The latest bought of optimism has managed to survive for another day, this time kept alive by a better than expected German ZEW survey, as well as comments from the World Bank President that the pace of contraction in world output is easing, something which should be pretty evident to anyone reading the figures, but the markets still seem to need reassurance. The ZEW index showed German investor sentiment climbing to a three year high, while Marks and Spencer announced better than forecast profits, and there was even rumours that the British Government have been in secret talks to start selling some of the large amount of shares they own in the UK banking sector. The improving risk appetite has kept the Dollar and Yen weaker, and allowed the Pound to climb to this year's high over 1.55, while keeping steady under 1.14 against the Euro.
The Pound climbed up against the Dollar in spite of slightly lower than expected inflation figures, which in previous times may have weighed on the Pound, however with central banks interest rate tactics thrown out the window, as interest rates are kept near zero, the inflationary figures had little effect on the currency. The expectation of a fall to 2.4%, was exceeded by a drop to 2.3%, still slightly over the 2% target, but moving in the right direction. The fear is that the move downwards might overshoot and send CPI down into deflationary levels, something which has already happened to the RPI measure, which contains mortgage repayments which have dropped dramatically along with interest rates. The BoE inflation report seems calm about this risk, but as the Pound starts to rise, making imports cheaper, the extra downward force on prices may have an effect.
The rising optimism has also had it's effect on the commodity market. the price of commodities seemed to be heading almost vertically upwards before the credit crunch, but have thankfully moderated since as speculators play less of a role, and the recession has brought demand down dramatically. As the recession seems to be abating, commodities have started to recover with copper, often used as an indicator of all industrial metals, and Oil starting to rise. A barrel of oil is climbing up to near $60 again, and with OPEC cutting supply to try to support the price, and unlikely to raise production as quickly as demand recovers it is likely that prices will return to pre credit crunch levels within the next couple of years.
There has been a data release already for the UK today, with the MPC minutes showing the committees fears that inflation will fall below target, which is almost certain, and that they would be reviewing the QE measures on a month by month basis. There is little new in this from last weeks inflation report and the market have taken in their stride. Later we get the Fed's minutes, also unlikely to make many waves, but before that the CBI release their industrial trend survey. The survey is expected to show some recovery, in the rate of decline rather than in absolute terms, and should support the general tone of the recession bottoming out
Michael Corcoran | Treasury Solutions Partner | Wholesale Banking | NAB