Significant Deterioration in Empire Manufacturing Survey as it Contracts in February

New York area manufacturing unexpectedly tumbled into contractionary territory in February, for the first time in almost three years. The Empire manufacturing survey fell much further than anticipated to -11.9 from 9 in January. Consensus had been looking for a reading of 6.5. Any reading below zero indicates negative growth. Since the national ISM manufacturing fell below 50 in December, the largest drop in almost five years, this has to be viewed as further support of the deteriorating U.S. economy, despite the pick-up in exports. In the February Empire Manufacturing survey, new orders plummeted to -12 while shipments fell by -5. Unfilled orders and employment also fell into negative territory. Delivery time and inventories were both unchanged in February after falling in the prior month. Prices paid remain elevated at 47, up from 40 last month. This is the first of the regional manufacturing indicators. The New York survey is considered to be a better indicator of high tech industry, rather than heavy industry such as autos. One bright spot was that the outlook for six months from now rose to 23, but it remains below its 2007 average of 41. Unfortunately, the future employment reading fell to its second lowest reading since the series began in 2001.

Industrial Production Higher on Utility Demand, Manufacturing Demand Unchanged

Industrial production rose a modest +.1% MoM in January due entirely to higher utility output (+2.2% MoM) tied to colder weather. The headline growth was right at consensus expectations. Manufacturing, which accounts for 80% of industrial production, was unchanged versus a gain of +0.2% in December. Capacity utilization, which measures how fully productive resources are utilized, was unchanged at 81.5%, after being revised higher for December. The market had been looking for capacity utilization to ease down to 81.3%. Capacity utilization remains near its long-term average. By category, mining output fell -1.8% MoM, construction supplies fell -1.1% MoM, and auto production declined -1.3% MoM. January vehicle sales were the slowest in over two years. Textiles also declined by -2.7% MoM. Production of consumer goods rose +0.3% MoM, and business equipment slowed to +0.4% MoM, from a gain of +.9% in December. Computers and electronics increased by 1.7% MoM. Industrial production, in both November and December, was revised up by +.1% MoM. Over the past year, industrial production is up +2.3% YoY, with utilities +6.2% YoY. Ex-autos, industrial production has still been up +2.3% YoY.

University of Michigan Consumer Confidence Survey Plummets to Lowest Level Since January 1992

The preliminary February U of Michigan consumer confidence survey tumbled 8.8 points to 69.6, a 16 year low. Consensus expectations had been for a drop to 76 from 78.4 in January. To put this level in perspective, the survey previously hit lows of 63.9 in 1990, and 51.7 in 1980, during the two worst recessions of the last thirty years. Current conditions fell to 85.4 from 94.4, and the outlook fell to 59.4 from 68.1. Inflation expectations deteriorated significantly. The one year outlook soared to 3.7% from 3.4%, where it has been for the past three months, while the five year outlook held steady at 3%. This was clearly a horrible number, and indicates that U.S. consumers are not feeling optimistic on the economy.

Import Price Gains Set New Annual Record

Import prices in January leaped higher. After falling a revised -.2% MoM in December, prices jumped +1.7% MoM in January (consensus +0.5%). Most of the rise was due to oil, excluding petroleum, prices rose a more modest +.6% MoM. On an annual basis, import prices spiked to another new record high of +13.7% YoY against data going back to 1982. Consensus had looked for an annual gain of 12.7% following the revised lower YoY increase of 10.4% in December. Petroleum prices rose +5.5% MoM in January, and are up +67% YoY. Crude oil prices reached a record $100 a barrel in January. Excluding all fuels, import prices rose +0.7% MoM and +3.3% YoY, so it is clear that higher energy prices have been the main driver of higher import prices over the past year. The next largest contributor to rising import prices are industrial supplies which rose +4% MoM and are up +36.8% YoY. Food and beverage costs have also been rising, increasing +3.1% MoM and 10.9% YoY. Capital goods import prices actually fell -.2% MoM, the first decrease in nine months, and are only up +0.5% YoY. Autos and consumer goods prices have been very tame, with both rising less than 2% YoY. Import prices from Canada, our largest trading partner, have risen +11.3% YoY, representing the large energy component of the imports. Non-manufactured goods prices for Canadian goods rose +31.4% YoY after the Canadian currency rose to multi-decade highs last year. Chinese goods rose +.8% MoM and are up +3.3% YoY, the largest increase since records began in 2004. European Union exports have risen +4.1% YoY, with the +1.1% monthly increase in January the largest in over a year. Latin American prices rose +3.6% MoM and +24.7% YoY. Brazil's Real was one of the best performing world currencies in 2007. Obviously rising import prices create an inflation risk for the U.S., and cut into the purchasing power of U.S. consumers. The dollar fell 8% in value versus a basket of foreign currencies last year.

Weekly Economic Calendar

February 18 – 22, 2008

                                                                                                            Consensus       Prior

Monday, 2/18

            President’s Day Holiday – Markets Closed

Tuesday, 2/19

            February NAHB Housing Market Index                           19                    19

                        Rose last month from record low of 18

            Minneapolis Fed President Stern speaks on U.S. Economy

Wednesday, 2/20

            January Consumer Price Index                              MoM   +0.3%             +0.3%

                                                                                                YoY     +4.2%             +4.1%

                        CPI Ex-Food and Energy                              MoM   +0.2%             +0.2%

                                                                                                YoY     +2.4%             +2.4%

Food and gasoline both expected to rise around +0.3% MoM

                        Service prices (rents, medical) rising faster than goods prices (autos)

Rental indicators remain elevated – OER +.3% MoM for last two months, tenant rent rose +.4% in December

                        Apparel prices may drop due to aggressive clearance sales

Seasonals often cause more aberrations than usual in January – new year pricing for many products and services

                        Headline inflation has only risen above 4% YoY  8 times in last 17 years

Core inflation expected to hold steady at +2.4% YoY, after rising for four straight months

                       

            January Housing Starts                                                      1010k              1006k

                        A decline in single-family expected to offset a rise in multi-family starts

                        Western U.S. has seen especially steep declines recently

                       

            January Building Permits                                                   1050k              1068k

Single-family starts have been running below permit levels indicating a further slowdown in construction

Multi-family starts in December had 2^nd largest decline ever (-40.3% MoM) suggesting a rebound is likely this month

            FOMC Minutes Released (January 29-30 Meeting)

            St. Louis Fed President Poole speaks on Inflation

Thursday, 2/21

            Initial Jobless Claims                                                          345k               348k   

                        Continuing Claims

                        Initial claims fell for last two weeks, following spike to 378k

                        Four week average rose to 347k

                        Continuing claims remain near a two year high

            February Philadelphia Fed                                                 -10                   -20.9

                        National manufacturing ISM rebounded

            January Leading Indicators                                                            -0.1%              -0.2%

Expected to decline for fourth straight month – last happened in 1990-91 recession

Six month trend likely to fall to lowest level since 2001 recession

Friday, 2/22

            No Data

U.S. Trade Gap Continues to Improve as Exports Grow at Record Levels

The December trade deficit was smaller than expected at -$58.8B (consensus -$61.5B). This was a decline from the $63.1B deficit of November, and close to the -$59.3B average for 2007. Exports grew +1.5% MoM, to a new record high for the tenth month in a row, and imports shrank -1.1% MoM. Demand for imported autos and goods from China (-14% MoM, +10% YoY) declined, allowing the gap between imports and exports to shrink by 6.9% MoM. This was the largest monthly improvement in the import/export gap in a year. Unfortunately, petroleum imports rose +4.2% MoM to a new record monthly high, and further price hikes in January will probably cause another record oil import bill in January. Aircraft continue to be large contributors to export growth. For the first time since 2001, the trade deficit shrank in 2007 versus the prior year, which has been a positive for GDP growth. Trade added the most to GDP last year since 1991. A weaker dollar and faster growth in other parts of the world have been the main catalysts for improving the trade deficit recently. For all of last year, the trade deficit narrowed by +6.2%, and this was the best annual improvement since 1991.

Today's TIDBITS

February 14, 2008   

NAR Says 4^th Quarter Home Price Decline Sets New National Record

From CNN: “Home prices continued their plunge during the last three months of 2007, setting a real estate trade group's record for the biggest-ever quarterly drop.   The national median price drop of 5.8%, to $206,200 from $219,300, was the steepest ever recorded by the National Association of Realtors (NAR), which has been compiling the report since 1979… "The continuing crunch in the jumbo loan market that began in August has disproportionately reduced the number of transactions in higher price ranges," said Lawrence Yun, NAR's chief economist, in a statement.  Fewer expensive homes were sold, bringing down median prices.  "California, south Florida, D.C., many of the high-cost markets are reflecting that," said Walter Molony, a spokesman for NAR.  Each of the four U.S. regions recorded losses compared with the fourth quarter of 2006. The West took the worst hit, at 8.7%. Prices dropped 4.8% in the Northeast, 5.4% in the South and 3.2% in the Midwest.  In Lansing, Mich., square in the Midwest Rust Belt, prices plunged 18.8% to $109,600. In Sacramento, Calif., prices fell 18.5% to $197,600, and in both Jackson, Miss and Riverside, Calif. prices dropped 16.8%.  Seventy-three of the nation's 151 real estate markets recorded price gains. Cumberland, Md., led the winners with an increase of 19% to $116,600.  The least expensive single-family-home market in the nation got even cheaper, as prices in Youngstown, Ohio, dropped 9.3% to $72,600. The most expensive market, San Jose, Calif., got dearer, with prices up 11.2% to $845,300.

Condo prices fared better. The fourth-quarter median condo price of $221,100 was little changed from the $221,200 a year earlier.   But some areas, mostly Sun Belt cities, took significant price hits.   Cape Coral, Fla., condo prices were down 26% compared with the last three months of 2006 to $202,300, and Tucson, Ariz., prices dropped 19.8% to $128,000. Atlanta prices fell 12% to $141,100, and Las Vegas was off 10.3% to $178,500.

Bismarck, N.D., condo prices recorded the largest gain at 20.8% to $125,000, with New Orleans second at a 17.8% gain to $173,300.  Last year, fourth-quarter home prices were 2.7% lower from the year before.  "The healthiest housing markets today generally are moderately priced and are experiencing job growth and often population growth, which in turn is supporting strong price growth," said NAR's Yun. "Most of the weakest markets have either experienced both job and population losses, or they are experiencing corrections following a prolonged period of rapid price growth."  Many markets have also been affected by soaring foreclosure rates.  Large numbers of houses for sale, many repossessed from borrowers, sit empty, depressing prices in cities from coast to coast - but most notably in economically distressed Midwest industrial towns and some once-booming Sun Belt cities.  NAR numbers are arrived at by examining the prices of all homes sold during the period. The median price is the one in which half of all homes sold for more and half for less.  Using median prices rather than mean - or average - prices reduces the impact of the sale of very expensive homes, which would raise mean prices disproportionately.  The NAR take on price trends, usually an optimistic one, was that recent steps taken in Washington would lead to improved conditions later this year.

"Higher limits for FHA loans, which go into effect March 14, will be a big help to first-time buyers in high-cost markets," said NAR President Richard Gaylord.  "Higher limits for conventional loans purchased by Freddie Mac and Fannie Mae will take a bit longer," he said. "When they become available, high-income, creditworthy borrowers in high-cost areas will have access to affordable and safer financing, and that will help unleash pent-up demand."  But other industry insiders are predicting harder times ahead. A Merrill Lynch report in January forecast peak-to-trough price declines of 15% in 2008 and another 10% in 2009 before markets begin to recover.”

Freddie Eases Mortgage Insurer Rating Requirement as Home Prices Fall

From Bloomberg:  “Freddie Mac…will purchase loans covered by mortgage insurers that don't meet the company's standards for the amount of capital backing their policies.       Freddie Mac's suspension of its requirements applies to mortgage insurers downgraded below AA- or Aa3 by ratings firms…The insurers will be required to submit a remediation plan within 90 days of a downgrade.  Higher defaults by subprime borrowers propelled a jump in mortgage insurance claims last year, leading the industry's three largest firms, MGIC Investment Corp., PMI Group Inc. and Radian Group Inc., to report their first money-losing quarters as publicly traded companies. The mortgage insurers and their subsidiaries have been downgraded or told they face possible cuts by ratings firms.       ``We're trying to help the mortgage insurers,'' said Brad German, a spokesman for Freddie Mac… Mortgage insurance pays lenders when homeowners default.  Falling values make it harder for borrowers to refinance or for lenders to recoup costs in a foreclosure, increasing claims.”

Comments on Bernanke’s Economic Update

From Morgan Stanley:  “The prepared text of the testimony that Bernanke delivered to the Senate Banking Committee was unusually brief and contained little new information. The language used to describe the economic outlook was very similar to that delivered in his last public appearance on January 17 – even though a lot has transpired since that time. Indeed, the exact same wording was used in a few key parts of the testimony, including that related to a discussion of “the downside risks to growth” and the inflation environment. Moreover, the concluding policy message, which noted that the FOMC will “be carefully evaluating incoming information” and “will act in a timely manner as needed to support growth” is basically identical to the wording used in the last couple of official FOMC statements.  We detected only a couple of new twists in today’s testimony. 

First, Bernanke referenced the problems facing some bond insurers. He noted that this situation has “added to strains in the financial markets” and could lead to “further writedowns” at commercial and investment banks…Second, the Fed Chief provided a baseline scenario for the economy that seemed to be broadly consistent with our own outlook. Although the text did not specifically address the issue of whether we are facing recession, Bernanke indicated that his own baseline forecast shows a period of sluggish growth over the near term “followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt.”  Our main takeaway is that Fed is not looking to send any strong policy signals at this point. Clearly, the door remains open for further action. However, after having moved quite aggressively in recent weeks, there is a sense that officials now appear to be willing to roll with the punches for a while.”

From Lehman:  “Bernanke offered a benign economic forecast. Chairman Bernanke began by noting that the "Federal Open Market Committee (FOMC) has moved aggressively, cutting its target for the federal funds rate by a total of 225 basis points since September, including 125 basis points during January alone. As the FOMC noted in its most recent post-meeting statement, the intent of these actions is to help promote moderate growth over time and to mitigate the risks to economic activity."  What seems out of synch with the market is the combination of his discussion of the importance of the medium-term forecast and his own, relatively benign, baseline outlook. He reminded that "Monetary policy works with a lag. Therefore, our policy stance must be determined in light of the medium-term forecast for real activity and inflation, as well as the risks to that forecast.” He added to that statement by noting that “At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt."

His follow on comments, which seem to be garnering the most attention, then reiterate

that "Although the baseline outlook envisions an improving picture, it is important to

recognize that downside risks to growth remain, including the possibilities that the

housing market or the labor market may deteriorate to an extent beyond that currently

anticipated, or that credit conditions may tighten substantially further. The FOMC will

be carefully evaluating incoming information bearing on the economic outlook and

will act in a timely manner as needed to support growth and to provide adequate

insurance against downside risks."  This last sentence clearly implies that the risk management approach to Fed policy is still in play. However, it comes after comments that suggest he is presently somewhat comfortable with his own outlook for growth and inflation. We continue to expect a 50 basis point rate cut at the March meeting as we see his forecast as a somewhat optimistic scenario that rightly includes the impact of the tax

rebates. However, financial market risks continue to mount and, by the March meeting

we believe these will be enough for the Fed to continue to rely on their risk management

approach and cut rates an additional 50 basis points, particularly in the absence of

significant inflation pressure and in light of the deterioration of the labor market and

credit availability.”

From Deutsche:  “Bernanke sticks to the script, highlights downside risks

Chairman Bernanke's testimony before the Senate Banking Committee mostly reiterated economic themes from recent policy speeches.  The Chairman again emphasized the importance of pre-emptive monetary policy-reassuring further timely action, if warranted; meanwhile, he also gave a nod to maintaining price stability, although the Fed's near-term focus remains clearly tilted toward slowing economic activity.  Similar to his previous comments, Mr. Bernanke once again highlighted the negative economic implications of what now appears to be an economy-wide credit crunch.  He stated, "More-expensive and less available credit seems likely to continue to be a source of restraint on economic growth."  His comments diverged slightly from those made previously in that the Chairman cited not only the credit-crunch and slumping housing markets as negative economic factors, but now more broadly included a softer labor market and higher energy prices.  Mr. Bernanke appeared to remain confident that stimulative fiscal and monetary policy would lead to a more solid pace of growth later this year; although, he did state the following:  "Although the baseline outlook envisions an improving picture, it is important to recognize that downside risks to growth remain, including the possibilities that the housing market or the labor market may deteriorate to an extent beyond that currently anticipated, or that credit conditions may tighten substantially further." However, there was one important subtle shift.  He said, "Our policy stance must be determined in light of the medium-term forecast for real activity and inflation, as well as risks to that forecast."  This indicates to us that further rate cuts will be conditioned on new information regarding the economic and financial outlook.  Implicitly, this also means that when the economy regains its footing, monetary policy will respond accordingly.  Our view is that growth will likely shrink in Q1, but rebound next quarter. This should compel the Fed to cut rates by 50 bps next month.”

From UBS:  “In Q&A, Mr. Bernanke was asked by Senator Carper (D-DE) about when will we know whether or not actions already taken in stimulating the economy are working. In response, Mr. Bernanke said: “Well, Senator, we’ll be looking over the next few quarters. Obviously, the general performance of the economy. But as I mentioned in my testimony, I think there are a few areas of particular sensitivity we need to watch. First is the housing market, we need to begin to see some stabilization in starts and sales, it would be very productive in terms of both the economy and the credit markets. Secondly is the labor market, we don’t expect a rip-roaring labor market by any means, but it would be nice if the labor market would begin to stabilize close to current levels. Third, credit markets, Senator Schumer was correct that there is a lot of concern among participants of the financial markets about the state of the credit markets. Much of that is connected with uncertainty about the broader economy. A significant worsening in financial conditions or credit availability would certainly be a warning bell that we need to take further action.””

Composition of Recent Foreign Official Reserve Growth

From Morgan Stanley:  “Total world official foreign reserves reached US$6.4 trillion

around end-2007, and continue to grow at roughly US$150 billion a month, with Asia accounting for half of this growth, and oil exporters another third of this increase…This is an acceleration: the average pace of the world’s foreign reserve growth was only about US$30 billion a month in 2005…Asian exporters and oil exporters remain the key reserve accumulators. Of the total stock of reserves, Asia and oil exporters account for US$3.9 trillion and US$1.2 trillion, respectively.1 In terms of monthly growth, they

account for US$75 billion and US$50 billion. With US$1.57 trillion,2 China is the world’s largest reserve holder, followed by Japan (US$996 billion)3 and Russia (US$483 billion)… Of the US$150 billion in monthly reserve growth, making some assumptions, roughly 70% of the total may have come from outright interventions, while only 12% came from interest earnings on the underlying assets and 18% from valuation changes (i.e., EUR appreciation)… At the country specific level, Japan’s rapid reserve growth in 4Q07 was a puzzle. We do not believe that the MoF conducted stealth interventions, but suspect that it may have bought EUR/USD, i.e., diversified, and the rise in EUR/USD exposed the higher weighting on EUR, which we guesstimate to be around 21%, compared to what we had presumed to be the case (10%).”

New Credit Crunch Hits Muni Market

From The Financial Times:  “A collapse in confidence in a $330bn corner of the debt market has left US municipalities and student loan providers facing spiralling interest rate costs.  The implosion of the so-called auction-rate securities market - amid worries that bond insurers guaranteeing much of this debt could face rating downgrades - is the latest incarnation of the credit crisis.  The market, heavily used by municipal borrowers and backed by triple-A rated guarantees from bond insurers such as Ambac and MBIA, was until now used as a safe harbour for investors.  The interest rates on such bonds reset either weekly or monthly and a lack of interest from investors can trigger a sharp rise to compensate holders.  The market's sudden slump has pushed interest rates as high as 20 per cent for entities from the Port Authority of New York & New Jersey to a hospital.  "The auction securities market is falling apart," …Municipal borrowers are scrambling to seek letters of credit from banks and other fresh sources of finance.  The auction rate securities market, much like structured investment vehicle and asset-backed commercial paper markets, had been growing fast.  Banks acting as dealers have been propping up the sector, but many pulled back this week amid a realisation that it might not be possible to restore con­­­fidence and woo investors back.  "Dealers who would normally pick up a slump are not doing so as their balance sheets are full”… The importance of bond insurers to municipal borrowers has prompted regulators to push banks to provide capital or credit lines so that Ambac, MBIA and others can retain their triple-A ratings.”

From Citi:  “The monoline saga drags on with auctions of bonds issued by local governments and student loan providers being the latest casualties. There have been failed auctions with some local governments being forced to pay as much as 20% to borrow in the short-term debt markets. It remains to be seen if this is a temporary phenomenon related to the inability of monoline insurers to cover their portfolios or a more secular decline in the availability of credit. CDS indices remain at extremely elevated levels on wide ranging concerns on the overall health of the financial sector and the global real economy. “

From Bank of America:  “Failures in the auction rate securities market accelerated today with an estimated 80% of all auctions failing. What does this mean for financial markets? Auction rate securities were used as cash equivalents primarily by individual investors and corporate treasurers. Those investors will now find their previous liquid cash surrogates replaced by term debt securities. With a total size of $330bn and roughly half of that held by individuals, a significant, albeit likely short lived liquidity crunch is again emanating out of the credit markets.”

From FTN:  “UBS has joined a growing list of dealers [Goldman, Lehman, Citi] that will not buy auction-rate securities if auctions fail to attract enough bidders, according to Bloomberg. Auctions by cities, hospitals and student loans have failed in recent days because they were undersubscribed.”

From Deutsche:  “Moody's downgraded FGIC, but noted that MBIA and Ambac are better positioned from a capitalization and business franchise perspective…”

Bank of America’s CEO Sees Mild Recession and Bank Mismanagement of Risk

From AP:  “The head of the nation's largest consumer bank said Wednesday there is an “even chance” the nation's economy is in a mild recession, comparing last year's credit crunch and ongoing turmoil in the nation's mortgage market to the Internet bubble of 2001.  But Bank of America Corp. chief executive Ken Lewis said that's not a reason to give up entirely on the complex securities that led to the crunch, helped precipitated the current economic slowdown and cost his bank and other financial services companies more than $145 billion in losses.  “The basic idea that banks can better manage and distribute risk by securitizing financial assets has created extraordinary growth and stability over the past 20 years, for the financial sector and for the global economy,” Lewis said. “The forms this activity takes will be simpler, but it will continue.”… Lewis reiterated the bank's belief that GDP growth will accelerate in the second half of the year and return to “trendline growth” in 2009.  “We have to be smarter about managing our risks and we have to get paid for the risks we take,” Lewis said. “But we do have to keep taking risk. It's the business we're in and it's what drives economic growth.”  Lewis said his bank, and many others, were unable to properly price the innovative products created by investment bankers when money to lend to prospective homebuyers was cheap and widely available. Those products included collateralized debt obligations, a complex security often backed by subprime mortgage loans – or those given to customers with poor credit histories.  Banks and others fell into a “follow-the-leader” exercise, Lewis said, in which the prices and risks of such assets were based on those that had come before. As the housing-market slump led to delinquencies, defaults and bankruptcies at mortgage lenders nationwide, the credit market seized up. Trading came to a halt because no one really knew how much the investments were worth, he said.  At Bank of America, the cost of mortgage related write-downs topped $5 billion in the fourth quarter, nearly wiping out earnings.  Lewis said Wednesday putting the nation's credit markets back on stable ground will require increased transparency in both the accounting of such assets and the firms that investment in them, and “a return to simpler, more traditional structures that are easier to value.”  In the meantime, Lewis said, the nation's financial service companies can work on their own and with the federal government to keep homeowners in their homes. On Tuesday, Bank of America – which Lewis has said does business with nearly one out of every two American households – joined five other lenders in granting some customers threatened with foreclosure a 30-day reprieve under an initiative announced by the Bush administration.  But the banks themselves, he said, need to be “willing to deal with our own challenges.”  “Central bankers will step in when possible to protect the markets from the most severe consequences,” Lewis said. “But companies on the hook for past decisions need to find solutions in the private sector, and not look to governments for help.””

MISC

From Lehman:  “Chicago Fed President Evans noted that economic data “readings like this indicate a greater than 50% probability that the economy is in a recession.””

From RBSGC:  “MBS are heading towards a disastrous month with -53 bp in excess returns so far.”

From RBSGC:  “Agency spreads for on the run issues are 15 to 30 bp wider versus Tsy and 16 to 20 bp wider to swaps YTD led by the 5yr sector. The dramatic cheapening in agencies is due primarily to concerns over FNMA and FHLMC Q4:07 financials, the lingering possibility of supply and the GSEs callable replacement needs.”

From Deutsche Bank:  “The yield curve has continued to steepen, with 2/10Y now at 173 bp in swaps. It was only 142 bp at the beginning of the month. Liquidity issues, as exemplified by the crisis in the auction-rate bond market, has caused increased buying focus on the short end of the yield curve.”

From The Washington Post:  “The National Association of Home Builders, one of the top 10 corporate donors to politicians, has stopped contributing to congressional candidates after it failed to get what it wanted in recent anti-recession legislation.”

From AP:  “Auto loans at least two months delinquent hit a 10-year high in January, Fitch Ratings said Thursday, signaling the continued spread of consumer weakness to beyond homes and credit cards.  The firm said 0.77 percent of U.S. prime and subprime auto asset-backed securities were more than 60 days behind on payments, with the rate jumping 12 percent from December and 44 percent from a year ago.  Subprime delinquencies topped the 4 percent level for the first time since late 1997, reaching 4.03 percent last month, up 10 percent from December and 43 percent from a year earlier.”

From USA Today:  “Car and truck repossessions this year are headed for the highest level in at least a decade, thanks to easy credit and a faltering economy, says an economist for one of the largest wholesale auto auction services.  So many vehicles are being snatched from owners who stop making payments that some repo operators and auto auctioneers say lots are overflowing.  This year's predicted 10% rise in vehicle repos to 1.6 million would be a third higher than 10 years ago, says Thomas Webb, chief economist for a unit of Atlanta-based Manheim, which sells cars to dealers worldwide. The increase comes atop a 10% rise in repos last year.  Webb blames overly "generous" auto loans in the past couple of years as a key factor in driving up defaults that lead to repossessions.”

From The Wall Street Journal:  “…utilities say more customer accounts are falling delinquent.  Sierra Pacific Resources, which owns two utilities that serve Nevada, said it has seen a 50% increase in accounts that are more than 30 days late compared with a year ago. Chief Executive Michael Yackira said it shouldn't be surprising, since "we lead the nation in home foreclosures." The problem is especially pronounced in Las Vegas, where a housing boom has turned into a bust, with more than 20,000 homes on the market now… In New York, Consolidated Edison said it has experienced a 12% increase in delinquencies, with 140,000 households falling behind during the past three months.  "We think part of it has to do with subprime mortgages," said ConEd spokesman Michael Clendenin. He added that people with rising mortgage costs sometimes put off paying utility bills because they know that under the laws of New York and many Eastern and Midwestern states, their power can't be shut off for nonpayment during winter months.”

From Deutsche Bank:  “Even though initial jobless claims fell for the second consecutive week, their underlying trend continues to move higher. Claims declined 9k to 348k for the week ending February 9 but the 4-week moving average still rose 12 to 347k, the highest reading since October 2005. The pattern is the same for continuing claims; they fell 9k to 2761k for the week ending February 2 but the 4-week moving edged up 4k to 2728k. We have cited 350k as a key level on claims that bears watching. To this point, the labor market has held in reasonably well, but the trend in claims over the last several weeks is troubling especially since it dovetails with a sharp decline seen in employee tax withholding receipts; they had been growing consistently between 6-7% until recently. But over last several weeks, tax receipts have seen their growth rate more than halve.”

From JP Morgan:  “…the yen…now sits at its lowest level versus the dollar in more than a month…”

From Deutsche Bank:  “…the ECB's Weber was beating the hawkish drum, suggesting explicitly that ".current interest rate expectations on financial markets do not reflect an appropriate assessment of inflation risks, at least for a stability-orientated central banker". Speaking on inflation, Weber went on to say that "Risks are clearly to the upside and this makes it all the more important to head off second-round effects at the first sign and prevent them from delaying a fall in the current rate of inflation, which is much too high." At the very least his comments suggest there is no consensus at the ECB in favour of a near-term cut in rates. Weber forecast Euroland growth to run at or a little below potential in 2008 (the latter believed to be 2% yoy).”

End-of-Day Market Update

From RBSGC:  “The market same under pressure early, on the narrower-than-expected trade deficit and speculation that Bernanke's testimony would be more balanced -- when the Chairman's comments broke no new ground and continued the dovish trend of Fedspeak, the market remained under pressure further out the curve, but impressively steepened out as the front-end firmed. Equities came under pressure later in the session, with all the major indices down 1% or more, and in a bit of shift from the recent trend Treasuries took little direction from this move.  We are taking no grand lessons from the Treasury markets intra-day decoupling from stocks, and are reminded that with the NASDAQ still down more than 11% YTD, and the DJIA and S&P off 6% and 7.7%, respectively -- the impact of equity ownership on any feelings of wealth is not a major upside factor for the American consumer. Layer on top of that, the impact of falling home prices (and presumably home equity as well).  On the housing front, we heard from the National Association of Realtors -- which reported that the median sale price of a U.S. home declined 5.8% in the fourth-quarter of last year -- bringing the median to 206.2k vs. 219k prior -- an impressive decline to be sure. The industry group also reported that prices were lower in 77 of 150 metropolitan areas -- the most on record (since 1979) -- with 16 of the metro areas reporting declines of 10%+. Concerning, yes, but not necessarily a new story -- it is still noteworthy and supportive of the hard-landing story.  

Volumes were very strong today…”

From Deutsche Bank:  “Equity markets faltered after Fed Chairman Bernanke essentially repeated his recent commentary…”

From UBS:  “Equity markets fell on Thursday, with the S&P500 down 1.3%, and the Nasdaq down 1.7%. The Treasury yield curve steepened, with the 2-year down 2bps at 1.90% and the 10-year up 8bp to 3.82%. The dollar weakened versus the Yen (-0.3%) and euro (-0.4%). Crude oil prices rose 1.8% to $94.92/bbl.”

Three month T-Bill yield rose 2 bp to 2.28%.

Two year T-Note yield fell .5 bp to 1.89%

Ten year T-Note yield rose 9 bp to 3.82%

Dow fell 175 to 12,377

S&P 500 fell 18 to 1349

Dollar index fell 26 to 76.14

Yen at 107.9 per dollar 

Euro at 1.464

Gold rose $1.5 to $908

Oil rose $2.03 to $95.30

*All prices as of 5:07PM

Retail Sales Much Stronger than Expected in January

Retail sales unexpectedly rebound in January, rising +.3% MoM, when a decline of -.3% MoM was expected.  This followed a -.4% MoM decline in December.  Excluding autos, sales were also stronger than expected at +.3% MoM (consensus+.2%).  Consumer spending is very important to the US economy because it represents about two-thirds of total GDP, and slowing job growth was expected to reduce spending.  Today's data is a surprise based on the weak sales data reported by discount and department stores, as well as other retailers.  The International Council of Shopping Centers had indicated that the +.5% YoY growth in January, for stores open at least a year, was the worst since 1970.

 

Auto sales showed a surprising recovery in January to increase +.6% MoM in January after falling -1.1% MoM in December.  Manufacturers data showed sales declining a large -6.7% MoM in January versus December.  Most forecasters are expecting auto sales to decline to a ten year low in 2008.  Another surprise was the 2% MoM rise in service station sales.  Excluding gasoline, retail sales rose +.1% MoM in January.  Clothing sales rose +1.4% MoM and food sales rose +.6% MoM.  Catalog and internet sales increased by +.5% MoM.

 

In contrast, department store sales eased by -1.1% MoM while building material sales fell -1.7% MoM.  Sales also declined for electronics (-1% MoM), appliances. and sporting goods (-1.3% MoM) in January.

 

Consumers now spend more on debt service, housing, medical, food and energy, as a percentage of total spending, than at anytime since records began in 1980.  That percentage has risen to 66.9%.

 

Year-over-year, retail sales are up 3.8%, with gasoline sales up 23% YoY.