Market News

The recent revival in Sterling sentiment was severely tested yesterday as the UK currency recorded the biggest intraday slide in nearly a month versus the Dollar after a report from the Royal Institution of Chartered Surveyors showed that the slump in house prices exceeded initial expectations.

The RICS housing index showed that the number of estate agents and surveyors reporting falling prices exceeded those reporting gains by 92.9 percentage points in May as the crisis in credit means that mortgage lending has declined to the lowest level in at least thirty years.

A significant drop in home loans means that prices are likely to fall further over the coming months but the Bank of England can’t afford to lower interest rates even as the economy edges closer towards a recession.

The Pound has enjoyed a three-day winning streak against the Dollar since Friday after a report on UK producer prices showed that factory-gate inflation accelerated at the fastest pace since 1986 and may force the Bank of England to raise interest rates.

Tighter lending conditions and falling home values is likely to weigh on consumer sentiment but a separate report from the British Retail Consortium showed that sales still rose 1.9% from this stage in 2007.

Although the Pound slipped versus the Dollar, the UK currency rallied higher against the majority of the 16 most actively traded currencies as the rebound in sales coincided with an unexpected increase in manufacturing output.

However, the Pound may come under some pressure this morning amid a plethora of economic data due for release in the UK with unemployment expected to increase to 2.6% in May but the monthly trade report is forecasted to show that the deficit in goods and services actually shrank in April.

The Euro declined against both the Pound and the Dollar yesterday despite reports in Germany that wholesale prices surged by the most in 26-years last month, indicating that inflation threatens to entrench the economy.

Wholesale prices rose 8.1% year-on-year in May, the highest since 1982, while the report will only serve to increase speculation that the European Central Bank will need to raise interest rates in July while balancing the inherent downside risks to economic growth.

The resurgent U.S Dollar rallied higher against the Pound yesterday and also recorded the biggest two day increase versus the Euro since 2005 as the Chairman of the Federal Reserve, Ben Bernanke, joined the Treasury Secretary in announcing that economic risks have subsided.

The recent spate of hawkish sentiment surrounding the future outlook of the U.S economy has seen traders increase the probability of an interest rate hike while a rebound in economic fundamentals is likely to support the Dollar over the coming months.

Policy makers seem determined to support the Dollar and prevent any further downside momentum after the U.S currency depreciated to a record low against the Euro earlier this year.

In term of economic data, the Dollar stood firm despite reports that the U.S trade deficit unexpectedly widened in April as surging import prices saw the gap in trade grow 7.8% from the previous month.

Data Released 11th June

U.K 00:01 NIESR GDP Estimate (3 months to May)

U.K 09:30 Average Earnings (3 months to May)

U.K 09:30 Claimant Count / Unemployment (May)

U.K 09:30 Trade Balance (April)

U.S 19:00 Federal Budget (May)

U.S 19:00 Fed Beige Book Released

written by Adam Solomon

The Pound rallied higher against the majors on Monday, rising towards 1.2600 versus the Euro by the close of trading while also consolidating above 1.9700 against the U.S Dollar after a report from the Office of National Statistics showed that UK producer prices increased at the fastest pace in at least twenty years last month.

The index provides a measure of factory-gate inflation and indicated that record high commodity prices will force manufacturers to pass on higher costs to the consumer, while the Pound rallied on speculation that the Bank of England will refrain from cutting interest rates even as the economy heads towards a recession.

Prices charged by factories actually increased 1.6% in April, the most since records began in 1986 and more than double initial forecasts. The slump in housing and consumer confidence is hurting economic growth but the Bank of England are clearly more focused on the upside risks to price stability after keeping the key interest rate unchanged at 5.0% last week.

The Bank’s reluctance to intervene means that UK interest rates are likely to remain on hold for the time being and are still the highest among the highest of the Group of Seven industrialised nations.

However, policy makers have also said that the pace of UK economic growth will slow to 1.0% in the revised estimate for the first quarter, the least since the months that followed the last recession 17-years ago.

The short-term revival in Sterling sentiment will be severely tested on Tuesday as a report from the British Retail Consortium will confirm a further decline in sales while UK industrial production probably contracted in April.

The Euro declined against both the Pound and the Dollar yesterday despite reports that exports in Germany rose beyond initial forecasts in April.

Sales abroad increased 1.2% from the previous month and the report provides some optimism that healthy overseas demand will help companies cope with the rising cost of energy prices.

The recent statement from the Chairman of the European Central Bank, Jean-Claude Trichet, indicated that policy makers are still pre-occupied with countering rising inflationary pressures despite news from Bundesbank last week that the economy is losing momentum.

The Dollar made significant gains against the Euro yesterday, rising from the lowest level in six weeks, after policy makers emphasised their concerns over the Dollar’s 7% depreciation in value this year.

A statement from the U.S Treasury Secretary, Henry Paulson, showed that policy makers were becoming increasingly concerned with volatile fluctuations in the currency market while the Fed may intervene if the Dollar slide continues.

The familiar tone of Paulson’s comments coincided with a separate statement from the Federal Reserve Bank of New York President, Timothy Geithner, said that the Reserve Bank is monitoring the Dollar closely.

Data Released 10th June

U.K 00:01 BRC Retail Sales (May)

U.K 09:30 DCLG House Prices (April)

U.K 09:30 Industrial Production (April)

- Manufacturing Production

U.S 13:30 Trade Balance (April)

CAN 14:00 BoC Rate Announcement

written by Adam Solomon

Following on from last week, the Pound plunged to the lowest level in over a week versus the Euro and briefly traded under the 1.9500 level against the Dollar before the release of the U.S non-farm payrolls in report on Friday.

As the Bank of England elected to keep UK interest rates unchanged at 5.0% this month, the European Central Bank indicated that rising inflationary pressures may warrant an increase in rates as early as July.

Nevertheless, the BoE can’t afford to reduce borrowing costs in the near term despite recent reports that house prices fell by the most in 15-years in May as tighter lending conditions and weakening consumer confidence increased the probability of a U.S led recession.

The Pound took advantage of broad Dollar weakness on Friday and rallied as high as 1.9700 by the close following the contraction in the latest U.S employment report. However, the Pound will struggle to consolidate of this unexpected upside move as the focus this week switches to the RICs house price balance, which is expected to reflect the further decline in UK home values.

Elsewhere, industrial production is forecasted to slow and the recent increase in job cuts is expected to show an increase in claims for unemployment benefits.

Nevertheless, the Pound may find some support on Monday as a separate report from the office on National Statistics is expected to confirm that UK producer price inflation accelerated to 2.7% year-on-year in May.

The recent revival in the Euro continued last week as the single currency broke through 1.2500 level versus the Pound and looks poised to test the resistance around 1.5800 versus the Dollar following the hawkish commentary from ECB President, Jean-Claude Trichet, last week.

The tone and language used in the Central Bank’s accompanying statement confirmed that policy makers were solely fixed on the upside risks to inflation and may even implement a rate hike in June, increasing the interest rate differential between Euro and the U.S.

In terms of economic data, the Euro shrugged off an unexpected decline in German manufacturing as output dropped 0.8% in April and indicated that growth in the economy may be slowing as a strong Euro and dwindling consumer confidence weigh on domestic demand.

Oil prices increased to a near record high on Friday, stoking the already elevated inflationary concerns as the rising cost of raw material is forcing manufacturers to pass on higher prices to the consumer.

The ECB’s governing council members are clearly less concerned with the declining outlook for growth and are instead more attuned with the imminent threat of inflation. That sentiment was echoed in a statement from ECB policy maker, Axel Weber, who said that financial markets had correctly interpreted the ECB’s message on Thursday as speculation over a July rate hike intensifies.

The Dollar fell by the most versus the Euro since early April and also suffered a sharp intraday decline against the Pound after the monthly U.S job report showed that unemployment reached the highest level in twenty years.

The volatility surrounding the release of the Non-farm payrolls report also led to a significant drop in U.S stocks despite the headline number falling less than initial forecasts.

Payrolls contracted by 49,000 in May and more significantly for the fifth month on a row while a separate gauge of the report plunged to the lowest level since 2003. The sustained increase in the number of jobless claims combined with the influx of students into the labour market for the Summer Break saw the unemployment rate jump by half a percentage point to 5.5% from April to record the biggest monthly increase since 1986.

The Dollar plummeted against the majors on Friday but the U.S currency may find some support on Monday as a report from the Commerce Department is expected to confirm that retail sales probably rose in May.

Data Released 9th June

U.K 09:30 Producer Price Index (May)

– Input
– Output

U.S 15:00 Pending Home Sales (April)

written by Adam Solomon

The Pound fell to the lowest level in two weeks against the Dollar yesterday, closing well under 1.9600 last night after an industry report showed that growth is slowing amid fresh concerns that the downturn in housing and shrinking consumer confidence will send the UK economy to the brink of recession.

Service sector growth unexpectedly contracted for the first time in five years while a separate gauge of the report showed that consumer sentiment fell to the lowest level since the survey began in 2004.

The CIPS index fell to a reading of 49.8 in May and a reading below 50 indicates contraction as companies cut jobs at the fastest pace since 1996. The Pound also declined against the Euro in the aftermath of the report as the focus switches to the Bank of England interest rate announcement tomorrow and despite fresh fears over an economic slowdown, rising inflationary pressures means that policy makers are unlikely to lower borrowing costs.

UK service industries account for roughly three quarters of the economy while industrial production has showed signs of struggling following the record increase in the cost of raw materials.

The Euro rallied higher against the Pound yesterday but the single currency struggled to stem the losses versus the Dollar after European retail sales fell 2.9% in April, which was more than three times initial forecasts as record high fuel and costs weighed on consumer confidence.

The EU report showed that the annual drop in sales was the largest since records began in 1995 while consumer price inflation rose to a 16-year high last month as oil prices doubled in the past year to peak at $135 a barrel.

The data reinforces concerns over the future outlook for the Euro-zone economy but the ECB are determined to focus on fighting inflation with some members of the governing council even suggesting that a rate hike may be necessary in order to rein prices and provide some relief to the consumer.

The Euro fell 0.2% against the Dollar yesterday but the single currency may continue the upside momentum versus the Pound as the ECB Chairman, Jean-Claude Trichet, is expected to reiterate his concerns over inflation.

The recent hawkish rhetoric from the Chairman of the Federal Reserve, Ben Bernanke, has helped the Dollar rally against most of the 16 most actively traded currencies while the upside risks to price stability means that policy makers may even need to raise interest rates by the turn of the year.

In terms of economic data, growth in U.S service industries slowed less than expected in May, following an increase in factory orders and a slowing labour market.

The ISM non-manufacturing index, which accounts for almost 90% of the economy, increased to a reading of 52.0 in April, while a separate report from the labour market showed that non-farm productivity accelerated beyond initial forecasts in the first quarter.

Data Released 5th June
U.K 12:00 BoE Interest Rate Announcement

EU 12:45 ECB Interest Rate Announcement
EU 13:30 ECB Press Conference

U.S 13:30 Initial Jobless Claims (w/e 31st May)

written by Adam Solomon

The Pound took advantage of broad Euro weakness to breach the 1.2700 barrier by the close of trading last night despite the mounting concerns surrounding the future of the UK’s largest buy-to-let mortgage lender and the biggest slump in the construction industry for at least 11-years.

The report from the Chartered Institute of Purchasing and Supply showed that activity fell as homebuilding stalled and subsequently the index recorded the lowest numbers since records began in 1997.

A separate gauge of the report showed that housing and confidence had also fallen to record lows as a worsening economic climate means that homebuilders are forced to cut jobs.

The crisis in credit has seen the worst downturn in housing since the end of the last recession in 1991 and the Governor of the Bank of England, Mervyn King, has conceded that the economy may contract at some point over the coming months.

However, the Bank’s monetary policy can’t afford to cut interest rates and provide some relief to the economy because the annual pace of inflation met the government’s 3.0% limit in April.
The MPC convene next Thursday for the UK rate announcement and the Pound may find some support as policy makers are expected keep the benchmark lending rate unchanged at 5.0%.

The Euro made widespread losses against the majors yesterday despite reports that European economic growth accelerated by more than initial forecasts in the first quarter, led by an increase in German business confidence and construction spending.

Gross domestic product across the 15 nations that share the Euro increased 0.8% in the revised estimate for the first quarter as companies weathered higher oil prices and a stronger Euro.
Producer price inflation in Europe has accelerated at the fastest pace since October 2000 in the figures released for April, keeping the pressure on the ECB to maintain a hawkish rhetoric and hold interest rates at 4.0%.

Factory prices rose 6.1% from this stage on 2007 as surging food and energy costs means that manufacturers have little choice but to pass on the deficit to the consumer and subsequently stoke the already elevated inflationary pressures.

As a result, the futures market has all but priced out a move in European interest rates this year but the ECB may need to review their stance over the coming months amid a sustained slowdown in manufacturing and service sector growth.

The Dollar rallied to the highest level in two weeks versus the Euro while the U.S currency also consolidated on the recent gains made against the Pound as the Fed Chairman, Ben Bernanke, indicated that the Reserve Bank have finished cutting interest rates.

The rebound in Dollar sentiment again coincided with a drop in oil and gold prices but the comments from Bernanke served to reassure the market that the Federal Reserve are closely monitoring the implications of a weaker Dollar and may intervene as necessary.
Elsewhere, a report from the Commerce Department showed that U.S factory orders increased unexpectedly in April as a weak Dollar helped spur demand from overseas.

The underlying strength in the manufacturing sector is helping supplement the worst slump in housing for nearly twenty years while soaring fuel prices is weighing on consumer sentiment. The Dollar’s short-term momentum may be tested this week as the focus switches to the monthly U.S job report on Friday.

Data Released 4th June
U.K 09:30 CIPS Services PMI (May)

EU 10:00 Retail Sales (April)

U.S 13:30 ADP Employment Report (May)

U.S 13:30 Labour Costs (Q1)

– NonFarm Productivity

U.S 15:00 Services ISM – NMI/PMI (May)

– Business Activity

written by Adam Solomon

The recent revival in Sterling sentiment came to a dramatic end yesterday as the UK currency fell by the most in four weeks against the Dollar after reports that Bradford & Bingley Plc plunged by the most since the lender went public in 2000 and plans to sell shares at a 33% discount.

The UK’s biggest buy-to-let mortgage lender saw its share price plummet 24% by the close of trading last night while the Bank also said that it will sell £179 million in shares to TPG Inc as the housing market continues to deteriorate and mortgage approvals plunge to a nine year low.

The Pound declined heavily against the Dollar and also registered significant losses versus the Euro amid speculation that Bradford & Bingley would need to raise more capital as the Bank’s 2007 profit dropped 48% to £93.2 million following an increase in investment write downs and the sale of assets.

In term of economic data, the Pound also came under pressure as a report on UK consumer credit showed that mortgage lending and approvals fell to the lowest levels since records began in 1999 while manufacturing growth unexpectedly stalled in May.

The report from the Chartered Institute of Purchasing & Supply showed that its index of factory output fell short on initial forecasts and slumped to the lowest level in nearly three years, signalling that the economy is edging ever closer towards a recession.

The drop in consumer credit combined with a 2.5% fall in house prices has prompted traders to raise bets that the Bank of England will cut interest rates this year despite expectations that inflation will exceed the government’s 3.0% limit for the remainder of 2008.

The recent spate of weakening economic reports has weighed heavily on the Euro in recent weeks but the single currency found some much needed support yesterday as European Finance Ministers met in Frankfurt and insisted that inflation was the single biggest threat to the economy after prices accelerated at the fastest pace in 16-years.

The governing council members seemed completely united in their concerns over rising consumer prices and it is now extremely unlikely that the ECB will cut interest rates before the turn of the year.

In addition, the resilience of German exports and the vibrant outlook for the economy was reflected in the unexpected increase in factory orders, which rose 35% from this stage in 2007, indicating that demand from overseas will help the economy cope with a U.S led economic slowdown.

The unrelenting increase in oil prices has seen the Dollar struggle against the majors recently but the U.S currency found some much needed support yesterday as the latest figures showed that manufacturing slowed by less than anticipated in May.

The ISM index showed that output rose to 49.6 last month, up from 48.6 in April as a weak Dollar helped spur demand for U.S made goods and helped factories through a domestic economic slump.

Production increased for the first time in three months while a measure of producer prices climbed to the highest level since 2004, which indicates that the Federal Reserve may have to raise interest rates at the end of the year in order to combat inflation.

Although the increase in production and construction spending will increase optimism that growth in the economy is stabilizing, a government report showed just last week that U.S gross domestic product rose just 0.9% in the first quarter of this year, capping the worst six month performance since 2003.

Data Released 3rd June

EU 10:00 Gross Domestic Product (Q1 Details)

EU 10:00 Producer Price Index (April)

U.S 15:00 Factory Goods Orders (April)

written by Adam Solomon