NEWS / Foreign Exchange

Retail Sales, Housing Starts, Industrial Production & CPI

Retail Sales & Excluding Autos (March)

Actual: 0.7, 0.8% Consensus: 0.4, 0.7% Prior: 0.5, 0.4%

Retailing expanded solidly in March. Total sales climbed 0.7% from 0.5% in February. Excluding autos, sales jumped 0.8% largely inflated by gasoline sales, which expanded 3.1% in the month. Excluding autos and gasoline, sales edged up by 0.4% boosted by sales of furniture (0.6%), building materials (1.4%), clothing (2.4%), and sales in food services and drinking places (1.2%). However, adjusted by CPI inflation, retail sales rose a modest 0.1% for the second consecutive month; 1% higher than the level of a year earlier. For the first quarter as a whole, sales??™ growth moderated 0.7% from 3% in Q406. This suggests that, excluding services, PCE growth could have eased in Q107 from the previous quarter. Spending on goods accounts for approximately 40% of PCE.

Housing Starts & Building Permits (March)

Actual: 1.518, 1544K Consensus: 1500, 1515K Prior: 1.506, 1532K

Residential construction readings suggest that the housing market have already bottomed. Housing starts rose 0.8% in March following a 7.6% gain in February; however, they were 23% below the pace of March 2006. Starts??™ underlying trend ??“measured by its six-month moving average- slowed to 1517K down from 1551K in February. Regionally, starts surged in the Midwest (44%), but fell in the Northeast (-6.1%), the South (-2.7%), and the West (-7.7%). Building permits also increased by 0.8% after falling for two consecutive months though its underlying trend slipped to 1603K from 1634K in February.

Industrial Production & Capacity Utilization (March)

Actual: -0.2, 81.4% Consensus: 0.0, 81.9% Prior: 0.8, 81.6%

In March, a solid increase of 0.7% in manufacturing production was more than offset by a 7.7% drop in the output of utilities. Growth in the manufacturing sector was driven to a large extent by computer and electronic products (2.0%), which were followed by positive contributions from nonmetallic mineral products (3.0%), machinery (1%), miscellaneous durable goods (1.6%), food, beverage, tobacco (0.7%) and chemical products (0.7%). The growth of computer and electronic products is positive for the investment outlook, supporting our view that the recent unusual deceleration of nonresidential investment resembles more a soft-patch rather than a recession. On a year-over-year basis, industrial output edged up 2.3% from 3.0% in February. Output growth has been moderating steadily since September, when it reached a record of 6%. Finally, the rate of capacity utilization slipped 0.2 pp. to 81.4%, 1.7 pp. above the average of the past ten years.

Headline CPI Inflation & Core (March)

Actual: 0.6, 0.1% Consensus: 0.6, 0.2% Prior: 0.4, 0.2%

The 12-month core inflation rate is beginning to slow gradually. The main source from pressures ??“the rental components??“ seems to be moderating and will likely tend to ease as improved housing affordability gradually translates into a shift back from renting to buying. Pressures will tend to ease somewhat as economic activity moderates and generates some slack in the labor market. We continue to expect core inflation to decrease somewhat ??“we maintain our base scenario for 2007: average of 2.3%-; yet, the risks continue biased to the upside. For further details see Inflation Observatory, March 2007.