ECONOMIC DATA ANALYSIS
Friday, 3rd June 2011
UK INDUSTRIAL PRODUCTION EXPECTED TO DROP SHARPLY
UK highlights in
the coming week:
MPC
Industrial
production (Apr)
PPI (May)
Net trade (Apr)
Global highlights
in the coming
week:
ECB
US Net Trade
(Apr)
Ger Industrial
Production (Apr)
OPEC meeting
UK MPC to remain
on hold for 27th
consecutive
month, but ECB
likely to signal a
rate rise in July
Bond yields hit
new lows for the
year, as concerns
build over US
recovery
CONTRIBUTORS:
Adam Chester
Head of UK Macroeconomics
Tel: 020 7158 1740
David Page
Senior UK Macroeconomist
Tel: 020 7158 8290
Jeavon Lolay
Director of Global Research
Tel: 020 7158 1742
Sian Fenner
Global Macroeconomist
Tel: 020 7158 3975
Nikesh Sawjani
UK Economist
Tel. 020 7158 1749
Mark Miller
Global economist
Tel: 020 7158 2141
• 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
CHART A: Bank Holiday impact on UK industrial
production
% change in manufacturing output, m/m
0
-1
-2
-3
-4
LBCM forecast
-5
-6
(Silver Jubilee) (Golden Jubilee) (Royal Wedding)
June 1977 June 2002 May 2011
Source: LBCM, Bloomberg
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 scrutinised
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
CHART B: Global economy starting to rebalance
Trade balance, % of GDP
10
China
8 Germany
6 UK
US
4
2
0
-2
-4
-6
-8
1994 1997 2000 2003 2006 2009
Source: IMF
UK April industrial was ‘carefully monitoring’ developments, instead trade deficit in April. Dated Brent crude oil hurtled
production likely of the term ‘strong vigilance’ that the market has through $120 and peaked at $126.7 before
to be heavily come to rely on as an indication of an imminent dropping sharply in May. Rising oil imports
impacted by the tightening. As such, the ECB is not expected to accounted for the majority of the $2.7bn jump in the
Royal Wedding raise interest rates this month, although the trade deficit in March ($48.2bn), with higher prices
markets will be scrutinising Trichet’s comments and volumes both playing a part. We look for the
at the press conference for tacit confirmation that total deficit at $50bn in April. However, the impact of
a move next month is on the cards. the Japanese earthquake and tsunami on both
imports and exports represents a wild card, with
UK Industrial Production (April): Judging by the parts shortages in the auto sector leading to an
recent softening in the manufacturing PMIs, the outright fall in US manufacturing output in April. We
UK industrial sector appears to have entered a suspect the trade deficit will peak this month, with a
soft patch after the strong growth recorded through softening in growth and weaker oil prices likely to
much of 2009/10. Recent trends alone would dampen imports over the remainder of the year.
argue for a softer IP outturn in April, although the
loss of an extra day’s output due to the Royal UK Trade Balance (April): The prospects for UK
Wedding and the impact of events in Japan are growth, this year and next, rest heavily on an
UK producer substantial wild cards. In June 2002, industrial ongoing economic rebalancing away from
price pressures production dropped by 4.5% on the month due to domestic demand towards net external trade. The
have started the additional Golden Jubilee Bank holiday. We strong contribution made by net exports to Q1 GDP
to ease look for a similar impact this year, with IP forecast growth suggests that this rebalancing may be
to have contracted by 3.0% and manufacturing starting to gain momentum. But the marked
output by 4.0%. softening in manufacturing activity in recent
months provides grounds for caution. The UK’s
UK PPI (May): Producer prices have risen sharply overseas trade deficit fell back slightly to £7.7bn
over the past year, as increasing food and energy in March, although this is still uncomfortably high.
costs have passed down the supply chain. There Overall, we look for an improvement in the deficit
are signs, however, that cost pressures are in April, to £7.2bn, although the noise surrounding
starting to ease. Oil prices (in sterling terms) fell this forecast is high due to the UK bank holiday
by 11% in May, while the input price component of effect and supply chain disruptions in Japan.
the latest manufacturing PMI fell to its lowest since
German IP (April): German industrial production
last October. We expect this week’s data to reflect
Editorial comments to: was hampered towards the end of last year by
this, with input prices forecast to have dropped by
Trevor Williams, severe winter weather conditions, but rebounded
1.0%, although output prices are likely to have risen
Chief Economist sharply in Q1 (March’s IP index was 4% higher
Lloyds Bank Corporate again (f: +0.4%m/m) as the lagged impact of
than in December). We look for only a modest
Markets earlier input increases continues to feed through.
Economic Research,
expansion during April - with our forecast at 0.3%
10 Gresham Street US Trade Balance (April): Surging oil prices are m/m - reflecting business survey evidence which
London, EC2V 7AE forecast to have led to a further widening in the US while still healthy, has eased back recently.

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ECONOMIC DATA AND EVENTS CALENDAR (6 - 10 JUNE)
Country Time Release/Event Period Actual Consensus Forecast Previous

Monday 6th June

UK 00:01 Lloyds Employment Confidence Survey May n/a n/a -58

SP 08:00 Industrial production Apr 1.5% -- (-0.9%)
US 08:30 Fed's Plosser speaks in Helsinki -- -- -- --
EZ 10:00 Producer prices Apr 0.8% (6.6%) 1.0% (6.8%) 0.7% (6.7%)
EZ 17:00 ECB's Trichet speaks in Montreal -- -- -- --
US 22:30 Fed's Fisher speaks in New York -- -- -- --

Tuesday 7th June

UK 00:01 BRC retail sales monitor like-for-like (total) May 2.0% n/a 5.2% (6.9%)
AU 05:30 RBA cash target May 4.75% 4.75% 4.75%
JN 06:00 Leading index Apr (p) 96.5 n/a 100.1
EZ 10:00 Retail sales Apr 0.3% (0.0%) 0.4% (0.1%) -0.9% (1.7%)
UK 10:30 DMO to sell £1bn of 0.625% I/L 2040 -- -- -- --
GE 11:00 Factory orders Apr 2.0% (9.1%) 2.5% (9.5%) -4.0% (9.7%)
US 17:30 Fed's Lockhart speaks in Charlotte -- -- -- --
US 18:00 Treasury to sell $32bn of 3yr notes -- -- -- --
US 20:45 Fed Chairman Bernanke speaks in Atlanta -- -- -- --

Wednesday 8th June

UK 00:01 BRC shop price index May n/a n/a (2.5%)

JPN 00:50 Current account Apr ¥266.0bn n/a ¥752.7bn
US 02:00 Fed's Dudley speaks in New York -- -- -- --
JPN 06:00 Eco Watchers survey: current May 33.0 n/a 28.3
GE 07:00 Current account Apr €11.4bn -- €19.5bn
GE 07:00 Trade balance Apr €15.0bn €15.5bn €18.9bn
WD 159th OPEC meeting -- -- -- --
EZ 10:00 GDP Q1 (f) 0.8% (2.5%) 0.8% (2.5%) 0.8% (2.5%) (p)
GE 11:00 Industrial production Apr 0.2% (10.0%) 0.3% (10.2%) 0.7% (11.2%)
US 18:00 Treasury to sell $21bn of 10yr notes -- -- -- --
US 19:00 Fed's Beige Book -- -- -- --
US 19:20 Fed's Hoenig speaks in Colorado -- -- -- --
NZ 22:00 RBNZ rate announcement Jun 2.50% 2.50% 2.50%

Thursday 9th June

JPN 00:50 GDP Q1 (f) -0.8% n/a -0.9% (-1.0%) (p)

AU 02:30 Employment change May 25.0k 30.0k -22.1k
AU 02:30 Unemployment rate May 4.9% 4.9% 4.9%
US 09:00 Fed's Plosser speaks in London -- -- -- --
UK 09:30 Trade in goods and services Apr -£2.200bn n/a -£3.005bn
UK 09:30 Global trade balance Apr -£7.549bn -£7.200bn -£7.660bn
UK 09:30 -ex oil & erratics Apr n/a n/a -£7.321bn
UK 09:30 Non-EU trade Apr -£4.350bn -£4.480bn -£4.479bn
UK 09:30 -ex oil & erratics Apr n/a n/a -£2.250bn
UK 12:00 MPC announcement (Bank Rate) Jun 0.50% 0.50% 0.50%
UK 12:00 MPC announcement (APF target) Jun £200bn £200bn £200bn
EZ 12:45 ECB interest rate announcement Jun 1.25% 1.25% 1.25%
EZ 13:30 ECB President Trichet press conference -- -- -- --
US 13:30 Trade balance Apr -$48.8bn -$50.0bn -$48.2bn
US 13:30 Initial jobless claims w/e 4/6 419k 415k -6k (422k)
US 16:30 Fed's Yellen speaks in Cleveland -- -- -- --
EZ 17:00 ECB's Mersch speaks in Luxembourg -- -- -- --
US 18:00 Treasury to sell $13bn of 30yr bonds -- -- -- --
Country Time Release/Event Period Actual Consensus Forecast Previous

Friday 10th June

CH 03:00 Trade balance (USD) May $19.8bn n/a $11.4bn

GE 07:00 HICP May (f) -0.2% (2.4%) -0.2% (2.4%) -0.2% (2.4%) (p)
FR 07:45 Industrial production Mar 0.4% (3.9%) 0.3% (4.2%) -0.9% (3.3%)
EZ 07:50 ECB's Trichet speaks in Frankfurt -- -- -- --
IT 09:00 GDP Q1 (f) 0.1% (1.0%) 0.1% (1.0%) 0.1% (1.0%) (p)
UK 09:30 Manufacturing output Apr -0.1% (3.4%) -4.0% (-0.6%) 0.2% (2.7%)
UK 09:30 Industrial production Apr 0.0% (1.3%) -3.0% (-1.7%) 0.2% (0.7%)
UK 09:30 PPI (input) May -1.0% (16.2%) -1.0% (16.6%) 2.6% (17.6%)
UK 09:30 PPI (output) May 0.3% (5.3%) 0.4% (5.4%) 0.8% (5.3%)
UK 09:30 PPI (output, core) May 0.3% (3.4%) 0.4% (3.4%) 0.6% (3.4%)
EZ 12:00 ECB's Gonzalez-Paramo speaks in Madrid -- -- -- --
US 13:30 Import prices May -0.7% (11.2%) n/a 2.2% (11.1%)

During the week

UK 08:00 Halifax house price index May 0.3% (-4.0%) n/a -1.4% (-3.7%)
POR - Portugal General Election (Sunday 5th June) -- -- -- --

Shaded areas denote those releases/events that are expected to attract most market attention
Data in brackets denote YoY. Market consensus estimates are taken from the preceding Friday.
* Released overnight

MARKETS

Change (bps):
Interest rates (%) Current on w eek on 1m th on 3m th on 6m th on 12m th
Bank Rate 0.50 0 0 0 0 0
£3mth Libor 0.83 0 0 2 8 17
UK 2-yr sw ap rate 1.46 -5 -9 -49 5 23
UK 5-yr sw ap rate 2.46 -8 -19 -60 -2 4
UK 10-yr sw ap rate 3.42 -3 -13 -46 -14 -6
UK 30-yr sw ap rate 3.94 1 -4 -22 -17 1
2-yr gilt yield 0.89 -4 -13 -55 -13 12
5-yr gilt yield 1.88 -10 -22 -68 -20 -33
10-yr gilt yield 3.26 -5 -16 -45 -15 -31
30-yr gilt yield 4.13 -1 -3 -30 -22 -14

Change (%):
Currencies Current on w eek on 1m th on 3m th on 6m th on 12m th
GBP/USD 1.63 -1.0 -0.9 0.4 3.5 5.5
GBP/EUR 1.12 -2.7 0.9 -3.7 -4.6 1.1
GBP/CHF 1.37 -2.6 -3.9 -10.0 -11.1 -8.5
GBP/JPY 131.5 -1.4 -1.4 -2.0 1.0 -9.3
Other
FTSE 100 5842 -0.7 -4.0 -2.7 1.7 2.7
Oil WTI future (US$/barrel) 99.5 -0.8 -10.4 -2.4 11.5 24.2
Gold spot (US$/oz) 1542.6 0.4 0.4 8.9 9.1 27.7
Prices taken at London close; Swap rate quote conventions:UK - Semi, Actual/365 vs. 6M Libor; US - Annually, Actual/360 vs. 3M Libor; Euro - Annually, 30/360 vs. 6M Euribor.
Swap rates are quoted as Ask prices