U.S. Market Update

Dow -205 S&P -14 NASDAQ -33

Markets opened broadly lower, selling off in the wake of gloomy PPI data and yet another leg higher in commodity prices. Core prices were seen climbing at twice the expected rate in April, while up 3% on a y/y basis, which was the biggest gain since the early 1990s. Retailers HD-4% and SKS-5.5% were off after reporting earnings this morning. HD came in above estimates but still saw profits for the quarter down 66% y/y and SSS -6.5%. The CFO noted that "all departments had negative sales growth," and that HD sees "softness in construction." Saks missed on earnings but saw improving SSS numbers and guidance for the quarter. Shares of Target were holding up initially following results, but have slipped since management noted they expected to see sluggish top lines sales trends to continue into near term. Organic food distributor UNFI has gained 7% on rising profits and positive guidance. Several Chinese telecom names were taking big hits this morning after recent quarterly reports: handset maker CNTF-16% after narrowly missing on earnings, wireless manufacturer GRRF-15% after just beating estimates. SMOD-19.75% was deep in the red after slashing its next-quarter EPS and revenue guidance due to a "difficult pricing environment" and delays at a supplier. A number of airline stocks were falling this morning, led by UAUA-8% and AMR-5.8%. Traders continue to discount surging fuel costs for the group and the general inability of the multitude of consolidation talk to find its way to fruition. One bright spot in morning trading was PEIX+20%, which was surging for a second day in a row on yesterday's very positive earnings report.

With US stock indices at session lows Treasury prices are testing session highs. The gains have been tempered somewhat by the elevated core PPI data, yields are at session lows with noticeable steepening in the benchmark curve. The 10-year yield is back below 3.80% while the two-year nearing 2.30% again. Piggybacking on this morning's PPI data was another surge higher in commodity prices. The energy complex is again the leader with Boone Pickens latest bullish comments sending oil towards the $130 mark. Pickens noted he sees oil likely to reach $150 a barrel this year. June gold is making fresh one-month highs above $920 along with silver. July corn, wheat and soybeans are trading up 1.5-2% in Chicago helping the CRB add 1% to 427.

In currencies the debate had centered in recent sessions on hawkish inflationary concerns among central bankers and the impact of slowing economic momentum on currencies, a point that the German Bundesbank highlighted in its monthly comments on Monday. The EUR/USD price action had reflected the ongoing debate as it probed the 1.54 to 1.56 range during the latter portion of last week. However, the commodity-related instruments have helped the dollar maintain a softer tone throughout the US morning. Comments from T. Boone Pickens pushed oil above the 129 level; Pickens noted in an CNBC interview that oil prices could rise to $150/bbl in 2008. European currencies were also aided by stronger-than-expected price data earlier in the session in both Germany and Switzerland. The weak German ZEW economic sentiment data was brushed aside for the time being as the weak USD-high commodity price theme resurfaced. The hawkish ECB comments on inflation seem to be having an effect on ZEW President Franz, who said that he personally believes the ECB will raise interest rates in near future. EUR/USD tested the 1.5675 level where chatter circulated of "quasi-government" offers building, capping the pair for the US morning. In addition, the Fed's Kohn noted this morning that the current Fed policy stance was appropriate and added that he saw the economy improving in the second half of 2008 into 2009. Kohn also noted that the USD's decline was helping exports but accentuating inflation concerns.

USD weakness was broad-based as the dollar lost over 100 pips against the majors in the session. USD/CHF probed below the 1.04 level, down 130 pips, while GBP/USD tested above its 100 week average of 1.9677 (up 200 pips in the session). USD/JPY was off 70 pips at 103.70. The AUD/USD hit fresh 24-year highs as it tested 0.9617 and USD/CAD dipped to two-month lows of 0.9875. Risk aversion was mixed in currencies as CHF firmed, while JPY was mixed. ITraxx crossover Index widened to 404 bps from 390 levels seen in early Europe. Weakness in equities helped bolster all sectors of the yield curve in the session. Over all, the curve steepened on safe-have buying. June Bunds +34 ticks at 113.59; June Gilts +23 ticks at 107.45.

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