Daily Financial Market Outlook

Daily Forex Fundamentals | Written by Lloyds TSB | Nov 26 08 08:29 GMT |

Overview & economic commentary The 2nd estimate of UK Q3 gdp is not expected to spring any surprise this morning provided that the ONS makes no backward revisions. This implies that growth is forecast to have contracted by 0.5% q/q. However, the availability of more complete data for foreign trade and activity in the services and construction sectors means that a revision cannot completely be ruled out. But with most of the bad news for Q3 already priced in and markets expecting more weak growth data for Q4, we suspect that today's data should not make a meaningful impact on expectations for UK interest rates. The DMO will auction £700mn worth of 2047 index-linked gilts. A very busy day lies ahead in the US where a number of data releases have been brought forward because of Thanksgiving tomorrow. US initial claims and personal spending are set to attract most attention as participants look for updates on labour markets and consumption trends. A substantial rise in weekly claims above 500,000 over the last two weeks points to steep losses in employment in November. How this is affecting the mood of US households will emerge this afternoon in the spending figures for October. A monthly decline in real terms similar to the one witnessed in September is pretty rare and is a testimony to the weakness of the US economy. We suspect that a 2nd successive drop may be inevitable in October. This has not occurred since the last (shallow) recession of 2001. Preliminary CPI data from Germany are forecast to show a drop in annual CPI below the ECB's 2% target for the first time since February 2007. Currency commentary FX markets were relatively quiet in Asia, catching their breath after the sharp swings yesterday which saw the dollar lose quite a bit of ground. The Fed's injection of $500bn in GSE MBS and $200by injection in ABS markets should help credit, mortgage and swap spreads to narrow. In fx, we expect no kneejerk reaction to the UK gdp data at 9.30, unless the data are revised down. Whether we get some follow through buying in equities may depend on US data this afternoon. Position squaring ahead of Thanksgiving suggests risk appetite may be cut back, with treasuries set to attract some flight-to-quality/ month-end buying. Inflation data from Germany could show a drop below 2% and squeeze 10yr bunds to 3.30%. We are looking to hear from ECB president Trichet and Mr Weber. A$/yen failed to test 64.0 resistance and the pull back below 62.0 could set the cross up for a re-test of 60.0 if equities falter. In EM, a 3rd straight day of gains for the rand pulled $/rand below 9.9740 support and this could trigger a short-term snap back towards 9.50. Major data and events today UK GDP (2nd estimate) (09:30) Q3 (prel) -0.5% Y-O-Y +0.3% Q3 (f'cast) -0.5% Y-O-Y +0.3% Median -0.5% Range -0.5%:-0.5% German CPI (07:00) (prel) Oct -0.2% Y-O-Y +2.4% Nov (f'cast) -0.1% Y-O-Y +1.8% Median -0.3% Range -0.6%:+0.1% US Initial claims (w/e 22/11) (13:30) Previous 542K Forecast 525K Median 531K Range 500K:560K US Durable goods orders (13:30) Sep +0.9% Oct (f'cast) -2.0% Median -2.7% Range -6.5%:+0.5% US Personal income (13:30) Sep +0.2% Y-O-Y +3.9% Oct (f'cast) +0.3% Y-O-Y +3.9% Median +0.1% Range -0.4%:+0.4% US Personal spending (13:30) Sep -0.3% Y-O-Y +3.8% Oct (f'cast) -0.7% Y-O-Y +2.9% Median -1.0% Range -2.0%:-0.4% US PCE deflator (13:30) (Oct) Sep Y-O-Y +4.2% Median +3.3% Range +3.0%:+3.9% US Core PCE deflator (13:30) Sep +0.2% Y-O-Y +2.4% Oct (f'cast) +0.1% Y-O-Y +2.3% Median +0.1% Range -0.1%:+0.2% US Chicago PMI (14:45) Oct 37.8 Nov (f'cast) 38.0 Median 38.0 Range 33.5:43.0 University of Michigan confidence (final) (15:00) Nov (prel) 57.9 Nov (f'cast) 57.0 Median 57.9 Range 55.0:58.8 US New home sales (15:00) Sep 0.46mn Oct (f'cast) 0.45mn Median 0.44mn Range 0.38m:0.47m UK DMO auction of £700m index-linked Treasury gilt at 0.75%, due 2047 US Treasury sells $26bn 5yr notes (18:00) ECB members Trichet (08:30) and Weber (16:00) speak Chart of the day: The worsening US labour market has caused household pessimism to spread 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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