UK Inflation Peaks?

October's UK consumer prices figures have brought further signs that inflation pressures are easing. The consensus forecast of a fall from 2.5% to 2.4% was a bit optimistic, but the outturn was even lower at 2.3%. RPI and RPIX both fell too. The numbers were helped by a drop in seasonal food prices - stripping that out, inflation held steady at 2.4%. But the core sectors were well behaved too, with clothing inflation ticking down from -5.3% to -5.4% and furniture/household goods inflation holding at -0.2%.

Perhaps the most pleasant surprise, though, is that services inflation posted a rare fall from 4.5% to 4.4%, N.B. driven by financial services! Provided that oil prices do not spike higher, there is a very good chance that headline inflation has now peaked too and could fall sharply over the next six months as energy effects fade. Bottom line: Inflation concerns shouldn’t stop interest rates falling (in February?).

Oil Prices Are Likely to Head Lower

It is unlikely that the recent correction in crude oil prices is over.

Oil prices have weakened in response to warm weather in the U.S. and a moderation in Chinese demand. The WTI crude oil price is now flirting with its 40-week moving average (MA), which is significant because the MA provided solid support during the two other corrective phases since 2003. This time, a breakthrough of support is probable. U.S. crude oil inventories have risen to levels significantly above the seasonal average of the past five years. Meanwhile, global energy demand growth has weakened markedly. Although world economic growth prospects are decent, a looming consumer-led slowdown in the U.S. should continue to temper global energy demand growth. Bottom line: While secular energy bulls have little to fear, oil prices should continue to moderate in the near-term.

Copper Wars

BAM’s plumber clients (a rapidly growing class of investor you understand) have been monitoring closely the copper price which is being subjected to an intense 2-way pull. The copper bulls are on top at the moment, causing prices to rise to record levels.

This little war stems from talk in the commodities market that China's State Reserve Bureau (SRB), have been shorting copper on the LME, to the tune of 100-200k tonnes. Copper price bulls are convinced that China does not have the reserves to deliver on these short positions, which are for Dec delivery and they are effectively taking the Chinese on head-to-head, in the anticipation that they will have to buy stock in the market to enable Dec delivery.

It now appears the Chinese are trying to talk copper down, in the hope of getting out of their short copper positions with less pain; the SRB has said it has reserves of copper of c.1.3mn tonnes, which represents 8% of global production. However it looks like bulls do not believe this figure and are effectively calling the SRB's bluff, with some believing the SRB's reserves to be nearer 300k tonnes. Short term, the copper price does not look like it is going down, with low inventories caused by production interruptions (strikes/power disruptions) at key mines. Add to this the potential for some quite severe Chinese short covering, those guessing where the Copper price will be by 31/12 would be very brave.

Bottom line: In the medium term what is likely is that copper miners will be subject to increased costs, thus squeezing operating margins. In addition most indicators point to the current supply/demand reversing in 2006, whereby supply will outstrip demand.

 And finally………..

 Why We Like Being British (1) - FROM BRITISH NEWSPAPERS

  1) Commenting on a complaint from a Mr. Arthur Purdey about a large gas bill, a spokesman for North

 West Gas said, "We agree it was rather high for the time of year. It's possible Mr. Purdey has been

 charged for the gas used up during the explosion that destroyed his house." (The Daily Telegraph)

  2) Police reveal that a woman arrested for shoplifting had a whole salami in her underwear.

 When asked why, she said it was because she was missing her Italian boyfriend. (The Manchester

 Evening News)

 3) Irish police are being handicapped in a search for a stolen van, because they cannot issue a

 description. It's a Special Branch vehicle and they don't want the public to know what it looks like.

 (The Guardian)

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