The prospect of the end to U.S. interest rate increases charmed the equity markets while at the same time sinking the dollar. Clearly, currency traders did not like the prospect of narrowing spreads between the U.S. and other countries such as the EMU and Canada that are interested in continuing interest rate increases. On Tuesday the Federal Reserve released the minutes of its December meeting when they signaled an approaching end to seemingly automatic 25-basis-point rate increases that have marked the last 13 meetings. Now that monetary policy is no longer on autopilot, economic data will be even more important in determining their decisions. But after a couple of days of heady gains, investors appeared to become cautious ahead of the Friday's U.S. employment situation report for December. Even though the report was weaker than analysts expected, hefty revisions to the November data mollified investors. On the week, all equity indexes followed here were up sharply while the dollar was down against most currencies including the yen, euro and the pound sterling.
Global Stock Market Recap
Europe and the UK
Stocks in Europe and the UK continued their winning ways into 2006. In London, energy stocks were up after crude oil prices climbed for the sixth time in seven sessions. BP advanced as oil rose above $63 a barrel. And in Europe, technology stocks were up in expectation of higher profits thanks to increased spending. Stocks such as Royal Philips Electronics NV, Europe's largest maker of consumer electronics, gained as an industry report predicted surging flat-screen television sales this year. The FTSE was up 2 percent while the DAX climbed 2.4 percent and the CAC jumped by 3.2 percent.
The biggest overhaul of the FTSE classification system in six years took effect on Tuesday. Many UK companies were switched to new sectors in an effort to classify them more accurately, and some sector names were changed. For example, house builders have been switched from construction and building materials to household goods, partly because they are felt to be more consumer-orientated than in the past. Similarly, airlines and bus stocks have been moved from transport to travel and leisure. The move is part of a broader shake-up in which all FTSE indexes worldwide have adopted the industry classification benchmark. A number of stock exchanges and data vendors have also adopted it. The ICB, which replaces the FTSE global classification system, was jointly developed by FTSE and Dow Jones, a rare collaboration between two rivals.
Asia/Pacific
Asian and Pacific stocks followed here continued to surge into the first week of 2006 on a positive profit outlook. The Nikkei, which ended the week at a five-year high, gained 2 percent while the Topix was up 2.1 percent despite the holiday-shortened week. The improved performance in the banking sector has been a strong plus for the Topix. And a positive performance by blue chips and technology-related stocks helped boost the indexes. Government forecasts continue to point to solid growth and to an end of deflation, strengthening investor confidence.
South Korea's Kospi - 2005's best performer - jumped 2.4 percent last week and to a new record, matching a 10-week winning stretch that ended in May 1999. Prices for memory chips elevated Samsung which helped to push the index higher. Chip prices have been increasing and with those increases, the stock prices of major manufacturers.
Currencies
The unexpected strength of the U.S. dollar was one of the big surprises in the 2005 financial markets. The currency enjoyed its best year against the euro and yen since 1999 and 1979 respectively. However, analysts believe that the gains were only a pause in the dollar's decline and the currency's descent will continue in 2006. If the first week of the month offers a clue to future behavior, analysts could be right. The dollar was down against both the yen and euro and most other major currencies after the Federal Reserve minutes released on Tuesday signaled that the end could be near for the interest rate increases that have dominated U.S. monetary policy.
Analysts think that two of the factors that helped the dollar to increase last year will fade in 2006. First, the Homeland Investment Act, a one-year tax break designed to encourage U.S. multinationals to repatriate overseas holdings, has already expired for most companies and will expire for the remainder in three months' time. And second, widening interest rate differentials between the U.S. and other countries might soon come to a halt. While the Fed raised rates eight times in 2005 to 4.25 percent, the ECB managed only one increase and Japan none. And in the UK, interest rates were lowered to 4.5 percent. This narrowed the spread to a mere 25 basis points as 2005 ended.
Indicator scoreboard
EMU - December manufacturing purchasing managers survey climbed to 53.6 from 52.8 in November. The PMIs improved in Germany, France, Italy and Spain. Output prices index remained unchanged at 51.4 while input prices eased to 62.2 from 62.6 in November. Manufacturing output and new orders performance also improved. An index reading over 50 signifies growth while one below 50 signifies contraction.
December services purchasing managers survey climbed to 56.8 from 55.2 in the previous month. The major contributors to the increase were improved orders and hiring. All major countries improved.
December flash harmonized index of consumer prices was up 2.2 percent when compared with last year. Although down from November's reading of 2.2 percent, the HICP remains above the ECB's 2 percent inflation target.
November real, workday and seasonally adjusted retail sales edged downward by 0.1 percent but managed a positive 0.1 percent gain when compared with last year. Sales were down in Germany on the month but were up in France and Spain. The data could undergo a somewhat larger-than-usual revision, given that the recent holidays may mean available data are less complete than normal.
November industrial producer price index excluding construction declined 0.2 percent but jumped by 4.2 percent when compared with the same month a year ago. The monthly decline was due to dropping energy prices, which were down 1.6 percent after soaring 1.8 percent in the previous month. Core PPI excluding construction and energy was up 0.1 percent and 1.4 percent on the year.
November unemployment rate remained at 8.3 percent for the third month. This is the lowest rate since May 2002, when 8.2 percent of the euro area's working-age population was without a job. The good news was concentrated in the services sector, but the manufacturing workforce also grew in December, for the first time since May 2001. The jobless rate in the majority of Member States was down or unchanged, with the notable exception of Germany, which was up. But German data need to be treated with some caution due to statistical inaccuracies in the new series, which Eurostat tries to smooth using its own internal adjustment procedure when calculating the eurozone's average.
EU - December economic sentiment index climbed to 100.5 from 99.9 in November. Although economic sentiment improved at the aggregate level, half of all Member States recorded a loss in confidence, while the other half improved or stayed the same. Industrial sentiment improved to a reading of minus 5 from minus 7 in November. Consumer sentiment also improved climbing from minus 13 in November to minus 11 in December. Retail sentiment was up to minus 4 from minus 6 in November. Services sentiment edged downward to plus 13 from plus 14 in the previous month while construction sentiment declined from minus 3 in November to minus 5 in December.
Germany - December seasonally adjusted unemployment dropped by 110,000, helped by fewer layoffs in construction due to favorable weather conditions. The unemployment rate was 11.2 percent, down from 11.4 percent in November. The unemployment rate in the east was 17.6 percent while in the west it was 9.5 percent, down from 18 percent and 9.7 percent respectively. November seasonally adjusted employment was up by 15,000 after declining by 4,000 in the previous month.
November real seasonally adjusted manufacturing orders were up 1.7 percent and 13.5 percent when compared with last year. Above average bulk orders once again contributed to the strong performance. Domestic orders were up 1.1 percent and 7.2 percent on the year. Foreign orders were up 2.3 percent and have soared 20.5 percent on the year. Orders for producer goods and capital goods were up 1.6 percent while consumer durables were up 1.9 percent on the month.
November industrial production was down 0.4 percent and up 5.1 percent when compared with last year. Manufacturing output dropped 0.5 percent. Consumer goods sank 2.1 percent but were up 2 percent on the year. Energy production was up 0.9 percent on the month but was down 1.4 percent on the year. Producer goods and capital goods edged upward 0.1 percent and were up 5.3 percent and 8.6 percent respectively on the year.
November retail sales including autos and gasoline stations were unchanged on the month and down 0.6 percent when compared with last year. Excluding autos and gasoline states, retail sales were down 1 percent. Food, beverage and tobacco sales were down 1.4 percent while non-food sales were unchanged on the month. Increases in clothing and drug sales were offset by declines in household goods and other.
France - Third quarter final gross domestic product was up 0.7 percent and 1.8 percent when compared with last year. Consumer spending was up 0.7 percent while exports picked up 3 percent and imports were up 2.2 percent. Business fixed capital investment was up 1.8 percent after declining 0.8 percent in the second quarter.
Americas
Canada - November industrial product price index was down 0.6 percent and up 2.9 percent from a year ago. Prices declined for petroleum products and lumber. November's drop was the first since July and the steepest since a 1.9 percent decline in November 2004. Petroleum and coal products prices dropped 8.7 percent, the biggest decrease since May 2003. If this category were excluded, industrial prices would have been up by 0.3 percent. Prices for lumber and other wood products fell 2 percent. This was a result of lower prices for particleboard and softwood type plywood.
November raw materials price index was down 1.7 percent and up 12.1 percent when compared with last year. The price of mineral fuels fell 5 percent while crude oil prices sank 5.8 percent. Excluding mineral fuels, raw materials prices were 2.2 percent higher on the month and 5.2 percent on the year.
December employment was down by 2,100 jobs, all part time. Full time jobs were up 35,700 but part time jobs dropped by 37,800 - all in the private sector. The unemployment rate edged up to 6.5 percent from 6.4 percent in November. Private sector employment fell 30,900 but was up 26,100 in the public sector. The number of self-employed rose 2,700. The participation rate, which is the proportion of the population that is in the labor force, inched up to 67.1 percent from 67.0 percent in November. The employment rate fell to 62.7 percent from 62.8 percent. Statistics Canada said the biggest layoffs occurred in the other services category, which lost 31,800 workers. The manufacturing sector lost 1,200 workers after a 6,800 gain in November. The biggest employment gains last month were in finance, insurance, real estate and leasing, which added 23,100 workers, followed by professional, scientific and technical services, where 21,000 jobs were created.
Bottom line
Attention shifts to the European Central Bank and the Bank of England, both of which will be meeting this week. The ECB, despite its focus on inflation, failed to hit its target for the sixth year running in 2005. The ECB defines price stability as an inflation rate below but close to 2 percent. It is currently running about 2.2 percent when compared with last year. Eurozone inflation is expected by analysts to fall within that definition later this year. At the same time, the stronger economy will encourage the ECB to continue raising rates in coming months according to analysts, although no action is expected at the January 12th meeting. At its December meeting the ECB lifted its main interest rate by 25 basis points to 2.25 percent for its first increase in five years.
Although pressure is mounting on the Bank of England Monetary Policy Committee to consider a cut in interest rates when it meets on Wednesday and Thursday, no change in the Bank's 4.5 percent key interest rate is expected. While consumers cut back on credit card spending in the run up to Christmas, approvals for home loans hit their highest in 18 months, evidence that the housing market remains resilient.
Equities vault into 2006
