Foreign Currency
Sterling has reversed its previous day gain versus the US dollar, following an unexpected rebound in US consumer confidence. Against the euro, the UK currency is broadly unchanged. Yesterday’s UK lending data had a minimal impact on sterling’s value in foreign exchange markets despite the data being decidedly worse than forecast. The number of mortgage approvals fell by 5,000 to 36,000, whilst the value of mortgage approvals fell by £2 billion to under £17 billion. In the second quarter of the year, mortgage approvals averaged £19 billion per month versus £26 billion in both the first quarter of 2009 and the final quarter of 2008. It is apparent that, in respect of the UK mortgage lending industry, the second round effect of the international credit crunch was more severe than the first round impact. The June consumer credit data was also distinctly negative. A strong reduction from May’s very strong number had been anticipated, but the reduction was a massive £0.6 billion reducing the June total to £0.8 billion, just below the trend rate in the first four months of the year. The consumer is the key to UK economic recovery and yesterday’s data increases the significance of the Crosby Report on mortgage market liquidity. The interim report will be published next Tuesday.
Interest Rates
Period rates are circa 0.05% lower in response to UK lending data. However, forward markets still discount an unchanged UK base rate until at least year end. The current financial market view is that the MPC has no room to reduce base rate near term given that UK consumer price inflation is some way above target. One interest aspect of the current scenario is the downward sloping yield curve. 10 year rates are some 0.30% below the current 2/3 year rates, whilst the 20 year rate is over 0.60% lower than 2/3 year rates. The lower level of very long term rates reflects the weakness of the equity market rather than long term inflation expectations. The next key data for rates across the yield curve is Friday’s US employment report, which frequently has a significant impact on period rates, especially longer dated maturities.
Equities
US equities are significantly higher following an unexpected increase in US consumer confidence, to 51.9 in July versus an initial June reading of 50.4. The data increases the probability that the US will avoid recession. The underlying tone in world equity markets still remains lacklustre given the substantial volume of negative economic news in the current quarter.
Oil and other commodities
Brent crude (1 month forward) has fallen below $123 / bl, on expectations of a rise in US weekly crude oil stocks and the OPEC’s President’s comment that crude oil could fall to $70-80/ barrel in the log term, subject to a favourable conditions., including a reduction in geopolitical risk and a further strengthening of the dollar. At present there appears to be limited room for the two scenarios.