European Market Update

Bernanke Flexes his Inflation Fighting Muscles in Asian Trading and the Dollar Likes It

ECONOMIC DATA

UK May RICS House Price Balance: -92.9% v -97.0%e
UK May BRC SSS: 1.9% v -1.5% prior
UK May All Sales 4.6% v 1.0% prior

GE May Wholesale Price Index: M/M 1.4% v 0.7%e || Y/Y 8.1% v 7.1%e

FR Apr Industrial Production: M/M 1.4% v 0.3%e || Prior revised from -0.8% to -1.0% |||| Y/Y 3.2% v 1.9%e || Prior revised from 1.0% to 0.7%
FR Apr Manufacturing Production: M/M 1.7% v 0.4%e || Prior revised from -1.5% to -1.6% |||| Y/Y 2.8% v 1.3%e || Prior revised from 0.4% to 0.1%

SW May CPI Level: 300.99 v 300.81
SW May CPI: M/M 0.4% v 0.3%e || Y/Y 4.0% v 3.8%
SW May Core CPI: M/M 0.4% v 0.3%e || Y/Y 2.9% v 2.8%e
SW Apr Industrial Production: M/M -0.3% v -0.1% prior || Y/Y 0.2% v 0.8% prior
SW Apr Industrial Orders: M/M -6.8% v 6.9% prior || Y/Y 10.1% v -9.5% prior

IT Apr Industrial Production: M/M 0.7% v -0.2%e || Prior revised from -0.2% to -0.1% |||| Y/Y 2.0% v -1.5%e || Prior revised from -2.5% to -2.6%
IT Apr Industrial Production y/y nsa: 8.0% v -1.9%e || Prior revised from -7.4% to -7.6%

NO May CPI: M/M 0.1% v 0.2%e || Y/Y 3.1% v 3.2%e
NO May Core CPI: M/M 0.1% v 0.2%e || Y/Y 2.3% v 2.4%e

UK Apr Industrial Production: M/M 0.2% v 0.0%e || Y/Y 0.2% v 0.1%e || Prior Y/Y revised from 0.2% to 0.1%
UK Apr Manufacturing Production: M/M 0.1% v 0.0%e || Y/Y 0.1% v 0.0%e || Prior Y/Y revised from 0.6% to 0.5%

IT Q1 Final GDP: Q/Q 0.5% v 0.4%e || Y/Y 0.3% v 0.2%e
IT Q1 Private Consumption: 0.1% v 0.2%e
IT Q1 Government Spending: 0.4% v 0.1%e
IT Q1 Total Investments: -0.2% v 0.0%e
IT Q1 Exports: 1.4% v 0.5%e
IT Q1 Imports: -0.5% v 0.4%e

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

In the newspapers overnight, according to the Financial Times Gazprom [GAZP.RU] is seeking US acquisitions. Gazprom is looking to increase the amount of LNG it sells in North America. The Telegraph reported overnight that Springer Science and Business may launch a bid for Informa [INF.UK] The Wall Street Journal looked at write-down concerns related to UBS in a piece written overnight. The article notes that UBS may have to take more write-downs on its mortgage securities holdings because the prices of these assets have fallen sharply in recent weeks. According to one independent analyst, Lehman's results may imply more write-downs at UBS. According to the Independent EDF [EDF.FR] has signaled that it will not raise its offer for British Energy [BGY.UK]

In energy news overnight Merrill Lynch raised its Brent oil price forecasts, boosting the 2008 forecast to $114 from $110, the 2009 forecast to $106 from $89, and the 2010 forecast to $100 from $85. In its monthly report the IEA cut its 2008 world oil demand forecast by 80K BPD from last month to 86.7M bpd, and cut its 2008 world oil demand growth forecast by 230K bpd from last month. The IEA said that they are ready to release oil stocks if supply is disrupted. The IEA said that oil supply growth has been poor in 2008, adding that costly oil is not only the result of speculation, as tight supply plays a role. The IEA added that Chinese and Middle Eastern oil demand is seen remaining strong, pointing out that Chinese demand has been revised up 40K bpd from last month. A representative from the Nigerian oil union said overnight that Chevron (CVX) will meet with union officials today, adding that a strike is possible unless talks are productive.

On the speakers front, the Fed's Bernanke said overnight that the latest energy price rises have added to upside inflation risks and inflation expectations. Bernanke added that the pass-through of raw materials costs to most prices and labor costs has been limited, noting that the Fed will strongly resist erosion in longer-term inflation expectations. Bernanke said that there is a risk that the economy has entered a substantial downturn has diminished over past month or so. Furthermore Bernanke said that the rise in the jobless rate and other data have affected economic employment outlook only modestly. Bernanke added that an un-anchoring of inflation expectations would be destabilizing for growth and inflation. The ECB's Trichet reiterated overnight that price stability is vital for jobs and growth, adding that the ECB has no room to be self satisfied. The ECB's Liebscher said overnight that he hopes that OPEC members are aware of their responsibilities, adding that Chinese and Indian oil demand boosts prices. Furthermore Liebscher said that oil prices have a double negative effect on growth and inflation. The ECB's Liikanen said overnight that trade restrictions on food have lifted food prices recently. Liikanen also warned against second round effects. Liikanen reiterated that a rate hike is possible in July, but is not certain. The German Deputy Finance Minister Mirow said overnight that central bank concerns about inflation must be takes seriously adding that he sees no change on the G8's FX stance. Mirow said that he cannot rule out discussion on FX at the G8 meeting in Osaka, but reiterated that he does not expect change on G8 FX stance since last meeting. Mirow said that he does not see signs of second-round effects in German wage deal

In new supply overnight Dutch DSTA sold €2.0B in 4.00% in July 2018 DSLs with an average yield of 4.73%. In the UK the DMO sold £1.1B in 1.875% I/L November 2022 gilts with a real yield of 1.31% and a bid-to-cover of 1.58x. Elsewhere the Greek PDMA sold €1.92B in 4.00% August 2013 bonds with an average yield of 5.15% and a bid-to-cover of 3.19x. According to the Financial Times more corporates are seeking to improve their liquidity by drawing on loan commitments. Citing a report published by Citigroup, the world's banks have agreed to lend about $6T to corporations that have not yet drawn down the loans (+100% over 2003 levels). If companies continue to draw on their loan commitments it could impact the balance sheets and reserves of banks. As expected the BBA announced that they will expand membership in the governing body and the LIBOR panels, noting that the LIBOR will be strengthened by extra scrutiny of banks.

In the currencies overnight the USD was firmer across the board as dealers took notice of the hawkish comments from the Fed's Bernanke during the Asian hours. The EUR/USD re-approached the 1.55-level and hit 3 month highs against the JPY above the 106.95-level. Weaker commodity prices are also sending USD/CAD above the 1.03-level for the first time since April 1st. NYMEX crude tested below the $134 level after Saudi Arabia proposed on Monday a meeting of consumers and producers. Dealers also noting that the pending G8 meeting is also helping the USD.

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