Need To Know News

Home Price Index: 197.2 vs. 198.6 prior revised

Year-over-year: Week (w/e 10/27/07 vs year-ago) 1.9%

Year-over-year: Month (October 2007 vs October 2006) 2.2%

Month-over-month: (October 2007 vs September 2007) -0.3%

The Johnson Redbook Retail Sales Index was up 1.9% in the third week of October following a 2.1% gain the prior week. Month-to-date, October was up 2.2% compared to October of last year (relative to a target of a 2.3% gain). Month-over-month was 0.3% below September (compared to a targeted 0.2% drop). October is a four-week month on the retail calendar ending on Saturday, November 3rd.

Results in the third week were again below our target. The performance was in part negatively impacted by the southern California wildfire, which caused store closures and destructions. In the Midwest, shoppers responded to more seasonal weather and started to purchase for current needs. Some department stores said sales growth was being driven by clearance, rather than by full price goods as business had been delayed by prolonged summer like weather. Elsewhere, sales of costumes, candy and decorations are exceeding expectations. The increase was due to earlier availability of Halloween products, warmer weather, more in store displays and better promotions. As noted, this year’s Halloween falls six days earlier than last year, a timing shift that could push some Halloween business into October from November.

Will the Fed Meet Market Expectations and Cut Rates? WSJ, A2

Investors: Whistling Past the Graveyard? WSJ, C1

As The US Economy Catches Cold, Will the World Become Infected?? WSJ,C1

Crude Up, Dollar Down! FT, 1

Menu of Chinese investment options FT, 1

SIVilis — The Wages of (Financial) Sin WP, D2

Softening the Blow as E. Stanley Hits the Road WSJ, C1

Who Will Head the Thundering Heard? NYT, C1

Asian Stocks were narrowly mixed overnight with the Hang Seng making new highs but falling back late in the session to gain only 51 on the day. The Nikkei fell 47 points after a poor reading on the Small Business Confidence survey for October and ahead of Vehicle Production figures and the BOJ tonight. The current BOJ rate target is .50% and there is little expectation the Bank will raise rates with the credit market overhang.

European Bourses are all lower at this writing with the DAX in negative territory after worse than expected ILO Unemployment data plus a revision higher to the previous unemployment rate. The German market is awaiting results from the IFO Business Climate Survey which may be impacted by the stronger EURO. The FTSE is off 47 points at this writing after MPC member Barker suggested scope for a rate cut - then took it away. The FTSE is a bit jittery ahead of tomorrow’s House Price surveys and Consumer Confidence readings as well as a bit of uncertainty re tomorrow’s FOMC announcement.

In addition to softer equity market prices, European bonds sold off overnight with the German 10yr adding 2bps and the U.K. 10 year adding 3bps. CABLE reached a multi-year high suggesting FX traders are expecting 25bps from the FED this week. GBP rates from the overnight to the 2yr are at least 100bps higher than U.S. rates for the same tenors and 149bps out at the 1yr. FED Funds opened at 4 15/16s with overnight Repos likely to send rates toward the target. TheUSD gained a bit of ground against the EURO overnight, falling back below 1.44; USD/JPY remains range bound below 115 at this writing.

OIL pulled back overnight behind the OPEC President’s comments re their “duty” to supply oil at stable prices saying that OPEC will supply more oil if needed. Al-Hamli also said he doesn’t think OIL will go to $100 per barrel and noted OPEC has spare capacity to the tune of 3.5mln bpd. NYMEX front month is down 1.21 a this writing. Gold is down 8.78 per ounce.

All eyes are clearly on the FOMC rate announcement tomorrow with the market pricing in a 100% chance of a 25bps cut though some dissension is emerging via a WSJ article (A2). The FED will already have the GDP data when it makes its decision and may well have a read on Non-Farm Payrolls (Friday). The Employment Cost Index this week will also offer evidence of inflationary pressures via wages. Given the apparently receding credit threat and the confessional nature of bank earnings, the FED may balk at even another 25bps, let alone 50.

The Redbook is out at 9am and should give some indication of the retail picture; September was up 1.1% following a 3% gain in August. The August S&P Case Schiller Home Price Index is out this morning and is expected to come in at -4.2%. The Conference Board issues August Consumer Confidence at 10am est; the consensus estimate is 99.0 versus a 99.8 reading for September. The expected figure may be a bit high given the surge in food and fuel prices.

Tomorrow’s Releases

8:55e—Redbook Retails Sales
10:00e—Consumer Confidence

Today’s Releases

Oct. Dallas FED Manufacturing Index: 10.6 vs. 4.5 prior

The US sells $20 bln in 3-month bill @ high 3.92% & $18 bln in 6-month bills @ high 3.945%

Sept. Chicago FED Midwest Manufacturing Index: 105.2 vs. 105.4 prior revised

Bill Gross’ November Outlook

Pimco’s Bill Gross says the credit crunch will hurt balance sheets and income statements for years to come. Gross alluded to the “shadow banking system,” which created productivity gains through finance as opposed to technical innovation. He feels the FED needs to cut rats to 3.5% with “real” short term rates at 1% in order to avoid recession. He also says lower rates could help prevent a contraction in lending.

Fitch: $36.8 bln in CDOs may be cut

Fitch Ratings announced that it may cut rankings on $36.8 bln in CDOs linked to RMBS. $32.6 bln worth of CDOs have been placed on review for a possible downgrade with $4.2 bln in CDOs already under review.

Lehman’s new $3 bln fund

Lehman’s new $3 bln fund would be used mainly for investment in first lien secured positions used in US leveraged buyouts.

US Treasury/ Fixed Income

The FED added $8.75 bln in overnight REPOS; FED Funds are trading at 4.125%.

Oct. FED Fund Futures now factor in a 96% chance of a 25 BPS cut and a 4% chance of a 50 BPS cut when the FOMC meets on Halloween. FED Funds have averaged around 4.5% at day’s settle since the FOMC cut 50 BPS on Sept. 18th.

The US sells $20 bln in 3-month bill @ high 3.92% & $18 bln in 6-month bills @ high 3.945%
Bid-to-cover: 3.02 and 2.87 respectively

Bonds are flat to mixed with strength in the long end.

30-yr. yield: down .0445 to 4.45%
10-yr. yield: down .0273 to 4.37%
2-yr. yield: up .082 to 3.78%
6-month yield: up .01 to 4.05%
3-month yield: up .02 to 3.96%
4-week yield: down .01 to 3.94%

Equities

With no major economic data to speak of, equities are higher across the board as Wednesday’s FOMC meeting draws closer.
DOW Futures: up 75 to 13925
S&P Futures: up 6.25 to 1549
Nasdaq Futures: up 10 to 2217

Forex

The USD is mixed vs. most major currencies; hitting a new record low in the USD Index and vs. the EUR.

USD Index down .26% to 76.827
EUR/USD up .25% to 1.4426
USD/JPY up .37% to 114.61
Cable up .5% to 2.0624
USD/CHF up .05% to 1.1647
USD/CAD down .93% to .9531

Commodities

Energies enjoyed a late day surge; metals are mixed.

Crude up 1.75% to 93.47
Unleaded up 2.12% to 232.20
Heating Oil up 1.35% to 246.53
Natural Gas up .71% to 7.269

Gold up .91% to 794.70
Silver up 1.6% to 14.51
Platinum down .28% to 1465
Copper down .35% to 352.50

3-month bid-to-cover:3.02 ; 83% awarded at high
6-month bid-to-cover:2.87 ; 8.96% awarded at high

The USD is mixed on the day with no major economic releases to speak of. Oct. FED Fund Futures factor in a full 25 BPS cut when the FOMC meets on Wednesday; there is also the potential for a corresponding discount rate cut. Wednesday’s Q3 advance GDP is not expected to impress, and a worse than expected reading has the potential to open the door for a potential 50 BPS cut; though a 25 BPS still appear s more likely. The USD Index is down .15% hitting a new record low at 76.903. EUR/USD is up .15%, hitting a new record high of 1.4413. Cable is up .43% and is within 20 pips of an all-time high at 2.0627. USD/CAD is at its lowest level since 1960 at .9552 and USD/JPY is up .45% to 114.70.

Oct. CPI in Germany came in slightly higher than expected, brining the harmonized y/y reading to 2.7%. Benchmark interest rate convergence between the EU and US may become a reality before year’s end, which should help maintain the EUR’s unprecedented run against the USD. Cable is higher in anticipation of a widening yield advantage following Wednesday’s FOMC announcement. GBP/EUR is up .3% to 1.43; EUR/JPY is up .6% to 165.33; GBP/JPY is up .9% to 236.43; GBP/CHF is up .5% to 2.401 and EUR/CHF is up .22% to 1.6792.

Today’s Releases

Dallas FED Manufacturing Index: 10.6 vs. 4.5 prior
1:00e—The US Treasury will auction $20 bln in 3-month bill and $18 bln in 6-month bills

US Treasury/ Fixed Income

The FED added $8.75 bln in overnight REPOS; FED Funds are trading at 4.125%.
Oct. FED Fund Futures now factor in a 96% chance of a 25 BPS cut and a 4% chance of a 50 BPS cut when the FOMC meets on Halloween. FED Funds have averaged around 4.5% at day’s settle since the FOMC cut 50 BPS on Sept. 18th.

US Treasury will auction $20 bln in 3-month bill and $18 bln in 6-month bills at 1:00e

Bonds pointed lower for most of the day as equities picked up strength; turning flat as lunchtime approaches.

30-yr. yield: down .0294 to 4.67%
10-yr. yield: down .0157 to 4.38%
2-yr. yield: up .0164 to 3.79%
6-month yield: up .01 to 4.05%
3-month yield: up .07 to 4.01%
4-week yield: up .07 to 4.02%

Equities

With no major economic data to speak of, Equities are higher across the board as Wednesday’s FOMC meeting draws closer.
DOW Futures: up 32 to 13880
S&P Futures: up 1.75 to 1544
Nasdaq Futures: up 6.5 to 2213

Forex

The USD is mixed vs. most major currencies; hitting a new record low in the USD Index and vs. the EUR.

USD Index down .17% to 76.891
EUR/USD up .1% to 1.4405
USD/JPY up .5% to 114.74
Cable up .4% to 2.06
USD/CHF up .12% to 1.1657
USD/CAD down .65 to .9559

Commodities

Energies are higher across the board; metals are mixed

Crude up 1% to 92.77
Unleaded up 1.52% to 230.85
Heating Oil up 1% to 245.68
Natural Gas up 1.93% to 7.355

Gold up .75% to 793.20
Silver up 1.1% to 14.435
Platinum down .44% to 1462.60
Copper down .35% to 352.50

The Employment Cost Index measures the change in the cost of labor including salaries, wages and benefits and is reported 4 times a year.  The reading this Wednesday is the last of the year.  ECI topped out at .90 this year with a low reading of .80 in July.  Wage pressures tend to go along with a good economy and have essentially been falling since they reached 1.20 in March of 2004.  The consensus estimate for ECI this quarter is .90%, unchanged from the July reading.  The  FED will  have these data at the FOMC meeting this week but it will be of lesser importance than Q3 Advance GDP.  Indeed, if the FOMC still has inflation on the back burner and credit markets on the front, these data may not be in the FED’s musings at all.  ECI comes out this Wednesday at 8:30am and will likely be over-shadowed  by Q3 GDP which is released at the same time.