The US data was mixed

The US data was mixed over the week and failed to offer clear market direction. The home sales data remained generally weak and continued to record sharp annual decreases. There was some evidence of stabilisation, although the monthly comparisons were distorted to some extent by revisions to previous data. The prices data was potentially significant with existing home sales recording the first annual decline for 11 years.

Second-quarter GDP was revised down slightly while durable goods orders also weakened for August. The drop in oil prices helped support consumer confidence over the month. As far as inflation is concerned, the core PCE deflator rose 0.2% in August with the annual increase rising to an 11-year high of 2.5%.

Federal Reserve officials continued to warn over the potential inflation risks during the week, although there was also a general mood of confidence that the pressures would ease over the next few months. Early in the week, markets were starting to factor in the potential for an interest rate reduction in the first half of 2007, although these expectations were revised slightly over the second half.

The German IFO index proved resilient with the September decline held to 104.9 from 105.0 the previous month, although there was a bigger decline in the expectations component. There was a significant improvement in business confidence for September while the provisional Euro-zone inflation rate eased to 1.8% from 2.3%. During the week, ECB officials continued to give the impression that interest rates would be increased at the October council meeting.

The dollar was able to resist significant losses over the week as the Euro failed to sustain upward moves and the US currency strengthened to near 1.2630 on Friday.
Source: VantagePoint Intermarket Analysis Software

UK GDP was revised down slightly for the second quarter which undermined confidence slightly.

MPC member Blanchflower stated that inflation risks had decreased while there was additional spare capacity due to the fact that the labour market had weakened. The National Statistics Office was an usual focus of attention after it reveal an error in the inflation data. The overall increase in nominal GDP was revised down to 4.8% fir the second quarter from 6.0% as export prices were revised down. The Bank of England referred to this indicator as a source of potential concern in the last set of minutes and the corrected data resulted in a downward revision to interest rate expectations.

Sterling weakened to 0.6780 from highs beyond 0.67 against the Euro and also weakened to lows below 1.8650 against the dollar.

The Japanese economic data was close to expectations with a solid increase in industrial production for August while there was a 0.3% increase in core consumer prices in the year to August. The yen was still vulnerable to the impact of carry trades with persistent selling pressure still evident over the week

The Japanese yen was also unable to secure any support from gradual Chinese yuan appreciation during the week and weakened to test lows beyond 118.0 on Friday.

The domestic Australian data had a slightly weaker bias, but international considerations remained dominant. Concerns over weaker commodity prices and the impact of bond redemptions in October pushed the Australian currency to lows below 0.7450 against the US dollar over the second half of the week. The Canadian dollar also retreated to near 1.12 against the US currency after failing to hold gains beyond 1.11
Source: VantagePoint Intermarket Analysis Software

Have a great day and a wonderful weekend.