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Monday May 21, 2007 - 10:43:38 GMT
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Forex Market News - Economics Weekly - Did the MPC discuss a 50bp hike in May?

Economics Weekly:

Did the MPC discuss a 50bp hike in May?


• The BoE Inflation Report last week supported the prevailing market view that another hike in Bank rate to 5.75% is on the cards later this year. However, while we acknowledge the risk of another 0.25% hike is significant, we remain of the view that a peak of 5.50% is still possible.

• It could be a volatile morning for financial markets on Wednesday. The minutes of the May MPC meeting will be anxiously awaited to further assess the likelihood and also possible timing of any hike later this year. Financial markets will be particularly keen to view the voting pattern and whether the minutes reveal any discussion of a 50bp hike. Anything less than an unanimous vote could elicit strong reaction as would a vote or mention of a 50bp rise. UK data this week are headed by the 2nd estimate of Q1 gdp on Friday. We expect growth of 0.7% to be confirmed, but a downward revision is possible after a disappointing set of recent trade figures.

• The strong prospect of further hikes in euro zone interest rates this year should be underlined again this week by data from Germany. The influential IFO business sentiment index is forecast to have climbed to 109.0 in May, from 108.6 in April - the highest since records for a unified Germany began in 1991. Consumer confidence, on Friday, may also have improved in June.

• It is a relatively quiet week for US economic data, but some key releases will draw strong attention. Durable goods orders, on Thursday, are forecast to show another strong rise in April, reflecting a pick-up in business confidence. However, housing market sales data on Thursday and Friday could provoke most market reaction, given the volatile swings in recent months.


UK data this week are likely to be overshadowed by the minutes of the May MPC meeting on Wednesday. After the detail and analysis of the BoE Q2 Inflation Report last week, financial markets will be keen to see how the MPC members actually voted earlier this month. The consensus view is that the decision to raise Bank rate by 0.25% in May to 5.50% was unanimous (9-0) and a different outcome could trigger a strong reaction. It may prove more significant if there was also discussion of a larger hike. We believe there is a small risk that a member may have voted for a 50bp rise. However, given the MPC's recent voting history, the possibility of a dissenter arguing for no change in interest rates should also not be ruled out. Although the meeting minutes are unlikely to change the prevailing market view that Bank rate will rise again this year, they could offer some clues of the possible timing, particularly if we get a 50bp vote. However, we currently remain of the view that rates could peak at 5.50% this year.

Data this week are expected to show UK economic growth is likely to average above its long-run average again in 2007, keeping upward pressure on inflation. On Monday, M4 money supply growth is forecast to have remained above 12% in the year to April and mortgage lending data from the BBA and CML are likely to have stayed robust. The CBI Industrial trends survey, on Thursday, should show the headline orders balance remained positive for the fourth consecutive month in May, the longest such sequence for over a decade. The second estimate of Q1 2007 gdp is published on Friday and should confirm growth of 0.7% for the third successive quarter and of 2.8% on an annual basis. There is a risk of a downward revision, to 0.6%, reflecting a weak recent set of UK external trade data.

The ECB have clearly signalled that interest rates will rise to 4.0% at their next meeting in June. The uncertainty for financial markets now surrounds the outlook for the rest of the year. Economic data this week are likely to support the view that another hike to 4.25% is a strong possibility. We look for this to take place in the final quarter, possibly at the October ECB meeting. The German IFO survey will attract most attention this week and may have edged to a record high in May, topping 108.7 set in December 2006.

It is a quiet week for economic data from the US, but the latest home sales data will draw significant attention on Thursday and Friday. There is risk of a strong market reaction should the outturns of existing and new homes sales in April differ significantly from the market consensus. US Fed chairman Bernanke and US treasury secretary Paulson take part in a strategic economic summit with Chinese officials this week.

Jeavon Lolay, Senior Economist
www.lloydstsbfinancialmarkets.com
Lloyds TSB Bank,
Financial Markets
Division,
Faryners House,
25 Monument,
London EC3R 8BQ
Switchboard:
0207 283 - 1000

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Amazing Trader EVENT RISK Calendar:

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12:30 US- Housing Starts & Permits
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Fri 20 Oct
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  • POTENTIAL PRICE RISK: HIGH Tue-- 08:30 GMT GB- CPI top tier confirmation of Inflation.

  • POTENTIAL PRICE RISK: Medium Tue-- 09:00 GMT DE- ZEW Survey second most important German monthly Survey.

  • POTENTIAL PRICE RISK: Medium Tue-- 09:00 GMT EZ- final HICP revision to flash report. Revisions are usually minor.

  • POTENTIAL PRICE RISK: Medium Tue-- 13:15 GMT US- Industrial Production. Top output indicator.



  • POTENTIAL PRICE RISK: Medium Wed-- 12:30 GMT US- Housing Starts and Permits revision to flash report. Useful housing leading indicator.

  • POTENTIAL PRICE RISK: Medium Wed-- 14:30 GMT US- EIA Crude. Top WTI inventory measure.



  • POTENTIAL PRICE RISK: Medium Thu-- 01:30 GMT AU- Employment. Top economic indicator.


  • POTENTIAL PRICE RISK: Medium Thu-- 02:00 GMT CN- GDP. Top economic indicator.


  • POTENTIAL PRICE RISK: HIGH Thu-- 08:30 GMT GB- Retail Sales. Top consumption indicator.


  • POTENTIAL PRICE RISK: Medium Thu-- 12:30 GMT US- Weekly Jobless. Employment Indicator.



John M. Bland, MBA
co-founding Partner, Global-View.com

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