The equity markets had a powerhouse finish to the week, capping off a robust trading week for the S&P 500 Index. The benchmark index finished the week up 34 points or 3%. The UK FTSE Index hit a new 52 week high and is sitting on resistance at the 200 week moving average. Oil and Gasoline, had solid gains and could be the impetus for a break of the top of the recent trading range. The Euro and the Pound where unchanged for the week as investors are still fearful of European debt issues.
The week started off with strong data out of the United Kingdom. The PMI survey released Monday showed the purchasing managers index for the U.K.’s manufacturing sector was unchanged at a 15-year high of 56.6 in February. A second straight reading at this lofty level help list the FTSE and the US indices.
In the US, Personal income increased by 0.1% compared to the prior month, while personal spending climbed by 0.5%, according to the Commerce Department. The saving rate slowed to the smallest since 2008. Economists surveyed forecast a 0.4% increase in income and a 0.4% increase in spending for January. Income has gone up six straight months and spending has increased four straight times. The saving rate in January was the lowest since 2.9% in October 2008. The rate was 3.3% in January, compared to 4.2% in December.
The ISM index fell to 56.5 in February from 58.4 in January. The ISM has been above 50 for seven consecutive months. The new orders index dropped to 59.5 from 65.9, and the production index fell to 58.4 from 66.2. The employment index rose to 56.1 from 53.3, the third month above 50, indicating that more firms are hiring than shedding workers. The prices paid index slipped to 67 from 70, showing that price pressures are high but easing.
Construction spending declined 0.6% as expected, at a seasonally adjusted annual rate of $884.1 billion compared to the prior month, according to the Commerce Department. December outlays were unrevised at a drop of 1.2%. November spending tumbled a revised 2.5%. Economists surveyed estimated spending in January on construction would tumble 0.6%. Residential construction project spending in January increased 1.1% to $269.15 billion, after dropping a revised 2.6% in December. Construction spending declined 0.6% as expected, at a seasonally adjusted annual rate of $884.1 billion compared to the prior month.
Q4GDP for Canada was reported at a much stronger than expected 5% annualized, the strongest reading since Q32000 and with the strength in consumer spending confirming improving domestic demand. Inflation remains well anchored for now, but it has risen from last year’s low (January reading at 1.9% y/y, up from 1.3% in December 2009).
Japanese equities has benefited to from encouraging employment data released today. The January unemployment rate fell to 4.9% from 5.2%. The consensus was for 5.1%. The job-to-applicant ratio was unchanged, at 0.46. While the data are encouraging and suggest that the improvement in the export sector may be encouraging hiring, that has not yet translated into spending. Unfortunately January household spending figures out overnight were reported at a weaker than expected 1.7% y/y (from 2.1%).
On Wednesday, Private-sector jobs in the U.S. fell 20,000 in February, according to a national employment report published Wednesday by payroll giant Automatic Data Processing Inc. The ADP loss is below the 50,000 drop projected by economists. The estimated change of employment for January 2010 was revised down, from a decline of 22,000 to a decline of 60,000. The February employment decline was the smallest since employment began falling in February 2008. ADP said the adverse weather had only a very small effect on the ADP Report due to the methodology used to construct it. The ADP survey tallies only private-sector jobs, while the Bureau of Labor Statistics’ nonfarm payroll data, to be released Friday, include government workers.
In its latest beige book report, the Fed said nine out of its 12 regional districts reported that economic activity improved, but in most cases the increases were modest, with activity held back by the Feb. 4-7 and Feb. 9-11 snowstorms. The beige book is a summary of economic activity prepared for use at the U.S. central bank’s next policy-setting meeting, March 16. The latest report, prepared by the Federal Reserve Bank of Kansas City, examined economic conditions across the Fed’s districts based on information collected on or before Feb. 22. “Richmond reported that economic activity slackened or remained soft across most sectors, due importantly to especially severe February weather in that region,” the report said. February’s severe winter weather is expected to have hurt several sectors of the economy. Analysts believe data Friday will show the U.S. economy continued to shed jobs as unusually violent snow storms walloped the East Coast last month. February retail sales are also expected to have been hit by the storms. Consumer spending, a key growth engine for the U.S. economy, improved slightly in many districts since the last Fed beige book was released Jan. 13. But it was hampered in several regions by the severe weather of early February, the latest survey showed. “Manufacturing activity strengthened in most regions, particularly in the high-tech equipment, automobile, and metal industries,” the report showed.
In Europe, Retail sales in the 16 countries that use the euro fell in January, indicating that the currency area’s economy is unlikely to grow much more strongly at the start of 2010 than it did at the end of 2009. Sales volume in the euro zone fell by 0.3% from December and was 1.3% lower than in January 2009, the European Union’s statistics agency, Eurostat, said Wednesday. The decline in sales was smaller than expected, with economists surveyed by Dow Jones Newswires last week having estimated that sales declined by 0.5% on the month. In the UK, February service sector PMI reported by CIPS services survey rose to 58.4 from 54.5 and vs. an expected 55.0. That is the highest level since Jan07.
On Thursday the markets focused on the ECB and the BOE. The European Central Bank left its benchmark interest rate unchanged Thursday and is expected to scale back special lending to banks introduced during the financial crisis, while the Bank of England’s Monetary Policy Committee voted to keep policy unchanged and extremely loose.
ECB President Jean-Claude Trichet will comment on the grounds for the central bank’s decision to hold its key rate at 1% at a press briefing. A calm situation on the inflation front, the ECB’s key concern, allowed Mr. Trichet to display a lenient monetary policy stance in his guidance at the briefing. The ECB will continue to conduct its weekly refinancing operations as fixed-rate tenders with full allotment for as long as is needed, and at least until Oct. 12, Mr. Trichet said at a monthly press conference after the central bank left its benchmark interest rate unchanged at 1%
BOE policy makers, meanwhile, have emphasized that they could increase the central bank’s bond-buying program, also known as quantitative easing, if the U.K.’s economic recovery begins to falter, and appear unlikely to tighten policy soon.
The U.K. economy has picked up significantly since the MPC launched its unconventional policy one year ago, but many challenges remain. The U.K. government is saddled with a huge debt burden from propping up banks and supporting demand during the financial crisis, which will require it to cut spending and raise taxes. Households and companies will also be restrained by high levels of debt.
In the US, The Labor Department said in its weekly report Thursday that initial claims for jobless benefits fell by 29,000 to 469,000 in the week ended Feb. 27. The previous week’s level was revised upward to 498,000 from 496,000. Total claims lasting more than one week, meanwhile, fell to a level not seen since January 2009. Economists surveyed expected initial claims to decrease by 23,000.
Nonfarm business productivity rose by a seasonally-adjusted annual rate of 6.9% in the last quarter of 2009, according to the Labor Department. Economists polled forecast a 6.5% increase in output per hours worked. The first reading released Feb. 4 estimated a 6.2% rise for the October-to-December period of last year.
Additionally, comparable-store sales rose 4% when 2.9% was predicted for the 28 retailers that report through Thomson Reuters. The next best month was January, at 3.3%. The positive showing marks half a year of straight gains after 12 monthly declines. With most retailers reporting, 82% beat expectations as they kept Christmas inventories low, were able to clear items without too much markdown and move spring merchandise in. The situation was helped by the dismal year-earlier comparisons, when retail sales were jolted by the economic crisis
On Friday, the US Labor Department reported that the U.S. economy shed fewer jobs than expected in February and the unemployment rate was steady at 9.7% despite stormy weather on the East Coast last month. The report showed that nonfarm payrolls fell by 36,000 compared with a revised 26,000 drop in January. Economists polled were expecting payrolls to fall by 75,000 mainly because of the severe weather. The January figure was revised from an originally reported 20,000 decline to a 26,000 decline and December was revised up by 40,000. The unemployment rate, which is calculated using a different household survey, remained at 9.7% last month. Economists had forecast the jobless rate would edge higher to 9.8%.
Currencies:
The RBA pursued its rate normalization process and hiked interest rates by another 25bp overnight (to 4%, bringing the cumulative tightening of monetary policy to 100basis points). The RBA is probably not done yet on the rate hike front, but the central bank will remain cautious in its policy actions and there was nothing in the statement suggesting that another rate rise is likely in April, with Governor Stevens just reiterating that rates should move closer to ‘average’. Additional other news that was bullish for the AUD was January retail sales were reported at a stronger than expected +1.2% m/m and offsetting a 0.9% m/m decline previously.
The Australian Q409 GDP data out overnight justified the RBA’s rate increase. Q409 GDP was reported up 0.9% q/q, adding on to revised (upwardly) 0.3% quarterly increase previously and for a yearly rate accelerating to a better than expected +2.7% from +0.9%. This year, the economy is expected to grow by 3%. The AUD has finally broken through our 0.9030/70 target and our medium-term bullish outlook is intact: higher commodity prices, higher rates in an improving growth environment are all prove supportive.
The Bank of Canada took a more hawkish stance boosting the Canadian dollar. While the target overnight rate was left unchanged at 0.25% as expected, the central bank indicated that inflation risks were no longer tilted to the downside and that core inflation has been slightly firmer than projected. The BoC acknowledged that Canadian economic activity has been higher than it had projected in the January MPR. That said, the BoC reiterated the target overnight rate would remain at current levels until the end of Q210. The bottom line is that the BoC is likely to hike ahead of most other major central banks including the Federal reserve. The Canadian dollar will probably test support near 1.0250.
The rating agency Fitch has warned that the UK is the most vulnerable of the AAA rated countries to the financial crisis and should trim its budget deficit more sharply in the next four years. While the news could signal a shift in Fitch’s outlook (currently stable), it would not be the first rating agency to make a change. S&P, which also rates the UK at AAA along with Moody’s (Moody’s Aaa is equivalent to AAA) has already put the UK on negative watch in May 2009
Commodities:
Crude oil was given a lift after Royal Dutch Shell Plc’s Kokori oil flow station in Nigeria was attacked during the week as militants renewed operations against the energy industry in the southern Delta region. The People’s Patriotic Revolutionary Force claimed responsibility for the assault in an e-mailed statement, saying it had begun “fresh and final hostilities in the Niger Delta and beyond.” The group called on international oil companies to leave the region immediately. An “explosive attack” at the Kokori station damaged a unit that separates crude oil from water, Tony Okonedo, Shell’s spokesman in Nigeria, said by telephone from Lagos. “It was unmanned and not producing at the time of the attack,” he said, adding that there was no spill or threat to the environment. Attacks by armed groups in the Niger Delta, home to Nigeria’s energy industry, cut more than 28 percent of the country’s oil production between 2006 and 2009 and deterred investment. Output started to recover after a government amnesty program last year prompted thousands of fighters to disarm.
Next week the markets will focus on:
- Monday – EMU Sentix Investor Confidence (930 GMT), Canadian Housing Starts (1315 GMT)
- Tuesday – National Australia Bank’s Business Conditions (0030 GMT), Japan Leading Index (0500 GMT)
- Wednesday – Australia Consumer Inflation (00 GMT), UK Industrial Production (930 GMT), EIA Inventories (1530 GMT), NBNZ Interest Rate Decision (20 GMT)
- Thursday – Australia Employment (0030 GMT), ECB Monthly Report (930 GMT), US Initial Claims (1330 GMT)
- Friday – Japan Industrial Production (430 GMT), EMU Industrial Production (430 GMT), Canada Employment Rate (1200 GMT), US Retail Sales (1330 GMT)