The MPC meeting minutes this week provided few surprises. David Miles votes for a bigger extension to the quantitative easing programme with the suggestion of a further £40bn rather the £25bn which was agreed upon. Conversely to that Spencer Dale voted against an extension of quantitative easing on the basis that it will fuel excessive asset price increases. Further discussion included the possibility of cutting the interest rate on a percentage of commercial bank reserves.

The UK's fiscal deficit is ballooning at a fast rate of knots. The deficit for October was a staggering £11.4bn far above what just about everyone was estimating. The total deficit so far this year of £86.9bn is above that for the whole of 2008. With tax receipts continuing to fall the situation will deteriorate further over the coming months.

This week we closed out our holding in Reed Elsevier and we traded Imperial Tobacco yesterday successfully.

The CPI data yesterday in the UK demonstrated that inflation is likely to gain momentum over the near term. The headline annualised rate increased to 1.5% from 1.1% which was a little higher than the consensus expectation which stood at 1.4%. The figure was higher than expected due to the impact of food inflation. With the prospect of vat returning to 17.5% and with the energy price comparatives starting to fade as we start to lose the comparable lower energy prices of last year we will see inflation moving higher with the prospect of it moving above target. However, it still seems likely that over the medium term the impact of so much spare capacity in the economy will keep prices relatively low. Nevertheless a return to inflation above 2% is likely to worry the market.


In the US today the housing start data for October was very bad with an 11% decline to 529000 compared to consensus expectations of a modest increase to 600,000 from the previous level of 590,000. If nothing else this demonstrates how fragile a lot of the data is at present and clearly a lot of the government incentives have helped this market. With rising job losses the outlook for the US housing market remains uncertain.

The CPI data in the US today for October came in at 0.3% for October which compared to the consensus figure of 0.2%.

Our new note on Scottish and Southern Energy is now available for clients via their research access.

With the market standing at close to its high for the year I find it difficult to want to rush into any major long positions and ideally it would be nice to see a fall back to the 5100 level. Whether this will happen is uncertain given that clearly a lot of money is chasing equities higher. A combination of an economy awash with capital and fund managers and investors afraid of missing out on the next leg up is likely to keep the market steady for the time being. With fiscal stimulus packages likely to continue worldwide into next year my greatest fear is that we will create yet another asset price boom whether it be commodities, equities or house prices. We still have a situation of economic recovery fuelled by big government spending and this cannot go on forever. However, the longer we keep pumping money into the economy without at least the suggestion that it will have to end at some point soon does provide real risk that the equity market is going to overshoot and when the announcement that quantitative easing and easy money is going to stop comes it is going to leave us open to a correction. I do think it would be preferable for the market to endure some short term pain to prevent a much more severe correction when the taps are turned off. Sadly I suspect that markets will continue to move ahead into the New Year and it will be 2010 before any suggestion of a change of policy comes which may mean that valuations have by then moved too far ahead to be able to digest the news without a major sell off.

The market seems to be going from strength to strength which I find a little worrying given where we are at and what next year holds in store from an economic perspective. A strong rally with mutilples where they currently stand is difficult to justify unless we see strong growth next year. Undoubtedly the US is going to enjoyy two or more quarters of almost trend growth, but the UK and Europe will be far behind and the US is likely to fall back to sub trend growth durng the latter part of 2010 unless the US consumer starts to fire on all cylinders, which is highly unlikely. If we see 5500 plus on the FTSE100 before the year is out I fear that the early part of 2010 will be a difficult one for traders.

We have today closed out a profitable trade in Reed Elsevier although we could have run it a little further with hindsight. I am hopeful of a pull back from these levels before the week is out which should provide the next trading opportunity. It is difficult to take long positions on strong days and we would prefer a bad day to increase the chances of a profitable swing trade.

Economic data


The first GDP estimate for the Euro zone published on Friday confirmed that Europe has at least climbed out of recession although the strength of Q3 GDP was a little less than anticipated at +0.4% compared to consensus expectations of +0.6%. At the same time data for Germany was published which provided the strongest showing with +0.7% (consensus expected +0.8%) whilst France lagged at just +0.3 % and Italy delivered +0.6%. Overall though the data was less than expected with a strong likelihood of sub trend growth over the next twelve months in Europe.

Today we have had the CPI data for Europe with the annual rate of inflation improving to -0.1% from -0.3% but remaining in negative territory. The slight improvement was due to energy inflation which is expected to push the annualised CPI back into positive territory over the coming months. However this is unlikely to result in a sustained increased given the amount of slack that remains in the euro zone economy.

A fairly busy week this week for data. Looking firstly at the US, we have retail sales for October today with the consensus expecting a 0.9% month on month improvement. Also today we get the Empire State manufacturing index for November which is expected to remain firmly in positive territory at around the 29 level indicating a good level of expansion in manufacturing activity. Tuesday brings the Producer Price Index for October which is expected to increase by 0.5% due to higher food and energy prices after a -0.6% decline the previous month. Also on Tuesday we get Industrial Production data for October with the consensus expecting a 0.4% increase following on from a 0.7% increase during September. On Wednesday we get CPI inflation data for October with a 0.2% month on month increase expected. The housing starts data has more recently had the capacity to move the market with any sign of deterioration in the housing industry being viewed as a potential indicator of a slowdown in the rate of US economic recovery. The housing starts for October are expected to show a rate of 600,000 for October. On Thursday we get the Philadelphia Fed manufacturing survey for November with the consensus expecting a figure of around 12 compared to the October level of 11.5 with a positive figure indicating growth in the manufacturing sector.

In the UK look out for the CPI data for October which is due to be published tomorrow with the year on year rate expected to tick up due to higher energy prices and weak sterling which is importing inflation into the economy. On Wednesday we get the publication of the Bank of England MPC meeting minutes. The comments will be of particular interest following the poor Q3 GDP data for the UK. On Thursday in the UK we get retail sales data for October with the consensus expecting a 0.6% improvement over the month.

Look out for Ben Bernanke’s speech in the US today. As always any comments he makes on the economic outlook have the power to move the market.

This week we will be updating our notes on Centrica and Scottish and Southern Energy.

A plethora of companies that I follow closely have reported this week and all have met or exceeded expectations. My favourite stock of 2009, Imperial Tobacco has again forged ahead into new territory and as with many stocks at present it is diffiicult to gauge new entry and exit levels when they have moved to new highs and as a result I always wait until they have settled down. With the market hitting fresh highs it becomes even more difficult and what you want to avoid is buying into stocks at new highs just when the market turns. Consequently I have left Imperial and a few others alone for the time being to focus on stocks where valuations still look attractive and are yet to really benefit from the ongoing rally. On paper that should help to reduce any downside risk in the event of a market sell off but also give me opportunity to still take some profits on long positions. I have not entertained the idea of shorting stocks for some time purely because of the strength in the market but I may well revisit this idea if we see further gains as some of the more cyclical areas are starting to look fairly valued to me.

The Bank of England Quarterly inflation report painted a downbeat picture with expectations of a slow recovery and a considerable amount of uncertainty as to where inflation is going over the medium term and whether the recovery will gain momentum. Inflation near term is expected to pop back over the targeted 2% level, with the reversal of the vat cut expected to impact and also ongoing weakness in sterling adding to domestic inflationary pressures. However, the committee still anticipates inflation to again weaken as the impact of low demand and a considerable amount of slack in the economy continue to pressurise prices. After that judging from the report it is very much an unknown and from 2011 assuming that the economic recovery has become more established and we have seen a return to trend growth it is then that the committee expects inflationary pressures will start to build. At that time the likelihood of interest rates starting to move back up towards more normalised levels seems a sensible assumption to us.


The UK unemployment rate increased to 7.8% from 7.7% and the number of people claiming unemployment benefit increased by 12,900 during October. The rate of increase has slowed but unemployment is likely to continue increasing for several months to come.

Economic Data


The RICS house price survey was published this morning which gave a relatively buoyant snapshot of housing market activity with 34% more surveyors reporting price increases than decreases in the 3 months to October. The consensus was looking for a figure of 28%. This is the highest figure since December 2006 although undoubtedly it is partially due to limited supply and historically low interest rates. The short term outlook for house prices still looks reasonable with the sales to stock ratio moving to its highest level since December 2007.

The British Retail Consortium October data has been published with a strong result for October with like for like sales up 3.8% giving the best like for like sales growth since 2007. This must however be set against a period last year when the credit crunch was in full swing and sales in October 2008 fell 2.2%.

The German Industrial Production data published yesterday provided good evidence that Q3 GDP will be strong when it is published on Friday. Industrial Production for September rose by 2.7% against consensus expectations of +1.2%. The German ZEW economic sentiment index fell to 51.1 in November from 56.0 in October. Despite the drop over the month the ZEW index has shown good improvement this year and at current levels it continues to lend weight to the prospect of a strong exit from recession in Germany.

Company Results

On our monitored list Vodafone and Imperial Tobacco have reported today. For clients please refer to comments within the Daily Briefing section on your account access.

A quiet week ahead on the economic front with the only notable UK data being the unemployment figures due on Wednesday with the claimant count expected to tick higher. Also on Wednesday we get the Bank of England Inflation report which will be very much in focus with expectations seemingly growing that inflation will start to rear its ugly head sooner rather than later. With the amount of slack in the economy at present this still looks a distant prospect but with so much money being injeted into the economy we would expect to see some inflationary pressures starting to return over the next 12 months.

In Europe there will be much interest in the French and German Q3 GDP numbers due on Friday, both of which are expected to show positive numbers as both economies continue to move out of recessionary conditions. This will again high light the extent of the mess the UK finds itself in at present.

This week is all about the companies that are reporting as many of them are on our monitored list and as a result we have kept away from trading them until after they have reported. Our general rule has always been to avoid holding stocks into their results and with so many reporting this week it has mean't a quiet period for our trading. For medium or longer term investors there is no need for avoiding company announcmenets, but for short term traders they will always make a big difference. Bearing in mind that new information will be made public on the day of an announcement unless you are very confident about the company you are trading there is always going to be the risk that something within the results is taken badly. With the level of volatility that can occur on announcement days the risk are generally too high. Sometimes it will ineviatbly mean missing out on a good return but there are always times whne it will save you from seeing a fast drop in the value of your trade.

Tomorrow we have Imperial Tobacco and Vodafone. On Wednesday Sainsbury are reporting along with Scottish and Southern Energy. Thursday brings British Telecom and trading statements from Centrica and Reed Elsevier. We are yet to include Reed on our trading list but as long as the results show some progress we are likely to start coverage and include them in the trade list.

The rise in the US unemployment rate to 10.2% underscores why consumer confidence has been declining again more recently. The overall increase of 190,000 in the number unemployed during October was a little worse than expectations of around 175,000. The increase in unemployment is unlikely to impact on the rebound in GDP over the next quarter with inventory replacement providing a boost, but as we move into 2010 unless the consumer is in better shape to start taking up the slack we could quickly see the rate of GDP growth fall away to sub trend and that will prove to be a real problem given the slack in the economy and with no real sign of the unemployment cycle turning.

It was interesting this week that the market ignored the fact that the Non Mnaufacturing ISM figure for October fell to 50.6 from 51.6, with the FOMC meeting taking the headlines. The rate at which unemployment is increasing will undoubtedly impact on consumer sentiment as we approach the festive period and it will be very interesting to see how the data pans out over the next month or so. It is difficult to see the market making much if any progress over the coming weeks.

The Federal Reserve chose not to change the message of low rates for ' an extended period' yesterday. Any sign of a change in policy will undoubtedly impact on market sentiment as expectations will quickly start to focus on when the first rate hike will come but this still looks like a distant prospect. Whilst the Fed is likely to signal a change in policy concerning its fiscal stimulus measures sometime soon the first rate hike still doesn't look likely until the second half of 2010 at the earliest.

All eyes today are on the ISM Non manufacturing data for October with the consensus looking for a figure of around 51.6 compared to 50.9 in the previous month. After a strong manufacturing figure on Monday we should see further improvement but it goes without saying that a drop would be taken very badly.

US ISM Manufacturing Data

The manufacturing ISM data for October was a strong 55.7 from the 52.6 recorded in September. This is a clear sign that the production rate has increased and whilst the new orders element of the index slipped to 58.5 from 60.8, the levels are still consistent with a healthy rate of GDP growth for Q4 which is likely to show a similar run rate to the Q3 figure of 3.5%. The employment index within the ISM figure improved to 53.1 suggesting that the employment situation may well be improving.

With the sell off in the Dow on Friday following poor consumer spending data for September markets will enter this week in nervous mode especially with three lots of key data to contend with. We start today with the publication of the US manufacturing ISM for October which is expected to show further improvement on the level of 52.6 last month with the consensus standing around the 53 mark. On Wednesday we get the Non manufacturing ISM data for October which last month crept into positive territory at 50.9 which suggests economic expansion and this month the consensus is expecting a move to 51.6. On Friday we get the non farm payrolls which are as always the most anticipated piece of economic data for the month. With lingering concerns over the sustainability of the economic recovery the employment data does need to show an improving trend and the expectation for October is a 175,000 decline following on from the decline of 263,000 last month. Any disappointment over any of these numbers this week will spell bad news for the market.


We also have all of the Central banks meeting this week with the Bank of England and the ECB meeting on Thursday and the Federal Reserve announcing on Wednesday. Talk of tightening interest rates is not going to happen for a long time yet and the focus will again be on any comments relating to the ongoing stimulus packages.

The US GDP number was better than expectations at 3.5% annualised and brought some calm to a situation that good have resulted in a big sell off if the number had disappointed. The fourth quarter should generate a similar result and we will still have to see what revisions are going to be made to the Q3 figure over the coming weeks. The real issues will come in the second half of 2010 once the inventory cycle has played its part in helping GDP and the US is looking at ways to withdraw its stimulus measures. The cash for clunkers programme contributed 1.66% of the announced Q3 figure and we do not have this benefit going forward. A slip back to sub trend growth is almost a certainty and it remains to be seen how the market will react to that. In the meantime we appear to have an environment where world equity markets may well be able to rally a little more.