Markets attempted to find a more optimistic tone, but it was very difficult to sustain any recovery in sentiment. Confidence in the financial sector weakened again later in the week and global stock markets were also on the defensive with bourses threatening to break below the lows seen during in the fourth quarter of 2008

The US economic data continued to illustrate that the economy faces a further sharp contraction for the first quarter of 2009. Housing starts fell by a further 16.8% in January with the annual rate at a record low of 0.47mn from 0.55mn the previous month while building permits declined to 0.52mn from 0.55mn.


The manufacturing survey data remained bleak with the New York PMI index weakening to a record low of -34.6 for February from -22.2. The Philadelphia Fed index also weakened sharply to -41.3 from -24.3 and this was the weakest reading since 1990. All the current components were depressed, although the improvement in the six-month outlook index will provide some slight optimism over second-half prospects.

The labour-market data also remained weak with initial claims at 627,000, unchanged from the revised level the previous week and at the highest level since 1980. Continuing claims also pushed to the highest level since at least 1970.

According to minutes from January’s FOMC meeting, confidence in the 2009 outlook deteriorated further with fears over the commercial-property sector and there was no indication that the housing sector was stabilising. The FOMC also discussed the possibility of moving toward an inflation target. Consumer prices rose 0.2% in January with the annual rate at zero.

President Obama signed the US$798bn fiscal stimulus bill into law and there were hopes that fresh plans to ease mortgage difficulties would help improve conditions. The 2010 Fed growth projections were revised higher.

The US capital flows data was better than expected with net long-term inflows of US$34.8bn for December from a net outflow of US$ in November. The data helped ease fears that the US would be unable to secure sufficient long-term flows.

The German ZEW economic confidence survey recovered further to -5.8 in February from -31 the previous month which briefly helped improve Euro sentiment, but the currency was unable to sustain the initial advance as confidence was weaker.

The currency continued to be unsettled by fears over the Eastern European economy and banking sector. Fears were fuelled by a warning from Standard & Poor’s that credit ratings were at risk. There were also warnings over a possible downgrading of Ukraine’s debt rating and some speculation over an Irish sovereign debt default. The internal Euro-zone stresses were illustrated by a further widening of yield spreads between Germany and the weaker Euro-zone members.

Later in the week, the Euro gained some relief on speculation that the German government would support the regional German state banks.

The Euro-zone PMI indices continued to deteriorate according to the flash data for February and markets remained confident that the bank will lower interest rates at the March meeting with strong expectations of a further 0.50% reduction.

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The dollar strengthened over the week as whole as confidence in other currencies weakened and pushed to three-month-highs near 1.25 against the Euro, although trading conditions were again erratic. The yen weakened steadily over the week as it tested 2009 lows near 94.50 against the dollar.

The Japanese economy contracted by 3.3% in the fourth quarter of 2008 with a sharp decline in exports and this was the weakest quarterly performance since 1974. The Tankan manufacturing index remained close to historic lows of -74 for February from -76 the previous month, reinforcing severe industrial-sector difficulties. The Nikkei index also weakened to a four-month low as confidence remained fragile.


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Following the latest meeting, the Bank of Japan pledged to expand the Commercial Paper buying programme and extend low-cost funding. There was no immediate move to re-introduce quantitative easing and interest rates were held at 0.10%.

Headline UK consumer inflation fell to 3.0% in January from 3.1% previously while the core rate rose to 1.3% from 1.1%. The higher than expected data will demand Bank of England attention even though the RPI rate fell to 0.1%.

The MPC minutes were in line with expectations with an 8-1 split for the 0.50% reduction to 1.0% with Blanchflower voting for a larger 1.0% cut. There was 9-0 vote to seek government approval for quantitative easing.

The currency was also undermined by renewed speculation that the AAA credit rating could be downgraded. The industrial data provided no support with the CBI industrial survey weakening further to -56 in February from -48 and this was the lowest reading for 17 years as overseas demand deteriorated. Retail sales data was stronger than expected with a 0.7% January increase as price discounting boosted volumes.

The government registered a small net budget surplus for January, but this was the weakest January data since 1995 as spending commitments continued to rise while tax revenue also weakened significantly. The assumption of RBS and Lloyds Bank liabilities will increase the government debt burden by at least GBP1trn.

Sterling struggled to secure decisive direction over the week, but secured net gains against the Euro There was also support on dips towards 1.40 against the dollar.

The Swiss franc weakened against the dollar over the week with lows near 1.1880. Initially, the franc advanced against the Euro before renewed selling pressure as confidence in the Swiss economy weakened on fresh doubts over the financial sector.