The first week of the New Year was a positive one for global equity markets as the S&P 500 Index closed up by 2.68%. The FTSE 100 was up 2% and the Nikkei was finished with a 1.25% gain. The week was filled will economic data, forcing traders to absorb new information regarding the state of the economy.
The week started off on a positive note as the Euro-zone showed a solid European manufacturing PMI reading. For the euro zone as a whole the 51.6 headline hit a new 21 month high and was slightly better than expected. Even though, the upside momentum may be slowing, France and Italy’s data beat expectations, while Germany was unchanged and Spain edged a touch lower. This was followed by a better than expected US ISM number.
The U.S. manufacturing sector finished 2009 on a high note, helped by improving production and ordering activity. The ISM’s manufacturing purchasing managers’ index rose to 55.9 last month, from 53.6 in November. December’s reading was above the 54.0 forecasted by economists. One must note that readings above 50 indicate expanding activity.
In addition, “The manufacturing sector grew for the fifth consecutive month in December as the PMI rose to 55.9, its highest reading since April 2006 when it registered 56,” said Norbert Ore, who directs the survey for the ISM. The ISM’s new orders index increased to 65.5 last month, from 60.3 in November, while the production index rose to 61.8 from 59.9. Both indexes suggest orders and output were increasing strongly in December.
Factory employment also showed gradual improvement. The index stood at 52.0 in December, from 50.8 in November. The inventory index stood at 43.4 from 41.3 in November. Steep inventory drawdown’s subtracted from real gross domestic product growth for most of the recession. This restocking should have added strongly to GDP growth in the fourth quarter of 2009.
Housing data grabbed the center of attention on Tuesday. The National Association of Realtors’ index for pending sales of previously owned homes plunged 16% to 96.0 in November from an upwardly revised 114.3 in October. The decline is the first in 10 months and is more than triple than expected by analysts. Analysts were expecting pending sales t fall by just 5.0%.
The Realtors are expecting pending home sales to increase as a result of the government’s recent extension of its homebuyer tax credit program. But, “it will be at least early spring before we see notable gains in sales activity,” NAR Chief Economist Lawrence Yun said. Still, the NAR pending home sales index in November was 15.5% higher than the 83.1 it was a year earlier.
The rest of the week was characterized by minor consolidation as investors prepared for Friday’s result. During the last day of the trading week, the Department of Labor released the US employment figures. U.S. job losses were higher than expected in December of 2009 and the unemployment rate remained at a lofty 10%, a sign the labor market has still some way to recover. November 2009 data was revised to show the U.S. economy added jobs for the first time since the recession began two years earlier. According to the Labor Department, Non-farm payrolls fell by 85,000 last month, compared with a revised 4,000 gain in November. The expectation by market participants was a payroll decrease of just 10,000. The November figure originally showed an 11,000 drop in payrolls. The unemployment rate, calculated using a survey of households as opposed to companies, remained at 10% in December, the same level as the previous month. Economists were expecting the jobless rate to increase to 10.1%.
Forex
The pound was on the defensive side all week as traders had a lot of economic information to absorb. UK data was mixed as the PMI service sector data came out as expected at 56.8 in December. Nationwide consumer confidence fell to 69 in December from 74 in November vs. 72 expected. The Bank of England’s Monetary Policy Committee kept its bond-purchase plan at £200 billion ($320.44 billion) and interest rates on hold at 0.5%. The decision to keep rates unchanged was widely expected. Economists polled believed there would be no immediate change in bond purchases or in the key interest rate, which was left at a record low for the 11th straight month. So far, the BOE has made asset purchases worth £193 billion. From a technical point of view The GBP/USD moved through the 200 day moving average at $1.61, a level which could act as resistance.
The possibility of an RBA rate hike may come back into the picture after the economy showed a stronger than expected retail sales figure and a narrower than expected trade deficit. Retail sales rose at the fastest pace in 8 months or 1.4% m/m vs. 0.3% expected, while the trade deficit narrowed to AUD1.7 billion vs. AUD1.8 billion expected. These figures generated talks that the deficit may begin to narrow as global growth boosts exports. The data followed Tuesday’s stronger than expected building approvals and suggests that the rising borrowing costs and withdrawal of the government stimulus has not yet dampened the consumer or the housing market. AUD/USD strength moved back into the market as the AUD/USD crossed back above 92 cents. From a technical point of view this pair is now trading above trend line support, but below major resistance
The Week Ahead
Next week the market participants will be watching the Japanese Trade Balance and Current account on Monday, followed by Australia Investment Lending and US Trade Balance on Tuesday. On Thursday Australian Employment Change leads off. Consensus is for a gain of 32 thousand jobs for December. This will be followed by the ECB interest rate decision, and US Retail Sales. To date, many are expecting a no change scenario from the ECB despite the recent improvement in the Euro-zone’s situation. The week will finish with the EMU Consumer Prices, US Industrial Production and Capacity Utilization, and US Consumer Confidence.
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