Daily Financial Market Outlook

Overview & economic commentary

The focus today will remain in the US, with a host of economic data due this afternoon and heading into a long weekend. However, the ongoing unease in credit markets could see choppy market sentiment continue to dictate trends in financial markets, as investors position themselves for a key week for corporate earnings, particularly from the financial services sector. After the news of a surprise rise in US retail sales in January, the consumer will today again take centre stage with the University of Michigan index of consumer sentiment due this afternoon. The index showed its first increase in six months in January, albeit revised down from the preliminary estimate and from the lowest reading since 2005 in December. We expect a modest rise to 79 in February, up from 78.4 last month, further tempering concerns that the US is heading into recession. We expect this to be supported by data showing US industrial activity expanded at the start of 2008, with official output rising by 0.1% in January and a modest rise in the Empire manufacturing survey in February. Figures showing decade high import prices and elevated capacity usage should highlight the potential inflation risk should US interest rates fall too far. Treasury capital flows data should show continuing strong demand for treasuries and agency debt in December. EU-13 trade figures this morning are forecast to show another solid surplus in December, easing fears the strong euro is damaging growth prospects.

Currency commentary

The downgrade by Moody's of FGIC overnight is dominating the headlines this morning as fears of a more severe fallout of the monoline industry for banks and equities in general could trigger another bout of risk aversion. The monolines were given 5 days yesterday to find new capital to protect their rating. This, US consumer confidence and US TIC data this afternoon are likely to dominate fx markets on the final trading day of the week. The BoJ left interest rates on hold at 0.50% this morning and in associate action took a more dovish view on the economy. So despite the weakess in stocks, the yen may struggle to extend recent gains as worries increase about faltering Japanese growth. €/£ bounced off yesterday's 0.7405 low this morning and with no major UK or EU releases until next week, the cross could range trade around 0.7450. In EM, the Rand continues to cut losses and firmed to 7.5732 vs the dollar overnight.

Major data and events today

* Japan interest rate decision (06:00)
Current: 0.50%
Actual: 0.50%
* EU-13 trade balance (nsa) (10:00)
Nov +€2.6bn
Dec (f'cast) +€3.0bn
Median +€2.4bn Range -€3.0bn:+€3.1bn
* US Import prices (13:30)
Dec zero Y-O-Y +10.9%
Jan (f'cast) +0.4% Y-O-Y +12.7%
Median +0.5% Range -0.3%:+1.3%
* US Empire manufacutring survey (13:30)
Jan 9.0
Feb (f'cast) 10.0
Median 7.8 Range 2.0:10.0
* US Treasury Internat. Capital Data (14:00)
Nov +$90.9bn
Dec (f'cast) +$80.0bn
Median +$72.0bn Range +$50bn:+$100bn
* US Industrial production (sa) (14:15)
Dec zero Y-O-Y +1.5%
Jan (f'cast) +0.1% Y-O-Y +2.2%
Median +0.1% Range -0.2%:+0.5%
* US Capacity use (14:15)
Dec 81.4%
Jan (f'cast) 81.3%
Median 81.4% Range 81.1%:81.6%
* University of Michigan confidence (prel) (15:00)
Jan 78.4
Feb (f'cast) 79.0
Median 78.0 Range 72.0:81.5
* Canada manufacuring shipments (13:30)
Nov +1.1%
Dec (f'cast) -0.1%
Median -0.2% Range -0.5%:+0.4%
* Former Fed Chairman Greenspan speaks in Texas (00:30)
* Bank of Japan interest rate decision (interest rates expected to remain at 0.5%) (06:00), Press conference (06:30)
* ECB members Quaden and Liikanen speak in Brussels (11:00)
* ECB President Trichet speaks on structural reform (14:45)
* US Fed member Mishkin speaks (17:45)

Chart of the day: Will the University of Michigan consumer sentiment index rise for a second consecutive month in 2008?

Lloyds TSB Bank

Posted in: Forex