Last week got off to a quiet start with the markets waiting for the minutes of the last Bank of England meeting which were released on Wednesday. The minutes contained no surprises. The committee members agreed as one to keep the level of quantitative easing at current levels [£175bn] and there was no mention of reducing the interest rates at which the BoE paid on deposits held with it by the banks. Then Mervyn King the Governor of the Bank of England seemed to indicate he welcomed a weak sterling as it would boost exports. One of the problems with this logic is that it assumes we have things we can export which given the state of UK industry makes me wonder. It also assumes that other countries want to or have the capability to buy our products which given the credit crunch is worldwide may be a wrong assumption. One theory that I have seen for the Governors need to undermine sterling is that it is one of the few controls he has at his disposal to hit the BoE’s inflation target of 2% by increasing the cost of imports. This could well be the case but the problem is that once a currency starts to weaken it is very difficult for a central bank to stop the rot. Limited UK economic data out this week. During the week we have some housing data with Augusts mortgage approvals and Septembers house prices surveys from the Halifax and the Nationwide. On Thursday we have the purchasing managers index which is expected to show a slight improvement
The US$ has gained against sterling, sitting at US$1.585/£1 inter bank as I write, which isn’t a surprise given sterling is the weakest currency over the last year losing 15% on a trade waited basis. But the US$ has been suffering against the euro, although it did pull back from one year lows, and other currencies given its dual deficits of budget and balance of payments. The Federal Reserve met last week and overall its announcement was positive on the economy with signs of improvement but cautious on the speed of the recovery given the surplus capacity that existed. Therefore US interest rates will be kept at current levels for quite a while. The US has committed to better fiscal management given that for the US$ to maintain the status of the world’s reserve currency then it will have to convince the world that it has some value. This week we have a raft of economic data. On Thursday we have the release of the Institute of Supply Management survey which is expected to show a small increase in August to 54 but this will be the highest level since April 2006 so would be a significant milestone. We also have the release of personal income and spending data which is expected to show a small increase on the back of the “cash for clunkers” car programme. And finally on Friday we have the unemployment figures which is expected to hit 9.8%.
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