The US growth and inflation data was concentrated late in the week

US economic trends and interest rate policy remained the dominant influence over the past week and the Federal Reserve left interest rates unchanged at 5.25% for the second successive month. Governor Lacker also dissented for the second decision running by voting for a 0.25% increase. The Fed stated that it remained concerned over inflationary pressure and would be ready to increase interest rates again if necessary. The Fed, however, also reported that growth was slowing and that inflation pressures should gradually subside.

The US data had a generally weak tone over the week. US producer prices rose 0.1% in August while there was a drop in underlying prices for the second successive month with a 0.4% decline. There was a 6.0% drop in housing starts for August with a 19.8% decline over the year. The Philadelphia Fed survey weakened sharply for September with the headline index falling a to the lowest level since April 2003 with a drop to -0.4 from 18.5 in August.

Confidence in the US economy weakened following the data releases and the US dollar, which had already drifted lower after the Federal Reserve interest rate decision, weakened to lows around 1.2830 against the dollar.

The US current account deficit rose to US$218.4bn in the second quarter of 2006 from US$213.2bn the previous quarter and the income account also registered a record US$4.1bn deficit for the quarter as US overseas debt continued to rise. The capital account data was weaker than expected with net inflows for July dropping to US$33bn from US$75.1bn the previous month.
Source: VantagePoint Intermarket Analysis Software

The Euro-zone data was limited, but the German ZEW index recorded another sharp decline with a drop to -22.2 in August from -5.6 the previous month. This was the eight successive decline and took the index to the lowest level since the beginning of 1999.

At the G7 meetings, officials stated that the yen should strengthen in line with the stronger domestic fundamentals and there were further comments during the week that the yen should strengthen against the Euro. The Chinese currency edged stronger over the week and this combination of factors provided some support to the Japanese yen.

The Japanese currency found further support close to the 118.0 level and strengthened to highs around 116.25 over the second half of the week.

The Bank of England minutes revealed that there was a 8-0 vote for unchanged interest rates in September although one member was close to voting for a cut. The majority of members were slightly more concerned over the risk of rising inflation and markets are continuing to price in another interest rate increase for November. The CBI industrial survey reported a further small recovery in confidence for September.

Sterling briefly strengthened to a 10-month high against the Euro at close to 0.67 and the UK currency also moved above the 1.90 level against the dollar for the first time in over two weeks.

Oil and commodity prices weakened during the week with oil prices particularly weak with a drop to US$60 p/b before a partial correction. The Canadian dollar weakened to near the 1.13 level on weak oil prices before recovering back to 1.1130 on a combination of a strong retail sales report and US dollar vulnerability. The Australian dollar was little changed at around 0.7540 even with the weaker US currency.
Source: VantagePoint Intermarket Analysis Software

Have a great day and a wonderful weekend.