ECONOMIC DATA ANALYSIS

Friday, 17th June 2011

GREEK TRAGEDY?
UK highlights in the coming week: MPC minutes (June) Public finances (May) EU crisis to dominate, as spectre of Greek default reaches fever pitch US FOMC to keep policy unchanged, but allude to growing downside risks MPC minutes likely to confirm the Committee remains in no mood to tighten UK public finances likely to highlight case for fiscal restraint Market attention looks almost certain to be dominated by the unfolding developments in Greece and the wider European periphery over the coming week. The possibility that Greece could be forced into a sovereign default, and the potential contagion this could precipitate across Europe, has been thrown into sudden and sharp relief as the political situation in Greece has descended into chaos over the last few days. EU sovereign debt crisis: The violent riots in Athens and the decision to call a no-confidence vote underlines the extreme difficulty the Greek PM is having in securing a political, never mind popular, mandate to agree further budget cuts. Since acceptance of further fiscal austerity is a precondition for the release of further IMF and EU emergency funding, the inability to build a political consensus has raised the spectre of a potential Greek debt default. These fears are now tangible. Over the past two days, the CDS spread on 5-yr Greek sovereign debt has soared to over 2200bp, essentially implying a probability of default of over 80%. The CDS spreads of Ireland, Portugal, Spain and Italy have also blown out, as concerns escalate that the crisis in Greece could precipitate funding problems across the European periphery (see chart A). The outcome of the no-confidence vote in Greece is now crucial. The result is expected on Sunday but could be early next week. When push comes to shove, our best guess is that the vote will yield a political consensus. If so, this should trigger
CHART A: Peripheral Eurozone economies CDS spreads
Bps spread 2000

the release of the next tranche of IMF loans, allowing the country to meet its immediate funding need, and setting the stage for a broader EU rescue package over the coming weeks. However, if PM Papandreou fails to muster sufficient support, a snap election would have to be called, plunging the country into an even deeper crisis - and, in the absence of swift international support, most likely trigger an increasingly likely Greek default. How this all plays out is certain to have a key bearing on global money and foreign exchange markets over the coming week. In the absence of a clear-cut resolution to the crisis, which seems highly unlikely, the euro remains vulnerable, while an ongoing safe-haven bid out of risk assets into cash and governments bonds could intensify. Beyond the immediate political crisis in Greece, the pressure on EU policy makers to resolve their differences and agree a rescue package is now immense. A package must be agreed to cap the risk of contagion. The markets will be watching to see whether events over the coming week force their hand.* US FOMC: The US FOMC reconvenes this week. While any change in policy is highly unlikely, the markets will be closely scrutinising Fed chairman Bernankes second post meeting press conference. This will take on added importance as it coincides with the expiry of QE2 at the end of the month and at a time of renewed softening in US economic growth. However, we expect to hear as much on the eventual exit strategy as the chances of further monetary accommodation. With core CPI inflation hitting 1.5% in May, and the strong prospect that it heads higher in the coming months, we believe the bar is simply too high for QE3 in 2011. However, it cannot be ruled out with an escalation of tensions in Europe heading the list of potential triggers. Eurozone manufacturing surveys (Jun): While the short-term resolution of the Eurozone debt
CHART B: Eurozone surveys to dip on international factors?
50 40 Empire State Manufacturing Survey (LHS) EZ Manufacturing PMI (RHS)

Global highlights in the coming week: US FOMC meeting Eurozone flash PMIs (June) German IFO survey (June) US GDP - final (Q1)

Greek no- confidence vote headlines a week likely to be dominated by the European sovereign debt crisis

US FOMC unlikely to signal QE3 as QE2 to end

60 55 50 45 40 35 30

Adam Chester Head of UK Macroeconomics Tel: 020 7158 1740 David Page Senior UK Macroeconomist Tel: 020 7158 8290 Nikesh Sawjani UK Economist Tel. 020 7158 1749 Mark Miller Global economist Tel: 020 7158 2141

1500

30
Greece

20 10 0

1000

500

Ireland Portugal Spain

-10 -20 -30

May 11

0 Jan 10
Source: Bloomberg

May 10

Sep 10

Jan 11

-40 Jul-01

Jul-03

Jul-05

Jul-07

Jul-09

Source: NY Federeal Reserve, Markit

* For more detail, refer to our Global Thematic, Crunch Time for Greece.

Although inflation risks have risen, UK MPC minutes likely to confirm that rates remain on hold

deficit crisis dominates market thinking, the longer-term solution will only be grounded in economic growth. This weeks Eurozone indicators, the PMI flash estimates and key national indicators, including the German IfO survey, look set to soften further. International trends of higher oil prices and supply-chain disruptions look likely to adversely impact the Eurozone as they have the US. We forecast dips in each of the key manufacturing surveys. While the indices look set to remain at levels consistent with ongoing recovery, a significant drop this week would compound wider market fears. MPC minutes (Jun): While Junes MPC decision to leave policy unchanged was well anticipated, minutes to the meeting will be watched to determine the new dynamic on the Committee and its reaction to a worsening economic backdrop. Junes minutes will record new member Ben Broadbents first meeting and we suspect he will have started his term by voting for unchanged policy. The Committees reaction to the ongoing soft patch domestically and overseas will also be keenly watched. Recent Bank articles and members speeches have focused on inflation expectations and the Banks reputation, suggesting the renewed acceleration in prices is unnerving the bank. Yet Governor King said little about the economic outlook in his Mansion House speech and, if anything, his references to a disturbing slowdown in money supply growth suggest that King himself is yet to be persuaded of the case for tighter policy over the coming quarters. With UK rate markets currently pricing the prospect of the first policy rate change well into 2012, additional dovishness may see scant reaction.

FPC minutes (Jun): Thursday saw the inaugural meeting of the interim Financial Policy Committee. Next weeks publication of the Financial Stability Report will be accompanied by a press conference by Governor King and minutes to the meeting. At this stage the interim Committee will be as much concerned with the mechanics of setting up the full FPC. However, the interim body will also begin the task of macroprudential supervision that will be an important feature of the policy landscape ahead. Public sector finances (May): 10-year gilt yields have trended lower since mid-April, benefiting from a softening in the domestic outlook, but also from growing fears over Eurozone developments. Indeed the gilt-Bund spread has narrowed to lows seen only briefly during the initial phase of QE and before that in 2002. That gilts are benefiting from rising sovereign debt concerns is testimony to the markets faith in the governments deficit reduction plan. Aprils PSNB provided little evidence of this, the deficit was 2.5bn higher than the previous year. In May we forecast a PSNB of 17.2bn. This would still be 1bn worse than the previous year. While this falls short of the 1.7bn per month reduction required on average to meet the governments official 122bn forecast for 2011-12 (ex interventions), it is likely to show signs of improvement - notably annual receipts growth. Since this is only the second month of the financial year and PSNB figures are often subject to marked revision, Mays figures are unlikely to alter market opinion. But affirmation of deficit reduction will be required over the coming months to keep that faith alive.

UK public finances to highlight case for further restraint

Editorial comments to: Trevor Williams, Chief Economist Lloyds Bank Corporate Markets Economic Research, 10 Gresham Street London, EC2V 7AE

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ECONOMIC DATA AND EVENTS CALENDAR (20 - 24 JUNE)

Country

Time

Release/Event

Period

Actual

Consensus

Forecast

Previous

Monday 20th June

UK EZ JPN JPN GE EZ EZ EZ 06:00 07:00 10:00 13:30 17:00 00:01 Rightmove house prices Jun EU & eurozone finance ministers hold meeting Cabinet office monthly economic report Leading indicator Producer prices Apr (f) May n/a --n/a 0.1% (6.2%) (1.9%) --n/a --n/a n/a n/a --1.3% (0.7%) --96.4 (p) 1.0% (6.4%) (1.6%) ---

Labour costs Q1 ECB's Trichet testifies to European Parliament ECB's Stark speaks in Munich

Tuesday 21st June

AU JPN UK UK UK UK GE GE UK UK US UK 09:30 09:30 09:30 10:00 10:00 10:30 11:00 15:00 18:30 02:30 05:30 RBA release board minutes All industry index BoE's Fisher speaks at Forum PSNB PSNB ex interventions PSNCR ZEW survey: expectations ZEW survey: current conditions DMO to sell 4.75bn of 2% Tsy 2016 Jun Apr -May May May Jun Jun --1.8% -10.5bn 18.1bn 16.9bn -2.0 90.0 --5 4.85mn --n/a -17.2bn 19.5bn n/a n/a n/a -n/a 4.95mn ---6.3% -7.713bn 9.954bn 3.259bn 3.1 91.5 -20 5.05mn --

CBI Industrial Trends Survey (exp'd output) Jun Existing home sales (saar) May OBR's Nickell speaks at the LSE --

Wednesday 22nd June

FR UK UK GE EZ NO EZ US US US 07:45 09:30 09:30 10:15 11:00 13:00 15:00 15:00 17:30 19:15 Insee Business Climate indicator MPC minutes (+0.50%/+0.25%/unch) MPC minutes (APF - Raise/unch/lower) Germany to sell 4bn of 3.25% bunds 2021 EC issues quarterly report on Euro area Norges Bank interest rate announcement Consumer confidence FHFA house price index Jun Jun Jun --Jun Jun (p) Apr 106 0-2-7 1-8-0 --2.25% -10.0 -0.2% 0 - 0.25% -n/a 0-2-7 1-8-0 --2.25% n/a n/a 0 - 0.25% -107

1-2-6 1-8-0 --2.25%

-9.7

-0.3% (-5.9%) 0 - 0.25% --

FOMC rate decision Jun Fed's Bernanke speaks at press conference

Thursday 23rd June

FR FR GE GE EZ EZ IT UK UK EZ US US EZ US 07:58 07:58 08:28 08:28 08:58 08:58 09:00 09:30 11:00 13:30 15:00 17:00 18:00 Manufacturing PMI 'flash' estimate Services PMI 'flash' estimate Manufacturing PMI 'flash' estimate Services PMI 'flash' estimate Manufacturing PMI 'flash' estimate Services PMI 'flash' estimate Consumer confidence BBA mortgage approvals Jun (p) Jun (p) Jun (p) Jun (p) Jun (p) Jun (p) Jun May 54.0 61.0 57.0 55.8 53.8 55.5 105.0 30.0k 12 -0.310m --n/a n/a n/a n/a 54.0 55.5 n/a n/a n/a -420k 0.310m --54.9 62.5 57.7 56.1 54.6 56.0 106.5 29.4k 18 --16k (414k) 0.323m ---

CBI Distributive Trades Survey (rptd sales) Jun EU Council Summit (day 1 of 2) -Initial jobless claims 17-Jun New home sales (saar) ECB's Trichet speaks in Jerulsalem Treasury to sell $7bn of 30yr TIPS May ---

Country

Time

Release/Event

Period

Actual

Consensus

Forecast

Previous

Friday 24th June

UK FR GE IT IT UK EZ US US US US US 00:01 07:45 09:00 09:00 10:00 10:30 11:00 13:30 13:30 13:30 13:30 13:30 BoE releases its Financial Stability Report Consumer confidence IFO business climate index Retail sales Italy to sell I/L bonds Jun Jun Jun Apr --84 113.5 -0.1% ---1.6% 1.0% 1.9% n/a 1.4% -n/a 113.3 n/a ---1.2% 0.8% 1.8% n/a n/a -84 114.2 -0.2% (-2.0%) ----3.6% -1.6% (r) 1.8% 0.6% 1.4%

BoE's King press conference & FPC minutes -ECB's Gonzalez-Paramo speaks in Malaga -Durable goods orders - ex transportation GDP (saar) Final sales (saar) PCE 'core' price index (saar) May May Q1 (f) Q1 (f) Q1 (f)

During the week

UK 10:30 DMO to sell 0.5% I/L Tsy 2050 -----

Bold text 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 (%) Bank Rate 3mth Libor UK 2-yr sw ap rate UK 5-yr sw ap rate UK 10-yr sw ap rate UK 30-yr sw ap rate 2-yr gilt yield 5-yr gilt yield 10-yr gilt yield 30-yr gilt yield Current 0.50 0.83 1.41 2.37 3.38 3.96 0.77 1.96 3.21 4.16 on w eek 0 0 2 1 0 0 -4 -1 -1 1 on 1m th 0 0 -14 -23 -13 -3 -21 -8 -15 -5 on 3m th 0 2 -30 -40 -27 -9 -46 -34 -33 -12 Change (%): Currencies GBP/USD GBP/EUR GBP/CHF GBP/JPY Other FTSE 100 Oil WTI future (US$/barrel) Gold spot (US$/oz) Current 1.62 1.13 1.37 129.8 5732 93.9 1527.7 on w eek -0.4 0.2 0.2 -0.4 -0.6 -5.4 -0.3 on 1m th -0.5 -0.7 -4.2 -1.9 -2.2 -3.1 2.8 on 3m th 0.2 -1.5 -5.5 2.0 0.6 -7.4 8.8 on 6m th 4.1 -3.8 -8.9 -0.5 -2.4 6.7 11.1 on 12m th 5.5 1.1 -8.5 -9.3 2.7 24.2 27.7 on 6m th 0 7 -17 -33 -29 -11 -43 -35 -35 -21 on 12m th 0 17 23 4 -6 1 12 -33 -31 -14

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