NEWS / Foreign Exchange

UK Manufacturing and Industrial Production Falls Short of Estimates

- The European indices are currently mixed trading near the unchanged level on both sides after a series of analyst downgrades in some big names ahead of the open weighed down on any upside momentum. Downgrades included Scottish and Newcastle, and Fraport.

- European government bonds opened lower paring some of yesterday??™s gains. Over in the UK gilts are also trading lower ahead of the BOE interest rate decision due out at 7:00 ET today. France sold ?‚¬1.0B in 4.0% 2038 OATs with an average yield of 4.32% overnight, as well as ?‚¬2.94B in 3.75% 2017 OATs with an average yield of 4.13%.

- Halifax house prices exceeded expectations in the UK. House prices were 1.0% m/m, above estimates of 0.5%. House prices reached a new 25-month high at 11.1% y/y. Despite the rise in house prices Halifax stressed that the UK house market continues to show signs of cooling, and attributes the rise in house prices to arithmetic reasons.

- Industrial and manufacturing production figures for the month of February fell below estimates in the UK. Manufacturing production posted its largest m/m decline since October of 2005 resulting from lower aircraft and motor vehicle production.

- Overnight the World Bank forecasted Japanese GDP growth of 2.3% in 2007 and 2.4% in 2008. The World Bank maintained its growth forecasts for China of 9.6% in 2007, and 8.7% in 2008. The World Bank said that the down turn in the US and weaker exports will slow Asian economic growth. Regarding the Yen, the World Bank said that Yen weakness is linked to the Bank of Japan??™s low-rate policy.

- The IMF cut its 2007 US growth forecast to 2.2% overnight from the previous forecast of 2.9%. The IMF said that if the US housing market downturn spreads it consumer spending and business investment, then there may be larger, cross-border repercussions.

- Regarding the Bank of England's interest rate announcement the shadow MPC voted 8 to 1 in favor of an interest rate hike, however expectations are for the BOE to leave rates unchanged at 5.25%, with only 9 out of 60 analysts (15%) forecasting a 25 basis point interest rate hike. Bond markets are finely balanced at the moment and project a 40% chance that the Bank of England will raise interest rates. Recall that in March the BOE voted 8 to 1 to keep rates unchanged at 5.25% with the dissenting voter, Blanchflower, voting for an interest rate cut. In February the BOE voted 7 to 2 to keep rates unchanged at 5.25% with the two dissenters, Beasley and Sentance, voting for an interest rate hike. Finally, recall that on March 27, in a testimony to the treasury committee Bank of England MPC members provided their respective outlooks on inflation and the economy, clearly showing that there isn't one collective opinion about such matters amongst MPC members, but a series of disparities.