Sterling Pressured by BOE Governor King

* The dollar traded mostly lower on Tuesday as risk appetite increased and US stock price indexes climbed to fresh yearly highs. Federal Reserve Chairman Ben Bernanke said the US recession is “very likely” over but the economy is still weak. US retail sales and producer prices rose more than expected. The S&P 500 was up 3.29 points to 1,052.63. The yen declined for a second day. The euro gained for an eighth consecutive day. The Australian and Canadian dollars advanced on higher commodity prices.

* The GBP/USD fell as Bank of England Governor Mervyn King signaled that the BOE might reduce the rate it pays on bank deposits held at the central bank. King also said the risk to inflation is still on the downside. A lower rate will induce commercial banks to lend more. After breaking its short-term uptrend, the GBP/USD is between the 1.64-area support and the 1.67-area resistance. If the 1.64 support is broken, the GBP/USD outlook will turn more bearish.

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Financial and Economic News and Comments

US & Canada

* US retail sales gained a more-than-expected 2.7% m/m in August, the most since January 2006, to $351.4 billion, after a revised 0.2% m/m decline in July, data from the Commerce Department showed. Most of the gain in August retail sales came from autos, gas, and general merchandise stores. Retail sales excluding autos rose a more-than-anticipated 1.1% m/m in August after a revised 0.5% m/m decrease in July. Retail sales excluding autos and gas increased 0.6% m/m in August, the second gain in six months. Retail sales declined 5.3% y/y in August but jumped at a 14.3% annual rate in the past three months. Retail sales excluding autos fell 6.2% y/y but rose at a 5.1% annual rate in the last three months.

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* US producer prices rose a more-than-expected 1.7% m/m in August, the fourth gain in five months, after a 0.9% m/m decrease in July, PPI data from the Labor Department showed. The rise in August PPI was mostly due to an 8.0% m/m increase in energy. The core PPI, which excludes food and energy, increased 0.2% m/m in August after a 0.1% m/m decline in July. The PPI fell 4.3% y/y in August while the core PPI rose 2.3% y/y.

* The New York Fed general business conditions index rose to a higher-than-expected 18.9 in September from 12.1 in August, indicating manufacturing in the New York region continued to expand this month to the highest level since late 2007 following an upturn that kicked off in August, according to the Empire State Manufacturing Survey, released by the Federal Reserve Bank of New York. The new orders index rose to 19.8 in September from 13.4 in August, while the shipments index fell to 5.3 from 14.1. The employment index ticked lower to -8.3 in September from -7.45 last month. “Future indexes remained relatively high and close to their August levels, suggesting that conditions are expected to improve further in the months ahead,” the NY Fed said.

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US business inventories fell a more-than-expected 1.0% m/m in July, an eleventh consecutive fall, to $1.33 trillion, the lowest level since March 2006, after a revised 1.4% m/m decrease in June, data from the Commerce Department showed, registering the longest stretch of declines since 2002. Business sales advanced 0.1% m/m, following June’s upwardly revised 1.1% m/m gain.

Europe

* The ZEW eurozone economic expectations index rose more than expected to 59.6 in September from 54.9 in August, indicating eurozone investor confidence improved this month, according to data from the ZEW Centre for European Economic Research. The current economic situation index improved to -77.9 from -82.1.

* The ZEW German economic expectations index increased less than expected to 57.7 in September from 56.1 in August, indicating Germany’s investor confidence rose to the highest level since April 2006, ZEW data showed. The current economic situation gauge advanced to -74.0 from -77.2.

* The UK consumer-price inflation rate rose at 1.6% y/y in August, the least since January 2005, after 1.8% y/y in July. August CPI advanced 0.4% m/m. The core CPI rate was 1.8% y/y in August, the same as in July and the highest level since November 2008. Retail prices increased 0.5% m/m in August but declined 1.3% y/y.

* UK house prices fell a less-than-expected 8.3% y/y in July, easing the pace of decline following a 10.7% y/y slide in June, according to data released by the Department of Communities and Local Government.

* The seasonally adjusted net balance of surveyors reporting increasing rather than decreasing UK house prices turned positive in August to a reading of 10.7%, the highest net balance since May 2007, after a revised -5.7% in July, a survey from the Royal Institution of Chartered Surveyors showed, indicating the UK housing market is stabilizing.

Asia-Pacific

* Japan’s machine tool orders fell 71.5% y/y in August, revised from a preliminarily reported 71.3% y/y decrease, final August data from the Japan Machine Tool Builders’ Association showed, after a 72.3% y/y drop in July. Domestic orders fell a revised 72.5% y/y in August and foreign orders decreased a revised 70.8% y/y.

* Foreign direct investment in China rose 7.0% y/y to $7.5 billion in August, the first rise in 11 months, after a 35.7% y/y decrease in July, the Ministry of Commerce said.

* Australia’s seasonally adjusted dwelling starts unexpectedly fell 3.7% q/q to 30,411 units in Q2 2009 after a revised 2.1% q/q decline in Q1, figures from the Australian Bureau of Statistics showed. Q2 dwelling starts dropped 24.1% y/y.

* The Reserve Bank of Australia tried to balance the risks of rising inflation and choking off an Australian economic recovery. “Members were conscious of the need to balance the task of controlling inflation over the medium term with that of supporting economic recovery,” RBA board members said in minutes of their September 1 meeting, released today. The minutes read: “As at the previous meeting, members noted that the policy decision in the near term involved balancing the risk of over-staying an accommodative stance, and that of prematurely tightening and adversely affecting confidence and demand. The meeting concluded that the balance was best struck by leaving the cash rate unchanged for the time being, pending further evaluation of incoming information at future meetings.”

Source: Hans Nilsson

15.09.2009