Bank of England hold UK loans rates for 12 months

The Bank of England's MPC voted to leave their rates unchanged and in addition held QE at £200 billion. 

The improved PMI data yesterday and the up tick in the revised Q4 GDP to 0.3% helped to reinforce this stance. 

It is now unlikely that there will be any change in monetary policy before the general election on rates or QE. 

However we have been surprised in the past by the BoE and we could be again; today the markets will be looking for any subtle changes in tome and sentiment on future monetary policy projections in the statement. 

The minutes in two weeks time will probably help to shed more light than todays decision from the BoE on future moves. 

Sterling has held firm after making gains yesterday against the USD and the JPY.

The 1.50 rate on GBP/USD is still the psychological level that the  Pound needs to hold above and build on.

Sterling was boosted by improvements in consumer confidence and PMI data and the new extra austerity measures announced by Greece. 

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Sterling exchange rate lowers against the US Dollar

Fiscal concerns and the contining dovish stance from the MPC continue to weigh on the Pound. 

Throw into the mix increased political uncertainty with the narrowing of the polls and the future does not look bright for the Pound. 

Today we had members of the MPC commenting on the quarterly inflation report where the bank lowered its growth and inflation forecasts underlining a dovish stance on monetary policy. 

King was his usual cautious self and highlighted the fragility in the UK economy and reaffirmed that inflation is likely to come down later in 2010. On the deficit he did note that we have a very large fiscal deficit and that rating agencies are to remain "somewhat uncertain" until the deficit is tackled. 

King affirmed that he would be immensely surprised if rating agencies downgraded the UK.

Another MPC member David Miles noted that the decision not to raise QE was very finely balanced and this has contributed along with the dovish tone overall to sterling slipping 1% against the USD and over 0.5% against the euro.

Later this week we have important feedback in the form of the second revision of UK GDP and also important numbers from RBS and Lloyds- especially critical due to the government involvement. 

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US Dollar shines after positive minutes

Yesterday the markets digested the minutes of the February interest rate meetings for both the UK and the US. 

Firstly looking at the UK the vote was a unanimous 9-0 to keep interest rates on hold and also to hold QE at £200 billion. The feedback from the MPC was ambiguous in the sense that the decision was unanimous and yet the comments were that it was a "finely balanced" decision to keep QE on hold. 

The unanimous decision gave Sterling a boost which was then tempered by weaker than expected employment numbers. Going forward this does not change the sentiment for sterling which will struggle to appreciate until the outlook for the UK warrants a more hawkish approach from the MPC.

Over to the US and the FOMC upgraded their forecasts for the US economy reflecting a more bullish tone from the Fed. 

They also discussed trying to shrink their reserves over time although no time frame was announced to do this. The positive tone from the Fed with improved economic sentiment in the US coupled with loitering fear in the markets helped to push the USD higher.

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UK jobless data worse than expected

UK jobless claims were up 23,500 against the expectation of a fall of 10,000 for the employment sector. 

This data for January was disappointing but not wholly unexpected and simply reinforces the fact that the employment sector remains very sluggish. Although we may have officially exited the recession on paper the reality is that we still have a long a painful road ahead.

The official unemployment rate remains at 7.8%. In addition to the employment data we also had the minutes from the February interest rate meeting for the UK. 

The BoE minutes came in 9-0 as expected to keep interest rates and QE on hold. Although all members voted to leave the size of the asset purchase programme unchanged- it was noted that some members felt the arguments for a further increase were "finely balanced". 

This underlies the uncertainty within the MPC on the future impact of the £200 billion already introduced and therefore the MPC will not close the door on further QE if required.

Sterling is likely to remain subdued as the BoE feel that inflation will fall further in 2010 and further expansion of QE is a weapon that they will use again if necessary. 

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Inflation figures create another letter from Mervyn King

UK CPI inflation rate came in at 3.1% against the expectation of 3.2% so slightly lower than expected. 

However the year on year rate is +3.5% and will require a letter of explanation from Mervyn King to Alistair Darling to explain why. King has regularly banged the drum that inflation will come down as we move through 2010 and today’s data to a small extent justifies his forecasts. 

However the data did not move the FX markets which have been quiet today considering the amount of market feedback. What the data does assist with is the BoE continuing with their policy of low interest rates and leaving the door open for further QE if deemed necessary.

Today European finance ministers are meeting again concerning Greece- feedback so far again is largely talk with no real details of the fundamentals of how assistance will be delivered. 

The ongoing situation is leaving the markets flat as risk is held off the table until further clarity is divulged. We have seen a further expansion in the credit default rates today for Greece reflecting the lack of clarity.

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Greece- is there a deal or not?

EU leaders are meeting today in an attempt to lay the foundations for a deal to rescue Greece. 

Lots of speculation already touted this morning. There has been talk of IMF assistance and then IMF involvement without funding. Germany and France are widely expected to shoulder most of the responsibility in supporting Greece. 

The most recent feedback is that aid for Greece will depend on Athens meeting its deficit reduction targets this year- begs the question- what if they do not? 

Lots of fence sitting which is still leaning to reduced confidence in the markets and associated strength of the safe haven currencies such as the USD and the YEN. Expect more volatility as more news and feedback filters through.

Sterling is suffering from a hangover today after a little too much of Mervyn King yesterday. 

The Bank of England governor killed off the rally in sterling by leaving the door open for a further expansion of the QE programme. However it was not all doom and gloom from King who dismissed fears that the UK would lose their AAA credit status. 

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Sterling rides the currency markets rollercoaster

The good start for Sterling soon lost momentum following the Bank of England's inflation report and Mervyn King's press conference. 

The markets and sterling were initially boosted following a report in Le Monde newspaper of a Germany led aid plan for Greece. The ECB did not comment on these reports but the rumour alone was enough to drive the markets higher with the USD shedding some of its recent gains along with the Yen- GBP/USD pushed through 1.5750 and GBP/EUR 1.1425. 

However the markets made a quick U-turn as party pooper Mervyn King dampened the mood with a dose of reality- the key blow was the affirmation that it is far too early to conclude that no more QE needed.

This forced GBP/USD back to 1.5650 and GBP/EUR to 1.1350. Expect the "will they or wont they" that is the ECB assisting Greece to dominate the markets over the coming sessions.

In economic data from the UK earlier December Industrial production output came in stronger than expected at +0.5%. Good news for the UK economy but not significant enough to lift sterling. 

Sterling is suffering at the moment as it is being sold on the fear factor. Later today we have Bernanke’s testimony to the congressional committee- this could lead to some US dollar volatility.

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Political concerns weigh Sterling down

The Pound has lost ground today as political concerns and the prospect of the Bank of England’s policy meeting later in the week weighed down Sterling.
 

Two UK opinion polls over the weekend showed a general election, which has to held by June, would result in a hung parliament.

This weighed on sterling since many believe that such a result would lessen the likelihood of the UK getting to grips with its rising budget deficit.

Meanwhile, traders were wary ahead of the result of the Bank of England’s monetary policy committee meeting on Thursday.

By midday in New York, the pound fell 0.9 per cent to £0.8740 against the euro, lost 0.1 per cent to Y144.21 against the yen and fell 0.6 per cent to $1.5902 against the dollar.

Meanwhile, the dollar hit a six-month high on a trade-weighted basis, consolidating sharp gains after US growth figures came in stronger than expected last week. 

The figures helped give the dollar an additional boost given that the US currency was already benefiting from increased risk aversion.

Safe haven demand for the dollar was boosted as fears over Greece’s fiscal position and concerns over continued Chinese monetary tightening weighed on risk appetite and global equity markets.

The dollar index, which tracks its progress against a basket of six leading currencies, rose to a high of 79.534, it highest level since July 30. The dollar also rose to a six-month peak of $1.3850 against the euro before paring some its gains to stand down 0.3 per cent at $1.3905 and climbed 0.5 per cent to Y90.77 against the yen.

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Quantitative Easing QE- are we done?

Today the markets are be focused upon the interest rate decisions from the Bank Of England and the European Central Banks. 

First up is the BoE- the markets will be waiting to see what the MPC do with QE- the UK asset purchase scheme. Will they hold firm at the current level of £200 billion? Will they expand by a further £25 billion? Or will they signal the completion of the asset purchase- or at least pause? 

There are valid arguments for all scenarios, however I feel that the most likely scenario is that the Bank will not extend now but leave the door open for future extension if deemed necessary. For sterling any signal on further extension would be negative and any closure or pause should be positive.

For the ECB the statement after the meeting will be all important and the situation in Greece, Spain and Portugal will be scrutinized. Trichet usually dances through tough questions without giving too much away so we are not likely to get any major surprises here. 

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Markets await central bank decisions tomorrow

Quiet economic data today with the focus looking forward to tomorrow's interest rate decisions from the Bank Of England and the European Central Bank. 

There is a possibility that the completion of the Quantitative Easing programme will be announced for the UK- however the ever cautious MPC will likely leave the door open for more if deemed necessary. Either way a pause or a cessation in QE should be largely beneficial for sterling in the short term. 

The statements following the respective decisions from the BoE and ECB will again be the highlight as future policy sentiment will be predicted by the markets.

Sterling had a bright start today against the USD pushing back through 1.60 and hitting a high of 1.6069 before slumping back to earlier levels. 

Reports of Asian Central banks buying GBP/USD earlier before the rally was sold back lower. EUR/USD also stuck its neck back above 1.40 again this morning to a high of 1.4026 before falling back to 1.40. 

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Wise Money forsees a volatile week ahead

It’s a big week for the currency markets with a number of events that will most certainly add to the already volatile conditions which we saw in January.

The Euro has continued to slide against the Dollar over the weekend as concerns that Greece's budget problems may spread continue to weigh on the single currency. 

Recent data from the Commodity Futures Trading Commission has shown that bets on a further decline now stand at the highest level in over a year. A strong Q4 US GDP figure (and subsequent stock market gains) on Friday further supported the dollar positive sentiment and helped the greenback reach a four-month high against the Swiss franc and a three-week high against sterling as signs the world's largest economy is gaining momentum spurred investors to buy U.S. assets. 

Reports due later today are also expected to show that show U.S. manufacturing expanded for a sixth month and household purchases rose.

In the UK, attention this week will focus squarely on the Bank of England's policy decision on Thursday and what this will mean for the future of the asset-purchase facility. 

With the property market showing signs of strengthening and the economy exiting recession, the MPC may move towards pausing it's emergency bond purchases after buying 200 billion pounds so far.

UK data earlier this morning showed that house prices rose for a sixth month in January as a shortage of homes for sale supported property values. However, prices were still down 0.8% from a year earlier.

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Sterling strengthens to 1.15 against the euro

Sterling is continuing its rally against the weak euro but has fallen back against other major currencies. 

GBP/EUR is pushing up and has already hit the key 1.15 level in trading today as the euro is pummeled against the major currencies. The move higher for sterling is more related to euro weakness this morning as risk aversion is back in play on further concerns surrounding Greece. 

The failing on the sterling Bull Run against the USD was fuelled by renewed concerns raised by Fitch the credit rating agency on the UK’s fiscal deficit coupled with a blunt warning from Mervyn King on the health of the UK economy. 

Alistair Darling again repeated the need to cut the deficit but the rating agencies are focusing on changes introduced and not to be introduced- the general feeling is that the pre-budget has not gone far enough.

Focusing on UK data we have seen jobless claims come in better than expected and the official unemployment rate has fallen to 7.8% from 7.9%- very good news. 

No surprises from the BoE in their minutes as the MPC voted to keep rates and QE on hold with a 9-0 decision. They also indicated that yesterdays surge in CPI is most likely a blip and CPI levels should wind lower in 2010 and the February inflation report will offer more clues on the real status of inflation. 

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Sterling continues to stride ahead in 2010

Another bright start for Sterling which continues it's gains. 

Sterling hit a 6 month high against the euro and pushed higher against the USD. The move was initiated with the acceptance and recommendation from the board of Cadbury’s on the offer by Kraft. 

The Kraft offer values each Cadbury’s share at 840p and shareholders will be entitled to receive 10p per share in the form of a special dividend. Sterling gained on the back of the expected benefits from the M&A flows of the deal. 

Then at 9:30 official UK inflation data came in much better than expected- UK December CPI has come in at +0.6% month on month, +2.9% year on year, demonstrably stronger than median forecasts of +0.3%, +2.6% respectively. 

This has raised the prospects for a Bank of England interest rate rise in 2010 and it certainly offers the Bank of England something to think about in early Feb.

This data also heightens the view on the UK employment data later this week- better data here could reinforce the view that the UK is firmly on the road to recovery. 

The Pound hit a high of 1.1455 against the euro and 1.6457 against the USD before falling back from the highs- Mervyn King is due to speak later and the market will expect a cautious approach which could take the edge off sterling- we will see later..

The Euro is under pressure this morning as the fallout in Greece continues to undermine the single currency and in addition the German ZEW came in weaker than expected for the third month in a row. The euro is closing in on key technical levels against the USD and the EUR with EUR/USD close to breaking below 1.4275 and GBP/EUR targeting 1.15. 

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Big week for Sterling ahead

A very good work for Sterling last week as it pushed higher against the major currencies. 

The push on sterling was largely attributed to improved economic data leaning to a more positive outlook for the UK economy. In addition the National Institute of Economic and Social Research (NIESR) estimated that UK fourth quarter GDP which is due out next week will come in at +0.3%- so therefore the UK will be out of recession! 

The upbeat assessment was mirrored by MPC member Andrew Sentence who commented that the Bank of England may need to raise interest rates this year. So will this good run continue this week?

Hopefully so. We have a plethora of economic data and feedback this week from the UK economy which could galvanize sterling further. 

We start on Tuesday with the Consumer and Retail price index which is a gauge on inflation for the UK- the expectation is that the measures will show an increase in inflationary pressure which will add further to the probability of a rate rise in 2010. 

Following this we have the Bank of England minutes which may offer an insight into the cessation of the Quantitative Easing programme- possibly as early as February. Following this we have retail sales and jobless data followed by public finance data. 

So a big week for the Pound and if we get more positives than negatives we could see a stronger Pound ahead of the official release of Q4 2009 GDP next week. Watch out for the public sector net borrowing data and M4 money supply which could trip up the pound if worse than expected.

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Sterling strenghtens on positive news

Sterling finished last week as it started in a positive tone.

The Pound has pushed through 1.60 against the USD and towards 1.12 against the Euro. The gains are largely due to the feeling that the Bank of England will end the Quantitative Easing programme in next months MPC meeting. 

The general sentiment is that UK GDP will come in positively at the end of this month and this will lean the Bank Of England to pull the plug on the life support for the UK economy. 

On top of this sterling has gained on the back of the latest opinion poll from the Sun which emphasizes an extended lead for the Conservatives after the failed coup to oust Brown. 

This is significant as it decreases the possibility of a hung parliament which would be sterling negative due to the lack of a majority to clearly define fiscal objectives. Expect more sentiment shifts before the Feb MPC meeting which will be significant; yesterday as expected there were no surprises in the MPC meeting for the UK with the interest rate and QE held.

The Yen remains in the spotlight as the market adjusts to the new finance minister Naoto Kan. Mr Kan is the polar opposite to the previous finance minister Hirohisa Fujii and favours a weaker yen.

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Which is the weaker- Yen or Sterling?

Both Sterling and the Yen are being seriously undermined by both political and economic concerns and are racing each other towards the edge of the precipice.

On the Japanese political front, the replacement of Fujii by Kan as Finance Minister was not greeted enthusiastically and as mentioned yesterday the Yen took a little dip in value. 

The major concern, was that the Japanese bond market might take flight and the ability of the Ministry of Finance to satisfy the country’s massive debt mountain could become compromised. 

Added to this, the first official comments from Kan were distinctly Yen negative with him saying he wants the Yen to weaken further (it fell immediately from 91.10 to 91.75) and then adding that many Japanese firms favour the $/Yen rate at 95.00 and that he must work with the Bank of Japan to bring the Yen to appropriate levels. 

Beat that lot, sterling …. Well it did try its best.

On the UK political front, the call from the 2 cabinet members for a secret ballot of Labour MPs to establish Gordon Brown’s position as leader of the party was viewed very negatively by the market on the assumption that a leadership battle this close to the election would be the final nail in the coffin for the Labour party but also, might be enough distraction for them to take their eye off the economy. 

Following on from this, there is a report in the Times this morning headed up, "Cash-strapped Treasury contemplates shining up gilts" which ponders the possibility that the Government might be forced to offer higher returns on its gilts in an attempt to maintain their investment appeal. 

This will obviously have the effect of further increasing the cost of servicing the country’s borrowings from the current forecast of £60 billion per year - and that is just the interest component.

Old Black Eyebrows is seeking to sell a record £225 billion tranche of debt this year at the same time as the Bank of England look to offload the bonds that it acquired via the Asset Purchase Scheme as part of the QE process and against the back-drop of investor concern over the UK’s status as a AAA rated sovereign. 

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Warnings from both the Bank of England and the ECB

The warnings reflect that the Banks in their respective domains are likely to need to report further write downs and should therefore raise additional capital while the ‘going is good’. 

On the back of an already weak Euro, this caused a further dip in its value on opening this morning. Tough talk from ECB member Nowotny didn’t alleviate any European concerns. 

Having just sorted out problems in a few Banks in his own native Austria, he was less than accommodative in his remarks about indebted nations within the Eurozone. He said that there will be no carte blanche bail- out of countries suffering beneath the burden of massive borrowings with his comments assumed to be directed towards Greece and its ever increasing problems. 

His policy view though was very dovish, saying that there was no need to raise interest rates and that Governments shouldn’t be looking to exit banking support measures. 

Euro/Dollar though, dipped to 1.4280 on market opening and after bouncing, revisited this level again in early London trade. 

The next real support for the Euro looks to be at the current 200 day moving average, which is presently at about 1.4170, and with the SNB still sniffing around in Euro/Swiss at levels below 1.5000, it might be that this will be a move too far and that we will see a bounce for year end.

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Bank of England split on expansion of quantitative easing

Yesterday morning we had the Bank of England minutes which fed through a vote of 6-3.

The market initially perceived the split of 3 to be in favour of a lesser increase than the £50 billion expansion in QE decided.

In fact the 3 – King, Besley and Miles wanted an expansion of £75 billion which confirms two things; one is that assumption is the mother of all errors especially when looking at current market conditions and also that the MPC are very very cautious and would rather do more than not enough.

This leaves the door open for more Quantitative Easing especially as Mervyn King was petitioning for larger stimulus and paints a pointedly negative slant on the UK economy from the MPC…hence this led to sterling weakness against the USD and EUR.

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Sterling the star performer yesterday

Sterling was the belle of the ball in the currency markets yesterday gaining 1% against the US Dollar and the euro.

The positive trend was started wit the news that CPI data for the UK (a key indicator on inflation) came in unchanged at +1.8%. Although the inflation level is still below the 2% target a drop was widely forecast.

This was especially true against the BoE raising the QE programme by £50 billion and the feedback from the quarterly inflation report which noted that inflation was set to fall below 1%.

Sterling jumped on the news as the market digested a less dovish underlying data snap than the sentiment preceeding.

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FTSE 100's first weekly fall in over a month prompts rally end fears

London shares have slid to their first weekly loss in more than a month, amid growing signs that the recent rally in shares may be drawing to a close.

The benchmark FTSE 100 index dropped 41.49 points – or 0.9pc – to 4,713.97, meaning it shed 0.4pc during the week. The index had increased steadily over the previous four weeks, sparking hopes that the worst of the bear market had now been consigned to history.

But in what experts described as a key signal to sell, it emerged that the dividend yield on the FTSE All-Share index has dropped beneath the yield on the benchmark 10-year gilt.

This technical threshold is regarded as an indicator of more subdued times on the stock markets. When the two levels last crossed in the other direction late last year, it was seen as a signal that the bear market could be drawing to an end.

The FTSE has had one of its most sustained spells of strength in history over the past few months, amid hopes the unprecedented support measures put in place by the Treasury and Bank of England could end the recession sooner than originally anticipated.

However, this week has brought with it more equivocal news about the economy, with the Bank warning in its Inflation Report that the recovery is likely to be slower and more protracted than many had anticipated.

Indeed, the yield on two-year gilts has hit its lowest level since 1992, amid fears that the UK recession may have further to run.

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Bank of England to pump another £50bn into economy via quantitative easing

The Bank of England announcment that it would pump another £50 billion into the economy to ensure continued recovery surprised many.

The move defied market expectations and put a dampener on hopes for a swift economic upturn.

The decision by the Bank to expand its programme of quantitative easing from £125 billion to £175 billion breaks the ceiling set by the Chancellor at £150 billion. It also confirmed that interest rates would remain at 0.5 per cent for a fifth consecutive month.

This is a huge surprise. All the rhetoric seemed to point to not doing very much more.

The Bank’s announcement was accompanied by a downbeat statement that the recession appeared to have been deeper than previously thought. It acknowledged that the Government had failed to persuade the banks to commit to higher levels of lending.

The move prompted the Tories to warn of the risk of inflation when Britain emerges from the recession. Philip Hammond, the Shadow Chief Secretary to the Treasury, said: “Every extension of the QE programme also adds to the longer-term risk of fuelling inflation when the economy recovers.”

In a statement, the Bank said that there were some encouraging signs, such as the stabilisation of the export markets and the benefits brought by a weak pound. It highlighted claims by business that “the trough [of the recession] is close at hand”.

It said that the lack of credit continued to dampen chances of a swift recovery. It said that it expected the quantitative easing programme to continue for another three months and that its scale would be kept under review.

Vince Cable, the Liberal Democrat Treasury spokesman, said: “With thousands of businesses still struggling to get loans, the Bank’s decision to put more money into the economy is the right way to go. As financial institutions continue to hoard money, quantitative easing has not yet fed through to the rest of the economy. It’s vital that it does.”

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Pound slides after QE expansion

The Pound dropped sharply on Thursday morning after the Bank of England extended its asset purchase scheme by more than expected after its policy meeting.

The Bank announced a £50bn extension to its programme to £175bn as it continued to use a policy started in March of quantitative easing to lift the UK economy out of recession.

”The Committee expects the announced programme to take another three months to complete. The scale of the programme will be kept under review,” the Bank said in a statement.

Ahead of the decision, forecasters were evenly split as to whether the Bank would announce that it planned to spend the remaining £25bn of the £150bn earmarked for its asset purchase programme or would remain on hold.

The more aggressive action sent sterling and gilt yields sharply lower.

Sterling , which on Wednesday hit a 10-month high of $1.7042 against the dollar, dropped 0.7 per cent to $1.6868, fell 0.5 per cent from a one-month high to £0.8529 against the euro and lost 0.2 per cent to Y160.86 against the yen.

The yield on 10-year gilts fell 14 basis points to 3.68 per cent, while the more interest rate sensitive 2-year gilt yield dropped 17 basis points to 1.1 per cent, not far from the low just above 1 per cent it hit in December.

The Bank also kept UK interest rates on hold at 0.5 per cent, but this was no surprise to investors.

Meanwhile, the euro held steady around multi-month highs against the dollar on Thursday as traders awaited the outcome of the European Central Bank’s policy meeting.

Like the Bank of England, the European Central Bank was widely expected to keep its main lending rate at 1 per cent after its policy meeting.

But analysts said the post-decision press conference with Jean-Claude Trichet, president, would be scrutinised for any signs that he had become more upbeat on the prospects for the region’s economy or any announcements over unconventional monetary policy measures.

Increased investor optimism over the prospects for global growth have boosted both the euro against the dollar this week, stemming haven demand for the US currency as traders abandoned the relative safety of the dollar in search of greater returns elsewhere.

On Wednesday, the euro hit a high of $1.4446 against the dollar, its best level since December.

Much of the optimism over global growth was provided by a string of above forecast surveys of activity in the manufacturing sector across the globe early in the week.

But analysts said some caution had been evident in the rally in riskier assets after the Institute for Supply Management’s survey of the US services sector came in below forecast and a survey of employment in the US private sector also undershot expectations on Wednesday.

The dollar also edged higher elsewhere, climbing 0.3 per cent to SFr1.0642 against the Swiss franc and rising 0.6 per cent to Y95.46 against the yen.

Elsewhere, the yen suffered as Asian equities posted strong gains, denting haven demand for the Japanese currency.

The yen fell 0.2 per cent to Y137.30 against the euro and lost 0.6 per cent to Y80.24 against the Australian dollar.

The New Zealand dollar was also hit after figures showed employment in the country dropped by more than expected in the second quarter.

New Zealand unemployment jumped to its highest level since mid-2000, sending the kiwi down 0.5 per cent to $0.6699 against the dollar.

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Foreign exchange markets take a breather

Mostly sideways trading yesterday as Sterling and the euro failed to advance further against the US Dollar.

We did see a test of the key 1.70 level but if you blinked you may have missed it. US equity markets also struggled to find a direction swinging between gains and losses with the Dow Jones finally ending slightly up.

A pause is probably sensible now as news may materialize that the optimism is not warranted and the overheated markets will quickly retreat. We have a three-pronged event risk this week as we have the monthly BoE and ECB meetings on Thursday and also the payrolls report on Friday from the US. It seems the market will await further direction from these event risks.

UK July services PMI has come in at 53.2, up sharply from 51.6 in June, some way better than median forecast of 51.8. UK June industrial/manufacturing output data has come out at +0.5% m/m and +0.4% month on month respectively, stronger that median forecasts of flat and -0.1%.

So good news flowing from the UK economy this morning but the markets are yet to sustain a move above 1.70 on the USD or 1.18 on the euro.

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Pressure grows on Bank of England as money supply falls

Pressure on the Bank of England's interest rate setting committee to extend its scheme of quantitative easing (QE), or creating new money, mounted today as it emerged that a key measure of money supply in the economy fell to its lowest rate in a decade.

The gauge of M4 money, which excludes certain parts of the financial sector and is closely watched by the Bank as an indication of whether quantitative easing is working, rose by 3.1 per cent in the second quarter between April and June, down from growth of 3.8 per cent in the first three months of the year. It was the lowest rate of quarterly growth since 1999.

On an annual basis, the measure rose from 3.35 per cent in the first quarter to 3.7 per cent, despite the fact that the Bank of England has pumped £125 billion of newly created money directly into the economy.

The Bank of England's own figures also showed that lending to businesses tumbled by a record £14.7 billion between April and June.

The second quarter slump in lending to “non-financial corporations” is the biggest since the Bank of England’s data began in 1997 - with manufacturing, construction and services worst hit.

Last week, Alistair Darling called Britain's biggest lenders to a meeting to put pressure on banks to increase lending to small businesses and customers amid fears that Britons are not benefitting from lower borrowing costs.

However the Bank's Monetary Policy Committee will take heart from a slight lift in M4 lending which grew at an annual rate of 2.7 per cent in the second quarter, up from 1.9 per cent in the first three months of the year.

The Bank of England has said that it will take time for the effects of quantitative easing to filter through to the wider economy, but economists said that today's disappointing figures would do little to engender hopes that the economy could be on the road to recovery.

The Bank's Monetary Policy Committee, which starts its two-day rate meeting tomorrow, is likely to keep interest rates at a historic low of 0.5 per cent, but will decide whether to extend QE by a further £25 billion to bring the scheme to its prevously announced ceiling of £150 billion.

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Banks reform toothless and muddled say MPs

The labour Government’s white paper on financial regulation earlier this month was toothless and failed to address the key weaknesses in the Tripartite system, according to MPs on the Treasury Select Committee.

Issuing its final report on the banking crisis yesterday, the committee said it was still a “muddle” which part of the tripartite — made up of the Bank of England, Financial Services Authority (FSA) and Treasury — was in charge of strategic decisions.

The Treasury’s white paper proposed a new Council for Financial Stability, chaired by the Chancellor, which will oversee the Tripartite. This is just a “cosmetic” change, the Treasury Select Committee said.

The new council will be in addition to the Financial Stability Committee, which sits within the Bank.

The White Paper also gave more power to the Bank to monitor overarching stability — so-called macro-prudential regulation — but did not make it clear how that power would be separate from the responsibilities of the FSA.

“Where before no-one had a formal responsibility for financial stability, now many do — the Bank of England, the FSA, the Treasury, the Council for Financial Stability and the Bank's Financial Stability Committee. Where responsibility lies for strategic decisions and executive action was, and remains, a muddle” the report said.

John McFall, the committee’s chairman, also said that the Government should not rule out imposing a split between retail and investment banking.

Such a measure, which would echo the restrictions imposed in the 1930s in the US under the Glass-Steagall Act, has been widely criticised among banks which argue that the law is outdated.

But Mr McFall said that banks have been able to “hold the taxpayer to ransom” by growing so large that they present a serious systemic threat, making it impossible for the Government to do anything but bail them out during the downturn.

In order to prevent banks from becoming so large again, the Government should “not rule out drastic action, such as forcibly shrinking the banks or separating out the riskier functions,” Mr McFall said.

Separately, the House of Commons’ Scottish Affairs committee said yesterday that the FSA failed to provide the “necessary level of supervision” over Dunfermline to prevent the downfall of Scotland’s largest building society.

It was the fault of Dunfermline’s board that the mutual embarked on risky lending on commercial property and buying loan books from other lenders, the committee said, but added that the FSA failed to issue “clear and specific warnings”.

The FSA rejected the charge, saying that it had written to Dunfermline in December 2005 soon after a regulatory “Arrow” visit, identifying the growing size of its commercial lending portfolio as a risk.

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UK GDP weaker than expected

Sterling started strongly in early trading moving towards 1.6550 on the USD, 1.1650 against the Euro and testing 157 on the Yen.

We then had the release of UK second quarter GDP which gave sterling a cold shower dropping a full cent against the USD and slipping against most other currencies.

The GDP number came in at -0.8 against a forecast of -0.3- this brings the year on year fall to -5.6% and is the biggest year on year fall since records commenced in 1955.

The USD strengthened a little yesterday following comments from the Fed that they may not actually need to buy all of the bonds that it previously announced- this is effectively reining in the Feds QE measures.

If we look back as to the level of weakness that the USD experienced on the announcement of the fed printing money- we saw a move from 1.29 to 1.47. Similar hints sprung from the Bank of England as MPC member Andrew Sentence said that the MPC could pause it’s bond-buying program- this added support for sterling.

Other data out today came in positive for Germany as PMI data was stronger than expected at 45.2- up from 40.9 in June in manufacturing and 48.4 from 45.2 for services. French PMI was mixed as manufacturing improved but services dropped.

The main mover in the markets yesterday was the Japanese Yen which retreated against the USD, EUR and GBP. It seems Japanese investors are now looking at overseas assets and yield as confidence in the markets improves. GBP/JPY is up from 148 last week to 156 this morning.

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Bank of England attacked for gilts sell off

Angry investors blasted the Bank of England on Thursday when it sparked a sell off in the gilts market after one of the biggest government bond offerings of the year.

In an interview published 20 minutes after the £5bn bond deal was finalised, Andrew Sentance, an external member of the Bank’s interest rate setting monetary policy committee, said it was considering whether to put on hold its quantitative easing programme designed to pump money into the economy.

Mr Sentance told Bloomberg that the issue at the committee’s next meeting, due to be held in early August, would be “whether we’re now going to move into a phase where we’re watching and observing what happens in the economy”.

His remarks raised expectations in financial markets that the Bank might be ready for a sustained pause in its injections of cash into the economy through the purchase of government bonds.

This is one of the biggest single gilts transactions of all time, and the Bank jolts the market with significant market-moving information only minutes after the deal has been sealed.

Benchmark 10-year gilt yields, which have an inverse relationship to the price of bonds, jumped 0.12 percentage points to 3.96 per cent on investor nervousness that quantitative easing could be nearing its end.

Investors said that, although yields on the inflation-linked bond sold on Thursday remained steady, Mr Sentance’s remarks spooked the market and could have repercussions for holders of gilts across all maturities.

The confusion overshadowed a successful bond offering by the UK Debt Management Office, which operates at arm’s length from the Treasury.

The inflation-linked gilt maturing in 2042 was the largest ever single transaction for a UK index-linked security.

Although it tries to avoid making statements at high-profile moments such as on Budget day, the Bank is not normally constrained by the operations of other branches of government.

As the chief arbiter of interest rates, the Bank would be concerned not to show any sign of trying to influence the cost of government debt. Any indication of collaboration could drive up the cost of debt if investors lost confidence in the Bank’s independence, analysts said.

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Golden era for stock markets is over and there's no silver lining

The golden era of stock markets is long gone. But it looks like equities have found a silver age.

The MSCI world index rose by 9pc in seven straight up days through Tuesday, to a new high for 2009. That’s impressive, but nothing like the good old days. The index is still 40pc below the all-time peak reached in October 2007.

And the blissful life of that epoch – when corporate credit was readily available and growth around the world was stable and strong– is not coming back anytime soon.

The golden stock market period was succeeded by a brief dark age of crisis: a deep recession and a series of ever-worse financial troubles. But that is over.

GDP is no longer in free-fall and second-quarter earnings reports so far have overall been pleasing: Nokia was disappointing, but Caterpillar, LG and the investment banks have all done better than expected.

Most important for markets, the global government financial complex is working. Central bank funding is readily available at almost no cost, government bond yields are still low, trading houses are raking in profits and investment-grade credit spreads have fallen back to the level before the Lehman Brothers collapse.

Looking forward, equity valuations aren’t scary. World markets are trading at 16 times expected 2009 earnings, according to Société Générale. But the recession is massacring profits this year.

The multiple on expected 2010 earnings is 12.4, cheap by the standards of the last two decades. Even if the forecasts that lie behind that calculation are too optimistic, share prices have room to rise a bit more before they can be considered exuberant.

In retrospect, it’s clear the golden period for stocks was built on weak foundations. The foundations of the silver age aren’t much more solid. The economy is still burdened by the past excesses of finance.

Even if GDP stops falling in the main industrial economies, the next phase is likely to be anaemic growth. A lurch downward is possible. And neither governments nor central banks can offer much more help without compromising their own credibility.

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UK inflation rate falls below Bank's 2% target

UK Inflation tumbled below the Bank of England's 2 per cent target for the first time in nearly 2 years as the recession continued to take its toll on prices.

The Consumer Price Index (CPI) gauge of current UK inflation rate fell from 2.2 per cent in May to 1.8 per cent in June — the first time it has been under 2 per cent since September 2007, when the credit crisis began to grip the country.

CPI was dragged down by food and non-alcoholic drink prices which fell below May and June but increased over the same period last year.

Inflation soared to a 16-year high of 5.2 per cent last year as higher oil prices fed through into higher prices for consumer goods. But lower oil costs and falling consumer demand are now putting downward pressure on prices.

Today's inflation figures, which were in line with expectations, will fuel forecasts that the interest rate will remain at a record low of 0.5 per cent for months to come, and that the Bank may extend its scheme of quantitative easing next month, beyond the £125 billion sum it has already “printed”.

Official figures show that the wider Retail Price Index (RPI) measure, which includes housing costs, tumbled deeper than expected into negative territory to a record low. It fell from -1.1 per cent to -1.6 per cent on the back of steep drops in mortgage costs, the sharpest drop since records began in 1948.

The Bank expects CPI inflation to continue falling in the coming months before stabilising at below 1 per cent. As soon as inflation falls below this level, the Bank’s Governor, Mervyn King, will be forced to write to the Chancellor to explain why inflation has veered by more than 1 per cent from the target. Mr King has already written three letters to explain why inflation has risen above 3 per cent.

Food price inflation eased sharply during June, with the biggest downward pressure coming from meat, bread and cereals, fruit, vegetables and milk, and cheese and eggs. There was also a smaller downward effect from sugar, jam and confectionery.

But the rising cost of computer games acted as an upward pressure on inflation, the Office for National Statistics said.

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Bank of England injects £25bn more into economy

The Bank of England’s monetary policy committee (MPC) is expected to extend its programme of quantitative easing (QE) by £25 billion, though there are doubts whether it will take action beyond that.

The Bank has so far committed £125 billion of QE in an attempt to boost the money supply, mainly through purchases in the markets of gilts and other assets.

It has permission from the Treasury for a further £25 billion of such purchases, which analysts expect to be announced this week. Beyond this, it would have to seek new approval from the Treasury, which indemnifies the Bank against losses on the scheme.

The shadow MPC, a group of independent economists that meets under the auspices of the Institute of Economic Affairs (IEA), calls on the Bank to maintain the base rate at 0.5% and extend QE beyond the £150 billion it currently has permission to undertake.

Economists continue to debate whether QE is working, with bank lending still subdued. The policy has become of central importance to the gilt market. Traders fear that gilts — UK government bonds — will fall sharply once the Bank calls a halt to the programme.

The Bank will discuss if it should extend QE next month, when it has the benefit of a new forecast for its August inflation report. It will weigh signs that the economy has stabilised against other evidence suggesting a sustained recovery is some way off.

A report to be published this week is set to show that the pace of the job market’s decline is slowing. The KPMG/REC Report on Jobs, produced by the accountancy firm in conjunction with the Recruitment and Employment Confederation, will suggest that the pace of decline in permanent and temporary staff appointments has eased — a picture consistent with recent official data showing a smaller monthly increase in unemployment following record rises in the winter.

This also chimes with the purchasing managers’ indices, particularly for the service and manufacturing sector, which continued their improving trend last month.

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Bank pours cold water on economic recovery

The Bank Of England is sceptical about the so called recovery in the economy it emerged today as minutes of its June meeting showed it was united on a decision to keep rates on hold.

Minutes from the Bank's meeting two weeks ago revealed the nine member monetary policy committee unaminously voted to keep rates at their historic low of 0.5 per cent.

The Bank conceded that there had been "positive developments" in the economy over the month and that "the risk of a continued sharp contraction in output in the near term had receded."

However, it indicated that a spate of more upbeat recent economic data about the services, industrial and housing sectors gave less reason for optimism than business groups and commentators have suggested.

"Even if developments over the month had been positive, the increase in confidence apparent in some financial market indicators and some household and corporate sector surveys remained fragile," the minutes said.

"There was no reason to conclude that the medium-term outlook for the economy and thus inflation has changed materially since the Inflation Report had been finalised."

Last week, the Pound surged to its highest overall levels this year as hopes that the British economy is emerging from recession continued to burgeon.

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Bank holds interest rate in pause for breath

BoE pegged interest rates at 0.5% today for a third month in a row.

Also stayed its hand over any other changes in its recession fighting strategy as it paused for breath in its battle to combat Britain’s economic slump.

The Bank opted to hold interest rates once more at their 315 year low of 0.5 per cent as it weighs the impact of its expanded £125 billion drive to jump-start the economy with injections of newly created money.

Between last October and March, the Bank drastically cut interest rates and embarked on its aggressive moves to “print money” under a strategy of quantitative easing (QE), involving huge purchases of government and company bonds to pump extra cash through the economy.

The latest glimmers of hope emerged yesterday when the key CIPS/Markit survey of the services industries, the engine room of the economy, showed the sector growing last month, for the first time in more than a year.

The survey’s headline index, which is closely watched by the bank's MPC, rose for a sixth month in a row to its best level since April 2008.

Conditions have also improved in manufacturing, with the parallel CIPS survey of industrial companies showing that, although the sector was still shrinking last month, its fortunes were the strongest for a year.

Other rosy news has come from the high street and the housing market, with retailers ringing up a surprisingly strong 0.9 per cent rise in the quantity of goods sold during April, and indications that the worst of the house price slump has passed.

Yet the Bank will remain on the alert for any signs that the recuperation of an economy that remains frail and vulnerable may falter.

The fragility of any revival was underlined by last month’s official GDP data, which confirmed a 1.9 per cent plunge in the first quarter, the steepest quarterly decline since 1979.

Leading economists also remain extremely worried that any recovery will be anaemic at best and is likely to prove short-lived.

Analysts fear that an upturn will not last as highly indebted households strive to rebuild their finances and as a battered banking sector continues to tighten credit conditions.

"We are currently in a Potemkin recovery — more appearance than reality,” Professor Charles Goodhart told The Times yesterday, in reference to the fake “Potemkin villages” constructed in 18th-century Russia to deceive Empress Catherine II.

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Wise Money warns Britain may suffer a double recession

One of the world's most influential economists warns today that Britain faces the prospect of two recessions in quick succession.

Robert Shiller, Professor of Economics at Yale University, said that the recent stock market bounce should be treated with caution.

He likened the current sense of optimism to a marital row. “You don't know whether the argument with your wife is really over or not. Is the problem something that your spouse will bring up again, and again?”

The apparent upturn could soon go into reverse, he told The Times, marking a repeat of economic patterns in the 1930s and the 1980s.

Such a double-dip slowdown has been nicknamed by economists a “W-shaped” recession, where recovery is so fragile, the country could be plunged into another slowdown as soon as it emerged from the last.

Since March the stock market has rebounded by 27 per cent, raising hopes that the recession may not be as severe and protracted as many economists had feared.

Some have interpreted the recent rally as a sign that the banking system - which imploded after Lehman Brothers, the US investment bank, went bust in September - has stabilised and that confidence is returning.

Last week Alistair Darling, the Chancellor, brushed aside doubts that his Budget forecasts had been overoptimistic and predicted that the recession would be over by Christmas. Many economists in the City believe that Britain will stagnate until the end of 2010 and that unemployment will continue to rise well after that.

Speaking to The Times this week, Professor Shiller said: “I was last here [in London] in the fall and there is definitely a sense of optimism now. The Fed [US central bank] and the Bank of England seem to have things under control. Everything seems to be getting better.”

However, he warned that “there is a real possiblity of another recession. We may well see more bad news. It is a real failure of the imagination to think otherwise.”

He said that there were a number of issues that threatened any long-term recovery for the British economy - rising unemployment, mortgage defaults, and another wave of new company failures that “could surprise us yet”.

Professor Shiller also said that the banks were still harbouring large portfolios of troubled assets.

“We all want to lick this problem — there's been a burst of confidence over the last few months, but really it's not based on any news. A lot of people think this recession is coming to an end. But I'm not so sure. A resurgence in confidence may not translate into new jobs. We are still in uncertain times.”

He added: “In 1931 in the US, President Hoover unveiled his recovery plan - there was a huge stock market rally — the market improved but it didn't hold because bad news kept coming in. Increased confidence can be a self-fulfilling prophecy but it doesn't always hold.”

Professor Shiller said, however, that he believed another likely scenario to be one where Britain would face a continuous decline with house prices falling for a number of years, drawing comparisons with the decade of misery in Japan in the 1990s.

The economist became well known when he predicted the timing of the end of the dot-com boom in March 2000, and was one of the first to warn that the US housing market was perilously overvalued and that its collapse would cause devastating reverberations across the world's biggest economy.

Professor Shiller has been in London this week promoting his book Animal Spirits. How Human Psychology Drives the Economy and Why it Matters for Global Capitalism, in which he argues that our own psychology and emotions, such as envy and resentment, drive house prices, debt levels and share values.

His co-author is George Akerlof, who won the Nobel Prize for economics in 2001. In the book, they argue: “What had the people been thinking? Why did they not notice until real events — the collapse of banks, the loss of jobs, mortgage foreclosures — were already upon us. The public, the Government and most economists had been reassured by an economic theory that said that we were safe. It was all OK.

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