UK high-street spending has proved resilient in recent months and retailers remain moderately optimistic about near-term prospects, according to the November CBI distributive trades survey. However, a significant slowdown is now being signalled by our leading indicator – see chart below. The indicator has five components: mortgage approvals, real earnings growth, retailers’ sales assessment, consumer buying intentions and household sector real money growth. Recent weakness mainly reflects drops in mortgage approvals and buying intentions coupled with lacklustre real earnings growth.

The Rock loan may have grown by a further £2.7 billion over the last week as negotiations about its future meander towards a conclusion. The increase from £1.1 billion in the prior week is consistent with reports of accelerating retail deposit outflows from the troubled bank. The cumulative rise since 12th September is now £29.1 billion (all figures based on changes in "other assets" on the Bank of England's weekly return). Recent trends suggest the bank's retail funding base may have largely disappeared by the time a bid is completed.

Against my expectations, US Treasury yields have fallen sharply in recent weeks. There are two explanations for the decline: a flight to (perceived) quality as the money and credit market “crisis” has intensified and rising fears of a global “hard landing”, involving a US recession and a sharp slowdown (at least) elsewhere.

If the latter explanation were the dominant factor, one would expect similar dramatic falls in other countries, particularly open economies with high exposure to the US. Yet in one such case – Korea – yields have been soaring not plunging. Five-year Korean Treasury yields have reached their highest level since 2002. Some special factors are involved but the rise has been mainly due to a combination of stronger-than-expected economic news and competition from rising money market interest rates.

Swings in Korean yields have historically coincided with or led moves in US Treasury yields – see chart. The recent divergence suggests that Korean bond market participants do not sense a coming US recession, while the fall in US yields mainly reflects a flight to safety, which could reverse sharply if money and credit market stresses abate.

Market Vane’s measure of bullish sentiment on US Treasury bonds has risen to 81%, the highest since 2003. Similar readings historically have often preceded at least a temporary rebound in yields.

Our MPC-ometer model predicts UK interest rate decisions based on a small number of economic and financial indicators. The model correctly explains 113 of 125 interest rate outcomes since the inception of the current policy regime in 1997 – a 90% success rate.

Earlier this year I applied the same analysis to ECB rate decisions and found a similar degree of predictability. The ECB-ometer includes 10 variables summarising trends in activity, inflation and financial market conditions. Eight of these variables also appear in the MPC-ometer, providing strong evidence of a common policy approach.

The chart below shows changes in the ECB’s main policy rate – the minimum bid repo rate – together with the ECB-ometer’s forecasts. Official rate changes are signalled by forecasts of +0.125% or higher and -0.125% or lower. The model correctly predicted seven of the eight increases over the last two years, with no false signals.

The ECB was widely expected to raise rates again in September, based partly on President Trichet’s use of the phrase “strong vigilance” at the August press conference. The model signalled an increased risk of tightening but the forecast of +0.12% fell just short of the trigger level. In the event, rates were left unchanged in September and “strong vigilance” was replaced by a commitment to “monitor very closely all developments” in the subsequent press statement.

The ECB-ometer’s forecasts fell back in October and November and the December reading is likely to be marginally negative, based on available data (estimate included in chart). The decline reflects weaker economic activity and tighter financial conditions, which have offset unfavourable inflation developments.

The ECB has continued to signal a tightening bias by emphasising upside risks to price stability in its monthly statements and speeches by key officials. However, the ECB-ometer suggests a neutral policy stance is now warranted by incoming data – see also here and here. The ECB is likely to retain a reference to upside inflation risks in the statement issued after next week’s meeting but this could be counterbalanced by acknowledgement that growth prospects have deteriorated, partly because of the strength of the euro. Such an adjustment would indicate a more symmetric policy outlook and could be the first step towards a rate cut in early 2008.