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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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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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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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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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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Loans Markets wrongfooted as Bank of England signals rates will stay low

London's money markets were left reeling for a second time in less than a week as the Bank of England signalled that traders had got ahead of themselves in assuming that it would raise interest rates significantly in the coming years.

Yields on gilts dropped by five basis points after the Bank indicated that if it followed the market's expected path for interest rates and lifted them above 4pc over the next two and a half years it would send inflation below its 2pc target.

In its quarterly Inflation Report, the Bank indicated that although it may have now reached an end with its £175bn Quantitative Easing (QE) programme, it remains more concerned about the risk of deflation than inflation in the coming years.

But despite concerns that the QE programme has failed – having not succeeded in lifting the growth of money flowing around the broader economy – the Bank's Governor, Mervyn King, insisted that the scheme had been a success, saying that were it not for this cash injection, growth would have been weaker and unemployment higher.

The Bank's chief economist, Spencer Dale, added: "It's still too early to know the precise impact that the asset purchases will have on nominal spending. But there are encouraging signs: gilt yields are lower than they otherwise would have been and it appears that the functioning of the corporate credit markets have improved.

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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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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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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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ECB lends record €442 billion to banks

The European Central Bank said today that it lent a record €442.24 billion at 1 per cent in one year funds to commercial banks.

The previous record for the central bank’s refinancing operations was €348.6 billion in two-week funds on December 18, 2007 as crisis-hit commercial banks scrambled to bolster their balance sheets during the crunch year-end period.

Interest rates overall would be expected to remain low, a key issue as the eurozone grapples with what is likely to be slow recovery from the worst global recession in more than 60 years.

The ECB has resisted the so-called "quantitative easing" practised by the US Federal Reserve and Bank of England — essentially printing money to buy government and private debt to boost recession-hit economies.

The ECB, however, has generated a flood of cash through loans that will now extend to 371 days, or 12 months, from one week to six months in the past.

Analysts had expected banks to leap at the chance to get an unlimited one-year loan at the ECB’s lowest rate ever.

The central bank has said that in subsequent one-year operations — the next is scheduled for September 29 — the rate could be higher depending on market conditions.

By providing huge amounts of cash to commercial banks, the ECB aims to lower the cost of borrowing by companies and individuals, and spur economic activity.

Money markets influenced by central bank operations determine the flow of credit for vast numbers of people around the globe, from managers trying to fund their businesses to families and students seeking mortgages and personal loans.

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Bond markets defy Fed as Treasury yields spike

The US Federal Reserve may soon be forced to launch fresh blitz of quantitative easing whatever the consequences for the US dollar, or risk seeing economic recovery snuffed out by the latest surge in long term borrowing costs.

Yields on 10 year Treasury bonds have risen relentlessly since March when the FED first announced its plan to buy $300bn (£188bn) of US government debt directly, a move that briefly forced rates down to nearly 2.5pc, a level thought to be the Fed's implicit target.

The US Mortgage Bankers Association yesterday highlighted the fragility of the US housing market, reporting that 12pc of homeowners are either behind on their payments or facing foreclosure, the highest level since records began.

Almost 6pc of "prime" borrowers are in arrears, showing how far the crisis has moved beyond the sub-prime. Most arrears are caused by job losses. The US unemployment rate has reached 8.1pc, and is even higher under older definitions, running at 15.8pc under Clinton-era metrics.

It is unclear why US bond yields have spiked so violently, with spill-over effects on gilts and bunds. One camp of investors is worried that inflation is rearing its ugly head again: others fear a sovereign debt crisis as over-extended states loses their AAA ratings.

The US is at the front of the firing line. Beijing is clearly losing its patience with the Fed's policy of printing paper, seen as a form of stealth default. There is some risk that further moves to step up quantitative easing could cause China to boycott US Treasury auctions. China and Japan together hold 23pc of all US federal debt.

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UK green shoots are trampled by Mervyn King

Sterling has slumped lower following yesterday's Quarterly inflation report by the Bank Of England emphasising a slow and uncertain recovery.

The inflation report is the first since the introduction of QE in March and the report was eagerly awaited to assess the inflation projections in the UK. Mr King was downbeat in his assessment of the UK economy and emphasized the uncertainty in the economy stating "it would be extremely unwise for anyone to claim they know what the future is to hold" and he also intimated that there would be no end to credit easing and interest rates will remain low for the foreseeable future.

So not particularly cheery from Mr King and this certainly takes the shine off yesterdays "green shoot" declarations from various economic pundits for the UK- in fairness a conservative approach is sensible to avoid the market trading on sentiment rather than reality.

Following the report sterling dipped from 1.53 against the dollar to 1.5139, against the euro sterling dropped from 1.1190 to 1.11. In other data from the UK we saw unemployment jump to its highest level since 1996 in a leaked report yesterday afternoon….the number of UK unemployed jumped by almost a quarter of a million in the first 3 months of the year taking the total levels to 2.2 million.

However manufacturing production fell by just 0.1% compared to expectations of a drop nearer to 1%- continued improvement in manufacturing production will be essential to drive growth and stop the rot of unemployment levels surging higher still…

Elsewhere, we saw China post a higher than forecast retail sales number but lower industrial output data….good news that the Chinese consumer is buying but they will hope to see an improvement in output soon.

One currency pair to watch is EUR/USD which earlier broke through 1.37 before retracing to 1.36- the increase in Oil to $60 per barrel driving this pair higher for now.

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 cautions to expect a sucker punch

Wise Money warns the 40pc rise on global bourses since March assumes that central banks have conjured away the debt overhang by slashing rates to zero and printing money.

Nothing of the sort has occurred. Two thirds of the world economy will be in deflation by July.

Bear market rallies can be explosive. Japan had four violent spikes during its Lost Decade (33pc, 55pc, 44pc, and 79pc). Wall Street had seven during the Great Depression, lasting 40 days on average. The spring of 1931 was a corker.

James Montier at Société Générale said that even hard-bitten bears are starting to throw in the towel, suspecting that we really are on the cusp of new boom. That is a tell-tale sign.

"Prolonged suckers' rallies tend to be especially vicious as they force everyone back into the market before cruelly dashing them on the rocks of despair yet again," he said. Genuine bottoms tend to be "quiet affairs", carved slowly in a fog of investor gloom.

Another sign of fakery – apart from the implausible 'V' shape – is the "dash for trash" in this rally. The mostly heavily shorted stocks are up 70pc: the least shorted are up 21pc. Stocks with bad fundamentals in SocGen's model (Anheuser-Busch, Cairn Energy, Ericsson) are up 60pc: the best are up 30pc.

Teun Draaisma, Morgan Stanley's stock guru, expects another shake-out. "We think the bear market rally will end sooner rather than later. None of our signposts of the next bull market has flashed green yet. We're not convinced the banking system has been fully fixed," he said

Mr Draaisma said US housing busts typically last nearly about 42 months. We are just 26 months into this one. The overhang of unsold properties on the US market is still near a record 11 months.

He expects the new bull market to kick off later this year – perhaps in October – anticipating real recovery in 2010.

Governments need to raise $6 trillion (£4 trillion) this year to fund bail-outs and deficits, led by this abject isle with needs of 13.8pc of GDP (EU figures). China fired a warning shot last week, saying the West risks setting off "inflation for the whole world" by printing money. It hinted at a bond crisis.

Yes, the glass is half full. China's PMI optimism gauge has jumped back above the recession line. The global PMI has been rising for seven months. But this usually happens after a crash as companies rebuild battered inventories for a quarter or two.

Note that container volumes in Shanghai fell 17pc in January, 22pc in February, and 9pc in March. Rail freight volumes in the US were down 32pc in April on a year earlier.

The Economic Cycle Research Institute (ECRI) says the US recession will be over by summer, insisting that its leading indicators have never been wrong – except once, in the Great Depression. Quite.

SocGen's other bear, Albert Edwards, says the new element in this slump is that GDP is contracting in "nominal" terms, not just real terms. Money incomes are flat. It is a crucial difference.

"This is like drinking hemlock. The US is gradually slipping further towards outright deflation, just as Japan did," he said. As companies retrench en masse they risk tipping the whole economy into Irving Fisher's "debt deflation trap".

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.

European Central Bank falls into line and embraces quantitative easing

ECB falls into line and embraces quantitative easing by following the policy first adopted by the Bank of England and America's Federal Reserve.

The European Central Bank has cut interest rates a quarter point to a record low of 1pc and embraced quantitative easing (QE) for the first time, catching markets off guard with plans to buy €60bn (£53.5bn) of covered bonds.

The hotly-disputed move to purchase assets brings the ECB into line with the central banks of the US, Britain, Japan, among others, that have begun "printing" money to stave off debt deflation.

The step-change in policy follows an open clash within the ECB's governing council over its handling of Europe's worst slump since World War Two, pitting national governors from southern Europe and Ireland against the ECB's German-led hawks. Bundesbank chief Axel Weber has fought a rearguard battle to head off QE, calling it an "undesirable option" that risked inflation later.

The majority also overruled his insistence on a 1pc "floor" for interest rates. Jean-Claude Trichet, the ECB's president, said the bank had not ruled out further cuts, "depending on future circumstances".

The refusal to accept Frankfurt's lead is a turning-point for ECB, which inherited its authority a decade ago from the Bundesbank. The upsets touches on a raw nerve in Germany where critics have always suspected that EMU would turn "soft". It may set off a political backlash.

The ECB also extended its liquidity scheme from 6 to 12 months and opened its window to the European Investment Bank, giving it a new crisis role.

David Marsh, author of The Euro - The Politics of the New Global Currency, said the ECB is loath to follow Anglo-Saxon banks in purchasing government bonds because this would give most help to big debtors such as Greece and Italy. "They don't want to be seen as bail-out merchants by acting as a bond purchaser of last resort for hard-pressed nations," he said.

The IMF says Europe's banks have written down just 17pc of likely losses, compared to half for US banks. They may need $500bn in fresh capital. "If the IMF is correct, the risk of a credit crunch is bigger than the ECB likes to admit," said Mr Annunziata.

The European Commission has slashed its eurozone forecast to minus 4pc and highlighted the danger off a more vicious downward spiral if "adverse non-linearities" take hold. "One cannot exclude the risk of social and political unrest," it said.

The ECB's policy shift is a vindication for Cypriot governor Athanasios Orphanides, a 17-year veteran of the US Fed, who has battled tenaciously for bold action.

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.

Doubts on quantitative easing policy as rates keep rising

Once again ditherer brown's incompetence is being highlighted.

It is only a few weeks since quantitative easing programmes were launched on both sides of the Atlantic – but already the effectiveness of the measures is being questioned.

That is because the purchase of government bonds by both the US Federal Reserve and the Bank of England is not helping sustain lower yields.

And it raises the prospect that the central banks will have to increase their fire power.

“The Fed’s problem is that the market realises that $300bn in Treasury buy-backs is just a drop in the bucket compared to $2,500bn in net Treasury issuance this fiscal year,” says William O’Donnell, strategist at UBS. “It’s a $300bn thumb in a dyke springing leaks everywhere.”

After falling to 2.5 per cent from 3 per cent when the Fed confirmed it would start buying Treasuries, the yield on the 10-year note is currently back around 2.9 per cent. This week’s selling of stocks has helped lower yields, but the move has been muted for now.

If 10-year US yields rise above 3 per cent, it may negate some of the recent decline in 30-year fixed mortgage rates, which are at historic lows for US home owners.

In the UK, the effectiveness of quantitative easing is also in doubt, after a euphoric start to the programme that saw benchmark yields plunge.

Yields on 10-year UK bonds have risen by about 50 basis points from a low of 2.91 per cent after the Bank of England announced plans to buy up to £75bn ($110bn) of gilts on March 5.

The increase in yields is partly due to signs of risk appetite returning to the markets, which takes away a natural support for gilts and Treasuries. The recent rebound in equity markets, amid hopes of green shoots appearing in the economy, has also put pressure on government bond prices on both sides of the Atlantic.

The rise in Treasury yields has been accompanied by rising inflation expectations as investors worry that the Fed’s outright purchases of Treasuries and mortgages under quantitative easing will ultimately spark inflation.

The expected average inflation rate for the next 10 years recently touched a six-month peak of 1.5 per cent, up from 1.1 per cent last month. Such an inflation expectation, however, is very low and dealers say supply is the main issue for the Treasury market.

The Fed’s planned purchases in Treasury debt this year is a fraction of the overall $6,000bn in outstanding debt and expected hefty supply due in the coming months and years.

For dealers, competition between the Fed and the Treasury creates a favourable trading environment at a time when dealer ranks have been thinned and bid-offer spreads are wider than normal, enhancing profits.

Trading opportunities have also flourished in gilts as dealers report that most sellers to the Bank of England have been hedge funds or bank proprietary desks. Many of these groups have sold bonds at high prices to the Bank of England and then bought them back at lower prices to book quick profits, which has no impact on the economy.

That is preventing the Bank of England from driving yields on 10-year gilts down to 2.5 per cent, a level where so-called real money accounts, such as life insurance companies, are likely to sell. It is hoped that these funds will then buy sterling corporate bonds, lowering the funding costs for UK companies and helping to stimulate the wider economy.

The rise in UK gilt yields comes amid worries that the Bank of England is not as committed to quantitative easing as dealers first thought following comments by Mervyn King, the Bank’s governor, to a parliamentary committee that the programme could be eased should signs of inflation emerge.

The Bank may make further comments on quantitative easing after its rate setting meeting today.

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Equities surge higher on US priniting presses

Markets are on a positive feel following yesterday's outline by Tim Geithner on the Public Private Investment Program in the US.

The plan involves the government buying up toxic assets held by banks which will allow the banks to free up their balance sheets. At the moment the debt sits with the banks and they cannot sell it on or value it, therefore the scheme aims to remove this and hopefully by doing this remove the chains that are preventing lending.

President Obama noted that the plan was a vital step but also reaffirmed that there was a "long way to go". Wall Street experienced a significant rally; the Dow Jones gained nearly 500 points in yesterdays session.

The low yielding currencies such as the USD and the YEN weakened on the news as investors sought higher yielding assets; the AUD and NZD continued to rally.

Interestingly EUR/USD has failed so far in its bid to extend towards 1.40 and the USD is at the moment gaining back towards 1.35 after failing to break 1.3730.

Sterling has moved higher against the dollar buoyed by the increase in the equity markets and GBP/EUR has also gained back to the 1.08 level.

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.

Markets enjoy another day in the sun

Shares in London jumped for a third successive day, giving hope that the cloud of gloom over the financial system is now lifting.

The benchmark FTSE 100 index jumped almost 3pc, rising 110.31 points to 3,863.99, while shares on Wall Street were also higher in late trading.

Markets were boosted by a statement from Barclays about its plans to shore up its balance sheet, and comments from analysts that shares are fast-becoming excellent value.

The news will encourage the Bank of England, which carried out the second of its reverse auctions as part of its quantitative easing programme. It is printing £75bn of new cash over the next three months to buy government and corporate debt from investors.

The idea is to encourage them to shift more cash into other investments such as equities. However, for the second time, the main sellers of the £2bn worth of gilts were not pension funds or insurance groups but investment banks and hedge funds.

There are nevertheless plenty of analysts who warn that the recent market recovery is actually a "sucker's rally", and that equities will fall further over the coming months.

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.