continued declines in housing market figures, record CPI numbers and a government

u-turn on a tax bill contributed to a week which started badly, got a lot worse before

glimmers of hope emerged on Friday. Needless to say a script is being written

somewhere charting all of this.

The May inflation report from the Bank of England mapped out the MPC’s considerable

worries over inflation and the balance that they must strike between that and falling

growth rates. ‘The nice decade is over’ was the comment the papers picked up on the

next day; an economic in joke signifying Non-Inflationary, Continuing Expansion as

supposed to a 10 year period of toasted crumpets and not having to go to school the

next day, but where to next?

The Governor will not have to write a letter yet however he would be wise to practice

his penmanship as analysts expect that he will have to write a least 4 letters over the

next year; a letter buying Mervyn King 3 months respite. The CPI figure, given the

interest rate being held at 5%, is expected to hit 3.7% as a peak before deflating

gradually back to target not until Q3 2010. That is also indicative of how anti-inflation

the MPC has become; some market participants have hardened their rate decision

outlines to reflect reluctance to movement for the rest of the year with relief only

coming in Feb 09.

This obviously differs from the Bank’s thoughts in February; household income has

decreased more markedly than expected and credit concerns are keeping markets tight

despite the bank’s best efforts to pump liquidity through. And this is what the future

seems to hinge upon; how credit markets can recover in the next year.

As mentioned above, the housing market remains a significant concern, wherever you

get your information. Caroline Flint, the UK’s Housing Minister, let slip the government’s

concerns over the housing crisis on Tuesday coincidentally the same day that RICS

published their monthly survey detailing that 95% of its members reported falling prices

in April. Combined with government notes confessing to not knowing ‘how bad it will

get’ and that a fall in prices of 5% - 10% would be ‘at best’, sterling continued its sell off.

Alasdair Darling was forced into an emergency budget to quell disquiet on the

government back benches due to the controversial abolition of the 10% tax band.

According to The Chancellor, of the 5.3M households hurt by the budget at least 4.3m

would receive all of their losses and the remainder at least half; it was a climb-down of

text book fashion and hurt sterling as the ‘Golden Rule’, the centerpiece of the Gordon

Brown’s prudent and parsimonious approach to public finances looks set to be broken.

Looking forward, sterling is likely to garner support on yield grounds but the extent will

be limited as confidence remains shot. It is a quiet week for UK data with Wednesday’s

MPC minutes the main focus; we expect a 7-2 voting record with members

Blanchflower and Gieve the dissenting voices.

Data is in short supply this week but key announcements from the US will still prove to

be influential. Further hints to the FOMC’s new inflation stance will be mined from the

minutes of the previous meeting (due Wednesday). Tuesday’s PPI are forecast to fall

and an overshoot could prove difficult for the dollar to shrug off.

European data is similarly thin on the ground. Wednesday’s German IFO figure should

show a continually confident economy while Friday’s advance PMI releases for both

the manufacturing and services sectors are forecast to fall but still remain in

expansionary territory.

Rallies in euro were seen last week however were quickly snuffed out by investors

taking profits and banking gains. GDP figures were much stronger than expected with

the iron-hided German economy particularly performing well. Inflation remains the

bugbear of European decision makers and their unwavering stance may be starting to

pay off as figures released showed a dip to 3.3% in April from 3.6% in March. The tone

of speeches given did slide slightly last week to a more dovish stance although

member Weber still remained typically aggressive.

There has been commentary recently over the euro’s possible ascent to the title of ‘The

World’s Hegemonic Currency’; the dominant currency in global circles, replacing the

dollar. This is doubtful as the euro is starting to show strains as manufacturers begin to

complain and politicians are now angling for more liens over monetary policy; the

political vulnerabilities being the crux of the problem.

The recent data from the US has painted a picture of an economy that is not getting

any worse but is still struggling to get back on its feet. It also traded in a fairly tight

range given the week’s volatile news flow, a sign of investors watching and waiting for

a definitive move before jumping in.

Retail sales fell by 0.2% in April although we saw an interesting rise in the building

materials area; US homeowners have now obviously adopted the mantra of ‘Don’t

move, improve’ although this will have little effect in the short term.

Gains were pared however on Friday as the important Michigan Consumer Confidence

survey fell lower than expected further amplifying the need for restraint in calling the

worst of these problems as over.

Comments from US Fed voters continued their renewed hawkish stance; the market

expects a hold at the next meeting with the next movement forecast to be a hike

although not until Q4 of this year.

GBPAUD hit levels last week not seen since the early part of 1997 even though data

from Down Under was poor and sent AUD lower against most other major crosses. The

Australian housing sector is in a similar position to the UK’s; a fall in the number of

home loans is causing a slowdown and confidence is starting to slip as well. Positive

data was the typical increases in commodity prices but as we all know what goes up

must come down and AUD is precariously balanced at the moment.

A poor retail sales figure sent NZD crashing to an 8 month low on its trade-weighted

index prompting fears that the economy, if not already there, is heading for a recession.

As a consequence bets on the RBNZ cutting rates have increased markedly over the

week even though the inflation rate is still hovering over the 3% rate. Support however

was found in strong data from the US increasing investors risk appetite although this

can peter out quickly and we could find Kiwi retracing higher.

The loonie moved below parity against its US counterpart without significant data to

support it last week as the commodity Bull Run continues. Greater confidence in the

US economy has strengthened the global risk appetite and investments into the

Canadian economy should so a subsequent jump. Oil prices of course still remain at

record levels and will continue to support CAD. If increased crude prices continue CAD

will stay close to current levels however may find it hard to make a significant move

through the parity barrier.

ZAR has strengthened well against GBP over the past week mainly due to sterling

problems as supposed to bullish South African data. Retail sales actually fell in March,

1.7% against February’s 2.9% as higher energy costs, increased debt servicing

obligations and power outages proved difficult to bear. These falls in growth are

symptomatic of most economies at the moment and although some central banks are

shrinking back from their previous anti-inflationary stance the RBSA is set to continue

in the early part of June as the market predicts yet another 50bps hike.

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.