Daily Insight

Despite the fundamental lack of UK economic data released yesterday, the Pound succumbed to comments from Bank of England policy maker, David Blanchflower, who was the sole voice for a cut in interest rates in July, said that the economic outlook has worsened significantly over the past month.

In an interview with BBC Radio, Blanchflower told journalists that the recent decline in retail sales and contraction in other areas of the economy meant that policy makers needed to “reconsider and take another vote next week.”

The recent spate of negative economic reports indicates that growth in services, manufacturing and housing have all slipped into negative territory as the UK economy edges closer towards the first recession since the early 1990s.

An estimate of gross domestic product showed that economic growth matched the slowest pace since 2001 earlier this week while policy makers are concerned that rising unemployment will induce a period of stagflation as prices accelerate at the fastest pace in a decade.

The Bank of England have kept interest rates unchanged at 5.0% as record high food and energy costs saw prices reach 3.8% in June and that prompted MPC member, Timothy Beasley, to voted for an increase in rates as he publicly stated that inflation is primary threat to economic growth.

The Pound declined against the Dollar yesterday while the UK currency again took advantage of broad Euro weakness to finish the session back above the 1.2700 level last night as the focus switches to the Nationwide house price data tomorrow.

The report is expected to confirm that prices slipped a further 1.2% on the month while falling 7.2% from this stage in 2007 as tighter lending conditions means that consumers are unable to borrow while rising mortgage rate are discouraging first time buyers.

The subdued sentiment surrounding the Euro and the outlook for the European economy continued yesterday as the EC sentiment index showed that industrial and consumer confidence dropped by the most since the September 11th terrorist attacks in 2001.

The Euro’s overwhelming advance against the Dollar this year has weighed on export growth while the impact of the credit crisis combined with record high commodity prices has hurt consumer confidence and seen inflation rise at the fastest pace in 16-years.

The index of sentiment slumped to a reading of 89.5 in July, which vastly exceeded initial forecasts and the tone of the report has limited the ECB’s scope to raise interest rates beyond the current 4.5% as growth in the economy slides towards contraction.

Nevertheless, the European Central Bank has maintained a staunchly hawkish resolve on monetary policy and the Euro may find some support this morning as the harmonised index of consumer prices is expected to confirm that inflation edged above preliminary forecasts this month.

The Dollar consolidated just under the one month high against the Euro yesterday while the U.S currency also registered gains versus the Pound despite oil prices rising more than $4 a barrel in New York after the U.S Energy Department reported the first decline in inventories for five weeks.

Elsewhere, the Dollar stood firm and found some support after the ADP employment report posted an unexpected increase in U.S payrolls this month following a revised drop of 77,000 in June, which was smaller than previously estimated.

However, the ADP report cannot be relied upon as a guide to current labour market conditions as the last 6 reports have all shown an increase in job growth while the government’s nonfarm estimates have pointed to contraction in the U.S workforce.

Data Released 31st July

U.K 07:00 Nationwide House Prices (July)

EU 10:00 Flash HICP (Harmonised Index of Consumer Prices) (July)

EU 10:00 Unemployment (June)

GER 09:00 Unemployment (July)

U.S 13:30 Initial Jobless Claims (w/e 26th July)

U.S 13:30 Employment Cost Index (Q2)

U.S 13:00 Advanced Gross Domestic Product (Q2)
- Deflator
- Core PCE

U.S 14:45 Chicago PMI (July)

written by Adam Solomon