Expert Analysis of Today's Market

• The dollar was mostly lower in light trading Friday after negotiations to push the Bush Administration’s $700 billon financial-rescue package through Congress stalled (but not stopped according to the parties). The US O2 GDP rose at a downwardly revised 2.8% annual rate and corporate profits fell. The yen advanced on increased risk aversion by the failure of Washington Mutual and temporary impasse of the Treasury’s proposal. The euro, Swiss franc and Canadian dollar saw small gains while the Australian dollar fell modestly. Traders seem unwilling to take big bets until the political situation clears.
• The GBP/USD was higher today but little changed for the week. The pair has recovered some of August and early-September’s heavy losses and stalled at the 1.86-area resistance. If this resistance is broken, the GPB/USD will likely rally to the 1.94 resistance. If the 1.86-area holds, the pair may test the 1.75-area support.

Financial and Economic News and Comments

US & Canada

• The US Q2 GDP was revised down to a 2.8% annual growth rate, compared to the original 3.3% estimate, the Commerce Department said. The Q2 GDP rose 2.1% y/y. The largest downward revision was for consumption, which grew at a 1.2% annual rate versus a previous estimate of 1.7%. Business investment was unrevised overall, but with less investment in equipment and software and more investment in structures. The largest drag on real GDP continues to be home building, but the annualized rate of decline in residential construction was revised to -13.3% versus a previous estimate of -15.7%. Excluding housing, real GDP was up at a 3.4% rate in Q2, up 3.1% y/y. The GDP price index was revised to a 1.1% annual rate in Q2 versus a prior estimate of 1.2%. Nominal GDP growth – real GDP plus inflation – was revised down to a 4.1% growth rate in Q2 versus a previous estimate of 4.6%. Overall, today’s data show the US economy was weaker than previously thought even before the latest US financial crisis.

• The Reuters/University of Michigan final index of consumer sentiment fell to 70.3 in September, lower than forecast, following 63.0 in August and 56.4 in June. The gauge of sentiment averaged 85.6 in 2007. As the latest US financial turmoil worsens, consumer confidence could dive again and consumer spending will be extremely weak through next year.
• Talks over the legislation were continuing on Capitol Hill, with House Republicans voicing opposition to the structure of the $700 billion financial-rescue plan. Democrats said Republican presidential candidate John McCain’s return to Washington Thursday contributed to the impasse by injecting presidential politics into the negotiations. The markets, however, widely speculated Congress will pass the rescue plan.
• Washington Mutual, the US largest savings and loan association, was seized by federal regulators Thursday night and sold to JPMorgan Chase for $1.9 billion. This is by far the biggest bank failure in American history.

Europe

• Germany’s consumer-price index increased 2.9% y/y in September after rising 3.1% y/y in August, the Federal Statistical Office reported. The CPI fell 0.1% m/m in September. Germany’s CPI using a harmonized European Union method rose 3.0% y/y in September after rising 3.3% y/y in August. The harmonized CPI fell 0.1% m/m in September.

• Germany’s import price index increased 9.3% y/y in August after rising 9.3% y/y July, the Federal Statistical Office said. The import prices index, excluding crude oil and mineral oil products, rose 4.1% y/y in August. The August import prices index fell 0.8% m/m. Germany’s export price index increased 2.9% y/y in August after rising 3.3% y/y in July. The August export price index declined 0.4% m/m.

Asia-Pacific

• Japan’s core CPI, which exclude fresh food, exceeded 2.0% y/y for a second month in August rising 2.4% y/y, the same inflation rate as July, the statistics bureau said. Excluding food and energy, prices were unchanged y/y in August after increasing 0.2% y/y in July. Tokyo’s core CPI advanced 1.7% y/y in September, faster than August’s 1.5% y/y increase.

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