Weekly Economic Data Preview

BoE & Fed Minutes Due as Expectations of Further Rate Cuts Rise

The minutes of the BoE and the US Fed's last interest rate setting meetings are published on Wednesday. Both are likely to show strong support for the last round of interest rate cuts, given the worsening global economic backdrop and the growing possibility that inflation may drop sharply, undershooting targets. Last week's BoE November quarterly inflation report showed a significant downward revision to the UK inflation outlook, predicated on lower commodity prices and weak domestic demand. The BoE now seems to take the view that the economy will join the eurozone in technical recession this year, as it emphasised the likelihood of another contraction in Q4 and a 1.5% decline next year before recovery in 2010. Although the last 1.5 percentage point interest rate cut and the heightened possibility of another one percentage point cut to 2% in by the end of the year should deliver a strong economic stimulus, continuing problems in inter-bank and credit markets and job insecurity and unemployment rising mean a more prolonged recession may now be likely, even with coordinated fiscal initiatives. In the Eurozone, the initial Q3 GDP result showed a 0.2% contraction. EU-15 data this week may show a very weak set of manufacturing & service sector surveys for November, increasing the possibility of another output contraction in Q4. Recession in the major economies will trigger a sharp drop in consumer inflation, which gives justification for further interest rate cuts. The BoJ is expected to keep interest rates on hold at 0.3% at its meeting on Friday, having made its first cut in seven years last month.

The BoE minutes from the 5/6 November MPC meeting due on Wednesday are likely to show unanimous support for the large cut in rates and a very bearish discussion on growth and inflation. In some ways, the minutes have been superseded by last week' quarterly inflation report, but the details of discussions will still attract considerable interest. UK data this week include CPI inflation, which could fall to 4.7% in October from 5.2% in September. This will mark the start of a sharp downward trend as lower food & energy prices and weak high street sales dampen the index. The UK also publishes retail sales data for October - anecdotal reports suggest that monthly sales may fall by 1%, bringing the annual rate to 1.3%, close to the low of 0.6% annual growth in September 2005. Public finance data may show the PSNB YTD cumulative balance rising further from £37.6bn in September, the highest 6-month shortfall since 1946-7 and up from £21.5bn a year earlier. Clearly not a good place from which to embark on emergency fiscal spending. However, extraordinary measures will be enacted on 24th November (publication of the Pre-Budget Report) to boost the economy.

There may be no surprises in the minutes of the Fed's 28/29 October FOMC meeting - the discussion is likely to have focused on downside risks to growth, keeping open the possibility of another cut in official interest rates by year-end. US data releases are likely to show that producer and consumer prices decreased in October, following reductions in key commodity prices. Capacity utilisation is also important as it could fall close to the 75% level which may indicate that the recent acceleration in jobs losses could be stepped up. Clearly, should job insecurity continue to contribute to weak consumer spending, the government's task of getting the US economy moving again will become an even more difficult one. Both the Empire Manufacturing and the Philadelphia Fed surveys for November are expected to show a worsening business outlook. Neither is the housing market situation improving as housing starts and building permits are expected to have decreased in October.

This is a quiet week for eurozone data as initial Q3 GDP and final October CPI inflation were published last week. The PMI manufacturing and services surveys for November are due, however, and could come in below the October lows of 41.1 and 45.8, respectively. Given the disparity in Q3 GDP results between member countries, the PMI regional breakdown will provide some indication of whether German PMIs also under-perform the EU-15 average.

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