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• The European DJ Stoxx 50 this morning up +0.51% due to sharply lower oil prices (-$7.49 per barrel) and some strength in Lehman Brothers that is supporting the banking sector. The decline in oil prices has helped airlines, automakers and retailer stocks in particular. British Airways is up 5% this morning and Carrefour gained +2.5%. UK homebuilder stocks received a boost today after UK Prime Minister Gordon Brown suspended a homebuyer tax and announced the acceleration of 1 billion pounds of government spending as a stimulus measure. Asia-Pacific stocks today closed mixed: Japan -1.75%, Hong Kong +0.65%, China -1.03%, Taiwan -1.66%, Australia -0.04%, Singapore +1.66%, South Korea +0.15%, Bombay +3.80%.
• Focus factors – The markets this week will focus on (1) the impact on the oil and gas markets and the extent of physical damage caused by Hurricane Gustav, and now Tropical Storm Hanna which is the next storm headed towards the Gulf, (2) the US stock market which has fallen into a consolidation range, supported by better-than-expected economic data and a continued expansive Fed monetary policy but undercut by worries about weaker earnings and consumer spending, (3) T-note prices which moved sideways last week as the market awaits further inflation and economic data, and (4) the dollar which is consolidating near the top of its sharp July-August rally as the market assesses the extent of European economic weakness.
• US calendar – On this week’s US economic calendar, today brings the Aug ISM manufacturing index (expected –0.5 to 49.5), and July construction spending. Wednesday brings July factory orders (expected +1.0%), the Fed’s Beige Book, and Aug total vehicle sales (expected at 13.0 mln vs 12.5 mln in July). Thursday brings the Aug ADP employment change (expected –2,000), weekly initial unemployment claims (expected –2,000), the Q2 productivity revision (expected +3.0% vs +2.2%), Aug ISM non-manufacturing index (expected unch at 49.5), and Aug ICSC chain store sales (July +2.6%). Friday brings the Aug unemployment report (payrolls expected –70,000, unemployment rate expected unch from July’s 4-year high of 5.7%), and Q2 mortgage delinquencies (Q1 6.35%).
• Fed policy – The market last week curbed expectations for Fed tightening next year by about 12 bp. The market is discounting only a 10% chance of a 25 bp rate hike at the next FOMC meeting on September 16. The market isn’t fully discounting a 25 bp rate hike until May 2009. The market is discounting a 50 bp rate hike by September 2009 and a 75 bp rate hike by November 2009.
• ISM manufacturing index – Today’s Aug ISM manufacturing index is expected to fall –0.5 points to 49.5, adding to the –0.2 point decline to 50.0 seen in July. The ISM index in the past five months has recovered from the 5-year low of 48.3 posted in February. The ISM index even poked above the boom-bust level of 50 in June to 50.2, after having been below 50 for the 6-month period from December through May. The US manufacturing sector has been boosted by strong exports and by the federal stimulus program. However, the situation for the manufacturing sector is expected to get tougher in the second half of the year as the effect of the federal stimulus program fades and as economic growth fades in Europe and Asia.
• The markets will also watch today’s ISM prices-paid index as an indicator of the extent of pressure on manufacturing firms to raise prices. Today’s ISM prices-paid index is expected to fall –6.2 points to 82.3, adding to the –3.0 point drop to 88.5 seen in July. The index hit a 29-year high of 91.5 in June. The recent decline in oil and commodity prices will help push input costs lower for US manufacturers, although prices are still very high on an historical basis and upward cost pressures continue.

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• September S&Ps this morning are trading +8.60 points on sharply lower oil prices and an upward rebound in banking stocks. The US stock market sold-off last Friday and closed near the low (Dow -1.47%, S&P 500 -1.377%, Nasdaq Composite -1.83%).
• Bearish factors for stock prices last Friday included (1) the largest drop in US personal income in 16 months in July, (2) the 14% plunge in Dell which dragged down the tech sector after Dell said "continued conservatism" is speading to western Europe and some Asian countries as sales growth slowed in those areas, (3) the -4.4% drop in International Paper after Deutsche Bank downgraded the world's largest maker of office paper to "hold" from "buy," and (4) the -14% loss in Fannie Mae and -15% drop in Freddie Mac after the Washington Post reported that Freddie Mac's capital cushion may not be enough to cover losses.
• Bullish factors for stock prices last Friday included (1) the unexpected jump in the Aug Chicago purchasing managers index to a 1-year high, (2) the larger-than-expected gain in the Aug University of Michigan consumer confidence, and (3) the +11% surge in PetSmart after the largest US pet-store chain said Q2 profit was 30 cents a share, more than the analyst consensus of 28 cents.
• The sharp decline in oil prices today is helping airlines and automakers in particular. UAL is up +15% this morning in European trading and GM is up +3.5%.
• Lehman Brothers is up +4% in European trading this morning after the Korea Development Bank CEO confirmed that it is still in talks to buy a stake in Lehman, supporting hopes that the bank will go ahead with its investment in Lehman and shore up Lehman's liquidity and capital base. The Lehman news helped support the banking sector with Citigroup for example up 1.5% this morning.
• Viacom (VIA/B) may see some strength today after its movie "Tropic Thunder" remained number one of the Labor Day weekend and took in $14 million.

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• December 10-year T-notes this morning are trading -10.5 ticks on higher European stocks and S&Ps. December T-note prices last Friday closed -6 ticks. Bearish factors for T-note prices last Friday included (1) the unexpected rise in the Aug Chicago purchasing managers index (+7.1 to a 1-year high of 57.9 versus expectations of -0.8 to 50.0) and (2) the stronger-than-expected Aug University of Michigan consumer confidence (+1.3 to 63.0 versus expectations of +0.3 to 62.0). Bullish factors for T-note prices last Friday included (1) the biggest drop in US personal income in 16 months (July personal income -0.7% versus expectations of -0.2%), and (2) month-end buying of long-term Treasuries (i.e. 10-year T-notes and 30-year T-bonds) as Aug was a refunding month and money managers needed to buy longer-term bonds at the end of the month to match duration in their benchmark indexes.
• The dollar is trading sharply higher this morning with the dollar/yen up +0.69 yen and the euro/dollar down 1.30 cents. The dollar index last Friday rallied and settled with decent gains. Bullish factors for the dollar last Friday included (1) the larger-than-expected drop in July Euro-Zone economic confidence to a 5-1/3 year low, and (2) the unexpected gain in the Aug Chicago purchasing managers index which surged to a 1-year high. Bearish factors for the dollar last Friday included (1) the larger-than-expected decline in US personal income in July for its biggest drop in 16 months, and (2) comments from ECB executive board member Smaghi that inflation in the Euro-Zone is "too high" and must be brought back below the central bank's limit. 
• October crude oil prices this morning are trading -$7.49 a barrel and October gasoline is trading -20.08 cents a gallon. The damage from Hurricane Gustav was less severe than expected since it lost power as it neared land and was downgraded to a Category 2 hurricane. In the Gulf, oil production is 100% closed and gas production is 95% closed due to evacuations, but companies are planning to restart production over the next several days. Refineries in Louisiana are expected to take at least a few days to get back up and running because of power outages and minor physical damage. Hurricane Hanna is not expected to go into the Gulf of Mexico and is expected to head up Florida's Atlantic coast and hit South Carolina by this weekend.
• October crude oil prices last Friday closed -$0.13 a barrel and October gasoline closed -1.02 cents a gallon. Bearish factors for crude oil prices last Friday incuded (1) speculation that energy producers are better prepared to face a huuricane than when they were hit by Katrina 3 years ago, (2) the stronger dollar, and (3) the comment from Russia's Energy Minister that Russia "will do everything" to maintain stable oil flows to Europe, despite the current political environment. The main bullish factor for crude oil prices last Friday was undercertainty about how much damage that Hurricane Gustav might cause as it struck oil platforms in the Gulf of Mexico and made landfall west of New Orleans on Monday.

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