Sterling fell one percent yesterday to 3 week lows against the dollar

A gauge of British factory order books improved only modestly and less than expected in September, while export order books saw their worse outturn in eight months.

The Confederation of British Industry indicated that the total manufacturing order book edged up to -27 in September, from a near 2 year low of -29 in August, but still showed sharply falling orders. The CBI said the survey found a sharp drop in demand from abroad for capital goods such as machinery and equipment.

Export orders were depressed by a weak European market pushing down the order balance to the lowest level since January. The report offered further evidence that the manufacturing sector in the UK remains weak. Soaring input costs stemming from oil prices, weak consumer spending and challenging world markets continue to restrain manufacturers.

In the US, hurricane Katrina fuelled a surge in initial jobless claims to 432k last weak, the highest level in more than 2 years. Claims linked to the storm totalled 103k last week and 91k the week before. The release had little impact on the markets as a boosted number was widely expected; moreover the underlying figure (outstripping the effects of Katrina) remained fairly robust.

Also in the US, the Index of Leading Indicators, a gauge of economic conditions 6-9 months ahead, fell 0.2% in August. Five of the ten indicators actually rose in August but had begun to lose a little momentum before the hurricanes and flooding. Ken Goldstein, the Conference Board’s labour economist said ‘the storms and floods will briefly lower investment spending and hiring. The net result is likely to be a slower economy for a few months, until the rebuilding efforts go into full swing.’

Concerns over hurricane Rita continue to dominate news headlines, and will be the focus for the markets in a very quiet day on the data front. Looking ahead to next week, eyes will be on the release of UK and US GDP data.

Bank of England minutes and hurricane Rita dominated yesterday's news

All nine members of the Bank of England’s Monetary Policy Committee voted to keep rates at 4.5% this month, according to the minutes released yesterday that suggested policy makers are not poised for any imminent move. The section covering the interest rate debate was very short indicating the MPC, which was split 5-4 last month, had not even considered a move.

Sterling appreciated after the release pushing cable through the 1.8100 level. The minutes were relatively neutral and perhaps not as dovish as the market had anticipated. Concerns were raised over rising oil prices and the likely effect on inflation.

The committee did state though that consumer prices had been higher than expected for reasons other than increasing oil prices alone. ‘There remains a risk that oil prices could rise further. This poses an upside risk to the inflation projection,’ the minutes said adding that price expectations remain ‘well-anchored, though there is no room for complacency.’

Close attention will be paid to consumer spending data and UK growth over the coming weeks for further clues as to the next move by the committee.

Hurricane Rita has been upgraded to a category 5 storm. Fears of another devastating hurricane striking the US Gulf Coast pushed oil prices up to $68 a barrel and gold to new 18 year highs. The dollar suffered as a result, overshadowing signs from the Fed that further rate rises are coming.

Despite the Fed stating that the effects of Katrina would be ‘near-term,’ the likely effects of another hurricane are clear to see.

Today we see from the UK the release of the CBI industrial trends survey for September. Confidence in the industrial sector may well have deteriorated as a result of surging energy prices. In the US, weekly jobless claims and leading indicators are the focus for this afternoon.

Interest rates in the US increase for the eleventh straight month

The US dollar edged higher last night following the FOMC decision to raise interest rates by 25 basis points to 3.75%. The dollar strengthened on the back of the release, cable was seen below the 1.8000 level again, and $1.2130 against the euro.

Although a minority of economists had expected the Fed to pause its rate hike cycle in the wake of Katrina, the decision to push rates higher had largely been priced into the markets.

The accompanying statement was on the hawkish side. The committee said that monetary policy was still ‘accommodative’ and rates could be raised at a ‘measured pace’. This would indicate that further tightening is likely in the coming months. They also stated that the effects of Katrina would be felt by the US economy in the ‘near term’.

The FOMC warned that rising energy prices could push inflation higher rather than having any major impact on economic growth. The decision to raise rates was not unanimous with one member voting to keep rates stable.

As the aftermath of Katrina continues to be well documented, Hurricane Rita is adding to energy price volatility as it sweeps across the Florida region. US crude rose by more than $1 a barrel amid worries that Rita would hit oil and gas operations in the Gulf of Mexico and refineries along the Texas coast.

Yesterday also saw the release of the German ZEW investor confidence survey. The survey dropped for the first time in four months as concerns about the nation’s election standoff and oil prices dimmed the economic outlook. The gauge of expectations fell to 38.6 from a reading of 50 in August, and came in well below expectations.

In the UK yesterday more light was shed on the current state of the housing market by the Royal Institution of Chartered Surveyors. Indications are that the market is showing signs of stabilising.

All eyes today will be on the release of the Bank of England minutes at 9.30am. August showed a clear 5-4 split in the decision to cut rates in the UK. A more unanimous decision is expected this month given concerns over oil prices and the likely negative impact on future growth and inflation.

Interest rates in the US increase for the eleventh straight month

The US dollar edged higher last night following the FOMC decision to raise interest rates by 25 basis points to 3.75%. The dollar strengthened on the back of the release, cable was seen below the 1.8000 level again, and $1.2130 against the euro.

Although a minority of economists had expected the Fed to pause its rate hike cycle in the wake of Katrina, the decision to push rates higher had largely been priced into the markets.

The accompanying statement was on the hawkish side. The committee said that monetary policy was still ‘accommodative’ and rates could be raised at a ‘measured pace’. This would indicate that further tightening is likely in the coming months.

They also stated that the effects of Katrina would be felt by the US economy in the ‘near term’. The FOMC warned that rising energy prices could push inflation higher rather than having any major impact on economic growth. The decision to raise rates was not unanimous with one member voting to keep rates stable.

As the aftermath of Katrina continues to be well documented, Hurricane Rita is adding to energy price volatility as it sweeps across the Florida region. US crude rose by more than $1 a barrel amid worries that Rita would hit oil and gas operations in the Gulf of Mexico and refineries along the Texas coast.

Yesterday also saw the release of the German ZEW investor confidence survey. The survey dropped for the first time in four months as concerns about the nation’s election standoff and oil prices dimmed the economic outlook. The gauge of expectations fell to 38.6 from a reading of 50 in August, and came in well below expectations.

In the UK yesterday more light was shed on the current state of the housing market by the Royal Institution of Chartered Surveyors. Indications are that the market is showing signs of stabilising.

All eyes today will be on the release of the Bank of England minutes at 9.30am. August showed a clear 5-4 split in the decision to cut rates in the UK. A more unanimous decision is expected this month given concerns over oil prices and the likely negative impact on future growth and inflation.

Emphasis on the Fed decision today along with German uncertainty and surging oil prices.

All eyes will be on the FOMC decision later on today, the big question being whether we will see an eleventh straight rate hike to 3.75% or a pause in tightening in the aftermath of hurricane Katrina.

The accompanying statement will offer the market guidance as to future moves by the Fed. The market will be looking to see if the central bank alters its pledge to raise rates at a ‘measured’ pace. The Fed’s comments will be important for the near term outlook for the dollar, a hike in rates could see the dollar strengthen given the uncertainty of what the decision will be.

Surging commodity prices yesterday were a key development. US crude oil rose to test $68 a barrel as the damage from Katrina further spilled onto US oil and gas production facilities, as well as transportation infrastructure in the region.

Fears that tropical storm Rita could wreak havoc in the oil-rich Gulf of Mexico, already battered by Katrina added to the woe. Gold prices hit 18 year highs, as worries of soaring US debt and subsequent dampening of the dollar filtered into the market.

The Euro was pummelled by investors as political chaos loomed in Germany following the election. The single currency sank to a low of $1.2101 before staging a modest rally to trade at $1.2155. It fell broadly against the yen, Swiss franc and marginally against Sterling.

The market looks ahead today, to the release of the German ZEW survey. A fall in expectations may well be witnessed as a result of the election and doubts about US growth.

In the UK yesterday, Stephen Nickell who sits on the Bank of England’s Monetary Policy Committee, said there is a ‘serious risk’ the British economy will not recover as strongly as forecast in August.

Focus will be on the minutes from the bank’s previous meeting on Wednesday to shed further light on these comments.

Expectations of the next move by the Federal Reserve dominated latter stages of trading last week

Consumer prices in the US rose 0.5% in August matching July’s figure, while inflation, excluding food and energy, held at +0.1%. Tuesday sees the FOMC rate decision release with the result being far from clear. Having seen the core CPI rise 0.1% or less for five straight months, inflationary pressures seem to have eased.

However, surging oil prices, as a knock-on effect from Katrina, has left this month’s decision difficult to predict. It has been suggested that the FED may drop the ‘measured’ language, so all eyes will be on accompanying minutes for hints as to their stance in the coming months.

Friday saw the release of the US Q2 Current Account deficit. Expectations were -$193 bn, the actual number came in slightly wider at -$195.66 bn.

The Dollar strengthened aggressively on the back of strong capital inflow numbers, which indicated flows of $87.4 bn in July and a revision higher of June’s number. Capital inflows stood well above the -$57.9 bn trade deficit for the same month, hence Cable’s move lower in late trading.

Election deadlock in Germany dominates the headlines this morning with both chancellor Schroeder and his conservative challenger Angela Merkel claiming victory and the right to form the next government.

The Euro declined 1.5% to trade at 1.2216 late on Friday in London amid concerns that the German election may not deliver a clear winner and these concerns have been confirmed.

The Euro has fallen across the board this morning, and is likely to remain under pressure until the uncertainty is removed from the market. The most likely outcome will be for a ‘grand coalition’ to be formed.

In this instance Merkel would probably become chancellor, Schroeder would vacate his position and the head of the SPD (whoever he/she is) would get the job as foreign secretary or finance minister. The German economy is the undoubted loser in this political mire.

This week data releases include the UK RICs housing survey for August, the market will be expecting further indications of weakness. The FOMC decision as already mentioned will be the focus on Tuesday, with attention then turning to the Bank of England minutes on Wednesday.

In August the MPC were split 5-4 so there will be some speculation of a possible split in September. However since the last meeting rising oil prices have caused concern and will be interpreted as negative for future growth and inflation, therefore the result may be more clear-cut.