Brave New World

Littler Britain 23/10/2009

The UK economy contracted by 0.4% in the third quarter of 2009, according to preliminary data released today. The financial markets, which had been expecting weak growth, reacted with shock. Not one of the 33 economists surveyed by Bloomberg expected a negative reading; the consensus forecast being 0.2% from a range of zero to 0.7%.  Chris Giles from the FT suggests that forecasters had expected a better reading due to the positive sentiment from business survey data since June and recent benign industrial production data. Overall, it seems,  a positive outlook for the UK has recently gained momentum, with Bank of England minutes revealing a more hawkish position adopted by the MPC, with a unanimous verdict against the extension of QE. Such a view will have to be revisted with today’s figures, at the very least, as they are so out of the step with expectations for growth.

It was therefore no surprise that the GBP nosedived today. Sterling fell from almost 1.67 to below 1.65 within minutes of the announcement while gilts rallied and short sterling futures fell as expectations for any near term monetary tightening evaporated. By late London trading GBPUSD had fallen a massive 370 pips- a sharp spike in volatility and what looks to be a key reversal in Sterling’s two week rally. The next target should be 1.60- safely within its 9 month range, and still higher than two weeks ago but with all the feeling of a dead man walking, particularly given today’s much more sanguine data from the Eurozone.