UK data weakest since 1968

UK manufacturing and Industrial production data has been released this morning.

The year on year drop in industrial production is the biggest drop since the series began in 1968. The year on year drop in manufacturing output is the biggest since Jan 1981.

Sterling is down since the data but that is probably due more to falls in the equity markets this morning as bank fears re-emerge.

At the moment there is a close correlation between the movements in stocks and currencies- this is particularly true with the USD, this is again evident this morning as the USD has gained against the EUR and GBP as equities trade lower this morning.

The Irish government is set to announce its budget- the expectation is for higher taxes and less spending…the economy is contracting sharply and its economy boasts the worst deficit in Europe.

The Yen has weakened to 100 against the USD and the Japanese economy will welcome this weakening of the Yen, elsewhere the pound is holding firm at 1.10 against the euro- and the USD is gaining across the board as equities slip.

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Central banks unite to save the markets

Friday capped a week of losses on global equity markets with the FTSE shedding nearly 9% while the Dow Jones fell 128 points.

This morning news is emerging of the outcome of talks over the weekend between world leaders to restore health in financial markets.

In the UK it has been announced the government will inject up to £37bn into banks in a move that will leave the government with sizeable stakes in some banks. The action raises levels of tier 1 capital in the latest attempt to restore confidence.

It has emerged from the weekend's meeting of Eurozone leaders in Paris that interbank lending will be guaranteed until the end of 2009 with UK Prime Minister Gordon Brown stressing the importance of "co-ordinated intervention" to restore confidence.

Brother Brown has urged European neighbours to follow the UK model of intervention whereby the government will take stakes in banks. The G7 finance ministers also unveiled a five point plan to revive markets while Australia, New Zealand and UAE have guaranteed all bank deposits and Norway and Portugal announced plans to aid bank financing.

Markets have reacted positively to the news with Australian markets rising 5.6% and the Hang Seng up 3.2% overnight. The FTSE, German and French markets all opened in positive territory this morning though Japanese and American markets are closed for public holidays.

It is likely today that individual EU nations will announce their plans within the framework agreed over the weekend while in the UK Producer Price Index data will be released, with an expected 0.4% month on month fall and 8.8% reduction year on year.

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Wise Money focus turns to tomorrows UK data

The week began with relatively little data but what was released was typically downbeat.

In the states we saw the release of the National Association of Home Builders (NAHB) housing market index, which held at 16 for the month of August matching market expectations and shows sentiment stuck at a record low.

A reading below 50 indicates US home builders view markets conditions as poor. However, the NAHB said in the report that it expects a recently enacted home buyer tax credit to boost appetite and encourage buyers to jump into the housing market. More housing data comes in the form of US building permits and housing starts this afternoon and the market expects a decrease in numbers here.

German PPI released this morning hit a 27 year high, accelerating to 8.9% in July from 6.7% in June. "As in previous months, energy prices had the biggest influence over the annual rate" the Bundesbank said.

In Germany we see the release of the ZEW survey, which is expected to follow sentiment of fading economic growth in Europe. There is reason to believe pressure will remain on the single currency and for the USD to remain strong, with support for the greenback coming from falling gold and oil prices.

Here in the UK, there isn't much to focus on in terms of data until tomorrow. Bank of England MPC member Besley writes in the Sun (that well respected financial paper) that it is "not easy in the current economic climate" to keep UK inflation at its 2% target. He added it will fall to 2% next year if inflationary wage increases do not take place.

Elsewhere the Bank of Japan kept rates on hold last night at 0.5% but downgraded its assessment of the economy for the second month running citing the risk that weakness in the US economy may trigger recession in Japan.

It remains pretty pessimistic in its view, seeing weakening export growth and domestic demand weighing on economic weakness.

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The Bank of Japan keeps interest rates on hold

The US Dollar lost ground against the euro yesterday to $1.4152 after France and Germany released better than expected industrial production data for August.

The dollar traded in a narrow range against the yen until the announcement last night that the Bank of Japan kept its interest rates on hold. Today the yen has lost ground to the dollar and euro.

Other currencies such as the Australian and New Zealand dollars, the Norwegian krone and the South African rand have rallied strongly against the yen since mid-August.

Links to commodity prices such as gold and the anti-inflationary positions of the respective central banks are viewed as important attractions for these currency pairs.

Sterling found support yesterday against the euro and dollar after comments from the governor of the Bank of England suggesting an early interest rate cut was unlikely.

This morning however, Sterling was down 0.3 percent at $2.0370. The euro rose to 69.66 pence - its strongest since early October. Whilst tighter lending conditions could produce a further credit squeeze, the sentiment from the BOE is that Britain's economy needs to slow over 2008 to stem inflation.

On Tuesday, Darling downgraded the government's economic forecasts citing the problems stemming from the U.S. economy.

Concerns that the strength of the euro would negatively impact international trade were countered yesterday with French, German and Italian positive production data.

The euro is at a two month peak against the yen to 166.28. This morning the euro rose 0.1 percent to $1.4160 within site of the record high of $1.4280 hit earlier this month.

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Bank of Japan leaves interest rates on hold

The Bank of Japan kept interest rates on hold overnight leaving the overnight call rate target at 0.5%. The Financial markets response was limited as the unanimous 9-0 vote was widely expected.

The Central Bank raised its key policy rate to 0.5% from 0.25% last month by an 8-1 vote, judging that the economy would stay on track for steady growth with prices seen in an uptrend. In the subsequent press conference Bank of Japan Governor Toshihiko Fukui said “the Central Bank will focus on economic and price movements in guiding monetary policy, but will also keep an eye on currency movements and recent rises in land prices”

Fukui also offered some comments on the recent volatility in financial markets saying this was a “healthy correction”

In the UK today all eyes will be on the release of the CPI number. The headline annual number is expected to drop slightly from the previous reading of 2.7% to 2.6% still well above the Bank of England’s 2.0% target level.

Falls in petrol and food prices are expected to offset rises in airfares following the increase of air passenger duty. Most economists will monitor this very closely for any clues as the Central Banks next move on interest rates.

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Interest Rates and Inflation likely to dominate currency converter's week

The FOMC meeting on Wednesday and the accompanying statement are likely to be the focus for financial markets this week. Expectations remain for the FED to leave rates on hold at 5.25% although some anticipate the statement may offer acknowledgement of softer growth and perhaps trouble in the sub prime lending sector.

On that note, this weeks U.S housing data (Tuesday & Friday) will be of particular interest in light of the recent focus on the faltering sub prime market.

In the UK a number of important releases are scheduled this week. Tomorrow the annual CPI Inflation is expected to fall slightly to 2.6% from the previous 2.7%. Wednesday sees the Bank of England minutes from the March meeting released, where most analysts are expecting no members voted for a hike.

Hopefully the minutes will shed some light on whether it is now a minority of members who feel the risks are consistently high enough to warrant a further hike this year. On Wednesday the Chancellor of the Exchequer will deliver his budget statement.

Finally UK Retail Sales for February will be released on Thursday. After the January sharp fall this is forecast to rebound in the region of 0.8% putting the annual figure somewhere in the region of 4.0%

In Japan the Bank of Japan begin their two day meeting today and forecasts are unanimous that tomorrows outcome will leave the target rate on hold at 0.5%. This places the focus on Governor Fukui’s subsequent speech and the BoJ’s monthly report which will both be closely monitored for signals of future rate hikes.

For those with an interest in or an exposure to China the Peoples Bank of China announced a 27bp hike in both the benchmark lending and interbank deposit rates on Saturday. The move was widely expected after the PBoC Governor said CPI had become worryingly high.

In the short term the stock market may not react well to the hike, but on the currency front pressure on the CNY appreciation will probably intensify. This is now the third time the Central Bank has raised interest rates since last April.

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BoJ decision sends Yen tumbling

The Yen hit fresh record lows against the euro and near a four year low against the dollar after the bank of Japan voted 8-1 in favour of raising interest rates by 0.25 basis points to 0.5%. Toshihiko Fukui, BoJ governor, mentioned future rate rises would be very gradual and that they would be keeping monetary policy extremely accommodative.

Over the week, the yen fell 1.7 per cent to Y159.50 against the Euro, lost 1.5 per cent to Y121.05 against the dollar and fell 2.1 per cent to Y237.50 against sterling.

The dollar moved to just over 1.9640 supported by a strong US CPI figure. In the Eurozone Friday's slightly lower than expected German IFO figure came in at 107.5 from an anticipated 107.5.

In spite of that strong Eurozone growth data could provide the ECB with the necessary arguments to defend further interest rate hikes. After a solid economic week Sterling rose to 1.4903 against the Euro.

Iran, meanwhile, remained defiant on its pursuit of its nuclear programme by admitting it had fired a rocket into the atmosphere. President Mahmoud Ahmadi-Nejad was quoted saying Iran has obtained the technology to produce nuclear fuel and Iran’s move is like a train that has no brakes and no reverse gear.

Mr Ahmadi-Nejad’s comments were quickly picked up by Condoleezza Rice, US secretary of state. “They don’t need a reverse gear,” she responded on Fox News. “They need a stop button.”

This week is light on the data front but Trichet is speaking on Wednesday at 2pm which will be monitored to see if there will any indication on future rate rises.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.