Morning Update

Rising Jobless Claims Darken Mood

Stocks are adding to early losses after jobless claims unexpectedly surged to a 26-year high, offsetting any positive sentiment from the House's passage of a $14 billion auto rescue plan last night as expected. Still, the bill faces an uncertain future in the Senate. Elsewhere, Costco Wholesale reported better-than-expected profits, but Procter & Gamble warned on sales, Cummins cut guidance, and Eli Lilly provided an update. In other economic news, import prices plummeted and the trade gap unexpectedly widened. Treasuries are pushing ahead, while overseas, Switzerland and South Korea cut interest rates.

As of 8:35 a.m. ET, the December S&P 500 Index Globex futures contract is 11 points below fair value, the Nasdaq 100 Index is 17 points below fair value, and the DJIA is 122 points below fair value. Crude oil is up $1.55 to $45.04 per barrel, and gold is up $20.80 per ounce at $829.60. The overnight LIBOR rate fell 1 bp to 0.12%, and the three-month LIBOR rate dipped 10 bp to 2.00%, the lowest this year in anticipation of further easing by the Fed next week. But the key rate remains well above its normal range, which is typically near the fed funds rate, signaling that credit markets are still not operating at optimal levels despite the massive actions taken by global central banks.

Jobless claims hit 26-year high

Weekly initial jobless claims jumped 58,000 to 573,000, well above the Bloomberg forecast of 525,000 and the worst reading in 26 years. The jump may have been influenced by difficulties in adjusting for seasonal factors, the Labor Department said, but the data may also be suggesting that job losses and the deceleration in economic activity are accelerating. The four-week moving average rose 13,750 to 540,000, and continuing claims surged by 338,000 to 4,429,000.Treasuries are higher.

Import prices in November fell by 6.7%, larger than a forecast decline of 4.9% and October was revised lower. Non-petroleum prices continued to slide, dropping 1.8%. Year-over-year, prices are down 4.4% amid the steep slide in oil. Non-petroleum prices are up 2.4% but the strong dollar, with the exception of versus the yen, and weak worldwide demand are likely to pressure prices in the coming months.

The trade gap widened from $56.6 billion in September to $57.2 billion in October, above the estimate of $53.5 billion. Exports fell 2.2% to $151.7 billion and imports declined 1.3% to $208.9 billion.

Uncertain Europe outlook

Markets across Europe slid at the opening after an influential forecasting group said Germany faces a "maelstrom" and a European Central Bank counsel member suggested the central bank has only limited room to maneuver. But strength in the energy group has helped the rest of the market pare early losses. The IFO Institute said it expects Europe's largest economy to contract by 2.2% in 2009 followed by a 0.2% decline in 2010. The IFO said Germany had benefitted from the strong global upswing due to its reliance on exports, but falling demand around the world is now poised to take a toll on economic activity. ECB Executive Board member Juergen Stark suggested that more aggressive rate reductions may not be forthcoming, echoing similar comments by other board members. He said he expects a gradual recovery in the second half of next year.

The Swiss National Bank became the latest central bank to ease, reducing the target on its benchmark rate by 50 bp to 0.50%. The SNB expects unemployment to rise and the economy to contract by 0.50-1.0% in 2009 but does not anticipate deflation. Elsewhere, Europe's second-largest paper maker, UPM-Kymmene (UPMKY $14), is down sharply after backing away from 4Q guidance reported at the end of October, saying that deliveries are declining at a faster-than-expected pace. But the company does not expect to post a loss.

Tokyo advances, rate cut in South Korea

Tokyo finished up for the fourth-consecutive session, with the Nikkei 225 Index adding 0.7% to close at a one-month high after the US House passed a rescue plan for the US auto industry. Honda Motor (HMC $22) and Toyota Motor (TM $63 posted strong gains in response to the vote, but prospects remain very uncertain in the Senate where Republican opposition is strong. Expectations of new infrastructure projects in the US also continued to underpin the market.

South Korea's Kospi Index closed up 0.8% after the country's central bank slashed its key rate by a greater-than-expected 100 bp to 3% in order to prevent the economy from sliding into a recession. The rate cut is the fourth in two months and brings the main rate to a record low, while the governor of the central bank said the country is on the "verge of an emergency situation" that may require more drastic action.