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.

The economic data in Europe at present is certainly indicating a relatively sharp slowdown from the strong growth levels achieved during Q2. Europe appears to be following a similar path to that of the US and after an initial growth spurt driven on by inventory replacement and for Europe a favourable currency movement earlier in the year, we are now starting to see growth return back to sub trend. In the UK yesterday we had further confirmation of this trend with the poor retail sales data for August which declined by -0.5% compared to consensus expectations of a +0.3% improvement.


In Europe today we have had the German Producer Price Index for August which was unchanged month on month compared to expectations of a +0.3% increase. The year on year rate fell from +3.7% to +3.2%.

The main data for announcement in the US today is the CPI data for August with the consensus looking for a +0.3% increase in the headline rate whilst the core rate (excluding food and energy) is expected to show a more modest +0.1% improvement. The main possible market moving event of the day will be the publication of the US University of Michigan Consumer Sentiment Survey for September. The consensus is looking for a modest improvement to around 70.0 from the previous reported level of 68.9 and any miss could well place markets under pressure this afternoon.

The economic data in the US this afternoon has once again provided very little to get excited about. As with yesterday it was not sufficiently bad to create a sell off but also not good enough to create the foundation for a rally. We are in a situation in which the market is now struggling for direction and it is unclear as to where the next significant move will be.


The US weekly initial jobless claims came in at 450,000 which were broadly in line with expectations and there will be some relief that the figure did not increase on last week’s level of 450,000. However, it should still be remembered that claims remain at elevated levels.

The Philadelphia Fed manufacturing index just failed to make it into positive territory with a decline of -0.7 compared to the previous reported level of -7.7 and consensus expectations of an improvement to 3.8.

Other US data published today was the Producer Price Index for August. The headline rate showed a +0.4% month on month improvement whilst the core rate (excluding food and energy) showed a more modest improvement of +0.1% month on month. Overall there is still little in the way of inflationary pressure in the US economy and we should get confirmation of this tomorrow with the publication of the August CPI.

Tomorrow in Europe the German Producer Price Index for August is due for publication and in the US apart from the CPI we also get the next reading for the University of Michigan Consumer Sentiment for September. The last reading was 68.9 and the consensus is expecting an increase to around 70.0.

The US data today has not provided any reason for major disappointment but at the same time there is little reason for optimism. The Empire State Manufacturing Index came in at 4.14 compared to consensus expectations of 5.0. The new orders element of the index moved back into positive territory from the -2.7 reported last time to +4.3 whilst the employment element remained relatively static at 14.9. Whilst this report only covers New York State it is clear that the manufacturing sector in the US has slowed down considerably during recent weeks. Tomorrow the report for Philadelphia is due for publication. This index declined last month to -7.7 indicating contraction and the consensus is looking for an improvement during September to around +4.0.


Other data that has been published in the US today is Industrial Production for August which was in line with expectations with a +0.2% month on month improvement. The July figure was revised down a little to +0.6% from +1.0%.

UK unemployment published today for the 3 months to July fell by 8,000 to 2.47 million which was less than what analysts had expected. There is no major economic data due for announcement in Europe today.

Tomorrow the initial weekly jobless claims will be in focus in the US. After the partially estimated reading last week analysts will be keen to see what this week holds. The consensus is looking for a number around the 450,000 mark. Other data due out in the US tomorrow is the Producer Price Index for August. In the UK retail sales for August will be published tomorrow with the consensus looking for +0.3%.

The UK CPI not unexpectedly remained unchanged year on year at 3.1% due to the impact of higher food and clothing prices. The core rate which excludes food and energy actually increased year on year from +2.6% to +2.8%. There is still a good deal of uncertainty as to where prices are going short term although most continue to expect a gradual decline. The impact of the VAT hike at the beginning of next year may well delay further a move in the CPI to closer to the Bank of England targeted rate of 2%.


This morning we have had further evidence of slowdown in Europe with the publication of the German ZEW Economic Sentiment survey for September. The consensus was expecting it to fall to +10.0 from the previous reported level of +14.0. However, the actual number came out at -4.3, substantially below expectations. A negative number indicates that more investors now expect deterioration in economic conditions compared to those that expect conditions to improve.

We have also had Industrial Production numbers for Europe this morning which showed no changed month on month, perhaps again evidence that economic conditions in Europe are slowing down after the strong Q2 growth.

In the US today the much awaited retail sales data for August was a little better than expected. If you strip out the impact of auto sales the gain month on month was +0.6% compared o expectations of +0.3%. The back-to-school season will have no doubt played a part in the strength last month but once again the data is good enough at least to suggest that a recession is not imminent.

Look out tomorrow for the US Empire State Manufacturing Index for September. The market will want to see this number remaining in positive territory and further confirmation that the manufacturing sector is not falling off a cliff will be well received. A negative number will be taken badly especially given the more recent rally on the back of the better than expected ISM data.

The economic data is again likely to drive the market this week. World markets have opened in good shape this morning following completion of the Basel III agreement on minimum capital ratios. The required amounts are towards the lower end of expectations and are seen as achievable by most European banks which is why the sector has rallied this morning. We have also had Chinese Industrial Production numbers for August which was up 13.9% year on year, a little ahead of expectations and this has also helped sentiment this morning.


We have noticed that some brokers have started to tweak up their estimates for US Q3 GDP following the better than expected trade data for the US last week. Estimates are now closing in on +2%.

There is plenty in the economic calendar this week although today there is relatively little to focus on. The week really kicks off tomorrow with the publication of US retail sales for August. The consensus is looking for a +0.3% month on month improvement. The other US data due for publication tomorrow is business inventories for July with a +0.6% month on month gain expected.

In Europe, Tuesday brings the German ZEW Economic sentiment index for September. Expectations are for a drop to +10.0 from the previous reported level of +14.0. Given the slowdown indicated in recent data there is downside risk to this number in our view. Tomorrow we also get Eurozone Industrial Production for July with the consensus looking for a +0.2% improvement after the -0.1% drop the previous month. Finally, tomorrow the UK CPI for August is due for publication. The CPI has stayed stubbornly high during recent months and with concerns that food price inflation is starting to tick up there is a real risk that the UK CPI is going to remain well above target for longer than expected.

What will be of significant interest this week will be the two manufacturing reports due for publication in the US. On Wednesday we get the Empire State Manufacturing report for September. This measures manufacturing activity in New York State and this index did improve by 2 points last month to 7.0, but the new orders element fell into negative territory. The market will want to see this index remain in positive territory indicating growth and the consensus is looking for +5.0 for September. A negative number will be taken badly given the concerns over the manufacturing sector, although these were allayed to some extent with the better than expected ISM number at the beginning of the month. The second manufacturing report is for Philadelphia and that is due for publication on Thursday. The index for the previous month did actually decline to -7.7 from +4.1 which indicates contraction. The market is looking for this index to bounce back to around +4.0, but another negative number cannot be ruled out. If we do get gloomy manufacturing reports this week it may well prove to be the catalyst for at least some profit taking after the recent rally.

We will comment more on the rest of the data due out this week in the next Daily Briefing.

The market is awaiting the US employment data and the ISM Non Manufacturing Index this afternoon. After the ISM manufacturing index on Wednesday defied expectations with an increase over the month there has been a sudden shift in sentiment towards the bulls. Expectations for private payroll growth within the nonfarm payrolls currently stand at +40,000 which hasn’t changed since earlier in the week and that’s despite the poor showing from the ADP number on Wednesday. Undoubtedly a negative private payroll number today will be taken badly but anything positive may well be greeted with relief giving the market a further excuse to rally after the market decline in August. The headline nonfarm payroll figure will still be negative as the census workers roll off the register with expectations of a drop of around -100,000.


The ISM Non Manufacturing data due out this afternoon is very important indeed given that it covers around 90% of the US economy. Expectations for July are for a reading of 53.0 from the previous reported level of 54.3. Given recent economic indicators we would certainly expect a decline although we would have said the same of the manufacturing report earlier in the week. There is the potential for a surprise but more likely a modest decline in line with expectations.

Overall a lot rests on the data this afternoon and if at the very least the numbers are no worse than expectations we would expect to see the market continue its rally. However, we would not read too much into this and it is more likely to be short lived. The US recovery is far from out of the woods and Q3 GDP is still lining up to be worse than Q2. Based upon recent data such as the bad construction numbers announced for July and the downward revision to the June number we may yet see a further downward revision to Q2 US GDP and a very low Q3 number with some commentators still suggesting Q3 could be negative.

The European data we have had today is the August Services Purchasing Managers Index for Germany, the EuroZone and the UK. The Eurozone was a little above expectations whilst Germany and the UK showed declines over the month. Euro Zone retail sales have also been published for July and the number was slightly below expectations with a month on month increase of +0.1% compared to expectations of +0.2%.

The ISM manufacturing report in the US yesterday afternoon changed the market mood completely and all of a sudden there was a rush to buy risky assets pushing world markets up by well over 2%. The ISM reading came in at 56.3 against expectation of a fall to 53.0 from the previous monthly level of 55.5. However, the new orders and unfilled orders element of the index declined to their lowest level in many months. More recent data relating to the US manufacturing industry has pointed to quite a sharp slowdown in activity and it is difficult to see this index making any more progress from here. In fact yesterday’s data was almost a little deceptive in terms of what the underlying picture currently is.


The US ADP private payroll data was dire, bearing in mind that we are supposed to be in a stage of economic recovery. To lose a further 10,000 private payrolls when the US should in fact be creating 100,000+ at this time is not an indication that all is well. Also yesterday, US construction spending for July was announced and this fell by -1.0% compared to expectations of a -0.6% fall. The June level was revised to a decline of -0.8%, which is a reflection of the poor state of the US housing market. However, yesterday the market chose to focus on the positives and we now look to the Non Farm Payrolls and the ISM Non manufacturing data due out tomorrow. If both of these please the market we may well see markets push further ahead over the coming week, but conversely to that we may get a reality check instead.

This afternoon keep an eye out for the US weekly initial jobless claims. After the significant improvement last week to 473,000 from the terrible 504,000 posted the week before the market will at the very least be looking for claims to be hovering around the 470,000 mark. A shift back up towards 500,000 will not be taken well, but if we see further improvement that is likely to give the market a further boost this afternoon. Other data due out in the US today are factory orders for July with the consensus looking for a modest +0.3% gain following the -1.2% drop during the previous month.

In the UK today we have had further confirmation that the housing market is in decline with the Nationwide house price index falling by -0.9% during August. In Europe the estimate for Q2 European GDP was unrevised at 1.0%. The European Central Bank is meeting today to decide on interest rate policy. We can expect no change and realistically any rate increase is unlikely to come until well into 2011.

The first of the employment data in the US is due for publication today with the ADP private payrolls for August due shortly. With clear deterioration in the US employment picture during recent weeks expectations have fallen and the consensus is expecting private payrolls to show a figure of just +20,000 last month. This compares to the July number of +42,000. However, there is considerable uncertainty as to what the figure will be today and it is not inconceivable that no private payroll jobs have been created. Either way the ADP number today will give some indication of where the Non Farm Payroll number is heading on Friday.


Today in the US we also get the ISM Manufacturing Index for August. More recent manufacturing data has suggested a rather rapid slowdown in conditions within the US manufacturing sector and the ISM number today will reflect that. The consensus is expecting a figure of 53.0 after 55.5 last month but given the recent weakness there is in our view some downside risk to this number.

Other US data due for publication is construction spending for July with the consensus expecting a drop of -0.6% after the +0.1% gain in June.

In Europe today we have had the August Manufacturing Purchasing Managers Index for the Euro zone and Germany which were broadly in line with expectations. The equivalent figure for the UK published today was a little less than expected at 54.3 compared to expectations of 57.0 after the July figure of 56.9. Overall, so far economic activity in Europe and the UK seems to be holding up a lot better than most feared although it is still early days given that the austerity measures and general fiscal squeeze are in the main yet to be felt.

The market is strong today after better than expected manufacturing data in China. The US economic data due out over the next couple of days will be crucial if the momentum is to be maintained.