Thursday's Brew - Jan 18

Beginning tomorrow, Today's Morning Coffee will return to being a pre-market report, where it adds the most value.

OVERSEAS MARKETS

The Bank of Japan opted today to keep interest rates unchanged at 0.25%. As a result, the yen is under pressure against the world's currencies, and the NIKKEI 225 rose 0.63%. Rumors abound that the bank was pressured from taking action by the government, and Bank members defended the decision on the basis of economic mixed data points. They pointed toward pending data on GDP and consumer spending, which is expected in the near term, to provide more basis for conviction. The rumors are exacerbated by the fact that the nine government appointed seats at the bank's decision making panel will be reviewed in April.

Asian stocks generally rose today, on fuel provided by yesterday's rather benign PPI data and positive industrial production and capacity usage data out of the U.S. With the critical American export market seemingly healthy, the Hang Seng climbed 1.06%, the SHSE-SZSE 300 Index rose 0.35%, the KRX 100 increased 0.31% and India's BSE SENSEX 30 edged up 0.61%.

The same was true for Europe, at least until the U.S. markets began dipping around 10:00 a.m. EST. Positive economic data led American and European traders to think about a decreasing likelihood for a U.S. interest rate cut in the near term. The DJ STOXX 50 fell 0.23% on the day, while the FTSE 100 held its ground, inching higher 0.09%. The only mover of note was Poland's WSE WIG Index, climbing 2.85% today, on news that Polish banks are expected to show strong profits on estimated 5.7% economic growth in the country.

ECONOMIC DATA & ANALYSIS

December CPI data was released at 8:30 a.m. today, and consumer prices rose 0.5%, compared to a Bloomberg consensus for a 0.4% increase. The result was greatly impacted by higher energy prices in December. More importantly, Core CPI, excluding food and energy, increased 0.2%, in line with Bloomberg's consensus and was comparable to no change in November. The trailing 12-month increase in core prices through December was 2.6%, compared to 2.6% in November and 2.9% in September.

So, with no surprise from the Core CPI number, the impact of this data should be relatively null, depending on if you are an optimist or a pessimist, or a bull or a bear. It seems to us, the Fed will remain in a position of inaction, and may even be more inclined to hike rates than to reduce them based on our interpretation of the existence of a positive data bias. However, we find food prices threatening to the inflationary outlook. Food prices, which account for one-fifth of CPI, were unchanged in December, but yesterday's PPI data showed an increase on the wholesale level. Also, the price of corn, wheat and soybeans have been on the rise, due to imbalance on the supply/demand scale. Citrus prices are rising as well, after the freeze in California, and that will only hurt the situation.

December housing starts rose 4.5%, increasing to an annual rate of 1.642 million, compared to a consensus expectation for 1.565 million. Building permits increased 5.5%, and represent a solid forward housing indicator. Some of the strength in housing can be attributed to the unseasonably warm weather this winter. We predicted earlier this year, and reiterate now our expectation that an early uptick should be followed by a second leg lower in the housing market. This is increasingly a contrarian view, when compared to most of the expert opinions we have seen expressed recently.

Weekly jobless claims for the week ended January 13th decreased from last week's low level, to 290,000. The measure was well below consensus expectations for a 315,000 result, and provided evidence of a healthy job market.

Fed Chairman Ben Bernanke testified before the Senate Budget Committee on the state of the economy today. The Fed Chairman told them what they wanted to hear, in our view, which was that the federal budget deficit would eventually lead to financial crisis. When President Bush took office, he inherited a surplus, and thus perhaps Ben was positioning himself for the new Congress, this being the first time he spoke before the Democratically controlled group.

The January Philly Fed Survey was reported at noon, providing a reading of the regions' manufacturing activity. A decrease in the previous reading surprised the market. Like last time around, the consensus tallied by Bloomberg expected positive data this month, amounting to a measure of 3.1. The actual Philly Fed Index measured at 8.3, well ahead of expectations, indicating expansion had resumed in the region after last month's strange contraction.

COMMODITY MARKETS
Crude is down 3.6%, testing the $50 floor, after crude stocks unexpectedly showed a build of 6.8 million barrels, versus expectations for a build of just 100,000. Heating oil is down 2.6% and gasoline fell 2.15% through the afternoon, while natural gas edged fractionally higher.

Nickel leads commodities on the upside, rising over 5%, while copper slides for the fifth day in a row, down 3%. The International Copper Study Group reported today that supplies of copper exceeded demand by 51,000 metric tons in October. Corn continues to benefit from a recent report showing harvest supplies would fall short of estimates, and with continued strong demand for ethanol perhaps creating a shortage of feed for livestock farmers.

STOCK SPECIFIC NEWS
Merrill Lynch posted net revenue growth of 27%, driven by strength in its Global Markets & Investment Banking segment. Thursday's earnings reports include Unitedhealth Group, Bank of New York, BB&T Corp., Capital One Financial, Fifth Third Bancorp, Harley-Davidson, International Game Technology and Sovereign Bancorp. In the future, we intend to provide in-depth stock reports for subscribers. Look for "Today's Morning Coffee" before the market opens tomorrow, where it belongs.

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