Interest Rate Cuts this Week ….

Interest Rate Cuts this Week ….

… will follow the recent dramatic easing in inflationary pressures that have been seen over the past fortnight. We have seen one stunning report after another culminating in last week’s dramatic drop in the Euroland’s measure of consumer prices. The MUICP showed that November’s rate of increase fell to 2.1%, a bigger drop than had been anticipated and an indication that inflation in Europe was already at the ECB’s target level (nearly) and still falling fast. Expectations are for further drops in December and early next year with it approaching zero by the spring. The UK’s rate is expected to follow a similar path next year, nearing zero towards the summer. The slowdown in the CPI of the major economies throughout the world (apart from Australia) can be viewed as almost a direct consequence of the decline in oil prices and the fact that they are holding at their lower levels. OPEC are trying hard to produce a small rise in prices but at present are succeeding in only producing a floor at about the $50 per barrel. This weekend’s OPEC get together managed very little other than focus attention on their next meeting later in December at which expectations are still high for a further production cut. This will however only succeed in maintaining current prices and therefore the recent massive reduction in energy costs will continue to feed through into the inflation statistics.

First up in ‘Rate Cut Alley’ is the Reserve Bank of Australia tomorrow. Locals are hoping for a 75 basis point cut to 3% but given their massive easing recently and the fact that Australia’s inflation data is bucking the global trend (5% y/y and rising), we might end up with something less. Then on Thursday the BoE/MPC and the ECB announce their decisions and cuts of 0.50% from each are the minimum anticipated. Yield curves must ease further this week in anticipation of these and addition cuts.

In the US, Obama’s early honeymoon in power is scheduled for its first real test. It has been widely acknowledged that it was he and his new Treasury Team that came up with the market popular rescue package for the Citigroup last week and that this was the major factor behind the biggest 1-week gain in the DJIA since the 25% gain that signalled the end of the 1932 bear market. Prior to taking up the reins however, he has made several firm promises one of which is that none of GM, Ford or Chrysler would be allowed to fail. This morning’s headlines warn that GM are in ‘last-ditch’ talks over a multi-billion dollar debt for equity swap, aimed at warding off bankruptcy. We will see how Wall Street view this later.

Today we start December with Sterling on a buoyant note, against the Euro especially, which suggests that opinion on economies and relatively risky currencies might have changed somewhat. As the Times say, this might prove to be another false dawn and a lot will depend on continuing positive moves from the newly appointed US Treasury team. Nearer to home, today’s latest CIPS/Markit purchasing managers survey is again expected to show a decline in the manufacturing sector. The headline index will show a decline in November from October’s already low 41.5 figure and will reinforce calls from the Engineering Employers Federation for state aid for many beleaguered manufacturing industries.

There have been several comments in the weekend press, from overseas and not from the UK, about the possibility that full EMU membership for the UK is again on the agenda. This seems fanciful at best ….

Today’s Data / Events:

ECOFIN Meeting (until 2nd Dec)

08.55 gmt German Manufacturing PMI (expected 36.7)

09.00 gmt EU Manufacturing PMI

09.30 gmt UK Manufacturing PMI (expected sub 40)

15.00 gmt US Construction Spending (expected -1.4% after -0.3%)

ISM Manufacturing Index (expected 37.5 after last 38.9)

Various Speeches by Fed Members after our close.

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The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. Currencies Direct cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.