Foreign Currency Report 05 December 06

GBP
UK retail sales growth slowed to their weakest level in eight months during November, with the milder weather hitting sales, a leading retail lobby group said. In its monthly survey of the sector, the British Retail Consortium reported that like-for-like sales, which excludes new stores and office space, rose just 0.5 pct in the year to November. This is well below the 2.6 pct growth reported in October and below analysts' forecasts for a smaller fall to 1.0 pct. The three-month trend rate of growth in like-for-like sales also slowed significantly as a result, to 1.9 pct in November from 2.5 pct in October. "Performance deteriorated as the month progressed and reflects the delicate state of the retail sector in the UK. High levels of promotional activity failed to drive the desired uplift and many retailers will be disappointed by November's results," said Helen Dickinson, head of retail at accounting firm KPMG, which helped compile the survey. The news will heighten concern that the Bank of England's November interest rate hike has made consumers less willing to spend going into the all-important Christmas period. If retailers are forced into heavy discounting in order to entice customers in the coming weeks, the central bank will be less inclined to follow up with a further rate rise early next year.

Growth in the UK manufacturing sector remained strong in the last quarter of the year despite lower levels of optimism about future performance, according to the manufacturers' organisation, EEF. Manufacturing firms reported good trading conditions as export markets remained positive and as domestic orders picked up. Growth was widespread across UK regions while investment levels stayed firm despite a continued squeeze on profit margins. Firms less confident about next three months, however. "The forward-looking responses on output and orders have fallen substantially, whilst responses on total orders were the weakest since the end of 2005." the EEF said. All sectors, except electrical equipment and electronics, expect some weakening of trading conditions in the next three months. "Manufacturers have enjoyed a strong year based on significant increases in exports but signs of a slowing world economy are making prospects look less certain for 2007," EEF chief economist, Steve Radley said. He called on the Chancellor of the Exchequer Gordon Brown not to increase the tax burden.

Euro

European Central Bank President Jean-Claude Trichet may raise interest rates this week for the sixth time in a year and prepare the ground for another increase in the first quarter, a survey of economists' shows. The Frankfurt-based ECB will lift its benchmark rate by a quarter-point to 3.5 percent on Dec. 7, according to all of the 41 economists surveyed by Bloomberg News. The bank, which also publishes new growth and inflation forecasts, will probably take the rate to 3.75 percent in March, the survey showed. Trichet and the rest of the ECB's 18-member governing council are likely to resist calls from some politicians to refrain from further increases following the euro's rally to a 20-month high against the dollar. Germany's Axel Weber has indicated that higher borrowing costs may be needed next year because the pace of growth threatens to spur inflation. 'The ECB is seriously considering higher rates next year, as from their point of view rates even at 3.5 percent are still accommodative,'' said David Owen, an economist at Dresdner Kleinwort in London. 'The forecasts are key to the outlook.'

The Eurozone industrial producer prices remained unchanged in October from September and were 4.0 percent up from a year earlier, the European Union's statistics bureau Eurostat said Monday. In October 2006, prices in none-energy sectors rose by 0.3 percent over the previous month, while price in the energy sector dropped by 0.5 percent. Compared to the same period last year, prices in non-energy sectors and in energy sector increased by 3.6 percent and 5.3 percent respectively. Industrial producer prices of intermediate goods climbed by 0.5 percent month-on-month in the 12-nation Euro zone. Prices of both capital goods and durable consumer goods also gained by 0.2 percent, and non-durable consumer goods 0.1 percent. Year-on-year, intermediate goods gained 6.4 percent. Capital goods increased by 1.8 percent, while both non-durable and durable consumer goods rose by 1.7 percent. In the 25-nation EU, industrial producer prices increased by 0. 2 percent month-on-month and by 4.3 percent year-on-year.

USD

Evidence keeps piling up that the housing sector, after fuelling the American economy with its historic boom, is now in a recession. Usually, housing downturns precede broader recessions in the whole economy. But this time, forecasters say that, for a range of reasons, the economy may continue on a path of growth. The decline in home prices and sales volume has ripple effects, to be sure. Wednesday, the Commerce Department reported that the economy grew at a 2.2 percent annual pace in the quarter from July through September, a slower pace than earlier this year. A main reason was the slump in residential construction. But housing and the rest of the economy may be travelling on divergent tracks. In 2001, the last time the nation was in recession, housing did well as home prices continued to climb. Now, the reverse appears to be occurring. "Typically in the past when housing fell into a recession so did the economy," says Ed Yardeni, chief economist at Oak Associates, an investment firm in Akron, Ohio. This time, "the rest of the economy is growing quite well, there seems to be a certain amount of resilience." Weathering the housing slump won't necessarily be easy. This week, the median sales price of previously owned homes took its biggest tumble ever, falling 3.5 percent in October from the level one year ago to $221,000, according to the National Association of Realtors. The housing slump hurts the economy in several ways. There's lower construction spending, falling purchases of appliances, paint, and other home-related goods, and a negative "wealth effect" that affects consumer spending. As home prices dip, homeowners have less equity in their homes, or less money to spend. Of the 13 occasions when residential construction turned negative on a year-over-year basis, recessions followed 10 times, according to research by the investment firm Merrill Lynch in New York.