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Cable Firms After PPI Revised Higher

By Boris Schlossberg,
15 January 2007 10:59 GMT

UK PPI  (YoY) (DEC) (9:30GMT; 4:30EST)      

Actual:                   2.3%                                                                      

Expected:             2.5%                                                                      

Previous:              2.4%                                                                      

 

How Did the Markets React? 


The true news in today UK PPI data was not  in the headline  number but in the revisions. Last month UK PPI input reading was revised sharply higher jumping to 3.5% from 2.8% originally reported. The release suggested that inflationary [pressures continued to persist in the UK economy and shed light on the surprise BoE rate hike last week. The bind and currency markets reacted as expected with Gilts moving slightly lower and spot inching higher. Stocks however surprised to the upside  as fresh M and A news overwhelmed any negative impact of higher inflation.

 

Bonds – 10-Year UK Gilts

Yields on 10-year UK Gilts rose slightly in the aftermath of the  PPI news with bond prices dropping from 93.24 to 93.16. Traders are beginning to speculate that UK economic growth will remain vibrant at least for the  first half of the this  year, likely pushing long term rates higher  while some are even predicting short term rates to ultimately; reach 6%.

 

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FX – GBP/USD

 

GBP/USD managed to clear the 1.9650 level in the aftermath of the hotter than expected revisions to the PPI input readings which rose to 3.5%.  The presence of persistent inflationary pressure with in the UK suggests that BoE will remain hawkish at least through the first half of this year and should continue to be supportive for the pound.  The unit made 29 month highs against the euro as the cross traded at .6580 due to divergence in interest rate expectations between the two central banks, as the ECB stuck a more dovish tone at it last press conference, offering no guidance to its next tightening move.

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Equities – FT 100

 

London equities rose in morning trade on Monday as investors rushed to buy into Smiths Group. The company unveiled plans to sell its aerospace division to General Electric, with much of the proceeds due to be returned to shareholders. The M and A news overwhelmed the higher inflation data boosting demand for shares. The FTSE 100 started the session 30 points higher at 6,269.4, a rise of 0.5 per cent. The mid-cap FTSE 250 was 0.8 per cent higher at 11,198.3 with support services and transport stocks driving gains.

 

There were strong gains for Vedanta Resources after the miner’s third-quarter earnings beat expectations. Its shares rose 3.2 per cent to £11.46, helping the rest of the sector. Anglo American was 0.6 per cent higher at £24.52, BHP Billiton rose 0.6 per cent to 929½p and Xstrata gained of 0.7 per cent to £23.78. Aviva, the insurer, was 1.6 per cent stronger at 837p after Credit Suisse lifted its rating on the stock.

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15 January 2007 10:59 GMT