Figures confirm US heading towards recession…

Preliminary GDP data released yesterday showed that the US economy contracted 0.3% in the third quarter, its sharpest decline in seven years, as businesses and consumers reigned in spending as fears of a recession took hold. The market consensus was for a decline of 0.5% so although the 0.3% contraction was the steepest decline since Q3 2001 it was not as bad as expected. Continuing job losses coupled with declining gains from stocks and other investments have put consumers under severe stress. The GDP report showed that disposable personal income dropped 8.7% in the third quarter after rising 11.9% in the second quarter boosted by the US government’s economic stimulus payments.

US Initial jobless claims for the week ending 25 October was left unchanged at 479k, above market expectations for a decrease to 475k. This compares to the revised 479k reading seen in the prior week (prev. 478k)

The Bank of Japan cut its interest rate by 20 basis points to 0.30%, less than the 25 basis point cut widely expected. The yen strengthened however on renewed investor concerns over riskier assets. Asian equity markets returned to negative territory after a week of gains reflecting the gloomy outlook that persists despite interest cuts.

This morning a report showed that German retail sales fell 3.1% in September after a rise of 3.3% in August, some turn around and underpins expectations that the ECB will cut interest rates next week. Gold slipped $3.75 per ounce to $731.75 and is on course for its biggest monthly decline since 1983, as oil also fell on recession fears forcing investors to cash in to stem losses.

Data due today includes Euro zone unemployment at 10:00 GMT, US personal income and spending at 12:30 GMT followed by the Chicago PMI for October at 13:45 GMT.

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Sterling fell sharply on Friday, hitting a new record low against the euro and a six-year low against the dollar as intensifying risk aversion and concerns about a weak UK economy weighed heavily on the pound. The euro rose 3% to 81.95 pence, while the pound traded as low as 1.5270 its lowest level against the dollar since 2002. Figures out Friday showed the UK economy contracted by 0.5% in the third quarter compared with the previous three months, much worst than forecast. Technically not a recession yet as second quarter growth was flat, however, both Prime Minster Brown and Bank of England Governor King have suggested that the UK is already in recession and therefore we should expect further negative growth in the fourth quarter.

The yen extended gains against the dollar and euro on Friday. The dollar fell to a 13-year low of 90.95 yen while the euro fell more than 10% to a low of 113.82 yen. However, the Japanese currency fell back just before New York markets opened on speculation the Bank of Japan may have intervened to curb the yen’s rise. While intervention would not trigger a change in trend it could contribute to a stablisation of the market and would be consistent with the G7’s position of only intervening in disorderly markets.

Oil prices continued to ease despite a decision taken by OPEC at an emergency meeting on Friday to cut production by 1.5m barrels per day. West Texas crude traded as low as $62.85 on Friday, down 3.7% on the day and a whopping 57% decline compared to its peak of $147.27 back in July. Gold was also trading lower at $680 losing nearly 6% of its value on Friday and 31% down from its peak of $987 in July.

Focus this week will be on interest rates. There are strong expectations that US rates will be cut by at least 50 basis points when the Federal Reserve announce their rate decision on Wednesday. Both the Bank of England and the European Central Bank are also likely to cut rates at their policy meetings scheduled for next week although it would not be a total surprise if they reduced rates early in a coordinated move with the Fed.

Credit pressures on the emerging market economies continue to increase with the IMF agreeing over the weekend to provide Ukraine with USD16bn of loans with talks between the IMF and Hungary in an advanced stage.

This week we have several key economic reports due including later today the German IFO business confidence index, US consumer confidence on Tuesday, FOMC rate decision on Wednesday and US Q3 GDP data on Thursday. The US economy is forecast to have contracted by 0.5% in the 3rd quarter and it is concerns over growth that will trigger the expected rate cut by the Fed on Wednesday.While care has been taken in the preparation of the information contained in this publication, it is a general guide and readers should not rely on any information contained in it in relation to a specific issue without taking financial, investment, banking or other professional advice.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. Currencies Direct cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

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