[ul]
[li][B]Data releases over the holiday period sent mixed messages about the health of the global economy. Whilst there were signs of a thaw in international money markets, there were ominous signs from the US, where the manufacturing sector stalled and employment growth slowed sharply. In the UK, a disappointing Christmas for some UK retailers and further evidence of a housing slowdown reinforced expectations of rate cuts ahead, pushing sterling to a new low against the euro.[/B]
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[li][B]Efforts by the world�s major central banks to ease the global liquidity squeeze by pumping funds into the financial system appear to be working. [/B]Interest rates that banks charge each other for loans have fallen back towards official interest rates, which should start to ease the availability of credit to households and businesses. In the UK, three-month LIBOR is now around 30bps above the UK Bank Rate, down from 110bps in mid-December. We�re not out of the woods just yet. It�s not just the cost of funds in the money markets that matters, but also lenders� attitudes, and developments on that front have been less encouraging. A Bank of England survey indicated that the supply of secured credit to UK households was reduced �materially� in Q4, while corporate credit had also been trimmed �significantly�. Moreover, lenders expected a further reduction in credit availability in Q1.
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[li][B]Household spending accounts for more than two thirds of all spending in the UK, hence the strength of the consumer will be vital in determining economic fortunes in 2008.[/B] The Christmas period accounts for more than a fifth of annual retail spending, providing an essential insight into how consumers are coping with the headwinds of high energy prices, a cooling housing market and the liquidity squeeze.
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[li] [B]Investors were unnerved by profit warnings from a number of UK retailers who reported disappointing holiday sales. [/B]The sense of unease was reinforced as further evidence of a slowdown in the housing market emerged. The Nationwide house price index slipped 0.5% m/m in December, the second consecutive decline, while the number of mortgage approvals fell to its lowest level for two years. Still, labour market conditions play the most important role in determining consumer spending - so long as employment holds up, 2008 should see a slowdown, not a slump.
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[li][B]Sterling has taken a tumble in recent weeks, especially against the euro. [/B]The pound slid to �0.748, its lowest level since the single currency was introduced and 5% below the level prevailing in early December. Given that c60% of UK exports are destined for the Eurozone, this will provide a welcome boost to UK exporters, helping to mitigate the impact of slowing demand at home. Survey data suggest that UK producers could do with the assistance, as the manufacturing purchasing managers index (PMI) slipped to 52.9 in December, from 54.9 the previous month, still above the 50 no-change level, but signalling a sluggish pace of expansion.
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[li][B]There were ominous signs from data releases in the United States. [/B]The manufacturing ISM (the equivalent of our PMI) slipped below the 50 level, suggesting that the factory sector contracted as 2007 drew to a close. Most worrying of all, US [B]employment growth dropped to its weakest pace for four years[/B], with only 19,000 new jobs created in December, while the unemployment rate rose to 5% from 4.7% in November. The strength of the labour market has been the key factor underpinning US household spending, which has been holding up well, despite the sharp slowdown in the housing market and surging gasoline prices. Hopefully this will be a blip rather than the start of a trend, but the Federal Reserve won�t be taking any chances and is now almost certain to trim rates again at its meeting at the end of January.
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[li][B]In the Eurozone, there were further signs of a slowdown.[/B] The downturn was most pronounced in Italy and Spain, where manufacturing and service sector PMIs fell close to or below the 50 level that indicates stable output. In Germany, manufacturing activity held up well, but the service sector slowed sharply, with the services PMI slipping from 53.1 to 51.2. France managed to buck the trend. Its manufacturing index rose during the month and although the service sector PMI fell marginally, at 58.2 it continued to signal a robust pace of expansion. Despite signs of moderating growth across much of the region, price pressures remain the main concern for the European Central Bank, with inflation uncomfortably high at 3.1% in December.
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[li][B]Finally, oil prices moved above $100 per barrel for the first time last week, albeit very briefly[/B]. The move occurred as US commercial crude oil inventories recorded a larger-than-anticipated drop, while events in Nigeria and Algeria raised new concerns about security of supply. However, it is unlikely to mark the first leg of another upward price trend.
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