Every Monday morning I expect to wake up to news of yet another bank collapsing or being rescued, the fact that it hasn't happened for the previous couple of weeks does point to the possibility that the central bank's, and the government's, actions may have finally brought some, limited, stability into the markets. The Interbank lending rate is see as a vital sign of normality in the markets, and after the 3 month rate rose to above 6.25%, it has started to moderate downwards, although slowly. As a little more stability returns to the banking sector the stock markets have rallied slightly; although still volatile, the S&P500 ended the week almost 5% higher than where it started.
The currency markets have followed the stock markets, and traders risk appetite. In spite of weak economic data the revival of relative optimism in the financial sector has benefited Sterling allowing it to climb above 1.29 against the Euro, and up towards 1.75 against the Dollar. There are now signs that the slowdown, which started in the US and has spread to the rest of the developed world, has now stated to impact upon the broader economy, as China's GDP figures are lower this morning. Compared to Europe and America the figures are still outstanding, at 9% growth, but the signs of a slowdown have impacted on commodity prices with the price of oil now closer to $70/bbl. As commodity prices start to come down there is hope that the high CPI figure we saw last week, at 5.3%, will be the peak, and we will see inflation start to moderate quickly, allowing strong rate cuts in the UK.
It's a quiet week on the data front for the UK and the US, so there will be no distraction from the UK's weak data. Today we've had the highest half year total since records began for Public Sector borrowing, hardly a surprise seeing how much the government are planning to plough into the money markets. Later in the week we have the minutes from the last FOMC meeting; It was in this meeting that the 50bp cut was announced so the minutes will be closely watched to see if, as some expect, a further 50bp cut is on the cards. On Thursday we have retails sales, and although the previous months figures have been surprisingly strong, the gloom that has been hanging over the economy for the past few weeks is likely to lead to a soft figure this time around. On Friday we end what is likely to be a depressing week with GDP figures for the 3rd quarter; these are not going to give anyone any boost for the weekend, as they are expected to come in flat, setting up the UK for a technical recession, as the 4th quarter is expected to come in with negative growth.
With the week's UK data showing a clearer picture of the economy, the Pound is likely to end the week lower than where it has started it.
Michael Corcoran | Treasury Solutions | nabCapital