Morning Update

Economic Headwinds Hamper Stocks

A much larger-than-projected rate cut in the UK supported stock futures in early action and bolstered expectations that the European Central Bank might take a more aggressive stance. But an inline rate cut from the ECB disappointed some traders and shares in the US remain solidly lower in choppy trading. Stocks are also coming under pressure from disappointing economic data and uncertain corporate outlooks. Cisco Systems, News Corp., and Toyota warned, AutoNation missed on the bottom line, and Costco and Target offered sluggish same-store sales. Meanwhile, continuing claims jumped and nonfarm productivity increased slightly. Treasuries are slightly higher, and world markets are under heavy pressure.

As of 8:40 a.m. ET, the December S&P 500 Index Globex futures contract is 8 points below fair value, the Nasdaq 100 Index is 24 points below fair value, and the DJIA is 46 points below fair value. Crude oil is down $1.02 to $64.28 per barrel, and gold is up $11.10 per ounce at $753.50. The overnight LIBOR rate rose 1 bp to 0.33%, and the three-month LIBOR rate fell 12 bp to 2.39%.

Productivity rises, multi-decade high on continuing claims

Preliminary nonfarm productivity increased 1.1% in 3Q, versus the Bloomberg forecast of 0.7% but 2Q was revised from 4.3% to 3.6%. Unit labor costs jumped 3.6%, topping the estimate of 3.0%.

Weekly initial jobless claims fell 4,000 to 481,000, above the Bloomberg forecast of 477,000. The four-week moving average was unchanged at 477,500, and continuing claims jumped 122,000 to 3,843,000, the worst reading since 1983. Treasuries are slightly higher.
ECB, BOE slash rates

The Bank of England cut its main rate by 1.5 percentage points to 3.0%, surprising analysts who had forecast a more modest reduction to 4.0%. The BoE said prospects for inflation have "seen a substantial downward shift" and it is seeing a very marked deterioration in the economic outlook. Consumer spending has faltered, the BoE said, and surveys point to a continued "severe contraction" in the near term. Shortly before the bank's announcement, HBOS reported that housing prices in the UK fell at their fastest pace in at least 25 years, signaling that the government and central bank are dealing with difficult economic problems.

The European Central Bank took a more measured approach and cut its benchmark interest rate by 50 bp to 3.75% as expected. Economic activity has come under heavy pressure from sagging demand in the US and the credit crisis that clogged financial markets at the end of 3Q and early 4Q. ECB President Jean-Claude Trichet will provide more details on the central bank's decision shortly before the US market opens. Meanwhile, factory orders in Germany fell 8.0% in September and highlighted the weakness Europe's largest economy is facing. The decline was the worst showing since 1991.

Earnings disappoints, recession fears hit Europe

A disappointing outlook from Cisco Systems and weak profits in Europe are disappointing investors, sending shares sharply lower in afternoon action. Adidas (ADDDY $31) reported 3Q operating profits of 473 million euros, nearly in line with analysts' forecasts, but the maker of tennis shoes and athletic equipment is trading much lower after withdrawing 2009 guidance. The company still sees higher sales and net earnings but the uncertain global economic climate makes it difficult to provide specifics. Axa (AXA $20), Europe's largest insurer by market capitalization, is under heavy pressure after reporting 9-month revenues fell nearly 1% to 69.5 billion euros. But the company said its financial position will enable it to withstand the credit crisis.

Tokyo slumps

Wednesday's sell-off in the US and renewed worries that the world's largest economy may be slipping into a prolonged recession took a heavy toll on Japanese stocks, with the Nikkei 225 Index tumbling 6.5%. Shares of Toyota (TM $80) lost 10.6% in anticipation of a troubling earnings report. After the close, Japan's largest auto maker said net profits plunged 69% to 493.5 billion yen, it reduced its outlook for global auto sales, and slashed its earnings forecast for the full fiscal year ending March 31 from 1.125 trillion yen to 550 billion yen. Toyota said this is the toughest environment the company has ever experienced.

Elpida Memory (ELPDF $45), which has been suffering from falling chip prices, posted a steep loss in 2Q and said it will delay a joint project to make memory chips in China. Japan's only maker of DRAM chips reported a net loss of 31.8 billion yen, worse than an expected loss of 22.4 billion yen.