The minutes of the Federal Open Market Committee's (FOMC) June 24-25 meeting show that FOMC board members agreed upside risks to inflation had increased and generally agreed downside risks to growth had diminished.

Most members thought the current 2.00% target rate was appropriate but that risks to inflation may initiate a reassessment. Most members said an unchanged target rate "would support an eventual decline in both inflation and unemployment," but that "circumstances could change quickly" and they would be ready to "respond promptly to incoming information about the evolution of risks."

Rudy Narvas, an economist at 4Cast, said the minutes were "exactly what we were expecting" for one exception, namely that it appears other members besides Richard Fisher were interested in hiking rates.

U.S. CPI inflation data surprised to the upside Wednesday morning with the annualized headline figure rising to a 17-year high in June. Meanwhile, Federal Reserve Chairman Ben Bernanke began the second of his two-day testimony, this time before the House Committee on Financial Services.

The seasonally adjusted U.S. consumer price index rose more than expected on both fronts as the core rate ticked up 0.3% in June, contributing to a 2.4% year-over-year change. Total inflation rose 1.1% in the month and soared to a 17-year high of 5.0% on the year, according to data released by the U.S. Department of Labor. Economists had expected a 0.2% monthly gain in the core rate and a 0.7% rise in total inflation.

"The news on headline CPI inflation couldn't really have been any worse," noted Paul Ashworth, senior U.S. economist at Capital Economics. He added that the "staggering" 1.1% monthly advance was the largest in 26 years. "Energy prices rose 6.6% in June and are up 24.7% on the year, while gas rose 10.1% in the month and 32.8% in the year."

Keeping the focus on downside risks to economic growth, Federal Reserve Chairman Ben Bernanke did not deviate from his remarks delivered on July 15 to the Senate Banking Committee in his second day of testimony, this time to the House of Representatives' Committee on Financial Services.

In response to questions from members of Congress, Bernanke said inflation is currently "too high" and that it remains a top priority for the Fed. Bernanke added that the Fed was balancing the risks to the economy and promised to be responsive as the situation evolves. On oil, the Fed Chairman repeated his view that speculation was not having a substantial effect on oil markets but admitted that a comprehensive energy plan would have some impact on commodity futures because markets were forward-looking.

Kansas City Fed President Thomas Hoenig said Wednesday that he expects positive but subdued growth for the remainder of 2008 and that the U.S. ought to avoid a recession. Speaking in Colorado, Hoenig said the strength in exports and government spending, tax rebates and a reduced drag from housing should help counter the effects of higher energy prices and financial stress. "While I believe we can avoid a recession, I recognize that there are significant risks that growth could turn out weaker than I suggest here," he said.

In other U.S. releases, industrial production rose more than expected in Wednesday's report from the Federal Reserve, showing a gain of 0.5% in June. However, some economists called the figure misleading, saying the real focus should be on the core rate, which declined in the month. Economists were looking for industrial production to rise by only 0.1% in June. Over the past 12 months, industrial production has increased by 0.3%.

A report from Wells Fargo and the National Association of Home Builders (NAHB) suggests that homebuilders were even more pessimistic in July as the housing market index fell two points to 16, creating a new historic low in the 22-year index. Three components make up the index, all of which fell in the month.

Average real wages in the U.S. fell by 0.9% month-over-month in June, below the previous month's 0.4% decline, according to data released from the U.S. Bureau of Labor Statistics on Thursday. The report also cited annual growth of 0.3% in real average hourly earnings, unchanged from May's result. Meanwhile, average weekly earnings in June came in at $613.12, compared to the previous year's $588.88 level.

Net long-term TIC flows came in below the consensus forecast, totalling $67.0 billion in May, while total TIC flows for the month fell to -$2.5 billion, according to data released by the U.S. Treasury on Wednesday morning. Economists had been expecting net long-term flows of $70.0 billion compared to the previous month's downwardly revised $111.9 billion level.

Weekly mortgage applications in the United States moved higher in the week ending July 11, according to data released from the Mortgage Bankers' Association (MBA) on Wednesday, which reported a 1.7% week-over-week rise in applications. In the previous week, applications rose by 7.5%.

In Canada, Finance Minister Jim Flaherty said his government is committed to lowering taxes further and reducing the national debt. He said the country's economic future is bright, despite the deeper-than-expected housing downturn in the United States, calling Canada's fundamentals "solid". The finance minister said Canada's financial institutions are well-capitalized and that the country's banking and housing sectors are "strong." He also said there is no U.S.-style housing "bubble" in Canada.

Economic growth will likely just be 1.7% in 2008, but should climb to 2.7% the following year as manufacturers benefit from a stabilized currency and domestic demand eases, the Conference Board of Canada said in its summer 2008 outlook report released today.

The report says exports, particularly in the auto sector, have been a weak spot in the Canadian economy that has dragged on the country's Gross Domestic Product (GDP) as U.S. demand has waned. The CBOC report says Canadian households have seemed oblivious to the U.S. slowdown early in 2008, but that signs of impact are starting to appear. Notably, employment gains are expected to slow and new fiscal stimulus packages, particularly federal and provincial tax cuts, are drying up, the CBOC noted.

Rising energy prices helped push up Canadian manufacturing sales in May by a higher-than-expected 2.7%, according to figures released Wednesday by Statistics Canada. Total sales hit $51.4 billion in May, the fourth increase in five months, but still came in well below the record $53.1 billion reached in March 2007. Analysts had expected to see May manufacturing sales rise by 0.5%.

According to the CIBC's employment quality index, wages in Canada are on the rise despite a slowdown in the pace of job creation. CIBC economist Benjamin Tal says the number of full-time paid employees in high-paying sectors rose "by a strong 6% in the past year" and by 3.5% during the last six months. The index has risen by 2.4% since the start of the year.

In overnight news, the Office for National Statistics (ONS) reported that the number of individuals in the UK claiming unemployment benefits rose 2.6% in June, reflecting an increase of 15,500 over the figure in May. The claimant count rate was unchanged from the previous month's reading and is in line with expectations.

Eurostat confirmed that consumer price inflation in the euro zone reached a record annualized rate of 4.0% in June, up from May's 3.7% rise. Month-over-month, consumer prices increased 0.4%, in line with expectations, but down from the 0.6% gain recorded in the previous month.

According to the Federal Statistics Office (Destatis), German consumer price growth slowed to 0.3% in June on a monthly basis, down from May's 0.6% increase. Year-over-year, inflation reached 3.3% after jumping to 3.0% in the previous month. June's annualized increase is the largest seen since December 1993.

By Stephen Huebl, This email address is being protected from spam bots, you need Javascript enabled to view it , with contributions from Erik Kevin Franco, This email address is being protected from spam bots, you need Javascript enabled to view it , Patrick McGee, This email address is being protected from spam bots, you need Javascript enabled to view it , Todd Wailoo, This email address is being protected from spam bots, you need Javascript enabled to view it , Steve Stecyk, This email address is being protected from spam bots, you need Javascript enabled to view it , Geoff Matthews, This email address is being protected from spam bots, you need Javascript enabled to view it and Sean McKibbon, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Nancy Girgis, This email address is being protected from spam bots, you need Javascript enabled to view it

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