The core UK inflation rate (excluding food and energy) remains stubbornly high and actually increased to an annualised rate of 3.1% in June from the previous level of 2.9% in May. The headline rate which does include food and energy moved down slightly to 3.2% from 3.4%. These figures remain well above the Bank of England’s target rate of 2%, but expectations are firmly in the camp of gradually declining prices over the coming months driven on by excess capacity in the economy. With a VAT hike due at the start of 2011, the Bank of England will no doubt want to see the CPI much closer to target before the inflationary impact of the VAT increase. Expectations for the timing of the first interest rate increase in the UK are still well into 2011, but this may change if the trend does not start to show a more meaningful decline.


In Europe the Centre for European Economic Research (ZEW) said that its German economic sentiment index fell to 21.2 in July from 28.7 in June. The European equivalent also fell during July to 10.8 after a reading of 18.8 in June. Both were below expectations and perhaps show the lagged impact of the European sovereign debt crisis. It is still too early to assess the impact of the austerity measures in Europe and again the lack of news flow more recently is helping the market to recover recent losses but that doesn’t mean the problem has gone away.

At the moment optimism has grasped the market and the US Q2 earnings season has every chance of keeping the momentum going in the short term. Most commentators appear to have dismissed the idea of a double dip recession as a low probability event. The next few weeks will be crucial given the fact that the economic data has in the main rolled over and to what extent the slowdown becomes something more is still an unknown and we do not believe that the idea of a double dip can be dismissed at this stage.

World markets managed a strong rally last week despite having digested a plethora of US economic data the week before which points to a slowdown in US economic activity over the second half of this year. The absence of any bad news last week undoubtedly helped the rally along, but as we move into the Q2 earnings reporting season this week attention will focus on company results and in particular outlook statements. The first report in the US comes from Alcoa after the market close today, but the real action won’t start until later in the week when the banks start to report with many of the technology companies and industrials scheduled for next week. A healthy reporting season may well help to instil confidence that a double dip is not on the horizon and possibly market expectations will start to adapt to slower growth paving the way for stability in the equity market. We remain very cautious about the market at present and although a good reporting season in the US may well help markets to recover some of the recent losses, there is still considerable uncertainty over whether the market is priced for low US growth over the second half.


In the UK today the ONS has published its final estimate of Q1 GDP which shows growth at 0.3%. More recent data suggest that the run rate during Q2 may have improved to +0.5% or +0.6%. However, that is still very small especially when you consider that according to the ONS GDP fell by 6.4% from peak to trough leaving a significant amount of lost output to make up.

This week is all about inflation with data due in the USA and Europe. In the US we get the Producer Price Index for June due for publication on Thursday with the Consumer Price Index for June due out on Friday. Both measures are expected to show modest declines of around 0.1% month on month. With so much spare capacity in the US economy and relatively weak demand it is difficult to see inflation becoming much of a threat for many months to come. Other notable US economic reports this week are retail sales for June due out on Wednesday which is expected to fall by around 0.2% following on from a 1.2% decline in May. The health of the US consumer is still very much in question and it is difficult to see consumer spending making much of a contribution to growth during the second half of this year. Also on Wednesday we get the minutes of the latest FOMC meeting which will make interesting reading. The market will be increasingly focusing on where policy makers see interest rates heading and the minutes will throw some light on any rifts occurring between the voters on how monetary policy should move over the coming months.

Thursday in the US brings the usual weekly initial jobless claims. After the decline last week to 454,000, the market is looking for a further fall to 445,000 this week. Also on Thursday we get another snapshot of the US manufacturing sector with the Empire State Manufacturing report for July. This index, which measures activity within the New York State manufacturing sector has remained comfortably within growth territory during recent months having registered 19.57 last month, with a reading of around 18 expected for July. A notable decline would almost certainly set the market back into worry mode over growth expectations for the second half. We also get the equivalent figure for Philadelphia on Thursday. The Philadelphia index surprised the market last month with a decline to just 8.0 and the market is expecting a bounce back for July to 12.0.

The week in the US ends with a dose of consumer confidence with publication of the first estimate for July of the University of Michigan Consumer Sentiment index. The last reading for June was 76.0 but with the recent decline in equity markets and ongoing weakness in the labour market a decline looks very likely. The consensus is looking for 75.0 but there is downside risk to this in our view.

In the UK tomorrow the CPI for June will be published. The month on month rate is expected to show no change bringing the year on year rate down to 3.2% from the 3.4% registered last time. The core annual rate is expected to dip to 2.8% from 2.9%. In Germany tomorrow the ZEW economic sentiment survey for July will be published. On Wednesday we get UK unemployment data and the European CPI for June as well as European industrial production for May. Thursday brings the ECB monthly economic report. Friday is relatively quiet on the economic front in Europe.

With little in the way of economic news world markets have continued to rally and this has helped the FTSE100 make its way back above the 5,000 level. What happens next is very difficult to say and the weekly initial jobless claims in the US this afternoon are likely to have a major bearing on where markets move by the close of business on Friday. After another elevated reading last week of 472,000 the market will be looking for a lower number with the consensus currently standing around the 465,000 level. A higher reading will not be taken well and after the strong market moves of the last 2 days disappointment will surely result in a sell off on the Dow this afternoon.


The US Non Manufacturing ISM data for June published on Tuesday provided further evidence that economic activity in the US has already peaked and the question now is at what level is GDP growth going to fall to. Expectations of 3% GDP growth for the remainder of the year in the US could well be optimistic especially given that the spurt in growth during Q4 2009 and Q1 2010 was primarily inventory driven which is now coming to an end leaving the US consumer to now pick up the baton.

Keeping with the US consumer the Red Book report on June retail sales published yesterday provided the market with some confidence that perhaps the US consumer isn’t dead. The report showed that retail sales increase by 3% compared to the same period last year. What the market didn’t focus on was the fact that month on month retail sales were down 0.5%. The debate over whether the US consumer will be able to maintain the momentum is likely to continue for some time and for the time being at least sentiment appears to be a little more positive than negative.

In Europe today we have both central banks meeting to discuss interest rate policy with the UK set to remain on hold at 0.5% whilst no change is expected in the European rate at 1%. Also today we have already had German industrial production for May which showed a healthy 2.6% month on month increase compared to the April number of 1.2%. In the UK we have already had manufacturing and industrial production for May. The former was up 0.3% (4.3% year on year) whilst the latter showed an improvement of 0.7% (2.6% year on year). This certainly suggests that UK GDP for Q2 is on track to show an improvement on Q1.

The economic data is driving the market far more than any other factor at present and today’s US data in the form of the Non Manufacturing ISM data is certainly in the top 3 of monthly announcements. The reading for May was 55.4 and the market will be looking for a figure close to this. A drop back to 53 or lower will almost certainly be viewed as further evidence of a slowdown in the US.


From a technical perspective the market is probably a little oversold but as we stated yesterday we would be cautious about any significant one day rallies as we have today with the FTSE100 up by the best part of 3%. If the US ISM this afternoon is broadly in line with expectations we may see the market stabilise a little but it is too soon to expect much more than this.

Yesterday in the UK we had publication of the UK CIPS/Markit report on services for June. The index fell from 55.4 to 54.4 which is the lowest level since August 2009. The business expectations element of this index suffered a big drop which is no doubt in part due to the impact of the budget. Overall the decline in this index suggests that activity is slowing and this is raising concerns over growth for the second half of the year. There is no major data scheduled for publication in Europe today.

A quiet day of trading in prospect with the US closed for the Independence Day holiday. After poor Non Farm Payroll data on Friday in the US there is very little in the way of catalysts to get any form of sustainable rally under way and any strong one day movements must be treated with suspicion at present. The market needs a reason to believe that growth in the US is sustainable at or around current levels in order to make progress. Sadly the data at present is suggesting the US is undergoing a growth relapse and possibly even a double dip although the latter is still a low probability event at the moment.


Looking through the fine details of the Non Farm Payroll data on Friday did not really provide any crumbs of comfort. The market did initially rally on the drop in the unemployment rate to 9.5% from 9.7% but the truth of the matter is that this was purely due to a drop in the labour force as people gave up looking for a job and took themselves off the register. The fact that average hourly earnings declined during May by 0.1% is a little concerning especially as aggregate hours worked dropped by 0.2% as well. If we start to see sustained pressure on wages over the coming months this could well be the catalyst for deflation in the US.

With the manufacturing sector in the US seemingly having peaked and activity across the board starting to slow, all eyes will this week be focused on the ISM Non Manufacturing index due for publication tomorrow. Over the last few months this index has remained comfortably above the key level of 50 which indicates growth. Expectations for the June reading stand at around 55 which compares to the May level of 55.4.

The US unemployment data will continue to be a critical indicator of what is happening in the US economy which makes the weekly initial jobless claims an invaluable indicator of what is going on. After last week’s disappointment over yet another high reading of 472,000, the next reading due on Thursday will be very important. If we see a further increase it will raise the possibility of the private payrolls number heading closer to a situation of very little if any job creation.

Today in Europe we have already had the Purchasing Managers Index for services for the Euro zone and Germany, both of which showed a modest improvement. Recent economic sentiment data has not shown any sudden collapse in confidence so far and overall the Euro zone does appear to be holding up relatively well against the back drop of the sovereign debt crisis. We are due to get the June Purchasing Managers Index for services for the UK today as well as May retail sales for the Euro zone. The main event of the week although some would argue it more of a non event will be the two central bank meetings on Thursday. Both the ECB and Bank of England are expected to keep rates where they currently stand and any change is unlikely to come until well in 2011. Other data worth looking out for this week is May manufacturing production in the UK and German industrial production for May both scheduled for release on Thursday. French and Italian industrial production for May will be announced on Friday.

A brief report this afternoon as today was all about the Non Farm Payroll announcement in the US. The overall decline of 125,000 was broadly as expected due to the temporary census workers coming off payrolls but the key number was the number of private payroll jobs created which was 83,000 (the consensus was looking for something over 100,000 and many were nearer to the 150,000 mark). It was interesting to see that the private payroll number of 41,000 reported last month was revised down to 33,000. The number for June is probably just enough to prevent a significant sell off this afternoon but realistically it is still very disappointing and certainly not a catalyst for any marked improvement in sentiment.


America is closed on Monday for Independence Day. Next week in the US is relatively quiet on the data front with the key data being the ISM Non Manufacturing Index for June due for announcement on Tuesday.

Investor sentiment is firmly into negative territory at present and markets are likely to creep lower ahead of the Non Farm Payroll data in the US tomorrow. The devil will be in the detail and this time all eyes will be focused on the private payroll element of the announcement. The ADP private payroll data yesterday was very disappointing with an increase of only 13,000 in June compared to expectations of 60,000, and this does not bode well for the employment report tomorrow. A Non Farm private payroll figure of less than 50,000 (May was 41,000) for June is likely to be viewed negatively but anything above 100,000 might just save the day. The headline number is likely to be negative due to the slow-down in hiring for the census work.


Chinese economic data is now grabbing the headlines. One area of the world viewed as the engine for world economic growth is starting to show signs of slowdown which is compounding the recovery fears raised by recent US data. Today in China we had the manufacturing Purchasing Managers Index for June. It fell to 52.1 from 53.9 in May. The new orders element of this index declined to 52.1 from 54.8 and the finished goods inventory rose to 51.3 in June from 49.8 in May reflecting the slow-down in new orders relative to production. Whilst growth does seem to be slowing in China it is not wholly unexpected for an economy expected to grow at an annualised pace of around 10% in 2010. This is especially so given the economic headwinds of the European debt crisis and a property bubble in China that the Chinese government is now attempting to slow. Despite these factors growth is still likely to remain at close to current levels. The greatest risk to the world economic recovery remains the possibility of a growth relapse/double dip in the US with a similar situation in Europe.

Today we have already had Purchasing Managers Index data for manufacturing in Germany, UK and Europe, all of which were broadly as expected and did not present any surprises which has helped markets to stabilise a little as the morning session has progressed. The next key numbers today will be in the US with the usual weekly initial jobless claims expected to give a number of 460,000 compared to the number last week of 457,000. We also have the important ISM manufacturing index for June. The reported figure for May was 59.7 and we can expect a fall for June judging by all of the recent manufacturing US data that has been declining from recent highs. Expectations are for a decline to 59.0, but the fall could easily exceed this.

Another poor day for world equity markets which started with disappointment over economic data in China suggesting slower growth and sentiment has been dented further this afternoon following publication of the US Conference Board’s Consumer Confidence index for June which suffered a significant decline to 52.9 from the previous reported level of 63.3 and the consensus was looking for a similar figure this month. The market is in no mood for bad news and with a several major economic data announcements starting to show real cracks appearing in the US economic recovery there is every chance that markets are going to move lower from here.

With markets again under pressure today the string of economic data scheduled for publication this week especially in the US is likely to have a significant impact on world equity markets. Confidence is extremely fragile and the US employment report is what everyone will be waiting for on Friday. The Non Farm Payrolls during recent months have benefitted from the hiring of temporary workers for the US census count, the pace of which will have slowed during the last month. The last payroll report after stripping out census hiring was very disappointing with private payrolls showing a gain of 41,000, much below what analysts were expecting. This month will be very important and another weak private payroll number will be taken very badly by the market. The consensus appears to be expecting a positive private payroll number of around +100,000 to +150,000. The slow-down in census hiring may well create a negative headline number but that in itself will not worry the market, but a poor private payroll number will. We will get a fair indication of where the Non Farm payroll report is headed when the ADP private payroll numbers are published on Wednesday. The market is expecting an ADP number of around +80,000.


In Europe today we have had German CPI data that was broadly as expected with a month on month rate of 0.1% whilst the annualised rate fell to 0.9% from 1.2%. Deflation rather than inflation is a greater threat at present.

In the US today the main data for publication was personal consumption expenditure which is viewed as a barometer of the state of the consumer and showed a 0.2% increase during May. Perhaps more importantly, incomes increased by 0.4% over the month providing consumers with the opportunity to increase their savings rate. This is trend that is likely to continue as the long process of deleveraging plays out.

It is interesting to see that several of the major brokerages are starting to review their GDP growth expectations for the US over the second half. Most expectations seems to be around the 3% level but after the final revision to the Q1 GDP data down to 2.7% from 3.0% forecasts for the rest of the year are likely to be revised. It is certainly difficult to see much momentum building from here given the poor state of the US jobs and housing market which is likely to create a drag on consumer expenditure. The real issue is to what extend expectations are out. If we see a significant slowdown in the rate of growth it may well create the conditions for a further decline in the equity market as we move closer to the final quarter of the year.

There is one particular economic indicator that is getting more press at present and that is generated by the Economic Cycle Research Institute. The particular index does have a very good history of predicting US recessions with only one occasion when it predicted a recession that didn’t occur. At present this particular data set is again suggesting a recession in the US is not far away, although most commentators seem yet to be convinced. If nothing else it may well be pointing to a significant decline in the rate of growth.

We have had two pieces of economic data today in the US. The weekly initial jobless claims were a little better than expected with the number coming in at 457,000 compared to the consensus expectation of around 465,000 and the number last week of 472,000. The number is still very elevated for this point in the economic cycle and there remains a real risk of significant disappointment over the non-farm payroll data scheduled for a week tomorrow. The other data in the US we have had today are durable goods orders for May which slipped y 1.1% against the consensus which was expecting a lightly more modest decline of 0.5%. If you strip out the impact of transportation orders the May figure shows a 0.9% improvement over the month compared to a decline of 0.8% in April.


We had strong evidence earlier this week that the US housing market is on the verge of a double dip. Existing home sales during May declined by 2.2%. The consensus was expecting an annualised rate of 6.2m when in fact the figure came in at 5.66m. The next day new home sales for May were reported and this figure came in substantially below expectations at 300,000 on an annualised basis compared to expectations of around 400,000. The decline during May was a record breaking 33%. The May decline is not quite so serious when you consider the increase in the two month period to April was 28.5% as homebuyers rushed to buy before the expiry of the homebuyers’ tax credits. Nevertheless in the absence of stimulus measures the outlook for the US housing market is looking increasingly gloomy. It certainly demonstrates the potential for a slowdown in economic activity as stimulus measures are withdrawn in the US as the year progresses. If we do see a further decline in US house prices it will inevitably impact on consumer confidence which has the potential to hold back GDP growth during the second half of the year.

Tomorrow in the US we get the final estimate for Q1 GDP growth which the consensus expects to remain at 3.0%. Expectations are for US growth to remain at this level throughout 2010. However, there is a real possibility that growth will tail off in the US during the second half of the year. The consumer still does not look to be in a position to take the reigns as the inventory replacement cycle that has boosted growth during recent months comes to an end. Also a lot of the stimulus measures in the US will have been used up by the start of the fourth quarter leaving a real risk of a raid slowdown in the rate of economic growth. This is a significant risk for equity markets as we enter second half. Also tomorrow we have the latest University of Michigan Consumer sentiment data for June which is expected to remain close to the previous reported level of 75.5.

Finally, the UK Budget was certainly tough in terms of the fiscal squeeze it will create but in order for UK plc to retain its AAA status it does go a long way to achieving this. The level of spending cuts and taxation are undoubtedly a risk to the recovery and there is a fine line between maintaining growth and stifling recovery but what is clear is that the size of the fiscal squeeze will almost certainly mean interest rates in the UK will stay very low for years rather than months. The jury will remain out for some time over whether the budget will achieve its objectives especially given the uncertainty over exactly what spending cuts will be made, something that will not be known until later in the year.

World markets have started the week with good strength following comments over the weekend from the Chinese central bank about its renminbi policy. They stated that they intend to relax the two year dollar peg put in place at the time of the global economic crisis to protect their exporters and will now allow their exchange rate to be more flexible. Just how flexible is not known but the move is seen as one that will reduce fears of a trade war with the US. A more flexible exchange rate policy should help to reduce inflationary pressures in China as well and overall this move should be beneficial for the world economic recovery. However any benefit is likely to remain relatively limited given the likelihood of the currency remaining very much managed with a significant move in the currency unlikely.


This week in the US we have the FOMC interest rate meeting which starts on Tuesday with their decision scheduled for Wednesday. There is still no reason to change the fed funds target rate and the focus will once again be on the accompanying statement with market watchers looking for signs of any future changes to policy. Also on Tuesday in the US we get existing home sales data for May. With the April expiry of the special tax credits incentive this number could easily disappoint with the consensus expecting an annualised rate of around 6.2m units. We get more home sales data on Wednesday with new home sales for May which are expected to fall by up to 20% to an annualised rate of around 400,000 units.

The major US data this week will be durable goods orders for May which after a 2.8% increase in April are expected to show a modest decline during May. The weekly initial jobless claims continue to make interesting reading and after the unexpected 12,000 increase last week to 472,000 a further rise this week will really stoke fears of a bad nonfarm payroll figure a week on Friday. In the US on Friday we get the third and final estimate for Q1 GDP which is expected to remain unchanged at 3.0% on an annualised basis. Friday also brings the next dosage of consumer sentiment data which always has the power to move the market during the final hours of trading on a Friday afternoon. The University of Michigan data provided a mid June reading of 75.5 with a similar figure expected this time. The more recent stabilisation of equity markets will no doubt help.

This week in the UK is all about the emergency budget tomorrow. There is plenty of press speculation/leaks on what is going to be announced and whilst most of it is probably already priced into market expectations there is still scope for surprise announcements and vat will be of particular interest. The extent of any hike and timing is very much unknown but it will have implications for retailers and the inflation rate.

In Europe tomorrow there will be further clarity of whether business expectations are changing in Europe with publication of the IFO business climate index for June. We also get the European Commission Consumer Confidence index for June. Wednesday brings the latest Gfk consumer confidence data and also due for publication are the European Purchasing Managers Index for Services and Manufacturing. The former registered 56.2 in May and a similar figure is expected for June whilst the latter was 55.8 and again a similar figure is expected for June. Look out for any material miss which could well dampen equity market sentiment.

On Wednesday in the UK the minutes from the latest Bank of England MPC meeting are due for publication. The rest of the week is relatively quiet in terms of European and UK announcements.

The next Daily Comments will be sent on Thursday.

We had more disappointing jobs data in the US yesterday with the weekly initial jobless claims rising by 12,000 to 472,000. Some of this may well be due to the economic impact of the BP oil spill, but nevertheless the level of claims looks set to remain elevated for far longer than many predicted. The US economy is still experiencing a recovery with very modest job creation at a time when we should be seeing a significant fall in the number of unemployed. If as many expect the economic recovery softens later in the year we may well see US unemployment remaining close to 10% for a long time to come.


Other US economic data published yesterday were the leading indicators for May which remained in positive territory at 0.4% although a little lower than the consensus expectation of 0.6%. The Philadelphia Fed Manufacturing Index for June was published yesterday and that showed a decline to 8.0 from the previous reported level of 21.4. There has most definitely been a slowdown in the pace of US manufacturing activity over the last couple of months with the ISM seemingly having peaked and the more recent New York survey and Philadelphia surveys starting to come back from their recent highs. This may well be more due to the inventory cycle coming to an end as firms have now replenished diminished stock levels and we may well see the data level out but remain in positive territory over the coming months.

We have no major data due for release in the US today. In the UK today we get a further insight into the finances of UK plc with the public sector net borrowing for May. We also get UK mortgage approval data for May today. In Europe the main announcement scheduled for today will be the German Producer Price Index for May. We will comment on this data on Monday.

The main event for next week will be the UK emergency budget on Tuesday.

The world cup has provided a short term fillip to UK retail sales during May as consumers stocked up on big televisions. The end result was a 0.6% gain compared to the consensus which was looking for a modest 0.1%. Sales for April were revised down from a 0.3% increase to unchanged. Next week the emergency budget is likely to bring significant cuts and increased taxation making life very difficult for consumer expenditure over the coming months and years. The outlook for retail in general looks to be very difficult indeed.


During recent days there has been a lot of market speculation about how deep the Spanish problem is. The Spanish government has been selling bonds this morning and has comfortably raised €3.5bn although at a significantly higher rate to what they had to pay in May. Today’s 10 years bonds were sold at 4.86% compared to the May level of 4.045%. The fact that they got the sale away comfortably has provided a degree of relief this morning and it almost feels as if the European debt crisis is now being ignored by the market and is considered old news. The truth of the matter is that it is a problem here to stay and the real impact may yet be felt by the real economy. Attention is now very much focused on Spain and Spanish banks which are having to borrow significant amounts from the ECB due to a squeeze in the private funding market. There were several headlines doing the rounds yesterday that Spain may need emergency funding although the Spanish finance minister refuted this. It will not take much to create a second wave of panic selling especially if the worries start to move to Italy. Despite the equity market rally of recent days there is still good reason to remain very cautious.

In the US yesterday we had further confirmation that the housing market is going into reverse following the expiry of the tax credit program. House builders are taking a cautious attitude to where the market is going with a 10% decline in housing starts following on from the 3.9% gain during April. The consensus was expecting an annualised housing start rate of 650,000 but the actual figure fell well short at 593,000. A weak housing market will not help a recovery that will become increasingly reliant on the consumer taking up the reigns as the various stimulus measures are gradually withdrawn over the coming months.

Turning to the US consumer, earlier in the week we had the Johnson Red Book retail sale report. The report stated “General merchandise and apparel sales in general underperformed basic goods, but retailers said weather fluctuations were less of a factor than a general decline in customer traffic and a lower propensity for spending, suggesting consumers were reducing discretionary purchases and being more defensive in their buying pattern” which does show the general strain consumers find themselves under at present. According to the report month on month sales declined by 0.5%.

Other US data we had yesterday was Industrial Production for May which came in a little ahead of expectations with a 1.2% month on month gain compared to the consensus which was expecting a 1% gain. Also in the US we got the Producer Price Index for May which fell by 0.3% month on month, a little less than the decline expected due to lower energy costs. At present there is very little in the way of inflationary pressures in the US. The US CPI data for May published today was broadly as expected with a month on month decline of -0.2%.

Today in the US the reported weekly initial jobless claims number has risen to 472,000 (the consensus was expecting around 450,000). It is possible some of this will be due to the fallout from the BP oil spill, but they way the trend is going private payroll job creation will be almost non-existent leaving us vulnerable to another poor non-farm payroll number next month.

Possibly the first signs of cracks appearing in the European economic recovery came today with a slump in German investor confidence. The ZEW German investor confidence index for June fell to 28.7 from 45.8 in May whilst the consensus was expecting a more moderate decline to 42.0. Undoubtedly the recent and ongoing sovereign debt problems in Europe are the cause of the decline and the real question is whether a decline in confidence will be temporary or sufficient to cause economic activity to slow down. We also had the ZEW European economic sentiment survey for June today which showed a steep decline to 18.8 from the previous reported level of 37.6.


The UK inflation report was broadly as expected with a decline to 3.4% year on year from the previous level of 3.7%.

In the US today we have had the Empire State Manufacturing index for June which was broadly as expected coming in at 19.57 compared to the May figure of 19.1. This does help to alleviate concerns over a slowdown in manufacturing activity. Tomorrow in the US we get Industrial Production for May as well as the May Producer Price Index and housing starts for May.

After the Dow gave up all of its gains yesterday, it has again rallied which has helped the UK market to another positive close. The appetite for risky assets certainly seems to be coming back but for how long is more difficult to gauge.

A busy week ahead in terms of economic announcements although today is relatively quiet with just April industrial production data for the Euro zone which came in a little ahead of expectations at 0.8% month on month compared to the consensus expectation of 0.7%. We are still getting a lot of data for the period prior to the fallout over Europe but even so most of the more forward looking indicators do not suggest that there has been any sudden reversal in current trends.


Tomorrow we get the UK May CPI data. Inflation in the UK has remained stubbornly high during recent months. The Bank of England has taken the view that with so much excess capacity in the economy we will see the more recent inflationary pressures ebb away with the CPI expected to fall back over the coming months. One fly in the ointment may well be the emergency budget next week and if the VAT rate is moved higher it will almost certainly result in the CPI remaining well above the target rate for some time to come. An interesting article in the Times yesterday quoted Andrew Sentance, a current MPC meeting member who suggested that the amount of spare capacity in the economy may not be as great as is currently assumed. This could well result in interest rates moving higher much earlier than expected. The data tomorrow is expected to show a small drop in the current annualised headline rate of 3.7%, but uncertainty does seem to be growing as to whether inflation will fall as much as expected. It is still difficult to envisage an interest rate hike this year unless the broader economy starts to show greater strength.

The newly formed Office for Budget Responsibility has produced revised forecasts for UK GDP growth today for the next 4 years bringing the previous Chancellor’s rather ambitious outlook down to more realistic levels. The new data forecasts growth this year of 1.3% (previously 1.0% to 1.5%), whilst next year has been reduced to 2.6% (previously 3.0% to 3.5%). This data has been published ahead of the emergency budget which will take centre stage next week and whilst expectations are already set for significant cuts it may still contain new policies that could upset the market.

The economic calendar in the US kicks off tomorrow with the Empire State Manufacturing index for May. This is a monthly survey of manufacturers in New York State. The April data did fall somewhat against expectations to 19.1 from the previous reported level of 31.86. The consensus is expecting the number for May to show a modest improvement on the April number. A further decline would certainly raise worries over a slowdown.

In the absence of any market moving news today the market is ticking higher with the FTSE100 up 25 points at the time of writing. The Dow futures are pointing to a 50 point gain.