Morning Update

Growing Gloom

The grim outlook for the economy is keeping pressure on stocks in early action after this weekend's G20 meeting was long on generalities and short on specifics. Citigroup may be in focus following reports that the banking giant is set to cut jobs, while Lowe's Companies beat the Street's profit estimate but offered a soft outlook. Target exceeded reduced expectations but ended its stock buyback program, and UPS will not issue a forecast for the holiday shopping season. In economic news, the weak reading for the Empire Manufacturing Index was in line with forecasts. Treasuries are slightly higher and world markets are mixed.

As of 8:38 a.m. ET, the December S&P 500 Index Globex futures contract is 19 points below fair value, the Nasdaq 100 Index is 33 points below fair value, and the DJIA is 185 points below fair value. Crude oil is down $0.61 to $56.43 per barrel, and gold is down $7.00 per ounce at $735.50. The overnight LIBOR rate fell 1 bp to 0.40%, and the three-month LIBOR rate was unchanged at 2.24%.

Weak empire report

The Empire Manufacturing Index fell from -24.6 in October to -25.4 in November, near the Bloomberg estimate of -26.0. A reading of zero marks the line between expansion and contraction. The measure of manufacturing for New York state fell to the lowest level since the index began in 2001. Treasuries are slightly higher.

A raft of economic releases will be awaiting traders this week, including data on inflation and housing. Except for welcome relief on the inflation front, not much in the way of good news is expected. And even the upbeat news on inflation is being tied to the steady stream of dismal data and falling demand in the real economy. Following this morning's pre-market release on manufacturing in New York, industrial production and capacity utilization will be out just before today's opening. September was impacted by the strike at Boeing and the hurricanes that rammed into the Gulf Coast and analysts anticipate a small rebound of 0.2% in October.

Tomorrow's Producer Price Index is expected to show a 1.8% drop in prices due to the near collapse in crude oil prices. The wholesale inflation report will be followed by Wednesday's release of the Consumer Price Index, and a 0.8% decline in the headline rate is forecast. The anticipated drop in wholesale inflation would be the largest decrease since the government began releasing the monthly index in the late 1940s. A 0.8% drop in retail inflation would be the biggest monthly drop since 1949. Core prices are also expected to finally begin moderating.

Housing starts, which have been in a steady decline, are expected to drop by 4.5% to an annualized rate of 780,000. Falling starts are helping builders deal with bloated inventories, but the decline, if realized, would bring starts to the worst level since at least 1959. Also look for weekly jobless claims and the Philly Fed's Manufacturing Index on Thursday.

G20 meets, Europe slides

Resilience in Tokyo lent support to European shares in early action, but gloom quickly clouded the view of traders and shares have turned solidly lower amid weakness in the banking sector. Initial attention was focused on the G20 summit meeting in Washington and the communiqu\x(c3)\x(a9) issued by the leaders of the world's largest economies.

The statement covered broad topics but lacked specifics. The countries recognized the severity of the financial and economic crisis and acknowledged the need to do more to stimulate growth but no major packages were forthcoming. The governments also concentrated on financial markets and recognized the need for greater transparency and accountability, sound regulation, the need for integrity in financial markets, and reforming financial institutions. Details, however, were lacking, but a framework for future progress has been established.

Japan enters recession

Japan's economy entered its first recession in seven years after the government reported that GDP contracted for the second consecutive quarter. The world's third-largest economy behind the US and the eurozone shrank at an annualized rate of 0.4% in 3Q, according to preliminary data, missing the consensus forecast of a scant 0.1% rise. GDP in 2Q was revised lower. Japan's economy minister conceded the economy has slipped into a recession, and analysts are worried conditions may worsen due to the strengthening yen and struggles in the US and in Europe. Stocks reacted poorly at the opening but shares came off lows in midmorning action on a modest drop in the yen, which aided exporters. The benchmark Nikkei 225 Index closed up 0.7%.

Elsewhere, China National Petroleum said problems with the economy are causing oil demand to quickly drop and inventories to rise. China's central bank has been cutting rates to prop up domestic demand and said this morning that it will follow a moderately loose monetary policy and will actively work to expand domestic demand. Stocks in China ended the day higher. A focus on the country's economic stimulus plan helped shares.