Morning Update

Stocks Spooked by Uncertainty

US equities have pared early losses but remain under pressure following declines in Japan and Europe as traders continue to brace for more sluggish economic data and deal with the fallout from uncertain corporate outlooks. Intel said the credit crisis may affect operations, Electronic Arts issued weak guidance, and commentary from KLA-Tencor disappointed. A possible merger between General Motors and Chrysler is reportedly on hold, while Sun Microsystems posted a loss. Elsewhere, consumer spending disappointed, while the Street is looking to the midmorning release of the Chicago Purchasing Managers' Index. Treasuries are higher in early action.

As of 8:35 a.m. ET, the December S&P 500 Index Globex futures contract is 5 points below fair value, the Nasdaq 100 Index is 15 points below fair value, and the DJIA is 48 points below fair value. Crude oil is down $2.20 to $63.76 per barrel, and gold is down $5.00 per ounce at $733.50. The overnight LIBOR rate dropped 33 bp to 0.41%, and the three-month LIBOR rate fell 17 bp to 3.02%.

Consumers retreat

Personal spending fell 0.3% in September, below the Bloomberg forecast of a 0.2% decline. Personal income increased 0.2%, versus expectations of 0.1%, but August was revised slightly lower. The core PCE Price Index, which is released in conjunction with spending and income, increased 0.2%, just above the estimate of 0.1%. Year-over-year prices held at an uncomfortably high 2.4% as companies continue to deal with the earlier spike in crude and raw material prices. The recent steep declines in commodity prices and falling aggregate demand should eventually reduce pressures on core inflation. Elsewhere, the Employment Cost Index rose 0.7% in 3Q, matching forecasts.

The Chicago Purchasing Managers' Index will be released shortly after the market opens. Manufacturing has been decidedly weak this month and many forward looking measures have come in below expectations. The Chicago PMI can be volatile on a month-to-month basis, and the gauge of manufacturing is expected to drop from 56.7 in September to 48.0 in October. Also, final University of Michigan consumer sentiment for October is forecast to hold at 57.5.

Europe sinks

A decline in Japan, weak earnings reports and poor economic data are leaning on stocks in Europe in afternoon action. Shares of BT Group (BT $24) are down close to 25% after the UK telecom company issued a profit warning. The company said it expects quarterly operating profits at its global services group to be "significantly below expectations" because of slower-than-anticipated efficiency savings and a continued drop in its higher-margin business. L'Oreal (LRLCY $15) cut its sales forecast and lowered its forecast for profits after noting a "clear slowdown" in some Western European markets and in North America. The company also termed the slowdown from sales at US hair salons as "brutal."

Inflation in the eurozone slowed from 3.6% year-over-year (y/y) in September to the preliminary estimate of 3.2% y/y in October, matching forecasts, as oil prices remain in a significant decline. Inflation has fallen for three-straight months from its 4.1% y/y peak, paving the way for an expected rate cut at Thursday's European Central Bank meeting. UK consumer confidence dropped to its lowest reading in 34 years, providing more evidence that the UK economy has slipped into its first recession in over a decade. Like the ECB, the Bank of England is expected to reduce interest rates next week.

BoJ cuts, profits warnings weigh in Japan

Profit-taking following gains of about 24% over the past three days for the Nikkei 225 Index, a raft of profit warnings, and a smaller-than-expected rate cut sent the key index in Japan down 5.0%. The Bank of Japan lowered its main lending rate from 0.50% to 0.30%, slightly above an expected cut to 0.25%. The market probably sees little difference between the 5 basis points but the smaller-than-expected move shows there was some dissension among bank members. The BoJ said falling stock markets around the world and the rising yen encouraged the easier monetary stance.

Nikon (NINOY $171) cut its net profit forecast by about 40% because of the global slowdown and the meteoric rise in the yen. Shares closed off nearly 20%. Mazda (MZDAF $2) and Mitsubishi Motors (MMTOF $1) both lost ground after cutting their profit outlooks due to weak sales and the strong yen. Mizuho Financial (MFG $5), Japan's third-largest bank, said it sees lower profits from a rise in credit problems. And Hitachi (HIT $49) and Pioneer (PNCOF $3) cut their respective outlooks amid the deteriorating global backdrop. Elsewhere, the jobless rate in Japan unexpectedly fell 0.2 percentage points in September to 4.0% but the job-to-applicant ratio fell to its lowest level in four years, suggesting that labor market conditions are tightening.