Global growth should be steady

Bank Credit Analysts’ normally reliable Global Leading Economic Indicator (GLEI) signals that world growth should remain solid in the months ahead. The GLEI continued to trend higher in October, indicating that global industrial activity is gathering momentum. The uptrend is broad-based, with most major regions and economies strengthening. The exception is the U.S., where the LEI heralds soggy growth in the first-half of 2006. There are hints that the rest of the world can withstand a mild slowdown in the U.S., aided by highly accommodative monetary policy - G7 real short-term interest rates are still very low by historical standards. Bottom line: the global economy is on track to expand at a steady pace, which is positive for equity markets.

However, financial market volatility will probably rise next year, despite the benign macro outlook. The growing influence of hedge funds, abundant liquidity, robust corporate health and low inflation drove many measures of financial market volatility toward record lows in 2005. Though the VIX index (implied equity option volatility) spiked higher on two occasions this year - following the downgrade of GM corporate debt in April, and again in October when inflation fears gripped financial markets - it closed last week just fractionally above its all time low. Hints that the Fed is close to completing its tightening cycle helped drag the VIX lower last week. However, the lagged effects of the increase in short-term interest rates, as well as a peaking in U.S. corporate financial health, indicate that the VIX will climb next year. Bottom line: greater equity market volatility will make 2006 a more challenging year for investors.

MPC Minutes

The minutes to November's UK MPC meeting add support to the view that interest rates could be on their way down again before very long. Not only did Stephen Nickell surprisingly vote for a 0.25% cut in rates at the meeting, but the general tone of the discussion was pretty dovish. Nickell's vote appeared to be

prompted by the drop in CPI inflation to just 2.1% in November (which the MPC knew about at the meeting), but he and some other members also believe that the risks to the Committee's growth forecasts - in particular those for net trade and investment - are firmly on the downside. Admittedly, other members noted

that consumer spending had shown signs of recovery (see below), a picture supported by the November retail sales figures. Meanwhile, most members still think that it is too early to conclude that the danger of second round effects from the rise in headline inflation is over - much will hang on the January pay round. Bottom line: Along with Charlie Bean's recent dovish comments in the press, the minutes support the view that interest rates could fall fairly early in the new year, perhaps as soon as February.

However (1)…………….

Retail Sales

December's CBI Distributive Trades survey provides further evidence that retail sales may not be quite as bad as feared over the crucial Christmas trading period. The reported sales balance jumped from -35 in November to 0, leaving it at the highest level since February. But beware reading too much into this for two reasons.

• First, the survey was misleadingly weak in November falling to a historical low. So December's rise may just be a  correction back to more normal levels.

• Second, this CBI balance relates to sales volumes compared to last year. And since the official sales data fell by 1.1% m/m last December, it would only take sales to be flat this December for the annual growth rate to rise by 1% or so from November's 2.2%.

Overall, then, the rise is certainly good news. But it is still possible that November's robust official sales data may be followed by weaker sales in December. The next clues will come from December's BRC survey set to be released on 10th January.

However (2)…………

U.K.: Housing market recovery continues

U.K. house prices are firming again, reducing the likelihood of a near-term BoE rate cut.

The November RICS survey moved into positive territory, a 17-month high, confirming that the modest recovery in house prices is intact. The caveat is that most of the gains were in the London area, and were probably inflated by the prospect of massive holiday bonuses. Nevertheless, further tightening in market conditions points to a sustainable floor in house prices going forward. The corollary is that consumer spending should begin to respond after 11 months of retrenchment. Bottom line: pro tem the BoE is on hold against the backdrop of a modest recovery in house prices and the possible resuscitation of the British consumer.

And finally…………………..

If you are frustrated by spam emails and are thinking of switching on your ‘Out of Office’ message over the holidays why not try something new:

 1. I am currently out at a job interview and will reply to you if I fail to get the position. Be prepared for my mood.

2. You are receiving this automatic notification because I am out of the office. If I was in, chances are you wouldn't have received anything at all.

3. I will be unable to delete all the unread, worthless emails you send me until I return from holiday on 4^th January. Please be patient and your mail will be deleted in the order it was received.

4. Thank you for your email. Your credit card has been charged £5.99 for the first ten words and £1.99 for each additional word in your message.

5. The e-mail server is unable to verify your server connection and is unable to deliver this message. Please restart your computer and try sending again. (Unkind!)

6. Thank you for your message, which has been added to a queuing system. You are currently in 352nd place, and can expect to receive a reply in approximately 19 weeks.

7. I've run away to join a different circus.

8. I will be out of the office for the next 2 weeks for medical reasons. When I return, please refer to me as 'Margaret' instead of 'Adam'.

HAPPY CHRISTMAS!

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