Daily Financial Market Outlook

Overview & economic commentary

The first estimate of UK Q2 GDP growth published today will show that the economy is slowing sharply, but still well off 1990/91 recession levels, see chart. We are expecting 0.2% growth on the quarter down from 0.3% in Q1 and well below the peak in quarterly growth of 0.9% a year ago. The Q2 figure translates to 1.6% growth on an annual basis (2.3% in Q1). We expect to see service sector growth holding up fairly well, but offset by weaker growth of manufacturing and construction as survey data during the quarter has been disappointing. With the market consensus also for 0.2% growth on the quarter, any variation, higher or lower is likely to affect perceptions on UK interest rates. US data releases today include monthly durable goods orders, which are notoriously volatile; we expect growth of 0.2% in June, from no change in May. Also, US new home sales may not offer markets clear direction about the status of the housing market, remaining at 0.51m in June the same level as in May. EU-15 M3 money supply growth in June, also due, is likely to have remained above 10%. Within the M3 lending data, we expect borrowing by non-financial corporates to remain robust (14.2% in May) despite the credit crunch, whereas growth in household borrowing is on a decelerating trend. Overnight, economic data from Asia showed that Japanese core consumer prices rose by 1.9% in the year to June, compared with 1.5% in May, the fastest pace in a decade. But this will not lead to higher official interest rates, due to sluggish GDP growth, recently revised down by the BoJ for this fiscal year to 1.2% from 1.5%.

Currency commentary

A heavy sell-off in US equities is followed suit by a lower open in European stocks and the FTSE-100 this morning. This triggered some sharp selling in carry strategies, with the yen and chf benefiting from the outflow of stocks. UK Q2 gdp could be a big market mover for sterling crosses and gilts at 9.30. Considering the amount of negative coverage in recent weeks, markets are expecting a very weak number of around 0.2% q/q. The broad forecast range 0.0-0.8% implies there is quite some uncertainty and this leaves the door open to a sharp knee jerk reaction in the event of a surprise and markets reassess the outlook for UK rates. £/$ edged back above 1.9850 o/n recovering from weak retail sales, and despite the lower open for banking stocks in the FTSE this morning. €/£ is stuck bang in the middle of the trading range, hovering just above 0.7900. Curve steepeners will be put on in fixed income if gdp disappoints and US stocks extend losses. How equities perform may overshadow the releases of US new home sales and durable goods orders.

Major data and events today

• UK GDP (first estimate) (09:30)
  Q1 +0.3% Y-O-Y +2.3%
  Q2 (f'cast) +0.2% Y-O-Y +1.6%
  Median +0.2% Range zero:+0.8%
• US Durable goods orders (13:30)
  May zero
  Jun (f'cast) +0.2%
  Median -0.3% Range -2.4%:+1.1%
• US New home sales (15:00)
  May 0.51mn
  Jun (f'cast) 0.51mn
  Median 0.50mn Range 0.48mn:0.54mn
• Uni. of Michigan confidence (final) (15:00)
  Jul (prel) 56.6
  Jul (f'cast) 56.6
  Median 56.3 Range 50.4:57.9
• EU-15 money supply, M3 (sa) (09:00)
  May Y-O-Y +10.5%
  Jun (f'cast) Y-O-Y +10.3%
  Median +10.3% Range +10.1%:+10.4%
• Tokyo core consumer prices (00:30)
  Jun Y-O-Y +1.3%
  Jul (actual) Y-O-Y +1.6%
• Japan National core consumer prices (00:30)
  May Y-O-Y +1.5%
  Jun (actual) Y-O-Y +1.9%

Chart of the day: UK Q2 GDP growth is slowing - maybe to 1.6% on an annual basis - but still no sign of a 1990/91- style technical recession

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

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