The economic news emanating from the US towards the tail end of last week was enough to keep market sentiment firmly in positive territory. The latest regional manufacturing index was published on Thursday for Philadelphia and that came in ahead of expectations at 24.3 after the previous monthly reading of 22.5 and consensus expectations of a dip to 16.0. The equivalent index for New York State was also firmly in positive territory when it was published earlier last week and all of the regional reports so far indicate that the US manufacturing sector has recovered from the soft spot earlier in the year and the momentum is still being maintained.


The US initial weekly jobless claims data is also indicating that the trend in unemployment is still showing signs of improvement. The latest number of 420,000 was bang in line with consensus expectations and follows on from the 421,000 last week. Not so long ago this number was drifting around the 500,000 mark, but realistically for the unemployment rate to fall in the US this number has to be south of 400,000.

With the holiday period almost upon us the market has already moved into its usual end of year subdued mode and we are unlikely to see much volatility over the next couple of weeks, and there is every possibility it will tick higher on low volumes if history is anything to go by. We do have a few data announcements this week. The main event in the US will be on Wednesday with the final estimate for Q3 GDP due for publication. The last estimate was +2.5% annualised and the market is looking for this number to be revised up to around +3%. The run rate for Q4 according to most forecasters is closer to +3.5% at present giving the US a better end to the year. Estimates for 2011 currently sit around the +3% mark.

Existing home sales data for November is due for publication in the US and is expected to show some improvement on the October level. Estimates are for 4.7m annualised compared to the last reported level of 4.4m. One key element of the US economic recovery will be an improvement in the US housing market which is some way off but we are least seeing some improvement on the very depressed levels of activity.

Thursday in the US brings durable goods orders for November with the consensus expecting a modest drop of -1.0% which is likely to be due to weak transportation orders. The initial weekly jobless claims are expected to remain static at 420,000 when they are published on Thursday. To round the week off the University of Michigan Consumer Sentiment data for December is due for announcement and is expected to show a modest improvement to 75 from the previous reported level in December of 74.0. The rise in the equity market is likely to play a big part in the improved sentiment.

In Europe today we have had the German Producer Price Index for November which rose +0.2% month on month which was a little lower than expectations. UK mortgage approvals announced today for November declined to 45k from the October level of 47k. There is no doubt that we are seeing weakness in the UK housing market and a decline in UK house prices during 2011 looks likely.

The CBI has published their forecast for 2011 UK growth this morning which they now estimate will be 2% followed by 2.4% in 2012. The main headline grabber from this announcement was their forecast for UK interest rates which they expect to start rising from the spring of next year and to reach 2.75% by Q4 2012. This is based on their estimate for UK inflation being significantly above the Bank of England’s 2% target during 2011. In our view it would be surprising to see the Bank of England raise rates so early next year given the fiscal tightening that 2011 will bring combined with the government job cuts. The MPC forecasts already allow for inflation to stay well above their target rate next year and it would take a significant spike in inflation to change interest rate policy so soon.

The only notable announcements due out tomorrow in Europe and the UK are the GfK Consumer Confidence surveys but neither will be market moving events. Wednesday brings the minutes of the latest Bank of England MPC meeting with a three way split expected again. The final estimate for Q3 UK GDP is also due out on Wednesday and is expected to be unrevised at +0.8% quarter on quarter.

With little in the way of market moving announcements due out over the next two weeks the Daily Comments will be issued if there is a notable event. Otherwise normal service will resume on the 4th January.

The market rally continues despite the rumbling in the background of the European debt crisis and in particular concerns over Spain. This story will gain more ground in the New Year with Spain facing the prospect of raising up to 170bn Euros next year from the markets according to Moody’s. In addition Spanish banks have around 90bn Euros of debt to refinance next year. With Moody’s threatening the prospect of a Spanish debt downgrade after placing their debt rating under review this story has some way to go. An EU summit today to discuss how future problems will be addressed from 2013 onwards is likely to keep the sovereign debt crisis firmly in the headlines for the rest of this week.


In the UK yesterday the unemployment data provided signs that the recent improvement in the unemployment trend may well be reversing and this is before the significant cuts come in the public sector workforce next year. According to the ONS unemployment in the 3 months to October increased by 35,000 to 2.5 million. The majority of the increase was due to cuts in the public sector work force which appears to have already begun. On a more positive note the claimant count measure of unemployment did fall during November but only by 1,200 following on from a 5,200 fall during October.

This morning in Europe we have had the December Purchasing Managers Index for manufacturing and services. The former increased to 56.8 from the previous reported level of 55.3 but the service index declined to 53.7 from 55.4. This was in part due to a slowdown in Germany where the PMI Service index fell to 58.3 from the previous reported level of 59.2. Overall most of the recent data points to a slowdown in GDP momentum within Europe which is not unexpected given the weakness among the peripheral countries, especially as the austerity measures start to bite. The coming 12 months will be another of sub trend growth.

UK retail sales for November published this morning were weaker than expected at +0.3% month on month compared to expectations of +0.5% and the upwardly revised October figure of +0.7%. December may well enjoy better than expected sales as consumers bring forward purchases in advance of the VAT hike in January.

In the US yesterday most of the data was either in line or a little better than expectations. The Empire State Manufacturing index which gives a gauge of manufacturing activity within New York State rose back into positive territory at +10.6 for December after the -11.1 reported for November. If anything this does demonstrate that the regional reports can be quite variable and you cannot read too much into one bad month. Industrial Production for November increased by +0.4% month on month during November which was bang in line with estimates. Inflation for November was a little less than expected with a +0.1% month on month increase in the Consumer Price Index leaving the year on year rate at +1.1%. If you strip out the impact of food and energy the year on year rate stands at just +0.7% leaving little in the way of inflationary pressures within the US economy at present.

Today in the US housing starts for November are due for publication. The consensus is looking for an increase to 550,000 on an annualised basis from the last reported level of 519,000. Given the poor state of the US housing market expectations are set firmly in negative territory and so a poor number is unlikely to upset the market at this time.

The weekly initial jobless claims provide the most up to date evidence of what is happening with the US labour market. The last reading came in at 421,000 and the consensus is looking for a similar number this week. Finally today we have the next regional manufacturing report, this time for Philadelphia. The November reading jumped to +22.5 from the October number of +1.0 and for December the consensus is looking for a number of around +16.0.

World equity markets have started the week firmly in positive mode. This is partially due to relief that the People’s Bank of China chose not to raise their interest rate over the weekend to follow on from the announced increased in the banks reserve requirement. With inflation getting ever stronger in China a tighter monetary policy seems inevitable with some commentators suggesting that a failure to act now will require significantly higher interest rates in the future.


In the US analysts are pleased that Congress is likely to pass a more favourable tax package before the yearend giving the US economy yet another injection of additional stimulus measures. The extension of the Bush tax cuts combined with a 2% payroll tax holiday in 2011 and a 3 month extension of the Federal unemployment benefits should provide a useful boost to household income during 2011. However, It must be borne in mind that the fact that the economy needs these measures in the first place when we are the best part of two years into the recovery phase suggests that the underlying picture remains very difficult indeed. However, for the time being anyway the market will accept any new measures that at least help to maintain the momentum even if growth is likely to remain at sub trend levels for the foreseeable future. The size of the US budget deficit rarely gets mentioned with the focus still very much on stimulus measures to keep growth going and these latest announcement could add a further $200bn to the deficit according to some estimates. At some point the US budget deficit will need to be addressed as we have seen across Europe and this may well be something that the market becomes concerned with as we move through 2011.

On Friday in the US the University of Michigan consumer sentiment index rose to 74.2 from the previous reported level of 71.6. The consensus was expecting a modest improvement to 72.0. The fact that sentiment has improved is welcome news although this probably a good deal to do with the rally in equity markets during recent weeks. This index during more normalised economic recovery conditions would be registering around the 90 level and at present it is still at a level more consistent with recession.

In the UK today the latest Rightmove House Price Index has been published and this fell -3.0% month on month following on from the previous monthly decline of -3.2%. These are significant falls and it remains to be seen whether this is a broadly based picture of what is happening in the UK housing market. The latest Halifax house price index fell by a more modest -0.1% month on month. The overall picture varies according to each data series but they do have one thing in common and that is that UK house prices at present are falling.

In the US today there is no major economic news and we look to tomorrow for the first major announcement of the week. The Producer Price Index for November is due for announcement tomorrow. Expectations are for a 0.7% month on month increase with input prices boosted by an increase in gasoline and food prices. Retail sales for November are also due out tomorrow and expectations are for a +0.7% month on month increase.

Another quiet day of trading ahead with little in the way of economic news to drive the market either way. The only economic news that could move the market this afternoon is the next reading of the University of Michigan Consumer Sentiment index for December. The final November index reading came in at 71.6 and the consensus is looking for a modest improvement to 72.0. Given the latest poor unemployment data which can have a big bearing on the sentiment indices, this number could go either way this afternoon.


In the UK today the main economic news is the Producer Price Index for November which rose by +0.3% month on month. This is basically a measure of inflation for UK manufactured goods and the annual inflation rate fell modestly to +3.9% from +4.0% with the decline due to a slight fall in the rate of petroleum price inflation. This particular measure of inflation is expected to remain at this elevated level for some time to come due to higher input costs. Given that this will feed through to final inflation we can expect the CPI to remain at elevated levels for many months to come.

In Europe, German wholesale price data for November has been published today and this rose by a strong +0.7% month on month leaving the annual rate a shade higher at +7.8%. This to a large extent reflects the recent increase in food and metal prices.

The People’s Bank of China has increased its reserve requirement once again to keep inflationary pressure under control after the most recent data for lending was above estimates. More measures will almost certainly be needed over the coming months to fight inflation and another hike in their interest rate is likely to come early next year.

The economic calendar is very quiet this week and there is not much for markets to chew on. After the dismal employment report in the US on Friday we would have expected a negative market reaction but in fact the response was quite muted. Whether it is a case of a poor report reinforces views of more stimulus measures in the future is hard to say. What is clear at present is that the market is focusing more on policy measures that are happening or might happen than the actual data. Ben Bernanke mentioned over the weekend that QE3 was not out of the question if it is needed. Today we have news that Obama has agreed to an extension of the tax cuts from the Bush era and it now seems likely that the emergency jobless benefits paid to 2 million people in the US will also be extended. There is certainly good reason to be very cautious with this market at present. As we move into the final weeks of the year there is every chance that it will rally a little further as volumes drop off but the start of 2011 could well test investor nerves with a very rocky path ahead.


In the UK today we get the NIESR estimate for November GDP whilst the Halifax publishes their November house price index.UK Industrial and manufacturing data for October is also due for publication and both are expected to show a +0.3% month on month increase. In Europe the only data of note that is due for publication is German factory orders for October.

In the US the only data due for publication is consumer credit for October.

The market at present is living off rescue announcements in one shape or form. The decision by the ECB to prolong their liquidity programme to support the region’s banks helped the rally in world markets yesterday. In addition the ECB has been aggressively buying peripheral euro zone debt for most of the week which has for the time being calmed investor nerves. Today we have just had the Non Farm Payroll data in the US for November and just when sentiment had turned firmly to the positive side for this data, the result has been disappointment with the headline number showing a gain of just 39,000. Within this the private payroll number was up just +50,000 compared to expectations of something closer to 150,000. The only positive was that the prior month headline number has been revised upwards to +172,000 from the previously reported level of 151,000. The rate of unemployment also unexpectedly increased to 9.8% from 9.6%. It was interesting to see that the retail sector actually shed 28,000 jobs in November at a time when they would be expected to be recruiting ahead of the holiday season. The public sector lost 11,000 jobs during November. The jobs market in the US is still far from out of the woods and we did see deterioration in the weekly initial jobless claims numbers yesterday which crept back up to 436,000 from the previous week’s reported number of 407,000 and consensus expectations of 425,000.


This afternoon the other major data set due for publication in the US is the ISM Non Manufacturing index for November. The consensus is looking for 55.0 which would be a slight improvement on the October number of 54.3. At the same time as the ISM number we get factory orders for October which is expected to show a decline month on month of -0.8% after a 2.1% increase last month.

In Europe today we have had the November Purchasing Managers Index for services for the Euro zone, Germany and the UK. The UK was the only one to show a decline over the month albeit a modest one to 53.0 from the previous reported level of 53.2. The UK service sector continues to grow but at a very modest rate. Retail sales for the Euro zone increased by +0.5% month on month during October which was slightly higher than expectations of a +0.4% increase and this follows on from a -0.1% decline during the previous month.

If the ISM data this afternoon meets expectations it may help to negate the impact of the poor unemployment data we have just had. If it doesn’t meet expectations it may well set us up for a few days of difficult trading as next week is relatively light in terms of economic announcements.

The data in the US yesterday was again a little better than expectations and provided grounds for some enthusiasm in world equity markets after the falls of recent days. The situation in Europe rumbles on but comments from Jean-Claude Trichet yesterday were taken as a sign that further action may be taken to prevent further contagion within the Euro zone. The ECB meets today to discuss interest rate policy and all eyes will be on the accompanying statement for details of any further measures that may be used in the coming weeks such as the delayed withdrawal of unlimited liquidity support for the region’s banks and increased bond purchases. However, there is room for disappointment this afternoon if no new measures are announced especially given that market expectations of the need for further action are starting to build.


The US ADP Private Payroll report yesterday was encouraging with a rise of 93,000 in private payroll employment after an upwardly revised 82,000 increase in October. This does suggest that we can look forward to a good Non Farm Payroll report tomorrow with expectations of the headline number showing an increase of around 170,000 with private payrolls expected to show a gain of around +150,000.

The important US ISM Manufacturing Index for November declined modestly to 56.6 from the previous reported level of 56.9. Within this the constituent indices did show weakness in some areas such as new orders which fell to 56.6 from the previous reported level of 58.9 whilst the employment index fell to 57.5 from 57.7. Overall though the data suggests that the US manufacturing sector is maintaining the momentum. Other data published in the US yesterday included construction spending for October which rose +0.7% month on month.

The US Beige book which was published yesterday and this gives anecdotal evidence on economic conditions in each of the 12 Federal Reserve Districts. The data which was compiled on or before the 19th November resulted in 10 districts reporting some form of growth whilst the other 2 reported mixed conditions. Within the 10 reporting growth 5 are experiencing a stronger pace of economic activity. Manufacturing activity continued to expand in all Districts and expectations for consumer spending during the holiday season are reasonably optimistic after several Districts reported that current sales are higher when compared to the same period last year. Overall a report that suggests that whilst there has been no deterioration the recovery is not gaining any real momentum.

In the US today the main data due for announcement are the weekly initial jobless claims data. After the better than expected reading last week of 407,000 the consensus is expecting an increase to 425,000. A reading below 400,000 would be taken very positively.

In the UK yesterday the Nationwide house price index for November declined by -0.3% month on month. If UK house prices continue to slip back this will have an inevitable impact on consumer sentiment and will be another factor that weights on consumer spending next year. The UK November Purchasing Managers Index for Manufacturing was also published yesterday and that showed a useful increase to 58.0 from the previous reported level of 55.4. The overall new orders index increased to 59.1 from 54.0 which certainly indicates that domestic demand has increased which bodes well for a good quarterly gain in manufacturing output.

October retail sales for Germany were better than expected at +2.3% month on month compared to expectations of a +1.25 increase although the previous month’s figure did decline by -1.8%. The German Manufacturing Purchasing Managers Index for November was also published yesterday and this showed a healthy increase to 58.1 from the previous reported level of 56.6. Overall Germany remains one of the few bright spots in Europe.