By Daniel Stewart & Co

The January industrial and manufacturing output figures, together with the trade balance, were disappointing. Exports were down more than imports and it appears that exporters, faced with reduced domestic demand, are using the weakness in sterling to raise prices and margins rather boost volume. A similar pattern emerged in 1992-3 in the immediate aftermath of the ERM debacle. It is possible that the figures  were distorted (one of those blips!) by the bad weather and this has also been suggested as an explanation for the drop (or blip?) in the rolling 3 monthly GDP estimate from the influential National Institute for Economic and Social Research.
The Budget date has been fixed for 24 March and Mr Darling has said that the commitment to halve the deficit is ‘non-negotiable’ (‘with whom?’ one would like to ask) and that, oh, there will be ‘no giveaways’ (who could have possibly thought there  should be?).The Lib Dems seem to have got fed up waiting for the other parties and have started to set out their spending plans. At first glance, they intend to be less  severe than the Tories in the next two years and then much more severe than Labour after that but, of course, neither are actually saying much. So, that gives plenty of scope for speculation as to whom the Lib Dems are more likely to support in a ‘hung’ Parliament. Much of this, however, appears already to be priced into sterling exchange rates.

The RICS survey on house prices was consistent with the slowdown reported by the latest Halifax and Nationwide surveys but Acadametrics (formerly the FT House Price Index) found that prices went up by an eye-watering 1.9% in February ,although  they concede that the (seasonal) low number of transactions may have created a....er... blip.

The BA cabin crew strike may be getting the headlines, ironically because their trade union (Unite) is said to be bankrolling the Labour fight back in marginal constituencies, but there also took place strikes by public section officials in the Met  Police, the courts and in Parliament. More and wider strikes are expected as budget cuts (or reallocations, if you prefer) are implemented.

The two gilt auctions went well enough with the £900m 2032 Index-Linked issue receiving the best level of bids at 1.83 times in the last four such issues. The £3.25bn 10 year auction has been brought forward to this Thursday to avoid a clash with the Budget and an extra £1bn auction added for a 2028 maturity.

Sterling began the week well on the back of the strong US NFP figures but the poor domestic data knocked it back as low as $1.4873 on Wednesday. However, the Press seemed temporarily to lose its appetite for pound bashing and some faint signs of the Tories’ recovering in the Opinion Polls helped sterling rally over the next 3 days to close on $1.518, scarcely above where it had started the week. Somewhat surprisingly, the GBP/EUR rate dipped as low as €1.0946 on Wednesday and then, although rallying, ended the week at €1.1034, still some 50 pips lower than it started.  Overall, therefore, the floors of around $1.49 and €1.10 are just about holding.

The votes on both holding rates and the QE programme were indeed 9 – 0 although there is a divergence of view on the risks for inflation. The committee clearly feel more unsure than ever about the path to recovery (‘uncertain’) and the pace and degree of inflation moderating (‘highly uncertain’) from its currently being well above target. In contrast output is ‘clearly below capacity’. This is not the language to  suggest a change in rates for months ahead.

As presumably Mr Brown intended, the forthcoming Budget is providing plenty of opportunities for political sniping. It is beginning to look as if Mr Darling may after all include a few electoral nuggets and avoid much detail on the deficit reduction programme. This suggests that he is after all prepared to put party before personal  reputation as he is unlikely to remain at No11 whatever the election result. He has been called ‘dead man talking’, referring to the logical conclusion of the off the record briefings by the ‘forces of Hell’ rather than the manner in which he speaks to the House. On the other hand, he may yet again speak his mind: after all, ‘Hell hath no fury like a Chancellor scorned’.

The Tories seem to be preparing to stick their necks out to demonstrate their fiscal rectitude and have received support from the rating agency Moody’s, the EU Commission and the Bank of England. All are saying that the Government should announce a credible and detailed deficit reduction programme with quantum more  important than the precise timing. The EU may have no sanctions against EU members outside the eurozone but supplying electoral ammunition for the Tories might be seen as ‘un-European’. Moody’s on the other hand do have the sanction of  removing the UK’s AAA rating and have their reputation to restore after being ‘discredited ‘in 2008-9. Charlie Bean, Deputy Governor of the Bank of England, weighed in by renewing the warnings of his boss about the unsustainability of the deficit over the medium term and, moreover, he considers that this is contributing to the weaker pound. None of this will not have gone down well in ‘Hell’.