RICS Housing Market Survey for October

The October housing market survey from the Royal Institute of Chartered Surveyors(RICS; overnight Monday/Tuesday) is likely to show the supply-demand balance in the housing market continues to favor buyers, thereby dampening prices. The September RICS survey showed that the balance of surveyors reporting new instructions to sell rose to +22%, from +12% in August. Furthermore, this was the eighth successive month that there had been an increase in instructions to sell. Meanwhile, new buyer interest fell in September for a fourth month running, although the net balance of surveyors reporting a rise in buyer enquiries did improve to -2% from -17% in August (which had been the fastest decline since January when enquiries were hit by very bad weather). Meanwhile, we expect the RICS survey to reveal that the balance of surveyors reporting that house pricesincreased over the previous three months weakened further to -40% in October, from -36% in September, -32% in August, -8% in July, and +8% in June.

We expect house prices to fall 10% overall during the final months of 2010 and in 2011. High (and likely to rise) unemployment, muted wage growth, an increasing fiscal squeeze, low consumer confidence, difficulties in getting a mortgage, a housing supply/demand balance currently firmly in favor of buyers, and a house price/earnings ratio above long-term norms are a poor combination of factors for house prices. Low interest rates and the current stamp-duty holiday for first-time buyers on all properties costing up to £250,000 only partially offset these adverse factors.

Manufacturing Output in September

We expect manufacturing output (Wednesday) to have expanded a respectable 0.3% m/m in September, as it did in August. Nevertheless, the y/y increase would moderate to 5.0% in September, from a near-16-year high of 6.0% in August, reflecting that output spiked in September 2009 as the manufacturing sector started to recover from its deep recession. Overall industrial production is also expected to have grown 0.3% m/m in September, after rising 0.3% in August. This would see y/y growth in industrial production ease to 3.5% in September, from 4.2% in August.

Latest data and survey evidence generally indicate the manufacturing sector is holding up pretty well after a very decent first half of the year. The concern remains that manufacturing activity will be pressurized increasingly over the coming months by stock rebuilding winding down, tighter fiscal policy weighing on domestic demand, and slower global growth hitting foreign demand for U.K. products.

Trade Deficit in September

The total trade deficit (Wednesday) is expected to have narrowed to £4.4 billion in September, from £4.6 billion August and a near-five-year high of £5.0 billion in July. Even so, this would still be above the average monthly shortfall of £4.0 billion during the first eight months of 2010. Within, this, the visible trade deficit is forecasted to have fallen to £8.0 billion in September, from £8.2 billion in August and £8.7 billion in July.

Despite showing modest improvement compared with July, the August trade data were nevertheless disappointing. Particularly disappointingly, total exports fell 2.1% in August, after a dip of 1.0% in July, with exports of traded goods down 1.8%. Meanwhile, imports fell 2.7% in August with imports of traded goods down 2.7%. This suggested that domestic demand is softening.

The United Kingdom's export performance so far in 2010 has been lackluster and largely disappointing, given the past sharp depreciation of the pound and improved global growth and trade. Furthermore, there is a serious risk that U.K. exports will be hit increasingly over the coming months by slowing global growth. Latest survey evidence is mixed. On the positive side, the export orders index of the manufacturing purchasing managers' survey rose to a five-month high in October, after a very weak performance over the previous four months. Nevertheless, the export orders balance of the October industrial trends survey from the Confederation of British Industry was weaker.

Bank of England Quarterly Inflation Report for November

Following the Monetary Policy Committee (MPC)'s decision to keep interest rates at 0.50% and the stock of quantitative easing unchanged at £200 billion at the conclusion of its 3–4 November meeting, attention will focus on the Bank of England's Quarterly Inflation Reportfor November (Wednesday). The new GDP growth and consumer price inflation forecasts contained in the report (which the MPC had access to at its meeting) will provide important insights into how monetary policy is likely to develop in both the near term and over a two-year horizon.

Given recent growing uncertainty over the timing and direction of future developments in monetary policy, the Quarterly Inflation Report will be scanned particularly closely. Latest available information shows the MPC policy vote resulted in a three-way split at the October meeting, and this is likely to have been the case again at the November meeting. There can be no doubt that Andrew Sentance continued to favor a small rise in interest rates, while Adam Posen highly likely again wanted a £50-billion increase in quantitative easing. Of key interest will be whether any of the other seven MPC members came off the monetary policy fence in November, and on which side. The report may offer some clues on this.

We expect the Bank of England to raise both its near-term GDP growth and inflation forecasts. Nevertheless, we do not expect the bank to raise its GDP forecasts further out, as we believe it will remain cautious about the longer-term risks to growth coming from increasingly restrictive fiscal policy, ongoing tight credit conditions, and high unemployment. We also expect the Bank of England's consumer price inflation forecasts to show inflation is still likely to be at or just below its 2.0% target rate on a two-year horizon. We expect the Bank of England to indicate that there are major uncertainties surrounding both the growth and inflation forecasts, thereby giving itself clear leeway to move monetary policy in either direction.

We suspect that the general tone of the Quarterly Inflation Report and the accompanying GDP and consumer price inflation forecasts to indicate that interest rates are more likely than not to stay at 0.50% for some considerable time to come. We also expect the report to indicate that when interest rates do finally start to rise, they move up only gradually. We also expect the Inflation Report to leave the door open to renewed quantitative easing should growth falter markedly over the coming months.

Certainly, the government is looking for the Bank of England to be a major part of any "Plan B" for the economy if its "Plan A" fails because of growth faltering substantially as the fiscal squeeze increasingly bites. Given that he appears to be fully supportive of the chancellor's fiscal tightening plans, it appears that Bank of England Governor Mervyn King would be willing to play his part if growth stalls.