Expert Analysis of Today's Market

• The dollar was little changed on Tuesday, with US equities trying to find a bottom and the FX market looking for a direction. US month-on-month producer-price inflation dropped in October, but the core PPI rose sharply. US stocks retreated below their lowest closing levels since 2003 before rallying at the close. The yen pared earlier gains as US stocks rose. Sterling’s recovery stalled after data showed UK consumer-price inflation eased increasing the chance of further sharp interest-rate cuts from the Bank of England. The Canadian dollar declined modestly as crude oil fell below $55, while the Australian dollar rose slightly trying to find support after extremely oversold.


• The EUR/USD was little changed. US Treasury Secretary Henry Paulson said it is “unrealistic” to expect the $700 billion financial-rescue plan to reverse the economic woes inflicted by the financial crisis. “It is not a panacea for all our economic difficulties.” The more cautious attitude to fiscal stimulus did little to move the pair. The EUR/USD is trying to build a base, but the long-term trend remains down. There are support in the 1.24-area and resistance in the 1.30.

Financial and Economic News and Comments

US & Canada

• US producer prices dropped a larger-than-expected 2.8% m/m in October, the most on record, following a 0.4% m/m decline in September, Labor Department figures showed. The PPI rose 5.2% y/y. The month-onmonth PPI drop was led by a 12.8% m/m fall in energy costs, the biggest since 1986, and a 0.2 m/m decline in food prices. However, the core PPI, which excludes food and energy, increased 0.4% m/m in October and rose 4.4% y/y, the most since 1989. Capital equipment prices climbed 0.5% m/m in October and rose 4.1% y/y, the most since 1989. Despite the month-on-month drop in the October PPI, the overall figures suggest an underlying problem with inflation has not gone away.

• US builder confidence plunged beyond a record low in November, with the NAHB housing market index dropping to 9 for the month, from an all-time low of 14 in October, Wells Fargo and the National Association of Home Builders reported. The index has plummeted from 61 to 9 over the past three years.


• Net long-term TIC flows totaled $66.2 billion in September, exceeding expectations following August’s upwardly revised $21.0 billion, while total net TIC flows rose to $143.4 billion following August’s upwardly revised $21.4 billion, according to US Treasury data. China has surpassed Japan as the biggest holder of US Treasuries. Total acquisitions of long-term securities by foreigners rose to $30.865 billion compared to August’s -$1.552 billion.


• Federal Reserve Chairman Ben S. Bernanke said the Fed has developed three programs to help commercial paper markets. 1. “The first allows money market mutual funds to sell asset-backed commercial paper to banking organizations, which are then permitted to borrow against the paper on a non-recourse basis from the Federal Reserve Bank of Boston.” 2. “The second program involves the funding of a special-purpose vehicle that purchases highly rated commercial paper issued by financial and nonfinancial businesses at a term of three months. This facility has purchased about $250 billion of commercial paper, allowing many firms to extend significant amounts of funding into next year.” 3. “A third facility, expected to be operational next week, will provide a liquidity backstop directly to money market mutual funds. This facility is intended to give funds confidence to extend significantly the maturities of their investments and reduce over time the reliance of issuers on sales to the Federal Reserve's special-purpose vehicle.”

Europe

• The annual UK inflation rate in October recorded the steepest drop since 1997, with the consumer-price index slowing to 4.5% y/y from September’s 5.2% y/y record high, data from the Office for National Statistics showed. The core CPI eased to 1.9% y/y in October from 2.2% y/y in September. The slowing CPI suggests the Bank of England will continue to cut its benchmark interest rate in the coming months.

• The UK retail price index slipped to 4.2% y/y in October, recording its biggest decline since 1993, from 5.0% y/y in September, the Office for National Statistics said.

Asia-Pacific

• The Reserve Bank of Australia saw benefits of cutting its benchmark interest rate this month, saying “there was an advantage in moving the setting of monetary policy quickly to a neutral position.” “The marked deterioration in global financial conditions over the past couple of months, which had also had an effect on Australian financial markets and share prices, was likely to have a significant effect as well on business and consumer sentiment…. This would probably lead to a significant curtailment of planned investment spending and caution on the part of households,” the RBA said in minutes of the November 4 meeting, released today. RBA Governor Glenn Stevens urged RBA policy members to consider reducing the overnight cash rate target by either 50 basis points or 75 basis points due to concern the global financial turmoil would hurt the Australian economy, the minutes showed. The RBA cut the rate 75 basis points to a 3 1/2-year low of 5.25%, adding to reductions in October and September. It is likely that the RBA will cut its key rate again in two weeks.


• Japan’s leading composite index was revised up to 89.4 from a preliminary 89.2 for September, following 89.0 in August, the Economic and Social Research Institute reported. The coincident index was also revised up to 100.9 from a preliminary 100.8 for September, above August’s 100.6.


• Japan’s nationwide department store sales fell 6.8% y/y to ¥584.6 billion in October, following September’s 4.7% y/y decline, the Japan Department Store Association reported. Tokyo department store sales dropped 8.4% y/y to ¥146.7 billion, down significantly from September’s 4.6% y/y fall.

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