US Markets Closing Comments - 17th Jan 2008

Economic Summary:

Stocks opened higher, but soft economic data, disappointing financial news,
and a somber testimony by Fed Chairman Bernanke brought a quick end to the
fledgling rally. The broad equity indexes slid by some 2.5%. Treasury prices
took another step higher, and the dollar fell on the day.

Housing starts plunged 14.2% to a 16-year-low level of 1.006mn in December.
This weaker-than-expected decline followed a net downward revision of 1.1% to
previous months. The drop was concentrated in multi-family starts, but this
does not minimize the weakness in this report. Building permits fell 8.1% to
the lowest level since March 1993. The decline in home construction should
subtract from GDP growth through 2008.

Initial claims for unemployment benefits fell 21k in the latest week, bringing
the 4-week average to 329k from 340k. The improvement is a surprise since
claims had been trending higher through Q4'07. Now claims have fallen steeply
for three weeks from 357k to 301k. The data are volaltile so not too much
should be made of this decline, but for the moment, the data are not
signalling a significant derterioration in labor market conditions.

Asset-backed commercial paper outstanding was up for third consecutive week
(+$26.3bn in week ended January 16), though it is still down 33% from its peak
in the week ended August 8. Total CP outstanding rose $35.5bn in the latest
week.

The Philadelphia Fed manufacturing index plunged to -20.9 in January from -1.6
in December. The consensus was looking for a decidedly less negative reading
of -1.0. January's was the lowest headline level since the -23.2 posted for
October 2001, during the last recession. The report details also signalled a
manufacturing contraction. They pointed to a sub-50 reading on the January
manufacturing ISM index.

In testimony, Fed Chairman Ben Bernanke reiterated the view he expressed last
week that "in light of recent changes in the outlook...for growth, additional
easing may well be necessary." Since a 50bp rate cut now appears to be the
least that the FOMC will do, the possibility of a steeper rate cut, of say
75bp, is open. In addition, Bernanke endorsed the drive for a fiscal stimulus
package that has gripped Washington in recent weeks. Some sort of package in
the next month or two is very likely to be passed by the Congress.

Weekly reserve data showed that daily average borrowing from the discount
window in the week ended January 16 fell to $1.2bn from $1.5bn the previous
week. Borrowing on January 16 alone was $5.6bn, with banks in the New York and
Richmond Fed districts tapping the window for loans. Fed funds did trade as
tight as 5% last night, rising above the current 4.75% discount rate.

Economic Outlook

The preliminary January Consumer Sentiment index will be released at 10:00 on
Friday (Forecast 74.5, Consensus 74.5). Consumer attitudes have been depressed
by tight credit, falling home prices, volatile equities, and elevated food and
energy prices. To these negative factors we can add a rising unemployment rate.
We look for a preliminary January reading of 74.5.