Moneycorp Update

DATA DISAPPOINTMENTS FOR STERLING
Wider UK trade deficit and falling factory gate prices dampen appetite for the pound. Dollar in the background with a four-day week and few US ecostats.

An uneventful week saw sterling meander along a cent-and-a-half range. It was only as London was tidying its desk on Friday afternoon that sterling set off lower. It then went on to lose a further half cent in the Far East this morning.

The UK economic data were mixed. Monday’s services sector purchasing managers’ index (PMI) fell by one point to a less-than expected 54.4. It suggested that companies were still growing their activity but at a progressively slower pace. Wednesday’s production figures were good in parts. Although manufacturing production grew by only 0.3% in May instead of the +0.5% analysts had predicted, it was a far better result than April’s -0.8% decline. The broader industrial production figure, which includes such things as mining and energy, reversed the previous month’s decline with a +0.7% rise. The Halifax house price index went down for a second month, this time by -0.6%, leaving house prices 6.3% higher than a year earlier.

The most disappointing data, at least as far as sterling was concerned, came on Friday with June’s producer price index (PPI) and the balance of trade for May. The input and output components of the PPI, representing manufacturers’ costs and factory gate prices, were lower in June by -0.2% and -0.3% respectively. The numbers supported the Bank of England’s projection that inflation will fall back towards its 2% target without the need for higher interest rates. The UK trade figures were also unhelpful. The deficit in goods widened to more than £8 billion while goods and services together registered a £4.5 billion shortfall. Both deficits were bigger than expected and cast renewed doubt on the alleged benefits of a weak pound.

Other events during the week saw an announcement from the new Office for Budgetary Responsibility (OBR) that its boss, Alan Budd, did not intend to renew his initial three month contract and that the two other members of the triumvirate would also be leaving before the end of the year. Critics of the new setup wondered why he was leaving. Could it be because of lack of independence? Perhaps not, for the International Monetary Fund (IMF) came out later in the week with economic growth projections remarkably similar to those put together by the OBR. The IMF agrees with the OBR that Britain’s gross domestic product will grow by 1.2%. Its forecast of 2.1% growth in 2011 is lower than the OBR’s 2.3% prediction.

The Independence Day holiday delayed the US services sector PMI until Tuesday. Just as in Britain, the figure was lower than the previous month and below forecast at 53.8. The services PMI was the week’s only important US data release. Weekly jobless claims moved in the right direction, a welcome relief for the dollar after the previous Friday’s disappointing non-farm payrolls number. Consumer credit logged a fourth consecutive monthly decline. It was the result of a combination of banks’ reluctance to lend and consumers’ disinclination to borrow. Wholesale inventories went up by +0.5% in May, giving the impression that suppliers are still confident about sales in the future.

Sterling tried to strengthen last but was knocked back. That does not bode well for it in the immediate future. With UK statistics for gross domestic product, inflation, consumer confidence, employment and earnings all due this week there is scope for further setbacks if the numbers are not supportive. Buyers of the dollar should hedge half their requirement until sterling’s future course becomes clearer.

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