Foreign Currency
Sterling is significantly higher against the euro. This reflects the prospect of negative eurozone economic data during the coming days which will strengthen the case for further euro repo rate reductions. The UK currency has also been boosted by significant demand from eurozone consumers whose purchases of comparatively cheaper UK consumer goods is keeping UK retail sales above water. The US dollar remains strong despite increasingly negative US economic data and virtually zero benchmark interest rates. US dollar overnight LIBOR fixed just above 0.1% yesterday. The Chartered Institute of Purchasing Supply/ Markit (PMI) survey of the service sector is expected a show a reading below 40. This would represent a significant first quarter downturn in the economy, given that the service sector represents a high percentage of UK output. Whilst the construction industry represents a much smaller percentage of gross domestic product, the fall in the PMI Construction Index to a record 29.3 does not auger well for first quarter growth which may now be in the region of minus 0.8% followed by a small negative number in second quarter 2009, and the first signs of recovery in the second half of the year.
Interest Rates
Period rates remain relatively stable in the run up to Thursday’s MPC meeting. Our estimate of base rate probabilities are: 50% - a ½% reduction; 15% - a ¾% reduction; 30% - a 1% reduction and 5% - no change. We expect UK base rate to be at 0.5% by mid March. Thereafter any economic stimulus will be via fiscal policy commencing with the March Budget.
Equities
Equity markets are marginally lower following a strong start to the year. This lack of sustained momentum is compatible with our view that there will be one further sharp downturn in equity markets ahead of a sustainable bull run in spring 2009 in the lead up to a global economic upturn towards year end. Equity markets tend to be a leading indicator of the global economy.
Oil and other commodities
Brent crude (1 month forward) has risen to $49/ barrel. Metal prices are currently stable, with short date aluminium at circa $1500/ tonne and the comparable price for copper at $3100/ tonne. Prices for 2 year delivery are some $200-300/ tonne above the short date price.