ANÁLISE ECONÓMICA - DADOS DE PRODUÇÃO INDUSTRIAL DO REINO UNIDO DEVEM CAIR DRASTICAMENTE

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Friday, 3rd June 2011

UK INDUSTRIAL PRODUCTION EXPECTED TO DROP SHARPLY

• Global benchmark bond yields hit new lows for the year, as concerns over the prospects for US growth escalate.

• MPC and ECB meet - no change expected from either, although ECB likely to set the stage for rise next month.

• Royal Wedding and Japan-related supply chain disruptions raise prospect of big fall in UK April industrial production.

• External trade data watched closely as markets eye prospects for rebalancing.

With non-farm payrolls rounding off a week of unambiguously poor US data, sentiment in the global money and FX markets remains focused on the possibility of a US-induced global slowdown. Prospects for Q2 GDP growth across the developed and many of the developing economies - including China - have been revised down steadily and with this, prospects for the turn in the global interest rate cycle. The multi trillion dollar question is whether the recent downturn in the US marks the start of a sustained economic slowdown - as the impact of earlier monetary and fiscal impetus fades - or (as we suspect) a temporary pause for breath, accentuated by supply-chain disruptions due to the Japanese earthquake.

For now, the markets are taking no chances, with global 10-yr bond yields hitting new lows for the year (with the US back below 3%) and equities succumbing to an ongoing “risk-off” trade. The coming week is unlikely to shed much light on this question, with little in the way of key US, or for that matter, European data. Instead, the focus will be on European policy-makers and the prospects, or otherwise, for global rebalancing.

The MPC and ECB meet on Thursday while, over the course of the week, external trade figures for April are due in the UK, Germany, US and China. In keeping with the rebalancing theme, the markets will also be eyeing the UK and German industrial production figures. Distilling a clear message from either the trade or production data, however, is likely to be difficult given the disruption surrounding events in Japan and, in the UK, the Royal Wedding. OPEC will also be back in the spotlight, with the oil cartel widely expected to announce an official increase in its oil quotas of around 0.5-1.0mn b/d - the first increase since 2007.

MPC: The MPC meets with the Committee almost certain to leave rates unchanged at 0.5% (for the 27th consecutive month). If anything, support for maintaining the status quo has strengthened following a spate of weak activity data and an easing in commodity prices. Notably, new member Ben Broadbent makes his debut. Broadbent has yet to make public his position on interest rates, noting at his Treasury Select Committee hearing that there are ‘strong arguments on both sides’. We doubt, however, that he will vote against the majority at his first meeting. Assuming other members hold their positions, this would leave just two members - Weale and Dale - advocating an immediate rate rise. Dale, has recently noted, however, that he is open to changing his vote at ‘any time’. He could conceivably do so this month given the weakness of the recent economic data. Although the rate decision is announced on Thursday, the composition of the vote will not be released until the minutes are published two weeks later.

ECB: Having already decided to raise interest rates in April, the debate at the ECB is not so much about whether to raise rates again, but when. The strength of the German economy and the continued overshoot of Euro area CPI inflation above the ECB’s 2% target provides the governing council with continued grounds for tightening. In recent months, the market has closely scrutinized the ECB’s language for a signal of its policy intentions. In the press conference that followed May’s Council meeting, Trichet noted that the ECB was ‘carefully monitoring’ developments, instead nof the term ‘strong vigilance’ that the market has come to rely on as an indication of an imminent tightening. As such, the ECB is not expected to raise interest rates this month, although the markets will be scrutinising Trichet’s comments at the press conference for tacit confirmation that a move next month is on the cards.

UK Industrial Production (April): Judging by the recent softening in the manufacturing PMIs, the UK industrial sector appears to have entered a soft patch after the strong growth recorded through much of 2009/10. Recent trends alone would argue for a softer IP outturn in April, although the loss of an extra day’s output due to the Royal Wedding and the impact of events in Japan are substantial wild cards. In June 2002, industrial production dropped by 4.5% on the month due to the additional Golden Jubilee Bank holiday. We look for a similar impact this year, with IP forecast to have contracted by 3.0% and manufacturing output by 4.0%.

UK PPI (May): Producer prices have risen sharply over the past year, as increasing food and energy costs have passed down the supply chain. There are signs, however, that cost pressures are starting to ease. Oil prices (in sterling terms) fell by 11% in May, while the input price component of the latest manufacturing PMI fell to its lowest since last October. We expect this week’s data to reflect this, with input prices forecast to have dropped by 1.0%, although output prices are likely to have risen again (f: +0.4%m/m) as the lagged impact of earlier input increases continues to feed through.

US Trade Balance (April): Surging oil prices are forecast to have led to a further widening in the US trade deficit in April. Dated Brent crude oil hurtled through $120 and peaked at $126.7 before dropping sharply in May. Rising oil imports accounted for the majority of the $2.7bn jump in the trade deficit in March ($48.2bn), with higher prices and volumes both playing a part. We look for the total deficit at $50bn in April. However, the impact of the Japanese earthquake and tsunami on both imports and exports represents a wild card, with parts shortages in the auto sector leading to an outright fall in US manufacturing output in April. We suspect the trade deficit will peak this month, with a softening in growth and weaker oil prices likely to dampen imports over the remainder of the year.

UK Trade Balance (April): The prospects for UK growth, this year and next, rest heavily on an ongoing economic rebalancing away from domestic demand towards net external trade. The strong contribution made by net exports to Q1 GDP growth suggests that this rebalancing may be starting to gain momentum. But the marked softening in manufacturing activity in recent months provides grounds for caution. The UK’s overseas trade deficit fell back slightly to £7.7bn in March, although this is still uncomfortably high. Overall, we look for an improvement in the deficit in April, to £7.2bn, although the noise surrounding this forecast is high due to the UK bank holiday effect and supply chain disruptions in Japan.

German IP (April): German industrial production was hampered towards the end of last year by severe winter weather conditions, but rebounded sharply in Q1 (March’s IP index was 4% higher than in December). We look for only a modest expansion during April - with our forecast at 0.3% m/m - reflecting business survey evidence which while still healthy, has eased back recently.

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