Daily Financial Market Outlook

Daily Forex Fundamentals | Written by Lloyds TSB | Jun 27 08 07:25 GMT |
Overview & economic commentary

Although cloaked by the shadow of the credit crisis, we expect data this morning to confirm UK economic growth was a respectable 0.4% in the first quarter, buoyed by robust consumer spending. Despite the sharp fall in consumer confidence indices and tighter credit market conditions, the previous estimate showed consumer spending rebounded by 1.3%, from just 0.1% growth in Q4. There was also a strong positive contribution from net trade, though mainly reflecting fewer imports rather than increased exports, however gross fixed investment was down by a sharp 1.6%. The data this morning will also provide the first official estimate of the saving ratio, which was just 2.9% last year, compared to 4.8% in 2006 and the lowest since 1959. However, we expect it to be even lower in Q1 than in Q4 2007 and for the average this year to also be below that in 2007, helping to support spending activity as incomes get squeezed. The chart below shows rising wealth has been the key factor behind the continued decline in the UK’s saving ratio. Other data released at the same time are forecast to show the UK’s external deficit rose sharply in Q1 2008, possibly twice as large as in Q4 2007. The current account deficit was a record £57.8bn in 2007, equivalent to 4.2% of gdp, indicating a high risk of further currency weakness. In the US, we expect strong personal spending data for May to contrast with the negativity of the Michigan consumer confidence index, which is at levels last seen in 1980. We believe the core PCE deflator may surprise to the upside, reflecting the revision to Q1figures yesterday.

Currency commentary

A brutal sell-off in stocks around the world pulled the rug from carry trade plays and put the safe haven plays back in focus in fx and bond markets. Yen and Swiss franc were bid up and an aggressive steepening move in bonds triggered a sharp fall in short dated yields. $/Chf could eye a test of 1.0200 support if equities stay under pressure and US data for personal spending disappoints this afternoon. A break below 106.62 support in $/Y would threaten a broader pullback towards 105.0. Equity futures are pointing to a slightly weaker start in the UK and Eurpe but US futures are pointing to some stabilisation this afternoon. A surge in Nymex crude above $140 added to the gloom in equities and is likely to cause further gyrations in commodity currencies like the C$ and Nok. The A$ and rand are attracting good demad after the surge in gold above $900. UK Q1 current account and final gdp data are due this morning but are unlikely to impact sterling crosses unless gdp is revised.

Major data and events today

• French producer prices (07:45)
  Apr +0.7% Y-O-Y +5.4%
  May (f'cast) +0.8% Y-O-Y +6.0%
  Median +0.6% Range +0.6%:+1.0%
• French GDP (07:45) (final)
  Q1 (prel) +0.4% Y-O-Y +2.1%
  Q1 (f'cast) +0.6% Y-O-Y +2.2%
  Median +0.6% Range +0.4%:+0.6%
• EU-15 current account (sa) (09.00) (Apr)
  Mar -€15.3bn
• UK GDP (final) (09:30)
  Q1 (prel) +0.4% Y-O-Y +2.5%
  Q1 (f'cast) +0.4% Y-O-Y +2.5%
  Median +0.4% Range +0.4%:+0.6%
• UK current account (09:30)
  Q4 -£8.5bn
  Q1 (f'cast) -£15.4bn
  Median -£12.1bn Range -£17.4bn:-£6.8bn
• US personal income (13:30)
  Apr +0.2% Y-O-Y +4.8%
  May (f'cast) +0.5% Y-O-Y +5.0%
  Median +0.4% Range +0.2%+1.9%
• US personal spending (13:30)
  Apr +0.2% Y-O-Y +4.8%
  May (f'cast) +0.6% Y-O-Y +4.9%
  Median +0.6% Range +0.1%:+0.9%
• US PCE deflator (13:30) (May)
  Apr Y-O-Y +3.2%
• US Core PCE deflator (13:30)
  Apr +0.1% Y-O-Y +2.1%
  May (f'cast) +0.2% Y-O-Y +2.1%
  Median +0.2% Range +0.1%:+0.5%
• Canada IPPI (13:30)
  Apr +1.4%
  May (f'cast) +1.1%
  Median +1.1% Range +0.3%:+2.5%
• Canada RMPI (13:30)
  Apr +5.1%
  May (f'cast) +4.0%
  Median +4.0% Range +4.0%:+5.0%
• US Uni. of Michigan confidence (final) (15:00)
  Jun (prel) 56.7
  Jun (f'cast) 57.0
  Median 56.8 Range 55.9:58.0

Chart of the day: The UK savings ratio has fallen sharply in recent years in line with the steep climb in household assets

Lloyds TSB Bank
http://www.lloydstsbfinancialmarkets.com

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