Expert Analysis of Today's Market

• The dollar rose against most key currencies on Friday despite mostly weaker-than-expected US data and signals of future Fed interest-rate cuts. The reason was the credit crunch has spread abroad and may force other central banks to cut rates as well. The yen fell versus most major currencies on a renewed interest in carry trades. Several currency pairs are testing important technical levels. If these are penetrated, a trend change for the greenback may occur.


• The EUR/USD fell on signs of European economic weakness. The pair is testing the uptrend that started in August. If this is broken, it will indicate a bearish outlook for the pair.

Financial and Economic News and Comments

US & Canada

• The Bush Administration and major banks are nearing a deal to freeze interest rates on sub-prime loans and Treasury Secretary Paulson said the government is preparing a plan to allow homeowners to renegotiate adjustable mortgages.


• Federal Reserve Governor Randall Kroszner said standardizing the workout process for sub-prime mortgages would speed up relief for borrowers facing foreclosure and would also speed up recovery of the market for mortgage-backed securities. “A systematic approach to loan modifications would likely reduce some of the uncertainties in the market for sub-prime mortgage-backed securities, helping to restore price discovery and liquidity," Kroszner said. "This would help to ease the tightening of credit conditions in the market.”


• Federal Reserve Chairman Ben S. Bernanke signaled he will cut interest rates. In a speech Thursday night, Bernanke said the Fed must be “exceptionally alert and flexible” as it weighs an economy that has been “importantly affected” by recent financial turmoil.


• US October personal income increased a less-than-expected 0.2% m/m after rising 0.4% m/m in September, the Commerce Department said. Personal spending rose a less-than-expected 0.2% m/m in October, following a 0.3% m/m increase in September. Adjusted for inflation, consumer spending in October was unchanged. October disposable personal income, income after taxes, increased 0.1% m/m but rose a strong 5.7% y/y. Spending and income have slowed notably over the last two months, increasing the chance of an interest-rate cut.


• The PCE price deflator rose 0.3% m/m and 2.9% y/y in October. Core prices increased 0.2% m/m and 1.9% y/y, just within the Fed’s comfort zone of 1.0-2.0%.

• US construction spending fell a stronger-than-expected 0.8% m/m in October at a seasonally adjusted annual rate of $1.158 trillion, the Commerce Department said. Residential construction spending decreased 2.0% m/m in October to $511.2 billion. Year-to-year, residential was 15.8% lower in October. Nonresidential construction spending rose 0.1% m/m in October.


• The Chicago manufacturing PMI index rose a stronger-than-expected 3.2 to 52.9 in November, indicating an expanding manufacturing sector. Orders held near 54 as production rebounded to 57.4 in November from a weak 46.9 in October. Employment also rose above the neutral 50.


• Philadelphia Fed President Charles I. Plosser said the credit markets remain volatile, but there is limited evidence to suggest the turmoil has had a meaningful impact on the broader economy.


• Canada’s economy measured by GDP slowed in Q3, expanding a 2.9% q/q annualized rate from 3.8% in Q2.

Europe

• European inflation accelerated in November to the fastest in more than six years, adding pressure on the European Central Bank to raise interest rates even as economic expansion cools. The EMU inflation rate rose to 3.0% y/y in November following 2.6% y/y in October, the European Union’s statistics office reported. The core rate at 2.1% y/y in November is above the ECB’s 2% ceiling.

• The ECB will extend the maturity of its regular refinancing operation settling on December 19 to two weeks from one. The Governing Council yesterday decided the extra measure was necessary to “satisfy the banking sector’s liquidity needs. The move came a day after the Bank of England said it will offer commercial banks emergency funds with longer repayment terms because of the risk that money markets will “tighten” at yearend. The Fed has also pledged to provide extra cash through a series of repurchase agreements into next year.


• German retail sales fell a more-than-expected 3.3% m/m in October, the Federal Statistics Office said. This is adding to signs of European economic slowdown.

Asia-Pacific

• Australia’s current account deficit narrowed to A$15.59 billion ($13.7 billion) in Q3 from a revised A$15.62 billion in Q2, the Bureau of Statistics said.


• Japan’s core consumer prices, which exclude fresh food, increased 0.1% y/y in October, the first increase since December 2006, the Statistics Bureau said.


• Japan’s unemployment rate stayed at 4.0% in October after rising in each of the two previous months, the Statistics Bureau said.

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