Scottish and Southern Energy is outperforming the market today (£11.10) along with most of the utility sector.  This is one of the attractions of trading within this sector when the market starts to reach levels at which a sell off is due. However, we could easily see some underperformance if the market rallies strongly over the next day or so. Either way we are happy to hold for the time being. SSE has underperformed the market for some time now and whilst the fundamentals are unexciting they should be good enough to prevent the shares from suffering too much if the market does decide to sell off heavily. We will consider cutting the position if the shares drop below £10.95 but as always much depends on what is happening with the broader market. Volatility levels are likely to increase over the coming days ahead of the Fed meeting next week and this may well provide us with an opportunity to achieve a price close to our target.

After a relatively quiet Monday in terms of economic data the week really kicks off today and the first announcement was the preliminary estimate for Q3 GDP in the UK which came in at 0.8%, double expectations of +0.4%. This compares to the Q2 rate of 1.2% and the more modest rate of +0.4% posted during Q1. The decline from the nine year high achieved during Q2 is not unexpected and a similar trend is likely to be seen in the rest of Europe after the initial surge earlier in the year. A more modest rate of growth is likely to continue into Q4 and early 2011. With the prospect of more quantitative easing and with interest rates likely to remain where they are well into 2011 this should help to negate the impact of the government cuts and fiscal squeeze. However, whether it is enough to stave off another period of negative growth remains uncertain.


The main event in the US this week will be the publication of the first estimate for Q3 GDP on Friday. Estimates range between 1.5% and 3% with the number likely to be towards the lower end of that spectrum and probably less than 2%. A strong number may well hit sentiment with so much expectation over the next round of quantitative easing which just about everyone expects to be announced when the Fed meets next week. However, the Fed have already made it clear that further measures are in the pipeline and it is difficult to see any data this week changing that.

Yesterday in the US the only notable data was existing home sales for September which showed a good improvement with a 10% increase to 4.53m on an annualised basis. Even after a 10% jump this number remains at a very depressed level compared to the historical norm, but it does at least suggest some stability is returning to the US housing market. The ongoing investigation into the legality of the foreclosure process in the US is likely to reduce the amount of distressed property coming onto the market in the short term which may in some respects also help to bring some stability.

The main event today in the US is the Conference Board Consumer Confidence Index for October. Most confidence and sentiment indices are oscillating around levels more consistent with recession or no growth but the market seems to accept this and as long as there is no further collapse in confidence this particular data set is unlikely to have much impact on the market. Expectations are for a slight improvement to 50.0 from the previous reported level of 48.5.

In Europe today the GfK consumer confidence index for Germany has been published and this stood at the same level as the previous month at 4.9 compared to expectations of a reading of 5.1.

The market at present is having a weak day with the FTSE100 down 46 points at the time of writing. We still lack any near term catalyst to take the market higher and the downside risks are increasing. The Fed meeting next week holds the key to the short term performance of the market. We remain nervous that if any additional stimulus measures do not meet expectations or perhaps even do not exceed expectations the market may well find reason for a bout of profit taking and perhaps even a short term correction.

We have a very quiet day ahead in terms of economic announcements. Yesterday in the US the data was broadly in line with expectations and we seem to be now stuck in a situation where the US economy is still growing but at a very modest level with little sign of any improvement in the trend. The market seems happy enough to accept this at the moment but for how long is very uncertain. For the market to go higher the additional stimulus measures in the US will have to exceed expectations in our view.


The weekly initial jobless claims in the US announced yesterday were an improvement on the week before at 452,000 but this was tarnished somewhat by the revision to the previous week’s data which was increased to 475,000. The running four week average is now down to 458,000 but with little sign of any real improvement in the trend the outlook for US employment remains poor and it is difficult to see any meaningful improvement for many months to come.

The US Leading Indicator data for September was as expected at +0.3% but the August data was revised down to +0.1% from +0.3%. The Philadelphia Fed Manufacturing Index for October was also in line with expectations at +1.0 but the increase from the -0.7 reported previously is unconvincing. Based on the regional reports there is a good possibility that the ISM number is going to trend lower in the short term.

The German IFO Expectations and Business Climate Index for October have been published this morning and both have shown improvement on the last reported reading against expectations of a modest fall. Having reached a three year high last month most commentators were expecting a decline this month, and the latest readings at least demonstrate that conditions are still comfortably within growth territory.

The Fed’s Beige Book was published yesterday and the overall picture it provided is one of modest recovery but with little in the way of evidence to suggest that any momentum is being gathered. 8 out of the 12 Districts reported some growth with 3 others suggesting a more mixed performance and one stating that conditions “remain slow”. Overall very little to get excited about but the market has taken that as yet another sign that additional stimulus measures will be required.


Today in the US we have three main economic data announcements. The first is the usual initial weekly jobless claims. Last week the claims level rose to 462000, a 13,000 increase on the week. This week the market is looking for an improvement to 455,000. The Leading Indicators (a composite index of 10 lead economic indicators) for September are also due out with the consensus expecting a gain of +0.3%, the same gain as was achieved during August. After the better than expected Empire State Manufacturing Index last Friday the market will be focusing on the Philadelphia Fed Manufacturing Index this afternoon for confirmation that the manufacturing sector is showing signs of once again building some momentum. The Philadelphia Fed reading last month was just into negative territory at -0.7 and the consensus for October is looking for a very modest improvement to +1.0.

Today we have had the October Purchasing Managers Index for manufacturing for Europe and Germany. The former increased to 54.1 from the previous reported level of 53.7 whilst Germany posted a reading of 56.1 against the last reported level of 55.1 and against expectations of a modest drop to 54.6. Manufacturing in Europe appears to be holding its ground at present and is not showing any sign of an imminent slowdown. We also had the equivalent figures for services and in the case of Europe the number did show a modest decline to 53.2 from 54.1 last month whilst Germany once again showed improvement with a move up to 56.6 from the last reported level of 54.9.

In the UK retail sales for September have proved to be disappointing with a month on month decline of -0.2% against expectations of a modest improvement of +0.3%. The August data was revised down to a drop of -0.7%. After the announced cuts in the comprehensive spending review yesterday it is quite likely that consumers will be nervous of the fiscal squeeze that lies ahead and may already be reacting to that. This could well be the start of a prolonged period of subdued consumer spending in the UK.

Today we will hear from George Osborne on the extent of the planned spending cuts and for a change the press will be focusing very much on the UK rather than what is happening in the US. There is no doubt that the severity of the cuts will hold back growth over the coming years but it is widely considered to be a necessary evil to bring the UK deficit back into line. It will be many months before the real impact begins to show although spending habits and intentions will almost certainly start to change immediately once the headlines start to come through. What the UK and most of the developed world face is a prolonged period of sub trend growth with significant uncertainty over the sustainability of recovery and an ongoing risk that the economy loses enough momentum to fall back into periods of negative growth.


A good deal of the recent equity market rally has been founded on a lot of hope and expectation that the US recovery will be kept on track with additional stimulus measures. The same may also be said of the UK with a now increasing likelihood that the Bank of England will soon start a next tranche of quantitative easing. Arguably a good deal of this is now priced in and unless the policy announcements follow the expected path or are indeed greater than expectations, then we have to consider the possibility of a period of range bound trading at best and more likely a period of consolidation.

Yesterday the market was spooked by the unexpected policy action in China after the People’s Bank of China raised the benchmark interest rate(the one year lending and deposit rate was increased by 0.25%). This looks to have been in response to the surge in bank lending during recent weeks. The market was expecting a rate rise but not until next year and this was the reason for the sharp reaction yesterday in equity markets. The overall impact of a modest increase such as this is unlikely to be significant, but it does now raise the question of when the next increase will come.

In the US on Monday the only significant economic announcement was Industrial Production for September which declined by -0.2% against expectations of a +0.2% increase. This is the first decline in Industrial Production this year and looks to be a reflection of the inventory replacement cycle which is slowly coming to an end. Yesterday in the US we had Housing Start data for September which increased to 610,000 on an annualised basis from the 598,000 reported for the previous month. Starts are now 13% above the June low but remain at a very depressed level and the US housing market looks set to remain in the doldrums for many months and possibly years to come.

Today in the UK we have had the publication of the last Bank of England MPC meeting which gives clear indication that we are moving closer to the second round of quantitative easing. In the US today the Fed’s Beige Book will be published which gives a snapshot of current economic conditions in the 12 Federal Reserve Districts.

The economic data published on Friday in the US was generally quite positive. Retail sales for September were a little ahead of the consensus at +0.6% month on month compared to consensus expectations of +0.5%. The previous month was revised upwards to +0.7% compared to the previous estimate of +0.4%. The gains were broadly based as well including the more discretionary areas such as furniture. We also had the Empire State Manufacturing Index for October which showed that general conditions within the New York manufacturing sector actually improved to 15.73 from the previous reported level of 4.14 and against expectations of an increase to 8.0. Whilst only a regional report, this does at least show that the manufacturing sector has not fallen off a cliff as some had feared and if anything growth may again be picking up a little more momentum.


Inflation in the US remains almost nonexistent according to the CPI inflation data published on Friday with the core rate of inflation which excludes food and energy showing no change over the month. The headline rate gained by just +0.1% leaving the year on year rate for headline inflation at +1.1% whilst the core rate is now at just +0.8%.

Ben Bernanke’s speech on Friday received plenty of press attention and with the recent market strength down to expectations of the next round of quantitative easing in the US, the market was looking for any sign as to the size and methods likely to be used. Bernanke didn’t really add any new information apart from reiterating the fact that more action now looks necessary. He did go on to use words that suggest the Fed is likely to utilise a gradual policy response rather than utilise an all out policy response which may well disappoint some market participants. The figure of a $500bn asset purchase programme seems to be the base line for current expectations and a probable starting point for the Fed, with the likelihood that more will follow if the initial response proves to be insufficient. An announcement will almost certainly be made when the Fed next meets on the 2nd/3rd November and up to that time we can expect the speculation and anticipation to keep the market relatively range bound.

The disappointing data on Friday was yet again the University of Michigan Consumer Sentiment number which remain at levels more consistent with no growth/recession. The latest estimate for October came in at 67.9 compared to expectations of 69.0 and the last reported number of 68.2.

In the US today the economic calendar is relatively light with just Industrial Production for September due for announcement. Expectations are for a +0.2% increase. There is no major economic data due out in Europe today.

The UK will be very much in focus on Wednesday with the results of the coalition government’s spending review due for publication. With so much debate as to whether the severity of the cuts will tip the UK economy back into recession there will be plenty of analysis doing the rounds later this week. Some sectors that are more reliant on government spending could well be volatile over the next few days.

A brief note today and with Columbus Day in the US it is relatively quiet on the economic front with world markets ticking modestly higher. The Non Farm Payroll employment report in the US on Friday was poor to say the least. The market reaction was a little baffling and once again it would seem to be hope over the next round of quantitative easing that is saving the day. The headline number for the September Non Farm Payrolls declined by -95,000 compared to consensus expectations of a more modest fall of -8,000. The private payroll number did increase by 64,000 which was enough to keep the market happy. However, one aspect that was surprising was the loss of 83,000 government jobs in addition to the 77,000 Census workers that came off the register. The decline in the number of government workers would have resulted in a negative headline number of -18,000 despite the impact of the Census workers. It will be interesting to see if this is the start of a trend within the public sector given the pressure which State budgets are currently under.


There wasn’t any good news from the US average hourly earnings data either which remained flat month on month. The unemployment rate remained flat at 9.6% but if you look at the broader U6 unemployment rate (includes all unemployed plus those that are working in some form or capacity, for example part time workers that want to be full time and also workers that have become discouraged and given up looking for a job) and this increased to 17.1%, a +0.4% increase on last month.

The economic data in the US more recently has been enough to dampen down double dip fears and this has helped to sustain the recent market rally. Data such as the Non Manufacturing ISM was better than expectations, but without a sustainable improvement in the jobs market it is difficult to see much GDP momentum going into 2011. The debate over when the next round of quantitative easing will come in the US will undoubtedly continue and how effective it will be remains to be seen, but more policy action now seems inevitable and an announcement before the year-end is looking increasingly likely.

There is no major data scheduled for today and we will cover the economic data due out this week in our report tomorrow.

All eyes are on the Non Farm Payroll data due out this afternoon. With the US closed on Monday for a public holiday and little in the US economic calendar until Friday of next week this report is likely to set the tone for trading over the next few trading days. The ADP private payroll number on Friday was disappointing with a decline of -39,000, although the previous month’s figure was revised upwards to a gain of 10,000 compared to the previous reported number of -10,000. Whichever way you cut it these numbers are poor to say the least although more recently the ADP data has not been a particularly good indicator of what the Non Farm Payroll number may contain. The consensus is looking for a modest drop in the headline Non Farm number of -8000 due in part to the remaining census workers falling off the register. The important number will again be the private payrolls with the consensus looking for a gain of around 75,000 although the forecast range is relatively broad at between 0 and 100,000. The market will almost certainly react badly to any negative number.


Yesterday both the Bank of England the European Central banks held their usual interest rate meetings and as expected there was no change in policy. The NIESR estimated yesterday that UK growth during the third quarter has slowed to +0.5%. This morning in the UK we have had Producer Price Input data for September which came in a little ahead of expectations at +0.7% month on month against the consensus which was expecting +0.4%. There is no doubt that inflationary pressures within the UK are remaining stubbornly high and this may well be a constraining factor when it comes to the decision over whether to implement additional quantitative easing.

The market has rallied strongly over the last couple of trading days after better than expected US Non Manufacturing ISM data and the Bank of Japan decision to engage further quantitative easing (QE). The debate seems to have shifted from whether or not a further slug of QE should be utilised in the US to a question of when QE2 starts. The economic data continues to indicate that the recovery is not picking up steam and GDP growth is likely to remain sluggish for the foreseeable future, and therefore the argument for additional measures is strong. However, the market reaction to the prospect of renewed quantitative easing is difficult to rationalise bearing in mind that the fact that more measures may be needed suggests the first round of policy action has failed to deliver the required result. It was interesting to see that the ADP Private Payroll data in the US published yesterday received no attention when the number for September actually declined by 39,000. Whilst the ADP number is not a particularly good guide to what the Non Farm Payrolls have in store it is hard to ignore the trend that it suggests. Overall, the recent market action should be treated with caution but as we have said before markets have a habit of becoming divorced from reality and the current rally may well have further to go yet. A lot will now depend on the US third quarter earnings season.


The main data announcement due for publication today in the US is the Weekly Initial Jobless Claims with the consensus looking for 450,000 compared to the number last week of 453,000. In Europe the European Central Bank and the Bank of England have their interest rate meetings today although we can expect no change in policy. The arguments for the second round of quantitative easing in the UK seem to be growing by the day and with so much press coverage of the forthcoming cuts, the pressure to engage QE2 in the UK will grow quickly.

The UK Halifax house price index for September has been published this morning and this showed a -3.6% month on month drop which is the largest on record. With consumer confidence due to take a significant battering over the coming months there is every chance that house prices are due for a prolonged period of declines.

Other data due for announcement today is industrial and manufacturing for August for the UK. We also get the NIESR UK GDP estimate for the 3rd quarter.

A brief update today as the focus today is on the US ISM Non Manufacturing Index due out this afternoon. The last reported level for this index was 51.5 and the consensus is looking for September to show a modest improvement to 52.0. This number could go either way given the momentum the US economy is losing and a dip below 50 would certainly be taken badly. The US economic recovery has been driven on by inventory replacement and there is no doubt that this element of the recovery is slowly but surely ebbing away leaving the US economy exposed to a weak consumer and an economy that has been broadly propped up by government use of stimulus measures. The next quarter could be a decisive one for the US stock market and the risks remain that as the stimulus measures are replaced by fiscal tightening we may yet see the onset of another recession. For the time being the market has maintained its ground given that most data measures have shown no imminent threat of a second recession but in our view the risks remain and it may only take one poor data announcement to set off another reversal in sentiment.


In Europe today we have had Purchasing Managers Index data for services for Germany, Europe and the UK. All three have shown a modest improvement over the month against expectations of a modest decline. The numbers are still well down on the peaks hit earlier in the year and growth during Q3 and especially Q4 looks set to be down on the Q2 numbers.

This week will be all about the US unemployment report due out on Friday. The Non Farm Payrolls last month registered a -54,000 decline, but this still reflects the impact of the temporary census workers falling off the register. The important number is the private payroll constituent and this gained by 67,000 in August. Expectations for private payrolls this month are for a gain of around 75,000 and the top line number is expected to show a modest 5,000 improvement, as the last of the census workers roll off the register. Also this week both the European Central Bank and Bank of England Monetary Policy Committee meet to discuss interest rate policy. Given the relatively benign inflation outlook and the undoubted slowdown in momentum in Europe and the UK, no change in policy is expected.


Today is a relatively quiet one in Europe with the Producer Price Index for August already published this morning showing a modest +0.1% month on month increase confirming that there is currently little in the way of inflationary pressure. We have two pieces of data in the US due for publication this afternoon with factory orders for August expected to show a modest -0.3% decline after a +0.1% gain in July. Pending home sales data for August is also due out and is expected to show a modest +2% gain on the month which would leave sales at very depressed levels but at least showing some signs of stability.

Arguably the second most important data announcement in the US comes tomorrow with the publication of the Non Manufacturing ISM for September. The last report showed the index declining by 3 points to 51.5, leaving it just above the key level of 50 which indicates growth. The consensus is expecting the index to remain very close to the last reported level. However, a dip below 50 will be taken badly by the market and would almost certainly result in a sell off tomorrow afternoon. In the UK and Europe tomorrow the main event is the publication of the Purchasing Managers Index for services for the UK, Germany, France, Italy and the Euro zone. All are expected to fall from the previous reported levels but remain comfortably above 50 confirming that expansion is still happening, but also showing that some of the momentum is still being lost.

On Wednesday we get the final estimate for European Q2 GDP which is expected to remain unchanged from the previous reported level of 1%. In the US on Wednesday the ADP private payroll report for September will be announced. This is a useful guide for where the private payroll number within the Non Farm report is headed and this month the consensus is expecting a 20,000 increase.

Thursday brings the interest rate meetings for the Bank of England and the European Central Bank with no change in policy expected. In the UK, manufacturing and industrial production data for August will be published. In the US the weekly initial jobless claims will be under scrutiny and after two weeks of improvement the market is looking for a continuation of this trend with a number of 450,000 expected compared to the last report of 453,000.

Friday brings the key Non Farm Payroll number in the US and we round the week off in the UK with the Producer Price Index for September.