Daily Financial Market Outlook

Daily Forex Fundamentals | Written by Lloyds TSB | Dec 04 08 08:37 GMT |

Overview & economic commentary Today will see the Bank of England and the ECB meet for their monthly monetary policy deliberations on what to do with interest rates. On this occasion, just like the last one, the outcome is very clear: interest rates will be cut. The only question is by how much. In the case of the UK, the economic data have been unequivocally poor. Take the Purchasing Managers Indices (PMI) for manufacturing, construction and services for November, all fell to series lows, about 12 years. Data for retail sales, manufacturing output, consumer confidence, business confidence and equity markets also weakened further. It is clear that the economic downturn is deepening and that financial markets remain in turmoil. With this background UK Bank rate will be cut by 1 percentage point and possibly more, even a repeat of the 1½% cut in November is possible, taking rates to 1.5%, the lowest since 1694. The ECB may not cut their repo rate by as much, but cut them they will, at least 0.5% and possibly up to 1% is likely. However much will depend on the ECB's latest projections for inflation and gdp growth in 2009, and whether president Trichet feels he can reach a consensus for a bigger reduction at the meeting that takes place in Brussels and not in Frankfurt. By cutting in even steps, the MPC and the ECB may ease the potential for pressure on their respective currencies. In the US, the trend of data will continue to show that the economy is weakening, and that growth will fall sharper in Q4 than it did in Q3. The weekly claims data will provide the last data point for unemployment ahead of the non-farm payrolls release tomorrow. Currency commentary A big day for UK and euro zone markets is lined up today with rate decisions by the BoE and ECB potentially sending ripples across all asset markets. £/ $ was offered in Asia and looks in danger of sliding back to the Nov 13 low of 1.4557 if the BoE delivers a rate cut of more than 100bps which we think is possible. This could also cause the spread UK/EU 2s to widen beyond -40bps (provided the ECB cuts by less than the BoE), giving markets a reason to push €/£ towards 0.8650. The cross cleared 0.86 resistance o/n and may target a move up to 0.8663, the Nov 13 high. A 50bps cut by the ECB is priced in so a bigger reduction could well pull the rug from under €/$. In the US, the widening in mortgage spreads (5yr GSE over treasuries rose to 315bps) and the rise in 5yr swap spreads to 93bps are signs of heightened risk aversion as markets price in a very weak NFP report tomorrow. $/NZ$ is broadly steady at 0.5314 after the RBNZ slashed rates by 150bps. €/Sek could extend to 10.60 if the Riksbank cuts rates by more than 50bps. Major data and events today BoE MPC interest rate decision (12:00) Current: 3.00% Forecast: 2.00% EU-15 GDP (10:00) (2nd estimate) Q3 (prel) -0.2% Y-O-Y +0.7% Q3 (f'cast) -0.2% Y-O-Y +0.7% Median -0.2% Range -0.3%:-0.2% ECB interest rate decision (12:45) Current: 3.25% Forecast: 2.75% US Initial claims (w/e 29/11) (13:30) Previous 529K Forecast 530K Median 540K Range 527K:550K US Factory Orders (15:00) Sep -2.5% Oct (f'cast) -3.8% Median -4.0% Range -6.5%:-0.5% Australia trade balance (00:30) Sep +A$1.46bn Oct (f'cast) +A$1.40bn Median +A$1.41bn Range+A$0.1bn:+A$3.85bn Canada building permits (13:30) Sep +13.4% Oct (f'cast) -5.0% Median -5.5% Range -10.2%:+2.0% Canada Ivey PMI (15:00) Oct 52.2 Nov (f'cast) 49.9 Median 50.0 Range 47.0:55.0 Riksbank rate decision (50bps cut expected, risk of a bigger reduction) (08:30) US Fed member Evans speaks in Michigan (15:45) US Fed member Bernanke speaks in Washington on housing finance (16:15) New Zealand interest rate decision, rates expected to be cut by 150bps to 5.00% (20:00) US Fed member Kroszner speaks on a panel on mortgage-backed securities in Washington (21:30) Chart: The cut in UK base rate today will temporarily cause the spread with 3-month Libor to widen back above 100bps 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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