Morning Update

Cautious Start

Stocks are mixed following yesterday's huge rally as traders sift through the latest earnings reports and pass the time ahead of the Fed's rate decision later today. Kraft Foods and Procter & Gamble matched profit expectations, Comcast beat, and Corning and Manitowoc lowered guidance. Meanwhile, durable goods orders came in mixed and Treasuries are higher. Overseas, markets rallied in response to the near 900-point gain in the Dow Jones Industrials yesterday.

As of 8:34 a.m. ET, the December S&P 500 Index Globex futures contract is at fair value, the Nasdaq 100 Index is 6 points below fair value, and the DJIA is 18 points above fair value. Crude oil is up $3.83 to $66.56 per barrel, and gold is up $21.10 per ounce at $762.40. The overnight LIBOR rate slipped 10 bp to 1.14%, and the three-month LIBOR rate fell 5 bp to 3.42%.

Mixed durables report

Durable goods orders rose 0.8%, better than an expected drop of 1.1% per Bloomberg, but August was revised downward by a full percentage point. Ex-transportation, orders were down 1.1%, versus the forecast of a 1.5% decline. August was revised down by 1.1 percentage points. Nondefense capital goods orders ex-aircraft, a measure of capital spending, fell 1.4%. Treasuries remain higher.

Fed in focus

The market is now focused on today's FOMC rate decision which will be released at 2:15 p.m. ET today. Most analysts expected rate the Committee to cut the target on the fed funds rate by 50 bp to 1.00%, bringing it back down to a level last seen in June 2004. However, the last time the Fed cut by 25 bp to 1.00% in 2003, the economy had already bottomed and was on the slow road to recovery. This time around, a 1% fed funds rate - assuming the Fed goes through with the projected cut - is happening as growth appears to be contracting and a prolonged and deeper recession is a distinct possibility.

Recognizing that there are structural differences between the Japanese economy and the US, the Fed could run into some of the same issues Japan faced when it reduced short term rates to zero earlier in the decade and lost the ability to add stimulus via rate cuts. This may prompt calls for more unconventional measures to support the economy by increasing its balance sheet and buying assets.

Europe jumps

Stocks in Europe are up over 3% and are following yesterday's late-day rally on Wall Street and a big jump in shares in Japan. Bayer (BAYRY $51) is up sharply after reiterating full-year guidance and reassuring investors, and EADS (EADSY $16), maker of the Airbus, is pushing ahead after news that it is not seeing cancellations in the wake of the credit crisis. The DAX Index in Germany, however, is down amid a drop in of Volkswagen (VLKAY $212) of over 40% in midday trading. Porsche (POAHF $64), which owns options to acquire about another 30% of the company, is taking actions to ease the short squeeze in the shares of Volkswagen that has caused the company to soar in recent days. Porsche is racking up a huge gain in response as it gets set to profit on Volkswagen's advance over the last week.

Shares rally in Tokyo

Buyers flooded the market in Japan following the huge US rally yesterday and chatter that the Bank of Japan is poised to cut interest rates, sending the Nikkei 225 Index up 7.7%. Short covering aided the advance, while the steep drop in the yen yesterday soothed tensions. Shares of Honda (HMC $23) surged 18.4%, Toyota (TM $71) closed up 10.4%, and chip equipment maker Advantest (ATE $13) added 8.5%. Nippon Steel (NISTY $35) rose over 2% after reporting a drop in quarterly profits that was caused by higher raw material costs. The world's number two steelmaker announced production cuts as it reacts to slowing demand around the world, but as expected, the company raised its full-year profit outlook.

After the close, Sony (SNE $22) posted a larger-than-expected drop in 2Q earnings, citing the strong yen and weaker camera sales. The number two consumer electronics maker reiterated its recently released profit forecast. Meanwhile, South Korea and China did not participate in the euphoria seen in major world markets as shares in both markets fell 3%. Hong Kong closed modestly higher.