Overview

Many instruments spent most of the week in small ranges, despite some sharp intra-day moves, as we struggled with wave upon wave of important economic figures. Against the US dollar the South African rand was top dog, up 1% on the week, while the Canadian dollar was bottom of the heap losing 1%. The Slovakian koruna, at 35.60 to the Euro, is at its strongest ever as the central bank governor said the current fast pace of growth (+9.8% Y/Y) could continue; other Eastern European currencies also strengthened a little. Interest rates consolidated at the lower edge of last week’s yields, and emerging market debt trades at some of the narrowest spreads ever over US ones. Many stock markets have yet again nudged higher, some for the eighth consecutive week, something considered a warning sign by Technical Analysts. The China Enterprise Index and Shanghai Composite have done especially well over the last two weeks; the Hang Seng set a new record high at 19,237, as did Singapore’s Straits Times at 2,817. Commodities were sidelined and NYMEX Crude at $55.45 per barrel is at its lowest since November 2005.

Political and Economic Developments

Probably the biggest surprise this week were a series of fairly tame inflation numbers, all linked to the fact that oil prices have declined since July’s record high. While Japan’s Q3 GDP rose at a very respectable 2.00% Y/Y, the Deflator was –0.8% and Q2’s revised to –1.2% from –0.8%, showing that deflation as measured this way persists for 32 consecutive quarters. October UK Input PPI collapsed to +3.8% Y/Y from +18.0% in December, its lowest since June 2004. Final German October CPI was revised down to +1.1% Y/Y, the Eurozone’s is running at 1.6% Y/Y, the UK’s was a lower than expected +2.4% Y/Y as higher university fees were outweighed by other factors. US October PPI dropped 1.6% on the month and Ex-food and energy is running at a mere 0.6% Y/Y, its lowest since 2003. US headline CPI dropped 0.5% in the month to October, practically the biggest decline ever, and is running at just 1.3% Y/Y; ex-food and energy it is 2.7% Y/Y, down from September’s 2.9%.

Underlying Themes

Just how big is the problem in the US housing market, and how big might it become? October Housing Starts dropped by a lot more than expected to 1486K units, a level not seen sine July 2000 and very significantly below the near record 2265K rate of January this year. Construction jobs are evaporating, of course, and the ever flexible and resourceful US worker is expected to retrain and move on. In complete contrast up-market London estate agents report that buyers are lining up for premium properties as City bonuses are expected to be a lot more generous than a year ago. The usual ‘fat cats’ comments as September Unemployment hit 1.7 million, the highest since 1999, and jobs in manufacturing shrank to a mere 3 million, the lowest since records began in 1841.

What to watch for next week

A holiday-shortened and much quieter week numbers-wise. Monday Brazil and Mexico are on holiday, UK Rightmove November House Prices, Japan October Convenience Store Sales, UK Money Supply and Public Finances, then US Leading Indicators. Tuesday Bank of Japan Minutes of their October meeting and UK November CBI Industrial Trends. Wednesday the Netherlands holds a general election, Japan September All Industry Activity Index, October Trade Balance and Supermarket Sales, plus November’s Monthly Economic Report. Minutes of the Bank of England’s MPC meeting, E12 September Industrial New Orders and November final University of Michigan Confidence Survey. Thursday Thanksgiving holidays in Japan and the US, November CPI for the different German states is due from this day, German final Q3 GDP and November’s IFO Survey. Friday just UK Q3 GDP. Sunday 26th the final round of Ecuador’s presidential elections, the 8th leader in less than a decade.

Positioning and Technical Analysis

A difficult week as markets shrivel and shrink as the party/holiday/year-end season starts. Interest rates and yield curves will probably be the most interesting as traders and investors continue to re-assess the economic outlook and what return is reasonable on a risk-free asset. We continue to feel these will move lower and may invert further. Stock markets look very overstretched and while we are not suggesting they will collapse, there is a good chance that for many indices this year’s highs are already in place. Commodities are going nowhere really and probably best avoided for another month. FX, at least for another week, is likely to be trapped between a rock and a hard place. We still feel that thin December markets are likely to favour generalised US dollar weakness.