The global markets jumped higher last 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 now dealing with its 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 Nasdaq also hit a 52 week high, settling up 88 points or 3.9%.
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 helped lift the FTSE and the US indices to higher levels.
Over in the U.S, 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 were expecting a 0.4% increase in income and a 0.4% increase in spending for January. Income has increased 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.
On the housing side, 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.
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 was 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. One must note the ADP survey tallies only private-sector jobs, while the Bureau of Labor Statistics’ nonfarm payroll data includes 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 to especially severe February weather in that region,” the report said. February’s severe winter weather is expected to hurt several sectors of the economy.
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. Trichet commented on the situation and stated that the ECB will continue to conduct its weekly refinancing operations as fixed-rate tenders with full allotment for a long as needed, and at least until Oct.12. Inflation was fairly subdued; therefore the bank had no problems commenting on its “helping” policy.
Over in the U.K, BOE policy makers 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. 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.
On Friday, the US Labor Department reported that the U.S. economy slashed 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 50,000 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 were expecting the jobless rate to edge higher to 9.8%.
Forex
The RBA pursued its rate normalization process and hiked interest rates by another 25 basis points (to 4%, bringing the cumulative tightening of monetary policy to 100basis points). According to our analysis, the RBA is probably not done yet on the rate hike front, but the central bank will remain cautious in its policy actions. 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’.
The Australian Q409 GDP data 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%.
From a technical point of view, the AUD increased during the week and is expected to test its prior highs. When observing the fundamentals, one can see that the medium-term bullish outlook is intact: higher commodity prices, higher rates and an improving growth environment are all 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 economy is in the cusp of feeling the impact of potential central bank tightening, which should push the Canadian dollar to support.
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