Global Markets

The rally in equities began on the last day of 2012 on optimism a deal would be reached to avert the fiscal cliff. Gains continued on Wednesday — the first trading day of 2013 — after Congress actually approved a compromise on tax rates. Investors then turned their focus to upcoming battles in Congress, including the likelihood of bitter struggles over spending cuts and the raising of the federal debt ceiling. Equities were dampened after minutes from the latest Federal Reserve meeting showed growing concern by FOMC members about the risks of its highly stimulative monetary policy. However, all of the indexes followed here advanced in the holiday shortened week.

Purchasing managers surveys

Eurozone manufacturing sank deeper into recession in December as new orders tumbled. It was a sharp contrast to continuing signs of revival in China and the United States. Markit's Eurozone Manufacturing PMI edged down to 46.1 in December from November's 46.2 and below a flash reading of 46.3. It has been below the 50 mark that divides growth from contraction since August 2011. Germany saw its crucial manufacturing sector shrink for the 10^th straight month and at a faster pace, while French data showed a decline in all but one of the past 17 months. The slump in Spain deepened. While Italy's index improved, it remained below 50 for the 17^th month. Ireland was the only member of the currency union to show manufacturing growth in December. The UK manufacturing sector managed to grow in December.

In Asia as a whole manufacturing activity expanded, driven by revival in China's economy, but export demand was uneven, pointing to further sluggish growth for the region. Factory activity in India expanded at its strongest pace in six months in December, boosted by output and a jump in new orders. The official China manufacturing PMI held steady in December at 50.6, matching November's seven month high. A similar survey by HSBC/Markit released a day earlier suggested activity was at its strongest since May 2011.

Global Stock Market Recap

Europe and the UK

The European markets overcame their early weakness on Friday and ended the session and the week in positive territory. The initial weakness was caused by indications that the Federal Reserve would probably end their $85 billion monthly bond purchase program before year end. However, the markets recovered in the afternoon following the U.S. December employment report which was in line with expectations. The report showed that non-farm payroll employment increased by 155,000 jobs following an upwardly revised increase of 161,000 jobs in November. The FTSE was up 2.8 percent on the week while the CAC advanced 3.0 percent and the DAX, 2.2 percent. The SMI jumped 3.5 percent.

Relief over the U.S. budget deal outweighed disappointing Eurozone manufacturing data for December, which showed activity in the region continued to shrink. It was a cheerier picture for the UK, however, where the manufacturing PMI reading was 51.4, against expectations for a reading of 49.2. Despite the upbeat tone, market participants remained skeptical about the longer term implications of the U.S. budget bill.

According to the minutes of the Fed Reserve's most recent policy meeting, voting members were concerned about the Fed's ballooning balance sheet. However, the Fed continued to believe that its asset purchase plan should remain in place for at least the next few months. Some members of the Federal Open Market Committee (FOMC) thought asset buying would be warranted through most of 2013. However, a smaller number thought that the Fed should be able to end the program well before December.

The Eurozone downturn eased at the end of the 2012 as rates of contraction in economic output and new business slowed, according to final composite data from Markit Economics. The composite output index rose to 47.2 from 46.5 in November but stayed below the 50 breakeven mark for the 11th successive month. The services PMI climbed to a five month high of 47.8 in December from 46.7 in November.

Asia Pacific

Even though equities declined broadly on Friday, the major indexes were up in the holiday shortened week. Gains ranged from 0.7 percent (KLCI and Kospi) to 2.9 percent (Hang Seng). The Nikkei, which traded for only one day during the week, was up 2.8 percent. Friday’s weakness (in all but Japan) was attributed to speculation the U.S. Federal Reserve may end its $85 billion monthly bond buying program earlier than expected. Caution before the U.S. employment report which would be released after markets here were closed for the week also provided a damper.

Japanese equities began 2013 trading on Friday following a four day holiday. The Nikkei jumped to a 22 month high as stocks played catch-up with a two day global rally in the wake of the last minute U.S. budget deal. The Nikkei soared 2.8 percent to its highest closing level since March 4, 2011 as the market got its first chance to react to the U.S. budget resolution, while other markets pulled back after the U.S. Federal Open Market Committee minutes suggested that its stimulus efforts could be withdrawn quicker than expected. Exporters led the advance after the yen dropped to its lowest level against the dollar since July 2010. The yen also weakened against the euro on expectations of further monetary easing by the Bank of Japan.

The Nikkei jumped 22.9 percent last year, accelerating from November 14^th when the government said it would call elections in December. The pro-stimulus Liberal Democratic Party won the general election, pledging to do more to fight deflation and spur the economy. The yen’s weakness has bolstered the nation’s exporters amid speculation new Prime Minister Shinzo Abe will push the central bank to buy more bonds.

Currencies

The dollar was up against the euro, pound sterling, Swiss franc and yen on the week but was lower against the Canadian and Australian dollars. The U.S. currency climbed to the highest level against the yen since July 2010 as the Japanese currency recorded its longest weekly losing streak in almost 24 years. The yen declined for an eighth week against the dollar — the longest losing streak since February 1989. Even so, it is still stronger than its 10-year average of 101.22 yen per dollar.

Japan’s newly installed Prime Minister Shinzo Abe said that the most urgent issue for his country was to break out of currency appreciation and deflation. During the worst days of the European sovereign debt crisis, investors fled to the safety of the yen and in the process sent the currency upward in value against its major counterparts. “Bold” monetary policy is one of the three prongs of his economic measures, he said. The Bank of Japan will hold its first 2013 policy meeting January 21^st and 22^nd after expanding its asset purchase program by ¥10 trillion at its monetary policy board meeting on December 20^th.

Selected currencies — weekly results

Indicator scoreboard

EMU

November M3 money supply was up 3.8 percent from a year ago. The ECB’s preferred 3 month moving average measure accelerated from 3.1 percent to 3.4 percent. The key private sector lending counterpart showed no change with a 12-month decline of 0.8 percent matching October's slightly steeper revised decline. Both overall borrowing by households (down 0.4 percent) and lending for house purchase (down 1.2 percent) were similarly steady. Borrowing by non-financial corporations was off 1.8 percent on the year, also in line with its start of quarter drop, while loans to non-monetary financial intermediaries (excluding insurance corporations and pension funds) was down 1.8 percent from November 2011 after a 2.2 percent annual decline last time.

December flash harmonized index of consumer prices was up 2.2 percent. Headline prices were held in check by a further softening in the energy sector where prices were up 5.2 percent on the year or 0.5 percentage points less than in mid quarter. Non-energy manufacturing products were running at a 1.1 percent annual rate for the third month in succession but services picked up 0.2 percentage points to 1.8 percent, their fastest pace since August. There was also some limited upward pressure from food, alcohol and tobacco where inflation reversed November's decline to stand at 3.1 percent. Final data including the key core rates will be available on January 16th.

Germany

December unemployment was down just 3,000 on the month after an unrevised 5,000 decline in November. The number of people out of work now stands at 2.942 million. The jobless rate held steady at 6.9 percent, its third consecutive month at this level, while vacancies were off 4,000 after a 3,000 drop last time. The December data followed a 10,000 increase in employment in November, its first increase since August.

November retail sales were up 1.2 percent following October’s revised decline of 1.3 percent. On the year, retail sales were down 1.0 percent. November's rebound was only the second monthly increase in five months and just the third since April and left the level of sales still below where it was in June. Moreover, with the retail PMI (47.6) hitting an 8-month low the year looks likely to have finished on a soft note.

Americas

Canada

December employment was up 39,800 while the unemployment rate edged down to 7.1 percent. Jobs growth was concentrated in full time positions which were up 41,200. Part time employment slipped 1,400. Moreover, private payrolls were up 59,400 while the public sector added just 3,200 new positions. However, self-employment declined 22,800. December employment growth was split between the goods producing sector (15,200) and services (24,500). Within the former manufacturing grew 9,300 and construction 17,800. There was also a modest rise in agriculture (5,400) and combined these gains easily offset declines in natural resources (13,900) and utilities (3,400). Services were propelled higher by solid increases in transportation and warehousing (21,500), trade (13,900) and health care and social assistance (17,200). Most other areas saw small advances although there was a notable drop in professional, scientific & technical services (41,500) as well as a smaller decline in public administration (12,600).

Bottom line

Investors focused on the budget negotiations in the U.S. as the old year wound down. They staged a relief rally when an agreement on taxes was reached. However, no agreement was reached on spending cuts and the debt ceiling. The negotiations will continue.

The Bank of England and the European Central Bank will meet Thursday. No policy change is anticipated from either Bank. New economic data revolves around international trade and industrial production for the most part.

Looking Ahead: January 7 through January 11, 2012

Anne D Picker is the author of International Economic Indicators and Central Banks.