Morning Update

Falling Jobless Claims, Benign CPI Lift Mood

Easing LIBOR rates underpinned shares, but a drop in jobless claims and easing retail inflation sparked an early advance in stocks as the Street continues to digest recent economic reports. Meanwhile, earnings continue to pour in, with Citigroup, Peabody Energy, United Technologies, Continental Airlines, and Southwest Airlines all topping the Street's profit forecasts, but eBay, which also beat, offered a soft outlook. Treasuries are lower, and world markets are down following yesterday's late-day slide in the US.

Inflation eases slightly, jobless claims dip

The Consumer Price Index was unchanged in September, below the Bloomberg forecast of 0.1%, and the core rate, which excludes food and energy, slowed from 0.2% in August to 0.1%, just shy of the estimate of 0.2%. Year-over-year, the headline rate slowed from 5.4% to 4.9%, and the core rate held at 2.5%.

Weekly initial jobless claims fell 16,000 to 461,000, below the Bloomberg forecast of 470,000. The four-week moving average increased 750 to 483,250, and continuing claims rose 40,000 to 3,711,000.

The Philly Fed's Business Activity Index will be out shortly after the market opens, and it will give us the latest snapshot of manufacturing in the mid-Atlantic region. A decline from 3.8 last month to -10.0 is anticipated.

The flood of money from global central banks brought the overnight LIBOR rate in dollars to its lowest level of the cycle. Nervousness among banks remains high, however, as evidenced by the incremental declines in the three-month rate. Confidence is slowly starting to return but banks are still uncomfortable parting with funds for a longer period.

The disruption in the global credit market has not been limited to commercial banking but has also affected some states and municipalities. Some local governments are having more difficulty issuing debt, which is creating higher coupon rates than we normally might see. An absolute worst-case scenario could force defaults in an extreme case. But historically munis have had very low default rates, with single A-rated securities defaulting at a rate of 0.0084%.

Europe follows Asia lower

Markets across Europe fell sharply at the open following yesterday's late-day slide in New York and steep losses across Asia. Shares have come off the bottom but remain lower on recession fears. Nokia (NOK $15) reported net earnings fell 29% to 0.29 euros per share, one euro-penny below the consensus forecast, as sales fell 5% to 12.2 billion euros. But its outlook helped shares pare losses after the leading cell phone maker in the world said its 3Q market share of 38% will be unchanged or up slightly in 4Q. Nokia added that China has fared "pretty well" so far.

Elsewhere, shares of UBS (UBS $17) are higher the Swiss government took a 9% stake in its largest bank by injecting 6 billion Swiss francs into the company, and the Swiss National Bank said it will buy 60 billion francs in distressed real estate securities. Credit Suisse (CS $38) raised 10 billion francs ($8.7 billion) in capital from private investors, including Qatar Holding.

Economic woes pound Asia

Japan's Nikkei 225 Index registered its biggest decline since the 1987 stock market crash, with the benchmark index falling 1089 points, or 11.4%, to 8,458. Wednesday's late-day slide in the US and concerns that Japan's economy is teetering on the brink of a recession were responsible for the massive sell-off. A Reuters' survey of manufacturing confidence showed that sentiment dipped to a six-year low. Comments from the country's prime minister that the US rescue plan may not be enough to fix what ails financial markets added to the gloomy mood. His comments were based on market weakness over the past couple of days. Separately, the Baltic Dry Index - a measure of shipping rates - fell to a 5 1/2-year low, suggesting that global growth is quickly moderating. Though the index is influenced by economic activity, new ships coming on line (increases in supply), also impact rates.