Need To Know News

Personal Income and Spending both rose 0.2% in October; Core PCE was up 0.2% month on month. Year on year PCE was up 2.9%, Core was up 1.9%. Real Disposable Income decreased 0.1% in October versus an increase of 0.2% in September. Purchases of Durable Goods decreased 0.6% versus and increase of 0.7% in September - this due largely to motor vehicles and parts. The percent change from the month a year ago shows a drop in durable goods purchases (-1.8%) but a sharp jump (4.5%) the Non-Durables suggesting sharp price increases are tipping consumer spending.

World equity indices are higher across the board this morning as FED Chairman Bernanke signaled the FOMC will cut rates at their December meeting. Though he mentioned inflationary pressures remained, Bernanke emphasized tightening financial conditions could potentially damage the real economy. Recent FED speakers have bolstered Street expectations of a 25bps cut in the FED Funds rate, but after Bernanke’s speech, expectations have been for a 50bps cut.

The Nikkei gained over 1% on Bernanke’s comments and encouraging economic data. Japanese CPI turned positive for the first time since December 2006 and the unemployment rate halted its upward climb. The JPY gave back some of its gains as carry trade picked up steam. USD/JPY is currently trading over 110.

European indices picked up strength on the heels of Bernanke’s comments as well, with the DAX up nearly 1.5% and the FTSE up over 1%. Also, European government bonds are set for their strongest month since February 2004. The German 10-yr. is up 3bps to yield 4.087% while the 10-yr. Gilt is up 5bps to yield 4.614%. EUR/USD is currently at 1.4759 while CABLE has advanced to 2.0652.

The Wall Street Journal is reporting Citigroup, Wells Fargo, Washington Mutual, and Countrywide are close to a voluntary agreement that would freeze interest rates on select subprime mortgages and prevent them from resetting.  The Treasury took an active role in these talks, which are a part of Secretary Paulson’s HOPE NOW initiative to contain the fallout from the subprime mess.

In commodities, oil fell below $90/barrel for the first time since October after Enbridge announced their pipelines will be fully operational within days. Also, expectations of OPEC increasing production at next week’s meeting have eased supply concerns.

Currently, U.S. equities look to be headed for a strong start with Dow Futures up 140 and S&P Futures up 17.25. Today’s economic releases include PCE inflation data from Commerce at 8:30am, expected to be unchanged at 0.2%. At 9:45am, we’ll be bringing you November Chicago PMI data, expected to be 50.5 after an October reading of 49.7. October Construction Spending data is due out of Commerce at 10:00am and is estimated to be -0.3% versus a prior reading of 0.3%. There are also two FED speakers this afternoon; FED Governor Randall Kroszner will be speaking in Philadelphia at 1:40pm, and St. Louis FED President William Poole will be speaking in Washington, DC at 4:00pm.

Bonds traded range-bound in the afternoon session, taking back all of yesterday’s losses. European bonds surged overnight, as the BOE injected over $20 bln in additional liquidity. This sent short-term borrowing costs in Europe through the roof overnight. If flight to quality continues in Europe and borrowing rates continue to rise, risk aversion has the potential to bleed into other markets. If this is the case, the bond market in the US should be very well bid. The yield on the 3month t-bill slipped below 3%; and continues to be the preferred contract as indicated by its considerable yield disadvantage vs. the 1&6 month bills. Dec. FED Fund Futures now show a 28% chance of a 50bps cut. This implied rate may be a bit overdone given the recent surge in short-term fixed income. Also, a 50bps rate cut for an economy growing at 4.9% a year seems absurd.

The USD extended its winning streak to 3 days, as the USD Index is up .72% to 75.615. The jump in European borrowing rates overnight helped the USD gain 1% vs. GBP and .67% vs. EUR. USD/CAD gained 1.2% and USD/CHF finished higher by .63%. If credit market tension continues in Europe, look for the USD to continue its advance vs. European currencies and look for JPY to surge.

Energies gave back most of their earlier gains as the DOE provided some of its crude reserves to make up for the supply disruption caused by the pipeline explosion. Crude was as high as 95.17 but finished up only 0.6% on the day to 91.15. Gasoline is down 0.23% to 227.05; Natural gas finished flat on the day and Heating oil gained 0.34% to 258.26.

Gold and other precious metals were sent lower as a result of continued USD strength. Gold slipped below $800 down $8 on the day. Silver and platinum were also down, 0.8% and 0.2% respectively. Copper was up again off signs of stronger demand via today’s GDP data and lower inventories in China; copper finished up almost 2%.

Friday morning we will be bringing you PCE inflation data for October from Commerce accompanied by Personal Consumption Expenditures and Personal Income. The consensus estimate for core PCE is 0.2 and is set against a prior reading of 0.2 for Sept. Personal Consumption Expenditures (spending) is expected at 0.3 vs. 0.3 prior. Personal income is expected at 0.4 vs. 0.4 prior.

Given the “moderate” and in line CPI data already seen for October the chance of a surprise in any PCE inflation measure is weak. Also, recent FED comments suggest core inflation is not a serious concern. Any movement away from expected core PCE would likely be to the downside given retail price cutting ahead of the holidays and in reaction to rising inventories. Energy costs may push Headline PCE above consensus estimates.

The Personal Consumption Expenditures, also known as Personal Spending, will most likely be in line but could see a drop given personal consumption’s downward revision in prelim GDP today. The weaker October Retail Sales numbers might weigh on the Personal Spending data. Any surprise in the Personal Income data is likely to be to the downside as well given October’s Non-Farm Payroll data.

The USD is fostering strength for a third consecutive day; and is currently trading higher vs. all major currencies expecting JPY. The USD Index is up .66% and has rebounded nicely after falling to a record low on Monday. The Libor rate for one-month Euro lending climbed from 4.1% overnight to 4.8%, thanks to a surge in European bonds. This surge in rates seems to be dragging down the EUR today, as it is down .6% vs. the Greenback. Cable is lower by 1%, as Nov. house prices fell more than expected at 0.8%. Also, the BOE pumped $20.6bln into the banking system today to forestall any liquidity issues. This seems to have caused a resurgence of credit fears abroad. If this fearful sentiment continues in Europe, the USD could potentially enjoy a more sustainable rally—especially if short-term borrowing rates in Europe continue to climb.

Q3 advance GDP came in as expected at 4.9%, thanks to increases in both exports and private inventories. This boost in inventories could be bad news going forward, as they may indicate a slowdown in demand and consumption. The boost in exports was due in large part to USD weakness, which puts more pressure on prices going forward. New Home Sales increased 1.7% in October, however, the revision to the Sept. data more than netted out this month’s gains. Jobless claims climbed over 352k this latest week, which is the highest reading since last February.

Bonds are higher across the board after selling off sharply for the past two sessions. T-Bills are very well bid with the 3m falling through the 3% rate this morning. T-bills have clearly been the beneficiary of a flight to quality bid and the demand for the 3m, despite its low relative yield, suggests funds are looking for cover at least into next year. Longer dated Treasuries have been on a roller coaster ride the past 2 sessions as equity indices underwent a relief rally – relief that Citi had raised some $7.5bln in new capital and relief that opinion of a FED rate hike has solidified on the “yes” side(at least momentarily). The 10yr daily chart may well be developing a longer term buy signal with today’s range fully encompassing yesterday’s range and appearing to be headed toward a close near the top of that range. FED speakers this afternoon and evening include Mishkin (voter on Board of Governors) speaks at 4pm today; Bernanke speaks in Charlotte (home of BofA) this evening at 7pm.

US equities indices experienced a marginal reaction to this morning’s data and stayed in the red for most of the morning. Equities turned briefly positive prior to lunch, though have since dipped back into the red. Dec. FED Fund Futures now show a 28% chance of a 50 bps cut. CBOT Binary options hold a 17% chance of a 50 BPS cut. Will the FED cut rates for an economy growing nearly 5%(y/y)? Markets seem to think so—which may force the FED to chop rates once again.

The USD is higher for a third straight day and is trading higher vs. all major currencies except JPY. Cable is down 1%, as house prices in the UK fell 0.8% last month. EUR/USD is down .6% to 1.4751 and USD/CAD is up 1.4% and is inching closer towards parity. The USD Index is up .6% to 75.52 after hitting a record low of 74.859 on Monday. The USD may give back some gains this afternoon and USD/JPY may extend weakness, especially if equities sell-off.

The Enbridge pipeline explosion reduced crude exports from Canada by 15%; which led to an overnight surge in energies. Crude traded as high as 95.17, though has since given back most of its gains. Unleaded was also considerably higher, but has since turned flat. Metals are lower across the board except Copper; and may be continue to decline if the USD continues its positive momentum.

The White House released new economic forecasts which may better account for housing slump and credit crunch for 2007, 2008, and 2009:

U.S. Real GDP Growth: 2.7%-2007, 2.7%-2008, 3.0%-2009

U.S. CPI: 3.9%-2007, 2.1%-2008, 2.2%-2009

U.S. Jobless Rate: 4.6%-2007, 4.9%-2008, 4.9%-2009

The Conference Board’s October Help Wanted Index came in as expected at 23, down from September’s reading of 24 and last October’s reading of 29.  The number of jobs advertised online fell 108,300, or 2.5%.  There was a widespread decrease in help wanted advertising nationwide as all nine U.S. regions posted declines, though the steepest occurred in the Pacific, West North Central, and East North Central regions.  The Conference Board’s labor economist Ken Goldstein noted that this is a consequence of a slowing economy, citing uninspiring readings of the Coincident Economic Index, Leading Economic Indicators, and Consumer Confidence.  Goldstein does remark that a silver lining lies in the forward indicators of labor market activity, which show signs of flattening rather than declining.  He does note, however, that this suggests slow labor market growth until the first quarter of 2008.