Monday 5th January 2008

Will 2009 witness a Recession or a Full-Blown Depression ? ….

… judging by the press consensus leading into the start of the New Year’s trading, this will depend upon Banks’ attitude and lending practices going forward. A continued squeeze on Credit availability (as witnessed by Friday’s BoE report) will cause the downturn to be far more severe and drawn-out than in previous recessions.

The BoE latest credit conditions survey shows that lenders tightened availability of credit to households and individuals alike over the previous quarter and expect to tighten even further in the months to come. This further contraction of credit facilities will serve to make matters worse unless the Government/Treasury/MPC are able to come up with something more innovative than just cutting interest rates. This is certainly the view expressed by the Times Shadow MPC at their recent meeting where the members voted 6-3 to leave rates unchanged (with the 3 looking for various degrees of rise). They painstakingly point out, however, that this should not be seen as advocating inaction - on the contrary, they look for the Bank to begin using ‘more unconventional’ methods for increasing money supply and stimulating the economy. Thus, despite historical reluctance by the rate setting committee to adjusting official levels at their January meeting, we are likely to see some action at Thursday’s meeting including a further cut in the Bank’s Base Lending Rate (by 50bp in my opinion - which is the current Market thinking as well at present). We might have to wait for the minutes to be released for more flesh on the bones.

Elsewhere, Janet Yellen, the president of the San Francisco Federal Reserve Bank has advocated "pulling out all the stops" to prevent economic stagnation persisting for longer than might otherwise be necessary. She called for active, discretionary fiscal stimulus in addition to all that has gone before.

This week’s UK data looks likely to continue to be very weak with House Prices, Manufacturing Output and Producer Prices all expected to have fallen. This pattern of continued economic weakening will be mirrored in data scheduled from the Eurozone and the US during the coming week. Very little of interest out today however therefore expect a slowish start to the new trading session.

As with the start of every new year, over the coming few days we will be inundated with projections for the coming 12-months, both economic and financial inter-dispersed with calls for a full 1% cut in base rates this coming Thursday.

Today’s Data & Events:

09.30 gmt UK Dec PMI for the Construction sector (exp -30.2 ag last -31.8)

15.00 gmt US Nov Construction Spending (exp -1.5% ag last -1.2%)

Technicals:

Early Year levels suggest that Euro/$ is on a bit of a move lower. A series of reducing peaks and troughs suggest a test through the 1.3625 support level. The declining peaks indicate resistance at 1.4070

Cable needs to move quite some way higher to break out of its current down trend. There is however a growing belief that even if Euro/$ does move lower, cable might hold in the current low 1.40s. We need to see a break through 1.4820 to signify a move back up to 1.5200

Sterling/Euro has bounced off its 1.0200 holiday low but this level will undoubtedly re-test in the coming days. 1.0850 needs to break for a concerted mover higher.

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