Morning Update

Same Story, Different Day

Economic worries are weighing on stocks in early action and erasing some of yesterday's late gains as a record drop in the Consumer Price Index and falling housing starts and building permits had little impact on traders. Elsewhere, equity news remains light as 3Q profit season winds down. BJ's Wholesale Club posted better-than-expected profits, while BASF will cut production. Treasuries are higher, and world markets are under pressure.

As of 8:38 a.m. ET, the December S&P 500 Index Globex futures contract is 8 points below fair value, the Nasdaq 100 Index is 5 points below fair value, and the DJIA is 69 points below fair value. Crude oil is down $0.41 to $53.98 per barrel, and gold is up $4.10 per ounce at $736.80. The overnight LIBOR rate rose 4 bp to 0.44%, and the three-month LIBOR rate dipped 4 bp to 2.17%.

Retail prices fall at record pace, housing slump continues

Led by an 8.6% drop in energy, the Consumer Price Index fell by 1.0% in October, the largest monthly decline since records began in 1947 and larger than a projected drop of 0.8% according to Bloomberg. The core rate, which excludes food and energy, fell 0.1%, below the forecast of a 0.1% rise. At a three-month compounded annual rate, core inflation is running at only 1.1%, near the bottom end of the Fed's implied target of 1-2%. Year over-year, the headline rate slowed from 4.9% to 3.7% and the core rate decelerated from 2.5% to 2.2%.

Housing starts fell 4.5% to an annualized rate of 791,000 in October, above the forecast of 780,000, while September was revised higher. The more-forward looking building permits slumped by 12.0% to a cyclical low of 708,000 units, underscoring the lack of confidence among new home builders that followed yesterday's record-low reading on the NAHB Housing Market Index.

In related housing news, the Purchase Index provided by the US Mortgage Bankers Association suggests recent signs that housing sales might have been bottoming may have proved to be too optimistic. The index fell 12.6% in the latest week to 248.5, the worst reading since Dec 2000. The downward trend appears to be accelerating, signaling that the credit squeeze, falling consumer confidence and employment, still-high mortgage rates, and the steep drop in the stock market last month are turning into the perfect storm that is keeping potential home buyers on the sidelines.

The Fed's minutes from the October 28-29 meeting will be out at 2 p.m. ET today and will shed more light on its decision to cut the target on the fed funds rate by 50 bp to 1.0%. Yesterday, Fed Chief Ben Bernanke said credit markets have improved but are still under stress. Bond markets will likely look for more clues as to how aggressive the Fed may be at its December meeting as the possibility rises that policymakers may begin to consider more unconventional measures to support the economy. With commodity prices falling at the fastest pace on record and declining economic activity showing signs of accelerating, earlier worries about inflation have abated over the short term. As Schwab's Chief Investment Strategist Liz Ann Sonders notes in her commentary, Arc of a Diver: Inflation Succumbs to Deflation, declining prices may become the next worry.

Deep recession worries drag down Europe

Worries about a long and deep recession are pulling European stocks lower, with economically-sensitive banking, mining, steel, and manufacturing issues getting hit the hardest in afternoon trading. Oil is hovering near $54 per barrel in early morning trading and copper prices are modestly lower as concerns remain high that falling aggregate demand will be an ongoing drag on prices.

Germany's BASF (BASFY $32) is much lower after saying said it will temporarily shutter 80 plants around the world and reduce production at another 100 after saying profits won't reach 2007 levels. The chemical maker said it is taking the actions to avoid overcapacity as a result of a "massive decline in demand." Approximately 20,000 workers will be affected though it is not clear how many layoffs will occur. Financial services firm ING (ING $9) is under heavy pressure after a brokerage downgrade, but unconfirmed press reports that Ireland may soon launch a rescue plan for its banks is sending the group much higher.

The Bank of England's minutes from its meeting earlier in the month showed that policymakers voted 9-0 to cut rates by 150 bp to 3.0%. Officials discussed larger rate cuts because of fears that inflation may quickly fall below its target of 2%, but there were concerns that an even larger reduction might hurt the pound.

Banks pressure Tokyo shares

The Nikkei 225 Index in Japan lost a modest 0.7%. Banking stocks were pressured by a 64% drop in 1H profits by Mitsubishi UFJ Financial Group (MTU $5) to 92 billion yen. Japan's largest bank said it will raise capital to support its balance sheet. Sumitomo Mitsui Financial Group (SMFJY $3), Japan's number three lender, will also raise capital by issuing preferred shares, becoming the latest bank to take the step of going to the markets to find support. Number two Mizuho Financial Group (MFG $5) has already announced measures to shore up its balance sheet as bad loans pile up.

Elsewhere, Nissan's (NSANY $7) CEO warned in an interview with the Wall Street Journal that profits will probably fall to "zero" in the second half of the fiscal year that ends in March as buyers avoid showrooms. He added that 2009 may be the most challenging year the industry and whole economy has faced in 50 years. Toyota Motor Co. (TM $63) will further reduce production in the US and in Canada.