Barchart.com U.S. Morning Call for Tuesday, May 29, 2007 U.S. Preview
- Overseas stock markets this morning are trading mostly higher. The European DJ Stoxx 50 index is up +0.21%. The Nikkei index today closed +0.48%, the Shanghai-Shenzhen 300 is up +2.35, and Australia is up +1.06%, although the Hang Seng fell mildly by -0.29%.
- This week's key economic news includes today's May consumer confidence report (expected +1.0 point), tomorrow's May 9 FOMC meeting minutes, and Thursday's Q1 GDP revision (expected +0.8% vs last +1.3%), and Thursday's May purchasing managers index (expected +1.1 to 54.0). Friday is a very busy day and brings the May unemployment report (payrolls expected +138,000 and unemployment rate expected unch at 4.5%), April core PCE deflator (expected +2.0% vs +2.1% in March), May ISM manufacturing index (expected -0.7 to 54.0), the final-May US consumer confidence index from the University of Michigan (expected -0.7 to 88.0), and the May vehicle sales report (expected unch from April at 16.4 mln).
- Fed policy - The market in the past several weeks has sharply curbed expectations for Fed easing. The market now believes the Fed will delay a 25 bp easing to 5.00% until May 2008, versus expectations as of May 1 that the Fed would have eased by 50 bp to 4.75% by May 2008. The main factors that have curbed expectations for Fed easing include continued hawkish statements by Fed officials and some stronger than expected US economic data.
- Consumer confidence - Today's May consumer confidence index from the Conference Board is expected to show a small increase of +1.0 to 105.0, stabilizing after the -4.2 point decline seen in April to 104.0. The consumer confidence index was at a 6-year high of 108.2 as recently as March, but then tumbled in April mainly because of rising gasoline prices.
2-year T-note auction - The Treasury today will auction $18 bln in 2-year T-Notes. The size of today's auction is unchanged from the last three auctions. Today's 2-year T-note issue was quoted at 4.85% in when-issued trading late last Friday. The 12-auction averages for the 2-year are as follows: 2.68 bid cover, $902 million in non-competitive bids, 2.10 bp tail to the median yield, 5.73 bp tail to the low yield, and 31% taken at the high yield. Indirect bidders (mainly foreign central banks) have taken an average of 35.5% of the last twelve 2-yeara auctions, which is moderately below the average of 39.0% across all recent Treasury coupon auctions.
Overnight U.S. Stock News - June S&Ps this morning are trading +2.70 points on fresh M&A news and higher stocks overseas. The US stock market last Friday closed moderately higher (Dow +0.49%, S&P 500 +0.55%, Nasdaq Composite +0.76%). The US stock market last Friday continued to see support from M&A activity after Coca-Cola paid $4.1 billion for Vitaminwater and UBS said Archstone-Smith, the second-largest US apartment owner, may be a takeover target.
- CDW may rally today after the Wall Street Journal reported that CDW will be purchased by a private equity firm, with Madison Dearborn Partners being mentioned as the leading candidate.
- AMD is up +1% in European trading this morning after news that Toshiba will use AMD microprocessors in about 20% of its laptops. That marks the end of Toshiba's exclusive use of Intel microprocessors.
- MedImmune is down -0.5% in European trading this morning after news that US regulators delayed a decision on the company's application of the FluMist nasal-spray vaccine in children because of compliance issues at a UK production plant.
- Avaya (AV) rallied 2.3% in after-hours trading last Friday after an analyst meeting for May 31 was canceled, sparking speculation that the company is entertaining a buyout offer.
- Coca-Cola is in talks to buy Highland Spring Ltd bottled-water company for nearly $1 billion, according to the UK-based Sunday Telegraph. Coca-Cola is up +0.4% in European trading this morning.
- WellPoint (WLP) may show some weakness today after a report in the LA Times said that California regulators are investigating WellPoint's Blue Cross of California for a $950 million dividend that California Blue Cross paid to its parent company.
- URS Corp has agreed to acquire competitor Washington Group Intl for $2.6 billion in order to expand its nuclear power management and construction business.
Today's U.S. Market Focus - June 10-year T-notes this morning are trading -2.5 ticks. Bearish factors include some nervousness ahead of today's April US consumer confidence report, which is expected to show a +1.0 point increase to 105.0, and some supply overhang ahead of today's 2-year T-note auction and tomorrow's 5-year T-note auction. June T-notes last Friday stabilized from the previous session's 4-month low and closed just slightly lower by -1 tick. The main bullish factor last Friday was the April existing home sales report which showed a decline of -2.6%, which was weaker than the expected report of -0.1%. T-note prices have plunged by 2 full points in the past 2 weeks mainly because of pessimism about Fed policy and some stronger than expected US economic data.
- The dollar this morning is trading mildly lower (dollar/yen -0.25 yen; euro/dollar +0.35 cents). The yen showed some strength today after the Japanese unemployment rate fell to a 9-year low, providing some confidence about labor market strength. The dollar index last Friday ccontinued to consolidate mildly below last week's 1-1/2 month high. The dollar has been supported in the past several weeks by lower expectations for Fed easing and the sharp increase in T-note yields which is attracting some capital into the US.
- July crude oil prices this morning are trading -62 cents and July gasoline is trading -2.05 cents. The main bearish factors is yesterday's news that a 2-day Nigerian oil worker strike ended. July crude oil prices last Friday closed +98 cents at $65.20 and returned to the middle of the trading range seen in the past 2 months. July gasoline last Friday closed +4.36 cents at 231.05 cents/gallon, which is only slightly below the contract high of 234.00 cents seen in mid-May. The market remains worried about refinery problems and the tight level of gasoline inventories now that the official summer driving season has begun.
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