UK interest rates cut by a third

Wise Money has sat through various BoE / MPC meeting/announcements when the Central Bank have surprised the market far more frequently on the hawkish side as it turns out but never has the market been so caught out by a UK decision.

The minutes in 2-weeks time have become more important than ever with the chance that the vote for a 150bp cut was unanimous inconceivable.

The process by which the committee came to the decision, will therefore be avidly anticipated. Last night's evaluation of the cut and its likely effect centred solely on just how much of the cut will filter through to the economy as a whole and how much would be absorbed by Banks to enhance their capital position and their bottom line.

Government pressure must be brought to bear especially as they are a major stakeholder in most of the major institutions after nationalising them.

There was very little market reaction immediately following the news as dealers, investors and the like seemed to be at a loss as to what they should do next.

The ECB weighed in with their expected 50 basis point cut bringing its rate down to 3.25% - a 75 point cut was discussed but ultimately rejected. According to ECB President Trichet euro zone inflation was expected to continue to fall back hinting strongly that another rate cut could follow as early as next month.

Reacting to the interest cuts and an IMF report released yesterday predicting that the world's developed economies were heading for their first full year contraction since the Second World War stock markets took fright and share values plummeted.

In New York the Dow Jones ended down 443 points or 4.85% following a decline of 5.7% in the FTSE 100. There were similar declines in Asian markets with the NIKKEI dropping 3.55%.

Turning our attention to today's key data all eyes will be on the US non farm payroll numbers for October due for release at 1:30pm GMT. Expectations are for a decline in jobs by some 230,000 taking the unemployment rate to 6.3% from 6.1% in September.

The effects of Hurricane Ike came too late to be fully reflected in September's figures so we could see the delayed impact of hurricane related disruption in this months figure. Not surprisingly private service sector job losses have accelerated adding to continuing reductions in manufacturing and construction jobs.

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.

Anything is possible?

But I am still of the opinion that the MPC will cut by 50bp today with a dovish set of minutes to follow and further cuts in the months to come.

Having said that, there is still considerable column inches being devoted to arguments for larger cuts at today's MPC meeting with the most extreme view being expressed by ex-committee member Willem Buiter. In the Telegraph this morning he argues the need for a cut of 150 basis points. The majority of polls still go for a move lower by 0.50% but with the risk skewed firmly towards a larger cut. We will know at midday.

The BIG unknown is how any move from the MPC will be reflected in the LIBOR market and whether lower rates will equate to a freeing up of credit for the beleaguered UK corporate market.

The Treasury, as part of their rescue package for the UK Banking system, demanded that in return for the bail-out, the Banks concerned had to maintain their lending at 2007 levels. The Council of Mortgage Lenders (the main lobby group for Banks and Building Societies) however, seemed to give the go ahead to its members yesterday to ignore this dictat by suggesting that it would not make commercial sense to insist or even expect that lenders automatically would pass on rate cuts to their borrowers.

In this case, it would seem senseless for the MPC/BoE to use up all its ammunition in one attempt to kick start an economy still in decline. Better to temper the cuts and produce them in a more strategic manner.

There is another policy meeting taking place today and it is very important to watch the ECB Council's decision on Euro Zone interest rates, plus M. Trichet's comments after the decision, for signs that the ECB is truly on board with other central banks in seeking to lower interest rates. Traders and investors across the board are expecting a 0.50% rate cut today.

However, it is worth bearing in mind that the hypothesis of a 50 basis point easing did not originate in Frankfurt. It was invented by the markets. M. Trichet may not be keen to be seen to be promising the markets that the ECB will continue to cut rates willy-nilly until the world economy is fixed.

Elsewhere, the Obama factor for the Dollar ran out of steam quite suddenly as a supposed Middle Eastern Central Bank's euro buying programme took hold. This coincided with a couple of sets of very weak figures from the US which filled the market with doom and gloom ahead of the non-farm payrolls figure on Friday.

Expectations for this number were hastily reviewed with the new estimated figure being nearer a 200,000 fall compared to the original 150,000. The short term outlook for the US economy is still grim and hence any significant Dollar appreciation will likely have to be deferred until next year when the new Administration begins to make a difference.

In the meantime, and with liquidity in markets falling away pre-Christmas and ahead of year end trading, volatility around major data releases will take over. To this end, keep an eye on the important figures coming up. traders will most certainly be doing so.

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.

Obama brings hope for the future

As had been well anticipated, Senator McCain conceded the Presidential contest to Senator Obama early this morning.

In the senate elections however, the Democrats have fallen short of the 60 seat filibuster-proof level that had been talked about in the run up to yesterday. Obama will now have 2 and bit months until he is sworn in as President on 20th January during which time interest will be high in his preparations for power.

Who will form the core of his administration? How will he propose to reduce the burgeoning US deficits? What is his view on the Financial crisis and how the current administration have sought to alleviate the problem?

Added to this is the question on every US citizen's mind, being can he pull the US economy round via an Obama feel-good factor alone or will in need a further stimulus package? And that is without any Foreign Policy considerations. Could be an interesting 10 weeks.

The US economic back-drop is not a pretty picture at present with the car market the focus …. Yesterday's news that US auto sales plummeted by 32% in October to its lowest monthly total since January 1991 provoked increased calls for new Federal Aid for the industry.

The present sales annual rate of 10.7 million unit is way below the break-even number of 16.2 million, and still falling. Something needs to be done to revive the consumer's confidence in the immediate future to get them back spending.

Ahead of the MPC meeting today/tomorrow we have had mixed signals from the economy, but most of them still negative.

While the mechanical effects of the big drop in energy and food prices seem likely to push the headline down below the rate of increase of the core very quickly, core CPI has been accelerating: Prices ex-food, -energy, -alcohol and –tobacco were 2.2% higher than a year ago in the latest report, almost double their yearly rate of increase in the first quarter.

This will obviously be a major discussion point for the MPC who must decide whether they are confident enough that ALL inflation risks have been contained and that price expectations are sufficiently well contained.

KPMG/REC reported the fastest falls in appointments and advertised vacancies in the history of their employment survey.The survey indicated that pay had shown the first fall in five years, with permanent pay falling to a reading of 45.7 from 50.0 in September and temporary pay falling to 47.0 from 50.4 in September.

The survey provides a very strong signal that UK unemployment is set to rise significantly in the next few months and into 2009, and earnings growth will be weak.

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.

Sterling plunges on brown's comments

We open this morning with Sterling looking almost sprightly following a couple of failed attempts overnight to force the rate down towards the 1.60 support level.

The fact that we bounced off 1.6150 a couple times makes that level a weak support for the moment but given current sentiment, is unlikely to provide significant resistance ahead of the weekend.

The Yen remains the Market's favourite for now with further gains provoking Finance Ministry comments already this morning.

Well we know exactly how the strong Yen and the global downturn are affecting the economy.. 3 consecutive negative quarters for Industrial Production and very a very downbeat outlook from Sony gives us a bit of a clue.

Elsewhere the flight by investors/speculators (call them what you will) from commodities, commodity based currencies, stock markets and almost anything else that moves leaves us with a big question.

Where on earth are these funds going? Given that yield appears no longer a priority then it might go someway to account for the stronger Yen and the very low level of short date Dollar rates.

The Fed yesterday went someway to put a floor under the latter by tinkering with the formula by which they reimburse Banks' excess balances held by the Central Bank.

In theory good, in practice we have still seen overnight Dollars offered at sub 1% this morning.

The MPC minutes revealed that, as expected, the vote to cut rates was unanimous. Given the committee wide agreement on the current problems that best the UK economy, there is a great possibility that we see a further 50bp cut at the November meeting and expectations abound that we will have Base Rate at 3% by some time in the 3rd Qtr 2009.

Given the magnitude of the expected total cut, one can see how short term investors are shying away from holding Sterling.

On the other hand, there must be a growing feeling that buying Sterling here and locking in the higher yields down the curve would prove to be a good strategy going forward. We will see which sentiment prevails.

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.

Wise Money sees up and downs like a yo-yo

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.

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.

A three way split decision by the MPC gives sterling a boost

The Pound was pushed to a three week high verses the Euro following a three way split in voting by the MPC at their July policy meeting.

Tim Besley was the loan voice calling for interest rates to rise while David Blanchflower to no one's surprise voted for a rate cut with the remaining 7 members opting to leave rates on hold.

The last time there was a three way split in the voting was way back in May 2006 when the base rate was 4.5% and CPI inflation was 1.8%. The vote didn't come as a huge surprise this time because the market was expecting a hawkish outcome anyway given the level of inflation reported earlier in the month which was known at the MPC meeting.

However, it does illustrate the Bank's dilemma in trying to balance a slowing economy and increasing inflation.

The BoE in the minutes acknowledged such weakness in the real economy, noting GDP may slow more than forecast, while reiterating its warning that consumer inflation pressures were likely to be higher than expected.

The account of the meeting was largely in line with the BoE's recent stance on rates, and apart from Besley's stand, the minutes did not appear to be more hawkish than in the previous month.

Oil prices fell again yesterday following a report that US stocks of gasoline increased more than expected pushing U.S. crude down by a further $1.78 to $126.64. Brent crude declined by $1.95 to $127.60.

Also helping the dollar was the approval by the House of Representatives of plans put forward by the US Treasury aimed at supporting the businesses of Fannie Mae and Freddie Mac who between them own or guarantee about half of the U.S.'s US$12 trillion mortgage market.

The Beige Book held no real surprises by reporting that the US economy continued to slow through June and July that consumer spending was sluggish or slowing, manufacturing was in decline in most regions, bank loan growth was restrained, and the residential real estate market remained weak across most of the country.

It also pointed to continuing inflationary pressures with many manufacturers planning price increases to combat higher input costs.

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.

Sterling remains under pressure but manages to advance against a weaker Dollar

The Pound gained no rest bite yesterday as more bad news on the financial sector and property market deepened economic gloom.

Firstly there was HBOS who confirmed that shareholders subscribed for a mere 8.3% of shares in its rights issue, leaving the underwriters with almost £3.8 billion of stock.

Then we had property website Rightmove who reported its first ever annual fall in house prices since it began keeping records six years ago; prices fell 2% year on year to July.

Following comments from John Gieve and David Blanchflower highlighted in yesterday's commentary dealers will be looking very closely at the minutes of July's MPC meeting on due out on Wednesday to gauge whether any other members of the committee are moving towards easing monetary policy soon, which would further weigh on sterling.

A Reuter's poll of economists predicts that the MPC will have voted 8-1 in favour of rates staying on hold.

The dollar initially gained from news that Bank of America reported stronger-than-expected quarterly earnings but sentiment remains cautious and the dollar fell back sharply as poor company earnings reports in after hours trading from American Express, Apple and Texas Instruments triggered fresh dollar selling.

Adding too the negativity surrounding the greenback was a report yesterday from the Conference Board that showed that the index of leading US indicators fell 0.1% in June. This was in line with expectations but of more concern to traders was May's figure which was revised down to minus 0.2% from plus 0.1%.

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.

MPC meeting takes focus

Little move again on exchange rates overnight, with EUR/USD continuing to be supported on the down side. It looks likely that the Euro will find buyers at 1.5680 which is a strong technical support level for the Euro before continuing its move down.

Oil prices remained firm at $137 a barrel with Gold also remaining stable at the 928 level. It is worth noting that the Dollar tends to strengthen when commodity prices stabilise or fall.

In the UK, the MPC decide interest rates at 12:00 with expectations for a hold in UK base rates at 5%. This fits in with the vote at the Times shadow MPC meeting, which voted 8-1 in favour of holding base rates at 5% with ex member Wadhwani calling for a 25bp cut. The outcome of the ‘real' MPC vote is likely to be very similar.

Consumer conditions in the UK continue to worsen with reports out showing that over the last month alone, the average family's shopping bill has risen by £50. This is an obvious reflection of inflationary pressures, but concern will be that with this massive increase in core expenditure, households will make do without, or with significantly less spending on other items deemed as luxury.

In the US, FED members Hoenig and Yellen are calling for interest rates to return to neutral sooner rather than later. This implies that the differential between the Fed funds rate and the US inflation rate must diminish with the easiest way to accomplish this being a swift move up in US interest rates. This should have the effect of being Dollar supportive.

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.

Attention turns to MPC meeting

Following on from last weeks meeting of the ECB when Euro rates were raised by 25bp, the MPC are due to meet on Thursday.

Expectations are for a hold in rates keeping the UK base rate at 5% for the third consecutive month.

The US Dollar continues to strengthen on from Friday. The holiday affected market chose to ignore US economic woes and drift the Dollar on a firmer bias in very thin trading.

Onto the Commodities, no real change in Oil prices although due to the record highs it now looks like this will filter through to fuel prices, so not good news for all us car owners. Gold is trading slightly lower since Friday's opening falling from 940 back to 920 as the Dollars strength filtered through.

A miserable outlook for UK employment in Britain, with available permanent jobs having fallen for the first time in five years whilst the number of people looking for employment rose last month. The situation for those looking for temporary work is also worsening. Will this be the start of the first recession in almost 20 years in Britain?

Onto slightly better news, it looks as though some of the mortgage lenders have started to bring their down lending rates in line with a fall in the Sterling yield curve at it's longer end. However, with the lenders tightening their already restrictive criteria for borrowers, this move lower in rates is unlikely to bolster the housing market to any degree.

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.

All eyes on the BoE minutes

Sterling was stronger yesterday thanks to firm money supply and public finance data. M4 money supply grew by a healthy 13% in the month of January while net monthly lending hit a fresh record high.

Today’s release of the MPC minutes from the monetary policy meeting held earlier this month is the main data out this week. The question being is whether there is room for another interest rate hike after the surprise rate hike in January.

If the decision to leave rates unchanged was unanimous, then the odds for a rate hike in March will be very low. If at least 2 members voted in favour of a rate hike, then market expectations will quickly adjust to reflect the possibility of 5.50 % rates next month.

The lack of US data this week aside from the CPI number and leading indicators is helping the dollar recover some of its losses from the prior week. The recently reported drop in producer prices suggests that we could see a similar decline in consumer prices, especially as inflation growth slows globally.

After the CPI report, we have the release of the minutes from the Federal Reserve’s monetary policy meeting in January. This will most likely prove to be a non-event since the minutes should contain a similar the message as the one that Bernanke delivered at his semi-testimony on the economy and monetary policy, which is that they have adopted a wait and see approach.

The Euro was weaker yesterday after softer producer price figures from Germany and less hawkish comments from European officials. Comments from Spanish politician Solbes and EU’s Alumnia suggest that interest rates will not go much higher while Alumnia said that inflation pressures are not excessive. Neither of these people are members of the ECB, but the shift is still worth noting.

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.