WISE MONEY

The gauge of M4 money, which excludes certain parts of the financial sector and is closely watched by the Bank as an indication of whether quantitative easing is working, rose by 3.1 per cent in the second quarter between April and June, down from growth of 3.8 per cent in the first three months of the year. It was the lowest rate of quarterly growth since 1999.

On an annual basis, the measure rose from 3.35 per cent in the first quarter to 3.7 per cent, despite the fact that the Bank of England has pumped £125 billion of newly created money directly into the economy.

The Bank of England’s own figures also showed that lending to businesses tumbled by a record £14.7 billion between April and June.

The second quarter slump in lending to “non-financial corporations” is the biggest since the Bank of England’s data began in 1997 – with manufacturing, construction and services worst hit.

Last week, Alistair Darling called Britain’s biggest lenders to a meeting to put pressure on banks to increase lending to small businesses and customers amid fears that Britons are not benefitting from lower borrowing costs.

However the Bank’s Monetary Policy Committee will take heart from a slight lift in M4 lending which grew at an annual rate of 2.7 per cent in the second quarter, up from 1.9 per cent in the first three months of the year.

The Bank of England has said that it will take time for the effects of quantitative easing to filter through to the wider economy, but economists said that today’s disappointing figures would do little to engender hopes that the economy could be on the road to recovery.

The Bank’s Monetary Policy Committee, which starts its two-day rate meeting tomorrow, is likely to keep interest rates at a historic low of 0.5 per cent, but will decide whether to extend QE by a further £25 billion to bring the scheme to its prevously announced ceiling of £150 billion.

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Also stayed its hand over any other changes in its recession fighting strategy as it paused for breath in its battle to combat Britain’s economic slump.

The Bank opted to hold interest rates once more at their 315 year low of 0.5 per cent as it weighs the impact of its expanded £125 billion drive to jump-start the economy with injections of newly created money.

Between last October and March, the Bank drastically cut interest rates and embarked on its aggressive moves to “print money” under a strategy of quantitative easing (QE), involving huge purchases of government and company bonds to pump extra cash through the economy.

The latest glimmers of hope emerged yesterday when the key CIPS/Markit survey of the services industries, the engine room of the economy, showed the sector growing last month, for the first time in more than a year.

The survey’s headline index, which is closely watched by the bank’s MPC, rose for a sixth month in a row to its best level since April 2008.

Conditions have also improved in manufacturing, with the parallel CIPS survey of industrial companies showing that, although the sector was still shrinking last month, its fortunes were the strongest for a year.

Other rosy news has come from the high street and the housing market, with retailers ringing up a surprisingly strong 0.9 per cent rise in the quantity of goods sold during April, and indications that the worst of the house price slump has passed.

Yet the Bank will remain on the alert for any signs that the recuperation of an economy that remains frail and vulnerable may falter.

The fragility of any revival was underlined by last month’s official GDP data, which confirmed a 1.9 per cent plunge in the first quarter, the steepest quarterly decline since 1979.

Leading economists also remain extremely worried that any recovery will be anaemic at best and is likely to prove short-lived.

Analysts fear that an upturn will not last as highly indebted households strive to rebuild their finances and as a battered banking sector continues to tighten credit conditions.

“We are currently in a Potemkin recovery — more appearance than reality,” Professor Charles Goodhart told The Times yesterday, in reference to the fake “Potemkin villages” constructed in 18th-century Russia to deceive Empress Catherine II.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Having said that, there is still considerable column inches being devoted to arguments for larger cuts at today’s MPC meeting with the most extreme view being expressed by ex-committee member Willem Buiter. In the Telegraph this morning he argues the need for a cut of 150 basis points. The majority of polls still go for a move lower by 0.50% but with the risk skewed firmly towards a larger cut. We will know at midday.

The BIG unknown is how any move from the MPC will be reflected in the LIBOR market and whether lower rates will equate to a freeing up of credit for the beleaguered UK corporate market.

The Treasury, as part of their rescue package for the UK Banking system, demanded that in return for the bail-out, the Banks concerned had to maintain their lending at 2007 levels. The Council of Mortgage Lenders (the main lobby group for Banks and Building Societies) however, seemed to give the go ahead to its members yesterday to ignore this dictat by suggesting that it would not make commercial sense to insist or even expect that lenders automatically would pass on rate cuts to their borrowers.

In this case, it would seem senseless for the MPC/BoE to use up all its ammunition in one attempt to kick start an economy still in decline. Better to temper the cuts and produce them in a more strategic manner.

There is another policy meeting taking place today and it is very important to watch the ECB Council’s decision on Euro Zone interest rates, plus M. Trichet’s comments after the decision, for signs that the ECB is truly on board with other central banks in seeking to lower interest rates. Traders and investors across the board are expecting a 0.50% rate cut today.

However, it is worth bearing in mind that the hypothesis of a 50 basis point easing did not originate in Frankfurt. It was invented by the markets. M. Trichet may not be keen to be seen to be promising the markets that the ECB will continue to cut rates willy-nilly until the world economy is fixed.

Elsewhere, the Obama factor for the Dollar ran out of steam quite suddenly as a supposed Middle Eastern Central Bank’s euro buying programme took hold. This coincided with a couple of sets of very weak figures from the US which filled the market with doom and gloom ahead of the non-farm payrolls figure on Friday.

Expectations for this number were hastily reviewed with the new estimated figure being nearer a 200,000 fall compared to the original 150,000. The short term outlook for the US economy is still grim and hence any significant Dollar appreciation will likely have to be deferred until next year when the new Administration begins to make a difference.

In the meantime, and with liquidity in markets falling away pre-Christmas and ahead of year end trading, volatility around major data releases will take over. To this end, keep an eye on the important figures coming up. traders will most certainly be doing so.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

In the senate elections however, the Democrats have fallen short of the 60 seat filibuster-proof level that had been talked about in the run up to yesterday. Obama will now have 2 and bit months until he is sworn in as President on 20th January during which time interest will be high in his preparations for power.

Who will form the core of his administration? How will he propose to reduce the burgeoning US deficits? What is his view on the Financial crisis and how the current administration have sought to alleviate the problem?

Added to this is the question on every US citizen’s mind, being can he pull the US economy round via an Obama feel-good factor alone or will in need a further stimulus package? And that is without any Foreign Policy considerations. Could be an interesting 10 weeks.

The US economic back-drop is not a pretty picture at present with the car market the focus …. Yesterday’s news that US auto sales plummeted by 32% in October to its lowest monthly total since January 1991 provoked increased calls for new Federal Aid for the industry.

The present sales annual rate of 10.7 million unit is way below the break-even number of 16.2 million, and still falling. Something needs to be done to revive the consumer’s confidence in the immediate future to get them back spending.

Ahead of the MPC meeting today/tomorrow we have had mixed signals from the economy, but most of them still negative.

While the mechanical effects of the big drop in energy and food prices seem likely to push the headline down below the rate of increase of the core very quickly, core CPI has been accelerating: Prices ex-food, -energy, -alcohol and –tobacco were 2.2% higher than a year ago in the latest report, almost double their yearly rate of increase in the first quarter.

This will obviously be a major discussion point for the MPC who must decide whether they are confident enough that ALL inflation risks have been contained and that price expectations are sufficiently well contained.

KPMG/REC reported the fastest falls in appointments and advertised vacancies in the history of their employment survey.The survey indicated that pay had shown the first fall in five years, with permanent pay falling to a reading of 45.7 from 50.0 in September and temporary pay falling to 47.0 from 50.4 in September.

The survey provides a very strong signal that UK unemployment is set to rise significantly in the next few months and into 2009, and earnings growth will be weak.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

The fact that we bounced off 1.6150 a couple times makes that level a weak support for the moment but given current sentiment, is unlikely to provide significant resistance ahead of the weekend.

The Yen remains the Market’s favourite for now with further gains provoking Finance Ministry comments already this morning.

Well we know exactly how the strong Yen and the global downturn are affecting the economy.. 3 consecutive negative quarters for Industrial Production and very a very downbeat outlook from Sony gives us a bit of a clue.

Elsewhere the flight by investors/speculators (call them what you will) from commodities, commodity based currencies, stock markets and almost anything else that moves leaves us with a big question.

Where on earth are these funds going? Given that yield appears no longer a priority then it might go someway to account for the stronger Yen and the very low level of short date Dollar rates.

The Fed yesterday went someway to put a floor under the latter by tinkering with the formula by which they reimburse Banks’ excess balances held by the Central Bank.

In theory good, in practice we have still seen overnight Dollars offered at sub 1% this morning.

The MPC minutes revealed that, as expected, the vote to cut rates was unanimous. Given the committee wide agreement on the current problems that best the UK economy, there is a great possibility that we see a further 50bp cut at the November meeting and expectations abound that we will have Base Rate at 3% by some time in the 3rd Qtr 2009.

Given the magnitude of the expected total cut, one can see how short term investors are shying away from holding Sterling.

On the other hand, there must be a growing feeling that buying Sterling here and locking in the higher yields down the curve would prove to be a good strategy going forward. We will see which sentiment prevails.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.