Sunday, June 14, 2009

Weekly Economic Data Preview : BoE Inflation Attitudes Survey, US Retail Sales in Focus

Market participants will keep a close eye on this week's economic data releases and government bond auctions to establish whether confidence in the prospects for recovery and the sharp rise in government bond yields is sustained. Considering the still fragile economic backdrop, characterised by rising unemployment and weak lending growth, concerns may intensify that a further rise in market yields could cause business and household optimism to lose recent gains. The NIESR will release its UK gdp estimate for the three months to May and the BoE will publish the results its latest inflation attitudes survey. Retail sales and the Fed Beige Book are due in the US.

Growing optimism about the UK economy and political volatility were credited for the sharp swings in sterling and a marked rise in swap rates last week. Confidence that the economy has bottomed is likely to receive further support this week from the NIESR. The National Institute of Social and Economic Research already reported a smaller rate of contraction in gdp in the three months to April (-1.5% vs - 1.9% in the 3-month period to March). It is expected to report a 2nd successive improvement on Thursday when the 3-month gdp data to May will be published. The surprise increase in the services PMI in May to 51.7 indicates that the sector returned to growth for the first time in thirteen months. Questions are now asked whether the next few months will see a further normalisation in activity or whether demand will peter out. The situation for manufacturing is more downbeat and confidence, whilst having recovered somewhat from the lows, will not be aided by the surge in oil prices and the strengthening in sterling. The manufacturing PMI last week pointed to a tentative improvement in output but the question is to what extent the rise in optimism is led by expectations that business will accelerate rather than an actual increase in demand. Restocking will ultimately help output levels to stabilise but with export orders still extremely weak lending to the sector still falling at an annual rate of 7.4% in May, we are doubtful that the sector is poised for an imminent return to growth. Manufacturing output data are due on Wednesday, and we expect a modest rise. Gilt auctions attracted strong demand last week and the DMO will be hoping to attract similar participation levels this week when it sells £5bn of 2014 gilts on Tuesday and £725mn of 2047 index-linked bonds on Thursday. The BoE will purchase £6.5bn of gilts this week, bringing the total so far purchased to just over £80bn, leaving roughly £45bn to do under the £125bn APF programme. In a statement the BoE last week said that programme will take another two months to complete and that the scale of the purchases will be kept under review. Other data releases this week include the RICS May house price survey on Tuesday and the monthly foreign trade statistics on Wednesday. The BoE will publish its quarterly Inflation Attitudes survey for May on Thursday. Inflation expectations for the next 12 months have fallen considerably since hitting a peak of 4.4% in Q2 2008, falling to a 4-year low of 2.1% in February. A decline to below 2% is possible.

The Fed will publish a round-up of the latest economic developments in the Beige Book on Wednesday. A majority of regional Fed Districts have observed a slight improvement in output growth in early Q2 leading the Fed to adopt a less downbeat assessment of the economy. However, last Friday's employment report for May underlined the still very weak labour market situation. The unemployment rate now stands at 9.4%, the highest since 1983. With mortgage rates up about 50bp in May and weekly claims having stabilised around 620,000, considerable uncertainty remains over the path to economic recovery. Retail sales data for May are due on Thursday and are forecast to show a rebound from a disappointing fall in April. Despite the distribution of tax credits and the resulting rise in personal income in early Q2, early evidence points to a preference among households to save rather than spend. Foreign trade data are due on Wednesday and may show a slight widening of the deficit in April due to higher oil prices. Consumer confidence will be published on Friday and may show a stabilisation in sentiment in June following three consecutive months of improvement. The Treasury will sell $65bn of notes in 3y, 10y and 30y maturities. Mixed demand for US paper and mortgage related selling could push 10y yields further above 3.80%.

The ECB last week kept interest rates on hold at 1% but revised down its growth estimates for the economy this and next year. The Bank made no comment on the possibility of further asset purchases beyond the 60bn euros already committed. Data this week may show a less negative trend in manufacturing output in Germany and France following increases in the manufacturing PMI's since Q1.

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