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Day by day, the evidence pointing to the UK economy entering recession, mounts

Wed, Jul 30 2008, 06:10 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

The New Zealand dollar started the overnight session on the back foot after an announcement by NZ Guardian Trust. This continued as the USD regained Monday’s losses on the back of softer oil prices and given a better performance from the US equity market. US confidence and housing data were also a little above consensus. The combination of these factors was enough to see NZD/USD sharply lower, falling to 0.7350 in NY morning trade before bouncing back to the 0.7390 region as oil climbed off its lows.

The Australian dollar was also softer against the greenback, falling back to 0.9500 (barely) for the first time since breaking through the old all time highs around 0.9650.

USD/JPY was firmly bid on broad USD buying and lower risk aversion as US financial stocks rallied, in some cases enjoying 10% gains on the day.

EUR/USD fell back through 1.56 as oil prices tumbled $4/bbl and the DJIA extended gains beyond 200pts.

US consumer confidence edges up from 51.0 to 51.9 in July. The Conference Board measure of confidence stabilised a little in July (albeit at multi-decade lows), probably due to gasoline prices edging lower in recent weeks. That would also explain the slight pull-back in inflation expectations. Other weekly and monthly confidence measures have also edged higher this month (and the final reading of the UoM sentiment index, more sensitive to prices, was revised sharply higher). Within the detail, though, the job market sentiment net balance continued to slide, consistent with a further upswing in the unemployment rate.

US house prices down 15.8% yr in May. House prices (for the 20 largest capital cities) continued to fall back in May, but the 0.9% monthly pace of decline was the smallest since August last year. This is because prices in some regions (most notably the northeast, but also parts of the midwest) have begun to edge higher, although in the West and South the losses are still running at around 3% in the month and nearly 30% over the past year. Despite the small national monthly loss, the annual rate of decline quickened, and with the mortgage market in turmoil, unemployment rising and the stock of unsold homes close to a year’s worth of sales at the current pace, prices are expected to keep falling overall.

Japan’s labour market is gradually softening. The unemployment rate rose to 4.1% in June from 4.0% in May. The jobs-to-applicants ratio fell to 0.91 from 0.92.

Japan’s consumer data lacklustre. Retail sales expanded 0.3%yr in June, the same rate as May, based on a flat month and a slightly upward revision to history. The real household spending series improved to -1.8%yr from -3.2% in May.

German inflation stabilised in July, and recent energy price developments could mean that 3.3% proves to be the peak for the annual rate. That in turn should help prevent Euroland inflation from rising further, which could encourage the European Central Bank to soften its rhetoric somewhat next week, or in September when they next publish their quarterly staff forecasts.

More dire news re the state of the UK household sector. The latest CBI retail survey plunged to a 25 year low this month (though the survey started in late June so the result may have been infected by the weakness already reported in the official June retail report). Consumer credit growth was constrained in June, and new mortgage lending continued to contract, with both the number of loans and value of lending down around 70% on their respective peaks less than a year ago, just before the credit crunch really started to bite. Also, a report on the mortgage market meltdown by Sir James Crosby (former CEO of one of the major banks) suggested there was no easy fix and that the problems would be protracted. Day by day, the evidence pointing to the UK economy entering recession, mounts.

Outlook

We continue to like NZD/USD lower multi week especially on a TWI basis. Rate cutting cycles from the US Federal Reserve, Bank of England and Bank of Canada over the past 12 months have shown that currencies typically continue to decline through the cycle, despite a market already expecting the future cuts to come.

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Published on  Wed, Jul 30 2008, 06:15 GMT