US Markets Closing Comments - 13th Feb 2008

Economic Summary:

For the first time in recent memory, the financial markets reacted to
stronger-than expected economic data. An unexpected 0.3% rise in retail sales
kicked off an equity rally. Also, a forecast by Applied Materials of stronger
orders helped boost tech stocks. Treasuries were mixed, with the long end
selling off on the retail sales data and the equity rally. The dollar edged
higher versus the euro and made large gains against the yen

Retail sales rose 0.3% in January, a stronger result than the 0.3% decline
expected by the consensus. Rising prices of such inelastic goods as food and
gasoline led to higher nominal sales of those goods, +0.6% and +2.0%,
respectively. Excluding gasoline sales, retail sales would have been up just
+0.1%. Sales of motor vehicles (+0.6%) were stronger than anticipated, given
the weak unit sales in January. Despite the strongerthan- consensus headline
gain, retail sales in real terms are still in a slowing trend and are
consistent with our call for a significant slowdown in real personal
consumption in Q1.

Business inventories rose 0.6% in December, thanks mainly to a
petroleum-priceinduced 1.1% jump in wholesale inventories. Retail inventories
were reported down 0.1% in December, following a 0.3% decline in November.

Factoring in the data recently reported for Q4, including today's retail sales
and inventory figures, it looks like the "preliminary" Q4 GDP report (due out
on Feb 28) will show a +0.2% growth rate, downwardly revised from the
"advance" report of +0.6%. We caution, however, that a big missing piece of
this puzzle, December international trade, is due out tomorrow. Trade has the
potential of altering the picture significantly.

Economic Outlook:

Initial unemployment claims for the week ended February 9 will be released on
Thursday at 8:30 (Consensus 347k). Claims in the previous week fell by a
less-than expected 22k to 356k. The latest two-week average of 367k has not
been that high since the spike in claims that occurred in 2005 in the
aftermath Hurricane Katrina. These data tentatively suggest that the labor
market may have taken a turn for the worse.

The December Trade Balance will also be reported at 8:30 (Forecast -$62.2bn,
Consensus -$61.5bn). The cost of imported oil dropped slightly in December.
This should limit the increase in the nominal cost of imports. Exports of
agricultural products are benefiting from price increases. Meanwhile,
non-agricultural exports are getting a boost from a lower dollar and have been
increasing at close to a 10% rate for most of 2007. For December, we expect an
improvement in the trade balance of about $1bn, bringing the deficit down to
$62.2bn.

Federal Reserve Chairman Bernanke will be testifying on the economy before the
Senate Banking Committee at 10:00 on Thursday. He will likely make the case
that economic activity has slowed significantly, due in part to the housing
market contraction and to tighter credit conditions in general. But he is
likely to hold out hope that the Fed's 225bp in easing since September, and
the tax rebates starting in May, will serve to keep the economy out of
recession.