Investment Management Blog - Montague Capital

In the UK……

As for the timing of the next cut in UK interest rates, the MPC minutes published this week went on to suggest that economic activity was not slowing down quite as fast as had been expected a month ago.  The MPC correctly anticipated both elevated pricing pressures (verified by this week’s 2.5% CPI number) and a robust labour market: the numbers of unemployed seeking benefit (admittedly not a perfect measure) fell yesterday for the seventeenth consecutive month.  What the doves can latch on to is that average earnings growth dipped a tad to 3.7%, suggesting that inflationary expectations are being contained.  However, with speculation about interest rate cuts aggravating an already weak trend in Sterling, the MPC will be looking more closely at the effects of “imported” inflation caused by steady currency devaluation which would make those cuts counter-productive.  The economy is not (yet) in such a bad state that the MPC needs to gamble that inflation numbers will oblige.  It can wait for clearer data.

And over the pond……..

After so much anguish last week, markets were well overdue for a bear squeeze.  It occurred this week, Wall Street recording its largest one-day gain for six years, in spite of the market not getting quite all that it had asked for.  The Fed funds rate was cut by “only” 0.75%, rather than the 1% it had been begging for, and results from Lehman Brothers and Goldman Sachs (profits halved) can hardly be described as “good”.  The banks’ profits remain under threat until such time as the mortgage crisis is finally resolved and that is still nowhere in sight.  That Lehman’s share price could have fallen 19% on Monday then rebounded 36% Tuesday shows that the market, frankly, hasn’t got a clue.  Didn’t believe Lehman’s defence on Monday, but lap it up today.  What has been the fundamental change overnight?  This is not a penny stock with no publicly available information.  Ironically, the detail that clinched the rebound in enthusiasm was a statement from Treasury Secretary Hank Paulson which he has worked so hard for the last nine months to avoid saying.  Telling us what every sensible observer has know for some little while, Paulson said that US Inc. is currently in “sharp decline” but that things will improve quickly later this year.  This was important because, whether or not the data supports the view, US Inc. needs to believe that it can now see a bottom from which recovery will eventually begin.  It was that sense of standing instead at the top of a bottomless cliff that had sentiment so terrified last week.  If market participants think they can see the possibility of recovery (almost invisible last week) they may now be prepared to take bets on its eventual arrival.  But although speculative bear positions will still need to be squeezed out, this is not to say that the fundamentals now support a surge back to the levels of last year.