Daily Financial Market Outlook

Overview & economic commentary

Overnight UK data from the British Retail Consortium showed like-for-like retail sales rebounded in May and, separately, the RICS house price index rose to -92.9% in May, still confirming weakness in housing activity. Ahead today, markets will focus on UK industrial production for April. We have pencilled in a small monthly rise in industrial production, which would maintain a slightly positive annual growth rate. This is consistent with weaker domestic demand and with export orders yet to respond fully to the weaker pound. Official UK house prices from the DCLG, which are based on completed deals, are also due and the annual rate is expected to fall to 4% in April from 5.2% in March, not as weak as the Nationwide and Halifax figures which should be regarded as more of a snapshot of the housing market. Bank of England governor Mervyn King speaks at the BBA at midday. Other central bank speakers in the calendar include ECB member Weber and Fed members Fisher and Mishkin. US trade data are due this afternoon and are expected to show the deficit widening to around $60bn in April as a result of higher oil prices. However, the non-oil deficit could shrink further, as exports are supported by the weaker dollar. The Bank of Canada is expected to cut interest rates by 0.25% to 2.75%, as growth prospects deteriorate.

Currency commentary

The pound outperformed major currencies yesterday, after official UK factory gate prices surged to 8.9% y/y, the fastest pace for 22 years. However, although overnight figures from the BRC and RICS were stronger than expected, £/$ and £/€ have eased back after peaking at 1.98 and 1.26, respectively. The pound, however, could benefit if industrial production comes in stronger than expected this morning. There are no major euro area data today, but ECB speakers include Liikanen and rate hawk Weber. €/$ backed down sharply after touching 1.5842 yesterday after hawkish comments from Fed chairman Bernanke. US trade data this afternoon will impact the dollar, but the greenback in trade-weighted terms is likely to trade within the past month's range. $/ C$ rose above parity last week to the highest since April 14 (1.0274), as markets speculate on how much further the BoC will cut interest rates. A 0.25% cut is priced in today, with further easing possible.

Major data and events today

• UK BRC retail sales monitor (May) (00:01)
  Apr -1.5%
  Actual +1.9%
• UK RICS house price survey (May) (00:01)
  Apr -94.7
  Actual) -92.9
• Japan machinery orders (00:50)
  Mar -6.2%
  Apr (f'cast) +0.5%
• UK industrial production (sa)
  Mar -0.5% Y-O-Y +0.2%
  Apr (f'cast) +0.1% Y-O-Y +0.2%
  Median zero Range -0.6%:+0.4%
• UK manufacturing output (sa)
  Mar -0.5% Y-O-Y +0.6%
  Apr (f'cast) +0.2% Y-O-Y +0.3%
  Median zero Range -0.3%+0.4%
• UK official house prices (DCLG)
  Mar Y-O-Y +5.2%
  Apr (f'cast) Y-O-Y +4.0%
  Median +3.4% Range +0.5%:+4.8%
• French industrial production (07:45)
  Mar -0.8% Y-O-Y +1.0%
  Apr (f'cast) +0.3% Y-O-Y +1.8%
  Median +0.3% Range -0.5%:+0.6%
• French manufacturing output (07:45)
  Mar -1.5% Y-O-Y +0.4%
  Apr (f'cast) +0.4% Y-O-Y +1.3%
  Median +0.4% Range -0.1%:+0.8%
• US trade balance (sa) (13:30)
  Mar -$58.2bn
  Apr (f'cast) -$60.0bn
  Median -$59.6bn Range-$62.0bn:-$56.3bn
• Canada trade balance (sa) (13:30)
  Mar +C$5.5bn
  Apr (f'cast) +C$5.0bn
  Median +C$5.0bn Range +C$4.0bn:+C$6.2bn
• Canada interest rate decision (14:00)
  Current: 3.00%
  Forecast: 2.75%
• ECB member Liikanen speaks in Finland (09:00)
• UK DMO to auction £1.1bn of 1.875% index linked gilts due 2022 (10:30)
• Bank of England Governor King to speak at BBA (12:00)
• US Fed member Fisher speaks in New York (13:00)
• US Fed members Rosengren (13:00) and Mishkin (13:30) speak in Boston
• Canada interest rate decision (14:00), rates likely to be cut by 25bps to 2.75%, with a risk of a 50bps cut)
• ECB member Orphanides speaks at Boston Fed (17:00)

Chart of the day: UK manufacturing output has not yet responded strongly to the weaker pound

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