With the US markets closing early for today’s 4th of July holiday, trading volumes were low and markets moribund.
The key economic data of the day was US factory orders which came in at a higher level than expected. Figures from the US Commerce Department showed that orders for US factories rose a bigger than expected 0.7% in May. Analysts had forecasts a gain of just 0.1%.
The markets are also ‘treading water’ ahead of tomorrow’s announcements from both the Bank of England (BoE) and European Central Bank (ECB).
The majority of analysts expect the BoE to increase its asset purchasing program, known as Quantitative Easing (QE) by up to £75 billion to try and stimulate the UK economy away from recession with the unfortunate side effect of devaluing the pound. The ECB is widely expected to cut its benchmark interest rate from 1% following a raft of poor euro zone data and fears that the long running sovereign debt crisis will continue to escalate.
International Monetary Fund (IMF) managing director Christine Lagarde suggested yesterday that the ECB would be better off tomorrow if it announced an increase to its asset purchase programme rather than lower interest rates as the majority of market analysts expect. A cut of 0.25% is widely anticipated and has limited the upside for the euro that it enjoyed from the positive reaction in the markets following last week’s summit.
In an interview with CNBC, Lagarde argued that lower rates are not needed by all of the euro zone countries. “Germany doesn’t need a lowering of interest rates set by the ECB, but Italy and Spain do. You can’t dissociate when you use that kind of policy instrument,” she explained.
Following last week’s summit, German Chancellor Angela Merkel will travel this afternoon to Rome to meet with Italian Prime Minister Mario Monti for ‘Italian-German intergovernmental consultations’, whatever they may be.
In an interview published this morning in the German daily Frankfurter Allgemeine Zeitung, Monti attempted to play down the differences between the growth policy focus highlighted by the likes of Italy, Spain and France and Merkel’s insistence on austerity measures. He repeated the German Chancellor’s idea that while growth was key, it was not to be achieved “at the price of budgetary discipline”.
Merkel and Monti plan to hold a joint press conference after their meeting.
Meanwhile, Charles Goodhart has called on the BoE to stop its QE programme because it is damaging the UK economy. Professor Goodhart, a former member of the BoE and currently at the London School of Economics and a member of The Times’ Shadow MPC, said that instead it should cut interest rates from the already historic low of 0.5% to 0.25% and start buying private sector bonds, as opposed to government gilts. He also urged his former colleagues to intervene directly in the mortgage market “through whatever channels they think would be technically best … I would not increase QE, though I expect the MPC to do so. The damage that this does by distorting long-term interest rates to extraordinarily low levels — to pension funds, those nearing retirement and savers generally — is now beginning to outweigh the marginal benefit to borrowers.”
