Last week started on a negative note, 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. Despite the negative news including various downgrades the markets bounced back after finding support, with the S&P 500 closing the week up .7 points or .007%.
The middle of the week presented volatile session as 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 shown that businesses had slashed their spending at a record pace in Q3, suggesting the downward revisions in overall growth numbers.
On Thursday, the Bank of England’s monetary policy committee 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 increased 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 by 0.2%. Business sales were $1.0 trillion in October, up 1.1% from a revised $993 billion in September. One must note that 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. Output producer prices increased 0.2% from October due to a rise in petroleum products and were 2.9% higher than a year earlier. 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 indicated that inflationary pressures are building in the U.K. economy. Despite current expectations, economists expect the Bank of England to maintain its very loose monetary policy for some months as the country struggles to emerge from its recession.
Forex:
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 by 31,200, boosting expectations that the Reserve Bank of Australia will keep raising interest rates at its next meeting 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. From a technical point of view The AUD/USD is consolidating and forming a triangle that could eventually break to the upside.
Over in Japan, a variety of mixed news affected the Japanese Yen during the week. 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. In addition, China’s Industrial production climbed 19.2% y/y in Nov (18.2% exp), while 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 now creating a bottom pattern forming higher weekly lows. Even though the pair is still trading below it 50 and 20 week moving average, a change in Dollar sentiment could provide further support around current levels.
Over in Canada, the BOC’s 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 that the government is not likely to use its tool kit to stem currency gains, should be supportive for the Canadian dollar once the overall US dollar rally runs its course.
The Week Ahead
Even though the economic calendar is packed with data this week, the major event will be the U.S interest rate decision. The Fed is expected to leave rates at a low of 0.25%, despite signs of emerging inflation. Tuesday and Wednesday should give investors a clearer picture as the Consumer and Producer prices are expected to be released. One must note that even though other central banks have begun to use exit strategies, the U.S market is still treading on thin ice. Any irrational move or statement from U.S officials could lead to another market drop.
Furthermore the bank of Japan is expected to release its rate decision. Even though the Japanese central rate is now at its lowest possible point, one should concentrate on the accompanying statement. Bank officials have recently pumped additional funds into the system to boost economic activity. Further liquidity could put pressure on the Japanese Yen and send the USD/JPY to higher ground.
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