Expert Analysis of Today's Market

• The dollar was mostly lower in volatile trading Tuesday. The EUR/USD rose to 1.6040, a new all-time high, as investors continued to worry over the state of the US economy and financial system. Federal Reserve Chairman Ben S. Bernanke said growth and inflation risks have both increased. The euro pared gains following weaker-than-expected German investor sentiment as well as the separate remarks by Treasury Secretary Henry Paulson and Bernanke before the Senate Banking Committee that stability remains a top priority. The dollar also pared some losses against other key currencies after crude-oil futures prices fell and stocks recovered somewhat. The GBP/USD rose above 2.00 supported by higher-than-expected UK inflation. The Canadian dollar was briefly below support at par for the first time since June 6 and the AUD/USD rose to the highest level since 1983. The USD/CHF and the USD/JPY fell as investors sold high yielding assets financed by loans in Switzerland and Japan.

• The USD/JPY broke the important support at 106 and fell to a 6-week low as stocks fell and risk aversion increased. The short-tem uptrend was also broken. This indicates the pair will test the 103-handle support.

Financial and Economic News and Comments

US & Canada

• US producer prices increased a more-than-expected 1.8% m/m in June, data from the Labor Department showed. The PPI rose 9.2% y/y, marking the highest year-on-year growth rate since June 1981. The core PPI rose 0.2% m/m and 3.0% y/y.

• US retail sales increased just 0.1% m/m in June, less than expected, following a downwardly revised 0.8% m/m gain in May and a downwardly revised 0.2% m/m increase in April, data from the Commerce Department showed. Retail sales excluding autos rose a slightly less-than-expected 0.8% m/m in June after rising 1.2% m/m in May. The less-than-forecast increase in June retail sales suggests restraint by consumers amid high energy prices despite the tax rebates aimed to stimulate the weak economy.

• US business inventories grew a less-than-expected 0.3% m/m to a seasonally adjusted $1.479 trillion in May, after climbing 0.5% m/m in April, according to data from the Commerce Department. Business sales increased 0.8% m/m to $1.189 trillion in May, following an upwardly revised 1.5% m/m rise in April. Business inventories rose 5.2% y/y and sales surged 6.6% y/y.

• The Federal Reserve Bank of New York’s general economic index climbed to -4.9 in July from -8.7 in June, still indicating manufacturing contraction in New York, the New York Fed reported. A reading of zero is the dividing line between growth and contraction.

• The Treasury Department proposal allowing it to buy an equity stake in Fannie Mae and Freddie Mac is aimed at restoring financial market stability, Secretary Henry Paulson said before the Senate Banking Committee, though he stressed “there are no immediate plans to access either the proposed liquidity or the proposed capital backstop.” “Continued confidence in the GSEs is important to maintaining financial system and market stability,” Paulson said.

• In prepared testimony to the Senate Banking Committee, Federal Reserve Chairman Ben S. Bernanke warned the US economy faces “numerous difficulties” and an “unusually uncertain” inflation outlook, suggesting those risks remain the Fed’s top priority despite an upward revision to the Fed’s 2008 economic growth forecast. “Helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve,” Bernanke said.

• The Bank of Canada, as forecast, left its benchmark interest rate unchanged at 3.00%, the lowest since December 2005, saying risks are “balanced” between slow economic growth and high inflation.

• Canadian home resale prices fell 0.4% y/y to C$341,096 ($340,900) in June, the first year-on-year decline since January 1999, the Canadian Real Estate Association said.
  

Europe

• The ZEW index of German investor and analyst expectations declined to a lower-than-expected -63.9 in July from -52.4 in June, the ZEW Center for European Economic Research said.

• UK consumer prices rose 3.8% y/y, exceeding the government’s 3.0% upper limit for a second month and the highest inflation rate since records began in 1997, the Office for National Statistics said. The core CPI accelerated to 1.6% y/y in June, the fastest pace since August 2007.

• UK retail price index accelerated to 4.6% y/y in June, the most since March 2007, the ONS said. Excluding mortgage-interest payments, retail price inflation was 4.8% y/y, the most since June 1992.

• UK house-price declines in June stayed close to the most widespread since the series began in 1978. The number of residential property agents and surveyors saying prices fell exceeded those reporting gains by 88 percentage points, compared with 92.2% in May, the Royal Institution of Chartered Surveyors reported.

Asia-Pacific

• The Bank of Japan kept its key interest rate steady at 0.5%, saying it will watch both downside risks to the economy and upside risks to prices. “Economic growth is slowing further,” BOJ Governor Masaaki Shirakawa said. “The BOJ will implement monetary policy flexibly” after monitoring both economic and price risks. BOJ policy-board members downgraded their assessment of the economy, cutting their forecast for real GDP growth this fiscal year ending March 31, to 1.2%, from the 1.5% forecast on April 30. Consumer prices excluding fresh food will rise 1.8%, more than the 1.1% projected three months ago, the BOJ said.

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