Daily Financial Market Outlook

Daily Forex Fundamentals | Written by Lloyds TSB | Aug 19 08 07:02 GMT |

Overview & economic commentary A paper published by BoE MPC member Besley did not go unnoticed yesterday and begs the question whether one of the leading hawks on the MPC has or is preparing to review his call for higher interest rates. In a document written jointly with two other colleagues at the Bank, Mr Besley warned about the increase in the cost of household external finance from the wider spread between bank borrowing and household lending rates, and the impact on consumer spending. The minutes of the August meeting are due tomorrow. There are no UK releases due today. The German ZEW survey of economic confidence is forecast to have rebounded somewhat in August from July thanks to the fall in oil prices. The two have been quite closely correlated since last year (see chart below). However, any improvement is likely to be overshadowed by worries that the German and euro zone economies are heading for recession after the negative Q2 gdp data of last week. Producer prices and housing market statistics are due in the US this afternoon. The drop in fuel prices and flagging car sales are likely to have been offset by higher prices for other consumer goods and capital goods. With core PPI inflation still rising at more than 3% in annual terms, risks for a pass through to CPI have not diminished. Housing starts and building permits are forecast to have declined by around 8% in July. This comes after a surprise increase of 9% in June, supported by changes in defining construction activity. Fed FOMC dissenter Fisher will discuss the state of the US economy where he may reiterate his discomfort about the level of inflation. Currency commentary The German ZEW index and US housing stats could add some volatility to fx markets today. A fall in crude oil below $112 spurred fresh dollar buying in Asia, with £/$ sliding below 1.8550 and €/$ reversing yesterday's gain and dipping below 1.4650. Equities could be the centre of attention for fx and bonds as worries resurface about the US GSE's and the front end of the curve catches a bid. The German ZEW survey could temporarily prop up demand for the euro if the index rebounds in August. Volatility levels in major euro crosses have levelled off at fairly high levels after they touched a onemonth high last Thursday. Less hawkish comments by MPC member Besley are hurting sterling as markets wonder whether he dropped his call for higher rates. In EM, currencies like the zloty and czech koruna managed to reverse some losses yesterday after Russia pledged to withdraw troops from Georgia. The return of some risk appetite implies that a decent reversal could be on the cards, especially against the dollar if US data disappoints. Major data and events today German producer prices (07:00) Jun +0.9% Y-O-Y +6.7% Jul (f'cast) +0.5% Y-O-Y +7.4% Median +0.7% Range -0.1%:+1.0% German ZEW survey (10:00) Jul -63.9 Aug (f'cast) -62.0 Median -62.0 Range -70.0:-50.0 US Producer prices (sa, prov) (13:30) Jun +1.8% Y-O-Y +9.2% Jul (f'cast) +0.8% Y-O-Y +9.3% Median +0.5% Range +0.1%:+1.6% US PPI core (sa, prov) (13:30) Jun +0.2% Y-O-Y +3.0% Jul (f'cast) +0.3% Y-O-Y +3.2% Median +0.2% Range +0.1%:+0.3% US Housing starts (sa) (13:30) Jun 1.066mn Jul (f'cast) 0.980mn Median 0.960mn Range 0.885mn:1.09mn US Building permits (13:30) Jun 1.091mn Jul (f'cast) 0.990mn Median 0.970mn Range 0.850mn:1.03mn Canada wholesale sales (13:30) May +1.6% Jun (f'cast) +0.6% Median +0.5% Range zero:+1.5% Japan interest rate decision (04:00) Current: 0.50% Forecast: 0.50% Reserve Bank of Australia publishes its August policy meeting minutes (02:30) US Fed member Fisher speaks in Aspen on the US economy (15:00) Chart of the day: The 22% drop in crude oil prices since July may have helped German ZEW index of economic confidence to rebound in August Lloyds TSB Bank http://www.lloydstsbfinancialmarkets.com Disclaimer: Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. 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