Output has fallen among the UK’s small and medium-sized manufacturers, and sentiment has deteriorated, according to figures from business lobby group the CBI. Of the 359 firms that responded to the latest quarterly SME Trends Survey, 28% said output volumes had fallen, while 23% of manufacturers reported output volumes increasing in the three months to July. New UK car registrations rose for the fifth month in a row in July, posting the strongest figures of 2012 so far. New car registrations rose 9.3% in July to 143,884 units, with the total so far this year up 3.5% on the same period in 2011. Halifax has added to a number of recent reports that the UK housing market weakened in July. The lender reported that average prices fell 0.6% month-on-month in July, following on from increases of 0.8% in June and 0.4% in May.
Today’s release of UK industrial production is yet another piece of data that is likely to be heavily affected by the additional bank holidays in June. The preliminary Q2 GDP release published late last month contained implicit estimates for output in June. Implied drops in electricity and gas output (around -4.7% on the month) and water (-6.1%) look very aggressive. In June 2002, the last time the UK experienced an additional bank holiday, output fell by only 1.7% and 0.0% respectively. Indeed, June’s implied water supply drop, if realised, would be the largest since May 1989. However, while Lloyds TSB expect upward revisions here, we expect output in the larger manufacturing sector to be revised slightly lower. The ONS has pencilled in a drop of 4.8% in June, not as sharp as the declines posted in previous Jubilees in 2002 (-5.6%) and 1977 (-4.9%). In total, Lloyds TSB expect the net effect of these revisions to lead to a slight upward revision in industrial production, but not enough to prompt an upward revision to Q2 GDP as a whole.
The single currency rose from $1.2375 late Friday to $1.2401 last night, widening its already one per cent gain at the end of last week, as investors gained confidence, turning them away from the typically “safe-haven” dollar. German Chancellor Angela Merkel helped the euro higher after she said her government backed the ECB’s bond-puchasing programme.
The positive market sentiment that started on Friday when financial markets changed their view on the ECB stance and the employment report surprised on the upside continued yesterday and the S&P 500 index was sent to a three-month high at 1,394, gaining 0.2% after jumping 2% on Friday. The rally in short-dated Italian and Spanish bonds also continued yesterday. The Spanish 2-year yield dropped 44bp to 3.37% and Italian 2-years dropped 7bp to 3.0%. The rally in peripheral debt gained momentum as it became clear that Merkel and her government back the plan announced by ECB President Draghi last week. According to Bloomberg German government spokesman Streiter said that Germany has “no doubt” that the ECB is acting within its mandate. After a meeting between the Troika (European Commission, European Central Bank and International Monetary Fund) and Greek Finance Minister Yannis Stournaras in Athens at the weekend, the institutions issued a joint statement, saying: “The discussions on the implementation of the programme were productive and there was an overall agreement on the need to strengthen policy efforts to achieve its objectives.” According to Italy’s Prime Minister Mario Monti in an interview with German publication Der Spiegel, the Eurozone tensions “bear the traits of a psychological dissolution of Europe.” Talking about the growing resentment between southern and northern European nations, he said that “it is very alarming, and we have to fight against it”.
The release of the preliminary reading of Italian Q2 GDP will help refine estimates ahead of next week’s Euro area GDP. The Italian release will be the fourth following prior readings from weak readings from Ireland (-1.1%), Spain (-0.4%) and Belgium (-0.6%).
In the FX market EUR/USD trades just above 1.24 this morning. In Danske view the downside tail risks to EUR/USD have fallen significantly the past couple of days and with still close to record numbers of speculative short euro positions in place according to the so-called IMM positions we continue to see upside for the cross.
Quiet but broadly risk positive trading yesterday left the USD on the back foot against most currencies, but there is reasonable support for the USD against most currencies close to yesterday’s lows, and while the more positive risk tone may well reassert itself later in the week, we would favour a further correction of the USD’s Friday losses today. There isn’t much on the calendar today to break recent ranges, and although we would expect the markets to test the commitment of the EU authorities to protecting the peripheral debt markets at some point, there is no particular reason to expect this today. There is good support in the USD index around 82.10, and scope for a move back up towards 83, but a break through 82.10 would suggest scope for another 1% or so on the downside.
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