Need To Know News

Tomorrow’s Releases

7:30e—Oct. Challenger Job Cuts: -28.5% prior
8:30e—Sept. Personal Income: 0.4% estimate vs. 0.3% prior
Personal Spending: 0.4% estimate vs. 0.6% prior
Sept. Core PCE (m/m): 0.2% estimate vs. 0.1% prior
Jobless Claims: 330k estimate vs. 331k prior
Continuing Claims: 2.534 mln estimate vs. 2.53 mln prior
10:00e—Oct. ISM Manufacturing: 51.5 estimate vs. 52 prior
ISM Prices Paid: 63 estimate vs. 59 prior
10:30e—EIA Natural Gas Survey: 59 BCF estimate vs. 68 BCF prior

Oct. Vehicle Sales-throughout day

Today’s Releases

MBA Mortgage Applications: 3.8% vs. 0% prior
Oct. ADP Employment: 106k vs. 61k prior revised
Q3 GDP Annualized: 3.9% vs. 3.8% prior
Q3 GDP Price Index: 0.8% vs. 2% prior
Core PCE (Q/Q): 1.8% vs. 1.5%
Personal Consumption: 3% vs. 3.2% prior
Q3 Employment Cost Index: 0.8% vs. 0.9% prior
Sept. Construction Spending: 0.3% vs. -0.2% prior revised
Oct. NAPM-Milwaukee: 63 vs. 70 prior

FOMC cuts 25 bps from benchmark and discount rate

The FOMC cut the benchmark by 25 BPS as widely expected. The statement“the upside risks to inflation roughly balance the downside risks to growth” is the most telling going forward, as it seems to place the FED may have its hands tied with regard to rate outlook. The statement acknowledged food and energy costs as upside risks to inflation, which is a shift away from the FED’s strict focus on core inflation. Today’s rate cut was an attempt to forestall downside risks to growth as a result of continued weakness in housing.

US Treasury: short-dated maturities to help fill unexpected funding needs

The US Treasury notes an “unprecedented” variation in rates as well as demand for short-dated maturities. The Treasury said it would put more focus on short-dated maturities to fill the funding needs of the government. A Treasury official said the short end of the curve is closely analyzed when there are near-term changes in receipts or outlays. Treasury has lowered the minimum purchase amounts for Treasury auctions to $100 from $1000.

SEC examining Goldman’s Q3 results

The SEC is investigating Goldman Sachs after they reported an 88% jump in Q3 profits. Goldman avoided extensive Q3 losses linked to subprime by taking short mortgage positions. The SEC would like to examine whether or not Goldman withheld information as to the extent of the mortgage crisis in order to corner the market.

US Treasury/ Fixed Income

The FED added $5.5 bln in overnight REPOS; FED Funds are trading at 4.75%.

Bonds were sent lower following the rate announcement.
30-yr. yield: up .0552 to 4.73%
10-yr. yield: up .0761 to 4.46%
2-yr. yield: up .0393 to 3.93%
6-month yield: flat at 4.07%
3-month yield: down .04 to 3.91%
4-week yield: down .03 to 3.99%

Equities

Equities shot lower following the rate announcement before rallying into the close.
DOW Futures: up 115 to 13935
S&P Futures: up 15.5 to 1551.25
Nasdaq Futures: up 28 to 2246

Forex

The USD continues to deteriorate, extending losses following the rate announcement.

USD Index down .28% to 76.558
EUR/USD up .33% to 1.4481
USD/JPY up .61% to 115.33
Cable up .6% to 2.08
USD/CHF flat at 1.1585
USD/CAD down .81% to .9461

Commodities

Energies got a boost from an unexpected drop in crude supplies; metals got a boost following the FED rate cut.

Crude up 4.5% to 94.49
Unleaded up 3.67% to 234
Heating Oil up 3.43% to 250.78
Natural Gas up 4% to 8.339

Gold up 1.09% to 796.50
Silver up 1.2% to 14.5
Platinum up .57% to 1449.1
Copper down .13% to 347.70

With this change, FOMC judges inflation risk and downside risks are roughly balanced. Looks like one and done–not constructive for equities.

The USD is lower vs. most major currencies just before the FED announces rates this afternoon. Advance Q3 GDP came in at 3.9% annualized, better than the 3.1% expected. Markets are anticipating a 25 BPS this afternoon as the USD achieved new record lows vs. the EUR and in the USD Index. Cable continues to surge higher, up .5% to 2.0785; USD/CAD is down .4% to .95 and USD/JPY is up .5% to 115.19. A 25 BPS cut should yield some more USD selling, however, there is potential for a counter-intuitive USD rally as 25 BPS may have already been built in. If the FED holds the line the USD should take back some of its recent losses and if the FED cuts 50 BPS a USD sell-off is the most likely scenario.

The ECB’s Guy Quaden reaffirmed the ECB’s main concern of price stability as opposed to stability in the forex market. Quaden feels that an extended US economic slowdown would lead to further USD deterioration. The Sept. Euro-Zone annualized employment rate came in higher than expected at 7.3% as did Oct. CPI (y/y) at 2.6%. EUR/JPY is up .72% to 166.66 and EUR/CHF is up .25% to 1.6765.

Oct. Nationwide House prices in the UK came in higher than expected at 1.1%. The higher than expected housing data opens the door for a potential BOE rate hike in the near-term as house prices have increased nearly 10% on a y/y basis. GBP/EUR is up .32% to 1.4372; GBP/JPY is up 1% to 239.44 and GBP/CHF is up .6% to 2.4098.

Today’s Consumer Confidence data may have bolstered the likelihood of a 25bps rate cut tomorrow. Indeed, the read on any of the recent data could cause the FED concern; weaker employment data (via weekly claims) and perhaps an abysmal read on Friday’s Non-Farm Payrolls data. Add to this the fact that Q3 Advance GDP is expected to come in at a 3.1% annualized rate versus 3.8% last time. Now subtract inflationary pressures – which core measures do very neatly – and the FED is covered.

Fed and Tsy have issued ominous warnings about the extent of the housing crisis but have been rather vague about how long it will take to work out or how deep a cut it will make in the economy. The FED is anticipating an extensive housing market downturn but lower rates don’t address this problem – they may however grease the corporate credit market to keep the economy growing (in a trickle down kinda way). Oh yes, keeping the spread to the discount rate is going to continue – so expect a cut there too.

So yes, the FED has cover to cut 25bps. However, it has become increasingly clear the FED is concerned about accusations of “moral hazard” – bailing out Wall Street. Indeed, FED speakers and the TSY Secretary, in retelling the subprime story and how things got out of hand, increasingly mention the notion that the subprime/Wall Street mess is merely an inadvertent beneficiary of lower rates. In short, rates are being cut to address “growth concerns” – which of course come from the first mover, the housing market which was of course set afire by subprime lending.

Is the FED worried about disappointing the markets? Would their “transparency” pledge be compromised if they fail to cut – you betcha. Will the “moral hazard” argument be bolstered? Probably.

Today’s Releases

MBA Mortgage Applications: 3.8% vs. 0% prior
Oct. ADP Employment: 106k vs. 61k prior revised
Q3 GDP Annualized: 3.9% vs. 3.8% prior
Q3 GDP Price Index: 0.8% vs. 2% prior
Core PCE (Q/Q): 1.8% vs. 1.5%
Personal Consumption: 3% vs. 3.2% prior
Q3 Employment Cost Index: 0.8% vs. 0.9% prior
Sept. Construction Spending: 0.3% vs. -0.2% prior revised
Oct. NAPM-Milwaukee: 63 vs. 70 prior
2:15e: FOMC Rate announcement: 4.5% expected
*the number sometimes comes out a little before or after 2:15e

US Treasury: short-dated maturities to help fill unexpected funding needs

The US Treasury notes an “unprecedented” variation in rates as well as demand for short-dated maturities. The Treasury said it would put more focus on short-dated maturities to fill the funding needs of the government. A Treasury official said the short end of the curve is closely analyzed when there are near-term changes in receipts or outlays. Treasury has lowered the minimum purchase amounts for Treasury auctions to $100 from $1000.

SEC examining Goldman’s Q3 results

The SEC is investigating Goldman Sachs after they reported an 88% jump in Q3 profits. Goldman avoided extensive Q3 losses linked to subprime by taking short mortgage positions. The SEC would like to examine whether or not Goldman withheld information as to the extent of the mortgage crisis in order to corner the market.

FOMC Preview

Oct. FED Fund Futures show a 92% chance the FED will cut 25 BPS and an 8% chance the FED will leave rates unchanged when the FOMC announces rates. A 25 BPS cut is widely expected and has been built into the market to some extent. If the FED cuts 50 BPS equities should enjoy a surge and the USD is likely to sell-off. If the FED leaves rates unchanged equities are likely to sell off, however, would indicate potential good news for the US economy going forward. If adverse effects from the credit crunch have been indeed “forestalled” the FED may hold the line.

US Treasury/ Fixed Income

The FED added $5.5 bln in overnight REPOS; FED Funds are trading at 4.75%.

Bonds are lower across the board helped by the better than expected Q3 GDP data.

30-yr. yield: up .0199 to 4.69%
10-yr. yield: up .0252 to 4.4%
2-yr. yield: up .0248 to 3.83%
6-month yield: down .08 to 3.98%
3-month yield: down .11 to 3.84%
4-week yield: down .09 to 3.93%

Equities

Equities have been in positive territory all day, helped by today’s GDP data.

DOW Futures: up 65 to 13889
S&P Futures: up 12.5 to 1548.25
Nasdaq Futures: up 17 to 2234

Forex

The USD is lower vs. most major currencies; hitting new record lows vs. the EUR and in the USD Index.

USD Index down .17% to 76.669
EUR/USD up .22% to 1.4465
USD/JPY up .5% to 115.23
Cable up .5% to 2.0780
USD/CHF flat at 1.1585
USD/CAD down .44% to .4597

Commodities

Energies got a boost from an unexpected drop in crude supplies. Metals are higher across the board.

Crude up 3.3% to 93.37
Unleaded up 3% to 232.45
Heating Oil up 3% to 249.87
Natural Gas up 2.5% to 8.22

Gold up .7% to 793.20
Silver up .89% to 14.45
Platinum up .74% to 1451.50
Copper up .2% to 348.65

DOE INVENTORIES

Crude: -3.894 mln vs. -5.288 mln prior

Gasoline: 1.295 mln vs. -1.931 mln prior

Distillates: 808 k vs. -1.847 mln prior

Refineries: -0.97% vs.-0.21% prior

API Crude: -3.255 mln
API Gas: -785 k
API Distillates: 3.077 mln

The Chicago Purchasing Mangers reported the Chicago Business Barometer fell past neutral in October, beginning the 4th Quarter with a slight contraction:
-Production and Order Backlogs dropped while Inventories and Employment stalled;
-Prices Paid increased at a faster rate;
-Buying Policy: Lead time for Capital Equipment failed to expand for the third month.

Construction spending in September rose 0.3%, better than the 0.4% decline analysts were expecting. That was the first increase after three months of declines. August construction spending was revised down to a -0.2% from the previously reported 0.2% increase. Private residential construction showed its 19th consecutive monthly decline, down 1.4% in September but private nonresidential construction rose 1.5% following a 1.8% increase in August. Lodging, office, health care and manufacturing construction showed the largest gains in the private nonresidential sector. Public construction rose 1.9% as state and local spending increased 2.7% and Federal construction spending fell 7.9%. Among the public sector construction projects those for education, transportation, power and water and sewage facilities showed the largest gains.

Kathryn Kobe NTKN, Washington DC

As The US Economy Slows FT, 1

Fe(d)xpectations NYT, C1

Choosing a Leader for Merrill’s Thundering Herd NYT, C1

Fed Rewriting Playbook? WSJ, A1

The Answer to How Goldman Does It (According to the NY Post) NYPost, Business Section

Investors Place Bets Ahead of the Fed’s Announcement WSJ, C1

SIVi Citi WSJ, C1

Home Prices Continue Fall WSJ, D3

Oil to Break $100/Barrel? WSJ, A6

As the Dollar Sinks in the West (and East) WSJ, C1

PMI came in lower than expected at 49.7, indicating a weak outlook by purchasing managers. Prices paid were 74.7, New Orders 53.9. Employment 49.5.