Foreign Currency
Sterling is ½% lower against the US dollar and virtually unchanged against the euro. Yesterday’s UK statistics had minimal impact on the market. The producer price data was mixed. There was an unexpected fall in input prices in July, but the year on year rate remains in the region of 30%. Given the recent reduction in oil pries, we expect the annual rate of input price inflation to fall towards 20% per annum in the autumn months. There is a time lag between input and output price movements, hence the monthly rise in output price inflation. The UK economy is facing both inflation and balance of payments problems. The deficit in goods and services widened marginally in June, to £4.4billion, whilst the headline deficit in goods widened by £0.2bn to £7.7bn. A significant element in the trade goods deficit is the high level of consumer goods imports. Given the current slowdown in the rate of growth of consumer spending, the trade deficit show gradually narrow in the coming months, thus limiting sterling’s downside against a strengthening US dollar.
Interest Rates
Period rates are somewhat higher ahead of today’s inflation data. The consensus forecast for CPI is figure more than double the inflation target. CPI is predicted by leading analysts to rise by 0.4% per annum to 4.2% pa. The annual rate of retail price inflation is predicted to be just under 5%. From a base rate perspective the key factor is the future path of inflation over the Bank of England’s two year forecasting horizon. The likely impact of recent UK price data on the future path of inflation will be apparent from tomorrow’s Bank of England Quarterly Inflation Report forecasts. There is likely to be further volatility in period rates following publication of this report and tomorrow’s UK labour market statistics.
Equities
Equity markets opened the week on a relatively positive note. FTSE 100 closed the day above 5500. It is too early to assess whether the market is in an early stage of an equity bull run, but the underlying tone is somewhat more positive than in the second quarter of the year. At present the key driving force is the downturn in oil prices. This factor is exerting a more positive influence on US and Japanese equity markets given their heavy dependence on imported oil.
Oil and other commodities
Brent crude (1 month forward) remains on a downward path despite the risk to two major pipelines that carry Caspian Sea oil across Georgia (close to the capital, Tbilisi). The combined capacity of the two pipelines is in excess of 1 million barrels per day. The principal factors behind the very recent decline in oil prices are the marginally slower rate of economic growth in China and India, and the rise in the value of the dollar.