The outlook for stocks has improved this morning, thanks to economic data suggesting inflation remains subdued in the U.S., and that more cuts to interest rates are likely.

The U.S. Producer Price Index came in down 0.9% on the headline, but dropping out food and energy, it was up 0.2% in July. The headline rate was weaker than expected, although the core rate was a bit hotter.

Nevertheless, economists do not see inflation standing in the way of monetary easing, and that has stocks looking up. President Bush’s decision to approve limited funding for stem cell research is also boosting biotech stocks.

In Canada, overall labour market conditions were reported almost unchanged in July. Employment was down just 14,000, yet a slight drop in labour force participation held the unemployment rate steady at 7% for a fifth consecutive month.

Employment fell by 36,000 in professional, scientific and technical services. Most of the drop can be attributed to fewer people at work in advertising services.

Also falling in July was employment in public administration, thanks to a decline in temporary census workers. Construction employment fell by 17,000 in July, the first major decline so far this year. Manufacturing employment actually edged up in July, as makers of automotive and aircraft equipment added staff.

In other economic news, the New Housing Price Index rose 0.3% from May to June. On an annual basis, this index of contractors’ selling prices increased 2.9%.

In Europe, stocks are mixed. The hope that the European Central Bank will soon cut interest rates has the euro trading higher against the U.S. dollar. The FTSE has gained 42 points to 5,445. The CAC 40 is up 33 points to 4,921. Only Germany’s DAX is still in a funk, down 24 points to 5,488.

In Japan, stocks slipped a bit in the wake of a report showing Japan’s economy is sliding further into recession as production, exports and investment fall. The Nikkei dropped just 20 points to 11,735. In Hong Kong, the Hang Seng finished the week up 49 points to 11,766.