Data Disappointments For Sterling
Wider UK trade deficit and falling factory gate prices dampen appetite for the pound. Stability returns to the euro as the Greek panic subsides.
Sterling spent a second week paying the bill for its post-budget honeymoon. It has now returned all the way to its position before the chancellor stood up to deliver his speech on 22 June. There was nothing dramatic about the decline and no sense of the panic that would have been typical six months or more ago. To some extent the fall was a completion of the technical head-and-shoulders formation that peaked a fortnight ago.
The UK economic data were mixed. Monday’s services sector purchasing managers’ index (PMI) fell by one point to a less-than expected 54.4. It suggested that companies were still growing their activity but at a progressively slower pace. Wednesday’s production figures were good in parts. Although manufacturing production grew by only 0.3% in May instead of the +0.5% analysts had predicted, it was a far better result than April’s -0.8% decline. The broader industrial production figure, which includes such things as mining and energy, reversed the previous month’s decline with a +0.7% rise. The Halifax house price index went down for a second month, this time by -0.6%, leaving house prices 6.3% higher than a year earlier.
The most disappointing data, at least as far as sterling was concerned, came on Friday with June’s producer price index (PPI) and the balance of trade for May. The input and output components of the PPI, representing manufacturers’ costs and factory gate prices, were lower in June by -0.2% and -0.3% respectively. The numbers supported the Bank of England’s projection that inflation will fall back towards its 2% target without the need for higher interest rates. The UK trade figures were also unhelpful. The deficit in goods widened to more than £8 billion while goods and services together registered a £4.5 billion shortfall. Both deficits were bigger than expected and cast renewed doubt on the alleged benefits of a weak pound.
Other events during the week saw an announcement from the new Office for Budgetary Responsibility (OBR) that its boss, Alan Budd, did not intend to renew his initial three month contract and that the two other members of the triumvirate would also be leaving before the end of the year. Critics of the new setup wondered why he was leaving. Could it be because of lack of independence? Perhaps not, for the International Monetary Fund (IMF) came out later in the week with economic growth projections remarkably similar to those put together by the OBR. The IMF agrees with the OBR that Britain’s gross domestic product will grow by 1.2%. Its forecast of 2.1% growth in 2011 is lower than the OBR’s 2.3% prediction.
After months of punishment as a result of the problems in Greece the euro has made a good fist of regaining some semblance of stability. There has been a correction to what commentators retrospectively describe as an ‘oversold’ condition, in much the same way that sterling recovered from its near-parity lows a year and a half ago.
The euro zone’s services PMI came in better than its British or US equivalents at 55.5, minutely higher than the previous month. Retail sales also performed better than forecast in June, rising by +0.3% instead of falling by that amount as analysts had predicted. Finalised figures for economic expansion in the first quarter of the year showed a +0.2% growth in gross domestic product (GDP), probably a tad short of the +0.3% growth that is expected to have demonstrated. Germany performed better than Britain on the industrial production front, with growth of +2.6% in May, while it demonstrated slower inflation at +0.8% in the year to June. If the Bank of England is under no pressure to raise interest rates in the War on Inflation, the European Central Bank (ECB) seems to be under no greater pressure.
Indeed, the ECB sided with the Bank of England in leaving its policy interest rate unchanged at Thursday’s meeting. President Jean-Claude Trichet expressed guarded optimism at the pace of economic growth but found no difficulty in containing his enthusiasm. Of more interest to investors was that he did not say about the ’stress tests’ that Euroland banks have recently undergone. The purpose of the tests is to examine how those banks would survive another serious economic or financial shock. Investors are uneasy that the ’stresses’ to which the banks’ balance sheets are subjected might not in fact be real life worst-case situations. The results of the tests will come out in a couple of weeks’ time and are eagerly awaited.
That sterling spent the whole week on the slide does not bode well for it in the immediate future. With UK statistics for Gross domestic product, inflation, consumer confidence, employment and earnings all due this week there is scope for further setbacks if the numbers are not supportive.
Buyers of the euro should hedge half their requirement until sterling’s future course becomes clearer.
Credit:- Moneycorp 13 July 2010
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