A sigh of relief can be heard somewhere in the hallowed halls of the BOE, as GDP figures came in much worse than expected, showing a quarterly decline of .5% vs. an expectation of a gain of .5%, driving YoY GDP down to 1.7% growth, lower than the expected 2.6%.So why is this a good thing? Well technically it is not, but lower GDP figures give the BOE justification for its extremely accommodative monetary policy. For months they have been claiming that it was needed despite the rising inflation that was hitting the UK, and now vindication is theirs.
But what to do going forward? Now the question becomes how do they stave off a double dip recession? Will inflation return to acceptable levels? The BOE minutes from the rate policy meeting will be out tomorrow which should show a continued commitment to propping up the economy in the face of inflation. This is decidedly Pound-negative, which could help the UK return to growth through higher exports and manufacturing.
In the meantime, the government will continue to reduce spending to try to get the deficit under control so a lack of demand may bring prices back to normalized levels which has been what the BOE had hoped for in the first place.
In other inflation news, CPI data in both Australia and Canada came in lower than expected suggesting that their respective Central Banks can leave rates alone for now.
All this adds up to Dollar and Yen strength, as a bit of risk aversion has hit the market and demand for carry trades is reduced. Commodities continue to decline, as the global economic slowdown reduces demand.
In the forex market:
Aussie (AUD): The Aussie is mostly lower as CPI data came in showing inflation at 2.7% vs. the expectation of 3%, the slowest increase in nearly 2 years. This likely gives the RBA continued reason for pause on rate hikes as the potential global slowdown could reduce demand for Australian raw materials, particularly from China. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is actually higher this morning ahead of tomorrow night’s rate policy decision. While it is almost certain that the RBNZ will not move on rates, there is some hope that the policy statement may allow for a potential rise down the road which is all carry traders can hope for at this point. So demand for the Kiwi today may be short-lived.
Loonie (CAD): The Loonie is also mostly lower as CPI data showed a slight decrease from the expectation, showing a rise of 2.4% vs. an expectation of 2.5%. This also suggests a pause in rate hikes, and oil prices are trading lower to 86.75 to reflect that slowdown.
Euro (EUR): Lost in the shuffle today is the Euro which is trading mixed today despite rumblings that a Spanish bond auction to come may not be as well-received as hoped. While I don’t see this rumor having legs, Euro is affected by the UK GDP report which is offset slightly by a better than expected German consumer confidence number.
Pound (GBP): Be careful what you wish for may be the mantra of UK policy-makers as GDP figures came in way worse than expected. Citing cold weather and response to austerity measures, the UK economy appears to be “under-heating”, according to one economist. With austerity measures set to kick in, it will be a challenge to encourage growth and to avoid the dreaded double-dip. (Click chart to enlarge)
Dollar (USD): The Dollar is the beneficiary of global weakness and we may get our own does of reality after consumer confidence figures are reported later this morning. Tomorrow is the FOMC meeting which should show a continued commitment to accommodative policy in the face of all of these global slowdowns.
Yen (JPY): The Yen is flexing its muscles today as safe haven demand has picked up despite the BOJ leaving rates unchanged at their rate decision meeting. Even the familiar rhetoric of the promise to pursue “powerful monetary easing” has not discouraged traders from buying Yen and reducing carry trades.
Today could end up being quite the ugly day for global markets, with stocks futures and commodities lower to start the US session.
Commitments to austerity and reductions in GDP from established economies may be the first shoe to drop. China has already started to potentially slow down the pace of their growth, and now the UK reports slowing growth BEFORE the austerity measures even start!
If there is a global contraction, then that would affect demand for commodities, which could then in turn hurt the commodity producing countries such as Australia, New Zealand, and Canada.
With the Euro debt crisis still on-going and far from resolved, a global flight to safety may make it harder for the PIIGS to finance their debt which could add water to an already dwindling economic fire.
While the other shoe has not fallen yet, it may just be a matter of time and trading with caution may be the best course of action at this point.
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