Central Banks keep interest rates on hold as global risks mount

US stock markets have rallied after a pickup in commodity prices as the US Dollar lost ground after the statement by the Federal Reserve.

US stock markets have rallied after a pickup in commodity prices as the US Dollar lost ground after the statement by the Federal Reserve. The Fed has left its benchmark interest rate unchanged even though the US economy is growing steadily but the Central Bank is being very cautious due to the threat and potential risks of global economic and financial turmoil.

GDP forecasts were also lowered by the Fed and markets are now expecting just 1 more rate hike later in 2016, much lower than the 4 hikes forecast earlier by the Fed.

With the Central Bank being so dovish, the Greenback lost ground against most of its counterparts though continues to find strength against the Japanese Yen.

Speeches by FOMC members Dudley, Rosengren and Bullard later today should provide further direction for the dollar, coupled with consumer sentiment data out from Michigan.

The euro has made a slight comeback after falling considerably last week after Mario Draghi’s speech boosting further quantitative easing for the Eurozone. However, a dovish Fed strengthened the euro.

Sterling strengthens across the board

Sterling has also strengthened across the board despite the Bank of England holding interest rates which was widely anticipated.

Most of the gains made were based on forecasts of slight gradual rises in inflation and growth and a dovish Federal Reserve.

Also, the Budget for 2016 was released on Wednesday and the market found a bit of cheer as GBPUSD touched its highest level for a month.

With no economic data out from the UK, markets will look towards events elsewhere for short term direction.

ECB lowers negative interest rates

It was a tale of two halves for the European Central Bank (ECB) meeting yesterday as interest rates were dropped.

It was a tale of two halves for the European Central Bank (ECB) meeting yesterday as interest rates were dropped.Initially they delivered a comprehensive package of easing which included a cut to the main refinancing rate from 0.05% to 0% and a deposit rate cut to -0.4% from -0.3%. QE was also increased and expanded and they introduced a new year 4 year liquidity package in the form of TLTROs.

At this point the market responded positively and the euro lost ground sharply against the US Dollar and the Pound. However, the rug was pulled by confirmation in the Q&A session from Mario Draghi that he does not expect to see any further rate cuts.

This line in the sand on no further interest rates spun the euro from weakness to strength in a very sharp about turn and led to euro gains on the day amidst huge volatility.

It seems the ECB are trying to focus their attention on the credit space through bank lending to support the recovery and to curb disinflation. The decision is effectively moving away from targeting euro weakness as a way to turn the tide of falling inflation.

The ECB has also now bought time before any additional easing would be considered. In summary they have sent the message out that they are done for now. This conclusion has been taken as a disappointment by the market which had expected the easing bias to continue with forward guidance and some are questioning if this is the ECB’s last stand and they are now out of bullets.

German inflation numbers come in weaker than expected

Today will be largely spent assessing yesterdays’ ECB decision and fallout. Elsewhere in the EU, this morning we have had German inflation numbers which have come in weaker than expected at -0.5%. Later on it’s the turn of UK trade balance which is expected to be slightly up from last month’s figure.

Aside from this there is little data out, however over the weekend we have some key Chinese data to look forward to.

UK productivity lags behind rest of G7

The UK was much less productive than the rest of the G7 in 2014- lagging by the most since 1991, official figures have shown.

The UK was much less productive than the rest of the G7 in 2014- lagging by the most since 1991, official figures have shown.The Office for National Statistics (ONS) said output per hour was 20 percentage points below the G7 average.

The UK was behind the US, Germany and France by a large margin and was slightly worse than Italy and Canada.

Productivity is seen as key to helping increase living standards in the UK by many experts.

“These figures show UK productivity continues to lag behind other developed economies,” ONS chief economist Joe Grice said.

“Since the economic downturn, productivity growth has slowed in most developed economies, but by more in the UK than the average.”

The Chancellor, George Osborne, pledged in July to take steps to encourage more long-term investment in infrastructure and by businesses to boost productivity.

Institute of Directors chief economist James Sproule said that UK firms should focus on “agility” rather than productivity.

“The economy of the future looks set to be dominated not by big companies, but by fast, agile, quick-moving and reactive ones,” he said.

“The firms that can respond to consumer demands most effectively and bring new products and services to market will reap the rewards.”

Productivity isn’t everything, but in the long run it’s almost everything – as Nobel Prize winner Paul Krugman noted 25 years ago in his book The Age of Diminished Expectations.

Unless you improve the amount each worker produces, you can’t expect living standards to rise.

It’s a harsh verdict on British economic performance that since 1991 when the ONS started making international comparisons, the gap between our productivity and the rest of the world’s advanced economies widened to a chasm.

Sure we have had economic growth. But the fact that we’re still 18% less productive than we would have been on pre-crisis trends gives you some idea why that growth hasn’t always flowed through to higher wages.

If each worker produced more, employers could afford to pay higher wages. That – of course – isn’t to do with workers working “harder”.

Much more decisive in improving how much each produces is investment – in plant and machinery, in skills and in public infrastructure such as roads.

The ONS international comparisons relate to 2014, so they’re a bit behind the times.

The latest official data on UK productivity, released in July, recorded a sharp pick-up in productivity at the start of the year.

Investment has also picked up. But if we’re going to catch up with the rest of the G7, we’ll have to sustain that for years.

UK economic growth increases to 0.7% in second quarter

UK economic growth increased in the second quarter of the year- helped by a big jump in oil and gas production.

UK economic growth increased in the second quarter of the year- helped by a big jump in oil and gas productionThe UK’s economy grew by an estimated 0.7% in the April to June period, the Office for National Statistics (ONS) said which compared with growth of 0.4% in the first quarter of the year.

Britain’s recovery strengthened, as the official figures suggested growth per head was finally back to pre-crisis levels.

Output in the economy during the second quarter was 2.6% higher than the same period a year earlier, the ONS said.

“After a slowdown in the first quarter of 2015, overall GDP growth has returned to that typical of the previous two years,” said ONS chief economist Joe Grice.

The UK’s economy has now seen 10 quarters of sustained economic growth.

The ONS stressed the first estimate was based on about 40% of the available economic data and is subject to revision.

It said manufacturing output experienced its first fall in two years with output dropping 0.3% in the quarter.

However, a surge in North Sea oil and gas production lifted overall industrial output by 1% – the biggest increase since late 2010.

The “mining and quarrying” component of the industrial output figures, which includes oil and gas extraction, rose by 7.8% in the quarter, the biggest increase since 1989.

The ONS said the increase, which came despite falling oil prices, was driven by tax cuts in March designed to support the sector.

Construction was flat in the period, the ONS said, recovering from a slight fall the previous quarter.

The UK’s dominant services sector recorded growth of 0.7%, following a rise of 0.4% in the previous three months.

Domestic demand is expected to remain strong, as wages rise and with the temporary effects of low inflation boosting consumer spending.

The ONS said there were also signs that businesses were finally increasing investment.

George Osborne, the Chancellor, said the figures showed Britain was “motoring ahead”. He tweeted: “We must stay on road we’ve set out on.”

The economy is now 5.2pc larger than its pre-crisis peak, and ONS said the 0.7pc expansion in the second quarter suggested that gross domestic product (GDP) per head was now “broadly equal to the pre-economic downturn peak” in the first quarter of 2008. This is expected to be confirmed by the ONS next month.

Mark Carney, the Governor of the Bank of England, has said that “sustained growth” of “around 0.6pc per quarter” will be needed for the remaining “spare capacity” in the economy to be eliminated and for rate setters to start tightening policy.

Mr Carney said in a speech this month that the decision to raise rates would come into “sharper relief” by “the turn of this year”.

Global stock markets slide on Greece debt crisis

Stock markets in Britain, Europe and the US have fallen after Greece closed its banks and imposed capital controls.

Stock markets in Britain, Europe and the US have fallen after Greece closed its banks and imposed capital controlsThe moves by the Greek authorities came after the European Central Bank decided not to extend any extra emergency funding.

London’s FTSE 100 index was down 1.47% and Germany’s Dax index fell more than 2%. In the US, the Dow Jones fell nearly 1% early in the session.

Bank stocks are among the hardest hit, with shares of Deutsche Bank and Commerzbank both losing more than 4%.

The Athens Stock Exchange and Greek banks will be closed all week.

On the money markets, the euro lost ground against other major global currencies.

The London FTSE 100 share index was down 98.47 points at 6,655.23 with other European markets seeing even bigger falls. Earlier in Asia, Japan’s Nikkei index fell nearly 3%.

On the currency markets, the euro saw volatile trading in Asia, falling by 2% at one point. However, it has since recovered some ground, with the euro down 0.15% against the dollar at $1.1149.

The euro has weakened against the pound, with one euro now worth £0.7089, while the pound buys €1.4108.

Oil prices are heading lower. Brent crude oil futures fell more than 1.5% to $62.10 a barrel.

Bond yields (an indication of borrowing costs) for Italy, Spain and Portugal – which are considered some of the weaker eurozone economies – rose sharply.

In contrast, German bond yields fell. German bonds are seen as safer investments in times of crisis.

Greece was due to make a €1.6bn payment to the IMF on Tuesday – the same day that its current bailout expires.

Last week, talks between Greece and the eurozone countries over bailout terms ended without an agreement, and Prime Minister Alexis Tsipras then called for a referendum on the issue to be held on 5 July.

At the weekend, the Greek government confirmed that banks would be closed all week, and imposed capital controls, limiting bank withdrawals to €60 (£42) a day.

There is zero chance of the European Central Bank turning Emergency Liquidity Assistance back on – life-saving lending to banks – unless Greeks give an affirmative vote to a bailout proposal from the rest of the eurozone and the IMF, which Juncker sees as a proxy for Greece’s monetary future.

As for Athens, most of the Syriza government detests the bailout offer – for the way it pushes up VAT and cuts pensions.

So we will have the bizarre spectacle of a Prime Minister, Alexis Tsipras, arguing both against the bailout and for remaining inside the eurozone – so goodness only knows how he will vote.

And Greek people will be torn between fear and loathing of bailout proposals that will damage the living standards of many of them, and fear and loathing of abandoning the euro and seeing their banks closed.

UK inflation rate goes positive

The UK inflation rate- as measured by Consumer Prices Index (CPI) rose to 0.1% in May, up from -0.1% in April.

UK inflation rate goes positiveThe biggest contribution to the rise came from transport, notably air fares, the Office for National Statistics said.

In April, CPI inflation turned negative for the first time since 1960, mainly due to a drop in air and sea fares.

ONS statistician Philip Gooding said: “Last month CPI turned negative, mainly because of falling transport fares due to the timing of Easter. This month, that fall has been reversed.”

He added that the falls in food and fuel costs over the past year “have eased this month, helping to push inflation up”.

While the prices of food and fuel rose in May from the previous month, the prices were still lower than a year earlier.

However, while the overall effect of food and fuel on CPI inflation pulled the rate down by about 0.5 percentage points in May, this was less pronounced than the month before when the prices had a negative effect of 0.7 percentage points.

In May Retail Prices Index (RPI) inflation, a separate measure which includes housing costs, was 1%, up from 0.9% in April.

Bank of England governor Mark Carney has said he expects inflation to remain low in the short term.

The Bank expects near-zero inflation to help the UK economy by boosting the spending power of households.

Chancellor George Osborne said “a powerful mix of low prices and rising wages” was “good news for working people and family budgets”.

Nevertheless, he said: “Of course the job is not done and we will continue to remain vigilant to all risks, particularly when the global economic situation is so uncertain.”

FTSE 100 flat despite strong UK shop sales

Shares in the Next shop group rose after the retailer reported stronger than expected sales- but the FTSE was held back by falling mining stocks.

FTSE 100 flat despite strong UK shop salesNext said that full-price sales for the 13 weeks to 25 April climbed 3.2%, helped by April’s warm weather, and its shares rose more than 3%.

But after a mixed morning, the FTSE 100 was down 3.36 points at 7,027.17.

Mining shares pulled the index lower after Antofagasta cut its copper output forecast.

Shares in Antofagasta fell 3.4% and other miners also dropped, with BHP Billiton down 2.6% and Rio Tinto 1.6% lower.

Shares in Barclays slipped 0.75% after the bank announced it was setting aside a further £800m to cover the cost of settling an investigation into foreign exchange rate-rigging. Barclays also took a further £150m hit to cover payment protection insurance (PPI) mis-selling.

The top riser in the FTSE 100 was Weir Group. The company said first quarter orders from its oil and gas business were down 23%, but this was not as bad as expected and its shares rose 4.1%.

Weir also said it cut costs at its oil and gas business by a further £10m.

In the FTSE 250, shares in Greggs rose 3.3% after the bakery chain announced a £20m special dividend.

Greggs said the dividend would replace a previously-proposed share buyback.

The firm also reported a 5.9% increase in same-store sales in the 16 weeks to 25 April, beating expectations.

On the currency markets, the Pound rose 0.19% against the dollar to $1.5368 and slipped 0.04% against the euro to €1.3968.

FOMC interest rate reactions are muted

Yesterday the FOMC left interest rates unchanged as expected and kept firm to the current pace of asset purchases.
FOMC interest rate reactions are muted
The reaction in the currency markets was muted as the Federal Reserve offered nothing significant to lean the market one way or the other.

The Fed could be seen as opening the door albeit very slightly for an increase in asset purchases by noting that they are prepared to increase or decrease purchases going forward. They maintained their tone on employment and growth even despite recent weak data releases.

Overall the meeting could be construed as slightly more dovish but effectively the FOMC will adopt a wait and see approach which is reflective of the mixed data of late.

Economic data from the US yesterday was mixed with weaker ADP employment data, the private sector added only 119,000 jobs in April and this could potentially lean towards a weaker non farm payroll number on Friday.

ISM manufacturing also fell but by less than expected. In essence going forward weaker data should lead to a weaker USD as there will be more likelihood of an increase in the pace of asset purchases.

Elsewhere, Chinese HSBC PMI also came in weaker than expected and more soft data from China will weigh on commodity currencies and in particular the AUS Dollar.

Bank Of Japan minutes yesterday revealed a continuation of an aggressive Bank Of Japan that raised few concerns with the impact on wider financial markets which suggests more of the same going forward from the BOJ.

Today the focus will be on the European Central Bank meeting. The ECB are expected to cut the refi rate by 25 bp form 0.75.

This has been mostly factored into the markets now and we are not expecting fireworks on this decision. The ECB may also discuss other measures which could potentially mix things up and move the Euro.

One item would be a cut in the deposit rate or a mention of this possibility, this would be euro negative or we could see other unconventional measures targeting growth. Also today we have Eurozone PMI data and of particular interest will be the estimates of manufacturing PMI for Spain and Italy.

UK economy in a better place

Following UK GDP surprising on the upside last week and coming in better than expected the Pound looks nicely positioned for further gains.UK economy in a better placeA key facet of the data is that it helped the UK to avoid a triple dip recession. Growth is going to be a key driver of currency movements going forward as economies around the globe search for growth.

We saw this in the markets with the Pound snapping higher against the USD and the Euro and continue its good run on Friday. The better than expected UK data comes against a backdrop of disappointing data from the US and China in particular and this was another reason the Pound rallied.

We saw disappointing German data last week in the form of PMI data and also the German IFO survey. Recently there have been more calls for a rate cut in Europe and recently the head of the Bundesbank Weidmann mentioned that if underlying data suggested so then a rate cut would follow.

The weaker PMI data and the IFO survey have now lead to most economists expecting a 25 basis point rate cut on Thursday. This should weaken the Euro against its major currency peers including the pound and the US Dollar.

A rate cut is not definite and the ECB always keep their cards close to their chest so all eyes will be on the announcement on Thursday.

Some have argued that a rate cut alone will not be enough to drive growth and we could see additional measures announced by the ECB to assist struggling peripheral economies, if so this could supportive of the euro.

US preliminary GDP came in weaker than expected on Friday at 2.5% against an expectation of 3.0%.

The weaker data in essence supports the view that the FOMC will keep their foot on the gas in relation to asset purchases and this in turn supports a weaker USD. We have lots of data this week including the big non farm payroll number on Friday and in addition the Federal reserve interest rate decision on Wednesday.

We are not expecting too many surprises from the Federal Reserve and if anything they are likely to offer a slightly more dovish tone than previously which will support a weaker US Dollar.

US strong sales data continues

Risk sentiment improved again following strong US data.US strong sales data continuesDurable goods came in higher than expected and housing data indicated an improvement for the first part of 2013.

The only negative news coming from the US was that consumer confidence fell as consumers have become more pessimistic about short term economic prospects.

This could be as a result of an increase in taxes which has coincided with a rise in gasoline prices.

However the underlying economic data so far is still coming in robustly and this is supporting the equity markets and overall risk sentiment.

Last night, credit ratings agency Fitch put Cyprus on negative watch saying that “the shock resulting from the systemic failure of Cyprus’s banking system will have profound negative implications for the domestic economy, which heightens the risk for public finances”.

The market is certainly still digesting what the future implications of the bailout could be for depositors in other euro countries and this is weighing on the euro as contagion is feared.

Today we have speeches from Federal Reserve members and the markets will be looking for feedback on the Fed’s bond purchases in the light of an improvement in US data.

It is likely that they will reiterate that bond purchases will remain until a substantial and prolonged improvement in the labour market is perceived and the consensus will be that we are not there yet. Aside from this it is a relatively light data day as we head into the Easter weekend.