Need To Know News

Equity indices slipped deeper into negative territory following the unexpected surge in weekly jobless claims, which showed their largest jump since September of ’05. The claims data, coupled with yesterday’s larger than expected ADP Employment report, casts a good deal of ambiguity on tomorrow’s January Employment report, which is expected to come in at 70k after 18k in December.

Equity indices rebounded and maintained positive momentum throughout MBIA’s four-hour conference calls on the heels of the release of its $2.3bln loss in Q4. MBIA CEO Gary Dunton affirmed the bank would keep its AAA rating at Moody’s and S&P. Following this surge Fitch announced it cut FGIC’s financial strength to AA from AAA. Dow futures, after trading as low as 12239 this morning, finished up over 300 points to 12695. S&P futures traded between 1334.50 and 1386.75 before closing at the top of its range. Nasdaq Futures settled at 1859.75, up 48.25. Russell Futures finished up nearly 4%.

Fixed income markets remained well-bid throughout the day and were unresponsive to the rally in equities. Both the long and short ends of the curve showed extended strength, though as a whole, only showed marginal flattening. The yield on the 4-week Bill yield dropped 13 bps to 1.64% and the 3-month yield fell 20 bps to 1.95%. FED Fund futures currently show a 66% chance of a 50 bps rate cut mid-February, even though the FED has cut over 1% from the benchmark and discount rate in less than two weeks. The BOE is expected to cut 25 bps and the ECB is expected to leave rates unchanged next week.

The USD finished the day mixed vs. most major currencies after surging in the morning session. EUR/USD reversed course to finish up .11% to 1.4878. USD/JPY ended the day up .25% thanks to the rally in equities. USD/CAD gained .87% to finish at 1.0017 after reaching 1.0087 earlier in the day. The USD Index took back some of yesterday’s losses and finished at 75.176.

Crude and gasoline each finished 1% lower. Natural Gas posted a modest gain after EIA Inventories showed natural gas stockpiles to plummet 274 bcf . Metals finished higher with platinum increasing by 3.35% and copper surging 2.12%.

Tomorrow’s releases include January Nonfarm Payrolls at 8:30am, expected to rise 70k after only rising 18k in December. At 10:00am, December Construction Spending comes out, estimated to fall 0.5% after the 1.0% rise in November. ISM Manufacturing Index and Michigan Consumer Confidence also comes out at 10:00am, expected to be 47.4 and 79.0 respectively. Tomorrow also marks the start of the OPEC meeting in Vienna.

The Jan. Employment Situation, which includes Nonfarm Payrolls and the Unemployment Rate, will be released Friday at 8:30am EST. The consensus estimate for Nonfarm Payrolls is 70k against December’s dismal 18k. Unemployment is expected to remain unchanged at 5.0% after ticking up 0.3% in last month’s report. Average Hourly Earnings m-o-m are expected to decelerate to 0.3% after last month’s 0.4%. Average Weekly Hours are expected to remain unchanged at 33.8.

Conflicting data on the upside this week included ADP Employment, which came in at 130k, 3 times higher than expectations. On the downside, Initial Jobless Claims today climbed the most since Hurricane Katrina, jumping 69k to 375k. However, it should be noted Jan. Initial Jobless Claims have been rather benign at 322k, 306k and 301k.

Given Jan. ADP Employment and previous Initial Jobless Claims this month, it looks as though Nonfarm Payrolls data have some upside potential despite today’s jump in Initial Claims. The x-factor may be government hires as widespread reductions in tax revenue, due to dipping property values and consumer spending, may have led to hiring freezes.

The change in the Unemployment Rate was a recession-like 0.3% in the Dec. Employment Situation. An uptick in the Unemployment Rate on the order of December’s is very unlikely, but if January data does show an increase the chances of a recession will certainly increase as well.

The University of Michigan Survey, out at 10:00am EST tomorrow, is estimated to come in at 79.0 versus and 80.5 in the prior reading.

The December and October readings were in the mid-70s and the Index has been falling since July ‘07. Consumer Sentiment has been a driver in ginned-up talk of recession, though Michigan’s Consumer Sentiment and the Conference Board’s Consumer Confidence are not reliable predictors of recessions.

The December reading marked the first turnaround in these data in several months but, given the employment situation, there is little reason to believe respondents will be upbeat on their assessment of current conditions or 6 months hence.

The ISM Manufacturing Index for January, released tomorrow at 10:00am EST, is expected at 47.3 after a recently revised reading of 48.4 for December. The Prices Paid index is forecast at 68.0, which would be unchanged from the previous month. Since underlying data on new orders, production, and employment are probably still getting hit by housing markets issues, the overall index is likely to disappoint.

If the manufacturing index comes in as expected, it would be the ISM’s 7th straight monthly decline. December’s 48.4 level — originally reported as 47.7 but revised this week — was the first sub-50 reading since Jan-06, and the lowest reading since Apr-03. ISM levels below 50 reflect a negative outlook.

Notable declines were evident across several subcategories in the December report: New Orders fell 6.9%, Production declined 4.6%, and Inventories fell 1.4%. Customers’ inventories bucked the downward trend, while Exports fell 6% and Imports rose 0.5%.

The ISM on Tuesday released annual seasonal factor revisions. Changes were relatively small for December, with the revised ISM composite index at 48.4 versus the previously reported 47.7. The “business activity” index for the ISM non-manufacturing report was revised to 54.4 from 53.9.

Tomorrow’s ISM release will be the first since the institute announced a re-jiggering of the composite index for the manufacturing survey. It still consists of the same 5 components (new orders, production, employment, deliveries, and inventories), but now each of the 5 has equal weight in the index. (Previously, the respective weights were 30%, 25%, 20%, 15% and 10%).

The non-manufacturing index report will now include a composite index, the ISM-NMI. (Previously, the headline release was the “business activity” component, which is the correlate of the production component in the ISM.) The composite index is made up of equal weights of the following four components:

1) Business activity (production)
2) New orders
3) Employment
4) Supplier deliveries

December Construction Spending is expected to fall 0.6% after gaining 0.1% in November. Residential Construction is likely to drop for the 22nd consecutive month as Housing Starts, Completions and Building Permits continued their slide in December.

Private Non-Residential Investment could be a positive addition, but is likely to show a marked deceleration. The credit-market spillover will continue to put pressure on the non-residential sector and drag down total construction spending, which compromises roughly 20% of GNP.

The December Jobs report showed a 1.1% drop in construction hours in December, consistent with the anticipated decline in construction spending. Public Construction is expected to be unchanged after a 2.5% jump in November helped keep total construction spending marginally positive. It does not appear that marginal increases in public and non-residential construction spending will be enough to offset continued deterioration in residential construction spending.