Market Commentary
by Scott J. Brown, Ph.D., Chief Economist

The Consumer Price Index (CPI) data this week was a surprise to the upside, rising 5.6% year-over-year (the largest increase since January 1991). However, investors were willing to discount the July inflation data as commodity prices continued to tumble. A weaker global economic outlook bolstered the dollar, which helped commodity prices fall even more. Real gross domestic product (GDP) fell in Japan and the euro area in the second quarter. The Bank of England said it expects growth to be “broadly flat” over the next year or so, with “downside risks that the slowdown may be more pronounced.”

Retail sales results were soft in July, suggesting limited follow-through from the economic stimulus payments. Real weekly wages, the major fuel for consumer spending, sank another 0.8% in July, after falling 0.9% in June and 0.7% in May, so they’re down 3.1% from a year ago (that’s not good). Import prices continued to show a broad-based acceleration in the July data. Industrial production was mixed, but generally soft in July.

Next week, the economic calendar thins out. Federal Reserve Chairman Ben Bernanke will speak on Friday at the Kansas City Federal Reserve’s annual economic symposium held in Jackson Hole, Wyoming. Unlike in the CPI, lower energy prices are expected to be a more significant factor in the Producer Price Index (PPI) – energy price declines will push both the PPI and CPI lower in August.

A change in New York City’s building codes, which went into effect on July 1, led to a sharp spike in permits in June. Starts are partly imputed from the permit data. The June spike should unravel just as sharply in July. The Index of Leading Economic Indicators should be dragged lower by a jump in jobless claims and the drop in building permits.

Central bankers from around the world will assemble in Jackson Hole for the Fed Camp mentioned above. Hopefully, they won’t all get eaten by bears. When Bernanke speaks, he may mention something about the economic and the current stance of monetary policy, but that’s not the focus here. More likely, he will discuss efforts that the Fed and other central banks have made over the last year, and may make in the future, to promote liquidity and keep the financial markets functioning.

Indices

	Last	Last Week	YTD return %
DJIA	11615.93	11431.43	-12.43%
NASDAQ	2453.67	2355.73	-7.49%
S&P 500	1292.93	1266.07	-11.95%
MSCI EAFE	1818.44	1871.94	-19.30%
Russell 2000	754.38	713.41	-1.52%

Consumer Money Rates

	Last	1-year ago
Prime Rate	5.00	8.25
Fed Funds	2.00	5.25
30-year mortgage	6.44	6.26

Currencies

	Last	1-year ago
Dollars per British Pound	1.870	1.997
Dollars per Euro	1.483	1.353
Japanese Yen per Dollar	109.74	117.57
Canadian Dollars per Dollar	1.064	1.067
Mexican Peso per Dollar	10.17	11.09

Commodities

	Last	1-year ago
Crude Oil	115.01	72.38
Gold	806.05	669.10

Bond Rates

	Last	1-month ago
2-year treasury	2.38	2.58
10-year treasury	3.84	4.05
10-year municipal (TEY)	5.91	5.83

Treasury Yield Curve – 8/15/2008

S&P Sector Performance Charts – 8/15/2008

Economic Calendar

August 19	—	Producer Price Index (July) Building Permits, Housing Starts (July)
August 21	—	Jobless Claims (week ending August 16) Index of Leading Economic Indicators (July) Philadelphia Fed Index (August)
August 22	—	Bernanke Speaks (“financial stability”)
September 1	—	Labor Day (markets closed)
September 16	—	FOMC meeting
November 4	—	Election Day