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There was little to cheer in any of the new UK statistics released yesterday. Household spending weakened unexpectedly, there were further hints of resurgent inflation and Gordon Brown continues to spend like there’s no tomorrow.
Retail sales in September were very poor, recording a 0.4% fall compared with consensus expectations of a 0.4% rise. Once food sales were taken into account, the picture was even worse, with the ex-food figure down 0.9%.
In part, those weaker sales may have been a response to higher prices. High street prices rose by 0.6% year-on-year – the first annual increase for five years.
That’s worrying, because a slowing economy accompanied by persistent price inflation is the last thing we need. And it’s likely to strengthen the resolve of the increasingly hawkish rate-setters at the Bank of England…
The minutes of the latest Monetary Policy Committee showed that two members voted for a rate hike last month. By itself, that was surprising – most analysts expected a unanimous vote to hold ahead of a rate rise in November. What was even more surprising was that the two dissenters were the most recent additions to the MPC, Andrew Sentance and Tim Besley.
Until recently, both of these two had been expected to join the dovish camp. But in their appointment hearing in front of the Treasury Committee, both sounded much less relaxed than expected about inflation. Now they’ve nailed their colours to the mast, pushing for an immediate rise to “reduce the possibility of needing to make a larger increase later on”.
The minutes also showed that several members who voted against a raise did so purely for timing reasons. They thought that another increase will be needed, but that there was no pressing need to hike in October. This comes down to managing expectations: markets are already pricing in a change in November rather than October, and after the shock rate rise in August, the MPC wants to avoid implying that their decisions are becoming unpredictable.
A November hike is now seen as virtual certainty, but an increasing number of analysts are now coming round to MoneyWeek’s view that this will not be the peak of the cycle. February 2007 is now seen as the most likely month for a further hike if one is needed; this would allow the MPC to see the next Quarterly Inflation Report and, perhaps more crucially, the results of the January pay round, before making a decision.
At the moment, there are still plenty of reasons to think another hike will be necessary. One factor that the committee members – in particular Sentence and Besley – found worrying was the rapid growth in the money supply. According to the minutes, there’s “no obviously compelling structural explanation” for this to expand as fast as it is doing. With that in mind, the latest money supply data certainly adds to the hawkish case. The M4 measure rose at 14.5% year-on-year in September, a 16-year high and well above consensus forecasts of 13.2%.
One member – probably archdove David Blanchflower – felt that the slackening labour market might prevent any further rises. It’s certainly true that the latest employment figures weren’t encouraging, with both the claimant count and the International Labour Organisation measures showing more people out of work. But with inflation staying stubbornly above target, the housing bubble still inflating and money supply growth dangerously high, more unemployment is likely to be the price we pay to get the economy back into shape.
Meanwhile, the latest government borrowing figures barely got a mention in the press, although they were predictably bad. Public sector net borrowing for September came in at £7bn, £2bn more than expected, and total borrowing for this year is on track to be £2bn-£3bn over the Chancellor’s forecasts. There’s now talk that Brown might once again extend his definition of the economic cycle so he can meet his self-imposed ‘golden rule’ of balancing the budget over the cycle. But it seems unbelievable that people will continue to be fooled by this statistical fudging.
We suspect that the two props of Brown’s economy – the public sector spending binge and the low rate-fuelled credit bubble – are set to collapse at the same time. Unfortunately it’s the taxpayer who will pick up the bill for this; watching Brown’s name become mud will be scant consolation.
Turning to the markets…
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The FTSE 100 recovered from earlier weakness to end the day 5 points higher at 6,156. Miners performed strongly, with Xstrata topping the leaderboard. Yell also performed well on news that Verizon Communications was to create a spin-off company comprising its print and online yellow pages businesses. For a full market report, see: London market close
On the Continent, the Paris CAC-40 closed one point lower, at 5,359, as investors consolidated recent gains. In Germany, the DAX-30 closed 5 points lower, at 6,177, with losses led by software company SAP.
Across the Atlantic, stocks closed higher. The Dow Jones Industrial Average closed above 12,000 for the first time as positive earnings reports from the likes of Apple and Coca-Cola propelled the index 19 points higher to a 12,011 close. The Nasdaq edged 3 points higher to end the day at 2,340. And the S&P 500 closed just under one point higher, at 1,366.
The Dow’s strength also boosted sentiment in Asian markets. The Nikkei climbed to a close of 16,651, a 100-point gain, despite a profit warning from Sony.
Crude oil was trading at $59.01 this morning, whilst Brent spot was almost 1% higher at $59.40 in London.
Spot gold was hovering around the $600 mark this morning, up from $598.40 in New York late last night. Silver last traded at $12.01.
And in London this morning, Tata Steel announced a £4.3bn takeover of Anglo-Dutch steel company, Corus. The acquisition will create the fifth-largest steel company in the world, and is India’s biggest ever foreign takeover. Shares in Corus fell by as much as 1.5% this morning.
And our two recommended articles for today…
Why reckless use of credit will cause financial disaster
– What does our growing use of fossil fuels have in common with the proliferation of mortgages, available over longer periods and increasingly at adjustable rates? Both are likely to end in disaster. But in the financial world, at least, there will be investment opportunities to be had. To find out where to find opportunities in the crisis, read: Why reckless use of credit will cause financial disaster
Where is a property bull market just beginning?
– Whilst the US housing market slumps and the UK looks to be heading for a house price crash, there is one country where a bull market in property is just beginning. And, says Steve Sjuggerud, it’s going to be the biggest investment trend of the next 15 years. To find out where property is about to go stellar, click here: A bull market in property is just beginning – but where?