Daily Financial Market Outlook

Overview & economic commentary

It is a relatively quiet day for global data and events, but a busy one in the UK. The highlight is the publication of the minutes of the 6/7 August BoE MPC meeting. Recent comments from Tim Besley, who voted for a 0.25% hike last month, have raised doubts about his latest decision earlier this month. However, the surprisingly precarious economic growth picture painted by the Q3 BoE Inflation Report last week, suggests David Blanchflower may not have been alone this month in voting for an immediate reduction. With financial markets now positioned for an interest rate cut later this year, any change to the three-way split vote (7-1-1) in July will dictate financial market trends today. We still expect a three-way split but for another MPC member to join the call for lower rates. Although data published at the same time as the minutes is likely to be overshadowed, it should still be instructive of current economic conditions. We forecast M4 money supply growth accelerated to 11.7% in July, well above the pace generally considered consistent with the official 2% inflation target or weak economic activity, although there are technical reasons why the headline rate has remained robust. The challenge facing the Chancellor will be underlined by figures showing cumulative net public borrowing at around £20bn to July compared to just £8.3bn at the same point last year. Later this morning, we predict a further modest fall in the CBI industrial trends index. Canadian retail sales are the final important release today. We look for a rise of 0.5% in June, underpinned by sales at gasoline stations.

Currency commentary

Whether BoE MPC member Besley stuck by his guns and voted for higher interest rates is the big question for sterling markets today as participants prepare for the minutes ofthe August MPC meeting. The timing of two articles by Mr Besley ahead of the minutes this morning looks a bit suspicious and makes us wonder whether he changed his view since the BoE Inflation Report last week. A 7-1-1 vote is expected by the market but a swing to 7-2 or even 8-1 could probably trigger new sterling selling and curve steepening (2/10s). Major fx crosses were kept in check overnight by fairly steady equity markets in Asia which decoupled from the US. The Shanghai composite stands out with a gain of 7% on speculation of government measures to support the economy liek the easing of restrictions. £/$ has stabilised near the lows and currently trades just north of 1.8600, with 1mth vol steady just below 10.0. Canadian retail sales and weekly US oil inventories are also due.

Major data and events today

• UK public finances - PSNCR (09:30)
  Jun +£15.5bn Cumulative +£25.5bn
  Jul (f'cast) -£6.0bn Cumulative +£19.5bn
  Median -£10.0bn Range -£12.5bn:-£5.0bn
• UK public finances - PSNB (09:30)
  Jun +£9.2bn Cumulative +£24.4bn
  Jul (f'cast) -£2.0bn Cumulative +£22.4bn
  Median -£4.3bn Range -£9.0bn:zero
• UK money supply, M4 (prel, sa) (09:30)
  Jun +1.8% Y-O-Y +11.4%
  Jul (f'cast) +0.8% Y-O-Y +11.7%
  Median +0.5% Range zero:+0.9%
• UK M4 sterling lending (prel, sa) (09:30)
  Jun +£46.1bn
  Jul (f'cast) +£18.0bn
  Median +£14.0bn Range zero:+£25.0bn
• UK CBI Industrial trends survey (11:00)
  Jul -8
  Aug (f'cast) -10
  Median -12 Range -24:-5
• Canada retail sales (13:30)
  May +0.4%
  Jun (f'cast) +0.5%
  Median +0.4% Range +0.2%:+0.7%
• Bank of England publishes its minutes of the 6/7 August MPC meeting (09:30)
• US weekly oil inventories are published (15:35)

Chart of the day: UK cumulative net public borrowing is well ahead of last year and likely to exceed the Budget 08 FY target

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