Week ending 21st September 2007   

It was another mixed bag for US economic data, as August housing starts and building permits predictably fell, with the August leading indicators also falling by more than expected. On the plus side, however, were the latest inflation numbers, as measured by PPI and CPI for August, which came in at -1.4% (2.2% year on year) and -0.1% (2% y on y). The main event, of course, was the FOMC decision on interest rates, where the Fed gave the market all it wanted and more. Not only did it lower the Fed funds rate by 50 basis points, to 4.75%, but it lowered the discount rate by a similar amount. Unsurprisingly, the stock market is reacting very favourably. The Dow gained 2.8%, as did the S&P 500, whilst the Nasdaq rose by 2.7%.

The Euro-Zone July trade balance fell to Euro 4.6bn from the prior month 7.8bn whilst the September ZEW survey on economic sentiment collapsed to -20.3 from August’s -6.1. The UK’s 3 day run on the Northern Rock bank was halted after strenuous and contradictory efforts by the UK monetary authorities, including the underwriting by the UK tax payer of ALL NR’s depositors’ funds and a suggestion by the Chancellor of increasing the current statuary guarantees to £100,000 per account for all banks!. UK August CPI was as expected at 0.4% (1.8% year on year) with the annualised RPI figure at 4.1%.Money supply is now running at 13.5%, up from July’s 13% and August retail sales were better than forecast at 0.6%. The FTSE 100 index rose by 2.7%, whilst the French CAC and the German Dax were higher by 2.9% and 4% respectively.

Out East, land prices in Japan’s 3 largest metropolitan areas rose for a second straight year and nationwide commercial land prices rose for the first time in 16 years. In China, retail sales are expected to rise by 15% in 2007, according to the Ministry of Commerce. The Nikkei rose by 1.2% over the week, whilst the Hang Seng gained 3.8%.

On the currency front, the $US fell by another 1.3% to 78.6 on a trade weighted basis, remaining below the psychologically important 80 level for a third week, whilst the main beneficiaries were again the commodity linked currencies such as the Oz, Kiwi and Canadian Dollar plus the South African Rand. Government Bond yields surged after the Fed’s rate cut (sniffing inflation), with the German 10 year higher by 19 bps to 4.36% and Japan’s 10 year JGB yield rising by 14 bps to 1.68%..US 5 and 10 Treasury yields spiked higher by 3% and 3.8% respectively, ending the week at 4.3% and 4.63%.

Within the commodities complex, the $crude oil price jumped by 4.5% to $81.6 a barrel, ending the week over the $80 former resistance level, whilst the. $Gold price surged by 2.9%, ending the week at $732oz, exceeding its May 2006 bull market high for the first time.

Next week sees the Q207 GDP forecasts for the US and the UK, with US also announcing the latest housing sales data and house prices, together with consumer confidence levels and August durable goods orders. The Euro-Zone September CPI and economic confidence numbers are due out, together with the August money supply figures. Japan also releases September CPI plus the latest unemployment and trade information.

Returning to the Bank of England's response to the bank run on Northern Rock was, like the US Fed, something of a sea change. Mervyn King, governor of the Bank of England, defended his conduct to the continuing crisis in front of a Treasury select committee. King, who had previously took a hard line on the difficulties facing the markets, believing that many institutions had taken a complacent attitude to risk, assured the committee that he had not come under political pressure to reverse the Bank's policy on the credit squeeze. King argued that, given the “unexpected” run on Northern Rock, the Bank had had to balance moral concerns against the strains on the structural integrity of the banking system in general. Coincidently, Northern Rock had allegedly donated heavily to the labour Government’s favourite think tank.

“The only real valuable thing is intuition”

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