Foreign Currency
Sterling is broadly unchanged against the dollar and euro, despite weak data from both the USA and Germany. The German IFO (Institute of Finance Officers) survey was distinctly negative. The business climate index fell by over 2 points to 94.8, whilst there was a sharp fall in the business expectations component to 87.0. The data does not auger well for eurozone growth in the second half 2008, increasing the probability that the eurozone is now in technical recession (two consecutive quarters of slightly negative growth). From a UK perspective, this is significant given that the eurozone is the UK’s largest visible export market. Yesterday, the most important release was the BBA (British Bankers Association) July lending statistics showing that July net mortgage advances were broadly unchanged. A complete picture of mortgage lending will be available next week with the release of the Bank of England mortgage lending statistics which includes all net lending (seasonally adjusted) and mortgage approvals. The latter statistic is expected to confirm that mortgage lending is currently static. We expect to see a minor recovery in the UK housing market in the fourth quarter due to a combination of factors.
Interest Rates
Period rates, 2 years plus, are broadly unchanged. The next key UK economic statistic is Thursday’s Nationwide house price index which is expected to show the annual rate of house price inflation heading towards minus 10%. Short term rates continue to edge down at snail pace. Three month Libor fixed yesterday at circa 5.75%. Whilst this was the lowest fixing since end February, the level is some 0.50% above a “neutral” fixing level, indicating the scale of the credit crunch. We expect 3 month Libor to be below 5.50% by year end, reflecting a combination of a fractionally easier credit scenario and an expectation of an early 2009 base rate reduction. The two factors are to some extent interlinked. An expectation of a base rate reduction would, most probably, improve liquidity in wholesale and retail markets as depositors anticipate a base rate move.
Equities
European equity markets fell yesterday in response to the negative tone on Wall Street the previous day. US markets staged a minor recovery yesterday despite a further reduction in the average price of US single family homes.
Oil and other commodities
Brent crude (1 month forward) has edged up to $115/ barrel. A tropical storm in the Caribbean has been upgraded to hurricane status (hurricane Gustav). This may well impact on Gulf of Mexico oil well production.