The euro, to its detriment remains centre stage in these highly volatile markets.
Yesterday, we saw three pieces of UK economic data published, all comfortably worse than even the direst prediction and yet the pound staged a rally against the euro in the afternoon ahead of today’s rate decisions from both the Bank of England (BoE) and European Central Bank (ECB) and tomorrow’s crucial euro zone summit.
The Office For National Statistics (ONS) reported that UK industrial output fell 0.7% between September and October, more than double the 0.3% figure expected by analysts. The data also showed that production fell by 1.7% in October compared with the year before, the fastest rate of decline in six months. This marked the eighth consecutive fall in the year-on-year figures, which last rose in February 2011.
Howard Archer, chief economist at IHS called the figures a” serious blow to hopes that the economy can avoid contraction in the fourth quarter even allowing for the fact that industrial production only accounts for 15.4% of GDP”.
Data also showed that UK manufacturing fell by 0.7% between September and October. The month-on-month fall was more than three times the rate forecast by analysts. Economists at Barclays Capital suggested the October data and the available survey information so far indicated industrial production had made a poor start to Q4.
“Survey information indicates this has been a result of weak domestic demand as well as slowing export orders,” they said. “We forecast industrial production to decrease by 0.7% q/q in Q4 with activity expected to fall across the board.”
Lastly, the National Institute for Economic and Social Research (NIESR) reported that the UK GDP estimate for the 3 months to November came in at only 0.3% as opposed to the 0.5% figure expected by analysts.
The negative data led to calls by some analysts that the BoE may loosen monetary policy again with a further increase in its bond buying programme, commonly known as Quantitative Easing (QE). Any further rise in QE from its current £275 billion budget would be to the detriment of the value of the pound.
However, the pound staged a rally in the afternoon after the FT reported that Germany is opposed to the latest deal to increase the euro zone’s firing power to contain the debt crisis. Sentiment towards the outcome of the euro zone summit talks soured as rumours have been circulating that euro zone leaders would agree to keep the current €440 billion European Financial Stability Facility (EFSF) going alongside a proposed €500 billion European Stability Mechanism (ESM), which is expected to start in the early summer of 2012.
Analysts believe the two facilities combined would be large enough to resolve the debt crisis. However German officials are said to be against any changes to how the two funds will be used.
The crucial two day euro zone summit begins in Brussels today with German Chancellor Angela Merkel and French president Nicolas Sarkozy issuing an ultimatum to the 27 members of the European Union in the form of a joint letter addressed to euro group President Herman Van Rompuy insisting that nations will have to decide if they accept greater EU control over their national budgets. If they reject the proposal then both leaders have stated that the 17 euro zone members will move forward with a more integrated union via new agreements outside the scope of the European treaties.
Speculation also mounted that the ECB may consider loosening collateral criteria for longer-term loans. This measure would give lenders more access to loans and ease the flow of credit to the economy. There is also increased speculation that ECB president Mario Draghi will announce a rating cut in tomorrow’s monetary policy meeting.
Overnight, the central banks of South Korea and New Zealand kept interest rates unchanged, preferring no doubt to see the outcome of the BoE and ECB rate meetings and the euro zone summit before committing to any new economic management strategies.
