Financial Markets And Economic Events for August 7th 2009

By: Lloyds_TSB

The Bank of England's decision yesterday to expand its asset purchase programme by £50bn to £175bn surprised the markets, but it underlines the importance the MPC attaches to economic data in its policy deliberations. In particular, although recent output indicators have improved, the recession was deeper than previously thought, implying an even larger degree of spare capacity in the economy.

Moreover, spare capacity is likely to rise further, as any recovery in output is expected to be gradual. Critically, the latest money supply data also confirmed that the availability of credit to the wider economy remained constrained.

As the table on the right shows, UK 10-year benchmark bond yields fell back towards 3.70% and 5-year swaps fell below 3.70%, somewhat in contrast to movements in US and euro rates which were supported by further increases in equities. The pound also underperformed versus the G-10 currencies, with £/$ and £/€ falling back from earlier 1.70 and 1.18 levels. The euro was also supported by very strong German factory orders data which registered a 4.5% monthly rise in June on the back of a 4.4% increase in the previous month.

Data and events preview

The US employment report takes centre stage today. The pace of decline in non-farm payrolls slowed in Q2 to a monthly average of 436k, compared with an average fall of 691k in the first quarter. For July, we have pencilled in a fall of 370k, while the jobless rate is expected to rise to 9.6% from 9.5%. It could reach 10% in the coming months. The market median forecast is for a slightly smaller decline in non-farm payrolls of around 345k. The monthly figures can be volatile, but we believe the weak ADP employment numbers and the unexpected fall in non-manufacturing ISM employment index, released earlier this week, point to downside risks.

UK producer prices and German industrial output are due this morning. Input prices in July are forecast to have fallen by around 1.0% on the month, reflecting lower commodity prices over that period. Factory gate prices were surprisingly weak last month and this morning's release could provide interesting indications of output price pressures ahead of the CPI/RPI data next week. We see output prices up slightly by 0.1% on the month and core output prices up 0.2%. In Germany, industrial production is expected to post a monthly rise of around 0.6%, with risks skewed to the upside following yesterday's strong factory orders data.

For more information: Emile Abu-Shakra Manager, Media Relations Lloyds TSB Group Media Relations Tel 020 7356 1878 http://www.lloydstsbcorporatemarkets.com/

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