off 3bps at 4.342% and the DAX is down 8.00 at this writing.

The GfK Consumer Confidence Survey for September was issued in the U.k. overnight and came in down 7 versus a consensus estimate of down 6, the worst level in 6 months. Certainly more disturbing is Northern Rock tapping the BOE for another $10bln (as reported in the FT) which raises the questions about other U.K. banks that might be in straits. The FT also reports GS is lowering its 2008 U.S. GDP f/cast to 1.8%. CABLE shot up through 2.03 in overnight trade and Sterling LIBOR, USD LIBOR and EUR LIBOR all shot higher as well. Former FED Chairman Greenspan “helpfully” told the BBC he puts the chances of a U.S. recession at “less than 50%” .

U.S. data includes Personal Income and Spending for AUG, both of which are expected at 0.4%. The y-o-y PCE Deflator is expected at 1.7%. Core PCE on a m-o-m basis is expected at 0.1% and the consensus estimate for y-o-y PCE Core is at 1.8%. NTKN will be bringing the PCE data live from Commerce at 8:30am EST. At 9:45 am Chicago September PMI comes out and is expected at 53 versus 53.4 last time. At 10:00 Commerce issues m-o-m Construction Spending for August which is expected to have fallen 0.3% versus the July reading of down 0.4%. Also at 10:00am EST NAPM Milwaukee, expected at 58 and University of Michigan Confidence for September, expected at 84.

Oil opens marginally lower this morning with BRENT futures down 10 cents, North Sea off 16 cents and NYMEX front month off 23 cents even as Tropical Storm Lorenzo, briefly upgraded to a CAT 1 hurricane overnight, blows itself out on the eastern shores of the Gulf of Mexico. TS KAREN is also weakening in the Atlantic 1215 miles east of the Windward Islands. Maximum sustained winds have fallen to near 45mph and there is some expectation the storm will weaken further in the next 24 hours due to strong upper level winds. Were the storm warnings responsible for the surge in OIL y/day? Perhaps a realization that there is not an unlimited supply of OIL, demand is growing and price will determine the winner of the lion’s share of this commodity.

GOLD is up over 4 bucks at this writing as the USD continues to weaken on a worldwide basis amid fears the FOMC’s rate decision may ignite inflation in the U.S. - which is exacerbated by a weak dollar……

Commodities Surge
Oil surged in late trading making a new high at 83.08 behind the upgrade of Tropical Depression Lorenzo to Tropical Storm Lorenzo in early afternoon trade. Oil products shot higher as well with Unleaded tacking on 3.05% on the day, Heating Oil rising 3.16%. The latest update on the storm reports winds of 60mph. Tropical Storm Karen is last reported 990 miles east of the Windward Islands with sustained winds at 65mph, moving east at 12mph.

Gold and silver tacked on more gains today as the dollar languishes near all-time lows against EURO and multi-year lows against Sterling. While today’s housing data came in worse than expected, the dollar was not battered as the market likely leaned on pretty much as expected Q2 final GDP. Grain prices were skyrocketing as well with Wheat up 14.75 cents and Corn up better than 11 cents. Surging worldwide demand (China), massive diversification by hedge funds, the corn/ethanol debate and loss of wheat acreage and the fear of a profoundly weaker U.S. economy are some of the reasons for the sustained bid to commodities.

Today’s Econ Data

2nd Quarter Final GDP came in today as expected at 3.8% but below the 4% previously reported rate. Personal Consumption in the second quarter data came in at expectations at 1.4% and unchanged from the previous report. The GDP price index came in .10% lower than expected at 2.6% and .10 lower than the previous report. Q-O-Q CORE PCE was up 1.4% versus at 1.3% prior reading and against the 1.3% consensus estimate. Initial Jobless Claims for the week ending September 22 came in well below the expected 316k at 298k and 15,000 lower than the revised 313k. New Home Sales for August were reported at 795k, 30k below expectations and 75k below the JULY figure.

US Treasury/ Fixed Income

Treasury Futures were mostly higher after this morning’s data suggested the housing market slump is still in full swing. The FED added 38bln in Repos today taking the lion’s share of collateral in Mortgage Backed Securities as it sought to liquefy the front end with FED FUNDs trading 5 1/16 this morning. The 10 year reversed course slightly today but is still in a longer term downward spiral, helping to push up rates on 30 year fixed, 15 year fixed and 5 year arms and giving lie how a rate cut might help homeowners.

Bear Stearns and Buffet

CNBC reports Buffet is not going to buy a stake in BSC, after which BSC sold off to its worse levels of the day although it did not give back all of yesterday’s gains on the rumor Buffet would take an interest in the beleaguered broker.

Tomorrow’s DATA

U.S. Data for tomorrow includes Personal Income and Spending for AUGUST. Income is expected to have risen 0.4%, as has spending. The August Y-O-Y PCE deflator is expected to have risen 1.7% versus a 2.1% gain last time. CORE M-O-M PCE for August is expected at 0.1%, the Y-O-Y figure is expected at 1.8%.

The Chicago Purchasing Manager’s Index for September is expected to have fallen 0.8 to 53.

August Construction Spending is out at 10am from Commerce and is expected to have dropped 0.3% versus a 0.4% drop in July.
The University of Michigan Consumer Confidence data is also out at 10am and is expected at 84 vs 83.8 last time. (U of Michigan interviews only 500 people, just

10% of the interviews done by the Conference Board).

NAPM Milwaukee is also out at 10am and is expected at 58 versus 63 in AUG.

EUR/USD continues to consolidate within tight ranges - 1.4145-1.4155, having sold off from new highs at 1.4189 made early in the NY session.  CABLE is drifting higher, albeit at a slow pace with hourly tests of 2.2260 capping the action for much of the session.  USD/JPY is making a stab higher this afternoon testing the 115.70 level at this writing.  GBP/EUR is pushing a bit higher this afternoon after weeks on continued sharp losses.  This afternoon’s retracement may turn around  behind a  Fidelity Fund manager’s prediction U.K. equities are headed into a perhaps 9 month bear market- this despite FTSE climbing back over its 200 day moving average