Morning Update

Stimulus Talk Aids Market

US equities are adding to Friday's advance and markets around the world are rallying following talk that President-elect Barack Obama will propose the largest infrastructure spending plans since the 1950s. The ramp up in spending will not immediately alleviate what will likely be the worst recession in at least 25 years as companies continue to announce cutbacks and reduce guidance. 3M has eliminated positions and reduced guidance, Dow Chemical will close plants and cut jobs, but McDonald's offered upbeat same-store sales. Treasuries are down modestly.


As of 8:35 a.m. ET, the December S&P 500 Index Globex futures contract is 27 points above fair value, the Nasdaq 100 Index is 36 points above fair value, and the DJIA is 215 points above fair value. Crude oil is up $3.20 to $44.01 per barrel, and gold is up $27.80 per ounce at $780.00. The overnight LIBOR rate fell 10 bp to 0.19%, and the three-month LIBOR rate is unchanged at 2.18%.

Reports this week

We will see a modest number of economic reports this week but Fedspeak on the economy will be nearly absent ahead of next Tuesday's decision on interest rates. Pending homes sales kicks off reporting on Tuesday and a 3.0% decline in October is expected. Tightening credit conditions following the credit crisis that rocked financial markets in late September and early October and markets that are still not functioning normally, coupled with falling employment and deteriorating consumer confidence, are expected to keep potential buyers on the sidelines.

Attention will turn to jobless claims on Thursday for the latest pulse on the job market and economic activity, while import prices will be released, which is expected to show that pricing pressures from overseas have evaporated. Friday may bring us to the most important reports. Retail sales are forecast to drop 2.0% in November, while ex-autos, a 1.8% decline is expected as consumers boost savings in the midst of the severe downturn in the economy. Fears the US economy could experience its first bout with deflation since the 1930s will put the Producer Price Index in the sights of traders. Additionally, wholesale inventories on Wednesday, the trade balance on Thursday, and business inventories on Friday will also get some play.

Europe rallies

European equities are following Asia much higher following news that the US is set to embark on the biggest economic stimulus package in over a half a century. Any government program to stimulate the economy will not immediately lift the US economy out the deep recession that is forming and actual spending could take months to enter the pipeline, but investors are applauding what they see as decisive actions by policymakers. Commodity and steel stocks, which have been among the worst performers recently, are rallying strongly on the news, while oil prices are up off recent lows amid indications that Saudi Arabia and OPEC may be cutting back production and more cuts may be on the way at its December 17 meeting. A rise in most commodities is also providing support for crude prices.

After cutting rates a larger-than-expected 75 bp on Thursday, a European Central Bank counsel member indicated that a rate cut at the January meeting is not a sure thing and policymakers will "monitor further developments." The ECB has been the most cautious of the central banks in recent years and has focused heavily on inflation. The rate cut last week was the largest in its history and counsel members may try to dampen expectation that a series of rate cuts are in the pipeline.

Asia surges ahead

Talk of massive new spending in the US and Friday's afternoon rally in the US following the loss of over a half million US jobs in November sparked a round of buying across Asia. Shares in Japan closed up over 5%, while South Korea jumped 7.5% and Hong Kong surged over 8.5%. India's stock market benefitted modestly from news that the country plans to stimulate economic activity. The government announced about $4 billion in tax cuts but shares finished off midday highs amid concerns that the plan may not be enough.