Weekly wrap: US GDP suffers a surprise fall

In the main, key global equity markets ended the week higher with the Nikkei enjoying its best run since 1959 while core government bond yields continued to rise. Confounding most economists' predictions, the US economy contracted by an annualised rate of 0.1% in the fourth quarter of 2012 as ‘fiscal cliff’ worries weighed on investor sentiment. However, real consumer spending, which contributes more than two-thirds of US economic activity, rose from 1.6% in the previous quarter to 2.2%, helped by a slower rate of inflation. The Institute for Supply Management’s January manufacturing index rose from 50.2 to 53.1, beating expectations. US non-farm payrolls added a less than expected 157,000 jobs in January although the number of new jobs for the year was revised up significantly (by 127,000) for November and December. The unemployment rate rose from 7.8% to 7.9% in January.
 

In the eurozone, the European Commission's Economic Sentiment indicator rose from 87.8 in December to 89.2 in January as a growing consensus believes that the worst of the region’s crisis is over. Germany's January unemployment figure came in at 6.8%, marking a 20-year low and demonstrating a resilient labour market despite the sharp fall in gross domestic product (GDP) growth at the end of 2012. Eurozone manufacturing hit an 11-month high as the monthly Markit Purchasing Managers' Composite Index (PMI) rose from 45.7 to 47.9 in January. Meanwhile, activity in the UK's manufacturing sector continued to expand although at a slightly slower rate. The Markit PMI fell slightly from 51.4 to 50.8, as factories ran down inventories and worked through existing order backlogs. Euro area inflation dropped from 2.2% to 2.0% in January; its lowest level in more than two years.
 

In China, the final HSBC/Markit PMI for January soared to 52.3 from 51.5 in December, remaining firmly in expansionary territory; the underlying trend appears to be a steady recovery.

A quiet week in the US while central bank meetings are unlikely to result in any change of policy

It's a quiet week ahead for the US, with investors focusing on factory order revisions to the durable goods report last week, ISM non-manufacturing, and the trade balance report. Monday's factory orders are expected to rise 2.0% month-on-month (m-o-m) in December after a flat November. Consensus forecasts expect ISM non-manufacturing to come in flat at 55.0 on Tuesday with risks to the downside due to payroll tax increases. Meanwhile, Friday may reveal that the US trade balance has narrowed as exports recover and imports remain sluggish.
 

Meetings for the European Central Bank and the Bank of England this week are expected to leave policy unchanged. Tuesday sees the release of eurozone services PMI, which is likely to highlight the divergence between France and Germany. Meanwhile, UK services PMI may show some recovery in services output. On Wednesday, German factory orders for December may reveal a moderate increase of 0.7% m-o-m after the surprise 1.8% contraction in November. Spanish and German industrial production is released on Thursday. Consensus forecasts suggest a contraction of 6.3% for Spain owing to the 3% VAT increase in September while Germany should see a recovery due to improving financial conditions and returning confidence in Europe.
 

In Asia, China’s consumer price inflation is expected to accelerate m-o-m due to seasonal increases in demand ahead of the Chinese New Year.