This is the busiest week in the US economic calendar with the all important non-farm payroll data due out on Friday and both sets of ISM data due for publication. After the last disappointing Non Farm number for December the market will be looking for an improvement this month. The consensus is looking for the headline number to show an improvement of around +150,000 and within this we would estimate that private payrolls are expected to come in around the +130,000 mark. After the dip in the unemployment rate last month to 9.4% there is every chance it will spike back up as disheartened workers return to the work force looking for a job, and the consensus is looking for an increase in the rate to 9.5%.


In the US today we have the Chicago Purchasing Managers Index for January due for publication. Consumer spending and personal income data for December will also be published with the former expected to show a +0.7% month on month improvement with income likely to have increased by +0.4%. The most recent employment data suggested a slight pickup in the number of hours worked and hourly earnings which should reflect in the data today.

The ISM Manufacturing Index is also due out tomorrow and is expected to show a slight increase according to the consensus, up to 57.5 from the previous reported level of 57.0. The US manufacturing sector has been outperforming during recent months and the regional reports continue to show good growth. Tuesday also brings construction spending data for December which is expected to show a +0.2% gain on the month which would be the fourth consecutive gain.

The ADP private payroll report due out on Wednesday cannot be relied upon to give any idea of where the Non Farm private payroll number may be headed and it has consistently been at odds with the Non Farm data during recent months. After registering a +297,000 gain last month the equivalent number within the Non Farm data turned out to be just 50,000. This month the consensus is looking for an ADP number of around +150,000.

The equivalent ISM number for non manufacturing is due out on Thursday. This index remained comfortably within growth territory for the December reading at 57.1 and this month the consensus is expecting no change or possibly a modest drop.

After the significant spike back up to 454,000 due to seasonal factors and bad weather the US weekly initial jobless claims are expected to fall back to 425,000 when they are released on Thursday. Also on Thursday factory orders for December are due for publication with the consensus expecting a -0.4% month on month drop.

We finish the week in the US with the all important Non Farm Payroll data for January.

In Europe we started the week off with German December retail sales which were below expectations with a month on month decline of -0.3%, which is the fourth decline in five months. On Tuesday in the UK the Nationwide House price index is due for publication. With the sharp decline in UK consumer confidence reported last week it will be interesting to see what impact this is having on housing market activity and if the recent decline in UK house prices is picking up momentum. In Germany tomorrow the manufacturing Purchasing Managers index and the unemployment rate for January will be released.

Wednesday is relatively quiet with the Euro zone Producer Price Index for December. On Thursday the European Central Bank meets to discuss interest rate policy. There will be no change in the interest rate but with headline inflation creeping up to 2.2% (the ECB target is 2%) in December from the previous reported level of 1.9% we are likely to start seeing the ECB members begin to take a slightly more hawkish view. Any change in monetary policy does not look imminent but as in the UK the chance of a hike in the interest rate before the end of the year has certainly increased. Also on Thursday Euro zone retail sales for December will be published. Expectations are for a +0.6% month on month increase but after the poor German retail sales data this morning there may well be some downside risk to this number.

On Friday there is no major economic data due for publication in Europe but in the UK the latest Halifax house price survey will be released for January.

The US Q4 GDP report came in at +3.2% annualised compared to consensus expectations of +3.5%. Given the only slight miss the market has taken this data in its stride. The next two quarters will be far more interesting especially once we start the approach to the end of quantitative easing in June. Any slowdown will very quickly start the alarm bells ringing especially if we are close to the stimulus tap being turned off. Also this afternoon in the US the next reading for the University of Michigan Consumer has just been published and this was a little better than expected at 74.2 compared to the last reported reading of 72.7.


UK consumer confidence fell by the most in almost two decades with the publication of the GfK NOP consumer confidence index which dropped eight points this month to -29. After the negative reading for Q4 GDP it must set the alarm bells ringing that the UK is at risk of2011 becoming one of no growth and certainly at the best very modest growth. Whilst Q1 GDP is likely to reflect a degree of catch-up after the poor last quarter which should help to achieve some growth in the first quarter there is every risk that we will see another quarter of negative or zero growth before the year is out.

In the US today the main event although some would argue non event will be the result of the two day FOMC meeting. There is unlikely to be any change in monetary policy and they may well tweak the language that was used for the last statement, but at present with QE2 still in motion it seems unlikely we will see any change in policy for January. Also scheduled for today are US new home sales for December which are expected to show an annualised pace of 300k from the previous reported level of 290k.


The Bank of England MPC meeting minutes have been published this morning and the big news is that a second member, Martin Weale has joined Andrew Sentance in voting for a +0.25% hike in the interest rate to 0.75%. Adam Posen on the other hand voted for another £50bn of quantitative easing with the rest voting for rates to stay on hold. The meeting minutes stated that the MPC considered the case for a rate rise in January, and that for some members this was 'a finely balanced decision'. Furthermore, the minutes stated "For most members, recent developments implied that the risks to inflation in the medium term had probably shifted upwards’. The shift in sentiment towards an interest rate hike is therefore clear although this meeting took place before the news that the UK contracted by -0.5% during the final quarter of 2010. With this in mind the interest rate is likely to be held at 0.5% over the coming months but if GDP does start to pick up again the first interest rate hike looks more likely than not before the end of 2011.

The big news of the day has to be the -0.5% contraction in GDP the UK suffered during Q4, according to preliminary estimates. Undoubtedly a lot of this is due to the bad weather conditions experienced but it does raise the question of just how well the UK economy can withstand the austerity measures being put in place as well as the recent hike in VAT. Whichever way you look at it a contraction of -0.5% is very bad indeed and certainly demonstrates just how fragile the UK economy is and how susceptible it is to any negative shock. The ONS estimated impact of the bad weather is -0.5% which suggests that in more normal conditions the UK would have registered no growth during Q4 anyway. Whilst a degree of catch up can be expected during Q1, which should result in a positive number, the data today will provide policy makers with a lot to worry about.


In the US today the main economic announcement was the Conference Board’s Consumer Confidence Index for January which rose to 60.6 from the previous reported level of 52.5. A lot of this will be due to the rise in the stock market and the perceived improvement in the jobs market. The increase is certainly welcome news although it must be borne in mind that confidence even now remains at very depressed levels.

Also in the US, the FOMC start their two day policy meeting today although we expect little change in their statement due out tomorrow evening.

The Purchasing Managers Index data for the Euro zone today has confirmed a solid start to the year with the PMI for services up to 55.2 from the December level of 54.2 whilst manufacturing did register a modest decline to 56.9 from the December level of 57.1, but remains well into growth territory. The composite index rose to 56.3 from 55.5. The equivalent numbers for Germany were strong suggesting that we are seeing the continuation of a strong trend within the core and a weak showing among the peripheral countries which will report next week.


There is no other major data that has been published today in Europe or the US. The main event of the week will be on Friday with the first estimate for US Q4 GDP which the consensus is expecting to provide a reading of around +3.5% annualised. Growth looks almost certain to be above 3% with an outside chance of 4%+.

In the UK tomorrow the first estimate for Q4 GDP will be published and it is expected to show a +0.5% quarter on quarter growth rate compared to the last reported reading of +0.7% for Q3. The economic headwinds continue to build and expectations are that growth over the coming quarters is likely to remain at around the current run rate with the risks skewed to the downside. Tomorrow also bring news of the UK public borrowing for December.

In the US tomorrow the two day FOMC meeting starts and the announcement on Wednesday is not expected to be materially different to the previous meeting result. The US interest rate is unlikely to change this year although expectations have started to shift with raised concerns over the inflation outlook. The main event in the US tomorrow will be the Conference Board’s consumer confidence index for January. After the dip in December to 52.5 the consensus is expecting a modest increase to 54.3. With unemployment showing some signs of improvement and a US stock market closing in on levels not seen since mid 2008 we should see some improvement in consumer sentiment.

Wednesday in the US brings new home sales data for December with the consensus expecting an improvement to 300K annualised from the previous reported level of 290k. After the better than expected existing home sales data last week we may well see an improved performance from new home sales although activity remains at very depressed levels.

In the UK on Wednesday the minutes from the latest Bank of England MPC meeting are due for publication. The market will be looking for comments concerning inflation and any indication that perhaps the currently divided opinion is starting to move closer to a rate rise. We have seen one broker projection this morning expecting the first +0.25% hike in the UK base rate in November of this year. In an interview on Friday, Adam Posen who is a member of the MPC stated that he expected UK inflation will fall well below the 2% target after a temporary surge, suggesting that it could be some time yet before a rate rise is on the agenda.

On Thursday the January CPI for Germany is due for publication as well as European Consumer Confidence. After a better than expected weekly initial jobless claims in the US last week of 404,000 the consensus is expecting a similar number when it is published on Thursday of this week. Also on Thursday US Durable Goods Orders for December are due out and are expected to show a +1.5% month on month improvement, although the headline number could well come out higher than this due to large non defence aircraft orders.

On Friday there is no major UK or European data due for publication and in the US we get Q4 GDP and the latest reading for University of Michigan Consumer Sentiment index which is expected to show a modest improvement on the last reported level of 72.7.

A brief note today given that there is no economic data scheduled for publication in the US and the only data worthy of note here is UK retail sales for December which declined by -0.8% against consensus expectations of a +0.1% gain. The recent retail trading reports had already flagged up the extent of the disruption caused by the bad weather and we may well see a degree of catch up during January.


In the US yesterday existing home sales were above expectations at 5.28m on an annualised basis for December against expectations of 4.9m. The jump from the previous reported level of 4.68m is encouraging but it must be borne in mid that activity is still bumping along close to levels not seen for over 10 years. It will be a long time yet before sales activity increases to a more meaningful level that could signal a real recovery.

Also in the US, the Philadelphia Fed Manufacturing Survey for January was broadly as expected at 19.3 compared to the consensus of +20.0. The constituent parts of this index did show some encouraging signs with a healthy jump in new orders and employment. Overall the regional reports continue to show the US manufacturing sector achieving respectable growth. It will be interesting to see the first estimate for Q4 US GDP which is due for publication on Friday of next week.

Worries over an overheating Chinese economy have once again brought fears that their central bank will have to implement further hikes in the Chinese interest rate. Chinese 2010 Q4 GDP came in at an annualised rate of +9.8% compared to Q3 of +9.6%. Consensus expectations were for a drop in the growth rate to +9.4%. Another increase in their interest rate looks to be almost a certainty given the high rate of growth and more importantly their inflation rate. The Chinese CPI for December was +4.6% year on year although this was a drop from the previous reported level of +5.1%. Most analysts expect the next rate rise of 0.25% in February.


US economic news yesterday was confined to December housing starts which fell to 529k from the November level of 555k. The US housing market faces many months of depressed activity and without a meaningful upturn it is difficult to see consumer confidence returning to pre crisis levels. The US economic calendar today provides further news of what is happening with the property market in the form of existing home sales for December which are expected to increase to 4.9m on an annualised basis from the previous reported level of 4.68m.

The US weekly jobless claims continues to provide a volatile picture making any assessment of current trends in unemployment very difficult to quantify. The reading last week was 445,000 and this week the consensus is looking for a drop to 420,000. The manufacturing data announced for New York State earlier in the week was still comfortably into growth territory and this afternoon we get the equivalent January data for Philadelphia. Expectations are for a slight drop to 20 from the previous reported level of 24.3, but again still well into growth territory.

There is no real news due out of Europe today but we did get UK unemployment data yesterday with the broader ILO measure showing an increase of 49,000 unemployed in the 3 months to November, bringing the total unemployment rate up to 7.9% from 7.7%. A combination of high unemployment and declining house prices is likely to weigh on UK consumer confidence over the coming months.

The market sell off which started yesterday afternoon is more a function of the strong rally during recent weeks rather than any significant shift in sentiment and a bout of profit taking was to be expected at some point. The news about China this morning has certainly provided a further reason for profit taking but a catalyst for a more significant correction remains absent at least for the time being. The European debt crisis seems to have lost some of the impact it did have last year, which is probably given the level of perceived political will to correct any problem, but it remains to be seen how the market will react to another bail out. The real worries are unlikely to come until mid year when the US quantitative easing program comes to an end and fears over whether the US economy is able to survive without government intervention will then be very high on the agenda.

The UK Consumer Price Index has again surprised on the upside today with the annualised rate moving up to +3.7% in December compared to the previous reported number of +3.3% and consensus expectations of +3.4%. The main driver is higher fuel, energy and food prices and with a vat hike this month the pressure will continue in the short term. A 4% inflation rate looks highly likely at present. The debate over when the first hike in the interest rate will come will rumble on with at least one+0.25% increase looking likely before the end of the year.


In Europe today the ZEW Economic Sentiment indices for Germany and Europe have been published, both of which exceeded expectations suggesting that conditions within the core remain in positive growth territory.

In the US the Empire State Manufacturing index increased to +11.92 for January from the previous reported level of +10.6, although it was a little lower than consensus expectations of +14.0.

With the earnings reporting season now getting underway in the US and with optimism still riding on a high the US market has reached levels not seen since mid 2008. Inflation expectations have jumped sharply but with the interest rate in the US unlikely to move this year equities look set to attract liquidity seeking yield. Fears of a double dip recession have all but disappeared and the market at least for the time being looks set to creep higher. There remain significant hurdles this year including the ongoing sovereign debt crisis in Europe plus the end of quantitative easing in the US in June. The debate over raising the US debt ceiling has already begun and with the current ceiling of $14trn expected to be reached during the coming weeks there is still no sign of how and when the US will actually start to reduce its budget deficit.

Inflation expectations are currently shifting with higher commodity, food and energy prices starting to spook the market over what to now expect from monetary policy in the UK and Europe. Both Central Banks met last week to decide on interest rate policy and in Europe the ECB made more hawkish comments about inflation which has started to shift expectations that the first rate rise may come sooner rather than later in Europe and certainly before the end of 2011. The European headline CPI reported last week increased to +2.2% year on year in January from the last reported level of +1.9%. The same situation in the UK is occurring and with a vat hike to contend with as well as the other major inflationary forces at present the CPI looks set to rise further over the short term. The December UK CPI is due for publication tomorrow with the consensus expecting no change in the last reported year on year rate of +3.3%. The debate now is about how much the MPC will raise rates in the UK this year with expectations now closer to a 0.5% hike compared to 0.25% only a few weeks ago. The question is whether the Bank of England can hold its nerve especially if the headline CPI starts to edge closer to 4% which would be double the targeted rate.


In Europe today all eyes will be on the gathering of European finance ministers to discuss the ongoing issues in Europe and undoubtedly this will include debate on whether to extend the size of the European rescue fund. Any firm decisions are unlikely for several weeks and possibly months but some expansion of the facility seems likely to help alleviate fears over a country such as Spain requiring a rescue.

Last week in the US the Beige book was published and this is a valuable aid in giving an up to date picture of what is happening with the US economy. This report which covered the period of November to the 3rd January stated a “moderate or modest” improvement in economic activity for 10 of the 12 regional Fed districts. The report was not dissimilar to the previous one although the overall tone suggests a modestly improving outlook.

The US unemployment outlook is far from clear. After making a decisive move below 400,000 during the holiday period the weekly initial jobless claims in the US once again spiked up, this time to 445,000, which was against consensus expectations of 420,000. The data is subject to the impact of seasonal variation and therefore the latest spike should not necessarily be taken as a sign of further deterioration but if we see a continuation of the trend this week it will be disappointing. Expectations for the number this week are for a drop to 420,000 (due out Thursday).

Also in the US last week we had retail sales data for December which fell a little short of expectations at +0.6% month on month compared to expectations of +0.8%. The University of Michigan Consumer Sentiment index also came in light of expectations and fell to 72.7 from the last reported number of 74.5. Inflation in the US remained almost non existent with the core rate for December at just +0.1% month on month. Finally, Industrial Production for December surprised on the upside at +0.8% month on month compared to consensus expectations of +0.5%.

Today the US market is closed for Martin Luther King Day. The economic data starts tomorrow with the Empire State Manufacturing Index for January. This data set which provides a snapshot of manufacturing activity in New York State has been prone to volatility more recently but expectations for this month are for a modest increase to +14.0 from the previous reported level of +10.6. For the UK and Europe the calendar is quiet today with just the Rightmove house price index for January. This has already been published showing a +0.3% increase although this is after a -3.0% decline during December.

A relatively quiet day in terms of economic announcements today. In the UK we have had the Halifax house price index for December which fell -1.3% month on month after a -0.2% drop in November. Against an economic backdrop of spending cuts and fiscal tightening there is a good possibility that house prices will fall during 2011. Low interest rates and reduced supply are likely to prevent a significant decline, but the real risk is if the Bank of England’s MPC change their inflation outlook and start to raise interest rates. Whilst a remote possibility in 2011, the risks of this will increase next year if an economic recovery is starting to take hold and inflation is remaining stubbornly high.


The press are continuing to come up with articles over the disappointing US Non Farm Payroll data published last Friday. The reality is that the numbers were broadly in line with recent data and the disappointment is more down to the fact that the market raised its forecasts after the strong ADP private payroll numbers earlier last week. The fact that the recent US economic data has continued to show a respectable growth rate during Q4 2010 has also raised expectations over employment growth. Either the ADP number is very inaccurate or more likely we will start to see an improvement in the Non Farm Payroll data over the coming months. It remains to be seen whether growth in employment will be sufficient to bring down the unemployment rate but it may well stabilise. The reported decline in the unemployment rate on Friday can be ignored due to the large number of people who gave up looking for work and who are more than likely to return to the labour force, which will simply reverse the decline. Ideally Non Farm Payrolls need a consistent run rate of around +250,000 to make any real difference.

The Euro zone debt crisis is starting to wake up again with various reports about Portugal doing the rounds. We are likely to see a similar story with Greece and Ireland when their respective governments denied they needed help until the market eventually forced their hand. The debt crisis is here to stay at least until the second half of 2011 when we may by then have more clarity on what is to be done with the remaining problem countries such as Portugal and Spain.

The main economic data event in the US this week will be the publication of December retail sales with the consensus expecting a +0.8% month on month gain with an increase in gasoline prices likely to play a big part in the rise. The core retail sales number which strips out the impact of gasoline sales and auto sales is likely to show a more modest rise of closer to +0.3%. The snow storms in the North East are also likely to have held back sales in the tail end of December.

Other US data this week of importance is related to inflation with the December Producer Price Index due out on Thursday and the Consumer Price Index on Friday. The next instalment of the University of Michigan Consumer Sentiment Index is also due for publication on Friday, and the first January reading is expected to show a modest improvement to 75.0 from the last December reading of 74.5. The Fed’s Beige book is due out on Wednesday and that provides anecdotal evidence of economic conditions in the twelve Fed districts.

In Europe we get euro zone November industrial production on Wednesday. Also on Wednesday the UK Nationwide Consumer Confidence index is due for publication. With consumer confidence already taking a hit with concerns over cuts during the coming months it will be interesting to see if sentiment is still deteriorating. On Thursday UK industrial and manufacturing production is due for publication and the MPC meets to decide on interest rate policy. There is no chance at present of any hike in the interest rate, but the meeting minutes when they are published will be scrutinised for any signs that the committee is starting to become more concerned about the inflation outlook. The ECB meets on the same day and again we can expect no change in policy at this stage. Friday in the UK brings more inflation data in the form of the Producer Price Index for December and in Europe we get the consumer price index for December.

After the exceptional Santa rally world markets have continued to run ahead during the first days of the New Year. The primary reason at present for the optimism is the US economy which continues to show good signs of recovery. The question of how much of this is down to the huge amount of stimulus being pumped into the economy will only be answered when we get closer to the end of QE2 in mid 2011 when the economy will have to stand alone. That is not to say we might still have QE3 but that looks less likely at present.


In the US within the last few days we have had both sets of December ISM data for manufacturing and non manufacturing which came in a little ahead of expectations and well within growth territory. The surprise of the week so far was the December ADP Private Payroll number which was announced yesterday and came in at a very significant +297,000, far higher than the expected number of around +100,000. The ADP number has been a poor predictor of what to expect from the Non Farm Payroll number during recent months but nevertheless with a number of this size the market will be looking for a healthy Non Farm Payroll number tomorrow when it is published. The consensus is looking for a headline number of around +140,000 and is expecting +150,000 from the private payroll element. The headline number is likely to be held back by declines in the public sector workforce.

Other surprises in the US this week were factory orders for November which rose by +0.7% month on month compared to expectations of no change. On the employment front the weekly initial jobless claims that were published last week fell to 388,000, the lowest level seen since early 2008. The number for this week has just been published and that came in at 409,000. The overall trend is most certainly down and if we do start to see claims consistently at the sub 400,000 level we may well start to see the US unemployment rate start to decline.

The minutes of the last FOMC meeting published earlier this week suggest that the Fed is still unconvinced about the recovery but clearly views the recent new fiscal stimulus packages and QE2 as a good support to growth during 2011. It does beg the question of whether the recovery is simply government led and lacks the foundation for sustainable growth, but that will not become clear for many months to come.

Europe and the UK have been relatively quiet on the economic front and the sovereign debt crisis has been sleeping over the holiday period but no doubt will awaken at some point during the coming weeks. It was interesting to see that the UK December Purchasing Managers Index for Services published today fell below 50 at 49.7 from the last reported reading of 53.0. The consensus was looking for a number of around 53 this time and a number that indicates contraction is certainly a cause for concern, but we would have to see the number remain below 50 over the coming months before taking it as a real indication of slowdown. The equivalent numbers published for Germany and Europe yesterday remain well into growth territory.

The oil price is starting to become a concern and whether we are going to see $100 plus this year remains to be seen but even at current levels it will sap spending power from consumers. In particular the US will be vulnerable as the drag on spending could well negate the additional stimulus measures announced towards the end of last year.