Expert Analysis of Today's Market

Inflation Remains Fed’s Major Concern

Hans Nilsson 2007-07-19

In New York mixed trading Thursday, the dollar was weaker against the Canadian and Australian dollars but slightly stronger versus the yen. Federal Reserve Chairman Ben S. Bernanke told Congress that inflation remains the Fed’s major concern, citing slower productivity growth as one risk that can lead to higher inflation. The yen fell in cross trade on renewed demand for carry-trades as equity prices rose in New York. Sterling fell on weaker-than-expected UK retail sales and Bank of England Governor Mervyn King’s comment that UK inflation will slow.

The EUR/USD, modestly higher and extremely overbought, is testing resistance in the low 1.38-area. The pair requires some consolidation. However, if the resistance is broken, the pair will move to 1.40.

Financial and Economic News and Comments

US & Canada

Federal Reserve Chairman Ben S. Bernanke told the Senate Banking Committee today that policy makers need more data to assure them that inflation is slowing before they can be confident that risks of faster price increases have reduced. “The month-to-month inflation numbers are very noisy, and so a couple of good numbers does not by itself mean that the problem is solved and gone away,” Bernanke said.

The Conference Board’s index of leading indicators fell 0.3% in June after a 0.2% gain in May, the Conference Board said. The coincident index rose 0.2% as the lagging index rose 0.5%.

The Philadelphia Fed manufacturing index fell to 9.2 in July after reaching a 2-year high of 18.0 in June, the Federal Reserve Bank of Philadelphia said.

US jobless claims declined 8,000 to 301,000 on a seasonally-adjusted basis in the week ended July 14, the Labor Department said. That is the lowest level in two months. Claims for the July 7 week were revised to 309,000 from 308,000. The 4-week average fell to 312,000 last week from a previous level of 318,250.

Canadian wholesale sales rose a slightly stronger-than-expected 0.6% m/m in May to C$43.1 billion ($41.3 billion), Statistics Canada said.

Europe

German producer price index rose a less-than-expected 0.2% m/m in June following a 0.3% m/m rise in May.

UK retail sales increased 0.2% m/m and 3.4% y/y in June, according to National Statistics.

UK mortgage lending fell sharply in June following a sharp rise in May, the British Bankers’ Association reported.

Asia-Pacific

Japanese department store sales jumped 5.5% y/y to ¥634.9 billion in June, up for the first time in four months, as hot summer weather boosted seasonal demands, the Japan Department Stores Association said.

China’s economic growth surged to 11.9% y/y in Q2 2007, while consumer price inflation rose 4.4% y/y, the National Bureau of Statistics said. The strong increases in GDP and CPI indicate some sectors of the Chinese economy may be overheating.

FX Strategy Update

2008
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