BoE dampens optimism over UK economy

Key economic data emanating from the US provided further evidence that the pace of economic decline continued to ease, while across the Atlantic, the decision by the Bank of England to expand its quantitative easing by £50 billion took markets by surprise.

The US ISM manufacturing index was stronger than expected with an increase to 48.9 for July from 44.8 the previous month. The services-sector data was less supportive though, as the ISM index dipped to 46.4 for July from 47.0 the previous month, contrary to expectations of a recovery.

The headline US jobless claims data was stronger than expected with a dip to 550,000 in the latest week from a revised 588,000 the previous week. This triggered a slight revision of estimates for Friday's payroll data which still managed to surprise postively.

The US lost an additional 247,000 jobs in July, but the unemployment rate fell to 9.4% from 9.5% in June. The losses were well below estimates of a 320,000 decline and an increase in unemployment to 9.6%.

In the eurozone, the Purchasing Managers' Index (PMI) for the manufacturing sector was revised up slightly which maintained the sense of optimism.

German factory orders data were stronger than expected with a further 4.5% increase for June following a 4.4% increase the previous month.

As expected, the European Central Bank (ECB) left interest rates on hold at 1.0% following the latest council meeting. Bank chairman Trichet also took a generally neutral stance in the press conference following the meeting with some cautious optimism over a gradual recovery in conditions.

In the UK, the interest rate decision from the Bank of England was no surprise with rates left on hold at the 0.50% level. The decision on quantitative easing was a surprise, however, as the bank announced an increase in the corporate bond buying programme.

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