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WHAT'S HAPPENING IN THE US

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The Week Ahead ...
The Week Ahead

13:30 Fri 25 October-Durable Goods Orders (Sep). This will be the main data focus this week. There will be interest in whether the recovery in durable goods orders evident since the start of the Spring is now beginning to run out of steam. (In August orders fell 3.1% m-on-m, reversing the 1.4% gain in the previous month).

15:00 Fri 25 October-Existing Home Sales (Sep). There is now some evidence that higher mortgage rates are dampening housing sector activity. The consensus expects a fall in the annual level of starts from 4.13mn to about 3.95mn.

The Week Just Past

Consumer prices rose 0.3% last month, and the annual growth rate edged up from 2.9% to 3%. The largest price gains were for food, clothing and transport, all up 0.5% in the month. The core index, excluding food and energy, rose 0.3%, up 2.7% on an annual basis.

Industrial production grew 0.2% last month, compared with 0.4% in August. The slowdown mainly reflected lower output from the auto-sector. The Fed said real growth of industrial output slowed from an annualised rate 0f 6.7% in Q2 to 4.4% in Q3, still a respectable rate of growth. The rate of capacity utilisation fell marginally from 83.4 to 83.3.

Housing starts fell 6% last month to a seasonally adjusted annual rate of 1.44mn, the lowest this year. The drop last month followed exceptionally strong figures during the Summer.

Commentary

The second and final televised presidential debate between Clinton and Dole before November's election appears to have sealed Republican Dole's fate. Snap polls by the ABC and CBS networks showed viewers believed Clinton had 'won' the 90-minute debate by a two-to-one margin.

President Clinton is likely to win the election by a fairly sizeable majority, especially while the US economy continues to grow at a healthy pace, and consumer sentiment remains at buoyant levels.

Dole's image as 'the bridge to the past' has not done him any favours. His fiscal policy also appears ill-judged. His proposal to cut $548bn from tax has been widely interpreted as unworkable, and anyway he missed the point. Most Americans see the reduction of the budget deficit as a much more important issue than tax cuts.

Given that the election result is in the bag, what are the likely developments post-election?

Budget politics will take centre stage, with the proposed recalculation of the CPI likely to have a significant impact on the size of the deficit. The current target date for a balanced budget is the year 2002, which voters appear confident that the Democrats can achieve.

No major tax reforms are expected, and those there are will be focused measures such as tax relief to small business. So called 'Corporate Welfare' (tax benefits to Corporate America) will be the main source of this relief.

World politics will not be the principal issue for Clinton and he is likely to sign up to unilateral sanctions in a movement towards much more projectionist policy. (Multilateral organisation such as the UN and theWTO have increasingly lost favour within the US). Although sanctions rarely work, the motivation will be political pressures from racial groups within the US. The obvious risk of a movement towards more protectionist policy will be more difficult trading conditions globally.

American voters maintain their indifferent stance towards international affairs. Of the 20 questions posed in the televised debate, only one raised foreign policy. Most involved domestic issues, notably education, the future of the Medicare programme and social security.

Clinton wants to leave his mark on history and to this extent he will be keen to tackle the central issues of entitlement reform and the financial crisis within Medicare. However this time he will want to work much more closely with Congress.

It is not clear whether the Republicans will keep control of the Senate. However, if they do it will be by the smallest of margins. The implications of this are that politics in the US will be moderate in the next presidential term. To gain power in the Senate a party requires the type of majority that neither party are likely to gain. This moderate theme should be good news to financial markets, as it reduces the likelihood of extreme domestic US economic policies.

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