A lack of hard data left the markets meandering in current ranges yesterday but there were a series of forecasts and assessments from the new Office for Budget Responsibility (OBR) of whom we will hear a great deal in the coming years. Their assessment of the government’s finances are that whilst the borrowing level is actually lower than we had previously thought, the previous Chancellor’s growth forecasts are apparently pretty optimistic and the government had squirreled away a whole heap of debt and expenditure that didn’t shown in the figures. Traders were relieved that the numbers weren’t worse than these and reacted positively to the lower debt level but seemed to shrug off the poorer growth forecasts which would leave the structural deficit at higher levels in the years ahead. Sterling strengthened through the afternoon but this morning’s release of inflation data will be crucial. Most analysts are expecting a small drop to 3.5 percent from last month’s 3.7 percent; still well above the Bank of England’s target 2.0% and sufficient to keep talk of interest rate hikes on the agenda.
The Euro had a worse day as credit ratings agency, Moody’s downgraded Greece’s sovereign debt once again but this time by four steps in the ratings ladder, and analysts at French financial giant AXA, reported that in spite of the €750 billion Eurozone support package, structural problems in the Eurozone will almost inevitably result in the eventual breakup of the Eurozone itself. They estimate that the rescue package will buy just 18 months of leeway because it treats the problem as a short term liquidity matter rather than a structural deficiency; hence their view that Greece will still reach a point of default and that will trigger a wave of similar problems across the Eurozone; especially in the southern Europe countries. They make the comparison with the US Federal System and cite the main difference as being the fact that Washington has overall legal powers over the states whereas Brussels’ powers are more limited. Their report can be summed up in the one sentence from their report, “We are looking at a noble experiment on the brink of failure”. Understandably, the Euro which had started the day on the front foot, weakened in later trade. Perhaps today’s release of the German ZEW business confidence index will calm fears.
In America, things look a little better. We heard overnight from the head of the St Louis Fed who was upbeat about the prospects for European recovery but that didn’t stop the euro losing ground against the Dollar as traders took profits on the Euro strength of the last few days. The Dollar is in fairly good form but will always weaken a tad when confidence rises as investors pull out of safe US assets in favour of the likes of the Australian and New Zealand Dollars where interest rates are so much more lucrative. However, Australian interest rates look set to stay on hold for the time being as shown in the minutes from the last RBA meeting which were released overnight. The RBA statement suggest there will be no change before August at the earliest and some analysts are expecting that to stay the case until October or later, especially in light of China’s plans to slow its economy and the overnight announcement that they would use the tax system to slow their housing market.
In addition to the UK inflation, German ZEW business sentiment index and Eurozone employment data, the markets will be focussed on US import prices and the Empire State manufacturing index. There is a feeling that energy prices will rise sharply as a result of the announcement of a moratorium on deep sea drilling after the Gulf of Mexico spill. If that is the case then US import prices will rise and increased income from oil exports will boost currencies like the Canadian Dollar, Norwegian Krone, and Russian Rouble etc.
So the quiet start to the week looks like it will end after the UK inflation numbers and normal service looks set to be resumed. I hope your Tuesday is a good one. I note the clamour for the banning of the vuvuzela is growing and I hope to goodness that happens or TV channels just turn off the crowd noise from the World Cup coverage. But none of that may be a problem if the strikes increase amongst security and bus driving staff. If no one can get to the games, then the noise will certainly stop.