Sterling got a spanking from Alistair Darling yesterday and dropped to its lowest level ever, 0.8139, against the Euro and 1.7966 against the dollar. Darling’s comments, that times are “arguably the worst they’ve been for 60 years” sent Downing Steet into firefight mode as they tried to undo some of the damage. However with UK mortgage approvals down and a Purchasing Managers Index showing manufacturing is continuing the contract, the move was set.

With Gustav being downgraded to a category 1 storm, the risk of a significant spike in oil prices has receded, although the extent of the impact from the hurricane still needs to be fully ascertained. The damage to oil refineries will be particularly important. Nonetheless, some analysts now think that oil prices will decline to below $100 by year-end.

Stories To Watch Today

• Yasuo Fukuda became the second Japanese Prime Minister to resign in under a year. This raises some serious questions about whether his party, the LDP, can and should still lead the country. The Nikkei is down 1.8%.
• Despite the woes of the UK economy, analysts still expect the Bank of England to hold interest rates at 5% in their MPC meeting on Thursday.
• Lehmans and KDC are, according to the Financial Times, getting closer to cutting a deal.
• Kansas City Fed governor Hoenig said overnight that the current policy stance “will make it difficult to achieve price stability” and that “the government must allow individual institutions to fail”. Hence Lehman’s unsightly hurry to raise cash?
• The latest on central banks looking to cut back their temproary funding for banks comes from the Times, who say the Bank Of England have ruled out extending its Special Liquidity Scheme.
• The Reserve Bank of Australia cut its interest rates this morning by 25 basis points to 7% in a widely expected move. Interesting this was their first cut in 7 years! The Aussie Dollar has got whacked so far this morning.

Big day Out For The ECB Thursday

The ECB will publish its updated staff projections at their September 4 meeting. The technical assumptions on oil, currency and market interest rates play a key role. What is important is that the oil drop may result in an unchanged call for next year’s CPI (currently at 2.4%): this is significantly better than feared only a few weeks ago.

Also grounded on the negative Q2 reading, the ECB will lower its GDP projections for both this year and the next. I think that the updated 2008 projection will be 1.4 - 1.5% (now 1.8%). Next year’s outcome will be lowered to 1.2 - 1.3% from the current 1.5%. My thinking behind these lower revisions: tighter financial conditions, slowing global momentum and surveys pointing to deeper and more protracted weakness than what expected only back in June.

Taken together, the updated staff projections should paint a more dovish picture than in June, when growth was roaring and inflation was about to hit the 4% peak. With oil prices well off the peaks and the lower GDP prospects pointing to softer wage growth and core inflation next year, the ECB should be a bit less worried about price developments and a bit more preoccupied of GDP prospects.

Data Today
Eurozone Producer Price Index (PPI) is out at 10.00. 8% was the previous figure, but the consensus is that this will rise to 9.1%. With producer inflation that high, how could Trichet cut interest rates any time soon?

The US is back in action after Labour Day and it has some industry figures out at 15.00: construction spending and ISM manufacturing. The Dollar will get a further boost if the ISM follows Friday’s Chicago PMI higher.

Equities
Commerzbank have got off to a predictably difficult start with their acquisition of Dresdner. Despite The Independent saying they plan to cut 1200 jobs in London, Deutsche have cut the rating on their nearest German competitor from ‘Hold’ to ‘Sell’. The main problem is the execution risk and how the two are going to bring the operating costs together.

Google’s attack on Microsoft continues as it releases a test version of an Internet Browser today. After yesterday’s US bank holiday, and depending on what analysts make of the software, the share price of either company could react.

Boeing’s machinists are threatening to go on strike on Wednesday, which could further delay production of the 787 Dreamliner.

Goodbody’s have cut their price target on C&C to €3.30 from €4.

BREAKING NEWS
The British government has just announced that stamp duty will be suspended for a year on properties that cost less than £175,000. Certainly this is a case of “desperate times, desperate measures.” The scheme, which will cost £1bn, is an attempt to boost the economy’s most vulnerable sector, the housing market. Will this be enough to get the UK homebuilders out of their long term doldrums?

*This post was last edited at 10.20 after being first published at 09.30. This is due to IT issues being resolved.*