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• The European stock market is trading slightly higher this morning with the European DJ Stoxx 50 up +0.11% with help from higher oil and mining stocks. However, overall sentiment remains bearish with this morning's $3.06 per barrel rally in crude oil prices. In addition, the June Euro-Zone CPI rate was reported this morning at a new 16-year high of +4.0%, up from +3.7% in May, which cements expectations for a 25 bp ECB rate hike this Thursday. The European banking sector is trading lower again this morning with UBS down -3.8%, Fortis down -3.8%, and BNP Paribas down -2.4%. Asia-Pacific stocks today closed mostly lower: Japan -0.46%, Hong Kong +0.27%, China -0.86%, Taiwan -0.33%, Australia -0.41%, Singapore -0.28%, South Korea -0.50%, Bombay -2.47%.
• The markets this week will focus mainly on (1) crude oil prices which posted a record high of $142.60 last Friday, (2) the global stock markets which sold off sharply last week with a –3.0% weekly sell-off in the S&P 500 index to a 3-month low and with the European Stoxx 50 posting a new 2-1/2 year low, (3) the US credit market which rallied sharply last week on global stock market weakness and continued fall-out from the banking crisis and high crude oil prices, and (4) anticipation of this Thursday’s US June unemployment report.
• On the US economic calendar, today brings the June Chicago purchasing managers index (expected –0.9 to 48.2), and the June Milwaukee purchasing managers index. Tuesday brings the June ISM manufacturing index (expected –0.9 to 48.7), May construction spending, and June vehicle sales (expected 10.2 mln vs 10.5 mln in May). Wednesday brings May factory orders (expected +0.4%). Thursday brings weekly initial unemployment claims (expected +1,000), June ISM non-manufacturing index (expected –0.7 to 51.0), and the June unemployment report. June payrolls are expected to fall –60,000, adding to the –49,000 decline seen in May and marking the sixth consecutive monthly decline. The June unemployment rate is expected to edge lower by 0.1 point to 5.4% following the +0.5 point surge seen in May to a 4-year high of 5.5%. There are early market closes on Thursday ahead of Friday’s 4th of July holiday.
• Fed policy – Market expectations for Fed tightening fell by about 25 bp last week in response to the slumping stock market, the ongoing banking crisis, and surging oil prices. In addition, the market was pleased that the FOMC in its post-meeting statement last week did not indicate any near-term intention to raise the funds rate target. The market is now discounting about a one-third chance of a 25 bp rate hike at the next FOMC meeting on August 2, a full-chance of that 25 bp rate hike by October, a 50 bp rate hike by February 2009, a 75 bp rate hike by May 2009, and a 100 bp rate hike by August 2009.
• Chicago purchasing managers index – Today’s June Chicago purchasing managers index is expected to fall -0.9 points to 48.2, more than reversing the upward rebound of +0.8 points to 49.1 seen in May. The Chicago purchasing managers index has been below the boom-bust level of 50 for four consecutive months, suggesting that the Chicago-area manufacturing sector is seeing recessionary conditions. Tomorrow’s national June ISM manufacturing index is expected to decline by –0.9 points to 48.7, reversing most of the upward rebound of +1.0 to 49.6 seen in May. The national ISM index has been below the 50 mark for four consecutive months, suggesting that the nationwide US manufacturing index is in a recession.

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• June S&Ps this morning are trading -1.60 points on higher oil prices and continued concern about the banking system. The US stock market last Friday extended the week's sharp sell-off (Dow -0.93%, S&P 500 -0.37%, Nasdaq Composite -0.25%). The S&P last week sold off by a total of -3.0% and is now down -12.9% on a year-to-date basis.
• Bearish factors last Friday included (1) a new record high in crude oil prices, (2) continued weakness in the banking sector on fears of more write-downs tied to the recent rating downgrades for bond-insurers MBIA and Ambac, (3) the prospects for a weak Q2 earnings season, which begins in two weeks, with the market expecting a 11% drop in Q2 earnings growth, (4) last week's plunge in auto and airline stocks and other sectors that depend on fuel prices such as transport (UPS, FedEx), and (5) technical selling as the S&P 500 posted a 3-month low and neared a test of March's 11-month low.
• Bullish factors last Friday included (1) the continued T-note rally to a new 3-week high, and (2) some carry-over support from Wednesday's FOMC post-meeting statement in which the FOMC did not indicate a near-term intention to raise the funds rate target.
• Oil stocks are generally trading higher this morning due to a new record high in crude oil prices with Exxon Mobil up +0.1% and Chevron up +0.3% Mining stocks are higher as well with Barrick Gold up +1.2% and Newmont Mining up +0.3%.
• US consumer and auto stocks are being undercut again today by higher oil prices. Ford is down -1.2%, Wal-Mart is down -0.9%, and Target is down -1.0%.
• MBIA is down -1.4% in European trading this morning as the company tries to raise cash by selling muni bonds, according to a report Friday in the Wall Street Journal.
• Consolidated Edison (ED) is trading -2% this morning as the New York utility was unable to come to an agreement with its union, keeping alive the possibility of a strike after a 3-day cooling-off period.

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• September 10-year T-notes this morning are trading -3.5 ticks on generally stable global stocks this morning and some long liquidation pressure. Sep T-note prices last Friday closed +5.5 ticks at posted a new 3-week high, bringing the 2-week rally to a total of about 2-1/2 points. Bullish factors included (1) the continued sell-off in the stock market, which caused some flight-to-quality and some capital flows into the T-note market, (2) last week's reduced expectations for Fed tightening due to the sharp sell-off in global stocks and the continued rally in crude oil prices, and (3) last Friday's slightly weaker-than-expected final-June US consumer confidence report (-0.3 to 56.4 versus expectations for unchanged at 56.7). The main bearish factor last Friday was the rise in the May core PCE deflator to +2.2% y/y from +2.1% y/y in April, versus expectations for an unchanged report of +2.1% y/y.
• The dollar is mixed this morning with the dollar/yen down -0.69 yen and the euro/dollar down -0.24 cents. The dollar index last Friday extended the sharp weekly sell-off and closed -0.127 at a 3-week low of 72.360. Bearish factors for the dollar last Friday included (1) the continued decline in US T-notes and reduced expectations for Fed tightening, which undercut the dollar's interest rate differentials, (2) the slightly weaker-than-expected US consumer confidence report, and (3) expectations for a ECB rate hike this Thursday of 25 bp to 4.25% while the Fed's monetary policy remains stuck in neutral. 
• August crude oil prices this morning are trading +$3.06 a barrel and August gasoline is trading +6.43 cents a gallon. Bullish factors include OPEC President Khelil's statement on Saturday that crude oil prices could reach $170 per barrel by yean-end on dollar weakness and on possible Iranian supply disruptions if Israel attacks Iranian nuclear facilities. August crude oil prices last Friday rallied to new record high of $142.60 and closed +57 cents at $140.21, the first close ever above $140 per barrel. Aug gasoline last Friday closed -0.71 cents at 351.72 cents per gallon. Bullish factors included (1) the slightly weaker dollar, (2) BP's shut-down of its Dutch refinery for repairs, and (3) continued hawkish comments coming out of OPEC.

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