Market Wrap 23rd April, 2010

Market Wrap 19th March, 2010

The dollar, the equity market and most commodities notched up gains this week as there was a lack of news that would cause the markets to stir. The only surprise of the week came when the Indian Central Bank raise interest rates, which was really more a surprise of timing than action. The S&P 500 Index rallied 9.5 points or .85% and the Dow Jones was the last of the major indexes (in the US) to make a new 52 week high. The dollar index retraced last week’s loses and gained .5%

On Monday in the US, Industrial Production increased by 0.1% in February to an index value of 101.0 (2002=100), better than the expected decrease of 0.1% following a 0.9% increase in January. Over the year, the industrial production index is up by 1.7%. Capacity Utilization was reported at 72.7%, an increase from the revised level of 72.5% for January, but 7.9 percentage points below its average for the period from 1972 through 2009. In February 2009, Capacity Utilization was measured at 70.6%. The biggest gain in the report showed output in the mining industry rose 2.0% after climbing 1.1% in January. Mining capacity use rose to 88.2% from 86.4%.

Net Foreign Purchases for January decreased to $19.1 billion, following a December decrease of $63.3 billion from $126.4 billion in November. Net foreign purchases of long-term U.S. securities were $36.1 billion, $40.3 billion of which were from private foreign investors and net purchases by foreign official institutions were negative $4.2 billion. U.S. residents purchased a net $17.0 billion of long-term foreign securities.

In Japan, the government upgraded its assessment of the economy for the first time since last July, noting that ‘The economy has been picking up steadily’, but also acknowledging that the rebound has been weak. However, MoF officials have been stressing the importance of fighting deflationary forces over the past few weeks, raising speculation that the BoJ could decide to introduce fresh QE measures (via more JGBs purchases) at this week’s meeting.

On Tuesday the Federal Reserve Bank left interest rates unchanged. The Fed’s statement following the March meeting was nearly identical to January’s remarks. The central bank continues to see economic improvement and expects to scale back emergency programs, but makes no signal that rates are going to rise in the near term. The Federal Reserve said it will end one of its main support programs for the U.S. economy, the purchases of $1.25 trillion of mortgage backed securities.

In economic news in the US, Housing starts decreased by 5.9% to a seasonally adjusted 575,000 annual rate compared to the prior month, according to the Commerce Department. While this was the biggest decline in four months, it followed an upward revision in the previous month’s data, when starts staged a 6.6% gain. January starts were originally reported up 2.8%. February’s homebuilding activity remained above the level of 573,000 registered in December. Economists surveyed forecast a 4.7% drop in February housing starts, to an annual rate of 563,000. Building permits, an indication of future construction, fell 1.6% to a 612,000 annual rate. Economists had expected permits to decline 3.1% to a rate of 603,000. January permits fell 4.7% to 622,000.

In Europe, Greece avoided a downgrade to its credit rating by Standard & Poor’s Ratings Services, which had warned last month that it was considering such a move, although the ratings firm slapped on a negative outlook. S&P credit analyst Marko Mrsnik said the Greek government’s plans to reduce its deficit was supportive of the nation’s current triple-B-plus long-term credit rating, which is three notches into investment-grade territory.

The Bank of Japan left the key target rate unchanged at 10 basis points, but appeared to bow to government pressure and increased the size of the three-month loan facility arranged last December to JPY20 trillion from JPY10 trillion. Tweaking this facility was widely tipped as a likely compromise formation between the BOJ who has argued that monetary policy was already extraordinarily easy and interest rates were extremely low, while the government wants more efforts to combat deflation. Nevertheless, the compromise was not satisfactory and two BOJ members (Noda and Suda) dissented.

The March 4th meeting minutes in the UK showed the MPC voted unanimously to keep policy unchanged. Importantly for those looking for bullish sterling news, the case for fresh QE was not really debated as the MPC thought that there was ‘little evidence to suggest’ a change in the UK economic outlook since the prior meeting. Policy makers confirmed they stand ready to expand purchases of gilts or tighten monetary policy if needed, with a ‘bumpy’ path ahead for the economy. Meanwhile, UK unemployment fell by 32.3k in Feb (vs. a 6k rise expected and vs. a 5.3k Jan gain.) Jobless claims fell at their fastest pace since 1997, which is a very encouraging sign for growth prospects. January average earnings were up by just 0.9% y/y (from 0.7% and versus 1.7% expected) but the ex-bonus y/y rate firmed to 1.4% y/y from 1.2%.

On Thursday, U.S. wholesale prices in February posted their biggest drop in seven months as gasoline costs fell sharply, leaving scope for the Federal Reserve to keep short-term interest rates at a record low. The producer price index for finished goods dropped by a seasonally adjusted 0.6% m/m in February, according to the Labor Department, following an unrevised 1.4% increase in January. The core PPI, which excludes volatile energy and food prices and is more closely watched by the Fed, rose 0.1% last month after increasing by 0.3% in January.

European Union statistics agency Eurostat reported Thursday that the 16 countries that use the euro had a combined deficit in their trade in goods of €8.9 billion ($12.23 billion) in January after a surplus of €4.1 billion in December 2009, a figure that was revised down from the previous estimate of €4.4 billion. The deficit was larger than expected, with economists surveyed having estimated that imports exceeded exports by €4 billion.

The Office for National Statistics said that U.K. public sector net borrowing was £12.4 billion in February, a record for that month but significantly less than the £13.3 billion expected by economists. The figure stood at £8.8 billion in February 2009. The U.K. Treasury said the February numbers mean the government is on track to hit its full-year borrowing forecast of £178 billion.

In the US, the seasonally-adjusted consumer price index was unchanged last month, the Labor Department said Thursday, after increasing an unrevised 0.2% in January. The last time inflation looked so tame was in March 2009, when consumer prices fell by 0.1%. Core consumer prices, which strip out volatile energy and food items and are more closely watched by the Fed, were up by a monthly 0.1% in February. In January, core prices fell by 0.1%. Economists surveyed were expecting an increase of 0.1% in both the headline consumer price figure and the core consumer price index number. On an annual basis, which is not adjusted for seasonal factors, consumer prices rose by 2.1% in February. Core consumer prices rose by 1.3% from 12 months ago, the lowest increase since Feb. 2004.

The Philly Fed said its index of regional manufacturing activity rose to 18.9 in March from 17.6 in February, with a positive reading indicating growth in the sector. Economists had been expecting a more modest increase by the index to a reading of 18.0.

The Labor Department said in its weekly report Thursday that initial claims for jobless benefits fell by 5,000 to 457,000 in the week ended Mar. 13. The previous week’s level was left unrevised at 462,000. Total claims lasting more than one week, meanwhile, increased moderately. The decrease in initial claims was just below economists’ expectations. Economists surveyed expected initial claims to decrease by 7,000. The four-week moving average, which aims to smooth volatility in the data, also went down for the week ending Mar. 13. The Labor Department said the four-week moving average decreased by 4,250 to 471,250 from the previous week’s unrevised average of 475,500.

On Friday, India surprised the market by announcing a 25 basis point hike in key rates today. The surprise was only in the timing. This brings the repo rate to 5% and the reverse repo rate to 3.5%. To the extent there was speculation of a rate hike, it was more about China than India. That said, India had raised reserve requirement earlier this quarter and many understood a rate hike was a question of time.

Canadian retail sales in January rose a robust 0.7%, which was slightly stronger than the 0.6% rise expected by analyst, according to Canstat. This small upward surprise occurred despite new car sales being much weaker than expected by dropping 2.3%. The offset was an unexpectedly large surge of 1.8% in ex-auto sales that was more than triple the 0.5% gain expected going into the report. The jump in ex-auto sales was attributable to sales at building and outdoor home supplies stores rising an impressive 7.4%. This strength was attributed to households making purchases before the expiration of the federal government’s Home Renovation Tax Credit. This factor may also have boosted sales at furniture, home furnishings and electronic stores, which rose 2.5% boosted by surge in sales of floor coverings. The Canadian dollar continued its move toward par.

The combination of mixed political signals in the Euro zone (IMF issue above) and technical resistance created the failure in the upward movement of the Euro. In general, a bottom will be tested multiple times prior before support is created. The Euro again felt pressure from the 50 day moving average which has held the Euro in a down trend for the past 4 months. Additionally, the RSI 50 level has created resistance where technical traders have become sellers.

Next week market participants will be watching:

· Monday – BOJ Monetary Meeting (2350 GMT)

· Tuesday – UK Consumer Price Index and Retail Price Index (930 GMT), US Existing Home Sales (1400 GMT),

· Wednesday – EMU PMI (Manufacturing and Construction – 9GMT), US Durable Goods (1230 GMT)

· Thursday – UK Retail Sales (930 GMT), US Jobless Claims (1230 GMT), Japan CPI (2350 GMT)

· Friday – UK Business Investment (930 GMT), US GDP and PCE (1230 GMT)

Market Wrap 12th March, 2010

Riskier assets boasted a robust week as equities and petroleum surged forward and the dollar retraced.  The Euro, the Aussie dollar, the loon and the pound all had solid returns.  The S&P 500 Index made a 2010 high, notching 10 straight higher closes and the Nasdaq is closing in on the highs made prior to the 2008 collapse.

On Monday, the markets focused on economic new out of Asia. A record rise in exports helped Japan’s current-account balance swing back to surplus in January, according to the government, adding to hopes that overseas demand will continue to support the nation’s economic recovery.  January’s current account surplus or Japan’s net earnings from international trade and investment, stood at ¥899.8 billion ($9.95 billion) compared with a ¥132.7 billion deficit a year earlier, according to the Finance Ministry. The result represents the 12^th straight month of surplus, while the rebound from the previous year ¥1.033 trillion is the largest since a ¥1.222 trillion recovery in March 1992.

Meanwhile, the nation’s bank lending in February, excluding that by Shinkin, or credit-union banks dropped 1.6% from a year earlier, according to the BOJ.  Bank lending fell for the third month in a row in February as businesses continued to shy away from making new investments.  The figure improved on a 1.7% fall in January, but still marks the third-straight month of decline. Weak lending from banks shows that Japan’s economic recovery lacks the necessary strength to prompt companies to borrow more to capital to expand their operations.  Firms have also reduced their reliance on bank lending as improving financial market conditions make it easier for them to raise money through selling bonds or issuing stocks if needed.  The BOJ also said Japan’s money stock increased 2.7% on year in February, compared with a revised 3.0% rise in January. M2 includes cash currency in circulation and deposits held by the BOJ and other financial firms in Japan, excluding Japan Post Bank.

On Tuesday even as the equity markets continued to rally, market participants focused on the weakening UK economy.  The economic data in the UK does not paint a pretty picture. The RICS February house prices (with the main index falling to a much weaker than expected 17% from 31%) was very disappointing. The January trade balance data was also a disaster for UK bulls, with the main deficit widening to a much worse than expected £7.98bn (vs. -£7billion previously and vs. -£7bn expected) while the non-EU trade gap widened to -£3.8billion (from -£2.6billion). This was the worse trade performance since August 2008 and resulted from a 6.7% monthly drop in exports while imports were down 1.6%. The slump in exports is disappointing at a time of sterling weakness but one should not forget that the UK main trading partner (the euro zone) recovery is extremely sluggish and a weaker currency will do little in the near-term if external demand is very weak to start with. Coupled with the negative adverse effects that the poor weather recorded in Q1 will have on GDP growth, the highly disappointing trade figures underline a further drag on economic activity.

On Wednesday, market participants were happy to see better than expected US inventory news.  U.S. wholesalers’ inventories unexpectedly fell 0.2% in January, according to the Commerce Department, as surging demand pulled goods off shelves in the first month of the year.  Wall Street analysts had expected inventories to rise by 0.2% in January. The unexpected decline followed a downward revision in December’s inventory level showing December inventories contracted by 1.0%, rather than the 0.8% drop originally reported.  Sales by U.S. wholesalers in the first month of 2010 were up 1.3% to a seasonally adjusted $346.7 billion, the latest data showed. It was the tenth straight monthly increase in sales, according to the Commerce Department. Sales were particularly strong for cars and groceries.  The decline in inventories is good news for the U.S. economy. As inventories are reduced, they will need to be replaced which creates more employment. The amount of wholesale goods on hand relative to sales was 1.10 in January, a record low. The inventory-to-sales ratio measures how many months it would take for a firm to deplete its current inventory. The ratio in December was 1.12.

In the UK, January industrial production figures gave fresh ammunition to Sterling bears, although the currency showed some buoyancy. UK January industrial production contracted by 0.4%, much worse that the +0.3% expected outcome and after a 0.5% reading previously. This left the yearly rate well in negative territory, at -1.5% (from -3.7%). It was a similar story for the manufacturing sector, with production contracting by 0.9% (from +0.9%) and for a yearly rate at a very sluggish 0.2% (from -1.9%). Of course, the poor weather had a lot to do with this highly disappointing performance in the UK industrial sector, but it is not just a weather story. The prior day’s highly disappointing January trade figures (and considering the highly manufacturing orientated nature of the UK external sector) hinted at a likely disappointment on the industrial.

In Asia, China reported stronger export and import figures for February than expected, with the net result of a smaller than expected trade surplus.  In fact, February’s trade surplus of $7.6 billion is the smallest in a year and a bit more than half of the January surplus.  In terms of global imbalances, the US trade deficit and the Chinese trade surplus have been roughly halved as a percentage of GDP over the last couple of years.  In the US case, it seems largely cyclical and the growth differentials that we expected to close the output gap in the US before Europe and Japan will likely see the US trade deficit grow again, though from a lower base.  In China’s case, the possibility of a structural shift is greater, though too early to tell.  China’s exports rose 45.7% in February from the depressed year-ago levels. Yet this is more than twice the pace in January and may also have been distorted by the earlier lunar New Year.  Imports jumped almost 45%, better than the 39.7% expectations, but well off the mind-boggling 85.5% pace reported in January.

Japan’s economy may be benefiting from the revival in its neighboring Asian economies, but domestic demand remains very sluggish and deflationary forces continue.  February machinery orders were softer than expected at down 3.7% m/m (vs. +20.1% in December.) That put the yearly rate at -1.1% (vs. -0.6% expected). Machinery orders are a good proxy for business investment, so this disappointing January performance is not particularly promising for Q1GDP.

On Thursday, riskier assets continued to climb, help a quarterly Federal Reserve report that said U.S. households’ total net worth climbed 1.3% in the fourth quarter, to $54.18 trillion from the third quarter’s $53.49 trillion. For 2009 as a whole, net worth rose 5.4%. Household net worth is assets, such as home equity, minus liabilities, such as mortgage debt.  A large chunk of the increase in net worth came from a drop in household debt, as an increasing number of financially stretched consumers defaulted on mortgage and credit-card debts. While the defaults are painful for families and costly to banks and investors, economists say they are also speeding the financial rehabilitation necessary for a return to robust growth.

Canada reported a larger than expected trade surplus earlier on Thursday.  At C$0.8 billion, it was four times larger than expected and the December figures were revised to show a C$0.1 billion surplus instead of a C$0.2 billion deficit.  Canada also reported a strong rise in Q4 capacity utilization rate to 70.9% from a revised 68.7% in Q3 (previously estimated at 67.5%).

The buoyant state of China’s economy was in the limelight Thursday in Asia. China is not just an externally driven economy, the strong February retail sales captured a very strong consumer sector, with a yearly growth rate beating expectations, at 17.9% y/y. February industrial production also impressed, with a 20.7% yearly rate, beating expectations. However, it is the February CPI that has caught most headlines, with a yearly inflation rate firming to a stronger than expected 2.7%, up from 1.5% previously. The data highlights overheating economic conditions, with the Jan/Feb reserve requirement hikes not filtering through to the economy just yet.

In Japan, the economic environment is not all that rosy and the final Q4GDP was revised down, to 0.9% (from 1.0%), with the deflationary forces yet again in the limelight as the GDP deflator stood at -2.8% y/y.

On Friday there was a plethora of data in the US for the market to absorb.

Retail sales rose last month by 0.3%, according to the Commerce Department. With the Super Bowl early in the month, electronic store sales soared. Economists surveyed had forecast a 0.3% decrease. January retail sales were adjusted downward, to a 0.1% increase from a previously reported 0.5% gain.  Excluding the car sector, all other retail sales rose 0.8%. Economists had forecast a 0.1% increase. Ex-auto sales in January rose 0.5%, revised from a previously estimated 0.6% gain. Retail sales data are an important indicator of consumer spending. Consumer spending represents some 70% of demand in the U.S. economy.

Unfortunately, Business inventories were on the soft side.  Not only was the January reading flat, but the December series was revised to -0.3% from -0.2%.  January wholesale and factory inventories had previously been released so the new information Friday was largely the 0.1% decline in retail inventories.   Inventories added mightily to Q4 09 5.9% annualized GDP and some analysts dismiss the growth because of this phenomenon.  However, a large part of the contraction was also due to inventories.  The inventory cycle is still unfolding.  The large swing in Q4 still is about the pace of inventory liquidation. It is a gradual process that can be stretched out for the next couple of quarters at least.   As sales are increasing, the inventory to sales ratio is tightening.

Currencies:

In Japan, both the prime minister and the finance minister made a none-too-thinly veiled threat of foreign exchange intervention. One investment house was quoted on the wires late
Thursday suggesting the odds of intervention stood at 47%.  The MOF is insistent on providing a deflationary fighting measure for the Yen.

The RBNZ left rates on hold (at 2.5%) and reiterated that rates would remain on hold until around mid-year but also signaled that the pace of tightening would be gradual.  Governor Bollard stated that rate hikes may be less than in previous cycles and that growth is likely to be subdued relative to past recoveries including the RBNZ’s forecast for 4.4% y/y growth in Q111.  Inflation is expected to remain within target and Bollard noted that financial conditions are tighter than the ODR would imply reinforcing his point that the ODR is likely to be hiked by less than in previous cycles.

Canada’s unemployment rate edged down 0.1 percent to 8.2 percent in February as 21,000 people started new jobs, Statistics Canada reported on Friday.  The agency said there were 60,000 new full-time jobs filled in February, but 39,000 part-time jobs were lost.  Analyst had expected an increase of 15,000 jobs and an unchanged unemployment rate at 8.3 percent.  The Canadian dollar is breaking through support and now could make a run at par.

Commodities:

Crude Oil edged higher this week, rallying a little more than a dollar per barrel driven by dollar weakness, a strong equity markets.  During the middle of the week, the Organization of Petroleum Exporting Countries predicted members will need to produce 28.94 million barrels a day to satisfy demand in 2010. OPEC projection is an increase of about 190,000 barrels a day more than last month’s projection.  “Even taking into account the uncertainty regarding demand for OPEC crude, current OPEC production is likely to exceed market needs,” the Vienna-based secretariat said in the report.

OPEC increased its forecast for worldwide oil consumption in 2010 by 120,000 barrels a day to 85.24 million barrels a day. That represents growth of 880,000 barrels a day from 2009, 80,000 barrels a day more than it forecast last month. Consumption growth is driven entirely by developing economies and will remain sensitive to the pace of global economic recovery, according to OPEC.

Next week market participants will be watching:

· Monday – Japan Consumer Confidence (500 GMT), EMU Employment Change (10 GMT), US NY State Empire Manufacturing Survey (1230 GMT), US Industrial Production (1315 GMT)

· Tuesday – EMU CPI (10 GMT), EMU Zew Survey (10 GMT), US Housing Starts and Building Permits (1230 GMT),

· Wednesday – BOJ Interest Rate Decision, UK Jobless Claims (930 GMT), EMU Construction Output (11 GMT), US Producer Prices (1230 GMT),

· Thursday – EMU Current Account (900 GMT), Canada CPI (11 GMT), US CPI (1230 GMT), US Jobless Claims (1230 GMT), US Philly Fed (1400 GMT)

· Friday  – Canada Retail Sales (1230 GMT)

Market Wrap 26th February, 2010

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. 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.

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.

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.

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)

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Market Wrap 11th December 2009

Markets began slipping on Monday after Standard & Poor’s put Greece’s A- sovereign rating on negative credit watch, pointing to issues with government finances that could lead to downgrades.  Market participants already nervous after issues with Dubai World, immediately moved into safe haven products such as the dollar and treasuries,  The trend accelerated Tuesday after Fitch Ratings’ decision to cut Greece’s long term foreign currency and local-currency ratings to BBB+ from A-, with a negative outlook.  By the end of the week, the markets bounced back with the S&P 500 closing the week up .7 points or .07%.

During the middle of the week, the markets needed to absorb some interesting economic data.  The pace of Japanese Q3 growth was drastically revised lower, which added to fears about the strength of the recovery with GDP revised down to 1.3% from 4.8% initially reported and vs. 2.8% expected.  The main influence on this sharp revision was a 2.8% drop in capital spending from the previous quarter, compared with the initial estimate of a 1.6% gain. Figures earlier this month had showed businesses slashed spending at a record pace in Q3, suggesting the downward revisions in overall growth numbers. The deflator was negative rather than positive, at -0.5%, rather than 0.2%.  On Thursday, the Bank of England’s monetary policy committee, as expected by many economists, held the key interest rate at 0.5% for a tenth consecutive month. The committee also met expectations by keeping the £200 billion ($325.14 billion) target for its policy of buying bonds with freshly created central bank money.  On Friday, U.S. retail sales rose in November nearly twice as much as expected, making a broad-based increase that suggested consumers were buying aggressively and supporting the economy in the holiday shopping season.  Retail sales rose 1.3% last month, the Commerce Department said Friday. Wall Street had predicted a 0.7% increase.  U.S. business inventories rose 0.2% in October, to $1.3 trillion, the first increase since August 2008, the Commerce Department announced Friday.  Wall Street was looking for stockpiles to fall 0.2%.  Business sales were $1.0 trillion in October, up 1.1% from a revised $993 billion in September.  The rise in business inventories will possibly lead to an upward adjustment in expected 4th quarter GDP in the US.  Also on Friday, U.K. factory gate prices rose at their sharpest annual rate for nine months in November due to higher fuel prices, the Office for National Statistics announced.  Output producer prices increased 0.2% from October due to rises in petroleum products and were 2.9% higher than a year earlier, marking the strongest annual increase since February.  Input producer prices for materials and fuels that manufacturers buy rose 0.1% on a month-to-month basis and 4% on the year, the strongest annual gain for a year.   Although the figures indicate that inflationary pressures are building in the U.K. economy, economists expect the Bank of England to maintain its very loose monetary policy for some months as the country struggles to emerge from recession.

Currencies:

The Australian dollar performed well during the week after the Australia’s unemployment rate fell to a lower-than-expected 5.7% in November from 5.8% in October and the number of employed jumped 31,200, boosting expectations that the Reserve Bank of Australia will keep raising interest rates when it next meets in February.  The strong jobs figures are the latest evidence that Australia’s economy continues to outperform other developed economies as it rides a wave of demand from Asia for its commodities while still-low interest rates and government stimulus support domestic consumption.  Economists on average had expected an unemployment rate of 5.9% in November, with the number of employed up 5,000.  The AUD/USD is consolidating and forming a triangle that could eventually break to the upside.

There was mixed news that affected the Japanese Yen.  Japanese core machinery orders fell 4.5% in October from the previous month, as non-manufacturers scaled back spending.  The fall in this leading indicator of corporate capital investment was slightly worse than the 4.2% drop expected by economists.   The soft Japanese household consumer confidence data (39.5 in Nov vs. 40.0 exp), the first decline time in a year, highlights the fragile nature of the Japanese recovery and may have weighed marginally on the yen.  China Industrial production climbed 19.2% y/y in Nov (18.2% exp), other data including retail sales and exports were not so strong.  Retail sales rose at a slower than expected 15.8% pace (16.5% exp, up from 16.2%).   The USD/JPY is creating a bottom pattern by making higher lows in the past 2 weeks.

Bank of Canada statement was more upbeat than expected but the positive impact on the Canadian dollar was cut short by overall US dollar strength.  While Governor Carney again noted the strong Canadian dollar could be a significant drag on growth he dropped the phrase indicating that the currency’s strength would offset favorable economic developments.  Additionally, he noted that growth would become more solidly entrenched and reiterated that inflation would return to target in 2011.  The statement combined with Canadian FM Flaherty’s statement last week where he gave the green light to Canadian dollar bulls by signaling the government is not likely to use its possible tool kit to stem currency gains should be supportive for the Canadian dollar once the overall US dollar rally runs its course.

Commodities:

Commodity prices were hammered this week lead by a downdraft in precious metals and petroleum products.  Gold has lost 100 dollars per ounce in the last 6 sessions, and silver lost $2 dollars per ounce.  West Texas Intermediate Crude Oil slumped to $71 dollars a barrel after the department of energy announced a greater than expected inventory build on Wednesday.    The bright spot for the week was the rise in Natural Gas due to better than expected inventory numbers and cold weather across the northern US.

Next week the market will be watching:

• Monday – Japan Industrial Production (430 GMT), EMU Employment Change and Industrial production (1000 GMT)
• Tuesday – UK Consumer Price Index (930 GMT), EMU Zew Survey (10 GMT), US Producer Prices (1330 GMT), US Industrial Production and Capacity Utilization (1415 GMT)
• Wednesday – Australian GDP (0030 GMT), EMU Consumer Price Index (10 GMT), US Consumer Price Index and Housing Starts (1330 GMT),
• Thursday – UK Retail Sales (930 GMT), Canadian Consumer Price Index (12 GMT), US Jobless Claims  (1330 GMT) , US Leading Economic Indicators and Philly Fed (1500 GMT)
• Friday – BOJ Interest Rate Decision (4 GMT), EMU Trade Balance (10 GMT)