Daily Financial Market Outlook

Overview & economic commentary

The FOMC meeting today will be pivotal in predicting whether the trough in official US interest rates has been reached. The Fed has already cut interest rates by a cumulative 3% since the onset of the credit crisis last year, reflecting its fears about economic growth while largely ignoring rising inflation. However, the minutes of the FOMC meeting on March 18 (Fed cut rates by 0.75%) suggested the balance may be shifting on the committee and a large injection of liquidity to contain the credit crisis also imply further aggressive interest rate cuts are unlikely. We predict a 0.25% reduction to 2% (in line with consensus) but expect some members again to dissent against any cut and also look for a mildly more hawkish tone to the accompanying press statement. Economic data in the week ahead will justify the need for further easing at this time. The preliminary estimate of Q1 2008 gdp today will tell us how close the US is to recession, with this likely to be one of the weakest quarters for economic growth. We look for a modest slowing to 0.5%, from 0.6% in Q4 2007, mainly reflecting continuing strong export growth, with the risk skewed to the downside. The ADP survey will also attract attention ahead of the NFP report on Friday. In the euro zone, data today will underline the outlook for unchanged interest rates, with the risk that CPI hit a 16-year high in April. Consumer confidence data in the UK are expected to show deteriorating sentiment in April, primarily reflecting uncertainty about the economic outlook.

Currency commentary

The Nationwide report o/n of a 1st fall in annual UK house prices in April since 1996 put sterling on the back foot early this morning. The move in €/£ above 0.7925 could see some profit taking when euro zone CPI is released at 10am. A surprise dro pin German CPI means a fall in euro zone CPI could be on the cards and this could lead to a pause in the unrelenting flow of hawkish ECB comments. A blockbuster day for the US lies ahead and will reveal whether the economy contracted in Q1 (we don't think so), and if the Fed is inclined to pause after cutting fed funds to 2.0% (our forecast). We suspect the FOMC statement could be open ended to allow for some policy easing to resume if the economic prospects do not brighten over the next few weeks or so. (house prices point to more immediate gloom). This could put the dollar under pressure ahead of NFP on Friday. A positive reaction in stocks to the Fed could see $/Y run back up towards 104.50.

Major data and events today

• UK Nationwide house prices (07:00)
  Mar -0.7% Y-O-Y +1.1%
  Apr (actual) -1.1% Y-O-Y -1.0%
• German unemployment (sa, rate) (08.55)
  Mar -55K Rate 7.8%
  Apr (f'cast) -30K Rate 7.7%
  Median -30K Rate -50K:-10K
• EU-15 CPI (prel) (10:00)
  Mar Y-O-Y +3.6%
  Apr (f'cast) Y-O-Y +3.6%
  Median +3.4% Range +3.2%:+3.7%
• EU-15 consumer confidence (10:00)
  Mar -12
  Median -13 Range -14:-11
• EU-15 industrial confidence (10:00)
  Mar zero
  Median -1 Range -3:zero
• UK Consumer confidence (GfK) (10:30)
  Feb -19
  Mar -18
  Median -20 Range -22:-17
• US ADP employment change (13:15)
  Mar +8K
  Apr (f'cast) -35K
  Median -63K Range -115K:-20k
• US GDP (sa, annualised) (prel) (13:30)
  Q1 (prel) +0.6%
  Q1 (f'cast) +0.5%
  Median +0.3% Range -1.0%:+1.4%
• US GDP deflator (sa, annual) (13:30)
  Q1 (prel) +2.4%
  Q1 (f'cast) +3.2%
  Median +3.0% Range +2.4%:+4.2%
• Canada GDP, monthly (13:30)
  Jan +0.6%
  Feb (f'cast) +0.2%
  Median +0.2% Range +0.6%:+1.1%
• Chicago PMI (14:45)
  Mar 48.2
  Apr (f'cast) 48.0
  Median 48.0 Range 46.0:50.0
• ECB President Trichet speaks in Germany (12:55)
• ECB member Garganas speaks in London (18:30)
• US FOMC interest rate decision (interest rates expected to be cut by 25bps to 2.00%) (19:15)

Chart of the day: Did the US economy contract in Q1, and how did the major components perform?

Lloyds TSB Bank
http://www.lloydstsbfinancialmarkets.com

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