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UK shows signs of steeper slowdown, but also high inflation

Tue, May 13 2008, 06:49 GMT
by John Hardy

Saxo Bank

Carry trades still popular - but can this continue? US Retail Sales on tap - market reaction to US data has mystified recently.

MAJOR HEADLINES – PREVIOUS SESSION

• UK Apr. BRC Sales Monitor showed same store sales falling -1.5%

• UK Apr. RICS House Price Balance out at a record low of -95.1% vs. -80.0% expected ant -79.4% in Mar.

• China Apr. Retail Sales rose 22.0% YoY vs. 21.0% expected and 21.5% in Mar.

THEMES TO WATCH – UPCOMING SESSION

Key Risk Events (All times in GMT)

• Sweden Apr. CPI (0730)

• UK Apr. CPI / RPI (0830)

• UK Mar. DCLG UK House Prices (0830)

• US Fed's Pianalto and ECB's Noyer to speak in Paris (1010)

• US Fed's Bernanke to speak on Liquidity Measures (1220)

• US Apr. Import Price Index (1230)

• US Apr. Advance Retail Sales (1230)

• US Fed's Hoenig, Yellen to speak on economic outlook (1700)

• US Fed's Fisher to speak

• US Weekly ABC Consumer Confidence (2100)

• Japan Apr. Domestic CGPI (2350)

• Japan Mar. Current Account (2350)

• US Fed's Evans to speak (0000)

• Australia Q1 Wage Cost Index (0130)

• New Zealand Apr. Non-resident Bond Holdings (0300)

Market Comments

The USD sold off a bit yesterday for no readily apparent reason ahead of today's Retail Sales release. Reactions to data have been odd of late, or they have at least not been particularly in focus. Friday's very good trade number, for example, was overshadowed by the record crude run last week. Also, today's headline Retail Sales less Autos number may not offer an accurate picture of the US consumption landscape as our studies show a heavy correlation with the number and changes in gasoline prices, and the latter have been on a vicious tear higher lately. But does the market want to delve into the details of the release? EURUSD continues to skim along just shy of the still quickly rising 55-day moving average, which comes in just below 1.5600 today. The interest rate differentials told us that EURUSD shouldn't have sold off to new lows last Thursday (the market confirmed the model as we saw a quick reversal back higher even though the pair did punch briefly to new lows during the Trichet press conference), but they don't suggest anything but a ranging outlook for now. There's a lot of range to work with. If we do see an extension of the EURUSD rally, our next technical areas of interest will be the 0.618 and 0.764 Fibo levels for the 1.6018 to 1.5287 move at 1.5737 and 1.5847, respectively. Conviction is low in the range here.

The picture for the UK economy was particularly ugly after yesterday's round of data. The record PPI number a bit surprisingly failed to offer any support for the pound as the focus perhaps remains on the risks of further economic weakness. The UK outlook continues to sour after the data overnight showed same store sales dropping strongly again in April and a strong new low in the leading RICS House Price Balance. Still, we wonder whether there is much more downside for the pound against the EUR in the bigger picture above the 0.80 - 0.81 area. Note that the CPI/RPI is scheduled is up today and the quarterly inflation report is out tomorrow. We don't envy the increasingly hot seat the BOE has found itself i.n

The market optimists decided to extend the party a bit longer yesterday, with another rise in equity prices accompanying signs of continued risk willingness in currencies. It seems everyone is chatting up the idea of putting on the carry trade again - one of the major banks even touted the idea of the "summer of carry". As has perhaps become painfully obvious and repetitive, we are very concerned about the potential for a renewed wave of risk aversion as it will eventually dawn on the market that a global slowdown is going to be a tough slog and could have further ugly implications for the riskier corners of the market. The timing and trigger of such a move back to defensiveness is the difficult call, but we most certainly have a hard time imagining a summer of love for risk. We note, too, that the carry picture isn't fully consistent and investors have been a bit picky in choosing their deposit currencies. After all - some of the traditional big high interest rate currencies have seen enough bad news of late - Australia and especially New Zealand - to give anyone pause. It seems the market was unanimous in selling the JPY yesterday, however, so there is no doubt which currency is still considered the funding currency for these trades. Let's see if this move higher in carry has any legs by the beginning of next week...shorting EURCHF above 1.6200 with a stop above 1.6300 is one way to place your initial bets that it won't.

Chart: GBPUSD

GBPUSD was recently a mess as both the USD and the GBP often moved in relative tandem vs. the rest of the market. But the technicals became a bit more decisively bearish as the pair broke below the 1.9600 area. The action in the last few session suggests that the key short term resistance now comes in the 1.9620/30 area, while on the longer term chart further below, a "neckline-ish" area is shaping up that could set up a more significant decline toward 1.9000 and perhaps beyond if broken.

Published on  Tue, May 13 2008, 07:03 GMT