Foreign Currency
Sterling is fractionally lower against a strengthening US dollar. Sentiment is moving in favour of the US currency, on a view that the American economy will survive the credit crunch without entering a recession, whilst the short term European economic outlook is more negative. The dilemma facing both the MPC and the European Central Bank at today’s meetings is how to reconcile the twin problems of near zero growth and inflation at levels close to double the inflation targets. In a keynote speech In January, The Bank of England Governor made reference to two “strong economic winds”– the international credit crunch and the sharp rise in food and energy prices. In recent months, these winds have strengthened leaving the both the MPC and ECB with no room for manoeuvre in respect of interest rate policy. We expect both central banks to leave the benchmark interest rates unchanged at today’s meetings. The euro / sterling exchange rate is predicted to remain within a narrow range, although there may be some volatility against the dollar in response to US economic or financial data. Major company announcements play an important role in respect of movements in US financial markets.
Interest Rates
Period rates are fractionally lower in response to a significant decline in German manufacturing orders, which may well herald a third quarter of negative German growth. The financial market consensus is that the MPC will leave base rate unchanged today. Next week’s UK economic releases will have an important bearing on base rate prospects. The most important releases are the inflation and labour market data and the Bank of England Quarterly Inflation Report. This morning sees publication of the Halifax house price index, which is expected to show a similar picture to the Nationwide index i.e. an average house price inflation of mortgaged properties in the region of minus 8-9%. We now expect average house prices (Halifax and Nationwide data) to reach a trough of circa minus 12% in the autumn. The average price of cash properties has fallen less rapidly, based on Land Registry data. The principal challenge facing the UK mortgage industry is not interest rates, but funding – as highlighted by the recent Crosby interim report.
Equities
European equities were in consolidation mode yesterday despite the negative German data and profit taking in the US.
Oil and other commodities
Brent crude (1 month forward) remains in the region of $118 / barrel. Yesterday’s weekly US stock data showed a mixed picture – a significant rise in crude oil stocks balanced by a significant decline in gasoline stocks.