Data out from the UK this week further dented any shorter term hopes of an economic recovery as QTR1 GDP was revised downwards showing growth had slowed to 2.3% Yr / Yr and down to just 0.3% for the quarter. UK house prices showed further deterioration with a fall of 1.2% in June, mortgage approvals fell to just 42,000 (The lowest on record) and so indicating further adjustments to come which also fed through to lower consumer confidence all this when inflation is expected to hit 4% in the coming months. Incidentally the Nationwide building society said that house prices were down 6.3% since June last year - the largest drop since the recession of 1992. The slowdown is not just confined to the consumer sector as UK manufacturing PMI fell to 45.8, the lowest reading since Dec 2001 and is probably a reflection of weaker domestic demand. There will be great concern in the drop in the all important services sector (The largest sector of the UK economy) with a larger than expected fall to 47.1 and thus confirming the economic malaise is spreading its tentacles and predicting worse to come.
On the back of the gloomy data, Sterling held up quite well against the US dollar hitting 1.9920+ at one point before falling back and trading at 1.9818 on Friday. The dollar being hurt once again as oil prices hit another record at $146+ per barrel and the Feds recent statement that rates are likely to remain on hold, undermined the greenback as interest rates yield differentials support the higher yielding currencies. Euro/ dollar traded at 1.58plus in expectation that the ECB would hike rates which they duly did, taking the cost of borrowing to 4.25%, but crucially in the post decision press statement, ECB President Jean Claude Trichet failed to indicate any further interest rate hikes so for now any further major gains against the dollar are likely to be capped. Non-farm payrolls showed a drop of 62,000 in line with expectation and helped support the dollar in Thursday afternoon trade. US services contracted further, falling to 48.2 in June and highlighted the effect elevated oil prices are now having. Global equity markets tumbled midweek on the inflationary outlook and the prospect of lower corporate profits.
Next week see’s the Bank of England MPC interest rate decision at noon on Thursday with no change expected. The bias must though be on an upside risk to higher borrowing costs as inflationary concerns mount.
On that note, have a great weekend, the football season will soon be upon us and Chelsea will win nowt again!