Daily Financial Market Outlook

Overview & economic commentary

Overnight, the UK's National Institute for Economic and Social Research reported a sharp 1.0% contraction in GDP growth in the quarter to November, incorporating yesterday's weaker-than-expected industrial production figures which showed a monthly fall of 1.7%. Figures for October were revised down to -0.8%. More forward-looking indicators, such as the Purchasing Managers' surveys, suggest that the economy contracted again in Q4 and likely at a faster pace than the 0.5% quarterly fall in Q3. In the eurozone, the only notable data releases are French and Italian industrial production for October, which are forecast to have fallen on a monthly basis. These figures come on the back of very weak German IP data earlier this week, which plunged 2.1%, signalling a very weak start to the fourth quarter. ECB speakers include Bank of Spain Governor Ordonez and executive board member Stark. US data include wholesale inventories and the monthly budget statement, the latter expected to show a rise in the deficit of around $200bn in November. The threat of a sharper economic downturn and greater risks of deflation have pushed treasury yields lower in recent weeks, outweighing the potential impact of greater issuance to finance the ballooning deficit, though, yields have started to edge back up this week, as equities stage some recovery and the US is set to issue $44bn of notes this week, including $28bn of 3-year notes today. Germany also offers €7bn of 2yr schatz today

Currency commentary

Only a vote in Congress this afternoon stands between the $ 15bn rescue package for the US car makers. Stocks of the companies fell yesterday on profit taking following the bounce on Monday. S&P futures are up 10.7 this morning. The fact that yields on US 3-month T-bills briefly turned negative yesterday demonstrates the degree of fear that still rules most asset markets. This is backed up by the range trading in $/Y. The cross held within a 0.9150-0.93 range o/n. Sterling is not doing too badly this morning considering the report by the NIESR that the UK economy contracted by 1.0% in the three months to November. A downward revision for the October quarter to -0.8% shows just how quickly conditions turned sour in Q4 which led the BoE to slash rates by 250bps at its last two meetings. A big move took place in EM o/n, with $/won sliding sub 1400 to a low of 1385.55, supported by a 3.5% jump in the Kospi equity index. A 12% surge in Rio Tinto shares in Australia may underpin the FTSE-100 today.

Major data and events today

• UK NIESR GDP estimate (00:01)
  Oct -0.8R%
  Nov (actual) -1.0%
• French industrial production (07:45)
  Sep -0.5% Y-O-Y -1.9%
  Oct (f'cast) -0.3% Y-O-Y -1.7%
  Median -0.5% Range -1.4%:-0.2%
• US Wholesale inventories (15:00)
  Sep -0.1%
  Oct (f'cast) -0.2%
  Median -0.2% Range -1.5%:+0.7%
• US Treasury statement (sa) (19:00)
  Oct -$237.2bn
  Nov (f'cast) -$200.0bn
  Median -$189.0bn Range-$235.0bn:-$118bn
• ECB member Ordonez speaks in Madrid (11:00)
• ECB member Stark speaks (18:15)
• German auction of €7bn 2yr Schatz due Dec. 2010
• US to sell $28bn of 3yr notes

Chart of the day 1: Forward-looking indicators such as the PMI survey point to sharper contraction in UK growth in the current quarter

Chart of the day 2: 10-year bond yields have fallen in recent week, due to significantly weaker growth and inflation prospects, but have they found a floor?

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