Thursday 6th November 2008

Anything Is Possible I Suppose ……

......but I am still of the opinion that the MPC will cut by 50bp today with a dovish set of minutes to follow and further cuts in the months to come. Having said that, there is still considerable column inches being devoted to arguments for larger cuts at today’s MPC meeting with the most extreme view being expressed by ex-committee member Willem Buiter. In the Telegraph this morning he argues the need for a cut of 150 basis points. The majority of polls still go for a move lower by 0.50% but with the risk skewed firmly towards a larger cut. We will know at midday.

The BIG unknown is how any move from the MPC will be reflected in the LIBOR market and whether lower rates will equate to a freeing up of credit for the beleaguered UK corporate market. The Treasury, as part of their rescue package for the UK Banking system, demanded that in return for the bail-out, the Banks concerned had to maintain their lending at 2007 levels. The Council of Mortgage Lenders (the main lobby group for Banks and Building Societies) however, seemed to give the go ahead to its members yesterday to ignore this dictat by suggesting that it would not make commercial sense to insist or even expect that lenders automatically would pass on rate cuts to their borrowers. In this case, it would seem senseless for the MPC/BoE to use up all its ammunition in one attempt to kick start an economy still in decline. Better to temper the cuts and produce them in a more strategic manner.

There is another policy meeting taking place today and it is very important to watch the ECB Council’s decision on Euro Zone interest rates, plus M. Trichet’s comments after the decision, for signs that the ECB is truly on board with other central banks in seeking to lower interest rates. Traders and investors across the board are expecting a 0.50% rate cut today. However, it is worth bearing in mind that the hypothesis of a 50 basis point easing did not originate in Frankfurt. It was invented by the markets. M. Trichet may not be keen to be seen to be promising the markets that the ECB will continue to cut rates willy-nilly until the world economy is fixed.

Elsewhere, the Obama factor for the Dollar ran out of steam quite suddenly as a supposed Middle Eastern Central Bank’s euro buying programme took hold. This coincided with a couple of sets of very weak figures from the US which filled the market with doom and gloom ahead of the non-farm payrolls figure on Friday. Expectations for this number were hastily reviewed with the new estimated figure being nearer a 200,000 fall compared to the original 150,000. The short term outlook for the US economy is still grim and hence any significant Dollar appreciation will likely have to be deferred until next year when the new Administration begins to make a difference. In the meantime, and with liquidity in markets falling away pre-Christmas and ahead of year end trading, volatility around major data releases will take over. To this end, keep an eye on the important figures coming up…. traders will most certainly be doing so.

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