UK Next Week s Agenda and Wrap Up, May 14-18

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1 11 May, 2012 UK Next Week s Agenda and Wrap Up, May Headlines for the UK and global economy - Wrap up - Next week s agenda - Financial overview - Government bond yields - Financial forecast - UK economy - Chart of the week - News and statements during the week Helena Trygg, , hetr01@handelsbanken.se

2 Headlines for the UK and key yglobal highlights g UK As expected, the Bank of England s Monetary Policy Committee voted to maintain the official bank rate paid on commercial bank reserves at 0.5 percent. It also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at GBP 325bn. The MPC also decided to pause its programme of assets purchases. As the MPC is stuck between low growth and high inflation, does the decision mean that the MPC is putting more weight on high inflation than the negative growth outlook? The negative first quarter growth and the gloomy industrial production figures raises the question if the central bank will be more expansive by expanding the asset purchase program during the second half of At the latest meeting in April, the MPC voted by 8-1 to maintain the Bank rate and not expand the asset program. Since then, barometers have been falling, the sterling is strong and production is modest. Next week, the BoE Inflation Report will be published and could tell us a bit more if the MPC is concerned over the high inflation rate and their outlook for growth. Industrial production fell in March by 0.3 percent and by -2.6 percent compared to March last year, following the PMI index for the manufacturing sector that fell to just above the 50-treshold treshold. Manufacturing output was flat and mining and quarrying fell by 3.7 per cent on the quarter. In contrast, the energy sector rose by 0.9 percent and water and waste management rose by 0.5 percent on the quarter. Since the year of 2000, industrial production have been falling with 14 percent. The preliminary estimate of GDP published on the 25 April 2012 contained a forecasted fall of 0.4 percent for production in 2012 Q1. This release of data also estimates production fell by 0.4 percent in 2012 Q1. Therefore there is no impact on GDP arising from this release of Index of Production data. Producer prices fell significantly in April, at least input prices. However, output prices rose which means that firms are increasing their margins by passing the cost to customers. Even output prces excluding energy rose in April. Global The 17-nation euro area is on the verge of losing one of its members, with more than 50 percent of investors predicting an exit this year as Greece s election impasse threatens to push the debt crisis to new depths, according to the Bloomberg Global Poll. As Greece faces political paralysis and voters balk at austerity, 57 percent of the 1,253 investors, analysts and traders who are Bloomberg subscribers said at least one country will abandon the euro by year- end and 80 percent expected more pain for Europe s bond markets. With a majority identifying ing a deterioration in Europe as a large threat to the world economy, respondents to the May 8 survey were increasingly worried Spain will default and less willing to buy French debt as Francois Hollande takes power. 2

3 Wrap Up, 7 11 May Monday Market holiday May Day Tuesday RICS House price balance, Apr -19 (e: -11, p: -10) BRC Shop Price index, Apr /1.3 (e: /1.6, p: /1.5) Wednesday BRC Sales like for like, Apr /-3.3(e: /0.6, p: /1.3) Auction of 4½% Treasury Gilt 2042 Thursday Industrial production, Mar -0.3/-2.6 (e: -0.3/-2.6, p: 0.4/-2.3) Manufacturing production, Mar 0.9/-0.9 (e: 0.5/-1.3, p: -1.1/-1.5) Bank of England decision Bank rate 05( 0.5 (e: 0.5, p: 0.5) Asset purchases target 325bn (e: 325bn, p: 325bn) Friday PPI input, Apr -1.5/1.2 (e: -0.9/2.1, p: 1.9/5.8) PPI output, Apr 0.7/3.3 (e: 0.4/2.9, p: 0.6/3.6) PPI output core, Apr 0.6/2.6 (e: 0.2/1.9, p: 0.1/2.5) Nationwide consuemr confidence, Apr 44 (p: 53) 3 m-o-m/y-o-y a = Actual e = Estimate p = Prior

4 Next week s agenda, May Monday No major events Tuesday Visible trade balance, Mar (e: -8.4bn, p: bn) Trade balance non EU, Mar (e: -4.7bn, p: bn) Total trade balance, Mar (e: -2.9bn, p: bn) Auction of 5% Treasury Stock 2025 Wednesday Claimant count rate, Apr (e: 5.0, p: 4.9) Jobless claims change, Apr (e: 5.0k, p: 3.6k) Average weekly earnings (3m/yoy), Mar (e: 1.1, p: 1.1) Weekly earnings ex bonus (3m/yoy), Mar (e: 1.4, p: 1.6) ILO unemployment rate, Mar (e: 8.4, p: 8.3) Bank of England Inflation report Thursday Mini-Tender of 5% Treasury Stock 2014 Friday No major events 4 m-o-m/y-o-y a = Actual e = Estimate p = Prior

5 Financial overview 5

6 Government bond yields 6

7 Financial forecast Base rates last 3 months 6 months 12 months USA Eurozone United Kingdom Ten year governm ent bond yields USA Eurozone United Kingdom FX last 3 months 6 months 12 months EUR/USD EUR/GBP GBP/USD

8 Bank of England and challenges ahead Since the latest MPC meeting in April, barometers as PMI for all three sectors has been fallen, figures from BRC sales declined significantly and house prices continue to fall or at least move sideways. The dovish rhetoric by MPC members from latest minutes showed that the vote was 8 eight members that voted for an unchanged Bank rate and no expansion of the asset program. One member voted to expand the program by an extra GBP 25bn. Long run government bond yields have fallen to the lowest level since records began (in 1703!) due to a global demand for safe haven investments. It is really interesting to see that CDS preads are in favour for the UK despite the fact that Germany is performing better than the UK at least economically. The MPC will make its decision with new quarterly economic forecasts to be published next week. Governor Mervyn King, whose second term ends in June 2013, will defend the actions at a press conference May16 when publishing the Inflation Report. Is the central bank now more concerned over the high h inflation instead of the low growth prospects? The inflation report will hopefully give us some clearness how the discussions are among members. No matter the rhetoric, the forecast for growth has become much more gloomy. 8

9 Chart of the Week European Commission forecast 9

10 News and statements during the Week Britain s economy may have shrunk more than previously estimated in the first quarter after the statistics office reported a deeper slump in construction. Building output plunged 4.8 percent in the three months through March, the Office for National Statistics said on Friday. That compares with a 3 percent drop in the first estimate of gross domestic product on April 25, which showed the economy contracted 0.2 percent. The revision on its own would shave 0.1 percentage points off GDP, the statistics office said. The building data may add to concerns about weakness in the UK economy as it grapples with a double-dip recession. Bank of England policy makers hadn t seen the revision before their decision yesterday to halt their quantitative-easing program at GBP 325bn, according to statistics office officials. (Bloomberg) Prime Minister David Cameron put overhauls of the banking system, employment law, the electricity market and pensions at the heart of his legislative program for the coming year. Queen Elizabeth II read out to Parliament in London on Wednesday a speech listing 31 proposals that the Conservative-led coalition government will seek to make law. Cameron may face the greatest opposition from lawmakers over proposals to overhaul the House of Lords, the upper chamber of Parliament, and to give more powers to the security services to monitor electronic communications. My government s legislative program will focus on economic growth, justice and constitutional reform, the 86-year-old monarch told members of both chambers of the legislature. My ministers first priority will be to reduce the deficit and restore economic stability. Cameron is looking to shift attention away from his worst electoral setback since taking office two years ago. His Conservative Party and their Liberal Democrat partners lost hundreds of seats to the Labour opposition in municipal polls on May 4, triggering renewed tensions in the coalition. (Bloomberg) David Cameron and Nick Clegg will renew their commitment to reducing Britain s budget deficit and rebuilding the economy as they seek to bolster their coalition government after losses in local elections last week. At a joint appearance on Tuesdaay, the Conservative prime minister and his Liberal Democrat deputy will say the dangers facing the economy underline the need to stick to the austerity plan agreed upon when their parties came to power two years ago. That was and remains our guiding task and in these perilous time it s more important than ever for Britain that we stick to it, Cameron will say, according to extracts released by his office. I don t hide from the scale of that challenge, or the message sent by voters in many places in last week s elections. I m listening. I m leading. I get it. Both the Conservatives and the Liberal Democrats lost seats to the opposition Labour Party in municipal elections on May 4, triggering renewed tensions in the coalition. Their leaders will restate the case for their policies against a backdrop of market turbulence in Europe, where an anti-austerity revolt saw voters punish administrations in France and Greece. Cameron and Clegg faced a backlash from voters after the economy slipped into its first double-dip recession since the 1970s. Labour says the government is holding back the recovery by trying to cut the budget deficit too quickly. (Bloomberg) 10

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