Daily Financial Market Outlook

Overview & economic commentary

The focus will be on inflation this week, with the latest monthly data due in the UK, US and euro zone. The continuing rise in crude oil prices and higher food prices suggests monthly rises could be strong, keeping annual comparisons at uncomfortably high levels. However, the impact of rising costs will be felt most acutely at the producer level, with UK data this morning set to show manufacturing companies saw input price inflation at around 22%, dwarfing decade high growth in their output prices of almost 7%, to keep pressure intense on margins. The Bank of England publishes the Q2 Inflation Report (QIR), on Wednesday, detailing its latest forecasts for growth and inflation. We expect it to show that both growth and inflation prospects have deteriorated since the Q1 QIR. Their judgement on the path of inflation based on market implied and unchanged interest rates could influence interest rate expectations this week. There are other key data published in the UK this week, most notably labour market statistics and house prices. It will be an important week for data from the US, with inflation, retail sales and housing market figures due. However, the limelight could be taken by a host of Fed speakers this week, including chairman Bernanke, with their latest views on the economy and interest rates keenly awaited. The highlight in the euro zone this week will be the first estimate of Q1 2008 gdp. We forecast growth matched the previous 0.4%, with a risk that it may be stronger.

Currency commentary

The dollar started the week where it left off on Friday, courtesy of an article in the WSJ this weekend stating that the G7 are trying to put a floor under the dollar. £/$ has dropped below 1.9500 and now awaits the UK PPI data at 9.30 for fresh trading impetus. UK inflation data will dominate the early part of the week, with CPI following tomorrow and the BoE publishing its Inflation Report on Wednesday. High yielders including the A$ and NZ$ were among the currencies hit overnight in Asia after weak housing data in New Zealand and rising unemployment spurred talk of a cut in NZ interest rates in the months ahead. The resulting narrowing in yield differentials will erode the carry trade and will force participants to look at alternatives to generate excess returns. In emerging markets, the SA rand has trimmed some of last Friday's losses vs euro and dollar. £/rand is trading back below 15.0 and could target a test of 14.6181 if UK PPI data comes in strong.

Major data and events today

Today

• UK producer prices, trade balance
• US Treasury statement
• Japan money supply
• Canada new housing index
• BoJ speaker: Governor Shirakawa (04:30)
• US Fed speakers: Pianalto (09:15), Evans (14:15)
• ECB speaker: President Trichet (15:30)

Tuesday

• UK BRC retail sales monitor, Inflation data, DCLG house prices
• US import prices, retail sales, business inventories
• French current account
• US Fed speakers: Lockhart (00:15), Pianalto (11:10), Bernanke (13:20), Warsh (14:15), Plosser (16:00), Yellen (18:00), Hoenig (18:00), Fisher (18:30)
• ECB speaker: Noyer (11:10)

Wednesday

• UK labour market statistics
• US consumer prices
• French consumer prices
• EU-15 industrial production
• Japan domestic CGPI, trade balance, current account
• US Fed speakers: Rosengren (13:30), Kroszner (14:15), Lockhart (17:00), Yellen (21:40)
• BoE Quarterly Inflation Report (10:30)
• Ecofin meeting in Brussels (08:00)

Thursday

• US initial claims, Empire manufacturing, TIC flows, industrial production, capacity use, Philadelphia Fed survey
• EU-15, German and French GDP
• EU-15 and German CPI
• Japan machinery orders
• Canada manufacturing shipments
• UK DMO auction of £2.5bn of 5% gilts due 2018 (10:30)
• US Fed speakers: Evans (14:15), Bernanke (14:30), Dudley (15:50)

Friday

• US housing starts, building permits, Uni of Michigan conf.
• EU-15 trade balance
• Japan GDP, GDP deflator, industrial output
• ECB speaker: Trichet (10:00)
• US Fed speakers: Braunstein (16:20), Constancio (tbc)

Chart of the day: Rising cost pressures are forcing UK manufacturers to raise prices at the fastest pace in almost two decades, keeping upward pressure on consumer prices

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