US Markets Closing Comments - 12th Feb 2008

Economic Summary:

The equity markets were cheered by news that Warren Buffett's firm, Berkshire
Hathaway, offered to reinsure roughly $800bn of municipal bonds. Also, a plan
announced by Treasury Secretary Paulson to prevent (or at least forestall)
home foreclosures didn't hurt. Treasuries fell on the same news, and the
dollar was mixed.

The January Treasury budget balance was reported at +$17.8bn versus +$38.2bn
in January 2007. A fall off in corporate profits late in 2007 helped to lower
the surplus compared to a year ago. The budget balance for fiscal 2008 to date
(October through January) is -$87.7bn versus -$42.2bn for the same four months
in fiscal 2007. The federal government posted a deficit of $163bn in fiscal
2007. Factoring in the upcoming fiscal stimulus package, we expect the deficit
to balloon to $381bn this fiscal year.

Economic Outlook:

Retail sales for January will be reported at 8:30 on Wednesday (Forecast
+0.2%/+0.5%, Consensus -0.3%/+0.2%). Retail sales may be positive in January
but mainly because of rising prices of such inelastic goods as food and
gasoline. Sales of autos and homerelated goods like furniture and building
materials probably declined in the month. We put overall retail sales up 0.2%
in January and expect a 0.5% rise excluding autos. Our forecast incorporates a
1.0% decline in auto sales and a 2.5% increase in gasoline sales. Excluding gas
sales alone, we put retail sales down 0.1% in January.

December business inventories are due out at 10:00 (Forecast +0.4%, Consensus
+0.5%). Business inventories is composed of factory inventories, wholesale
inventories, and retail inventories. Factory inventories were up 0.8% for
December, and wholesale inventories jumped 1.1%, boosted by higher prices --
particularly higher prices for petroleum goods. This larger-than-expected
wholesale inventories figure suggests that our forecast of +0.4% for December
business inventories may be too low.

Market Summary:

The Fed reported that Monday's $30bn 28-day TAF auction had a stop-out rate of
3.01%, 15bp above the minimum bid-rate of 2.86%. The bid-to-cover was 1.95,
above the 1.55 average of the two previous auctions. There were 66 bidders
this time around, above the 54 average of the two January auctions. One
possible reason for the more aggressive bidding in yesterday's auction was the
fact $30bn in TAF loans were maturing from 28- days ago. Previous TAF auctions
had provided $10-to-$20bn of net new reserves.