Today's Headlines

Bloomberg:

• Confidence in Euro Region at Two-Year Low as German Orders Slide: Economy. European confidence in the economic outlook fell to the lowest in more than two years and German factory orders plunged as the euro area’s leaders struggled to contain a worsening fiscal crisis and global demand weakened. An index (EUESEMU) of executive and consumer sentiment in the 17- nation euro area fell to 93.3 in December, the European Commission in Brussels said today. That’s in line with the median of 19 economists’ estimates (EUESEMU) in a Bloomberg survey. Factory orders in Germany, the region’s largest economy, dropped 4.8 percent in November, the most in almost three years, according to the Economy Ministry in Berlin. “Things are really starting to slow down,” Jennifer McKeown, senior European economist at Capital Economics in London, said by telephone. “There’s an underlying economic downturn going on at the same time as the peripheral debt crisis continues. Even the strongest parts of the euro-zone economy are beginning to falter. We see the euro zone beginning to break up, perhaps as soon as this year.”
  
• Fitch Downgrades Hungary's Bonds to Junk. Hungarian bonds pared gains after Fitch Ratings became the third company in two months to cut the country’s credit ranking to junk as the government worked to restart talks on an international bailout. Ten-year government bonds (GHGB10YR) yields fell 33 basis points to 10.072 percent, after dropping as low as 9.9 percent earlier today, according to generic prices compiled by Bloomberg. The yield has risen 17 basis points in the past five days, the fifth week of advances.
• Sovereign, Corporate Bond Risk Rises, Credit-Default Swaps Show. The cost of insuring against default on European sovereign and corporate debt rose, according to traders of credit-default swaps. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments jumped eight basis points to 383 at 3 p.m. in London, approaching the record 385 set Nov. 25. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 3.5 basis points to 293.5 and the subordinated index rose two to 530, according to JPMorgan Chase & Co. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 0.5 basis points to 757. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 1.25 basis points to 178.5.
• ECB Takes Record Deposits Stoked by Emergency Lending Operations. The European Central Bank took a record amount of overnight deposits yesterday as the region's financial institutions entrusted funds amassed from emergency lending operations. Euro-area banks parked 455.3 billion euros ($582 billion) with the Frankfurt-based ECB, the most since the euro's introduction in 1999 and up from 443.7 billion euros reported yesterday. Financial institutions borrowed 1.9 billion euros at the central bank's marginal lending facility. The ECB last month loaned 523 banks a record 489 billion euros for three years to keep credit flowing to the 17-nation euro economy during the sovereign debt crisis. It loaned the money at its benchmark rate of 1 percent. The surge in deposits suggests banks are placing excess cash back with the ECB at the overnight rate of 0.25 percent, incurring a loss rather than lending it for more elsewhere.
• Europe Banks Tie Up Assets in Covered Bond Sales: Credit Markets. Covered bond sales are accelerating in Europe as the lack of alternative financing prompts banks facing $1 trillion of maturing debt to pledge their best assets to raise money. Societe Generale SA, France's second-biggest lender, Barclays Plc and other banks have sold 15.2 billion euros ($19.4 billion) of covered bonds this year, about equal to all of December, according to data compiled by Bloomberg. Securities backed by assets are becoming a popular way for European banks to raise financing as the region's deepening sovereign crisis pushes the cost of issuing unsecured debt in euros to about the highest since April 2009. Banks issued a record 368.4 billion euros of covered bonds in 2011, up 5.6 percent from 348.8 billion in 2010.
• Morgan Stanley(MS) Recommends Yuan Puts, CDS as China Economy Hedge. Chinese yuan put options have the highest reward/risk ratio, while China sovereign credit-default swaps also look attractive even as an actual credit even is "extremely remote". The Most attractive equity hedge is puts on the S&P/ASX 200, which is Australia's benchmark stock index.
• Fed's Duke Sees 'Choppy' U.S. Job Market. Federal Reserve Governor Elizabeth Duke said the economy will continue on a gradual path of recovery this year and that the current stance of monetary policy is “appropriate.” “My forecast is for the unemployment rate to gradually and perhaps fitfully move lower and for inflation to settle over coming quarters at or below levels consistent with the Federal Reserve’s dual mandate,” Duke said in the text of her remarks to the Virginia Bankers Association and Virginia Chamber of Commerce in Richmond.
• U.S. Payrolls Beat Forecasts; Unemployment Falls. Payroll growth in the U.S. beat forecasts in December and the unemployment rate dropped to the lowest level in almost three years as the economy gained strength heading into 2012. The 200,000 increase followed a revised 100,000 gain in November that was smaller than first estimated, Labor Department figures showed today in Washington. The jobless rate unexpectedly fell to 8.5 percent, while hours worked and earnings climbed. The so-called underemployment rate -- which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking -- decreased to 15.2 percent from 15.6 percent. The number of people unemployed for 27 weeks or more fell as a percentage of all jobless, to 42.5 percent from 43.1 percent.
• Holiday Surge in U.S. Delivery Hiring May Melt Away in January. Delivery companies such as FedEx Corp. and United Parcel Service Inc. added 42,200 jobs to payrolls in December, about a fifth of the total for all employers last month. History indicates the gain will be followed by a similar-sized loss in January. A surge in Internet holiday shopping over the past three years is prompting such companies to take on more truck drivers and warehouse workers than usual to handle the rush. It takes time for government statistics to be able to smooth over such seasonal trends, leading to a see-saw pattern in hiring. “I wouldn’t be surprised if there will be some payback,” said Ethan Harris, co-head of global economic research at Bank of America Corp. in New York. “There is a shift toward remote shopping and seasonal factors aren’t going to pick that up completely.”
• Oil Falls for Second Day as European Outlook Overshadows Iranian Tension. Oil slipped for a second day as speculation Europe is headed for a recession overshadowed concern that tensions with Iran may lead to a disruption in Middle East shipments. Futures decreased as much as 0.9 percent as the euro dropped to the lowest level versus the dollar since September 2010. Crude oil for February delivery fell 73 cents, or 0.7 percent, to $101.08 a barrel at 12:47 p.m. on the New York Mercantile Exchange. The contract is headed for a 2.3 percent gain this week. Prices advanced 8.2 percent in 2011. Brent oil for February settlement declined 27 cents to $112.47 a barrel on the London-based ICE Futures Europe exchange.
• Goldman(GS), Morgan Stanley(MS) Estimates Reduced. Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), the major U.S. banks most reliant on trading, had their earnings estimates reduced by analysts as a weak fourth quarter dimmed prospects for a capital-markets rebound in the first half of 2012. Sanford C. Bernstein’s Brad Hintz cut his fourth-quarter estimate for Goldman Sachs by 76 percent and almost quadrupled his expected loss for Morgan Stanley as “already anxious clients grew increasingly cautious,” he wrote in a note to investors today. Doug Sipkin, an analyst at Ticonderoga Securities LLC, lowered his 2012 Goldman Sachs estimate by 23 percent on a more pessimistic view of the firm’s fixed-income trading revenue.

Wall Street Journal:

• ECB Steps In as Italian Yields Hit 7%. The European Central Bank again stepped into government bond markets to buy debt issued by the Italian and Spanish governments, whose borrowing costs spiralled higher Friday on concerns over the euro-zone financial system. The yield on 10-year Italian government bonds moved up to 7.12% as investors sought higher risk premiums, returning Italian borrowing costs to levels deemed unsustainable over the longer term. At that level, the Italian government must pay 5.24 percentage points more than German yields at that maturity.
• Investors Sour on Subprime Mortgage-Bond Market. After flickering to life early in 2011, the market for subprime- and other risky residential-mortgage bonds has returned to its comatose state. And many investors believe a revival could be years away. Prices on some bonds, which are backed by mortgages that don't meet the standards needed to get backing from government-controlled companies like Fannie Mae and Freddie Mac, plummeted as much as 30% last year. The ABX, an index that tracks the value of subprime bonds, ended the year at 43.44 cents on the dollar, down from 59.90 cents at year-end 2010.

Business Insider:

• Meanwhile, Spain's Unemployment Rate Jumped to 22.9%. (graph)
• The Best and Worst Stock Pickers On Wall Street.
• This Is How You Can Tell Congress To Undo The NDAA. The NDAA amendments 1021 and 1022 allowing indefinite detention of American citizens is now law, signed by Obama on New Year's Eve. The list of people opposed to the signing is as long as it is diverse, so with a few suggestions from ZeroHedge's Tyler Durden, here are some options before Congress that could help tone down the new law.
• 34 Facts About The National Debt That Should Set America On Fire With Rage.
  

Zero Hedge:

• Obama Proposes .5% Pay Increase For Federal Workers.
• Be Careful What You Wish For, Such As ECB Printing Money.
• Barclays Estimates ECB Losses On Bond Purchases At €30 Billion, Or Nearly Half Of Eurosystem Capital.

LA Times:

• Obama Rule Would Let Undocumented Stay in U.S. During Application. The Obama administration will announce Friday a proposed new regulation that would allow certain undocumented immigrants to remain in America while applying for legal status -- a step aimed at keeping families intact and one that may also shore up the president's support with Latino voters.

Apple Insider:

• Apple(AAPL) to Open New Store-Within-A-Store Outlets Inside Target(TGT) This Year.

USA Today:

• Automakers Rush to Offer Apps in Cars.

Financial Times Deutschland:

• Greece's latest European Union rescue package may need to be increased from the 130 billion euros proposed last year because of worse-than-expected budget numbers.