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European Market Update

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Euro−Zone Retail Sales Beat Estimates Ahead of ECB Decision and Non− Farm Payrolls

Thu, Jul 3 2008, 12:06 GMT
by John J. Phillips IV

TradeTheNews.com

ECONOMIC DATA

• ·SZ June CPI: M/M 0.2% v 0.3%e || Y/Y 2.9% v 3. 1%e
• ·SP June Services PMI: 36.7 v 43.3 prior
• ·SW Riksbank raised rates by 25bps to 4.50% as expected
• ·IT June Services PMI: 48. 5 v 47.7e
• ·FR June Final Services PMI: 50.1 v 49.2e
• ·GE June Final Services PMI: 52.1 v 53.3e
• ·EU June Final Services PIM: 49.1 v 49.5e
• ·EU June Final Composite PMI: 49.3 v 49.5e
• ·SP June Consumer Confidence: 51.7 v 56.4 prior
• ·UK June Services PMI: 47.1 v 49.5e
• ·EU May Retail Sales: M/M 1.2% v 0.6%e || Y/Y 0.2% v -0.7%e
• ·IC Sedlabanki holds rates at 15.50% as expected

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

·On the equity front overnight Singulus [SNG.GE] reported overnight that it exceeded its expected Blu-Ray order volume in the 1H. The company sees additional orders in 2H, and currently targets market share of over 65%. An analyst at Dresdner said overnight that European banks may rebound by 10%-15%. The analyst did not provide a time frame for the expected rebound. Verband der Chemischen Industrie (VCI), the German Chemical industry association, said that the industry will not experience a slump, and forecasted 2008 sales growth of 5.5% y/y

·In new supply overnight Spain's Tesero Pùblico sold €1.496B in 3-year 4.1% bonds with an average yield of 4.956% and a bid- to-cover of 1.48x, as well as €1.555B 5-year 4.75% Bonds with an average yield of 4.862 and a bid-to-cover of 1.56x. In France the Agence France Trèsor sold €2.72B in 4.00% April 2018 bonds with an average yield of 4.85% and a bid-to-cover of 2.07x, as well as €710.0M in 4.25% April 2019 bonds with an average yield of 4.87% and a bid-to-cover of 4.54x, and €1.95B in 4. 25% April 2023 bonds with an average yield of 5.00% and a bid-to-cover of 1. 62x.

·In fx all eyes have turned towards the ECB ahead of its scheduled monetary policy meeting. The USD was steady ahead of the ECB's rate decision and press conference. The EUR/USD has held above the 1.5850 level throughout the European morning. Front month crude hit fresh all- time highs above the $145.20 level as a potential ECB rate hike would spur a commodity buying bunge for inflationary hedging purposes. The GBP maintained a soft tone as weaker PMI data and cautious comments on the UK housing sector weigh on sentiment. The SNB noted that a new inflation surge and weak CHF are a concern. The EUR/CHF is currently off of its best levels and testing the 1.61 handle

·On the speaker front US Treasury Secretary Paulson said overnight that that both US and UK economies are focused on the economic downturn. Paulson said that core inflation is relatively contained, adding that the focus is on the downside risk in the capital markets, with oil prices and housing remaining a concern. Paulson noted that there is a lot can be done about economic downturn.

·Following their decision to boost rates by 25bps to 4.50% Riksbank said that the Repo rate will have to be raise a few more times, adding that the Swedish economy is expected to slow further. Riksbank boosted its forecast for the repo rate to 4.8% by Q4, up from the previous forecast of 4.3%, and noted that it expects the rate to peak at 4.9% in Q3 of 2009. Riksbank also boosted their 2008 CPI forecast to 3.9% from 3.5%, and raised the 2009 CPI forecast to 3.5% from 2.8%. Furthermore, Riksbank cut its 2008 GDP forecast to 2.1% from 2.6%, and cut its 2009 GDP forecast to 1.2% from 1.8%.

·The SNB said in their monetary policy report that a new inflation surge and CHF weakness would be a cause for concern. The SNB reiterated that signs indicate that current inflation surge is temporary, nothing that they anticipates slowing growth in the coming quarters. The SNB noted that it sees inflation remaining above 2% until Q2 2009, adding there is a considerable uncertainty regarding inflation outlook

NOTES

·The Spanish services PMI for the month of June came in at 36.7. The reading was the worst in the measure's 9-year history, and was also the lowest number recorded for any of the PMI reading in the Euro-Zone.

·Looking ahead the ECB's interest rate decision is due out at 7:45 ET today. The ECB is widely expected to raise interest rates by 25bps for the first time in 13 months to 4.25%. There has been some chatter circulating that perhaps the ECB could raise rates by 12.5bps in lieu of 25bps in order to maintain its inflation-fighting credibility, and to provide an excuse for market participants to take profit in commodity related instruments. Chatter of a 12.5bps rate hike began circulating a couple of weeks ago after a number of ECB members used the term “small rate hike”. Since then the debate has been whether the ECB member were indicating that one rate hike would suffice, or that a hike of less than 25bps would suffice. Considering that the ECB has never struck out with a rate move of less than 25bps many market participants have dismissed this as a possibility today. Whatever the case may be the ECB's post rate announcement press conference will also be monitored for any indication as to what the ECB might do moving ahead.

·Non-farm payrolls data in the US is due out one day early ahead of the Independence Day holiday in the US. Estimates range from -130K to -20K, with the current consensus at - 60K. Market participants will also be looking for any revisions to May's - 49K reading. Note that the ADP employment change, although unreliable and volatile, often seen as a precursor to the non-farm release, came in at - 79K yesterday. The unemployment rate is expected at 5.4%. The data is due out at 8:30 ET.

Published on  Thu, Jul 3 2008, 12:10 GMT

Archive

• Is the ECB in denial or the first of possible October surprises?
  Published On Thu, Oct 2 2008, 13:33 GMT
• Weak European PMI highlight growth outlook and corporate profit potential
  Published On Wed, Oct 1 2008, 13:14 GMT
• Sense of calm returns; European equities recover from opening level lows; Carry-trades in focus
  Published On Tue, Sep 30 2008, 13:51 GMT
• European Financial Sector under stress
  Published On Mon, Sep 29 2008, 13:01 GMT
• European Central banks announced additional liquidity operations to ease quarter-end pressures; Delay in US financial market bailout package prompts risk aversion
  Published On Fri, Sep 26 2008, 14:05 GMT

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