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• The European DJ Stoxx 50 this morning is trading +1.79% higher as better-than-expected earnings from Societe Generale, France's second-largest bank, lead European bank shares higher. Also supporting stock prices today is the drop in crude oil prices to a 3-month low which is offsetting the negative sentiment seen after Jul Euro-Zone retail sales dropped by the largest amount (-3.1% y/y) since the series began in Jan 1996. Asia-Pacific stocks today closed lower: Japan -0.14%, Hong Kong -2.51%, China -2.53%, Taiwan -2.35%, Australia -1.38%, Singapore -0.54%, South Korea -0.57%, Bombay +2.63%.
• FOMC meeting – The market is assigning a very small 10% chance that the FOMC at its meeting today will raise its funds rate target by 25 bp to 2.25%. Instead, the consensus is that the FOMC will leave its funds rate target unchanged at 2.00%. Fed officials continue to voice their concern about inflation and some officials have gone so far as to say that inflation risks should take precedence over a weak economy. However, the reality is that the Fed cannot afford to raise the funds rate target at present given the continued vulnerability of the US banking system. Fannie Mae and Freddie Mac almost experienced a fatal liquidity run just several weeks ago that required the Fed and US Treasury to step in to provide the full force of federal backing. Merrill Lynch just last week surprised the market with another big write-down and an $8.5 billion capital raise. As long as there are still unexploded bombs laying about in unknown places in the financial system, the Fed wi ll have to keep interest rates low to maintain investor confidence. Moreover, the US economy is likely to sink going into Q3 and Q4 after the temporary boost seen in Q2 from the federal stimulus checks, meaning the Fed cannot tighten going into a likely period of falling growth. However, the Fed’s monetary policy is currently very easy with the real federal funds rate currently at –40 bp (i.e., the federal funds target of 2.00% minus the core CPI rate of 2.4%). That represents the easiest Fed policy in 4 years. The reality is that when the US banking and housing crises stabilize, the Fed will be under pressure to raise the funds rate target quickly back to about the 5.25% level, which is where the funds rate was before the banking crisis emerged last summer.
• ISM non-manufacturing index – Today’s July ISM non-manufacturing index is expected to show a small decline of -0.2 points to 48.0, adding to the -3.5 point decline to 48.2 seen in June. The ISM non-manufacturing index in June dipped below the boom-bust level of 50 after having been above 50 in previous four months. The dip in the ISM non-manufacturing index below 50 was a sign of flagging growth in the US service sector, which is the linchpin for the US economy since the US manufacturing sector is slowly shriveling away. The market continues to worry about weaker US economic growth through year-end as the impact of the federal stimulus checks fades.

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• September S&Ps this morning are trading +10.00 on the drop in crude oil prices to a 3-month low and on the rally in European bourses. The US stock market yesterday closed with modest losses (Dow -0.37%, S&P 500 -0.90%, Nasdaq Composite -1.10%).
• Bearish factors for stock prices yesterday included (1) the larger-than-expected gain in the Jun core PCE, the Fed's preferred measure of inflation, to its largest increase in 16-months (+2.3% y/y), (2) the prediction from NYU economist Roubini that credit losses stemming from falling US home prices may rise to $2 trillion, (3) the nearly 10% drop in Wachovia after Morgan Keegan & Co. urged investors to sell the stock of the fourth largest US bank because its new CEO will need more time to rebuild the bank's finances, and (4) the 12% plunge in Freeport-McMoran as the world's largest publicly traded copper producer fell after copper prices tumbled to a 6-month low. 
• Bullish factors for stock prices yesterday included (1) the larger-than-expected gains in Jun personal income and spending, (2) the larger-than-expected rise in Jun factory orders, (3) the -$3.67 fall in crude oil prices which fell to a 2-3/4 month low, and (4) the rally in the S&P 500 Health Care Index as Human rose 4.9% after raising its full-year earnings projection because costs moderated in Medicare drug plans and Kindred Healthcare rallied 6.1% after Wachovia raised the largest US operator of hospitals for patients needing long-term care to "outperform" from "market peform."
• Masimo (MASI) rallied over 7% in after-hours trading yesterday as the maker of medical devices reported Q2 profit of 18 cents a share, well ahead of analysts' estimates of 13 cents a share.
• Syniverse Holdings (SVR) gained over 8% in after-hours trading yesterday afternoon and is up 9.8% this morning as the provider of technology services to mobile-phone companies said 2008 annual revenue could reach as high as $495 million, higher than analysts' estimates of $464.8 million.
• Societe Generale, France's second-largest bank, rose over 6% after reporting Q2 profit of 644 million euros, higher than analysts' estimates of 550 million euros.
• Barclays Plc is trading 4.9% higher this morning as UK's third-biggest bank agreed to sell its UK life insurance unit to Swiss Reinsurance Co. for 753 million pounds ($1.5 billion).
• DCT Industrial Trust (DCT) fell 3.7% in after-hours trading yesterday as the owner of real-estate properties reported Q2 revenue of 17 cents a share, below the 18 cents a share expected by analysts, and as the company cut its annual funds-from-operations forecast.
• Anadarko Petroleum (APC) dropped 4.8% in after-hours trading yesterday as the second-largest independent US oil producer reported Q2 profit of $1.76 a share, 1 cent below analysts' estimates of $1.77 a share as forward contracts fell in value.
• General Motors (GM) and Daimler AG are both trading 4% higher this morning in Germany as crude oil prices fell to a 3-month low of $118 a barrel overnight.

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• September 10-year T-notes this morning are trading +1 tick as the market awaits the Jul ISM service index and the conclusion of today's FOMC meeting. September T-note prices yesterday drifted lower after an early rally fizzled and closed -6 ticks. Bearish factors for T-note prices yesterday included (1) stronger-than-expected Jun personal income and spending (Jun personal income +0.1% versus expectations of -0.2% and Jun personal spending +0.6% versus expectations ofg +0.5%), and (2) inflation concerns with the greater-than-expected rise in Jun core PCE, the Fed's preferred gauge of prices, (Jun core PCE +0.3% m/m and a 16-month high of +2.3% y/y versus expectations of +0.2% m/m and +2.2% y/y). Bullish factors for T-note prices yesterday included (1) the 141% increase in planned job cuts by US employers in July, according to Challenger, Gray & Christmas, for the biggest y/y% increase since Nov 2001, (2) a flight-to-quality after the stock market tumbled on fears of m ore credit losses as HSBC, Europe's largest bank, posted its steepest earnings decline since 2001 on record subprime mortgage defaults in the US, and (2) a prediction from NYU economist Roubini that hundreds of US banks will fail in a "severe, protracted recession," as they write down consumer credit losses and recognize millions of dollars in outstanding home-equity loans that likely will be worth zero.
• The dollar index this morning is trading at a 1-1/2 month high as Jul Euro-Zone retail sales dropped by the largest amount (-3.1% y/y) since the data series began in Jan 1996. The dollar/yen is -0.38 yen and the euro/dollar is -0.92 cents. The dollar index yesterday closed slightly higher. Bullish factors for the dollar yesterday included (1) the stronger-than-expected Jun US factory orders, (2) the larger-than-expected increases in Jun personal income and spending, and (3) the larger-than-expected decline in the Aug Euro-Zone Sentix investor confidence to a 5-year low. Bearish factors for the dollar yesterday included (1) the larger-than-expected rise in the Jun Euro-Zone PPI to +8.0% y/y, the highest level since the index first began in 1990, and (2) concern that global stock markets will continue to decline as credit losses mount after HSBC, Europe's largest bank, said first-half profit declined 29% as it set aside more money for bad loans in the US. 
• September crude oil prices this morning are trading -$1.74 a barrel and September gasoline is trading -3.78 cents a gallon. Massive long liquidation continues in the crude oil market today as crude oil prices fell to a 3-month low of $118 a barrel overnight as the danger from Tropical Storm Edouard abates and the dollar rallying to a 1-1/2 month high encourages overall commodity selling. September crude oil prices yesterday sold-off sharply and closed -$3.69 a barrel and September gasoline closed -8.41 cents a gallon. September crude oil and gasoline both posted 2-3/4 month lows yesterday. Bearish factors for crude oil prices yesterday included (1) speculation that Tropical Storm Edouard will miss most offshore oil facilities in the Gulf of Mexico as it approaches Texas, (2) carryover weakness from natural gas prices which tumbled to a 6-month low, and (3) the stronger dollar. Bullish factors for crude oil prices yesterday included (1) continuing Middle East tensio ns with the apparent testing of an anti-ship missle by Iran with a range of 185 miles and a repeated warning by the commander of Iran's Islamic Revolutionary Guard that his forces could respond to any attack on his country's atomic installations by closing the Strait of Hormuz, and (2) the larger-than-expected increase in Jun US factory orders.

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Earnings reports (confirmed releases for companies with market caps above $10.0 bln listed by mkt cap): PG-Proctor & Gamble (BEST earnings consensus $0.78 per share), CSCO-Cisco Systems (0.39), EMR-Emerson Electric (0.80), NWS-News Corp (0.35), COV-Covidien (0.66), DUK-Duke Energy (0.24), ADM-Archer Daniels Midland (0.69), VNO-Vornado Realty Trust (1.38), WY-Weyerhaeuser (-0.19), UPL-Ultra Petroleum (0.65), TAP-Molson Coors (1.16), LBTYA-Liberty Global (0.00), MGM-MGM Mirage (0.42), EXPD-Expeditors International (0.34), PXD-Pioneer Natural Resources (1.36), CSC-Computer Sciences (0.76), VMC-Vulcan Materials (1.20), DNR-Denbury Resources (0.54), VTR-Ventas (0.20), RRI-Reliant Energy (0.15), CDC-CEDC (0.52), XCO-EXCo Resources (0.26), FST-Forest Oil (1.51), OKS-OneOK Partners LP (1.04), HSIC-Henry Schein (0.68), NI-Nisource (0.11), HCN-Health Care REIT (0.38)

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