substantial pain in the UK housing market. This is unlikely to influence much has given

some lenders’ reticence to pass on the benefit to its customers. Futures markets are

pricing in further UK cuts throughout the year on a seemingly bi-monthly basis; the next

one being June, in an attempt to underpin the economy. The minutes, not due for

another fortnight, will prove to be interesting as we ascertain the extent to the unanimity

of the vote; early indications point towards a 7-2 split.

As mentioned above, the UK housing market remains on the ropes as house prices fell

by 2.5% in March the largest fall in 12 years and saw Daily Mail readers running and

hiding under the bed. Numerous banks have been offering deals to allow home-owners

to refinance and avoid a painful exit from fixed rate deals but as yet most have been

treated by the market as somewhat cynical in nature and subsequently credit tightening

has continued.

The ‘balancing act’ that Mervyn King so frequently speaks of is becoming more and

more clear. The economy’s lack of growth coupled with rising inflation was most

recently documented this morning. Factory gate prices, the price manufacturers charge

for goods and services rose 0.9% alone in year resulting in a 20% increase over the

past year. It is simple economics and business sense that a certain portion, if not the

total, will be passed on to the consumer and the inflationary cycle continues.

Looking forward inflation will once again be the focus with Tuesday’s CPI due to rise

after record breaking highs in soft commodity (wheat, corn, rice dairy products) and oil

prices. Tomorrow will also see the Royal Institute of Chartered Surveyors and the

Department of Councils and Local Government both reporting on house prices;

needless to say a dramatic recovery is not the expectation. Reports in the UK press

today also raise the spectre of further sell-offs in the property sector as buy-to-let

investors find its their turn to get squeezed. 680,000 buy-to-let mortgages will renew in

the next 24 months with the average increase in rates seen to be 1.25% from a median

package available in 2006.

The main 3 economies will be reporting their CPI figures this week with the US reading

due Wednesday. This is forecast to be the only dollar positive piece of data this week

as the rest are focused on poorly fairing sectors such as housing and employment.

Both technical and fundamental analysts are looking towards a weaker dollar by the

end of the week against GBP and EUR.

European data is viewed as being supportive and as such a surprise to the downside

could provoke a limited sell-off. This however is unlikely given the inflation concerns in

the EU. Thursday’s ECB monthly report should also prove to be interesting reading.

Trichet continued his aggressive anti-inflationary stance last week holding the ECB’s

interest rates at 4%. As has become the custom, given the now formality of a hold in

rates, the press conference saw Trichet reiterate the need for vigilance against the

threats of inflation. He also stated that the problems in the financial markets were likely

to continue into the latter part of the year, agreeing somewhat with the IMF’s recent

study. Analysts and speculators leapt on this as indication that a shift in policy may be

forthcoming and the market is now pricing in a cut for September.

Data wise it was a quiet week with only French and German industrial production

figures, which both rose, being of note. This drew attention to the relative successes of

some economies in the Eurozone against some which are finding the single currency’s

strength to be a bugbear.

All of us are planning to take a holiday this year, with probably half venturing to the

Med. The tourism sector makes up 4% of GDP and 10% of the workforce in Andalucía,

on the streets of Marbella and Granada given the amount that Joe Public’s sterling will

now get them. The same I dare say will be true in Italy, Greece and Cyprus.

It was another see-saw week for the dollar against the euro as it veered from a 2 week

low to another all-time high before finally regaining its composure on Friday. The tone

was set by the previous week’s non-farm payroll numbers which concluded a poor Q1

for the dollar and saw 200,000 jobs lost in the 3 month period.

The minutes from the Fed’s most recent meeting showed a division in what

policymakers think should be the concentration of the US central bank; Some stated

expectations of a ‘severe slowdown’ in the growth rate whereas others were more

alarmed by the inflation outlook. This alludes somewhat to the ‘difficult balancing act’

that Mervyn King and other central bankers have gone on record saying they are

dealing with.

Today’s retail sales figures should provide some support for the greenback as should

Wednesday’s CPI although the benefit may be offset as all economies should see a

rise due to high oil and its derivative prices. Risk however comes in a couple of housing

market announcements which are due to show further deterioration in the already

ravaged property sector.

The Australian jobs market provided a boost for the economy as the unemployment

market only rose slightly to 4.1% from 4.0% previously and a further 14,800 increase in

employment on a MoM basis. The positives were undone however as business and

consumer confidence measures both fell. Increases in commodity prices also helped

add a bit of backbone to AUD and will continue to do so in the short term.

All in all the survey did not prove to be a surprise and any ill feeling towards kiwi was

priced in already. Alan Bollard on Thursday provided a bit of a boost by acknowledging

that the NZ economy is still fundamentally sound and creditworthy and that banks and

businesses need not hibernate to ride out a potential storm. Friday saw kiwi dip after an

ambitious plan for the sale of 40% of Auckland International shares to a Canadian

pension fund fell through although some ground was regained after Fonterra, the dairy

cooperative, forecast large payouts off the back of global price increases in the price of

milk solids. Looking forward, the global credit crunch continues seemingly unabashed

by government’s and central banker’s attempts to control it. Should a risk averse

sentiment fall over the market NZD may fall as carry trade investors slink off to lick their

wounds. Upcoming data includes consumer and food prices early next which are

expected to rise in line with similar indices in other developed countries.

In a typical week, data and external factors would have made for a strong loonie last

week. This however proved not to be the case with CAD moving to 1.02 against its US

counterpart. Even with commodities higher, with oil in particular making new records

and a trade surplus up by $2.1bn to $4.9bn significant gains are unlikely as consumer

confidence has fallen following global trends.

The MPC hiked rates by 50bps on Thursday taking the repo to 11.5%. This was in

response to an inflation rate which has risen from 8.5% in Q1 ’08 to 9.3% currently.

This is also expected to rise as no allowance for rising electricity prices has been

factored in. As such the next meeting, scheduled for early June, is also forecast to

bring about a 50bps hike. Retail sales are also falling as people are using disposable

income to service debt and pay for more expensive utilities at the moment and with this

likely to continue the SA economy is due for further tightening.

anytime regarding these briefings, if you have any questions or thoughts on them, or if you are

interested in a particular event in the calendar.

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The above comments are only our views and should not be construed as advice. You should

act using your own information and judgement. Although information has been obtained from

and is based upon multiple sources the author believes to be reliable, we do not guarantee its

accuracy and it may be incomplete or condensed. All opinions and estimates constitute the

authors own judgement as of the date of the briefing and are subject to change without notice.

Any rates given are interbank and therefore for amounts of £5million and so are not indicative of

rates offered by World First for smaller amounts.

GBPUSD, move as any combination of two of these rates must produce the third in order to satisfy a

condition known as No Arbitrage. If there are movements in two markets, then the third must move

deterministically. Also knows as triangulation.

higher yield economy (Australia). This yields a certain profit unless the interest rate differential narrows or

the exchange rate moves such that it costs more to buy the currency back.

Macroeconomic models (such as eCIP).

elements like energy and luxury consumption leaving the ‘boring’ elements like utility bills and food.

[Quotes from BoE governor Mervyn King]

Interest Rate Traction: Although there is a group of people who announce an interest rate, it has to feed

through the economy through some very complex and poorly understood channels. Once rate hikes are

having an effect on inflation and long term yields it is said that they are finding traction with the economy.

who are not employed.

Participation rate: The percentage of the population of working age in the labour force.