Bank leaves Interest Rates on Hold

The MPC’s decision to leave interest rates on hold this morning, for the third consecutive month, will be seen by some as support for the view that rates have troughed. However, the continued weakness of both activity and underlying price pressures suggests that monetary policy will need to be loosened further in this cycle, perhaps considerably.

But the next ECB move may be Up

Euro area retail sales volumes were soft in September, but the outlook is slowly improving. The September decline was probably related to the surge in oil prices, and should soon reverse since energy prices have subsequently declined. While consumer demand is by no means robust, the ECB views strong credit growth in both the corporate and household sectors as a warning sign for policy. Bottom line: ECB officials have not indicated that a December rate hike is coming, but the economic data point clearly to policy tightening not far down the road.

Global Equities: What Headwinds?

Global stocks should continue to outperform

The October correction in both global equities and bonds rattled many investors. But, both asset classes were previously overbought, so the sell-offs were hardly unexpected. Indeed, the underlying outperformance of equities versus bonds still appears to be intact, reflecting the market’s optimism about the global economic outlook. More caution about the near term is required because a potential growth scare could emerge as the U.S. economy slows. That said, a base case scenario of a U.S. soft-landing that will dampen inflation fears should enable economic momentum in the rest of the world to continue to improve through 2006. Given their relative valuation advantage, such a scenario argues in favour of maintaining a full weighting in equities. Bottom line: Assuming the global economy stays on a healthy growth path global equities offer better return prospects than bonds on a 6-12 month time horizon.

But could the World withstand a U.S Slowdown?

The U.S. economy has been the locomotive of global growth for many years. But the combination of higher energy bills, rising interest rates and a diminishing tailwind from housing point to weaker U.S. consumer spending growth in the coming year. If the U.S. economy glides onto a soft-landing path, as we expect, global growth should hold up, especially since China continues to hum. Of course, a global growth scare could develop once the U.S. begins to slow, but if inflation expectations remain contained, it will create a buying opportunity for risk assets. Bottom line: The Japanese, euro area and emerging economies will remain firm as long as the looming slowdown in the U.S. is mild - stay tuned!

And finally…….

Prometheus from sources: ADM, Barclays Capital, Cazenove, Charles Stanley, HSBC, ING, SocGen, UBS.