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Volatility Ruling Markets, Dollar Weakens More

Stocks got a good lift on the opening despite a negative forecast from Federal Express that says more about the economy than the company. That move up, driven in part by options expirations, has faded. The energy markets are "cooking" and oil is rising close to $95 per barrel, ahead of the expiration of the December contract there today.

Treasuries were briefly impacted this morning by comments from Fed officials that traders took to mean there would be no Fed easing in December. But buyers rushed back in and the flight to safety buying spree resumed. The yield on the two-year is moving back toward the low levels of yesterday.

"There's been extreme moves in Treasuries, along the entire yield curve. with short maturities acting the most aggressively. They are pricing in fear in the credit market, not Fed easing," said CNBC's Rick Santeill

Getting Squeezed
The slowing economy and high fuel prices are taking a toll on Federal Express. The company this morning cut its current quarter earnings forecast (and indirectly its stock price) because of rising fuel prices. FedEx CFO Alan Graf said in a statement that fuel costs have risen 8% since the company cut its earnings guidance for the second quarter in September. We also know that Fed Ex has been raising prices, a potential impact on retailers (and consumers) as holiday season gift shipping picks up.

This follows Starbucks comments late yesterday that it faces sluggish traffic at its stores. Starbucks CEO Jim Donald said on a conference call yesterday that "It is apparent that our customers are feeling the impact of the economic slowdown." He said the combination of the slowdown and price increases have impacted the frequency of customer visits. Starbucks lowered guidance on the first quarter and 2008. The company also starts its first national television ad campaign today.

Shrinking Dollar
The U.S. dollar is weaker today. Yesterday, the governor of the United Arab Emirates central Bank said the government is seriously considering ending its currency peg against the dollar. This adds to speculation that the entire Gulf Co-Operation Council will ultimately peg their currency to a basket of currencies. Six countries are in that council, including Kuwait, Qatar, Oman, Saudi Arabia and Bahrain.

Meanwhile, the latest Treasury data on foreign investment in U.S. securities shows that the net capital outflows we saw this summer moderated in September as foreigners bought more long maturity U.S. securities. The $14.7 billion outflow was well below the forecasts of $60 billion and a far cry form the outflow of $150.7 billion the month earlier.

Fed Speak
Fed Governor Randall Kroszner today says the Fed's monetary policy stance should help the economy get through its rough patch. "A sequence of data releases consistent with the rough patch for economic activity that I expect in coming months would not, by themselves, suggest to me that the current stance of monetary policy is in appropriate," he said in an appearance at an Institute of International Finance's conference in New York.

St. Louis Fed President Louis Poole told Dow Jones that he agrees with forecasters who see a weaker economy before growth improves next year. Poole said markets are improving and he's optimistic on credit market problems clearing up.

He said if the fourth quarter is as expected "and given that there's already been 75 basis points of easing, and given that we can't affect the fourth quarter anyway - the fourth quarter is going to be irrelevant to the December decision unless it tells us something about next year we don't already know," he told Dow Jones.

Lending Crunch?
Goldman Sachs' chief U.S. economist crunched the numbers and says credit losses from the sub prime debacle could now total as much as $400 billion. Jan Hatzius says if leveraged investors see losses of, say $200 to $400 billion, they may need to scale back their lending by $2 trillion. He says the analogy that the losses being taken by financial institutions are similar to a days losses in the stock market is totally wrong. The credit losses mainly impacted leveraged investors such as banks, broker-dealers, government sponsored enterprises and hedge funds. Those types of investors don't take a hit to net worth. They cut back on lending.

"At present, we believe at a reasonable estimate would peg expected credit losses son the currently outstanding stock of mortgages in the $300-400 billion range," he wrote.

Stocks on the Move
Dow component Hewlett Packard is getting a lift from Morgan Stanley this morning. The firm upgraded Hewlett to overweight from equal-weight and said the stock has attractive risk rewards in a slowing macro environment.

Advanced Micro Devices confirmed the $622 million investment in the company from the Mubadala Development Co. Cisco pumped up its stock buyback plan with an announcement of $10 billion more.

Fannie Mae stock fell sharply after the company held a conference call with investors to discuss its accounting. On the call, Fannie executives defended a change in the way they disclose losses on home loans. Wire reports say analysts were skeptical of the change and it was reflected in their questions on the call.

Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.