Expert Analysis of Today's Market

• The dollar traded lower Tuesday as US consumer confidence dropped to a 16-year low and home prices fell, ahead of tomorrow’s Federal Open Market Committee interest-rate decision meeting. The FOMC will leave its benchmark rate at 2.0% tomorrow and fears are growing that the FOMC accompanying statement will not be as tough on inflation as markets had earlier expected. Rising inflation is the largest problem facing the US economy and the lax monetary policy is counter-productive as it makes the inflationary problem worse. The euro rose despite signs of further weakness in the European economy. The Australian dollar advanced following reports that China agreed to a record price increase for iron ore, Australia’s largest export. The Canadian dollar rose on continuing strength in energy prices.


• The USD/JPY was little changed as US stocks are testing the support at the low reached at the height of the financial crisis back in March. Renewed financial-sector worries and more signs of US economic weakness are pressuring stocks. The USD/JPY has been testing the 108-area resistance the last nine trading days, unable to penetrate this resistance. If the US equity market finds support at this level, the USD/JPY will rise to 110 as higher equity prices will increase the risk aversion and carry trades.

Financial and Economic News and Comments

US & Canada

• Home prices in 20 major US cities fell by a record 15.3% y/y and 1.4% m/m in April, standing at where they were in 2004, according to the S&P/Case-Shiller home-price indexes. Home prices in 10 major metropolitan areas dropped by a record 16.3% y/y and 1.6% m/m in April. The indexes showed house-price declines continued to get steeper in April, with prices in every region showing year-over-year drops.

• US home prices fell 4.6% y/y and 0.8% m/m in April, standing at December 2005 levels, as the housing slump continued to affect states at the heart of the real estate boom, according to the Office of Federal Housing Enterprise Oversight (OFHEO) house-price index.


• The Conference Board US consumer confidence index fell to 50.4 in June, lower than forecast and the lowest level in 16 years, from 58.1 in May, data from the Conference Board showed. The present situation measure fell to 64.5 from 74.2. The consumer expectations measure fell to a record low of 41.0 from 47.3. “Perhaps the silver lining to this otherwise dismal report is that consumer confidence may be nearing a bottom,” said Lynn Franco, director of the Conference Board Consumer Research Center.

• The Richmond Fed manufacturing index fell to -12 in June from May’s reading of -3, the Federal Reserve Bank of Richmond said. Among the index’s components, shipments lost 10 points to -11, new orders fell 9 points to -13 and the jobs index lost 8 points to -12. The figures showed manufacturing activity contracted further with price growth quickening in June. Additionally, revenues declined in the overall service sector in June, falling 8 points from May’s reading to -14, according to the Richmond Fed service sector revenues index.

Europe

• German consumer confidence dropped to the lowest in more than two years on soaring energy prices. The GfK consumer climate indicator fell more than expected to 3.9 in July from a revised 4.7 in June, data from GfK AG showed. The economic expectations indicator declined by just under 6 points to stand at 7.5; however, remaining in the positive range, which is above the long-term average of zero. The income expectations indicator fell by 3 points to its current value of 7.2, the lowest value since December 2006. The propensity-to-buy indicator fell to -23.7, its lowest value since June 2005. GfK also cut its previous 2008 forecast for private consumption in real terms from 1% to 0.5%.

• Inflation has surpassed unemployment as the top concern among European citizens, whose confidence in the outlook for their national economies fell in early 2008, according to a European Commission survey. The euro-area economy has not achieved all its expectations and now faces new challenges as commodity prices surge, the European Commission said.

Asia-Pacific

• The Reserve Bank of India raised its key interest rate a half point to 8.5% and increased banks’ reserve ratio, in further moves to curb accelerating inflation.

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