The equity market ended in consolidation mode last week, as Monday’s bounce was followed by Thursday’s downdraft. The S&P 500 index lost 0.36% for the week, as markets participants prepared for this week’s holiday week.
Although the markets received a nice boost on Monday, disappointing economic news quickly followed and weighed on investor’s sentiment. The slightly worse than expected euro zone industrial production report (-11.1% y/y on a work day adjusted basis vs. -10.8% expected) spooked investors as the news hinted towards a possible downward revision of the Euro zone’s Q4 GDP forecast. This is in contrast to the US, where last week’s retail sales data hinted towards an upward revision to the US’s Q4 GDP forecast. Euro zone employment also accelerated to the downside, falling -2.1% in the third quarter vs. -1.8% in the second quarter.
In Japan, the Tankan report was also slightly disappointing. The index increased by 9 points to -24, better than the reading of -27 expected. Still, despite three consecutive quarters of improvement last week’s figure was the weakest. Furthermore, the outlook for capital spending was much weaker than expected. Large firms now plan to cut their estimates by -13.8% this fiscal year, worse than the -10.8% drop, forecasted three months ago. This resulted in the third quarter GDP being slashed to 1.3% from the 4.3% initial estimate because of sharply lower capital spending. Due to recent economic data the Tankan survey now suggests that the gloomy trend will continue something that will weigh on investor’s sentiment during this fragile recovery.
Over in the U.S, the US producer price index rose last week by 1.8 % for November, nearly double economists’ projections, as energy prices soared and light truck prices picked up. Compared to last November’s figure, wholesale prices were up by 2.4%, the first such increase in 12 months. Core producer prices, which exclude food and energy, rose by 0.5% in November, also exceeding estimates. Prices for light trucks jumped by 4.2% last month, while cigarette prices swelled by 2.2%. In addition, US consumer prices climbed 0.4% in November, according to government data Wednesday indicating inflation is in check. Excluding volatile food and energy prices, the “core” inflation index was flat for the month. The headline index was in line with expectations, while analysts had been looking for a 0.1% rise in the core CPI. Over the past 12 months, overall prices have increased by 1.8% and core prices have been up by 1.7%.
Inflation data was scrutinized by investors ahead of the rate decision to see if there would be any changes to the wording of the FOMC statement due to the numbers. The Federal Reserve Statement displayed little change from prior statements and alerted that market that monetary easing would continue for a substantial period of time. These comments were expected by market participants and the reaction was already baked into the market’s price.
Employment data also grabbed market participant’s attention as Thursday’s first-time jobless claims rose by 7,000 to 480,000, defying expectations of Wall Street’s economists that the number would drop. The less volatile four-week average of new claims, however, fell by 5,250 to 467,500, maintaining a healthier trajectory.
The week ended with the Bank of Japan’s policy meeting. The board voted unanimously to leave its policy rate unchanged at 0.1%, as it studies the effects of a measure announced earlier this month to try to lift demand. One must note that the BOJ offered up to 10 trillion yen ($111.2 billion) in short-term funds to the market. The policy board also said in a statement that it decided to “further disseminate” the BOJ’s thinking on price stability, and made it clear that the board won’t tolerate on-year falls in the consumer price index.
Forex
Dollar strength continued last week pushing the index to higher ground. The dollar index pushed to a high of 78 points, the highest level the index had seen since the beginning of September. On individual pairs, the pound was pushed lower, after an unexpected drop in U.K. November retail sales raised new doubts regarding the U.K’s economic recovery. The Office for National Statistics reported that retail sales fell by 0.3% in November from October, the first month-on-month decline in over six months. On a positive note, UK jobless claims slipped -6.5K (12.5k expected) and average earnings including bonuses were higher than expected at 1.5% (vs. 1.2% expected). From a technical point of view the pound is closing in on its 200 day moving average at $1.60, currently trading above horizontal support. A break below these two important levels could see further selling towards support located around at $1.58.
On the other side of the globe the Australian dollar hit its lowest level since late Nov after Australian GDP came in lower than expected and the RBA stated that its policy is now in the normal range. Furthermore, the Australian economy grew at a slower than expected 0.2% q/q pace in Q3 (0.4% expected) vs. 0.6% in Q2. The GDP report revealed that consumer and government spending are still fueling growth, while exports are still declining. The less hawkish outlook may have triggered profit taking. Thursday’s break of support could lead to further selling pressure, should the Dollar continue to gain strength.
The Week Ahead
This week’s trading week should be light on volume ahead of the holidays. Despite that fact one must remain cautious as low priority events this week could take the markets for a spin. Those who are not taking a break this week will be watching the Japanese All Industrial Activity and Canadian Retail Sales on Monday. On Tuesday UK GDP leads off, and is expected to show a -0.1% q/q contraction compared to an initial forecast for a -0.3% figure. Even though the economy is experiencing major problems, economists are now speculating that the U.k economy is slowly crawling out of its dire straits. US GDP will follow and is estimated to come in at 2.8% q/q. In addition Existing Home Sales will grab some attention, especially as the housing sector is still weighing on the U.S economy. On Wednesday EMU New Orders is up first and then US Personal consumption and Spending will follow. Towards the end of the week US Durable Goods will take the stage and is expected to show a positive 0.4% q/q.
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