Need To Know News

Economic Releases
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. The markets took the data in stride with a bit of volatility in equities, bonds and the dollar following the housing data but no real directional change in any market.
FED adds 38bln in REPOs accepting a variety of collateral
The FED added significant liquidity to the front end, helping to knock FED FUNDs off their high of 5 1/16 today back to a 4 ¾ bid. Collateral accepted included agencies, mortgage backed securities and treasuries with the lion’s share made up of mortgage backed securities.
The 10 year bond sell-off since the FED cut rates is keeping average rates is not helping home loan rates according to the Freddie Mack Weekly Survey. 30 year fixed rates are at 6.42%, up 8bps from last week. The rate on FRM for 15 years is at 6.09% versus 5.98% last week. Only ARMs fell over the past week with the 5 year at 5.6% versus 5.65% last week.
OIL and GOLD
Oil has been very well bid throughout the session with a tropical storm warning issued in the south – western area of the Gulf of Mexico. Wind speed is expected to climb from 10KTs to 15KTs overnight, 15 to 20KTS by Sunday night. Current seas are 2 to 4ft with 5 to 7ft by Sunday night.  Tropical Storm Karen is 1225 miles east of the Windward Islands with sustained winds of 70mph and moving WNW at 13mph.   Gold remains well bid due to the weak dollar and despite a recent BHP discovery thought to be one of the largest ever and indications of larger supply in general.

Forex
USD is still taking a beating against the EURO, making yet again another new low at 1.4189 in NY trading today. CABLE is holding well over 2.02 the figure and but USD/JPY is tracking higher with a test of 116 likely this afternoon or overnight.

5.26% of bids awarded @ high

Non-comps take $119 mln
Primary Dealers take $7 bln
Indirect take $5.83 bln

FED Funds are trading at 5 bid at 5 1/16

8:20: The FED adds $6 billion in 14-day REPOS

9:40: The FED adds $20 bln in 7-day REPOS

9:51: The FED adds $7 bln in 4-day REPOS

10:00: The FED adds $5 bln in overnight REPOS

73 BCF estimate vs. 63 BCF prior

August single-family homes sales declined 8.3% to 795 thousand units at an annual rate. This was the lowest number of sales of new homes since June 2000. The August sales total was well below analysts’ expectations of 825K. Sales numbers from May through July were revised down from last month’s estimated levels, although the rate of increase between June and July was revised up slightly. There were 529K new homes for sale at the end of August, an 8.2 months supply at the current sales rate. About 34% of the new homes for sale at the end of August were completed. The median price of new single-family houses was $225,700, down 7.5% from year earlier and over 8% below the July median price. This was the lowest price for new single-family homes in over two years. The regional variation in new homes sales was very large. The Northeast and the Midwest registered double-digit gains in sales while the South and West saw double-digit declines.

Kathryn Kobe NTKN, Washington DC

The Conference Board reports its Help Wanted Index fell to 23 in, the third month in a row of lower Help Wanted Advertising and down from a 29 reading last AUGUST. The Conference Board reports all nine reporting regions declined with the largest loss in New England which fell 25.4%, followed by the South Atlantic Region, down 18.4% and the Mid-Atlantic Region which was down 16.9%. The downturn in the index is attributed to the housing market slump with significantly less buying and building occurring, higher gas prices, tighter credit conditions and a loss of consumer confidence.

The final GDP estimates for Q2 ‘07 show the output of goods and services produced in the United States rose at a 3.8% annual rate, down slightly from the 4% annual rate reported in August but in line with analyst’s expectations. Final sales were revised down from a 3.7% rate of increase to a 3.6% rate of increase. A slight downward revision took place in nonresidential structures, which was partially offset by a slight upward revision in equipment spending. Residential construction was revised down slightly, declining at an 11.8% annual rate compared with an 11.6% rate in the August estimates. Exports growth was slightly weaker than first estimated and the decline in imports was not as large as originally estimated; thus causing a larger subtraction from GDP growth than the earlier estimate had included. Personal consumption expenditures grew at a 1.4% annual rate and contributed 1% to GDP growth in the second quarter. That came primarily from strength in services, expenditures; expenditures on nondurables fell slightly during the quarter. Nonresidential investment in equipment and structures added a bit more than a percentage point to growth but residential construction subtracted about 0.6%. Net trade contributed the most to GDP growth, 1.3%, as exports rose and imports declined. Inventory investment rose almost $6 billion in real terms, with over half coming from farm inventory gains.

The GDP price index rose 2.6% at an annual rate, a slight downward revision from the 2.7% increase reported in August. The downward revision came from slight changes in the price indexes for fixed investment. The PCE core price index was revised up slightly to a 1.36% annual rate from a 1.33% annual rate reported in August.

Corporate profits after tax totaled $1152.2 billion, up $57 billion or 5.2% from the previous quarter and 3.3% above a year ago. Corporate cashflow, one measure of the internal resources companies can call on to finance investment, rose 4% during the quarter or almost $52 billion from the first quarter. However, cashflow was down 2.1% from the second quarter of 2006. Unit labor costs for nonfinancial corporate businesses rose slightly in the second quarter, up at a 1% annual rate from the first quarter. But that was mostly offset by a slight decline in unit nonlabor costs, leaving unit profits slightly higher than in the first quarter, although still slightly below the levels achieved during the second quarter of last year.

Kathryn Kobe NTKN, Washington DC

Intial Jobless Claims came in at 298k, a decrease of 15,000 from a upwardly revised 313k. Intial Claims came in well below the expected 316k and at the lowest level since May 2007. Continuing Claims were at 2.551mln, an increase of 11k from the revised 2.54mln. California saw the largest increase for the week ending September 15 at over 5300 coming, unsurprisingly, from the construction and service industries. Florida initial claims increased over 3500 with losses in construction, trade, service, manufacturing and agriculture. Michigan claims fell by over 2700 due to fewer layoffs in the automobile industry.

World Equity Indexes are all higher behind a nearly 100 point rise in the Dow Jones yesterday. Much of that rise has been put down to a strong bid in the defense sector due to pending approval of a massive 190bln defense department request and rumors of Warren Buffet perhaps taking a position in Bear Stearns. The NIKKEI gained ground behind better than expected Septermber Small Business Confidence figures and ahead of tonight’s August Jobless Rate, August Household Spending, September Tokyo CPI, National CPI and preliminary Industrial Production figures for August. German data included the September Unemployment rate which came in better than expected at8.8%, the lowest level in 14 years. German Regional CPI data came in higher than expected both on a M-O-M and Y-O-Y basis. The preliminary September CPI is expected to come in flat, the Y-O-Y data is expected to show a 2.3% rise. September CPI harmonised data is expected flat in the M-O-M reading and up 2.5% in the Y-O-Y data. U.K. housing data for September indicated Nationwide House Prices rose 0.7% on a M-O-M basis and 9.0% on a Y-O-Y basis whle U.K. Retail Sales fell to the lowest level in nearly a year.

EUR/USD eking out new highs overnight amid overall signs of strength in European economies and fears that the U.S. economy may be headed toward at least slower growth, if not outright recession, due to the housing crisis. CABLE climbed back over 2.02 with the July Index of Services, coming in at a better than expected 1%, showed continued strength led by finance and business services. USD/JPY stayed with tight ranges but looks poised to test 116 today amid continued demand for carry trades.

Spot Crude Oil is trading higher in Europe with Brent up better than half a dollar, North Sea up 51 cents and NYMEX front month up 52 cents at this writing. Gold is catching a strong bid in Europe, up over 2 dollars on USD weakness.

U.S. Economic Data at 8:30am EST includes Final Q2 GDP which is expected at 3.8% versus the previous reading at 4%. Personal Consumption is expected at 1.4%; the GDP Price Index is expected at 2.7% and the Q2 Core PCE reading is expected at 1.3%, unchanged from the last reading. Initial Jobless claims for the week ending September 22 are expected at 316k versus a 311k reading last time. At 10:00am EST, New Home Sales for August are expected to come in at 825k versus 870k last time. The M-O-M data is expected to fall 5.2% versus up 2.8% in July. The August HELP Wanted Index is also out at 10am EST and is expected to come in at 24 versus 25 last time.

Goldman Cuts Merrill’s Q3 estimates

Goldman Sachs cut Merrill Lynch’s Q3 EPS to 0.15 from 1.95 citing a “multi-billion dollar” writedown due to weakness in mortgages and CDOs. A Goldman analyst predicts Merrill will have $4 bln in writedowns with $1.5 bln in losses related to fixed income. This led to a brief pullback in equities as bonds took back most of their losses.

Buffet to buy Stake in Bear Stearns?

Speculation that Bear Stearns would be selling a minority stake led to a 10% gain in the company’s stock. Bank of America, Wachovia and China Construction Bank are said to have expressed interest in a 20% stake of Bear Stearns. Warren Buffet is also rumored to interested, which led to a late session surge in equities

Economic Releases

August Durable Goods Orders ex-transport came in below estimates at -1.8% after a prior revised reading of 3.4%, the largest one-month drop since January. The Headline figure also came in lower than expected at -4.9% vs. a 6.1% reading in July, the largest monthly decline since October ’06. Surprisingly enough, the poor data lead to a rally in equities, a minor sell-off in treasuries, and a counterintuitive strengthening of the USD.

MBA Mortgage Applications fell 2.8% in the week of September 21st, the first weekly drop in application in just over a month.

The American Bankers Association reports overdue payments on home equity credit lines hit a 5 and a half year high in Q2 ’07 at 0.77% . Delinquencies from other consumer loans fell in Q2.

Rating Agencies

SEC Chairman Christopher Cox testified before the Senate Banking Panel saying the SEC is looking into underwriting standards and whether credit rating agencies were improperly influenced by issuers. The SEC is investigating whether or not rating agencies took proper measures in managing conflicts of interest. The SEC will also investigate procedures and methodologies to find out why it took so long for RMBS ratings adjustments.

A representative of S&P says the company has heightened the intensity in which it rates and analyses transactions to ensure the viability of the ratings. S&P also says it has increased the time in which transactions are analyzed and is taking steps to prevent potential conflicts of interest.

Moody’s proposed changes to subprime RMBS securitization including:

- 3rd party oversight of loan accuracy and info
- Increase loan-level info access to transaction participant
- Improved credit distinctions
- Expansion and standardization of RMBS reports

US Treasury/ Fixed Income

The FED added $15.25 bln in overnight REPOS; FED Funds are above the 4.25% target at 4.875%.

US Treasury auctioned $18 bln in 2-yr. Notes @ high 4%; bid-to-cover 3.29; 86.89% bid awarded @ the high. The high bid-to-cover indicates strong demand for 2-yr notes.

Bonds sold off after the poor durable goods report and turned flat after Goldman cut Merrill’s Q3 earnings estimate. Bonds weakened as equities rallied late due to rumors that Warren Buffet may be a minority stake in Bear Stearns.

30-yr. yield: down .003 to 4.897 %
10-yr. yield: up .004 to 4.628%
2-yr. yield: down .004 to 3.99%
6-month yield: down .02 to 4.04%
3-month yield: down .11 to 3.68%
4-week yield: down .18 to 3.2%

FED Funds Futures show an 86% chance of a cut to 4.5% in October.

Forex

The USD gained vs. most major currencies with the USD Index up .3% after hitting a historical low yesterday.
EUR/USD down .1% to 1.4127
USD/JPY up .64% to 115.51
Cable down .15% to 2.0157
USD/CHF up .4% to 1.1707

Commodities

DOE Inventories showed an unexpected increase in Crude and Unleaded stocks and a higher than expected drop in Refinery Utilization. Tomorrow’s EIA Natural Gas Storage change is expected to show a build of 74 BCF.

Crude finished $1 higher to 80.50
Unleaded fell 1 cent to 202.77
Heating Oil finished marginally higher at 218.29
Natural Gas is up 1% to 6.423

Metals finished the day lower across the board

Gold is down $3 to 735.80
Silver is down 8 cents to 13.54;
Platinum is down 1.80 to 1356
Copper is down 1 cent to 361.90

Tomorrow’s economic releases

Q2 Final GDP 8:30 E

3.8% estimate vs. 4% prior

Jobless Claims 8:30E

316k estimate vs. 311k prior

August New Home Sales 10E

-5.2% (825k) estimate vs. 2.8% (870k) prior

August Help wanted Index 10E

24 estimate vs. 25 prior

Natural Gas Report 10:30E

74 BCF estimate

Money Supply 4:30 E