Conditions within the global credit markets and implications for economic trends continued to exert a powerful influence on markets over the week

The US housing data remained weak with October existing home sales dropping to an annual rate of 4.97mn from 5.03mn previously, the lowest rate since the current series began in 1999. Inventories also rose while prices fell and new home sales also remained at multi-year lows at 728,000 for the month. The Case-Shiller house-price index fell 4.9% in the year to September.

The durable goods orders was disappointing with a 0.4% drop in October while core sales fell 0.7%. Jobless claims also rose to 352,000 in the latest week which suggest that the labour market is starting to weaken, although weekly data will be volatile. Consumer confidence fell to a fresh two-year low while third-quarter GDP growth was revised up to 4.9% from 3.9%.

The Fed’s Beige Book reported that activity was generally slowing while the housing sector remained depressed with core inflation steady to marginally lower.

Fed Vice Chairman Kohn expressed unease over the growth outlook and stated that the Fed could offset tight credit markets with a cut in interest rates. The remarks reinforced market expectations of a further interest rate cut in December, especially with Chairman Bernanke also warning over financial strains.

The German consumer inflation data recorded a further increase to 3.0% in November from 2.6% which was the highest rate since the end of 1994. The Euro-zone inflation rate also increased to 3.0% for November. The data reinforced ECB concerns over the inflation outlook, butt here wee also increased fears over the growth outlook as credit conditions tightened again.

After dipping sharply to record lows beyond 1.4950 against the Euro at the end of last week, the dollar secured a generally corrective tone. There was a recovery back towards 1.4700 in choppy trading with the trade-weighted index also moving higher.

Developments in carry trades triggered further short-term market volatility. The Japanese yen strengthened to highs around 107.25 against the US dollar during the week, but then weakened back towards 111.1 in volatile trading. Similarly the Swiss franc tested record highs beyond 1.10 against the dollar before weakening to 1.1250 with the Swiss currency also retreating back to beyond 1.65 against the Euro.

The domestic trends in Switzerland and Japan did not have a major impact. Swiss consumer prices rose 0.5% in November which pushed the annual inflation rate to 1.8%. Core Japanese consumer prices rose 0.1% in the year to October, the first increase for 10 months, but this did not have a significant impact on interest rate expectations.

UK economic developments remained under close scrutiny over the week. The Nationwide Bank reported a 0.8% drop in house prices for November which was the weakest monthly figure for 12 years and the annual growth rate dropped to 6.9%, the lowest figure for the year. Mortgage approvals fell to 88,000 in October from 100,000 previously while consumer lending slowed to GBP8.8bn from GBP10.8bn.

The Bank of England expressed considerable uncertainty over the economic outlook with fears that growth would deteriorate while there would be short-term upward pressure on inflation with the overall outlook less benign.

MPC member Blanchflower again called for lower interest rates, but the other members continued to express uncertainty over the situation with Governor King expressing major doubts over the underlying trends. Futures markets slightly increased the chances of a December interest rate cut while Libor rates increased to the highest level since mid September.

Sterling found support close to 0.72 against the Euro and corrected back towards 0.7125 before settling near 0.7150. Sterling peaked above 2.08 against the dollar and dipped below 2.06 on Friday.

MPC member Blanchflower again called for lower interest rates, but the other members continued to express uncertainty over the situation with Governor King expressing major doubts over the underlying trends. Futures markets slightly increased the chances of a December interest rate cut while Libor rates increased to the highest level since mid September.

Sterling found support close to 0.72 against the Euro and corrected back towards 0.7125 before settling near 0.7150. Sterling peaked above 2.08 against the dollar and dipped below 2.06 on Friday.