Global health check

• October PMIs to provide latest reading on global activity.  
• Domestic conditions to show modest improvement, the start of a broader trend?  
• Subdued US payrolls report before the elections as uncertainty mounts.  

Doubts creep into markets amidst global economic risks ... Financial markets paused for breath as the economic landscape remains uncertain. Stocks fell this week and currently stand just below levels at the start of October. Admittedly, global ‘core’ bond yields remain higher, and particularly in the UK reflecting a recent shift in QE expectations. The persistence of higher yields seems related to the perceived removal of tail risks, particularly in the Euro area. However, global economic uncertainties over the coming weeks may weigh on sentiment.

Global activity reaching a crossroads ?...This week brings the latest batch of global manufacturing PMIs. These are key barometers of global activity and have been harbingers of the softening in recent quarters. However, this month’s indicators will be scoured for some sense that we may be close to a turning point. ‘Flash’ estimates of euro area PMIs showed further manufacturing weakness in October. However, preliminary estimates from China suggest the official PMI should rise. We forecast a rise to 50.5, which would be the first reading above 50 for three months. We attribute some of the pick-up in China to domestic infrastructure spend, which in turn reflects the authorities’ efforts to spur the domestic economy. Indeed, stimulus across a range of emerging markets provides hopes for a broader revival in activity over the coming quarters. In the US, the outlook remains complicated by concerns surrounding the ‘fiscal cliff ’. We forecast a modest dip in the ISM this month. These concerns could grow before they fade.

Gauging UK trends after upbeat Q3 GDP...The domestic economy looks likely to be caught between the divergent euro/non-euro trends in manufacturing. The still greater influence of the currency union is likely to dominate, but we do not expect as sharp a drop in the manufacturing PMI as across the euro area, pencilling in a fall to 48.1 from 48.4. Our own Business Barometer will provide a more detailed outlook on Monday. We will also monitor domestic trends in the coming week. Mortgage approvals, household lending and money supply all look set to post some signs of modest improvement on Monday. MPC members have repeatedly suggested that the FLS will take some time to impact the economy, but a number of other positive developments over the summer have resulted in the BoE reporting an easing in credit conditions, particularly to households, in recent months. This provides a genuine cause for optimism amidst the more volatile GDP figures. It also appears part of the reason why Governor King and Deputy Governor Bean appear prepared to let QE expire over the coming weeks, despite only the first signs of a more sustainable period of economic expansion emerging.

US payrolls more important for election than policy? ...This week’s modest rebound in US Q3 GDP and the decision by the Federal Reserve to leave policy unchanged underlined the economic outlook. This coming Friday’s payrolls report for October will have more importance for the following week’s election. The ADP survey on Wednesday will give a steer towards Friday’s release, although we warn that methodological changes this month will include downward revisions to previous months, more in line with the recent subdued payrolls reports. However, jobless claims continue to suggest the labour market has remained broadly stable. Our forecasts envisage payrolls posting another lacklustre 95k, but much variation on either side of this could exert some influence on what appears a tight race for the White House, adding to the uncertain outlook.

Disclaimer

This document is confidential, for your information only and must not be distributed, in whole or in part, to any person not involved with the proposed transaction without the prior consent of Lloyds TSB Bank plc (“Lloyds Bank”). Whilst Lloyds Bank has exercised reasonable care in preparing this document and any views or information expressed or presented are based on sources it believes to be accurate and reliable, no representation or warranty, express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. In particular, whilst we have sought to identify appropriate products and to provide guidance as to how those products might operate under various accounting standards we are not, and should not be considered to be, giving an accounting opinion or advice and you should conduct your own independent enquiries and seek your own professional advice in this respect. Any transaction which you may enter into with us will be on the basis that you have made your own independent evaluations based on your own knowledge and experience and any professional advice which you may have sought in relation to all aspects of the transaction including legal, regulatory, tax or accounting.

All terms contained herein, including pricing, are indicative only and subject to change without notice.This material has been prepared for information purposes only and Lloyds Bank, its directors, officers and employees are not responsible for any consequences arising from any reliance upon such information. If you receive information from us which is inconsistent with other information which you have received from us, you should refer this to your Lloyds Bank Sales representative for clarification.

Lloyds Bank, Lloyds TSB Corporate Markets and Lloyds TSB are trading names of Lloyds TSB Bank plc and Lloyds TSB Scotland plc. Lloyds Bank and Lloyds TSB Corporate Markets are trading names of Bank of Scotland plc. Lloyds TSB Bank plc. Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales no. 2065. Lloyds TSB Scotland plc. Registered Office: Henry Duncan House, 120 George Street, Edinburgh EH2 4LH. Registered in Scotland no. 95237. Bank of Scotland plc. Registered Office: The Mound, Edinburgh EH1 1YZ.

Registered in Scotland no. 327000. Authorised and regulated by the Financial Services Authority under registration numbers 119278, 191240 and 169628 respectively.