The markets continued to gyrate this week as investors remained fearful of issues related to European debt specifically the debt related to Greece and Spain. The Euro after facing heaving selling pressure mid week was able to bounce and finish up the week with a slight gain. The S&P 500 Index as well faced a large push to the downside, only to finish the week with a small loss. The first bit of news the markets needed to digest on Monday was that the Dutch government collapsed over the weekend as the Labor Party withdrew from the government as it refused to agree to the NATO request to extend Dutch troops stay in Afghanistan. The spread between Dutch and German 2-year and 10-year bonds was flat Monday, suggesting no real market impact. It is the fifth Dutch government to falter since 2002.
On Tuesday, the equity markets where on the defensive today as investors sold riskier assets after the conference board release much worse than expected confidence number in the United States. The S&P 500 index fell 13 points below 1100 to 1094. Gasoline dropped 5 cents per gallon or 2.4%, and the dollar strengthened against most major currencies.
The confidence number took the markets by surprise. The Conference Board, a private research group, said its index of consumer confidence declined to 46.0 this month, from a revised 56.5 in January, first reported as 55.9. The February reading was far below the 54.8 expected by economists surveyed. The present situation index, a gauge of consumers’ assessment of current economic conditions, fell to 19.4 this month from 25.2 in January, originally reported as 25.0. The February index was the lowest in 27 years. Consumer expectations for economic activity over the next six months dropped to 63.8 from a revised 77.3, first reported as 76.5.
In other economic news, U.S. home prices fell in December but were up when adjusted for seasonal factors, according to the S&P Case-Shiller home-price indexes, as yearly declines continued to ease. For the fourth quarter, the S&P Case-Shiller U.S. National Home Price Index posted a 2.5% decrease from a year earlier, a significant easing from the 19%, 15% and 8.7% declines in the rest of 2009. It fell 1.1% sequentially but rose 1.6% adjusting for seasonal factors. The indexes showed prices in 10 major metropolitan areas fell 2.4% in December from a year earlier, while the index for 20 major metropolitan areas dropped 3.1%. Both indexes dropped 0.2% from the previous month, although adjusted for seasonal factors, they increased 0.3%. The softer than expected German IFO report for February combined with deterioration in French consumer spending in January provides further evidence that the economy is moderating after meager growth in Q409 (0.1% q/q gain). Germany’s IFO main business climate index was reported at a weaker than expected95.2 in February, down from 95.8 previously (first decline in 11 months). A further disappointment was a decline in the current assessment index (to 89.8 from 91.2). Meanwhile, the forward looking business expectations index was a little more encouraging (firming to 100.9 from 100.6) and so was the services sector index (at 6.8 vs. 4.9). Accompanying remarks show that the disappointing February reading resulted from the severe weather conditions which hampered construction and retail sales activity. While it should also be noted that the weather disruptions are of a temporary nature, IFO warned that the adverse weather conditions could have translated into a contraction in economic activity in Q1. Such a scenario provides further ammunition to euro bears. In addition, French consumer spending fell -2.7% m/m in January (-1.1% expected) brining annual pace down to 1.5% (3.6% expected). December spending was revised down to 1.3% m/m from 2.1%. The January data were depressed by the end of the French cash for clunker program with car sales falling -16.7% on the month.
The markets were listed on Wednesday after dovish comments from Ben Bernanke. In his semi –annual testimony before congress, Federal Reserve Chairman Ben Bernanke said the U.S. economy still needs record-low interest rates for several months at least because the recovery from its deep recession is expected to be slow. In his testimony to the House Financial Services Committee, the Fed chief said the U.S. central bank is actively looking at what tools to use once the economy needs higher rates. Market participants celebrated the news that rates would continue to be low for an extended period of time.
Also of note, The Securities and Exchange Commission voted 3-2 Wednesday in favor of a final rule that will curb short selling for individual securities that decline at least 10% in a single day. The vote brings an end to almost a year of debate over the practice, in which investors attempt to profit by selling borrowed shares of a stock that is losing value.
Also on Wednesday, U.S. sales of new homes fell 11.2% in January, setting a record low and erasing all gains in the market for new homes during the past year, as the economy recovers from recession. Demand for single-family homes fell 11.2% from the previous month to a seasonally adjusted annual rate of 309,000, according to the Commerce Department. Economists surveyed had estimated sales would rise 3.8%, to 355,000. It was the third drop in a row. Sales in December fell 3.9%, revised from an originally reported 7.6% decline. The new-home sales report is volatile because it is based on a particularly small sample. The government said it was 90% confident that the true change in new-home sales in January was between minus 25.2% and plus 2.8%. The 11.2% decrease carried sales to their lowest level since records began in 1963.
On Thursday, the euro has come under renewed pressure following a warning from Moody’s that it may lower its credit rating on Greece within a month if the Greek government misses its March fiscal targets. Moody’s credit rating, at A2, is already two notches below that of S&P (currently BBB+) which warned yesterday of a potential Greek downgrade within the month. A Moody’s downgrade would put the credit rating at the lowest investment grade before speculative grade. That would in turn make the Greek refinancing process more difficult and reinforce concerns about a downward spiral in which concerns about Greek government debt impacts holders of the debt with repercussions being felt in the economy making the crisis worse. The Euro bounced back at the end of the trading session after testing recent lows at 1.3450.
In the US, Durable goods jumped more than expected in January (up 3.0% m/m vs. 1.5% expected) but details raise concerns that Q1 GDP could be revised lower. Shipments of non-defense capital goods ex-aircraft and used in the calculation of GDP, fell -1.5% in January after gaining 2.4% in December. Due to the volatile nature of the durable goods report, forecasters are likely to wait for further confirmation to lower forecasts. Note that the headline numbers jumped due to an unexpected jump in private sector aircraft orders (up 126%), a surprise after Boeing reported orders fell sharply in January and underscoring the volatile nature of the data. Orders expected transport fell for the first month in three, down -0.6% vs. +1.0% expected. That said, the decline comes off a higher December base after the December data were revised to up 2.0% from up 0.9% and leaving non-transport orders at a slightly higher level than forecasters had expected. Weekly jobless claims were also disappointing adding to the view that the outlook remains uncertain. Claims jumped unexpectedly to 496K (460K expected and vs. 474K in the prior week). The Labor Dept said the jump was due in part to a backlog of claims in the Mid-Atlantic States and New England following the recent storms. Including this latest data, that puts the four week average at 473K, still an improvement over the 513K averaged before the start of the holiday period in late November.
Sales of used homes decreased by 7.2%, to a 5.05 million annual rate, the National Association of Realtors said Friday. Economists surveyed by Dow Jones Newswires expected sales to increase 0.9%, to a rate of 5.50 million. The surprise decline followed a revised 16.2% drop in December to 5.44 million. NAR originally estimated December sales fell 16.7%, to 5.45 million.
Gross domestic product rose at a 5.9% annual rate October through December, the fastest rate since the third quarter of 2003, according to the Commerce Department. GDP expanded by 2.2% in the third quarter of 2009. A month ago, the department first estimated that GDP ,rose by an annual 5.7% in the fourth quarter. For all of 2009, GDP declined an unrevised 2.4%, which was the largest full-year contraction since the 10.9% drop in 1946. The economy expanded 0.4% in 2008 and 2.1% in 2007.
With all the gyration in the market, the S&P 500 Index is having a difficult time with strong resistance at the 50 day moving average.
Currencies:
The British pound was under pressure most of the week and was hurt by the largest drop in UK business investment on record and concerns about a double dip. Business investment fell -5.8% q/q in Q409 vs. a consensus forecast for a 0.1% increase and vs. a downwardly revised -1.8% drop in Q309 (from -0.6%.) That resulted in a much faster than expected -24.1% y/y (-18.5% exp) drop in Q409 vs. a downwardly revised -20.8% in Q3 (-19.9% initially reported). Adding to concerns about recession, the London Chamber of Commerce survey showed that 47% of companies expect the economy to dip back into recession with only 29% predicting a lasting recovery. While UK Q409 GDP was revised higher to up 0.3% q/q (vs +0.2% expected and from an initial estimate at +0.1%) there are several negatives for the pound: 1) The upward revision in Q4 followed a downward revision in Q3 and growth throughout H209 was actually flat. 2) The upward revision in government spending boosted the overall figure and this is bad news for public finances prospects and is not sustainable. 3) Early indicators for Q110 have not been particularly promising, with the poor weather likely to bring an additional negative bias to the growth profile early this year. The UK economy has contracted by nearly 5% in 2009, but the recovery will be very sluggish in 2010, with a 1.2% sub-trend growth rate.
In Japan negative CPI readings are not a thing of the past: the Tokyo February CPI y/y rate was reported at -1.8% y/y (not as bad as the -2% expected outcome and from -2.1%) while the nationwide January inflation rate ran at -1.3% y/y (from –1.4%), with core CPI unchanged, at -1.2%. Continued weakness in the consumer sector (hardly a surprise at a time of struggling labor market and depressed real disposable income) was highlighted by the January large retailers’ sales (reported at a worse than expected –5.6%), but retail trade was up by a larger than expected 2.9% on the month. A further sign of a sluggish domestic demand is the continued weakness observed in the housing sector and the January housing starts reported yet another negative reading, but again not as bad as expected, at –8.1% y/y. USD/JPY is holding steady at horizontal support near 88.90.
The Euro was extremely volatile during the week creating a 3 big figure range between 1.37 and 1.34. The crisis in Greece and potential Spain has create a lot of trepidation for market participants. From a monetary stand point, relatively low inflation figures is assisting the ECB. This was confirmed by January CPI data. With a 0.8% monthly decline in the CPI corresponding to a yearly rate at 1% (from 0.9%). Inflation is therefore running well below the ECB’s 2% ceiling, a further element justifying a very gradual exit strategy for the European monetary authorities. The EUR/USD was able to hold the 1.3430 level, in its second test of the downside early in the week. Levels close to 1.37 where sold into, which will most likely serve as strong resistance for the immediate future.
In the commodity markets, petroleum traders held on tightly as the oil markets whipsawed in both directions. The WTI crude oil contract reached a high of 80.78 and a low of 77.05. The daily moves where almost 2 dollars on each trading day. The fundamental news saw a build of 3m barrels of crude on expectations of 1.9 million barrels on Wednesday Department of Energy inventory release.
Next week the markets will be watching:
- Monday – Australia Current Account (0030 GMT), EMU PMI (900 GMT), UK PMI (1000 GMT), US PCE 1330 GMT), US Construction Spending (1500 GMT), Japan Jobless Rate (2330 GMT)
- Tuesday – RBA Interest Rate Decision (330 GMT), EMU PPI (10 GMT), Bank of Canada Interest Rate Decision (1400 GMT), Fed Beige Book (1900 GMT)
- Wednesday – Australia GDP (0300 GMT), EMU Retail Sales (1000 GMT), US ADP Employment (1315 GMT),
- Thursday – EMU GDP (1000 GMT), Bank of England Interest Rate Decision (1200 GMT), EMU Interest Rate Decision (1245 GMT)
- Friday – US Employment Number (1330 GMT)