The economic gloom deepened this week as UK house prices recorded the largest drop this year according to Righmove. The Bank of England Governor Mervyn confirmed that the UK is in for a sustained period of deflating house prices in which it was” impossible to say how far they would drop and over what period of time” On the other side of the coin, BOE policy maker Sentence said that “a weaker UK housing market and economy would offset rising prices over the next year” therefore suggesting it would result in lower inflation. He also suggested that tightened credit conditions are also likely to lead to a weaker labour market. Mortgage lending dropped to the lowest on record and consumer confidence dropped to a multiyear trough. However the main cause of inflation…oil… continued to post record new levels at $140+ per barrel with some speculating that it will hit $170 per barrel before the end of the summer. Sterling remained relatively supported within its recent range against the Euro and hit 1.2720 at one point as markets paired back their expectation that there would be 3 further interest rate hikes over the coming 12 months to counter the inflationary threat and the outlook for European interest rates looks a little cloudy after the hike that is expected next Thursday 3rd June taking base rates to 4.25%. The European manufacturing & services indexes showed contraction and heightened inflationary pressures and the German business confidence IFO fell to the lowest since December 2005.
In the US, the Fed kept interest rates on hold with an 8-1 vote, there were no forward signals regarding a move up or down for the next meeting in August. They showed more concern with inflation than downward pressures on the US economy as “their inflation expectations have increased and downside risks to growth remain”. Consumer confidence dropped significantly and the dollar went the same way……south. Cable traded just shy of 1.99 on Friday and against the Euro the dollar was down to 1.5740+. A 3% sell off on US stock markets on Thursday on concerns of lower corporate profits & consumer spending due to inflation and oil prices further spooked the greenback. Coincidentally June apparently recorded the worse June performance on US equities since the great depression of the 1930’s! Record oil prices and heightened inflation are likely to keep the pressure on US corporate profits over the coming months and with oil being traded as a hedge against the dollar , the greenback in my view is likely to remain soft.
Have a great weekend.