After what has been another, ahem, interesting year we lead up to the Christmas break with a flurry of last minute data. As this may help set the scene for the New Year a brief overview is probably appropriate.

UK

GDP data for the third quarter (Q3) was revised up to -0.2%, having been officially measured at -0.4%. It would not have been surprising to see this figure flat or even slightly positive and in light of news this quarter it seems likely that the UK economy will have emerged from recession in Q4.

After years of increasing debt and reducing savings the UK consumers savings rate jumped up to 8.6% in Q3, indicating the consumer is sensibly trying to repair balance sheets. This is good news and hopefully points to a more stable economic environment in at least one area.

Inflation has started to tick up and as the latest Bank of England minutes (released this morning) discuss this will have much to do with fuel prices. Combined with the VAT hike on January 1^st inflation may be a big cause for concern early next year, although at the moment we anticipate these fears will prove misplaced as growth remains subdued.

Internationally

In the US the strong Q3 figures have been revised down further, starting at 3.5% the figure now stands at 2.2%, annualised. Breaking down the figures as we did before it looks like 2.3% of this growth came from areas supported by government spending and stimulus.

Chicago Fed figures indicate that some sectors of the US economy have been mired at recessionary levels over Q4 and the possibility that the worlds largest economy’s rebound may be grinding to a halt seems to be growing.

On the positive side there are indications that the US housing market may have stabilised and affordability levels are now good (particularly compared to the UK where prices still stand at a frightening 6 times average wage) while there are indications that unemployment may not be getting any worse. We do however need to see several months’ worth of data to fully buy into this latter story.

Thankfully Emerging Market growth remains robust and it appears that the Chinese stimulus package is still working well. While there continue to be fears about market distortions and bubbles as a result the Chinese government has proved remarkably adept at tweaking things and there seems to be no obvious reason why this growth will grind to a halt. In the short term we do remain wary about individual equity markets but the longer term growth potential remains intact.

Indicators

The Dollar is showing some signs of recovery, particularly against the Euro, with the DXY index (discussed last time) breaking out of its downtrend. On a macro level this makes sense because despite doubts about the speed of its recovery the US recession has been shallower than Europe and the long term growth prospects are better.

The big question is, will the strengthening dollar break the carry trade and send markets backwards? So far this has not happened and the hope is we will see an orderly unwinding of the trade if the dollar gets stronger but with stock market volumes incredibly light for the end of year holidays it is difficult to read anything into this at the moment.

Yesterday the VIX volatility index briefly dropped to its lowest point for the year, indeed its lowest point since pre-Lehman’s. This reflects a more relaxed mood in the markets, although to many commentators this is now seen as a high level of complacency. Without trying to spoil Christmas this is perhaps the most worrying indicator because with the macro outlook still so unclear and therefore corporate earnings so uncertain, we would think there should be more caution in the market.

Conclusion

Never before have we experienced a time like the last 16 months and the legacy of this period, and the boom that led us here, will linger for many years.

As a consequence of this remarkable period we have encountered so many divergent views on markets and economies from so many accomplished people, extrapolating out all different kinds of outcome but one thing has remained constant, those that most accurately predicted the fall have remained steadfastly measured in their outlook.

Morgan Stanley’s expectations of a BBB recovery among the larger nations: Bumpy, Below-par and Boring may be as good as we should expect.

One conclusion however remains clear. Now is not a time to be too clever or brave but to gather around yourself what is truly important at this time of year and count your blessings as we look towards a New Year, with optimism and hope but also a strong sense of caution.

Merry Christmas and a Happy New Year

And finally (having tried very hard to find a decent Christmas joke, and failed miserably, after such a year our politicians deserve a brief mention)………

It’s tough being a politician. Half your reputation is ruined by lies the other half is ruined by the truth.