There wasn’t a lot of data to mull over on Monday but the UK economic growth figures were sufficiently stimulating to keep most traders busy. Whilst the headline figure; the final calculation of UK economic growth for the first three months of 2010, was exactly as per the previous estimates, the detail within the figures held the most interest. The balance of power in the growth figures was very clearly with the government. The government spent 1.5 percent more of our money in Q1 than in the previous quarter but household spending actually fell by 0.1 percent. In other words, were it not for the extra cash pumped in by the government, Britain would still be in recession.
That is highly significant when the new government’s spending cuts are the main talking point at the moment. I guess as long as the new administration is content with seeing a second recessionary dip, then they will have nothing to fear. Perhaps getting the double dip out of the way early on in their reign is the safest way to make sure they are in a better position when we reach the next general election. Sterling slipped fir the early part of the day but stabilised and even strengthened in later trade as it dawned on traders that, for the most part we had learned nothing we didn’t already know. Obviously, while that data was being collated, we have had a sequence of weak UK data including a slowdown in the housing market and mortgage lending, a rise in unemployment and poor high street activity in spite f the World Cup logos on everything from pants to hammer drills.
We get the latest UK inflation data today and that will be very interesting. We are looking for a slight fall in the headline number which would make the majority of the Bank of England’s monetary policy committee heave a sigh of relief after they voted to keep the base interest rate at a record low of 0.5 percent last week. Andrew Sentence, the member who voted for an interest rate hike, will no doubt be expecting a continuation of the high inflation numbers we have witnessed over the last year.
And the government was made very aware yesterday of the problems they face by the Institute of Chartered Accountants in England and Wales (ICAEW) and the Centre for Economics and Business Research (CEBR). I can see why they use acronyms but their joint study reveals that there might be as much as £1.13 trillion of liabilities lurking in the government’s books and this is on top of the massive estimate that already puts public sector net debt at £932bn. So if my calculator is accurate and has enough digits, I can report that we may owe more than two trillion Pounds in total (is that eight noughts or twelve, I can never remember but it is a shed load of cash; that I do know). How the UK has kept its AAA credit rating is beyond me but the main credit ratings agencies seem content that the British government is doing its best in attacking the deficit. However, China’s tame credit ratings agency, Dagong Global Credit Rating Co, has downgraded amongst others, Britain, America, Spain and France as it places greater emphasis on wealth creation and reserve holdings. Guess what, as a wealth creator and large holder of reserves, China is top rated. Who’d have thought it!
The pound was pretty stable yesterday against the Euro; circling around the €1.19 to €1.20 level but that was largely due to the lack of Eurozone data. There is a lot of concern over the ‘Stress tests’ that EU banks are having to undergo in order to check their survival rate if we see a similar crisis to the 2008 debacle. The old saying that ‘no news is good news’ doesn’t seem to apply here as the lack of detail of the tests is being seen as delaying a potentially poor result. Many traders are very nervous about tomorrow’s auction of €1.25 trillion of government bonds by Greece. If the interest rate they attract is higher than 5% or the auction is undersubscribed, we could expect a sharp drop in the value of the Euro because it will be viewed as a sign that no one trusts EU debt until the stress test results are announced.
Overnight news that Australia’s business confidence fell to its lowest level in a year and the impending slowdown of the Chinese economy allowed the Australian Dollar to weaken in early EU trade. This will come as some relief to those needing to buy Aussie dollars but anyone with AUD to sell must be thinking seriously about doing so at some of the strongest levels we have seen in several decades.
Today also brings the German ZEW business sentiment index and the US trade balance; all of which are likely to be market moving. So after a quiet-ish Monday, this morning feels like that moment in the film Gladiator when General Maximus announces “At my signal, unleash Hell”. Drum roll please..............
And finally, It seems that BP’s engineers and their sub-aquatic robots have successfully capped the well head at the bottom of the Gulf of Mexico. Let’s hope it holds and the real cleanup operation can start to get on top of the problems.