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• Case Shiller 20 city home price index falls 3.6% versus year ago; Housing double-dip confirmed
• Bank of Canada holds rates steady, says stimulus will eventually be withdrawn
• RBA watcher McCrann sees July RBA hike
• Fitch affirms France at AAA; outlook stable
• Chicago PMI plummets to 56.6 in May from 67.6 in April
• US consumer sentiment falls to 60.8 in May from 66.0 in April
• Member of German FDP (junior partner in Merkel’s coalition) says Greece should leave Euro zone
• EU’s Rehn: Greek talks to end in coming days; no restructuring; GErman banks have exposure of EUR 40 bln to Greece
• BOE’s Sentance: BOE risks losing credibility: Sky
• S&P 500 rises 1% to 1345
• US 10-year note falls 2 bp to 3.50%
• Oil rises $2 to $102.60

More bailout money for Greece? Buy everything!

That seemed to be the logic today as “risk on” was the rallying cry early on. Horrid US economic data, from home prices to manufacturing to consumer confidence, all combined to sober the market (as did a call from a German parliamentarian to toss the Greeks out of the euro) late in the US morning. EUR/USD stalled at 1.4415 on several occasions this morning before skidding back to 1.4360 on the Shaffler comments about Greece. A late equity rally helped pull the risk trade higher late in the day, with EUR/USD ending at 1.4390, AUD/USD off lows at 1.0675 and USD/JPY up from 81.20 US lows, ending at 81.50.

EUR/GBP was in demand for month-end, as it usually is, testing resistance in the 0.8750. Cable recouped some losses late in the day, bouncing from 1.6423 to end at 1.6450. BOE’s Sentance repeated the MPC should hike rates a little now to avid sharp hikes later…

LONDON (MNI) – A ‘big risk’ is emerging to the credibility of the
Bank of England’s commitment to its inflation target, outgoing Monetary
Policy Committee Member Andrew Sentance said Tuesday night.

Sentance, whose term on the MPC expires today, told Sky television
that a “big risk (is) now emerging to the credibility of the Bank and
people’s views of inflation in the future”.

“If inflation does not come down in the way that the Bank is
suggesting — and there is a big risk that is the case – then that will
have a serious knock-on effect on the credibility of the Bank’s
commitment to its inflation target. That is a risk for the future”.

Sentance conceded that the ‘big worry’ is that expectations and
wages would start to drift as a result of that potential loss of
credibility.

In other comments, Sentance said that there was a danger that the
fall in sterling would produce long-lasting inflation effects via
effects on competition and firms’ pricing power, given the openness of
the UK economy to international trade.

“The big issue with the fall in the pound is how big its effects
will be and how long it will continue,” Sentance said.

Sentance noted past episodes of sterling weakness, such as those
seen during the 1990s had produced long-lasting effects.

“We have to take the value of pound very seriously.”

In broader criticism of the way the UK central bank operates,
Sentance suggested that the way the BOE tends to analyse the world had
grown up during a period when the economic situation had been much more
stable. In times when inflation is not at target, the BOE tended to rely
very much on its forecast but the latter did not put enough weight on
factors such as the global economy and the exchange rate, he said.

The situation is much more complex now, Sentance said.

For instance, “the fact that inflation is high is not necessarily
associated with strong growth. In fact, in some ways high inflation is
squeezing growth out of the economy by squeezing people’s disposable
economy,” he added.

Sentance reiterated that rates needed to rise now but only
‘gradually’.

“If that doesn’t happen, we will face a sit where interest rates
have to move much more sharply and that in itself will be a bigger
threat to growth”.

Sentance said that he wouldn’t disagree with the BOE latest
forecast that inflation could peak near 5%, but said his greater worry
was that from this high level it would take a long time to bring it back
down.

“It is going to quite a long time to get inflation back down
again,” Sentance said.

“And that is one of the arguments – it’s not the only argument –
for higher interest rates.”

“I don’t think we’re going to be back at 2% by the middle of next
year,” Sentance said, saying that the latest BOE Inflation Report backed
him up on this.

Sentance warned that “wage increases are already starting to drift
upwards and will drift up further if we experience higher inflation and
that is the kind of risk that the BOE should safeguard against”.

He said that BOE Chief Mervyn King’s controversial comments on
fiscal policy had not been a ‘big issue’ for himself.

“We do now have a fiscal plan being implemented that should
consolidate public finances and the challenge that I think perhaps we
are being a bit slow to address is actually getting monetary policy
back on track”.

–London newsroom: 00 44 20 7 862 7499; email: dthomas@marketnews.com

[TOPICS: M$B$$$,M$BDS$,M$$FI$,MT$$$$,M$$BE$]

It is very early in Sydney but AUD is getting a lift, mostly from the Terry McCrann column in the Herald Sun.

The risk trade is holding up well in US trade as equities rise about 0.7% while oil rises $2 to to $102.60. That’s a plus for the AUD, after it fell on GDP data overnight.

We’ve edged as high as 1.0665 from session lows of 1.0643.

We’ve spent most of the NY afternoon n the 1.0650s…

US DATA: May farm prices -0.6%.

Not sure why, but USD/JPY is getting a boost in thin month-end markets. Rates, equities and commodities are pretty steady and the wires are quiet, so I’ll chalk it up to an order. We bounced toward 81.50 from New York session lows around 81.20.

While 1.4415/25 is proving a tough nut to crack 1.4360 is proving to be equally firm support.

I still like playing from the long-side near-term, especially as US yileds continue to dip on soft US data. A gradual decline works against the dollar while a sharp (ie “risk-off”) decline tends to support the buck. SO far, yield declines have been slow and accompanied by rising equities and commodities.

By Chris Cermak

WASHINGTON (MNI) All signs point to a slowdown in U.S.
manufacturing ahead of the Institute for Supply Management’s Wednesday
release of its May survey, leaving businesses wondering whether the
pullback is temporary or points to a more serious weakening of the U.S.
economy.

The May ISM purchasing managers index is forecast to drop to 57.5
in May from 60.4 a month earlier according to a survey of economists by
Market News International.

It would mark the first time this year that the closely-watched
manufacturing index has fallen below 60, though it is still well above
the 50 mark that indicates growth in the sector.

HSBC economist Ryan Wang said U.S. exports, which fueled a rebound
in manufacturing earlier this year, are now a key reason for the slower
pace of growth in May.

“The slowdown seems to be global. That’s impacting the U.S.,” Wang
said in an interview. “The key question is whether it turns into a more
serious pullback.”

Regional manufacturing indicators across the board have signaled a
slowdown is on the cards. The Philadelphia Fed’s manufacturing index
plunged to 3.9 in May from 18.5 the previous month.

The New York Fed’s Empire State report and Chicago PMI have also
shown slower growth in their regions, while the Dallas Federal Reserve
and Richmond Fed indexes reported contractions in May.

The weakening in the manufacturing sector has followed a broader
weakening in growth across the U.S. economy, where a stubborn
first-quarter GDP reading of 1.8% has left many economists revising
downward their predictions for output in the coming months.

Yet job growth in manufacturing has not slowed as significantly,
also mirroring a trend in the wider economy.

The manufacturing sector added 29,000 jobs in April, as the wider
economy added 244,000. The employment indicators of regional
manufacturing indices have also typically shown less of a slowdown than
the overall indicators for the sector.

Wang said many businesses appeared to be “hitting the pause button,
certainly in production,” hoping to avoid a build-up of excess
inventories as they wait to see whether demand will firm up in the
coming months.

The May ISM Manufacturing Survey will be released at 10 a.m. ET
Wednesday.

–Chris Cermak is a reporter for Need to Know News

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MAUDS$]

–House Minority Whip: House GOP Setting Up Debt Hike Vote To Fail

By John Shaw

WASHINGTON (MNI) – House Minority Whip Steny Hoyer Tuesday blasted
House Republican leaders for setting up a vote this evening on debt
ceiling legislation that is designed to fail.

Hoyer said he is urging House Democrats to either oppose or vote
present on this version of the debt ceiling bill, charging that House
Republican leaders are “playing games” with a potentially explosive
issue.

The House will vote Tuesday after 6:30 p.m. on a bill that would
increase the debt ceiling by $2.4 trillion without any conditions placed
on it.

No Republicans and few Democrats are expected to vote for it.

The House debt limit vote will be held under a special procedure
that prevents any amendments but also requires the measure to get a
two-thirds majority to pass.

Republican leaders have said the purpose of the vote is to show
there is no support for a “clean” debt ceiling increase.

“They are not even making a pretense it’s real,” Hoyer told
reporters at a briefing, regarding House Republican leaders stance on
the debt hike bill. He called the vote a “charade.”

Hoyer said House Republican may be trying to give “political cover”
for their members by allowing them to vote against this version of the
bill, with the expectation that they will support a subsequent debt hike
bill that is linked to a spending cut package.

Hoyer said the debt ceiling vote Tuesday evening may confuse and
even rattle financial markets.

“This does not give certainty and even raises concerns that need
not exist,” Hoyer said.

Hoyer said the Tuesday vote in the House will not be a legislative
high point. “It will not be an adult moment on the floor of the House of
Representatives,” he said.

He said the debt ceiling bill is being scheduled “solely for the
purpose of being defeated.”

The U.S. has already reached its $14.29 trillion debt ceiling.
Treasury Secretary Tim Geithner has said that Congress must pass
legislation increasing the debt ceiling by August 2.

Hoyer said Congress and the White House should focus on negotiating
a deficit reduction package that could be linked to a debt hike vote
later in the summer.

** Market News International Washington Bureau: (202) 371-2121 **

[TOPICS: M$U$$$,MFU$$$,MCU$$$]

Presumably he is talking about relative weakness against the euro and the inflationary impact that brings…

Sentance, who steps down soon from the MPC, also notes a big risk emerging that to the credibility of the Bank of England. He repeats that if rates are not hiked gradually now, they will have to be hiked sharply later, which will threaten growth.

There is more upside risk to inflation, Sentance says.

GBP is marginally above session lows, now at 1.6440 as month-end selling pressure abates.

• Greek debt restructuring not on the table
• Greek discussions quite difficult
• German bank’s exposure to Greece about EUR 40 bln
• Sees sufficient result from second round of stress testes fro German banks

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