United Kingdom

31/10 Nationwide House Prices (Oct)

[This data was initially scheduled for release on 25/10, but has been postponed until 31/10.]

Not for the first time in recent months, the Nationwide Building Society??™s measure of house prices was slightly stronger than expected in September. Against a central market expectation of 0.4%, seasonally adjusted house price advanced 0.7% last month, which is bang in line with the average seen over the last six months. Nevertheless, the indications are that house price inflation is slowing. Not only did the annual rate of change continue to decline, easing from 9.6% in August to 9.0%, but the key threemonth on three-month rate of change that we believe provides the best guide to the underlying trend continued to moderate, dropping from 2.2% in June to 1.6%, the slowest since July 2006. We believe we will see a further shift down over the coming few months. Latest figures show that the combination of the MPC increases in interest rates over the past year and the recent turmoil in credit markets is impacting materially on the demand for mortgage credit. True, the outstanding stock of mortgages is currently growing extremely rapidly, with figures for August showing only a modest deceleration in the annual rate of change to 10.8%. However, both the number and value of new mortgage approvals, which lead actual mortgage borrowing, are weakening markedly. Indeed, the number of new mortgage approvals fell 5.8% in August and are now 9.2% lower than they were in August 2006. At the same time, the value of mortgage approvals was down 4.8% on the month, which brings the total decline on a three-month on three-month annualised basis to 30.2%. And with mortgage interest payments now accounting for 10.1% of household disposable income compared with just 4.8% at the beginning of 2002 the squeeze on the personal sector is tightening. Although we still don??™t believe the housing market is about to crash, the annual rate of increase is heading for low, single figures, where it will remain for an extended period. Financial markets expect a rise of 0.3% in October, which would cut the annual rate to 8.6%.

United States

30/10 Consumer Confidence (Oct)

The consensus expectation of only a modest fall in consumer confidence to 104.5 in September always looked a tad optimistic. Sure enough, the reading was significantly worse than this, with the overall index slumping from an upwardly revised 105.6 in August to 99.8, lowest since November 2005. The figures ??“ with both the present situation index and the already low expectations component falling markedly ??“ caused something of a stir, with a number of commentators dusting off their recession warnings as a result. However, the fact remains that even after this latest fall consumer confidence remains substantially above the levels normally associated with declining consumer demand. Indeed, if the past is any guide to the future, we would need to see it falling by around 30-40 points before it became consistent with recession. Further declines are in prospect ??“ after all the expectations component is beneath its long run average ??“ but recession remains a long way off. The consensus expects a rebound to 100.0 in October.

31/10 GDP (Q3, advance)

As expected, the pace of economic growth in Q2 was revised down a fraction from 4.0% at annualised rates to 3.8%. The change reflected small downward adjustments to net trade (a smaller than previously reported fall in imports) and fixed investment spending. However, the main story remains unaltered, with economic growth rebounding strongly from Q1??™s pronounced slowdown. That said, the headline figure continues to overstate the strength of the underlying economy. Within the domestic sector for example, consumer demand, which represents some twothirds of national income, slowed abruptly, expanding by at an annualised rate of 1.4% compared with 3.7% in Q1. Consequently, domestic demand was underpinned by a pick up in non-residential fixed investment spending and a bounce in government consumption. But even with this, overall domestic demand only managed to expand by a comparatively modest 2.5%, whilst excluding inventories (which equals final domestic sales) demand was up an even further beneath trend 2.3%. This means that much of Q2??™s acceleration was attributable to net trade, and more precisely a 2.7% annualised decline in imports, the first such fall since the first quarter of 2003. Consumer demand should be stronger in Q3. Unfortunately, net trade and business investment are likely to be less supportive. This suggests were looking at headline growth of around 2.5% in both Q3 and Q4, although the consensus is looking for 3.1%.

31/10 FOMC Meeting

When it met in September, financial markets fully expected the Federal Reserve to cut interest rates. The only outstanding issue was whether it would lower its target for the Federal Funds rate by 25 or 50-basis points. In the end the Fed opted for 50 (down to 4.75%), exactly mirroring the cut in the discount rate in August. In a short but to the point policy statement the Fed noted that growth in the first half of 2007 had been moderate, but felt that the recent tightening of credit conditions had ???the potential to intensify the housing correction and to restrain economic growth more generally???. As a result, the action it was taking was necessary to ???help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time???. In a clear attempt to demonstrate it hadn??™t abandoned the fight against inflation, the statement went on to note that ???some inflation risks remain???, but emphasised that it would ???continue to monitor inflation developments carefully???. But in a suggestion that this would not be an isolated interest rate reduction, the statement ended with the assurance the Fed would ???act as needed to foster price stability and sustainable economic growth???. Financial markets are now expecting a further 25 basis points off the target rate this month.

Eurozone

29/10 German Consumer Prices (Oct, prelim)

Consumer price inflation in Germany jumped from 2.0% in August to 2.4% in September. However, this acceleration primarily was due entirely to major energy price ???base??? effects rather than a pick up in underlying inflationary pressure. Essentially, falling energy prices pushed down the overall price level 12 months ago, which would need to be repeated over the coming six months for the annual rate of change not to rise. As a result, the underlying rate, which excludes energy, was unchanged at 2.0%.Financial markets are looking for the initial stab at the October headline figure to hold steady at 2.4%.