Morning Update

GDP Drop Less than Feared

Rates cuts in the global markets that followed the Fed's 50 bp reduction yesterday sent stocks in Asia much higher, while shares in the US are extending early gains after the advance report on 3Q GDP fell less than expected, suggesting that the initial impact from the credit crisis may have been less than feared. Meanwhile, credit conditions continue to ease and several key earnings reports are worthy of mention. Exxon Mobil, Visa, International Paper, and Colgate-Palmolive posted better-than-expected profits, but Prudential Financial swung to a loss. In other news, jobless claims slightly exceeded expectations, and Treasuries are lower.

As of 8:35 a.m. ET, the December S&P 500 Index Globex futures contract is 30 points above fair value, the Nasdaq 100 Index is 22 points above fair value, and the DJIA is 199 points above fair value. Crude oil is up $1.49 to $68.99 per barrel, and gold is up $11.70 per ounce at $766.20. The overnight LIBOR rate dropped 41 bp to 0.73%, and the three-month LIBOR rate fell 23 bp to 3.19%.

GDP drop smaller than forecast

Advance 3Q GDP, the broadest measure of economic output, fell 0.3% on an annualized basis, less than a forecast drop of 0.5% per Bloomberg. Personal consumption dropped 3.1%, worse than the estimate of a 2.4% decline, indicating that consumers are pulling back on spending amid the weakness in the economy and the problems in the credit markets. The core PCE Price Index, increased from 2.2% in 2Q to 2.9% in 3Q, higher than the forecast of 2.5%.

Weekly initial jobless claims were unchanged at 479,000, above the Bloomberg forecast of 475,000. The four-week moving average fell 5,000 to 475,500, and continuing claims dipped 12,000 to 3,715,000. Overall, the trend remains to the upside, suggesting economic activity is diminishing and the labor market is weak.

Credit conditions continue to ease and the drop in the LIBOR rate was aided by the FOMC's rate cut yesterday and action by the Fed to ease conditions in the commercial paper markets since Monday. Treasuries are lower.

Rate cut expectations, earnings drive Europe higher

Stocks in Europe are building on recent gains after the Federal Reserve cut rates as expected yesterday and a UK government official said that falling oil prices should bring inflation back down to its target. Traders took his comments as a signal to the Bank of England that it would not oppose a cut in rates as most observers expected the central bank to follow the Fed with a 50 bp rate cut of its own at its meeting next week. In equity news, higher oil prices helped Royal Dutch Shell (RYDBF $25) offset a drop in production and report a 22% rise in 3Q net income to $8.5 billion. Shares of Alcatel-Lucent (ALU $2) are much higher after the telecom equipment maker confirmed 2008 guidance. The company reported an unexpected drop in 3Q adjusted earnings to 40 million euros but said that it is in "good shape" from a cash standpoint.

Volkswagen (VLKAY $132), which has seen wild gyrations in its shares, is trading up after reporting 3Q net earnings of 1.2 billion euros, ahead of the consensus of 961 million euros according to Bloomberg, and reaffirming full-year profit targets. And truck maker MAN (MAGOF $52) posted a 34% jump in net profits due to strong sales but the company cut its outlook because of slower demand and lower orders. Meanwhile, the latest economic data continues to suggest Europe is entering a recession. The eurozone business climate indicator in October fell to a 12-year low and October's eurozone consumer confidence dropped to its lowest reading in almost 15 years. Most observers expect the European Central Bank to respond with a rate cut at its early November meeting.

Asia cheers rate cuts

Buyers stampeded into shares in South Korea, and the Kospi Index posted a 12% advance after Wednesday's rate cut in the US and news that the Federal Reserve had established a currency swap line with the Bank of Korea. The deal should improve liquidity, which helped the South Korean won surge. Aided by rate cuts in China, Taiwan and Hong Kong, Hong Kong's Hang Seng Index barreled ahead and closed up 12.9%, and Tokyo's Nikkei 225 Index posted a 10.0% advance. A retreat in the yen versus the dollar and the euro and talk of a rate cut helped shares, while bargain hunting also aided sentiment. After the close, Nintendo (NTODY $37) reported higher profits from the sales of it popular Wii gaming consoles but warned that the higher yen will keep it from reaching full-year profit goals.