Friday 25th July 2008

Up and down like a yo-yo, but more down than up.

Sterling’s rise following the split MPC vote on Wednesday was short lived as UK retail sales data for June released yesterday plummeted. Sales fell in all but one sector, with clothes, shoes and household goods sales severely hit. The sharper-than-expected decline drove the pound lower as investors bet the Bank of England may have to cut interest rates to bolster the economy. The Office for National Statistics said retail sales volumes fell 3.9% in June, the sharpest fall since records began in 1986, after an upwardly revised 3.6% increase in May. Analysts were expecting a fall of just 2.5% and an annual gain of 4.4% but annual growth was just 2.2% compared to 7.9% last time. While the Bank of England has given little sign that lower borrowing costs are on the way, because inflation is running at its strongest rate in more than a decade, most economists think rates will need to fall eventually.

It was also bad news for the Euro zone with German business sentiment declining sharply. The Ifo business climate index fell to 97.5 from 101.2 in June, its lowest level since September 2005. Also of concern to policy makers at the ECB will be the fact that both Manufacturing and Service sector PMI indexes also fell in June. Services PMI declined to 48.3 from 49.1 in May its lowest reading for 5 years while Manufacturing PMI dropped to 47.5 from 49.2 - readings under 50 indicate contraction.

It wasn’t any better stateside either. The US weekly jobless claims jumped by 34,000 to 406,000 from 372,000 the previous week and new home sales were down 2.6% in June to record their lowest level for 10 years. With the crucial US Non Farm payroll numbers due out next Friday the jobless claims does not bode well. Wall Street closed 283 points lower on the back of the weak economic data and the record losses announced by Ford. The car giant’s second quarter loss amounted to US$9 billion as sales of trucks and larger vehicles plummeted.

US crude oil prices bounced a little from recent lows to close at $126.15 yesterday with Brent crude also closing up at $126.96.

The Aussie Dollar has come under further pressure following an announcement by the National Australia Bank that they have written off A$798m in credit market related losses thereby increasing speculation that the Reserve Bank will need to cut interest rates sometime soon.

On the economic data front today we have UK Q2 GDP at 9:30am, expectations are for a small increase of 0.1% despite the fact that the PMI’s for the construction, manufacturing and service sectors all fell below the 50 no change level during the period. Later this afternoon we have US Durable Goods (1:30pm), the University of Michigan confidence survey and US New Home sales figures for June both due out at 3:00pm.

Back