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Tuesday May 13, 2008 - 11:02:32 GMT
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Forex Blog - European Market Update: Stagflation Fears Mount as UK CPI Rises to Key Levels


· FR Mar Current Account: -€2.5B v -€600M prior || Prior revised from -€600M to -€1.0B

· SP Apr CPI: M/M 1.1% v 1.1%e || Y/Y 4.2% v 4.2%e

· SP Apr Core CPI: M/M 1.1% v 1.3%e || Y/Y 3.1% v 3.2%e

· SP Apr Harmonized CPI: M/M 1.1% v 1.0%e || Y/Y 4.2% v 4. 2%e

· SW Apr CPI: M/M 0.5% v 0.5%e || Y/Y 3.4% v 3.4%e

· SW Apr Core CPI: M/M 0.5% v 0.4%e || Y/Y 2.4% v 2.3%e

· SW Apr CPI Level: 299.67 v 298.08 prior

· UK Apr CPI: M/M 0.8% v 0.5%e || Y/Y 3. 0% v 2.6%e || Core Y/Y 1.4% v 1.3%e

· UK Apr RPI: M/M 0.9% v 0.8%e || Y/Y 4.2% v 3.9%e || Y/Y Ex-Mortgage 4.0% v 3.6%e

· UK Apr Retail Price Index: 214.0 v 213.3e

· UK Mar DCLG UK House Prices: 5.2% v 4. 5%e


· In equity news overnight Arch Capital (ACGL) added $500M to its existing buyback program overnight. Finmeccania [FNC.IT] announced an official deal to acquire DRS Technologies (DRS) for $81/share for a total of $5.2B. The offer represents a 4.9% premium to yesterday's closing price. Societe Generale [GLE.FR] reported a first-quarter net of €1.09B overnight, above consensus estimates of €994M. Operating profit declined to €1.18B from €2.16B a year ago, while revenue declined to €5.68B from €6.05B. Societe General had first-quarter corporate and investment bank writedowns of €1.179B, which were offset by gains from one-off items. As of March 31 the bank reported a tier-1 ratio of 7.9%. Credit Agricole [ACA.FR] reported a first-quarter net of €892M, below consensus expectations of €1.17Be. The bank noted that it expects to post €1.2B in writedowns, and added that it is considering a capital increase of €5.9B. Toll Brothers (TOL) reported preliminary second-quarter revenue well ahead of analysts' estimates this morning, but also relayed some frightening metrics including a 49% y/y decline in gross contracts, a 58% y/y decline in net new contracts, and a 17% y/y decline in average price per unit.

· In the newspapers overnight, the Wall Street Journal noted that Exxon (XOM) sent an e-mail to its large shareholders seeking support for its plan to not support the establishment of an independent chairman. Les Echos wrote overnight that EDF [EDF.FR] is the sole bidder for British Energy [BGY.UK], noting that EDF's bid is worth about £11.4B. The Wall Street Journal's Heard on the Street was cautious on MBIA (MBI) and HSBC (HBC) overnight. The article notes that MBIA is urging investors to not focus on the company's stated book (measure of net worth based on assets minus liabilities), but to pay more attention to its analytic adjusted book value. In terms of HSBC, the WSJ questions if the company has seen the worst of its
US related write- downs According to Il Sole 24 Ore, Banca Italease's [BIL.IT] board may review an offer from Germany's DZ Bank. WirtschaftsBlatt wrote overnight that Telekom Austria (TKA) may sell a stake in its mobile-phone unit. The newspaper said that potential buyers include Telefonica (TEF), Vodafone (VOD), and AFK Sistema. The New York Post wrote overnight that members of the New York Mercantile Exchange (NMX) are moving ahead with plans to kill the $9B takeover by the Chicago Mercantile Exchange (CME) unless the rival futures trading giant significantly boosts its offer.

· In energy news overnight the IEA cut its 2008 world oil demand growth forecast by 390K bpd to 1.2% from last month's forecast of 1.5%. The new projections render an aggregate demand forecast of 86.84M in 2008, down from the 87.23M forecast last month. The IEA said that slower economic growth, and high prices are curbing oil demand, adding that demand growth in
China and India are unlikely to change anytime soon. The IEA also said that the current cut in the world demand growth forecast may not be the last. Elsewhere, the Iranian Oil Minister said overnight that Iran is reviewing its crude output, but said that no decision has been made yet.

· In fixed income news overnight, ahead of tomorrow's BOE inflation report Sean O'Grady wrote in the Independent that Britain may see stagflation for the first time in around three decades, noting that the stagflation phenomenon has been recreated by the unprecedented confluence of two new phenomenons: the credit crunch, which has choked off the supply of lending to the economy, and the commodities boom, which has pushed prices up and sucked even more purchasing power out. Elsewhere Morgan Stanley raised its 2008 GDP growth forecast for
Germany to 1.9% from 1.7%.

· In the currencies volatility reigned supreme in the GBP related pairs overnight as
UK inflation data took center stage. The above estimate CPI reading initially sent the GBP broadly firmer against the major pairs. The GBP/USD probed the 1.96 area, while the EUR/GBP approached the 0.79-level. However, dealers took the opportunity of GBP strength to aggressively establish fresh short Sterling positions citing the stagflation scenario that seems to be gaining credibility. Dealers cited the multi-decade low in the RICS house price data released during the Asian hours as one factor of concern. The G7 central banks are facing the delicate issue of combating inflation and warding off the ills associated with possible slower economic growth. The USD is mixed, as Euro-related pairs appear to be the focus. Markets are having trouble focusing on the underlying theme as risk aversion, sector rotation and stagflation concerns continue to joist for positions among global trading desks.

· The Fed's Lockhart said overnight that financial markets are still unsteady, noting that both the
US and global economy have slowed substantially. Spain's Solbes said overnight that it is difficult for the ECB to cut interest rates at this time, but noted that it might be easier by end of 2008. Although the wording is slightly different the comment is in line with ECB rhetoric which anticipates that inflation could begin to fall towards the end of 2008, however some ECB members have begun to stray from that view. In Germany, the Deputy Economic Minister said overnight that first-quarter GDP growth of 0.9%, and second-quarter GDP growth of 0.1% are not implausible.

· On the data front, the April RICS house price balance in the
UK declined to its lowest level since 1978 at -95.1%. Along with the release a RICS economist said that he believe that the BOE should cut rates. The decline in April is the 9th consecutive decline in the house price index. Overall, Spanish CPI data for the month of April was in line with expectations leaving market participants little to get excited about, however the UK CPI data for April was worth writing home about as it further confirmed that the BOE is in a very tough position. Headline m/m CPI rose to 0.8%, its highest level since May of 2001, while the y/y reading rose to 3.0%, its highest level in 13 months. Recall that last time the y/y CPI reached the 3.0% level the BOE's King was required to send an explanatory letter to the exchequer. Similarly, the m/m RPI rose to its highest level since April of 2002, while the y/y ex-mortgage reading reached 4.0%, its highest level since September of 1992. The data seems to reconfirm the existing market view that the Bank of England will have an extremely difficult time cutting interest rates in the coming months as inflationary pressures are expected to continue posing a threat to the economy, while, at the same time, slowing economic growth, and the credit crunch are likely to keep the BOE from raising rates in an attempt to combat inflation. The BOE's quarterly inflation report, which is due tomorrow, will certainly be a key event as market participants will analyze the monetary policy committee's torn views on the subject in an attempt to gain insight into the BOE's next possible policy move. The BOE minutes, which are due next week, could provide some insight into the BOE's most recent thought process on the policy front. Preliminary GDP data due later this month, on 5/23 to be exact, could also prove interesting, and may play a notable role in the BOE's next policy setting meeting.

· Looking ahead, on the data front the April import price index as well as April retail sales data are due out in the US at 8:30 ET, and will be followed by IBD/TIPP economic optimizing for the month of May at 10:00 ET, along with March business inventories. In Fed Speak the Fed's Bernanke is set to speak on Fed liquidity measures at a financial markets conference, while the Fed's Yellen is due to speak on the
US economic outlook in Vancouvery. The Fed's Hoenig is due to speak about the economic outlook in Oklahoma, while the Fed's Fisher is due to speak about both the Fed and the economy in Texas later today. On the earnings front US notables Canadian Solar (CSIQ), Dish Network (DISH), TJX Companies (TJX), Verasun Energy (VSE), and Wal-Mart (WMT) are all scheduled to report results in the US pre- market this morning.


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