Wednesday 5th November

Well That’s The Easy Bit Done……..

As had been well anticipated, Senator McCain conceded the Presidential contest to Senator Obama early this morning. In the senate elections however, the Democrats have fallen short of the 60 seat filibuster-proof level that had been talked about in the run up to yesterday. Obama will now have 2 and bit months until he is sworn in as President on 20th January during which time interest will be high in his preparations for power. Who will form the core of his administration? How will he propose to reduce the burgeoning US deficits? What is his view on the Financial crisis and how the current administration have sought to alleviate the problem? Added to this is the question on every US citizen’s mind, being can he pull the US economy round via an Obama feel-good factor alone or will in need a further stimulus package? And that is without any Foreign Policy considerations….Could be an interesting 10 weeks.

The US economic back-drop is not a pretty picture at present with the car market the focus …. Yesterday’s news that US auto sales plummeted by 32% in October to its lowest monthly total since January 1991 provoked increased calls for new Federal Aid for the industry. The present sales annual rate of 10.7 million unit is way below the break-even number of 16.2 million, and still falling. Something needs to be done to revive the consumer’s confidence in the immediate future to get them back spending.

Ahead of the MPC meeting today/tomorrow we have had mixed signals from the economy, but most of them still negative…..

While the mechanical effects of the big drop in energy and food prices seem likely to push the headline down below the rate of increase of the core very quickly, core CPI has been accelerating: Prices ex-food, -energy, -alcohol and –tobacco were 2.2% higher than a year ago in the latest report, almost double their yearly rate of increase in the first quarter. This will obviously be a major discussion point for the MPC who must decide whether they are confident enough that ALL inflation risks have been contained and that price expectations are sufficiently well contained.

KPMG/REC reported the fastest falls in appointments and advertised vacancies in the history of their employment survey.The survey indicated that pay had shown the first fall in five years, with permanent pay falling to a reading of 45.7 from 50.0 in September and temporary pay falling to 47.0 from 50.4 in September. The survey provides a very strong signal that UK unemployment is set to rise significantly in the next few months and into 2009, and earnings growth will be weak.

Against this, the Nationwide Building Society’s survey of UK consumer prospects showed a surprise jump from 51 to 55 against the economists expectations of a drop to 47. This appears to be almost entirely on the back of expectations of ongoing interest rate cuts …… yet more pressure on the MPC.

If the MPC affirms that it is about to embark on a course of monetary easing, then it will have considerable room to cut base rates relative to the Federal Reserve. Not a good scenario for Sterling and likely to maintain the downward pressure of cable over the next 3-6 months. As for the Euro cross rate… well, what on earth is the ECB going to do with interest rates? If the MPC turns out to be a more ready rate cutter than the ECB (which does look likely), then I would see Sterling slide further against the Euro as well.

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