Expert Analysis of Today's Market

• The dollar consolidated huge weekly gains against most key currencies Friday after the House of Representatives passed the $700 billion financial-market rescue bill. The US labor market and the overall economy deteriorated further in September as companies shed 159,000 workers, the fastest pace in more than five years, today’s employment data showed. The yen rose modestly as US stocks slid as recession fear outweighed the bailout passage. The pound and Swiss franc advanced, the Australian dollar was little changed, and the Canadian dollar fell. Next week, the Bank of Japan, the Reserve Bank of Australia Bank and the Bank of England will decide on their monetary policies. The BOJ may cut its key interest rate or keep it unchanged at 0.5%. The RBA is expected to cut its cash rate target by 50 basis points to 6.5%. The BOE is likely to lower the UK bank rate to 4.75% from 5.0%.
• The EUR/USD declined modestly today and lost about 8 cents for the week. After breaking the long-term uptrend this week, the pair is likely to move lower. After such a huge loss, there may be some consolidation and a possible test of the 1.39-1.40 resistance; however, the technical situation indicates lower levels. Fundamentally, debt deflation will likely continue and pressure the pair. Purchasing power parity also indicates the EUR/USD will fall significantly.

Financial and Economic News and Comments

US & Canada

• The House of Representatives on October 3 voted 263-171 to pass the Senate’s revised version of the $700 billion plan for the Treasury to intervene in financial markets. President George W. Bush welcomed the passage of the rescue bill and signed the most expensive government intervention in the financial markets since the Great Depression.
• US nonfarm payrolls declined 159,000 in September, the sharpest drop since March 2003, while revisions to July and August added 4,000 jobs, resulting in a net loss of 155,000, data from the Labor Department showed. Private (non-government) payrolls fell 168,000 in September. The weakest job categories were manufacturing (down 51,000), retail (down 40,000), and construction (down 35,000). The strongest sector was education/health (up 25,000). The unemployment rate remained at 6.1%. Average hourly earnings increased 0.2% m/m in September, up 3.4% y/y, both lower than expected. Overall, the figures show a dismal outlook for the US labor market and the overall economy. We believe the Federal Reserve will consider cutting the federal funds rate at the end of this month.

• US service industries expanded at a slower pace in September. The ISM US non-manufacturing index fell to 50.2 in September, higher than forecast, from 50.6 in August, the Institute for Supply Management said. A reading of 50 is the dividing line between growth and contraction.

Europe

• The European services purchasing managers index (PMI) was revised to 48.4 for September, up from preliminary estimates of 48.2 but down from August’s 48.5, Markit Economics reported.

• Eurozone retail sales rose a more-than-expected 0.3% m/m in August, following an upwardly revised 0.1% m/m increase in July, Eurostat said. Retail sales fell a less-than-expected 1.8% y/y, matching July’s revised year-on-year decline.
• Germany’s services PMI was revised up to 50.2 for September from preliminary estimates of 49.3; still, lower than August’s 51.4, Markit Economics said.
• The UK services PMI dropped to a record low 46.0 in September from 49.2 in August, Markit Economics reported. The most pronounced declines were seen in employment, which posted its fifth monthly contraction, and outstanding business, which hit a record low 42.1 in September. Prices charged dropped to the lowest level since December 2007, while input prices fell to its weakest point since January.

• UK housing equity withdrawals declined to -£2.76 billion in Q2 2008, following Q1’s fall to £5.242 billion, the Bank of England reported. Withdrawals as a percentage of post-tax income also fell, coming in at -1.2% in Q2 from Q1’s 2.3% level.

Asia-Pacific

• Australian inflation rose a more-than-expected 0.4% m/m in September after increasing at 0.1% m/m in August, TD Securities reported. Annual inflation rose a more-than-forecast 4.5% y/y, matching the Australian Bureau of Statistics current annual figure and well above the Reserve Bank of Australia’s target range of 2-3%.
• Australia’s AiG performance of service index increased to 44.9 in September, below 50 still indicating contraction in the Australian service sector, following 39.3 in August, the Australian Industry Group reported. The sales index climbed to 42.2 in September from 35.9 in August. New orders rose to 44.5 from August’s 38.4. The employment index increased to 47.0 from 44.4. Meanwhile, input prices fell to 71.0 from August’s 73.9, and selling prices declined to 52.5 from 53.2.

• Japanese Economics Minister Kaoru Yosano said the Ministry of Finance and the Bank of Japan should cooperate more in light of the global financial crisis. He said if the BOJ were to cut interest rates at its monetary policy meeting early next week, there would be little reaction and it would do little to contain the crisis. He added that recent moves by the BOJ to inject liquidity into markets were smart and effective.

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