Europe - Growth slowing, inflation topping out... |
In our latest monthly bulletin we pushed out the timing of an ECB interest rate cut to the third quarter of this year, but we remain convinced that the ECB will have to lower rates in response to slowing economic activity. Most of the available surveys suggest growth is running below trend and moderating further, with the EU Commission’s Economic Sentiment Index the latest in this regard. This index, which combines measures of consumer and business confidence in the zone, peaked in the middle of last year and has declined steadily since, with this April showing a particularly sharp fall. Based on the past relationship, the latest reading points to the annual rate of GDP growth slowing to around 1.5% in the current quarter (Q2) from over 2% at the end of 2007, which in turn is consistent with little or no increase in GDP in Q2 from the first quarter of this year. The market has begun to tentatively price in some chance of a quarter point rate cut early next year, though with growth slowing quite noticeably and with inflation looking as if it has topped out - it fell to 3.3% in April from 3.6% in March - we think there is scope for the market to bring forward the timing of any cut and to price in a greater reduction in rates than it currently expects. If so, this would tend to weaken the euro, which lost further ground to the dollar this week as the Fed indicated it will now keep US rates on hold for a while.
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Irish Live Register eases back slightly in April...
After a very large increase of 12,000 in March, the Live Register of unemployment fell back slightly - by 200 - in April, according to the CSO. The Register, which includes the unemployed, causal and part-time workers, stood at 199,700 last month, up from 158,400 in April 2007. While the yearly increase is a concern, we will have to wait for the first quarter National Household Survey (QNHS), which provides a better measure of unemployment, to see if labour market conditions have dis-improved in line with the live register results. The latest QNHS, for Q4 2007, showed unemployment stood at 101k, an increase of 10k from Q4’06. Also according to the CSO this week, new car registrations fell by over 22% year-on-year in March and in the first quarter were 5.3% lower than in the corresponding quarter in 2007. Poor car sales are dragging down retail sales, which posted a small overall decline in February, and, on the basis of this week’s numbers, car sales will again contribute negatively to retail sales growth in March.
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United States - Fed cuts again but signals it is now on hold... |
The Fed cut interest rates for the seventh time since last September, with the 25bps reduction in the fed funds rate taking it down to 2%. However the Fed also signalled that it will now pause and put policy on hold, as it waits to see how the reduction in interest rates to date is affecting the economy. It does remain quite downbeat about the short-term outlook, noting that activity remains weak, with consumer spending and business investment subdued, and expecting tight credit conditions and the "deepening contraction in the housing market" to weigh on growth over the coming months. At the same time, however, it believes that its "substantial easing of monetary policy" should help to promote moderate economic growth over time, though it will "continue to monitor economic and financial market developments and will act as needed" to support the economy. Overall then, while there is no promise to cut interest rates further the Fed is not ruling out the possibility that it might have to do so. For now though, rates are likely to remain at 2%. The recent economic data also supports the notion that the Fed will keep rates steady for a while - they suggest that while growth has obviously slowed quite sharply the situation is not deteriorating any further. The prospect of rates remaining on hold should support the dollar, which strengthened further this week, both against the euro and on trade weighted basis. |
United Kingdom - Impact of credit squeeze apparent in housing market... |
The impact of the current credit squeeze is particularly apparent in the housing market, with data released this week showing a further fall in mortgage approvals in March - they were down more than 11% from February - and a continuing decline in house prices, with the Nationwide and Halifax measures both showing a decline of more than 1% in April from March. Activity in the broader economy is also moderating however, with real GDP growth slowing to 0.4% - well below trend - in the first quarter of this year. The indications are that growth will moderate further in Q2, judging by the available survey evidence. The purchasing mangers’ measures of activity in the manufacturing and construction sectors both slipped further in April, while the CBI’s latest retail sales survey points to a sharp slowing in spending on the high street last month. The Bank of England’s Financial Stability Report published this week noted that the losses that will ultimately be felt by the financial system are unlikely to be as large as feared and suggested that confidence in credit markets will return gradually in the coming months. The Bank still has further work to do on the interest rate front however, given the on-going slowdown in the economy and the fact that official rates are still relatively high at 5%. We expect rates to fall to 4.5% by the end of this year, though the Bank of England is likely to stay on hold at next week’s meeting. Swap rates were lower on the week helped by an easing of inter-bank interest rates and soft economic data, though sterling strengthened against both the euro and dollar. |
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Japan - Bank of Japan keeps interest rates at 0.5%... |
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The Bank of Japan kept interest rates at 0.5% when it met during the week. In its Outlook which accompanied the decision the Bank stated that Japan’s economic growth was slowing, mainly due to the effects of high energy and materials prices. It still believes that the Japanese economy will grow at around potential (1.5%) each year in ‘08 and ‘09. According to the Outlook, the downside risks to growth include negative developments in overseas economies and global financial markets as well as bigger than anticipated increases in energy and material prices. The Bank thinks the current outlook is highly uncertain and will pay close attention to future economic developments and will “implement its policies in an accordingly flexible manner”. It was a mixed week for Japanese data. Retail sales grew by 1.1% in the year to March while the jobless rate fell marginally to 3.8% in the same month; both of these indicators were in line with expectations. Industrial production, which was forecast to grow by 2%, disappointed by falling by 0.4% year-over-year in March while housing starts fell by 15.6%, a larger fall than had been anticipated.
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