Morning Update

Mixed Start to the Week

Stocks are slightly lower as easing conditions in the credit markets are offset by ongoing economic jitters. Earnings remain on the radar but the season is slowly starting to wind down, while investors get ready for a key manufacturing report later this morning and the labor report on Friday. On the equity front, Sysco Foods missed on the bottom line, but Goodyear Tire & Rubber beat the Street's profit estimate. Treasuries are mixed. Asia closed higher but gains in Europe have evaporated.

As of 8:35 a.m. ET, the December S&P 500 Index Globex futures contract is 3 points below fair value, the Nasdaq 100 Index is at fair value, and the DJIA is 34 points below fair value. Crude oil is down $1.22 to $66.59 per barrel, and gold is up $11.30 per ounce at $729.50. The overnight LIBOR rate dropped 2 bp to 0.39%, and the three-month LIBOR rate fell 17 bp to 3.86%.

Weak economic data expected as credit markets slowly thaw

Expectations of aggressive rate cuts in Europe this week, the massive injections of liquidity by worldwide central banks, and a backstop of the commercial paper market by the Fed have all worked to ease credit conditions. The three-month LIBOR rate remains at an elevated level but has returned to where it was at the start of the credit crisis in September. Still, confidence has not been fully restored and the FOMC has cut rates by 100 basis points since Lehman Brothers first failed and precipitated the crisis in the financial markets.

The economic calendar has some notable releases this week and kicks off today with the ISM Manufacturing Index about 30 minutes after the opening bell. The closely-followed measure of manufacturing is expected to fall from 43.5 in September to 41.5 in October. A weakening global economy has begun to pressure exports and auto sales have been particularly hard hit by tighter credit standards. Moreover, housing remains in the doldrums. A reading of 41.5 would put the national measure of the goods-producing sector at its lowest level since October 2001. Most readings on manufacturing last month have missed the mark as economists have had a difficult time quantifying the impact from the credit crisis, the drop in stocks, and the resulting impact on consumer sentiment. Also look for October auto sales later today.

Probably the week's most sought out report, nonfarm payrolls and the unemployment rate, will be released on Friday. A 200,000 drop in jobs and a rise in the unemployment rate from 6.1% to 6.3% are forecast. Despite the jolt the economy received from the turmoil in financial markets, jobless claims have been reasonably restrained in recent weeks, but the level does suggest the economy has already entered a recession. A loss of 200,000 positions would also signal the economy is contracting and would be the worst reading in 5 1/2 years. Prior to Friday's payroll report, jobless claims will be out on Thursday and a 2,000 decline to 477,000 is forecast.

Meanwhile, the drop in output registered in last week's look at GDP is expected to take a toll on nonfarm productivity. Data will be released on Thursday and a 0.9% rise is anticipated. Additionally, the ISM non-Manufacturing Index and the ADP employment change will be out on Wednesday and factory orders will be released on Tuesday. Fedspeak will be fairly light this week.

Early gains in Europe fade

Easing money market rates and expectations the European Central Bank and the Bank of England will cut interest rates at their respective meetings on Thursday were providing a fertile ground for European shares. But continued concerns about the economy have stocks off their earlier highs. Commerzbank (CRZBY $11) is trading much higher after announcing it will take 8.2 billion euros from the government to bolster its balance sheet. Germany's second-largest bank won't pay dividends or bonuses this year and next year and also reported a 3Q operating loss of 475 million euros.

India up on rate cut

India's BSE Sensex 30 Index jumped 5.6% and was among the leading performers after the country's central bank cut its key rate by 50 basis points and eased its reserve requirement to encourage growth and minimize damage from the credit crisis. The surprise cut follows a rate reduction a couple of weeks ago. The faltering world economy is beginning to hit South Korea's critical export market, prompting the government to announce an $11 billion fiscal stimulus package to support growth. The government's finance minister fears that growth may slip to its lowest in a decade without the measures. The Kospi Index closed up 1.4%.

Meanwhile, Panasonic (PC $16) is reportedly in talks to acquire Sanyo Electric (SANYF $1), the world's largest maker of rechargeable batteries. The largest maker of plasma TVs in the world said no announcement has been made, and the company has not decided anything in regards to the purchase. People familiar with the matter said a deal could be reached by the weekend. The market in Japan was closed for a holiday. Sanyo did not comment.