Concerns about the financial health of two key US mortgage institutions, Fannie Mae and Freddie Mac, caught investors' attention. The two firms, which sell or guarantee around $6 trillion of US mortgages (around half the mortgage backed securities market), lost almost half their value in trading last week amid concerns about their capital adequacy. William Poole, a former Fed Governor argued that Freddie Mac could be viewed as technically insolvent if its assets were valued under fair-value accounting rules, because of the fall in the market-value of the mortgage-backed securities held on their books. But policymakers note that this is irrelevant as these institutions intend to hold these mortgage securities to maturity, and are solvent from a regulatory point of view.

Given the firms' central role in the US mortgage market and hence the wider financial system, the turbulence prompted swift action. Treasury Secretary Paulson has proposed that the Treasury be given authority to buy equity stakes in the firms "if needed" and to increase the credit lines available to each firm from the current limit of $2.25 billion. The Federal Reserve also authorised the firms to borrow directly from the New York Fed to ensure the firms had access to credit to cover shorter-term obligations.

The MPC opted to stand pat at last week's meeting - hardly surprising, with the Committee stuck between a rock and a hard place. A cut would have provided a welcome boost to the slowing economy, but could have sowed seeds of doubt over the MPC's inflation-fighting credentials, especially as inflation is already expected to peak above 4% later this year. Unless activity takes another significant turn for the worse, a cut looks unlikely until 2009.

The lack of summer sun is not the only factor depressing sentiment in the UK at the moment. Last week data from the Halifax showed that UK house prices fell by 2% in June, slightly less than in May (-2.5%). That leaves prices 6.1% lower than at the same time last year and takes the average price of a home back to the levels prevailing in August 2006. Given that household budgets are also under pressure from rising food and energy prices, perhaps it isn't all that surprising that the Nationwide's consumer confidence index fell to a series low in June. Over half of respondents (53%) believe the economic situation will be worse in six months' time.

The weaker pound has yet to give a major boost to the UK's trade performance. Despite sterling's 12% fall over the past 12 months (on a trade-weighted basis), the gap between the UK's exports and imports remains sizeable at £4.2bn in May (£4.1bn in April). The longer sterling continues to trade cheaply in foreign exchange markets and domestic demand continues to soften, the more puzzling a widening trade deficit becomes. It takes time for trade flows to adjust to exchange rate movements, so the trade deficit should narrow in the coming months. The hope is that this will lend welcome support to UK activity - the danger is that slowing demand in our key markets will neutralise much of the benefits of a more competitive pound.

At last week's G8 summit the US agreed, for the first time, to a long term target for cutting greenhouse gas emissions. Leaders agreed to consider "the goal of achieving at least a 50% reduction of global emissions by 2050, recognising that this global challenge can only be met by a global response". However, China and India (which are not part of the G8) dealt a blow by refusing to lend their support. Despite the difficulty in finding a global consensus, the market is beginning to find its own solutions. China's aluminium producers, the world's largest, agreed to cut output by up to 10% to ease power shortages, while Toyota announced that it would build its hybrid "Prius" in a US factory originally intended for sports utility vehicles (SUVs).