The euro-zone remains a key source of downside risk for the U.S. economy. The likelihood of significant debt restructuring for Greece is highly elevated. The consequences of a hard default are very serious and would extend in two dimensions, to other peripheral sovereign credit markets and also to core Europe through bank exposure, particularly in France. A “Lehman moment” in Europe would likely bleed over to the U.S. resulting in a liquidity drain by European banks, a drop in demand for U.S. exports and an increase in the value of dollar relative to the Euro. However, it would also reinforce a flight to quality to U.S. assets. The key problems are political and not capital. Speculation that China will buy Italian bonds has temporarily soothed financial markets. To ease dollar shortages, three separate dollar liquidity operations have been announced, involving the ECB, the Fed, Japan, England and the Swiss. These liquidity operations appear to be designed to prevent immediate strains and will not address fundamental debt restructuring or the institutional and political problems that the euro-zone faces. U.S. consumer prices in August were hotter than expected as the headline CPI registered a 0.4 percent increase on the heels of a 0.5 percent gain in July. The price pressure was broad-based, coming from energy, food, apparel and rents. The Producer Price Index for finished goods was unchanged in August. Higher consumer inflation limits monetary policy maneuvering room at the Federal Reserve. One choice for easy policy advocates is to define away the problem by elevating the Fed’s so-called “comfort zone” for inflation. The Industrial Production Index for August increased by a modest 0.2 percent, but the headline number was held down by falling utility output. Overall manufacturing output increased by 0.5 percent after growing by 0.6 percent in July with the rebound in automobile production. August Retail sales were unchanged even as consumer confidence fell back to recessionary levels. Most major sales categories showed moderate gains, but lower sales at auto dealers and clothing stores held the total down. Overall, it was a benign sales report, still in line with our expectation of 1.7 percent real personal consumption expenditure growth in 2011Q3 and supportive of a moderate gain to Q3 real GDP.