Morning Update

Recession Worries Take a Toll

Economic fears are being exacerbated and stocks are extending losses after retail sales fell more than expected and the Empire Manufacturing Index signaled that conditions worsened, suggesting that the credit crisis is quickly beginning to affect the economy in a negative way. The disappointing data and worries about the economy are overshadowing better-than-expected earnings from Wells Fargo, JPMorgan Chase, Coca-Cola and Genentech. Intel matched and CSX offered soft guidance. In other news, Producer Prices were mixed, Treasuries are higher, and markets overseas are slipping.

Lousy economic data

Advance retail sales fell 1.2% in September, worse than the Bloomberg forecast of a 0.7% decline. Ex-autos, sales were off 0.6%, worse than expectations of a 0.2% decline. Ex-gasoline station sales and autos, sales were down a disappointing 0.7%.

The Producer Price Index declined 0.4% in September, matching the estimate, but the core rate, which excludes food and energy, increased 0.4%, above the forecast of a 0.2% rise. Year-over-year, the headline rate eased from 9.6% to 8.6% but the core rate increased from 3.6% to 4.0%.

Empire Manufacturing, which is the first look at the goods producing sector this month, fell from -7.4 in September to -24.6 in October, way below the estimate of -10.0. A reading below zero indicates contraction.

Business inventories will be out later this morning, but traders will be more focused on the Beige Book from the Fed, which summarizes activity in each of the Fed's districts. The report could shed new light on the credit crisis and its economic impact.


Europe resumes slide

European markets that had basked in the glow of the decisive moves to jumpstart the credit markets have faded, and recession fears and still-tight credit markets are pressuring sentiment in afternoon action. LIBOR rates are heading in the right direction, but the modest easing has been painfully slow given the hundreds of billions of dollars pledged to backstop lending and bolster bank capital. Despite government offers of assistance, France's largest banks denied they need to raise capital. Most German banks also brushed aside suggestions that government offers of funds are necessary.

Shares in Europe are being led lower by a 10% drop in mining stocks and steep declines in cyclical issues. Rio Tinto (RTP $194) announced small cutbacks in aluminum production due to weak prices, and it plans to slow some projects. The mining giant also said demand in China is slowing, while renewed weakness in commodity prices is adding to declines in the sector. ASML Holding(ASML $15) is under pressure after noting the downturn in the semiconductor market and the uncertain outlook is slowing orders. The world's largest maker of lithography systems said customers are in a "wait and see" mode due to the credit crisis, and access to credit is difficult for its customers. ASML reported a 56% drop in 3Q net earnings to 73 million euros, which came in slightly above expectations.

Asia falters

The Nikkei 225 Index in Tokyo was the lone winner in Asia, with defensive issues and short covering supporting the benchmark index. But the broader market languished amid continued worries that the economy is slipping or has slipped into a recession, and automakers remained under pressure, with Honda Motor (HMC $24) losing more than 5%.