UK Trade figures...

If the Government were hoping for some good news to help their election chances yesterday was another severe setback for them. The latest UK balance of payments data (see Article 21, page 153 of Reading and understanding Economics for more info) was truly shocking. The figures showed that exports fell by 7% in January. This was much worse than analysts had expected. The result was a further sharp fall in sterling on the FX markets with the pound slipping back below $1.50.

The really disturbing aspect of these numbers is that you might expect to see the sustained fall in the pound boosting UK exports and inhibiting the level of imports coming into the economy. The depreciation in the currency pushes up the cost of imports and makes UK exports cheaper on World markets. While the higher price of imports does seem to be increasing domestic inflation the more favourable rise in exports does not seem to be coming through. There had been a hope that the improved competitiveness of the UK's manufacturing sector would help to rebalance the economy with exports and investment compensating for weaker consumption and government spending. Sadly the latest data suggests that this is not happening. The next concern for the Government will be the latest GDP data released on the 23 April 2010. This might show that the UK is back in recession which will hardly be good news just a month or so ahead of the election.

Fed makes surprising move...

Late last Thursday night the Fed announced that they would be raising the interest rate it charges banks looking for emergency loans. The 25 basis points increase in the discount rate took it to 0.75%. This is a clear signal from the Fed that it thinks that there is some evidence that the US economy is really starting to recover Such a move had been expected at some point in 2010 but the timing caught the markets by surprise. As a result we saw a jump in the US dollar as well as some gains in the major stock market indices. We are probably some way away from a movement upwards in the far more significant Fed Funds Rate but some increase is possible in the early summer. For Fed watchers it is going to be an interesting year ahead.

Obama acts to cut back on bank risks

Yesterday the US President announced plans to limit the risks taken by major US financial institutions. This came as a complete surprise and as a result we saw sharp falls in the shares of several banks including JP Morgan Chase and Morgan Stanley. The key measure is that US banks that take ordinary personal deposits will be forced to close or sell off their proprietary trading operations. This is the type of activity that got banks like Bear Stearns (see page 197 of "Reading and Understanding Economics") into severe trouble in 2008. Put simply, the bank's prop trading desk is involved in taking bets on financial markets using the its own money rather just than carrying out a trade for a client in which only the client's money is at risk. This type of activity has been associated with the creation of clear conflicts of interest with some banks encouraging their clients to buy financial products that the banks had a stake in. It is now expected that the UK Government will follow this lead and introduce similar measures in the near future.

Doves versus the Hawks!

The latest minutes (November meeting) from the Bank of England's Monetary Policy Committee (MPC) highlight some clear divisions among its members in relation to the future direction of UK monetary policy. Seven members voted for the further £25bn boost to the quantitative easing (QE) programme which took the total to date up to £200bn. One dovish member (David Miles) actually wanted the QE to amount to some £40bn. In contrast one other hawkish member (Spencer Dale) wanted no further QE at all. These divisions reflect the wider view of the City economists. In recent weeks we have seen some of them arguing that we should do more to promote growth and that any inflationary threat was minimal. In contrast some others now feel that the Bank's actions have gone too far. They fear that we could see a serious rise in UK inflation next year. To be honest it is hard to decide which side of this argument that I feel most comfortable to support. There are clearly some inflationary pressures mounting reflected in higher oil prices and the more confident tone of the stock market. Against that there is clearly a risk that the economic recovery could hit the buffers during 2010. If that happens the risk of higher inflation will soon disappear. We live in interesting times!

Manufacturing output improving?

Yesterday we saw the publication of some slightly more encouraging data on the UK's manufacturing sector. The Chartered Institute of Purchasing and Supply's Purchasing Managers Index (PMI) rose to 53.7% in October. This compared to a figure just below 50% in September. In the United States the equivalent PMI is a major economic release and this would have hit the headlines. However, in the UK this data is more low key. The significance of the data is that any figure above 50% indicates that this sector is growing. So the rise from below 50% to 53.7% in October could be taken a clear sign that the worst is over. However, we should wait to see this trend confirmed with November's data published in early December.

Investment Banks drive stock market indices forward!

Today Goldman Sachs, the US Investment Bank, announced that their profits had hit over $3.2bn in the third quarter compared to a year ago. This followed on from Wednesday's numbers showing that JP Morgan Chase had earned $3.6bn net income in the three months to the end of September 2009. This was way better than the analysts had expected and the outcome was that the Dow Jones Industrial Average (DJIA) went above 10,000 for the 1st time in a year. The broadly based rally in stock prices also reflected some very good retail sales numbers and some encouraging figures from Intel. The big question is can this stock market confidence build further taking the DJIA to even higher levels. For what it is worth I would not be too surprised to see some slight fallback in share prices as traders become more cautious perhaps deciding to sell some stock and take some profits. They have after all seen a 50% rise in the main stock market indices since March of this year. So keep an eye on all the key indices which are shown on the front page of the main section of the FT.

G20 take centre stage!

In recent days the actions of the G20 leading economies have dominated the news agenda. One aspect of this has been the various statements made by some of the key players on the need to clamp down on the level of bankers' bonuses and the activities of hedge funds in an attempt to avoid some of the causes of the credit crisis. There has, however, been a clear divide between those leaders representing continental Europe (Angela Merkel and Nicolas Sarkozy) and the those representing the Anglo-US axis (Brown and Obama). The former advocate much tougher financial regulation including explicit measures to limit bankers' pay in the future while the latter favour lighter regulation on financial institutions. There is little doubt that both Brown and Obama are facing stiff opposition from the city of London and Wall Street to any attempt to come down too harshly against the banks. This will be a debate that will continue for some time....