A further downgrade to Q3 US GDP to just 2.2% against consensus estimates of 2.7%.  A lower rate of inventory replacement was the primary reason for the downgrade. This perhaps shows that US companies are not so enthusiastic about rebuilding inventories with expectations that the economic recovery will not necessarily be as robust as many expect. This is a theme we are likely to see as we start 2010 with inventory replacement likely to remain less than expectations which is likely to prove to be a drag on 2009Q4 growth and may well result in growth falling away further as we move through 2010.

UK Q3 GDP growth was revised up to -0.2% from -0.3% which is not a major surprise although some commentators were expecting a higher revision with the number turning positive.

The markets look as if they will be standing at close to highs for the year. The two day rally we have had is typical of the end of year moves on light trading volume. It is not to be trusted and generally means we encounter profit taking as the New Year begins and is something to be wary of if taking long positions during the last few days of the year.

As always at this time of the year analysts focus on the performance of the retailers and what is going on in the high street. All indications so far this year are that discounting and sales whilst in full swing in many areas, the level of discount promotional activity is less than last year with many retailers holding their nerve and prices into the final few days. The most heavily discounted areas at present are clothing and furniture. With Woolworths now absent from the high street many toy sellers would be enjoying a better time and from the listed companies Home Retail which owns Argos is likely to be a main beneficiary. All will be revealed in early January when the main players will update the market on their Christmas performances.


With the holiday season upon us we are not likely to see too much in the way of major market movements although there is still plenty of economic data on the agenda this week. In the US look out for the final estimate for Q3 GDP which is expected to remain close to the second estimate of 2.8%. On Wednesday in the US we get the University of Michigan consumer sentiment data for December and on Christmas Eve Durable goods orders for December.

On Tuesday in the UK we get the final estimate for UK Q3 GDP which may well see an improvement on the previous quarter on quarter estimate of -0.3%. On Wednesday we get the minutes from the latest Bank of England MPC meeting which is unlikely to yield any surprises.

On Friday we closed out our latest long position in Sainsbury at a profit.

The US weekly initial jobless claim are much in focus these days with everyone looking for a definite and sustained turned n the US unemployment rate. The data this week has disappointed with claims rising once again. The monthly trend in the Non Farm Payrolls should still show a decline in the rate at which unemployment is increasing.


Elsewhere in the US we have had Leading Indicator data which is as it says a predictor of economic activity and these were a little ahead of expectations. It does look as though the US economy will continue its current growth spurt into 2010, but for how long is still very uncertain. The Federal Reserve meeting yesterday concluded with a commitment to continue with rates at 0.25% for 'an extended period'. However they also made it clear that many of the other stimulus measures currently in place will be withdrawn in early 2010 and the jury remains out on just what impact that will have on economic activity as the taps are slowly turned off.

In the UK retail sales data for November proved to be disappointing with a -0.3% decline following on from a 0.6% gain in October. This was against expectations of a 0.5% improvement especially with consumers expected to buy before the scheduled VAT increase in January.

The market has sold off heavily today after a weak day on Wall Street yesterday following Fed comments about removing some stimulus measures in early 2010. The Basel Committee of central bankers has today talked about the implementation of higher capital requirements for investment banks by 2012 which has caused a sell off across the banking sector.

As with the US Producer Price Index reported yesterday, the CPI data for November has shown some strength with a 0.4% month on month increase during November. This was primarily due to a hike in gasoline prices which looks likely to reverse to some extent with recent weakness in the oil price. The core rate remained unchanged leaving the core year on year rate at 1.7%. Elsewhere US housing starts for November reversed most of the October 10.1% decline with an 8.7% improvement to an annualised rate of 574,000. There is clearly a lot of scope for volatility in this number and also seasonal factors. The weather also played a role with a cold October followed by an unseasonably warm November.


We get the Federal Reserve interest rate decison this evening which is widely expected to remain at the targeted level of 0-0.25%. The accompanying statement will be scrutinised for any evidence of a change in the policy of rates remaining at current levels for 'an extended' period. At some point soon we can expect the language to change although rates look unlikely to be moved until later in 2010. On the day that the language does change it is almost certain that the market will sell off heavily if only temporarily. However, this will be a feature of 2010 with a real possibility that the start of monetary tightening will be the catalyst for a prolonged period of underperformance from the market.

A mixed bag of economic data today. In the US industrial production rose by more than expected during October with a 0.8% month on month increase compared to expectations of a 0.6% improvement. The Empire State Manufacturing index which shows the level of activity in the New York manufacturing sector fell sharply from a level of 25.0 in November to only 2.55 in December. A positive number indicates expansion and such a sharp decline is a little worrying. The consensus was expecting a number around the 20 level. The other worrying data from the US today was the Producer Price Index which shows the level of inflation within inputs. The rate rose quite sharply by 1.8% (consensus expected 1%) during November and more importantly even the core rate excluding food and energy rose by 0.5% (consensus expected 0.2%). The rise in the headline rate was primarily due to food and energy and with oil having fallen back again this may well be a short term blip. The core rate was pushed higher by light truck prices so again this is unlikely to be the start of a more pronounced hike in inflationary pressures at least in the short term.

In Europe we have had the ZEW economic sentiment index for Germany which fell back to 50.4 in December from the previous level of 51.1 which was broadly as expected. In the UK the CPI came close to returning to the Bank of England's targeted level of 2% with the CPI moving up to an annualised rate of 1.9% during November. This was primarily due to an increase in petrol prices. With the amount of slack remaining in the UK economy it seems likely that the recent inflationary pressures are likely to fade although an increase above 2% in the very short term does now look likely.

A quiet day on the economic front in the US and the news that Abu Dhabi has provided $10 billion to avert a default by Dubai’s Nakheel PJSC is likely to remain the major market driver this afternoon.


In Europe we have had Industrial Production data for October which registered a 0.6% month on month decline. This was not totally unexpected after the 1.8% month on month decline in Germany. Looking at the breakdown of the eurozone data it is interesting to see a sharp decline in non durable consumer goods production. It suggests that firms do not expect to see a sustained increased in consumer demand and if nothing else demonstrates that the recovery in Europe remains fragile and is seemingly on course for a GDP growth rate during Q4 that could be lower than Q3.

On Friday we closed out a long position in Sainsbury for a 1% gain. With the market up 50 points today and close to its high for the year we are going to sit it out and wait for a bad day to take the next long position.

The market definitely has a quiet feel to it at the moment despite a good two day movement which I suspect is on low volumes. This afternoon the key data to look out for are retail sales in the US. Expectations stand at around a 0.9% improvement during November with the number dropping to 0.5% if you exclude auto sales.

The Pre-Budget report yesterday did nothing to address the budget deficit and the Chancellor actually raised public borrowing forecasts by £5bn over the next four years. He maintained his GDP forecast of 1.25% for 2010 and 3.5% for 2011 and 2012. The fact that his forecast for 2009 was way off the mark received little attention with his forecast reduced to -4.75% from -3.5%.


The announcement of a temporary windfall tax of 50% on bonuses in excess of £25000 for bankers had been widely anticipated. There was little in the way of measures to boost economic activity within the report with more help for low income families but with an imminent hike in the VAT rate back to 17.5% combined with the new 50% tax rate for high income earners it is difficult to see any real benefit to consumption.

All difficult decisions on spending cuts and tax increases have unsurprisingly been deferred until after the next election. The forecasted time line for getting the budget deficit under control is now longer than previously stated and it will be reduced at a slower rate. This may well have implications for the UK’s credit rating and the uncertainty over a possible downgrade could well place further pressure on sterling and with the anticipated heavy gilt issuance this may well push gilt yields higher.

During recent days we have had some soft economic data and the reported decline in German Industrial production during October is a case in point. A fall of 1.8% compared to expectations of a 1% increase does demonstrate that the economic recovery is far from certain and we may well see a lower GDP growth rate during Q4 for Germany compared to Q3. This of course raises a question mark over the rate of growth we are likely to see during 2010. It should be borne in mind that these figures can be subject to volatility but the change in trend so soon is a little worrying.

There was a similar picture for the UK with stagnant industrial production during October against expectations of a 0.5% increase.

In Japan it was interesting to see the extent of the Q3 GDP downgrade which fell from an initial estimate of 4.8% to just 1.3%.

For clients we have updated our note on Sainsbury which you can access via your research login.

During recent days we have had some soft economic data and the reported decline in German Industrial production during October is a case in point. A fall of 1.8% compared to expectations of a 1% increase does demonstrate that the economic recovery is far from certain and we may well see a lower GDP growth rate during Q4 for Germany compared to Q3. This of course raises a question mark over the rate of growth we are likely to see during 2010. It should be borne in mind that these figures can be subject to volatility but the change in trend so soon is a little worrying.


There was a similar picture for the UK with stagnant industrial production during October against expectations of a 0.5% increase.

In Japan it was interested to see the extent of the Q3 GDP downgrade which fell from an initial estimate of 4.8% to just 1.3%

Today we have the all important pre-budget report.

We have closed out today a profitable trade in Reed Elsevier with a view to buying it back if the opportunity arises. The market looks as if it is losing momentum at the moment and it is very possible that a Dow sell off will bring the market back and the Reed share price back below £4.70.

The US unemployment data for November published on Friday did provide the market with a pleasant surprise. The decline of only 11,000 in payroll numbers with a fall in unemployment to 10% from 10.2% compared to forecasts ranging from a decline of 100,000 to 150,000 with the unemployment rate expected to remain static at best. The improvement in the trend certainly demonstrates that the US recovery is gaining momentum. We should see the number turn positive in early 2010 especially once recruitment gets under way for the decennial census count. The data also included a revison to the previous two months figures with the declines being revised down by 159,000. We have been asked whether the data for last month is simply a one off improvement but on the face of it the data looks solid and it does suggest an improvement in the employment outlook. Companies have been rigorous in cutting staff costs for some time now and this change in trend is consistent with the recovery in output that is ongoing.


In the US consumer credit data for October will be released today and Ben Bernanke is due to comment on economic conditions later today. In Europe, Germany will be releasing factory order data for October.

Both sets of ISM data in the US this week have been disappointing although they still indicate that the recovery is ongoing. The Non Manufacturing ISM fell back below the key level of 50 to 48.7, with anything above 50 generally indicating expansion. However, the new orders element of the composite index remained relatively buoyant at 55.1 which suggests that the momentum is being maintained. Overall though the fact that the composite index has fallen back below 50 so soon is a reason for worry and certainly any further deterioration may well mean the economic recovery is losing momentum far sooner than many were expecting.


The second estimate of Eurozone Q3 growth confirmed that the economic recovery is ongoing in Europe. The estimate of 0.4% is unrevised from the preliminary estimate. Most of the gain was due to inventory replacement with consumer spending down 0.2% over Q3. Exports over Q3 increased by 2.9% although this was almost matched by imports which increased by 2.6%. The real concern remains consumer expenditure which will have to take up the slack during 2010 if the recovery is to maintain its momentum. Retail sales in the Eurozone for October were unchanged on the previous month against expectations of a modest improvement.

This week we also had the publication of the Beige book in the US which basically compiles anecdotal reports at the regional Fed banks. The message was one of slight improvement with 8 of the 12 districts noting a modest improvement in activity whilst the remaining 4 reported little change.

The panic over Dubai has now abated and already looks to be old news. The market is close to posting new highs for the year and as we move closer to the quiet holiday season we can see the potential for a gentle rally to the year end. After that we expect conditions to become difficult and it is not impossible that the year will start badly as profits are locked in and renewed uncertainty over the strength of economic recovery may well put markets under pressure.

All eyes are on the Non Farm Payrolls in the US this afternoon. The consensus expects a decline of 100,000.

The US Non Manufacturing ISM data for November was disappointing with a decline back below the key level of 50 to 48.7 against consensus expectations of an improvement to 52.0 from the previous month's level of 50.6. The market has sold off a little but we have not seen an adverse reaction to the number probably because the new orders constituent remained strong at 55.1. The employment element fell to a disappointing 41.6 and this remains a major area of concern if we are going to have a jobless recovery.

The ISM Manufacturing Index data registered a sharper fall than what many were expecting with a decline to 53.6 in November from the previous level of 55.7 in November. The key issue is that the index remains above the 50 level and growth within the US manufacturing sector is continuing. It would appear that the US economy is still on course to post a level of growth for Q4 similar to that in Q3.


The ADP employment data in the US for private payrolls was broadly as expected with a further decline of 169,000 in the payroll numbers for November. The Non Farm Payrolls on Friday are likely to show a similar decline although expectations stand closer to a fall of 100,000.

A Morgan Stanley note has been doing the rounds during the last few days and they seem quite bearish on the outlook for 2010 primarily because of the likely impact on expectations for 2011 as the stimulus measures are withdrawn during the coming months. It is difficult to disagree and if you look back historically at how equity markets respond to periods of monetary tightening a prolonged period of underperformance can occur. As to when this happens is a matter for debate, but undoubtely during 2010 we are going to have some very volatile periods and the gains we have made during 2009 are going to be a lot harder to replicate.

The shakeout from Dubai last week had upset a number of stocks which have fallen back below support lines and despite their strong fundamentals it does make life more difficult in finding appropriate entry and exit prices. We have closed out a position in Imperial Tobacco today at a modest loss simply because it fell back heavily last Thursday with the rest of the market and we must now see how the price moves in the very short term before attempting to trade it again. The shares are up strongly today along with the market and in all likelihood they will continue to rally if the market continues to make up the lost ground. However from a trading perspective it is sometimes more prudent to close out and watch how the trading range develops before trading the stock again.

As we are now into the last trading weeks of the year it will be interesting to see if the market ends on a high which I suspect it will. However I do think January will again be the start of a volatile trading period and I would not be surprised to see the market sell off once again as we enter 2010.