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.

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.

The Euro zone and fears over what comes next are dominating investors thinking at present with Spain now considered to be the real issue. However, any clarity on what is going to happen with Spain is probably months rather than weeks away and to what extent and for how long this problem will plague the market is very uncertain indeed. At the moment sentiment is very weak and the downside risks to the market as we approach the final trading weeks of the year have increased. The traditional yearend rally may well be nonexistent this year and with the FTSE100 up only +2.8% on the year at the time of writing the risks of a negative return for 2010 cannot be ruled out.


The first of the major economic data in the US comes tomorrow with the ISM Manufacturing Index for November. Today we have the Chicago Purchasing Managers Index for November which is expected to show a modest improvement on the previous reported level of 60.6 with anything above 50 suggesting growth. Most of the recent regional reports have shown some improvement and this particular index comprises both manufacturing and the non manufacturing sectors. Also due for publication this afternoon in the US is the Conference Board Consumer Confidence Index for November. With the improving jobs outlook we may well see a slight increase on the last reported number of 50.2 which would be consistent with the most recent University of Michigan Consumer Sentiment Index. Finally, Ben Bernanke will be giving a speech later today on the current economic environment and as always there is the possibility that what he says could move the US market this evening.

In Europe today German unemployment data for November has been published which fell by 14,000 to 2.9m although the unemployment rate remained static at 7.0%. Euro zone unemployment for October has also been published and this rose to 10.1% which is the highest level in 12 years. There is quite a divergence in the country specific rates if you compare Spain where unemployment currently stands at 20.7% to the German November rate of just 7%. Finally, the European CPI for November has been published today and that has left the year on year rate stable at +1.9%.

The week began with markets firmly in positive territory following the confirmed details over the weekend of the €85bn Irish bail out. The enthusiasm did not last very long and after a near 50 point gain in the FTSE100 this morning the gains have all been lost and the FSTE100 has closed down -117 points. Concerns over Europe and who will be next and uncertainty over the future of the Euro are not going to go away and this is likely to be a dominant theme over the coming weeks and months. If there is any catalyst out there to take the market higher it could be the US economy which has been surprising on the upside for a few weeks now although most of it has been lost with the noise over Europe and more recently Korea. Whilst we can’t get too enthusiastic about the data, it does at least suggest that US GDP is not losing any more momentum at around the +2.5% level on an annualised basis. More importantly one of the key elements of any recovery is declining unemployment and judging by the weekly initial jobless claims data this is starting to show some real signs of improvement. Whether the momentum will be maintained is another question altogether and there are still considerable barriers to recovery especially given the dire state of the US housing market. The US economy has also been on a significant amount of government induced life support and as this fades away over the coming months growth may once again fade with it.


This week brings a lot of economic data which may take some of the focus away from what is going on in Europe. Today has been relatively light in terms of economic announcements but from tomorrow onwards we have some of the heavy weight data especially in the US with the ADP private payroll report and ISM Manufacturing Report on Wednesday whilst Friday brings the Non Farm Payrolls and the ISM Non Manufacturing report. Ben Bernanke will be talking tomorrow as well which could well impact on market sentiment given how fragile it currently is.

In the UK today the Office for Budget Responsibility upgraded its GDP forecast for this year from +1.2% to +1.8% although it has downgraded forecasts for the next two years with 2011 cut from +2.3% to +2.1% whilst 2012 has been reduced from +2.8% to +2.6%. With the coming fiscal squeeze these projections may well prove to be optimistic.

In Europe there is a good deal of data due for publication this week with the main event on Thursday when the ECB meets to discuss interest rate policy. The interest rate is set to remain unchanged and the focus will be on whether the ECB decides to shelve plans to withdraw emergency liquidity support for the region’s banks in early 2011. They are also likely to revise their Euro zone GDP forecast for 2011 and 2012.

A brief update today given that the US market is closed for Thanksgiving and there is little on the economic agenda. What we did get yesterday in the US was again mildly positive for the economic recovery. The stand out number was the weekly initial jobless claims which came in at a much better than expected 407,000 compared to expectations of 435,000 and the previous reported level of 439,000. A move below 400,000 would be very good news and we should see a good improvement in the Non Farm Payroll data and at the very least stability in the level of unemployment. This data series has shown improvement now for several weeks in succession which does suggest an improving outlook for US unemployment. The other bright spot yesterday was the latest reading for the University of Michigan Consumer Sentiment index which was 71.6 compared to the last reported level of 69.3 and consensus estimates of 69.5. This index still remains at levels more consistent with recession based on past data but any improvement has to be welcomed and this may well be a reflection of the improving jobs outlook.


The disappointing data yesterday in the US was durable goods orders for October which fell 3.3% but this follows on from an upwardly revised +5.0% in September and most of the volatility is due to the change in transportation orders. After stripping out transportation, orders fell 2.7% during October after a +1.3% increase during September.

Finally, US New home sales fell by 8% during October to 283,000 on an annualised basis and this compares to consensus expectations of 314,000. The US housing market does appear to be going from bad to worse with little hope that conditions are going to improve for some time to come.

There has been no major economic data published in the UK and Europe today.

With Thanksgiving on Thursday in the US the tail end of this week is likely to be relatively quiet but we do still have a fair amount of economic data to get through. The calendar for today is light with just some consumer confidence data for Europe due for publication and nothing scheduled in the US. The market today has started in positive territory after the announced bail out package for Ireland but has since given up all of the gains with the FTSE100 running at a -32 point deficit at the time of writing. From the perspective of bringing stability the news has to be welcomed but realistically the fact that we now have a second EU country in need of financial assistance is not something for markets to be overly positive about. We wonder how long it will be before Portugal starts to hit the headlines. For the time being we are through the next major hurdle and the negative sentiment of the last week seems to be dissipating slowly.


The economic data emanating from the US and Europe continues to be encouraging and whilst not pointing to any significant momentum shift in GDP growth we are at least not seeing any further deterioration. In some respects the disappointing areas such as US unemployment are starting to show signs of improvement which will be a very important factor if growth is to break out of its sub trend path. Next year still holds some very significant hurdles for world economic growth and it seems likely that markets will remain range bound as we approach the year end.

The main event of the week comes tomorrow with the second estimate for Q3 US GDP. The preliminary estimate gave GDP Q3 of 2% annualised and the consensus is looking for a slight upward revision to 2.4% primarily to greater than expected inventory build up. The Q4 run rate according to most economists is still around the 2% level on an annualised basis.

Also tomorrow in the US we get existing home sales data for October. The US housing market is unlikely to show any real signs of improvement for many months to come and the data tomorrow is expected to be around 4.5m on an annualised basis, very close to the last reported level of 4.53m units.

The minutes from the latest FOMC meeting will be published tomorrow and following the decision to utilise a second round of quantitative easing we can expect their GDP and inflation forecasts for 2011 to be lowered.

In Europe tomorrow the second estimate for German Q3 GDP will be published and this is expected to be unchanged at +0.7% quarter on quarter. We also get the latest German and Euro Zone manufacturing purchasing managers index data.