Expert Analysis of Today's Market

• The dollar gained against other key currencies Friday on lower commodity prices and a report that the Korea Development Bank considered buying Lehman Brothers. Federal Reserve Chairman Ben S. Bernanke tried to convince the financial markets that he does not need to raise interest rates as the slowing US economy will bail him out on the inflation front. The yen fell on increased risk appetite following renewed financial-market confidence. The Canadian dollar declined modestly versus the greenback and strengthened against other major currencies after yesterday’s gain that broke the loonie’s short-term downtrend. Sterling fell as the UK economy stagnated unexpectedly and private consumption fell in the second quarter. The Australian dollar declined on lower commodity prices.


• The EUR/USD fell as eurozone June industrial orders dropped the most since December 2001 adding to evidence of a deepening economic slowdown in Europe. The pair found short-term support in the 1.46-area early this week and tested resistance at 1.49 yesterday. The EUR/USD may need to trade in the 1.46-1.49 area before a test of the significant 1.44-1.45 support, which is the long-term uptrend. If this support is broken, the pair will fall to 1.35.

Financial and Economic News and Comments

US & Canada

• Federal Reserve Chairman Ben S. Bernanke said inflation should ease later this year and in 2009, signaling he isn’t contemplating higher interest rates despite what he called “a jump in inflation.” “[T]he recent decline in commodity prices, as well as the increased stability of the dollar, has been encouraging. If not reversed, these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next year,” Bernanke said in his speech on “Reducing Systemic Risk,” at the Federal Reserve Bank of Kansas City’s Annual Economic Symposium, Jackson Hole, Wyoming. The Fed “is committed to achieving medium-term price stability and will act as necessary to attain that objective,” he said. Addressing market conditions and the regulatory reform outlook, Bernanke also discussed two strategies for reducing systemic risk: strengthening the financial infrastructure and increasing the systemwide focus of financial regulation and supervision.

Europe

• Eurozone new industrial orders dropped 7.4% y/y in June, more than expected and the most since December 2001, led by a 29.8% y/y decline in orders for transport equipment, which “tend to be very volatile, with a limited immediate impact on production,” Eurostat said. Excluding transport, industrial orders fell 1.5% y/y. Industrial orders declined 0.3% m/m in June. Excluding transport, which fell 3.7% m/m, industrial orders increased 0.6% m/m.

• The eurozone current account deficit rose to €8.2 billion in seasonally adjusted terms in August, up from July’s downwardly revised deficit level of €5.5 billion. “This reflected deficits in current transfers (EUR 6.5 billion), goods (EUR 2.0 billion) and income (EUR 1.2 billion), which were only partly offset by a surplus in services (EUR 1.5 billion),” the European Central Bank said. Without adjusting for calendar effects, the current account deficit contracted to €1.0 billion in August from July’s downwardly revised deficit level of €19.6 billion.


• The UK Q2 GDP was unchanged from Q1, compared with a previous growth estimate of 0.2% q/q, according to preliminary estimates from the Office for National Statistics. UK economic growth was 1.4% y/y, the weakest since 1992. Private consumption contracted 0.1% q/q in Q2 after increasing 1.3% q/q in Q1. The figures indicate the UK economy is on the brink of a recession.


• European Central Bank council member Klaus Liebscher said the ECB must anchor inflation expectations “on a low level” to avoid a wage-price spiral. “Our central concern is to avoid second-round effects,” Liebscher said. The ECB “will do what’s needed” to fight inflation. “Price stability is our mandate and we’ll have to guarantee it over the medium term,” he said.

Asia-Pacific

• Korea Development Bank Chief Executive Officer Min Euoo Sung declined to comment on a Reuters report that KDB is “open to” a potential acquisition of Lehman Brothers Holdings Inc. Reuters, citing an unidentified KDB spokesman, said KDB is studying a number of options, including buying Lehman.

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