Overnight Developments

• The European DJ Stoxx 50 this morning is down -1.00% and Sep S&Ps are down -6.10 points (-0.66%). The Asia-Pacific stock markets today closed mixed with Japan (-0.64%), Hong Kong (-1.09%), China (+1.35%), Taiwan (+1.35%), Australia (+0.09%), Singapore (-1.35%), South Korea (-0.05%), India (+0.09%).
• Global stock markets are mostly lower ahead of the all-important Jun US nonfarm payrolls report. Energy producers are lower after crude oil slipped to a 1-week low while automakers are weaker after European carmakers were downgraded to "market weight" from "overweight" by Credit Suisse Group AG which sees "increasing risk to first half of 2010 estimated cash flows as retail volume and price support from scrappage schemes fade." Europe's unemployment rate in May rose a more-than-expected +0.2 to 9.5%, a 10-year high, and increases the odds that the ECB may have to expand its use of unconventional tools to battle the recession. Although the ECB is expected to leave its benchmark 2-week refinancing rate unchanged at a record low 1.00% at the conclusion of today's monetary policy meeting, President Jean-Calude Trichet will unveil further details of the bank's plan to buy 60 billion euros of covered bonds. Producer prices in Europe unexpectedly declined for a 10th straig ht month after May Euro-Zone PPI fell -0.2% m/m, while the -5.8% y/y drop is the largest annual decline in European producer prices since data began in 1981.
• Asia-Pacific auto-makers slumped after US auto sales in Jun failed to climb above a 10 million annualized rate. Honda Motor, Japan's number 2 automaker, fell 2.3% after reporting a -30% y/y slide in US auto sales for Jun and Mazda Motor fell 2.4%. Maruti Suzuki Ltd., maker of half of India's cars, dropped 2% after the government said it will increase fuel prices to narrow revenue losses at state-run refiners. The Chinese stock market was a bright spot today after power companies led the Shanghai Composite Index to a 1-year high after the state-run Xinhua News Agency said power demand in China's manufacturing hub of Guangdong rose in June. The dollar rallied today after China's Vice Foreign Minister told reporters in Beijing that he's "not aware' of China pushing to put the subject of an international currency on the agenda for next week's Group of Eight meeting, easing concern that China plans to diversify its $1.95 trillion of currency reserves.

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• September S&Ps this morning are down -6.10 points ahead of the release of the Jun US nonfarm payrolls. The US stock market yesterday closed higher but below the best levels of the day (Dow +0.68%, S&P 500 +0.44%, Nasdaq Composite +0.58%).
• Bullish factors for stock prices yesterday included (1) the unexpected rise in May US pending home sales which have now risen for four straight months and may indicate an improvement in the slumping US housing market, (2) the larger-than-expected increase in the Jun ISM manufacturing index to a 10-month high, adding to evidence to suggest that the worst of the recession is over, (3) the report from Morningstar that US stock mutual funds rose an average +19% in Q2, the biggest quarterly gain in almost a decade, and (4) comments from San Francisco Fed President Yellen that the prospect that policy makers will leave the benchmark US interest rate near zero for the next several years is "not outside the realm of possibility."
• Bearish factors for stock prices yesterday included (1) the larger-than-expected job losses in the Jun ADP employment change, (2) the statement from the president of Legg Mason Global Asset Allocation LLC that he's "unconvinced" by the stock market's rally since March as US unemployment continues to rise and industrial production continues to slow, and (3) weakness in hotel stocks after Barclays Capital downgraded the sector to "underweight," saying the hotel outlook is "extremely bearish" with more deterioration to come as the recession causes companies and business travelers to spend less on travel and perks.

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• September 10-year T-notes this morning are up +3.5 ticks. Sep T-note prices yesterday traded lower most of the day but recovered the losses into the close and finished unchanged. Bearish factors for T-note prices yesterday included (1) comments from San Franciso Fed President Yellen that caused the yield curve to steepen when she said the prospect that policy makers will leave the funds rate near zero for the next several years is "not outside the realm of possibility," (2) the better-than-expected Jun ISM manufacturing index which rose to a 10-month high (+2.0 to 44.8 versus expectations of +1.8 to 44.6), (3) the unexpected increase in US May pending home sales (+0.1% versus expectations of unchanged), and (4) position-squaring ahead of today's Jun US nonfarm payrolls report that may show the labor market is stabilizing. Bullish factors for T-note prices yesterday included (1) the larger-than-expected decline in the Jun ADP employment change (-473,000 versus expecta tions of -394,000), (2) the larger-than-expected drop in May US construction spending (-0.9% versus expectations of -0.6%), and (3) the Fed's purchase of $2.999 billion in Treasuries maturing betwween Aug 2019 and Feb 2026 as part of its quantitative easing program.
• The dollar index this morning is higher with the dollar/yen -0.01 yen and the euro/dollar -0.75 cents. The dollar index yesterday fell to a 2-1/2 week low and closed lower. Bearish factors for the dollar yesterday included (1) reduced safe-haven demand for dollars on signs the global recession is easing after China's manufacturing sector expanded for a fourth month in Jun and the US Jun ISM manufacturing index jumped more-than-expected to a 10-month high, and (2) comments from San Francisco Fed President Yellen that the prospect that policy makers will leave the benchmark US interest rate near zero for the next several years is "not outside the realm of possibility," which undercut the dollar's interest rate differentials. Bullish factors for the dollar yesterday included (1) the report from the IMF that the dollar's share in global foreign-exchange reserves increased to 65% by the end of Q1, a 2-year high, and (2) the drop in the yen to a 1-week low against the dol lar after the Q2 Japan Tankan large manufacturers index rose less-than-expected, indicating the Japanese economy may be slow to recover from recession.
• August crude oil prices this morning are down -$1.53 a barrel and August gasoline is -4.29 cents a gallon. Aug crude oil prices yesterday finished lower and closed down -$0.58 per barrel. Aug gasoline closed down -4.30 cents a gallon. Bearish factors for crude oil prices yesterday included (1) the larger-than-expected increases in weekly gasoline and distillate inventories (gasoline +2.33 million bbl versus expectations of +2.0 million bbl and distillates +2.90 million bbl to a 22-year high of 155 million bbl versus expectations of +1.5 million bbl), (2) the US Energy Department's report that US diesel supplies rose 2.18 million bbl in the week ended Jun 19 to 111.6 million bbl, a 16-year high, (3) the prediction from the AAA, the largest motoring organization in the US, that gasoline prices have peaked and won't go higher during this year's summer driving season than the $2.693 a gallon peak established last week, (4) continued slack US energy demand after US daily fuel demand in the four weeks ended Jun 26 was down -5.8% from a year ealier, and (5) the prediction from MFC Global Investment Management that "prices are higher than justified by the fundamentals of the market" and that distillate inventories keep climbing because industrial demand has yet to recover. Bullish factors included (1) the slump in the dollar index to a 2-1/2 week low, (2) the larger-than-expected increase in the US Jun ISM manufacturing index to a 10-month high, possibly leading to improved US energy demand, and (3) the larger-than-expected decline in weekly crude oil inventories (-3.66 million bbl versus expectations of -2.0 million bbl).

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