BANK VOTES DOWN QE2, AT LEAST FOR NOW

Reasonable UK ecostats let down by falling house prices. RBA rate decision sends AUD lower; strong employment data reverse the fall.

Having started the week in what turned out to be the middle of a five-cent range sterling touched a record low before recovering slightly to open in London this morning just a cent down on the week. Sterling shone brightly enough against the US dollar but on the broader front its beacon attracted fewer supporters. That was a shame, because some of the UK economic statistics looked quite good. Purchasing managers' indices (PMIs) for the construction and services sectors both improved by a point and a half, having been predicted to fall by that sport of amount. Industrial production was up by the expected 0.3% in August and 4.2% ahead on the year. The producer price data were higher than expected. They showed a further tightening of the squeeze on margins with factory gate prices rising at an annual 4.4% while manufacturers' costs were up by 9.5%. On the downside, the statistic that nearly did for sterling was the Halifax house price index. It fell by -3.6% in September, the biggest monthly drop in the index's 27-year history. The Halifax tried to downplay the figure's significance, noting that prices were only -0.9% lower at the end of the third quarter than at the end of the second and were up by 2.6% on the year. However, there can be little doubt that spending cuts and tighter rules for bank lending will mean more downward pressure on prices.

There remains a possibility that the Bank of England will decide on a second round of last year's Asset Purchase Programme, in which it bought £200 billion of government and other bonds. This "quantitative easing" (QE) is mostly unpopular with investors because it involves creating money (albeit only temporarily, in theory). At its October meeting the Monetary Policy Committee decided against such a move and there was a relief rally for the pound. Investors are tempering their enthusiasm for sterling, however, until they see the minutes of the meeting in a fortnight's time: They will want to read not just that the idea of renewed QE (QE2) was dismissed but that it was rejected resoundingly.

Australia began a shortened week with an uptick in the University of Melbourne's inflation measure from 3.0% to 3.2% and a downturn for the Australian Industry Group's (AiG) Performance of Services Index, which fell back from 47.5 to an even more negative 45.6 (anything below 50 signifies worsening conditions). The equivalent measure for the construction sector saw an even more disappointing decline from 43.2 to 40.8. It was better news on the employment front. September brought an increase of 49.5k jobs after an upwardly revised +31.6k in August. The unemployment rate was steady at 5.1%. Particularly impressive was that the loss of 6.3k part-time jobs was massively outweighed by the increase of 55.8k full-time positions.

The Reserve Bank of Australia surprised three quarters of the market by not raising its cash rate from 4.5% to 4.75%. Most investors had taken the RBA's hawkish comments in recent days and weeks as a virtual guarantee that interest rates would go up. They showed their displeasure by selling the Australian dollar. Almost instantly it lost a cent against the US dollar, one and a half against sterling and two against the NZ dollar but it made up the loss later in the week, partly as a result of the strong employment numbers.

Sterling's challenges this week will be Tuesday's inflation data and Wednesday's unemployment numbers. Higher inflation and more people in work would be good for the pound but that is not what the analysts are forecasting.