The North American markets should add to solid gains that were posted yesterday afternoon once the U.S. Federal Reserve chopped it key fed funds rate for the first time in four years.

Futures prices were all heading higher for the Dow Jones industrial average, the S&P 500 and the Nasdaq 100.

On the inflation front, Canadian investors received a pre-opening boost when it was reported that Canada’s annual inflation rate for August dropped to 1.7% from 2.2% in July. The decline gives the Bank of Canada less reason to increase domestic interest rates next month.

U.S. inflation fell 0.1% in August, the first retreat since October 2006.

The powerhouse C$ took a breather on the foreign markets overnight, opening today in North America at 98.43 cents US, down 0.21 cent.

Before the open, No. 2 U.S. investment bank Morgan Stanley reported its third-quarter income from continuing operations fell to US$1.47 billion from US$1.59 billion a year earlier. Net revenue rose 13%.

Morgan’s report follows yesterday’s higher-than-estimated results for Lehman Brothers Holdings.

Analysts are watching the investment banks for signs of fallout from the battered subprime mortgage sector. Bear Stearns and Goldman Sachs are scheduled to report earnings on Thursday.

The Fed’s decision to yesterday cut its key fed funds rate to 4.75% from 5.25% was meant to boost investor confidence and reduce market volatility that was triggered by the subprime chaos.

The Fed move also perked up the foreign markets. Britain’s FTSE 100 rose 2.1%, Germany’s Dax gained 1.9% and France’s CAC-40 rose 2.4%.

Japan’s Nikkei 225 climbed 3.7%, its biggest point gain in more than five years. Hong Kong’s Hang Seng index surged almost 4%.

Oil futures, meanwhile, reached a record high of US$82.38 a barrel overnight.