Expert Analysis of Today's Market

• The dollar fell against most key currencies Wednesday after the ADP report predicted US private employment will show a 79K decline in the job report tomorrow. This larger-than-estimated ADP number surprised traders. Interestingly, ADP forecasting records have consistently overstated job growth since August 2007, which could bode ill for the dollar. The Canadian dollar gained the most in almost two months as crude oil prices rose to a record. The Australian dollar was higher; however, remaining below the important 0.9670 resistance. The yen was modestly higher despite another US equity sell-off. Sterling fell on signs of more trouble in the UK housing sector.


• The EUR/USD rose above the important 1.58-handle for the first time since April. The pair was supported by the weak US employment forecast reducing the chances of a Fed rate hike. The ECB is expected to raise its benchmark rate to 4.25% from the current 4.0% tomorrow. Today’s strong EMU inflation report also increased the possibility of additional rate hikes. If tomorrow’s US employment report is weak, the EUR/USD may test the all-time high.

Financial and Economic News and Comments

US & Canada

• US factory orders increased 0.6% m/m in May following an upwardly revised 1.3% m/m gain in April, the Commerce Department said. Factory orders for nondefense capital goods orders excluding aircraft, seen as a barometer of capital spending by businesses, declined 0.4% m/m in May after rising 3.1% m/m in April, signaling weakness in the US manufacturing sector and overall economy. Excluding transportation orders, overall factory orders increased 0.4% m/m in May after rising 2.8% m/m in April.

• US companies cut 79,000 jobs in June, more than forecast, following a downwardly revised 25,000 gain in May, indicating weakness in the US labor market, according to data from ADP Employer Services. Risks are to the downside for Thursday’s employment report.

• US Treasury Secretary Henry Paulson urged new regulations that would allow financial firms to liquidate without threatening market stability. “We need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm,” Paulson said.


• Federal Reserve Board Governor Frederic Mishkin said the US economy will face “substantial headwinds for some time,” which means economic growth is unlikely to improve much this year. He also said rising food and energy prices are threatening to deliver a second blow that could significantly delay any recovery. “Unfortunately, just as the problems in financial markets have begun to abate, commodity prices have reached new heights, which clearly could take a toll on the US economy as well as on the economies of our major trading partners,” Mishkin said. We agree inflation is a big problem and believe the Fed should hike interest rates, so the real federal funds rate will turn slightly positive. That will support the dollar and reduce commodity inflation.

Europe

• European producer prices accelerated a record 7.1% y/y in May on surging energy prices, the biggest increase since the series began in 1990, after rising 6.2% y/y in April, Eurostat reported. The May PPI rise adds to concerns that faster inflation will become embedded in the economy.

• The CIPS UK construction PMI fell to 38.8 in June from 43.9 in May, signaling sharpest decline in construction output since the survey began in April 1997, the Chartered Institute of Purchasing and Supply said.


• European Central Bank President Jean-Claude Trichet said there is a risk of inflation “exploding” if central banks do not act decisively. “We central banks have a big responsibility,” Trichet told Germany’s Die Zeit newspaper. “If we’re not decisive, there’s a risk of inflation exploding. If we act in a decisive way, we can master the situation.” The comments were made on June 23 for an article to appear Thursday when the ECB is expected to raise its key interest rate by a 25-basis point to 4.25% at its rate decision meeting.


• According to the Organisation for Economic Co-operation and Development (OECD)’s forecasts, unemployment in the US will rise to 5.4% in 2008 and 6.1% in 2009 from 4.6% in 2007. Euro-area unemployment will fall to 6.8% in 2008 from 7.1% in 2007 before rising back to 7% in 2009. Japanese unemployment is forecast at 3.8% in 2008 and 2009, a decline from 3.9% in 2007.

Asia-Pacific

• Retail sales in Australia rose a more-than-expected 0.7% m/m in May, the fastest pace since November 2007 but only the second retail sales increase this year, after falling a revised 0.1% m/m in April, data from the Bureau of Statistics showed. Retail sales rose 6.1% y/y.


• Australia’s building approvals declined 6.5% m/m in May on the highest interest rates in 12 years, following a revised 5.4% m/m rise in April, the Bureau of Statistics said. Building approvals rose 0.2% y/y.

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