Need To Know News

Equities started the day lower after AIG announced Q4 write-downs near $15bln. Major indices continued to sell off throughout the session, pushed lower by a 15-year low in Michigan Consumer Confidence and a worse than expected Chicago PMI. Both Dow and S&P Futures were down over 2.5% while the Nasdaq was down more than 2%. A slight increase of in Personal Consumption at 0.4% did little to help markets. The plethora of FED Speakers today did little to help as well.

The most poignant FED comments came from the St. Louis Fed’s Poole, who lashed out at Fannie and Freddie saying the GSEs’ financial state was among his top concerns. Boston Fed President Rosengren said he felt the U.S. economy would avoid recession while Lockhart of the Atlanta Fed said that subprime was contagious to all financial markets. Recent Fed comments about the FED needing to stand ready to retract rate cuts in order to prevent bubbles were echoed today by Chicago Fed President Evans.

Crude and Gold both reached record highs overnight of 103.05 and 978.50, respectively. However, neither was able to match those numbers throughout the session. Crude did however remain above 101.00 for the entire session. Precious metals stayed in positive territory as well with Silver cracking 20.00 for the first time in 28 years.

Flight to quality choked fixed income yields for a third consecutive day with the 30yr up 1.8% now yielding 4.4% and the 10yr up 1.4% with a yield of 3.519%. The2yr yield at 1.63% is the lowest since ’04. The short end of the curve was decently bid except fro the 4week bills whose yield gained 3 bps to 2.08%. The 3 and 6 month bills are both yielding 1.83%. Fed Fund futures now show a 70% chance of a 75 bps cut on March 18th despite some rather hawkish comments from the Fed’s Charles Evans and Bill Poole.

The USD sell off continued on Friday with the Greenback falling vs. all major currencies except CAD. USD/JPY fell to a 3yr low at 103.83 and closed 10 pips under the 104 handle; USD/JPY is down nearly 3.5% this week. USD/CHF dropped 1% on the day and is down nearly 4% on the week. EUR/USD finished flat on the day at 1.5194 and is up nearly 2.5% on the week. Cable also finished flat on the day at 1.9885 and is up just over 1% this week. The USD is marginally lower on the day and is down 2.3% on the week.

On Monday, Philly FED President Charles Plosser will speak in Arlington, VA at 8:00am. At 10:00, Jan. Construction Spending data will be released at Commerce, expected at -0.7% from -1.1% in Dec. Also at 10:00, the ISM Manufacturing Survey comes out, expected at 48.4 after 50.7 in Dec. Treasury Secretary Paulson will speak in Arlington, VA at 10:00 as well. FED Governor Randall Kroszner will speak in DC at 2:00pm.

WFC reports exposure to 3 SIVs in their money market mutual funds amounts to $1bln. Current problem is $39mln liability on a “guarantee obligation”. WFC is off 1.22 at 29.34 about $5.00 over year low levels.

St. Louis Fed president Bill Poole expressed his belief that controlling price pressures should be the primary objective of the Fed. Poole also warned of “substantial problems” in Freddie and Fannie’s financial strength. Chicago Fed president Charles Evans addressed the potential for excesses as a result policy easing and said a swift removal of rate reductions is important when they are no longer necessary.

DOW breached session lows, dropping 2% to 12,335 and S&P futures fell 1.95% to 1,338. Treasuries extended their gains with the 30yr yield falling to 4.41%, the 10yr yield falling to 3.54% and the 2yr yield falling to 1.68%. The short end of the curve was roughly unchanged except for the 6month bill whose yield is down 10 bps to 1.83%. Fed Fund futures now show a 58% chance of a 75 bps cut mid-March despite the hawkish comments from Poole and Evans.

The USD showed little reaction to the speeches. EUR/USD and Cable are flat on the day. USD/JPY is down 1.3% and USD/CHF is down 0.92%

Chicago Fed President Evans said an important question for the FED will be whether recent rate cuts will create more “excesses” in the economy. He goes on say the FED should “promptly” remove rate cuts when needed. Evans is not a voting member.

At the never-ending subprime panel in New York City, St. Louis FED President Bill Poole:

* Aruged market expectations that the FED will provide financial stability will affect behavior, but not in a hazardous way
* Says FOMC policy has done a good job of protecting the financial system without protecting any one firm
* Quotes Greenspan, saying “no firm is too big to fail, but some may be too big to liquidate quickly”
* Notes there could be a situation where intervention is inevitable, but he would enact high standards for such a situation and only act if disturbance posed a “clear and present danger”
* Says he’s more skeptical of the financial strength of the GSEs
* Affirms the FED can deal with liquidity pressures but not solvency issues
* Thinks GSEs are the top potentially serious problem, and that this problem resides the “structure” of GSEs

* Says best policy in a crisis is to bring about stability first and then reverse course if inflation arises
* Admits that while financial firms cannot expect targeted aid, GSEs can

Fed watchers are probably asking, “Why the Panel discussion?”

Lockhart’s observations include;

* Resolution of subprime crisis requires some stabilization of U.S. housing markets

* current state of financial markets - “evolving positively but still fragile - unusually vulnerable to shocks”

* “decline in value of housing starting to create concern about other consumer loan and mortgage markets including credit cards, auto loans, student loans and prime mortgages.

* major investors in Asset Backed Commercial Paper have exited the market - perhaps never to return

* “Generally favorable economic conditions should help improve financial market stability”

* Recent FED rate cuts should “encourage stronger economic growth in the second half of 2008″

* Subprime crisis “raised questions about the fundamental institutional, incentive and practices framework of several moder markets”.

Back by popular demand, the Fed will be conducting two TAF auctions on March 10 and March 24 for $30bln in 28-day credit. The FED will continue to perform bi-monthly TAF auctions as long as necessary.