Katrina effect is already waning

Feelbad factor will not stop a rate rise

It all looked so simple for the Federal Reserve three weeks ago. At each of its last 10 meetings the US central bank had tweaked interest rates up by a quarter of a point in its attempt to bring borrowing costs back to more normal levels without killing off the economy.

Then came Hurricane Katrina and petrol at $3 a gallon. The impact has been swift and brutal. The latest snapshot of sentiment from the University of Michigan found consumer confidence fell from 89.1 to 76.9 - a level not seen since October 1992. Yes, the feelbad factor among Americans has hit depths not reached even after 9/11.

Should rock-bottom consumer confidence translate into spending in shopping malls and car showrooms, the world's biggest economy is heading for an almighty downward lurch. The Fed's open market committee will have the weekend to digest yesterday's news before deciding what to do with US interest rates on Tuesday. The data will have given members pause for thought, and there is an argument that the Fed should wait for the dust to settle before making another move.

Despite the Michigan survey, the odds are still, just, on a rate rise on Tuesday. The slump in confidence is likely to be temporary, especially since crude oil prices have already returned to pre-Katrina levels and wholesale gasoline prices are on the way down too. But the underlying pressures that pushed up crude prices have not gone away, and the Fed will be wary of being too aggressive. Two more quarter-point increases taking rates to 4% and that will be it.

Change is in the air in Tokyo and Berlin

A week after Junichiro Koizumi's LDP party was returned to power in Japan and as Gerhard Schröder faces his own much tougher test at the German polls tomorrow, Foreign & Colonial have been weighing the implications for investors.

Japan and Germany were once economic powerhouses but over the past decade they have run out of steam. Since 1995 real GDP in the US has grown by some 40%, while both Germany and Japan have registered only about 15%. Germany struggled to integrate east and west, while its exporters faced high wages and a high euro exchange rate. Japan suffered recurring bouts of recession and persistent deflation. This year, however, has seen change. Germany and Japan have been among the best performing major equity markets this year - up 15% and 13% respectively - while the US, after the spring dip, has been relatively flat.

At the heart of that outperformance, says F&C, is a belief that fundamental reform will be forthcoming. The bulls reckon Mr Koizumi now has a clear mandate and a free hand for reform, starting with Japan's all-powerful post office. In Germany, Angela Merkel still looks set to replace Schröder - though the result could yet be a grand coalition - bringing more hopes of reform.

F&C, however, urges caution. It is the corporate sector, it notes, that is driving change, and for equity investors, the outlook for earnings is still dependent on management.

More wobble from Robinson needed

The grand old house of Cazenove has stuck its neck out to say it is "quite possible" that enough Rentokil shareholders would support a proposal to install Sir Gerry Robinson as executive chairman. Wow. Cazenove is suggesting revolution is on the cards.

Think about what has to happen. His prime supporter, the US fund Franklin Templeton, owner of 15% of the stock, has to exercise its right to call an extraordinary general meeting to oust Rentokil's chairman and chief executive. Has such a proposal ever been tabled seriously at a FTSE 100 company?

Half the voting shareholders, which in practice may be about 40% of the total, then have to ditch Doug Flynn after a few months as chief executive. Flynn would be removed not because his turnaround plan is seen as hopeless but because he is in the way. Shareholders would instead appoint Robinson on a £50m share package that smashes the consensus on corporate pay.

All things are possible, particularly when American shareholders are big players, but this plot still looks far-fetched. Robinson is offering no cash to Rentokil's investors, other than their own. He is fighting almost solely on his reputation, which is good but surely not enough to persuade investors that £50m in shares can be handed over without performance criteria attached. It sounds, from Robinson's meetings with analysts this week, as if the great man is wobbling on the performance point. But if he is really in this game to win, he needs to wobble a lot further yet.