Morning Update

Earnings Season in Focus

Oil prices are solidly under $40 per barrel and copper, a key industrial, and gold are seeing renewed weakness amid growing worries that demand will not recover anytime soon. Stocks are under modest pressure as the unofficial start to 4Q earnings season quickly approaches with the release of Alcoa's numbers after the close. Traders will be looking to several economic reports this week, including inflation, manufacturing and retail sales. The Street will also focus in on Fed Chief Ben Bernanke's speech tomorrow on the economic environment. Elsewhere, Treasuries are weaker and world markets are lower.

As of 8:34 a.m. ET, the March S&P 500 Index Globex futures contract is 4 points below fair value, the Nasdaq 100 Index is 1 point below fair value, and the DJIA is 48 points below fair value. Crude oil is down $2.56 to $38.27 per barrel, and gold is down $26.50 at $828.50.

The unofficial start to 4Q earnings season begins after the close of trading today when Dow component Alcoa (AA $11) reports. A dismal season is anticipated, and the largest aluminum company in the US will probably not be exempt since it is expected to post a loss of $0.09 per share ex-items. Profits are forecast to come under heavy pressure since the big drop in energy prices (aluminum production is energy intensive) will not be nearly enough to offset the big decline in aluminum prices and falling demand. Alcoa has announced production and job cutbacks in order to cope with the global recession. Forecasts range from a profit of $0.03 per share to a loss of $0.20.

Busy week on the economic front

This week's economic calendar will highlight the consumer, inflation, and the manufacturing sector. Retail sales for December will be out at midweek and are expected to remain under heavy pressure as shell-shocked consumers continue to shift excess dollars toward savings. The Producer Price Index on Thursday and the Consumer Price Index on Friday are expected to reflect further downward pressure on prices. Thursday will also give us the first look at manufacturing in January, with the Empire Manufacturing Index and the Philly Fed's Business Activity Index. With exports, housing, and autos under pressure, steep declines are expected. Industrial production and capacity utilization will be reported on Friday.

Meanwhile, the Import Price Index will be released on Wednesday and another sharp decline is anticipated due to the big drop in crude prices that continued into December. Falling oil prices are also expected to produce a narrowing in the trade gap, offsetting lower exports, when it is reported on Tuesday. And weekly jobless claims may capture a little more attention following recent, unexpected declines. The Labor Department said last week that difficulties in making seasonal adjustments did not influence the level of weekly claims, but given the sluggishness in the economy, many observers are skeptical.

Elsewhere, the Beige Book on Thursday will provide a summary of the latest activity in each of the Fed's twelve districts. The decline in activity accelerated in 4Q, and the report will provide anecdotal information on consumer spending, employment, and pricing. In addition to several Fed speakers, Fed Chief Ben Bernanke's Tuesday morning remarks on the economic and financial crisis in London will be closely followed. The Fed discussed some of the unconventional steps it may be planning in its last FOMC statement, and since interest rates are at rock bottom levels, traders are looking for more transparency and details as to what the Fed's next move may be.

Europe braces for earnings season, ECB

Stock prices in Europe are languishing in front of the unofficial start to 4Q earnings season in the US, with mining shares down sharply amid renewed concerns that the global recession will continue to stifle demand for commodities. With oil prices falling solidly below $40 per barrel due to nervousness that demand will remain shackled, the focus now turns to the European Central Bank's rate decision on Thursday. Given recent signs that Europe's economy has weakened faster than some had expected, the ECB is coming under increasing criticism because it has been more reluctant to quickly ease than its counterparts. The meeting on Thursday is expected to produce a 50 bp reduction in its key rate. But at 2.0%, that would still leave the rate high compared to most nations, which could deepen the eurozone recession and delay a recovery.

US job decline hinders Asia

Heightened fears about the economy following the massive jobs losses in the US are extinguishing any early hopes that the many stimulus plans and numerous rate cuts around the world will quickly stabilize the world's largest importer. South Korea, which is highly dependent on exports, saw its benchmark Kospi Index drop 2.1% as economic woes weighed on shares. A string of bad economic data in recent week also hampered stocks in Hong Kong, but losses in China were modest. Nonetheless, inflation and GDP data out of China are on the horizon and worries that deflationary pressures are growing and economic activity is falling are rising. The market in Japan was closed for a holiday.