Weekly wrap: Misery loves company – eurozone recession deepens and Japan fails to recover
The markets’ strong start to the year lost ground as investors digested news that the eurozone economy shrank by 0.6% quarter-on-quarter (q-o-q) in Q4; the weakest quarter in almost four years. Data from the German Statistics Office showed that Germany contracted by 0.6% (q-o-q), mainly owing to a significant fall in exports, while France reported negative growth of 0.3% over the same period. UK annual consumer price inflation for January remained unchanged for a fourth month in a row at 2.7%, with upward price pressure originating from increases in alcohol and air fares. Meanwhile, January British retail sales disappointed, with a 0.6% month-on-month (m-o-m) fall in sales volumes, largely owing to the bad weather – economists had predicted a 0.4% m-o-m rise. In the bond markets, Spanish and Italian 10-year government bond yields ended the week lower (prices rose), reflecting increasing stability in peripheral European bond markets. The price of key commodities such as gold and oil also weakened.
President Obama’s State of the Union address revealed more detail on his policy agenda. He pledged to revive the economy, support the middle class, reform taxes and called on Congress to raise the federal minimum wage and approve US$50bn in infrastructure projects. He remains committed to reducing the budget deficit, but cautioned that spending cuts and tax increases must be "balanced". January US retail sales were in line with market estimates, up 0.1% m-o-m according to the Department of Commerce. Another positive release was the Department of Labor’s initial unemployment claims report, which saw the number of claims falling to 341,000 in the week ending 9 February, a fall of 27,000 from the previous week. Elsewhere, Japan’s economy contracted by 0.1% (q-o-q) in Q4 2012, dashing hopes for a mild recovery, while the Group of Seven industrialised nations (G7) brought up the issue of Japan’s monetary policy, which is seen by some as a deliberate move to weaken the yen, causing the currency to appreciate later in the week.
A blast of euro area economic indicators should keep the markets busy
Key releases in Europe include the eurozone and Germany ZEW economic sentiment surveys as well as Germany Ifo business climate and current conditions surveys for February; analysts are expecting higher readings given improving business confidence last month and improving order books. The European Commission consumer confidence index is also forecast to rise from -23.9 a month ago to -23.2 in February, in line with a slower fall in personal consumption over the first quarter of the year. Initial estimates for manufacturing and services sector PMI (purchasing managers’ index) for the euro area, France and Germany are out on Thursday. In the UK, Wednesday brings the release of the Bank of England’s Monetary Policy Committee meeting minutes as well as the three-month ILO unemployment rate for the December period; the consensus is for no change to the 7.7% registered previously.
The focus for US investors will be the publication of the FOMC’s (Federal Open Market Committee) latest meeting minutes on Wednesday, which will probably reveal a split in decision on asset purchases. Investors will also be looking out for further signs of stabilisation in the housing market with the NAHB housing index out on Tuesday while the following day sees the release of January housing starts, which may fall to 924,000 following a strong rise in December of 954,000. Still on the housing front, sales of existing homes may have fallen slightly from 4.94m in December to 4.90m owing to limited supply. Meanwhile, the market consensus is for a slight rise of 0.1% m-o-m in headline CPI (consumer price index) inflation for January (December- flat), continuing the trend of slower price rises.