US Markets Closing Comments - 26th Feb 2008

Economic Summary

Evidence of accelerating inflation, falling home prices, and faltering
confidence could not keep equities down today. While closing off their highs,
equities rallied on a $15bn stock buyback plan from IBM and on optimism the
market has adequately priced in the risk of a recession. Treasuries did react
to the poor economic news with a rally of their own. And the dollar fell in FX
trading, hitting a new record intraday low of 1.4970 against the euro.

The January Producer Price Index surged 1.0% (+7.4% YoY), beating market
expectations of a +0.4% rise. Both food and energy prices bounded past
estimates. Even excluding the volatile food and energy components, the index
rose more than anticipated. The core PPI was up 0.4% (+2.3% YoY). Accelerating
inflation will complicate the Fed's monetary policy going forward but should
not keep the FOMC from cutting rates again as soon as its March 18 policy
meeting. We still look for a 50bp cut to 2.5% on the funds rate target.

The 20-city S&P/Case-Shiller home price index fell 2.2% for December (-9.1%
YoY), and the national index was down 8.9% YoY in Q4 (versus -4.6% in Q3).
This is generally considered a superior index of home prices because it
attempts to adjust for the quality of homes. Recent readings are the lowest in
the history of the index. By now it is painfully clear that consumers cannot
count on rising home equity to supplement their incomes and support their
discretionary spending.

February Consumer Confidence plunged 12.3 points to 75.0, a five-year low. The
expectations index, at 57.9 (versus 69.3 in Jan) was the lowest since January
1991, two recessions ago. The present situation index fell to 100.6 from 114.3
in January; it hadn't been this low since November 2004. These data will
certainly help justify further rate cuts from the Fed, even in light of the
stronger inflation data we've been seeing.

The Richmond Fed manufacturing index was not quite as bad as anticipated, at
-5 in February versus -12 in January. Shipments, which had plunged to an index
level of -17 in January, recovered to -4 in February. Employment fell to -5
from January's -2. These data continued to signal contraction in manufacturing
activity.

The OFHEO House Price Index fell 1.3% in Q4, following a 0.3% decline in Q3.
In YoY terms, prices as measured by OFHEO were -0.3% in Q4 (versus +1.9% in
Q3), the first YoY downturn in this index in the current housing market
contraction.

Economic Outlook

January's new orders for durable goods will be reported at 8:30 on Wednesday
(Forecast -6.0%, Consensus -4.0%). Durable goods orders in December surprised
on the upside with a 5.0% jump, but we should see an offset in January.
Reports from Boeing suggest that orders for all civilian aircraft fell by over
30% in January. We look for a decline of 6.0% in overall January durable goods
orders. Excluding transportation goods, new orders probably fell by 1.5% after
their 2.3% rise in December.