UK Interest Rates to Hit 0%? - US Economic Data Still Weak

Last Week
The BOE surprised traders last week when its Monetary Policy Committee (MPC) decided to cut interest rates by 150 basis points to 3.00%. The market had been expecting a much less aggressive cut to 4.00%. This move fuelled speculation that the BOE will need to cut rates at a faster pace than other central banks and heightened the likelihood that the Official Bank Rate will eventually reach 0.00%.

As you might expect, the GBP closed lower on the week against all other major currencies on the back of this speculation. Although the existing Sterling bearish trends remain in consolidation there are absolutely no signs of a reversal in the medium to long term. The Pound’s value over the coming months will depend on the pace at which the ECB, Federal Reserve and others slash rates. However, the ECB has demonstrated much more measured cuts and the Federal Funds Rate already sits at 1.00% with very little room to the downside.

In the US, Barack Obama became the first African-American President of the United States with 53% of the popular vote. One thing is for certain, he is unlikely to experience any honeymoon period when he is sworn in come January. He will be more than aware of the disappointing economic data coming out of the United States last week.

US Non-Farm Employment Change came in worse than expected at -240K compared to the -200K expected. To make matters worse, September’s data was revised down 125K to -284K. September and October’s data together make the worst two-month series since 2001. Unemployment also surged to the highest level since 1994. It now stands at 6.5%, much worse than the 6.3% expected and 6.1% seen in September.

This Week
The high volatility begins in the early hours of Monday morning this week with Australian Home Loans and the RBA Monetary Policy Statement. September’s Home Loans came in at -2.2% and a further MoM drop of 2.7% is expected to have occurred in October.

Also on Monday we have PPI Input from the UK. This data measures inflation in the prices paid by manufacturers for goods and raw materials. PPI Input is expected to come in at -2.6% MoM for October, compared to -1.2% the month previous.

High volatility from North America is also expected with Canadian Housing Starts expected at 13:15. In September construction on 218K new residential buildings began (annualized) with this number expected to fall to 202K in October.

Monday evening will play host to PPI Input from New Zealand. Prices in September increased by 5.6%.

Tuesday will be fairly quiet this week with French, US and Canadian bank holidays. Although some stock exchanges will remain open large banks will not. Low volatility is likely throughout the Forex market.

At 10:00 we will see high volatility from the German ZEW Economic Sentiment reading. A reading of -62.5 is expected, slightly higher than the -63.0 seen the month before but the index is fixed firmly in pessimistic territory.

At 20:00 the Reserve Bank of New Zealand will release its Financial Stability Report. The report is released twice per year and a press conference is usually held at the release time.

On Wednesday we will see employment data from the UK with Claimant Count Change regarded as most important. It is expected that 40K more UK workers are out of employment, and consequently claiming unemployment benefit when compared to a month earlier.

More high volatility will come from the UK at 10:30 with the BOE Inflation Report due for release. Of course traders will be watching this report closely because it explains the Bank’s view of inflation over the coming two years. However, further interest cuts in the UK may already be set in stone despite these inflation projections.

At 21:45 we will see Core Retail Sales and Retail Sales from New Zealand. The core number is expected to fall by 0.1% MoM compared to a 0.8% increase in September, while the headline number should grow by 0.1% on the month. Growth of 0.4% was seen in the month of September.

Thursday will see Germany deliver its second high volatility release of the week with preliminary quarterly GDP. The German economy is expected to have contracted by 0.2% over the last quarter.

At 13:30 we will see Trade Balance data from the US and Canada. The US trade deficit probably shrunk slightly in October from $59.1B to 56.5B. In Canada, trade surplus is expected to have fallen by CAD 700M to 5.1B.

After a fairly quiet week the US will finish with a flurry of high volatility with no less than 4 such events on Friday, although it does share one of these with the Eurozone.

At 13:30 we will see Core Retail Sales and Retail Sales releases. The core number likely fell by 1.1% on October when compared to -0.6% in September. Headline Retail Sales are expected to have fallen by 2.0% over the same period.

Also at 13:30 we have Fed Chairman Bernanke and ECB President Trichet taking part in a panel discussion at the 5th ECB Banking Conference in Frankfurt. The discussion will be on the topic of "International Interdependencies and Monetary Policy - a Policy Maker's View".

To round up the week we will see preliminary University of Michigan Consumer Sentiment with a reading of 56.0 expected.