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PREVIEW: BOE Seen Cutting UK Rate by 50 bps to 1.5%

Bank of England (BOE) policy makers are expected to cut the UK base rate by 50 basis points to 1.5%, below the 2%-level that was held during most of the Great Depression in the 1930s. Need To Know News' Scream Audio will broadcast the BOE rate announcement live at 1200 GMT on Thursday, January 8. The BOE's Monetary Policy Committee (MPC) has been aggressive in cutting rates to 69-year lows --slashing 300 basis points since October 2008 -- and is not expected to be deterred from another trim even if that means taking the UK base rate to 1.5%, the lowest level in the bank's 315-year existence. "We doubt such comparisons will prevent the MPC from cutting," said Citi economist Michael Saunders. "The role of the bank rate was different in the 1930s, and it generally acted as a penal rate level, a ceiling for money market rates, rather than -- as now -- as a benchmark anchor for money market rates." Saunders said that from July 1932 to August 1939 when the rate was steady at 2%, three-month bill rates -- roughly analogous to interbank rates -- averaged just 0.70%. Nor will the MPC be gun-shy due to fears about a sterling selloff. "The drop in sterling is largely a reflection of the weakness of the UK economy and valid expectations for lower policy rates," said Saunders. In fact, several economists are predicting the BOE will decide to cut rates by a full percentage point at its upcoming meeting due the rapid deterioration in the UK economy. The MPC actually contemplated a bigger rate cut than the 100-basis-point move it took at its December meeting, minutes showed. "If the Committee cuts interest rates by another 1% in January, interest rates could be at zero within just two or three months," said Vicky Redwood, UK economist at Capital Economics. Even though many UK banks have been resistant in passing the BOE's rate cuts in full, that's no reason to think the central bank won't pursue an aggressive easing policy, said Redwood. Lower official rates could still pull down longer-term rates, not mention provide a lift to confidence.

PREVIEW: BOE To Cut UK Rate by 50 bps to Record Low of 1.5%

Equities Close

Equities finished lower with the Dow down 1.1% to 8824, the S&P falling 1% to 904 and Nasdaq dipping 0.7% to 1579. Volume was light today and the S&P spent most of the day in the red. In the afternoon, the S&P repeatedly bounced off resistance at yesterdayâ��s close of 913 before selling off into the close. Half of the sectors in the S&P were negative with Utilities down 3% but Consumer Discretionaries gaining 1.4%. Financials fell 1.1% with Citi falling almost 5%. At 8:30am tomorrow, Initial Jobless Claims are expected at 560k after 573k prior. Continuing Claims are forecast at 4.38mln from 4.429mln previous. At 10am, November LEI is predicted to fall 0.2% after a 0.8% decline previous. Also at 10am, the December Philly FED Index is expected at -39 from -39.3 in November. At 10:35am, Natural Gas stocks are expecting a draw of 115bcf after a fall of 67bcf prior. At 1:30, Dallas FED President Fisher will speak on the economy.

YouGov/Citi Survey: UK Inflation Expectations Fall to Record Low of 0.8% in Dec.

The December YouGov/Citi survey showed that the public's inflation expectations fell to 0.8%, a record low, from 0.9% in November. The headline number has plunged from 2.9% in October and 4.4% in September. "The weak trend in inflation expectations allows the MPC (Monetary Policy Committee) to go on cutting in response to recession and credit crunch," Michael Saunders, economist at Citi, said. "We expect a 0.5% cut from the BOE (Bank of England) at the January meeting, and -- depending partly on sterling -- perhaps further easing thereafter."

SEC Finalizes $30bln ARS Settlement With Citigroup, USB --Press Release

Citi is on the hook for $7bln, UBS for almost $23bln. This is the largest settlement in SEC history.

Looking Ahead: NY's Morning Headlines

Indexes Soar On Citigroup Rescue Plan, But Volume Falls; Leaders Unimpressive IBD http://license.icopyright.net/user/viewFreeUse.act?fuid=MjA1MTY5Nw== Stocks Surge Again On Rescue Of Citi, Stimulus Promises IBD http://license.icopyright.net/user/viewFreeUse.act?fuid=MjA1MTcwNg== Citi Faces Pressure to Slim Down WSJ http://online.wsj.com/article/SB122753629931853007.html?mod=todays_us_page_one US House Prices Suffer Record Fall FT http://www.ft.com/cms/s/0/5ff59ac6-ba41-11dd-92c9-0000779fd18c.html

European Pertinent Press

UK Alone Cuts Vat as Part of GBP 20bln Stimulus Plan WSJE1 http://online.wsj.com/article/SB122754350445553305.html Germany's Merkel and France's Sarkozy Differ on Stimulus Approach IHT11 http://www.iht.com/articles/2008/11/24/business/france.php Citi Saved But Troubles Remain FT16 http://www.ft.com/cms/s/b3ed7d78-ba92-11dd-aecd-0000779fd18c.html FT1 http://www.ft.com/cms/s/0/a4023fb2-ba5a-11dd-aecd-0000779fd18c.html Deutsche Bank's Ackermann Refocusing on Commodities, Deposits WSJE3 http://online.wsj.com/article/SB122754500796753383.html Ruble Weakness Seen as Probable WSJE23 http://online.wsj.com/article/SB122753526504552987.html Most Hedge Funds Trading Below Net Asset Value WSJE27 http://online.wsj.com/article/SB122756619729054383.html Obama Adds Tim Geithner as Treasury Secretary to Renowned Economic Team FT2 http://www.ft.com/cms/s/1a5435e6-b9c8-11dd-99dc-0000779fd18c.html FT2 http://www.ft.com/cms/s/d1988714-ba92-11dd-aecd-0000779fd18c.html Warren Buffett and Berkshire Shares Not Immune to Financial Crisis NYT http://www.nytimes.com/2008/11/25/business/25buffett.html?scp=2&sq=buffett&st=cse

Fixed Income Update

Bonds are lower this morning as equities rally offÂ the Citi bailout. The 30yr is up 13, the 10yr is up 14, and the 5yr is up 12. Yields are flat to slightly higher on the short end.

US Opening Comments- FX

The Citi news has taken a toll on USD, with the USD Index dropping 1.3% to just above the 87 handle. EUR/USD is trading just off overnight highs near the 1.27 handle and Cable is trading in the middle portion of its overnight range about 25 pips below the 1.50 handle. USD/JPY peaked out just North of the 96 handle overnight and is currently trading at 95.57.

US Opening Comments- Fixed Income

European and US bond markets are facing selling pressure off the news of the $300bln loan guarantee to Citi plus Barclays shareholder approval to raise over $10.5bln from funds in the Persian Gulf. Bonds should continue to face selling pressure going into the Wall Street open , though losses may be limited given the fragility of the current market environment. Todayâ��s light US economic calendar could also keep focus away from fixed income, though the October Existing Home Sales at 10:00e could provide a subtle reminder of the state of the US economy. The 10yr is off 16 tics to just below the 120 handle after bouncing off Thursdayâ��s high at 119.70. Short end yields are for all intensive purposes are higher, though the 4week yield at 0.03% and 3month yield at 0.01% continue to see very limited interest. Fed Funds are trading at 0.75%, reverse overnight repos are anticipated. Todayâ��s auction calendar includes $56bln in 3 and 6month bills and $36bln in 2year notes.