More twists than the Tour
There has been a return to risk trading this week and appetite has yo-yoed, bringing with it the usual results for the major currencies. Market focus has been fixed on the bottom line with consumer price inflation and corporate earning figures due in the US. The upshot of this data is that while people seem to be spending less, with unemployment record breakingly high, banks have returned to operating profitably, which serves as good news for the financial sector.
This week we learned the UK unemployment rate hit 7.6% with a further 281,000 people losing their jobs in the second quarter. This is the highest rate in 12 years and unemployment is expected to keep rising throughout 2009. The annual inflation rate has fallen to 1.8%, while consumer prices rose 0.3% on the month to June. This is positive news for the Bank of England as it is the first time in 21 months inflation has fallen below the 2% target.
Despite the negative employment statistics, sterling exchange rates have remained within recent ranges as the pound was buoyed by positive news from corporate America. Sterling is currently trading in the vicinity of 1.63 versus the US dollar and 1.16 versus the euro.
Corporate earnings have been the major news in the US this week, with Goldman Sachs, JP Morgan, Intel, Google and Bank of America all reporting second quarter profits. The surge of confidence this created triggered a greenback sell off, reducing exchange rates for the yen and US dollar.
However with the FOMC minutes failing to convince markets of recovery and the Fed's balance sheet looking sky-high, risk aversion remains just around the corner. The Philadelphia Fed results showed manufacturing continues to shrink and core inflation is running at 0.2%.
In the eurozone, the German ZEW economic survey was distinctly more downbeat than markets predicted while industrial production across the euro area is running at an annual rate of -17%.Consumer prices for the eurozone also fell 0.1% this month, falling into negative territory for the first time, dragged down by deflation in Germany and Spain.
Eastern European inflation figures show that none of the prospective euro area nations have inflation rates low enough to join at present. Across the region wage growth is slowing, falling 2.5% in Hungary in May. At present Poland remains the only eastern European nation to avert a recession and GDP expanded by 0.8% in the first quarter of 2009. As a regional comparison, Hungary's GDP shrunk by 6.7%, the Czech Republic by 3.4% and Slovakia by 5.6%.
At present uncertainty still abounds and it is unclear whether we are on the way up, down or just treading water at this stage of the recession. The fact that corporate giants in America have returned to making a profit, for the first time since 2007 in the case of JP Morgan, has improved market confidence and the sense of stability. However there is still a large proportion of traders and economists who are uneasy with the global situation and this may lead to a revival of risk trading over the coming days.
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Have a good weekend.