Yesterday was an eventful day on the markets with unemployment data, the Bank of England report, and the agreement of the economic stimulus plan in the US, all having an effect. Sterling started the day on the back foot as the previous day's news of the US bank bailout failed to inspire the markets, sending financial stocks, and Sterling, lower. The unemployment figures were expected to continue the downward trend with the mass redundancies from the closure of Woolworths likely to ramp the claimant count figures up above 90k, however the actual figures, although bad, were not as bad as forecast, showing a rise in the claimant count of "only" 73k.
Sterling rose on the back of the figures, but the rise was as brief as a Michael Owen comeback; as soon as Mervyn King started to speak in the press conference for the quarterly inflation report, Sterling started to fall. It's not hard to see why when the details of the report are looked at: the UK is in a 'deep recession', 'further monetary easing may well be required' and ' this is likely to include actions aimed at increasing monetary supply' i.e quantitative easing. The outlook for 2009 GDP was downgraded with the nadir likely to be a 4% year on year dip, and inflation is expected to struggle to get above 1% in the two year horizon, details that could be seen in the employment figures which showed earnings growth, and therefore labour costs, slowing down. As Governor King finished the press conference, the conclusion is that the UK is going to be weaker than the BoE previously thought, inflation will undershoot target, which is going to require quantitative easing measures, and possibly more rate cuts, although King did also say that rates are already so low that it doesn't matter where they are, it is therefore no surprise that Sterling fell to hover around 1.11 against the Euro, a drop of 4c from the recent high, and almost 8c from the recent high against the Dollar down to near 1.42.
Sterling has fallen further against the Dollar than the Euro due to the differing states of the US and Eurozone economies. The US Dollar was buoyed by news that their trade deficit had narrowed, and also by the passage of the economic stimulus bill, which will pump $789bn into the economy, saving/creating an estimated 3.5 million jobs. The Eurozone on the other hand is weakened by it's bail out plans, with investors already demanding greater returns from loans to certain Euro states, the greater indebtedness could cause problems. A further problem that has recently reared it's head is protectionism, it is perhaps understandable when states are spending so much of tax payers money that they would want that money spent stimulating domestic demand, but when the US specify in the bill that they have to buy US goods it hurts international trade, when France specify that their auto bail out plan is tied to the automotive industry closing factories in other EU countries rather than France, it weakens the whole point of the single European market. Sarkozy may have taken some time out from attacking Gordon Brown to attempt to implement such nationalistic measures, but France is likely to now find itself at the end of an EU investigation. The UK economy is one of the most exposed to international trade, so a rise in protectionist policy is not good news for us.
The UK data releases are finished for the week, so the markets can concentrate on the Euro and the US Dollar. Today we have Eurozone industrial production, and US retail sales, Both are expected to show weakness with Eurozone production falling by over 2%, and US retail sales slumping by around 0.4%, which would represent a improvement from last month's fall of over 2%.
Michael Corcoran - Treasury Partner | Treasury Solutions | nabCapital