US Fed Beige Book Reported a Picture of “Widespread Deceleration in Activity”

Main News Daily Update

The pound reached its highest level against the euro in more than a week as a gauge of U.K. house prices unexpectedly rose and a report showed manufacturing expanded for a third month in July. Sterling advanced against 15 of its 16 most-traded peers, also lifted by speculation that takeovers will result in foreigners buying pounds or British companies repatriating funds from overseas. U.K. government bonds fell as demand held up at a Portuguese debt auction, easing appetite for the safest assets and damping concern that euro-region nations will struggle to fund themselves. “We got a little bit better housing data,” said John Hydeskov, an analyst at Danske Bank A/S in Copenhagen. “There has also been some talk of M&A flows.” The main economic event today is the Bank of England’s interest rate announcement, at noon. We expect both the level of the bank rate and the size of the QE programme to be left unchanged at 0.5% and £200bn, respectively. However, the recent run of poor data, such as the PMI surveys and various housing market indicators, may reignite the debate about whether further policy easing is required to revive a faltering economic recovery. If, as we expect, growth slows sharply in the months ahead then options for further stimulus are likely to start dominating the MPC’s policy agenda. Although today’s announcement is unlikely to prompt much market reaction, the minutes of the meeting, published in two weeks’ time, could be more eventful, particularly if they show that support for further policy stimulus is growing. Ahead of today’s MPC announcement, UK external trade figures for July are released. Lloyds TSB expect the visible trade deficit to have risen slightly to £7.6bn from £7.4bn the month before. For M&A (Mergers and Acquisitions) Dana Petroleum Plc said today it’s worth 18 percent more than Korea National Oil Corp.’s hostile bid for the U.K. company. Vodafone Group Plc, the world’s biggest mobile-phone company, sold a $6.6 billion stake in China Mobile Ltd.

In Germany, Industrial production inched up by 0.1% m/m in July. Industrial production inched up in July (+0.1% m/m, after -0.6% m/m in June). Nevertheless, it remained 9.5% lower than the level prior to the crisis. Manufacturing production was unchanged (0% m/m, after -0.3% m/m) in line with the fall in capital goods production (-0.7% m/m, after -0.3% m/m in June). The drop in goods exports in July (-1.5% m/m, after +3.7% m/m in June) suggests a slowdown in exports and in manufacturing production in Q3 2010. The euro declined versus the dollar and the yen on speculation European banks will struggle to raise funds amid signs the recovery in the 16-nation region is slowing. Europe’s currency weakened versus 15 of its 16 major counterparts after FT Deutschland reported European Central Bank Executive Board member Juergen Stark as saying German banks need more capital.

Trade data are also released in the US and Canada. Lloyds TSB look for a slight narrowing in the US trade deficit to US$47.5bn, but with the risk of a bigger decline should imports revert back towards their 3 month average level. The Fed’s Beige Book was released yesterday evening but didn’t reveal much new and didn’t have any market impact. The Beige Book reported a picture of “widespread deceleration in activity”. It confirmed that the recovery was sluggish, that consumers remain cautious and that housing has slowed after the expiry of the first-time buyer credit. It also suggested some division between states with Eastern states slowing more relative to states in the West. A US initial jobless claim is the main release today. Claims have improved slightly over the past couple of weeks but we should see a further decline as the level is still relatively high. The US trade balance for July should improve. Imports have increased a lot in recent months but should be tapering off in line with weaker demand growth. Exports may slow a bit as well on the back of lower growth in Asia recently.

The Central Bank of South Africa (SARB) is scheduled to give its interest rate announcement this afternoon. The market expects the official rate to be cut by 50bps to 6%, although given the strength of recent wage data, SARB might be persuaded to keep rates unchanged. Hungarian industrial production in July surprised somewhat on the downside (at 9.0% y/y in July, down from June’s 15.2%) – as did Polish and Czech IP figures. This is in line with the negative surprise on German manufacturing numbers in July. The numbers are not that bad, but clearly show some moderation in manufacturing activity in central and eastern Europe (CEE). Release of the Czech final Q2 GDP came out better than the preliminary numbers showing that the Czech economy expanded by 2.4% y/y (flash estimate was 2.2% y/y) and by 0.9% q/q (flash estimate was 0.8% q/q). The revision of Q2 GDP in the Baltics was minor – in general the new figure confirms that recovery in growth accelerated. As was broadly expected the growth engine was exports, which are expected to contribute positively to GDP growth in the coming quarter as well. Domestic demand remains weak and the positive outcome mainly comes from the positive inventory cycle or restocking. In line with consensus Danske expect Czech inflation to rise to 2.0% y/y in August, up from 1.9% y/y in July. Even though Czech inflation could rise above the Czech central bank’s 2% inflation target in the coming months, it will only be temporary and in Danske’s view will not trigger a rate hike. Hungarian markets remained under pressure amid higher risk aversion on the back of renewed concerns about eurozone debt problems yesterday. The market is beginning to price in near-term rate hikes in Hungary as the forint continues to weaken especially against the Swiss franc.