Morning Update

A Cold December Wind

US equities are slipping as traders take profits following last week's rally as continued worries about the economy in front of a key manufacturing report out later this morning and the nonfarm payroll data at the end of the week have the Street on edge. Meanwhile, traders continue to look at a relatively decent start to the holiday shopping season. Separately, crude prices are under pressure after OPEC decided over the weekend to delay a cut in production until its mid-December meeting. Treasuries are higher and most markets around the world are weaker.

As of 8:30 a.m. ET, the December S&P 500 Index Globex futures contract is 23 points below fair value, the Nasdaq 100 Index is 26 points below fair value, and the DJIA is 199 points below fair value. Crude oil is down $2.88 to $51.55 per barrel, and gold is down $31.00 per ounce at $788.00. The overnight LIBOR rate fell 7 bp to 1.09%, and the three-month LIBOR rate was unchanged at 2.22%.

Black Friday driven by bargains

Early signs suggest that the 2008 Christmas shopping season began on a fairly upbeat note, especially given that the season commences against the backdrop of a rapidly shrinking workforce, woefully low consumer confidence, and the worst financial crisis since the Great Depression. The National Retail Federation said shoppers spent an average of 7.2% more per person over the four-day weekend but it kept its forecast of holiday sales growth at just 2.2%.

However, the decent start was marked by massive discounts designed to get consumers in a buying mood and some surveys suggested that many shoppers focused mainly on deeply-discounted items. And retailers will probably need to keep offering discounts since the NRF said more shoppers had completed a greater amount of their holiday shopping versus 2007. Meanwhile, a separate survey suggested a more sobering start to the holiday shopping season as ShopperTrak RCT said sales increased 3% on Black Friday.

ISM, payrolls lead week of key reports

This week's economic calendar is likely to confirm that the US economy is facing its greatest contraction since the steep recession of 1982. The ISM Manufacturing Index, a closely-followed report that looks at factory activity, will be released at 10 a.m. ET and a drop from 38.9 in October to 37.0 in November is anticipated. A reading below 50 signals that the sector is contracting, while a level of 37.0 would be the lowest in 26 years, suggesting that the many problems the economy is facing are taking huge toll on the nation's factories. Construction spending is also slated for a midmorning release.

Probably the most anticipated report of the week will hit on Friday when the unemployment rate and nonfarm payrolls are released. Payrolls are forecast to drop by 320,000 in November, which would be the second largest decline in since 1982 and the most concrete sign that the economy is firmly entrenched in a recession. Consumers have nearly gone into hibernation amid concerns about job losses, and businesses have announced plans to cut back on capital spending, which has further shaken an already weak economy. The unemployment rate is expected to rise from 6.5% to 6.8%.

The Fed's Beige Book - a summary of economic conditions in each of the Fed's districts - and the ISM Non-Manufacturing Index are also expected to provide more gloomy news on Wednesday. Also, look for nonfarm productivity at midweek followed by jobless claims and factory orders on Thursday.

Europe sags

Stocks in Europe are starting the week on a sour note and are down nearly 3% in afternoon trading. Commodity, chemical, and mining companies are taking the biggest hits, while oil shares and oil prices are coming under pressure after OPEC decided to delay a cut in production until its regularly scheduled meeting in the middle of the month. Equities are also feeling the heat from a larger-than-expected drop in British factory output. The UK Purchasing Managers Index fell from 40.7 in October to 34.4 in November, well short of the forecast of 39.7. A reading below 50 signals that manufacturing is contracting. The contraction brought on by the credit crisis and falling home prices is spreading to the rest of the economy at a much swifter-than-expected pace. Declining output will give the Bank of England more ammunition to slash rates at the upcoming meeting on Thursday as a 100 bp cut to 2.0% is expected. The pound fell against the dollar following the release.

China gains but data is weak

Much of Asia lost ground but China's Shanghai Composite Index managed a 1.3% advance despite very poor economic data. Two gauges of manufacturing activity continued to signal that factory production in China is declining, suggesting that the slump in demand in the developed economies is hurting growth activity. The People's Bank of China, which slashed rates by more than a full percentage point last week, said it has lifted lending controls on banks. Although the massive rate cut shows that the central bank is heavily committed to supporting the economy, it may also be a signal that the Chinese economy is facing much weaker conditions than many had anticipated.

The yuan is also coming under pressure as the government may now be trying to use a weaker currency to support exports. However, it is uncertain whether the central bank will continue to allow the Chinese currency to weaken further. A weaker yuan could exacerbate tensions among US policymakers at a time when economic activity in the US is declining.

Separately, Taiwan Semiconductor Manufacturing (TSM $7), the world's largest contract maker of semiconductors, cut its outlook for 4Q revenues and profit margin because of a drop in shipments. The announcement follows Samsung Electronics' (SSNLF $626) decision on Friday to cutback on production and reduced guidance late last week from STMicroelectronics (STM $7).