5.0%. I believe they want to cut rates but can’t, given the rest of the data being so

sterling negative at the moment and confidence in the economy decreasing at a

frightening level.

The past ten years of expansion in the UK have been predicated on expanding

personal growth through the housing market and the credit crunch has put paid to that.

With a large proportion of consumer’s time and cash still tied up in bricks and mortar

and the prices of those assets falling at rates not seen since the mid 90s consumer

confidence is still down around the proverbial ankles and fears over a further slowdown

abound.

PMI data figures were also poor with the services sector posting a low not seen for 5

years as it dipped into contractionary territory.

Much has been made over the weekend of the central governors’ new found hawkish

squawking. Bernanke seemed to advocate a ‘strong dollar’ policy as the weakness of

the dollar weighs on the US’s main inflation reading, the PCE deflator. Trichet also

spoke of a potential hike in the near future for the Eurozone. This will not sit well with

everyone and political hay may be made should the Irish referendum on the Lisbon

treaty fall through. This is due Friday and I would not be surprised should the Irish go

against Brussels that we hear discontent from other EU member nations over the pain

they are feeling. Mervyn King is due to speak at a banking conference in London on

Tuesday and hints to his view and what the minutes released in a fortnight will look like

will have us all scouring his speech.

Other data due for release this week from the UK includes the Royal Institute of

Chartered Surveyors house price data which is forecast to show that the Halifax figure

of a 2.4% drop in price through May is not an aberration. Labour market and industrial

production releases are also forecast to disappoint.

US releases this week include CPI, retail sales, foreign trade, consumer confidence

and the Fed’s beige book. The CPI and beige book releases will be the most closely

watched as impacts from still record oil prices are due to filter into sentiment readings.

Retail sales are also forecast to fall due to the price of gasoline.

All in all the Eurozone is fairly quiet this week with only Thursday’s ECB monthly report

of note.

The euro drifted last week until the meeting and press conference on Thursday which

snapped it back to its familiar strengthening poise against sterling and the dollar.

Comments from Trichet were more hawkish than usual as he stated that a certain split

of the council voted for a rate hike but a hold was achieved by consensus, with the rate

staying at 4.00%.

The markets are pricing in the possibility of a hike next month although this may prove

to be very unpopular with some member states. These are likely to be Spain and Italy;

2 countries whose PMI figures were well below the all important 50.0 level.

signal to markets and to the broader public…which seems to have been well

understood, that such an outlook on inflation is not acceptable for a stability-oriented

monetary policy”

Ben Bernanke moved the markets like only the Fed Chairman can last week as

indications of a ‘strong dollar’ policy came to the fore. The weaker dollar has had an

impact on inflation stateside and this gave markets the idea that the G7 may look to

strengthen the dollar or at least protect against further losses.

The belief that rate hikes are probable by the Fed in the near term was undermined by

Friday’s influential Non-Farms payrolls announcement. The figure fell by 49k however

the unemployment rate rocketed to 5.5% from 5.0% in April.

Other data was positive however with the manufacturing sector providing most of the

good news. The PMI index rose to 49.6 in May from an April reading of 48.6, factory

orders increased to a greater level than expected and non-manufacturing PMI also held

levels above the 50.0 expansionary level.

We saw the AUD hold strong with Australian GDP data last week confirming that the

economy is not slowing as fast as the RBA were expecting. Company Operating Profit

and Building approvals statistics also came in stronger than the market had

forecasted. On the flip side of those results the Australian construction activity

worsened for the third straight month in May due to higher interest rates, tighter liquidity

and lower confidence levels. Housing Industry Association chief economist Harley

Dale said the survey reinforced the fact that the impact of higher interest rate, food

bills, and fuel costs is only beginning to bite in earnest in the June 2008 quarter.

The main release for Australia last week was the RBA meeting on Tuesday – interest

rates were kept on hold. However, the RBA delivered a less Hawkish than expected

statement. Their forecast is that demand will moderate and they will hold to a no

change in rates conditional on such continued moderation in demand.

In the week gone by the main attention economically speaking was the Reserve Banks

meeting on Thursday. As has been widely broadcast they decided to keep the OCR on

hold – however the sentiment surrounding the meeting was negative. In its Monetary

Policy statement the RBNZ slashed its growth forecasts and raised the prospect of a

rate cut by year-end – despite forecasting inflation to reach 4.7% later this year. The

forecast rate cut or ‘Easing Cycle’ has by the majority of economists been scheduled to

occur later this year with the smart money still on a Sept to Nov time frame. The NZD

depreciated in value off the back of Thursdays release against the majority of its

currency pairings notably hitting a seven year low against the AUD.

The loonie pulled back last week as it was undermined by falls on global commodity

markets. The uncertainty that this cast over the markets also hurt CAD which was still

reeling somewhat from a disappointing GDP figure which showed the first quarterly

contraction in 5 years.

Commodity markets will continue to help and hurt the Canadian currency and

participants should look at oil market moves for indications of direction.

The main focus is on the SA MPC rate announcement this Thursday where they are

due to raise rates by a least 50bps, a move that is designed to combat spiralling

inflationary pressures. The main sectors experiencing pressure are now the public

sector (double-digit wage increases) and the continuing upside on food and energy

prices. This coupled with fairly poor business sentiment and an expected lacklustre

manufacturing release coming up this week should see the ZAR test the 16 level Vs

GBP whilst also losing ground against EUR.

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.

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