Foreign Currency
Sterling is 1 ½% lower against the dollar and euro in response to the combination of negative UK employment statistics followed by a very downbeat Bank of England Quarterly Inflation Report. In June, the unemployment rate rose by 0.2% to 5.4%. Given the current weakness of the UK economy, it is probable that the unemployment rate will peak at around 6% in the winter months. Underlying average earnings fell by 0.1% to 3.7% per annum, whilst the headline earnings figure including bonus fell more sharply to 3.4% (using 3 monthly average data which smoothes the timing of bonus payments). The currency also lost ground following publication of the Bank of England Quarterly Inflation Report, whose short term central forecast is one of low growth and high inflation. The Bank of England predicts that economic growth will be close to zero in the coming months, whilst target inflation (CPI) is forecast to peak in the region of 5% per annum. The longer term outlook (2 year view) is more encouraging, with economic growth just below long term trend and CPI just below the 2% target.
Interest Rates
Period rates are, between 0.10% and 0.20% lower following yesterday’s employment data and Bank of England Inflation Report. The lack of inflationary pressure in the labour market provides some scope for a 0.25% base rate reduction, based on the Bank of England’s more optimistic view of UK inflation on their 2 year forecast horizon. It is conceivable that the MPC could reduce base rate to 4.75% in November or December should the economic climate deteriorate further. In its Quarterly Review, The Bank of England accepts that “there is risk that the slowdown will be even more pronounced”i.e. the risk of a mild recession. If this scenario were to unfold, the MPC would probably reduce base rate by ¼% provided that average earnings remain well contained. There is probably further potential downside on period rates given the prospect of negative third quarter data. The downside will be limited by signs of recovery in the housing market as the price of fixed rate mortgages steadily declines.
Equities
World equity markets were in downbeat mode yesterday in response to the negative short term prospects for the UK – the world’s fifth largest economy. Nevertheless, the underlying trend is marginally bullish, given the more positive interest rate and commodity price climate.
Oil and other commodities
Brent crude (1 month forward) has risen by circa $3/ barrel to $114/ bl, following a significant decline in US crude oil and gasoline stocks. The recent slowdown in the global economy has led to a significant reduction in metal prices. The fall is most pronounced in respect of copper prices, which are currently trading at circa $7,300/ tonne for short term delivery.