Daily Financial Market Outlook

Daily Forex Fundamentals | Written by Lloyds TSB | Jul 11 08 06:52 GMT |

Overview & economic commentary

Today sees the release of some important data out of North America. High oil and other commodity prices have already pushed up US import price inflation to decade highs, see chart below. The recent rise threatens to do more of the same. This will have a double whammy; widening the trade deficit and at the same time increasing inflation pressure in the US economy. We look for a 2% rise in May, to take the annual rate up to nearly 20%. As a result of higher oil prices, we expect the trade deficit to widen, to just over $62bn in May. Ex oil, the trade deficit is narrowing, but the recent rise in oil prices means that the overall deficit may widen further in the months ahead if oil prices remain at $140 a barrel. With higher prices, and rising unemployment, has come a sharp fall in consumer confidence, and we expect this to be reflected once again in the University of Michigan survey, for June. But this gloom, which has continued despite the arrival of tax rebates in the post, has not stopped consumer spending from being firm. However, the government fiscal deficit in May is likely to have been around $30bn. In Canada, the trade surplus should remain around $5bn, despite higher oil prices. Unemployment has been rising has the economy slowed, but the unemployment rate should remain steady in June as employment rises. Japanese industrial production is out and the data are likely to show that the annual rate of growth is being maintained at just over 1%, even as the developed economies see a slower pace of expansion

Currency commentary

General Electric is expected to report 0.54ct profit/share around midday and the company's guidance for Q3/Q4 is what may dictate price action in fx/ bonds and equities on the final trading day of the week. The dollar is a touch weaker this morning and, aside from the GE results, it may be influenced by US trade and consumer confidence data this afternoon. Record energy prices and oil imports are forecast to have pushed the deficit to $62bn in May, but markets will focus on the ex-oil number to gauge the strength of US exports and their contribution to Q2 gdp. Michigan confidence could be a market mover if it deviates significantly from the 56.0 forecast. Tax rebates may well have propped up morale and this could be a portent of strong retail numbers next week. €/£ trades at the upper end of the trading range this morning around 0.7980. Canadian employment data is also due and may move the C$ if the data sparks a reassessment of BoC interest rate expectations. £/C$ could break 1.9950 support in the event of a stronger set of numbers.

Major data and events today

• US Trade balance (sa) (13:30)
  Apr -$60.9bn
  May (f'cast) -$62.0bn
  Median -$62.2bn Range-$64.6bn:-$58.4bn
• US Import prices (13:30)
  Apr +2.3% Y-O-Y +17.8%
  May (f'cast) +2.0% Y-O-Y +18.7%
  Median +1.9% Range +0.6%:+2.8%
• University of Michigan confidence (prel) (15:00)
  May 56.4
  Jun (f'cast) 56.0
  Median 55.8 Range 54.0:57.0
• US Treasury statement (sa) (19:00)
  Apr +$27.5bn
  May (f'cast) -$30.0bn
  Median -$30.0bn Range -$20.0bn:-$50.0bn
• Canada unemployment rate (12:00)
  May 6.1%
  Jun (f'cast) 6.1%
  Median 6.1% Range 6.1%:6.2%
• Canada employment change (12:00)
  May +8.4K
  Jun (f'cast) +10.0K
  Median +10.0K Range 5.0K:+15.0K
• Canada trade balance (sa) (13:30)
  Apr +C$5.1bn
  May (f'cast) +C$5.2bn
  Median +C$5.0bn Range +C$4.5bn:+C$5.6bn
• Canada new housing index (13:30)
  Apr zero
  May (f'cast) +0.1%
  Median +0.1% Range -0.2%:+0.2%
• Japan Industrial output (05:30) (final)
  May (prel) Y-O-Y +1.2%
  May (f'cast) Y-O-Y +1.2%
  Median +1.2% Range +1.1%:+1.2%

Chart of the day: US import prices have risen dramatically since last year, adding upward pressure on overall inflation

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