Investment Management Blog - Montague Capital

The latest CBI business confidence survey suggests that things are playing out as the Monetary Policy Committee would like, but that it is still a close call.  Exports have having a positive impact, as Sterling weakens, but profitability is under pressure.  As the CBI’s head of economic analysis summarised it, “The climb in oil and other raw material prices over recent months has driven costs up significantly.  Although firms are having some success in passing these costs on, profit margins are under pressure.”  And that – in the proverbial nutshell – is the trade-off for consideration at this week’s rate-setting meeting.  Are margins being squeezed enough to prevent cost increases, including wage rises, from being passed on?  The MPC, in making its decision whether or not to leave rates unchanged, will have the privilege of access to inflation numbers which we can’t see yet.  10% or so off the crude oil price over the last month won’t hurt, but it’s a shame that we now face a series of gas price rises over the coming year that would not look out-of-place in hyperinflationary Zimbabwe.  After the relative market calm of the last fortnight, if rates do go up – and there’s been plenty of rhetoric in minutes and speeches to leave the market with no excuse to claim that it could not consider the possibility – it will come as a bit of a shock.  That not least because those “in the know” will have capitulated on the preferred central case scenario that things could, given time, have come right untouched and of their own accord.  On top of which we will have results from HSBC, RBS and Barclays to digest.  Nearly a year since the European Central Bank first pumped emergency liquidity into the system (August 9^th) the credit crunch is definitely not over. 

The “Pink ‘un” makes a very nice point about Friday’s US non-farm payroll numbers.  A loss of “only” 51,000 jobs in July is not a result.  The growth of America’s population requires the creation of 115,000 new jobs every month to maintain full employment.  But over the last twelve months the 1.45m increase in the potential workforce has been met with a 200,000 increase in unemployment.  Who says there’s n recession in the US? 

Lufthansa’s unions had been threatening strike action in pursuit of a 9.8% pay rise.  Management has settled for a rise of 5.1% this year, 2.3% in a year’s time and a 2.4% one-off performance related bonus.  (Hint: that totals 9.8%.)  Who’s won?  Management might just have got the edge.  This year’s rise is 1% in front of the latest Eurozone inflation number, but the trend in employees’ domestic fuel bills could mean that next year’s rise is the wrong side of future inflation.  In a decision that they may live to regret (unless they know far more about the oil price than the “experts” do) unions have sacrificed jam tomorrow for jam today.  However, the European Central Bank may be less happy with a settlement that confirms the game plan that inflation will be higher before it might go lower.  But a 2.4% bonus – for what?  Airlines globally are losing money faster than they’re burning fuel.  The devil will be in the (private) detail.  What are the arrangements for compulsory redundancies when Lufthansa’s results fail to impress the examiner in 2009? 

How long before the markets of Europe and the UK begin to follow the US and Japan by announcing results outside market hours?  The idea is supposed to be to give “analysts” more time to think and arrive at reasoned reactions to the news flow, so reducing the volatility in share prices that is all too prevalent these days.  What the initiative can’t do, however, is alter the fact that the news flow is unremittingly grim these days.  Two-thirds of Japanese companies have reported outside hours and the average fall in their earnings has been 20%.  As it’s a global marketplace out there, UK and European companies will not gain immunity just by trying to bury the bad news alongside reports of the latest England cricket disaster.  Far better to face the truth and get used to the new regime.