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  • King rules out rate rises in the UK
  • Wellink open-minded about extending Greek debt maturities
  • Eurozone PMIs give euro a modest lift
  • Silver slips the most
  • US ISM data softens but prices remain firm


In a surprise move, India’s central bank lifted the repurchase rate by a greater-than-expected 50bp overnight to 7.25% in response to continuing concerns about rising inflation. In March, wholesale-price inflation jumped to 9%, well above the central bank’s target. In comparison, China’s inflation rate is currently 5.4%, although it is widely accepted that this is an under-estimate. If it were not for price caps on diesel and gasoline, India’s inflation rate would be much higher. Indian Oil has been unable to raise diesel prices since last June and gasoline prices since mid-January. For now, the Indian economy seems to be weathering relatively well both the aggressive tightening in monetary policy over the past year and the loss of purchasing power represented by much higher prices. That said, the Indian central bank expects the economy to slow down in the second half of this year. Inflation remains the number one policy challenge in Asia right now. For instance, South Korea’s Finance Minister stated overnight that his government was ‘going all out’ to limit price gains.

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King rules out rate rises in the UK. Bank of England Governor Mervyn King ruled out any tightening of monetary policy in the UK anytime soon in a speech yesterday, suggesting that: “…the economic consequences of high-level indebtedness now would become more severe if rates were to rise”. Expanding on this theme, King said that ‘the problem of leverage, the sheer volume of debt in the economy, is still very large and this poses massive macro-economic challenges which will last many years’.

Mixed news on China’s economy. China’s services sector continues to power ahead, with the services PMI rising to 62.5 last month, up from 60.2 in March. In contrast, a manufacturing PMI dipped to 52.9 in April, from 53.4 in the previous month. Separately, a survey conducted by Soufun Holdings showed that house prices in China rose for an eighth consecutive month in April.

Wellink open-minded about extending Greek debt maturities. In the first such concession by an ECB policy official, Dutch central bank chief Nout Wellink suggested yesterday that he was open to the idea of extending the maturities on Greek debt. However, he was adamant that Greece should still repay its debt in full. In recent days, some politicians in Greece and other European officials have been floating the idea of a voluntary restructuring, whereby creditors offer to extend the maturity on Greek debt that they hold. Although an interesting idea, it does not alter the fundamental problem, which is that Greece’s outstanding debt may simply be too large for its economy to service.

Eurozone PMIs give euro a modest lift. The single currency was able to find favour in the weaker dollar environment, in part thanks to the upward revision on the eurozone PMIs vs. their preliminary readings seen last month. The overall reading was nudged up from 57.7 to 58.0, with both Germany and more so France revised up.   This served to give some further support to the euro, especially with the ECB interest rate decision approaching later this week.   There are no expectations of a further change in rates following last month’s opening move on the tightening cycle.   Nevertheless, solid data could support some increase in the rhetoric at the post-meeting press conference, with the market sensitive to any language that may prepare for another increase in rates in the coming months.   Eurozone interest rates moved higher Monday at the shorter end of the curve, with EUR/USD still proving sensitive in interest rate dynamics between the US and the eurozone.

Silver slips the most. One of the biggest reactions seen Monday was on silver, although this was not all related to the bin Laden news. Late last week, the CME increased margin requirements on silver by an average of 13%, in light of market volatility.   As such, silver initially fell over 10% early Monday, although this was against the backdrop of softer commodity prices overall in the wake of events elsewhere.   Still, the move has served to take some of the wind out of silver’s sails which, prior to this slump, had rallied over 50% so far this year, leaving gold’s 10% increase trailing in its wake.


US ISM data softens but prices remain firm. The prices side remained firm in the April survey, with the softening of the headline manufacturing data from 61.2 to 60.4 – not quite as much as the market had been anticipating.   Nevertheless, the fall in the production series, back to near levels last seen in January, kept the softer dollar tone during the afternoon session intact and allowed EUR/USD to push the highs of the day towards the 1.4870 area. New orders were also softer for the second consecutive month.