Foreign Currency
Sterling is 1% lower against the dollar and yen despite better than expected UK trade statistics. The UK trade deficit in goods and services narrowed to £3.9billion in September whilst the previous month’s statistic was revised down to a deficit of £4.4bn. The reduction reflected a significant decline in traded goods imports. There was also a slight increase in export volume and value. The surplus on services remained unchanged at £3.6bn, whilst the deficit in traded goods fell to £7.5bn. Today is a significant day for UK releases with publication of average earnings and unemployment statistics, plus the MPC Minutes of the recent meeting that endorsed the 1.5% cut in base rate. Unemployment statistics will be closely monitored in the coming months for signs of a significant rise that could delay economic recovery. The Bank of England Quarterly Inflation Report, published at 10.30, should reveal the significant revisions to the Bank’s growth and inflation forecasts that led the MPC to announce the reduction in base rate to the lowest level since the 1950’s. The Report will also provide guidance as to the prospect of any further reductions in base rate.
Interest Rates
Period rates are relatively stable, reflecting the view that base rates may be on hold for some time. This scenario could change following publication of this morning’s unemployment statistics and Bank of England Inflation Report. The pace of the expected increase in unemployment could determine the timing and direction of the next move in base rate. The gradual downward trend in short term rates continues. Yesterday, 3 month LIBOR fixed at 4.3750%, some 0.05% below the previous day’s level. In respect of forward rates, the futures market currently predicts that 3 month LIBOR will be well below 3% next March, a view compatible with a 2.50% base rate.
Equities
Equity markets have re-entered a bearish mode reflecting unease over the path of American and Asian growth. On balance, yesterday’s European economic data was positive.
Oil and other commodities
Brent crude (1 month forward) has fallen to $55/ barrel reflecting the current economic backdrop.