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Main News Daily Update

Ahead of the Bank of England interest rate decision on Thursday, the focus in the UK is on the manufacturing output numbers for the month of July. After a deep recession over the course of 2008 and 2009, 2010 has seen a strong rebound in activity with annual growth rates exceeding 4% over the last few months – the fastest rate of expansion for nearly two decades. However, output in the sector still remains close to 10% below the pre-recessionary peak, and the most recent surveys suggest that the rally may now be running out of steam. The headline manufacturing PMI index has fallen for four consecutive months, and the new orders component of the survey is at its lowest point for more than 12 months. However, both readings remain above the crucial 50 level which suggests a moderation, versus an outright decline in growth over the coming quarters. For the month of July specifically, we expect to see a small 0.3% fall in output. The theme of moderating UK growth in the second half of the year is likely to be echoed in the latest monthly NIESR GDP estimate, which should show quarterly growth slowing from the 0.9% rate recorded for the month of July. Fundamental sterling traders would have only a low-level piece of event risk to absorb Tuesday (the BRC inflation index). Far more important a concern for the currency going forward will be the overall health of the economy. Economic performance will further determine interest rates and fiscal policy going forward. From that perspective, no indicator is better suited to define expectations than the NIESR GDP estimate for August.

Globally, the economic calendar is fairly light, with German industrial production numbers and the policy decision from the Bank of Canada (we are forecasting no change in rates) the only events likely to be of significant interest to investors. Germany’s Trade Balance surplus is expected to narrow to 13 billion euro in July as overseas sales stall to mark the worst performance in three months. The outcome follows yesterday’s disappointing factory orders figures, reinforcing fears that a slowdown in global demand will weigh heavily on the world’s second-largest exporter. An uptick in Industrial Production may offer a counter-balance, with output expected to add 1 percent in July, but orders figures are inherently more forward-looking and may prove to overshadow the release. Is it really shocking news that European officials understated the potential risk that its regional banks face? It would seem so given the strong risk aversion move and robust dollar bid (especially against the euro) that developed Tuesday. However, that wouldn’t hit at the root of the issue. This particular Wall Street Journal article wasn’t the catalyst for the general market like many analysts have idly claimed. Instead, this was a general concern surrounding the region that had started to build momentum yesterday. And, to be frank, the issue was not Europe’s finances; but rather, it was a general revival in uncertainty that would target those currencies and regions with the most unstable fundamental futures. It just so happens that the financial media took a special interest in this particular region yesterday; and therefore, the investors’ attention was redirected to this general region. Identifying the source of today’s move as a confidence issue rather than a region-specific catalyst offers far better perspective into gauging the stability and conviction of the resultant FX trend. Alone, EURUSD would offer a reading of extraordinary velocity in risk aversion with a consistent decline through the day and the biggest close-to-close decline in four weeks.

Turning to sentiment, S&P 500 stock index futures are down 0.2 percent in late Asian trade, pointing to continued risk aversion that promises to boost the safety-linked US Dollar and Japanese Yen against most other major currencies. Outside the pull of risk appetite trends Tuesday, the dollar was offered little guidance by more structured fundamental factors. The economic docket was extraordinarily light for the session with nothing that could be construed as top or even second tier event risk. That being said, there were a few events that would take place; but a distracted market wouldn’t fully account for the shift. Turning a spotlight on the otherwise overlooked, long-term concern of the United States’ fiscal troubles, the Fed released the minutes of its Board of Governors discount rate meeting. Looking beyond a week growth forecast, the real interesting development was that both the Dallas and Kansas City Fed Reserve banks voted for a higher discount rate. A major disconnect in lending (which is itself a prominent hurdle to growth) is banks’ propensity to sit on capital to bolster reserve ratios and protect balance sheets rather than pass the capital on to consumers and businesses that would turn it into economic activity. Many argue that raising the discount rate (the rate at which banks borrow from the Fed) could dissuade them from hoarding the capital for small and arguable guaranteed returns. We will see if this gains any traction going forward. In other news, the White House laid out more details of tax breaks and spending programs the docket will once again offer a definitive timeframe for event risk (whether it is really market moving is another issue). The Fed Beige books will offer an economic assessment that probably won’t surprise; but consumer credit could be interesting.