Morning Update

Short Week Begins Positively

Stocks are starting the week just above the flatline as trading is expected to be thin heading into the Christmas holiday on Thursday. Toyota is warning that it will see its first-ever loss, while sagging demand prompted China to announce another rate cut. Walgreen Co. missed on the bottom line, Manpower withdrew guidance, and Sysco Corp said conditions are becoming more difficult. Treasuries are slightly lower and world markets are mixed.

As of 8:30 a.m. ET, the March S&P 500 Index Globex futures contract is 4 points above fair value, the Nasdaq 100 Index is 1 point below fair value, and the DJIA is 44 points above fair value. Crude oil is up $0.34 to $42.70 per barrel, and gold is up $10.00 per ounce at $847.40. The overnight LIBOR rate was up 1 bp to 0.11%, and the three-month LIBOR rate eased by 3 bp to 1.47%.

Walgreen Co. (WAG $26) reported 1Q net earnings fell 10% to $0.41 per share, five cents below the Reuters estimate, as sales grew 6.6% to $14.9 billion. Same-store sales increased 1.7%. The drugstore said it continues to post solid sales in a difficult retail environment but said it plans to further cut back on store opening in 2010 and 2011. The new target for growth is expected to reduce capital spending through 2011 by approximately $500 million, which is beyond the $500 million announced in July.

Sysco Corp. (SYY $24) said market conditions have become "progressively more difficult" in recent weeks and the food distributor expects flat to slightly negative year-over-year sales comparisons for fiscal 2Q.

Manpower (MAN $36) said it anticipates that demand for its services will be especially weak in December as it has been hearing that many of its light industrial clients are taking prolonged plant shut downs around the holidays compared to last year. The employment services firm added that because of continued declines in global labor markets and changes in foreign currencies, it is withdrawing 4Q guidance. Manpower had seen a revenue decline of 9-11%, or 5-7% in constant currency. During the two months ended November 30, 2008, the company experienced a revenue decline of 20%, or 11% in constant currency, compared to the prior year period.

Short week highlights spending, housing

Treasury prices are down as traders look to new data this week and book profits following recent gains. The holiday-shortened week will see all of the economic reports squeezed into Tuesday and Wednesday. Final 3Q GDP will kick off the week and the median outlook per Bloomberg shows that analysts anticipate the broadest measure of output will be unrevised at an annualized drop of 0.5%. The report is unlikely to have much impact since 4Q is coming to an end and attention has shifted to next year.

New home sales and existing home sales for November will also be reported on Tuesday and expectations of further declines are expected. Economic output is quickly falling and potential buyers are shying away from purchases amid worries about their jobs, while tightening credit standards are shutting some buyers out of the market. Also, look for final University of Michigan consumer sentiment.

Wednesday brings us personal income and spending, which is expected to show that falling employment, worries about job losses, and tighter credit standards continue to crimp consumer outlays. Durable goods orders will also be released on Wednesday and are expected to register a significant decline. And jobless claims will round out the week on Wednesday. The stock market is set for an early closure of 1 p.m. ET on Wednesday and will be closed for Christmas on Thursday.

Europe flounders on earning worries

European stocks have eased off midday lows but remain solidly to the downside amid earnings worries and heavy pressure from automotive shares and related industries. Toyota's (TM $64) worsening outlook is leaning on the group, while Michelin (MGDDY $10) is under pressure after saying that demand is weakening. The number two tire maker in the world said it saw a sharper month-over-month drop in demand for tires in all its markets in November, including Asia and South America, and plans to significantly pare operations at most plants around the world. Earlier in the day, Japan's Bridgestone (BRDCY $29), the largest maker of tires, cut its profit forecast amid falling demand.

A record year-over-year drop in industrial new orders in the eurozone is adding to the glum mood on indications that falling global demand is worsening the economic outlook. Orders plunged a record 15.1% in October versus a year ago, well below the forecast of a 9.8% decline. Orders in October dropped 4.7% after falling over 5% in September as the credit crunch put the brakes on the economy. Nonetheless, interest rates in the eurozone are among the highest in the developed economies and policymakers have been downplaying expectations of another reduction in January.

Toyota faces red ink

Citing falling global autos sales and the strengthening yen, Toyota said after the close that it expects its first operating loss ever as it forecast red ink of 150 billion yen ($1.7 billion), versus its prior estimate of a 600 billion yen profit. In response, Japan's largest automaker plans to cut capital spending, delay expansions in capacity, and reduce production. The company is also considering a cut in its dividend, the first since it was listed on exchanges in 1949, according to news reports. Toyota did not comment.

BoJ moves, US auto bailout lift Tokyo

Banks reacted favorably to the Bank of Japan's decision late Friday to buy commercial paper, while the White House's announcement that it will assist US automakers aided the broader market, with the Nikkei 225 Index finishing up 1.6%. The rally occurred in spite of another spate of bad economic news that saw exports from Japan plunge on weak global conditions and the trade gap widen. The Bank of Japan also cut its outlook on the economy in its monthly assessment and said economic conditions are "deteriorating."

Elsewhere, the People's Bank of China will reduce its one-year rate to 5.31% from 5.58% and the one-year deposit rate to 2.25% from 2.52%. The PBOC will also cut the reserve requirement ratio in order to stimulate lending amid growing signs that China's economy has stalled.